Corpo Compiled Tsn 2017.docx

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno PERSON is a subject of rights and obligations. Only a person has rights only a person has obligations. Because a person has rights and obligations, only a person can sue and be sued. If you are not a person, you cannot be sued and neither can you bring suit. Bisag unsa pa gani nimo ka bright na iro, duklon cyas ulo, mukiha ba cya? Does he have the personality to bring suit? NO! Because he is not a natural person.

FIRST EXAM COVERAGE November 15, 2017 (Eliza Devilleres) THE IMPORTANCE OF FORMALITY IN CORPORATIONS This is where you have to grasp the importance of formality. For the acts of a corporation, reality is not as important as the formality.

What does it take to be a natural person? All you have to be is to be born. Neither you, much less me, decided that we will be persons. Not even your parents decided that you will be persons. They were hoping that they could have children, but they did not decided anymore than the rooster can meet the sunrise by crowing at dawn. Somebody else up there decided that you will be a person. And so you are – you are the subject of rights and obligations.

Why is it that formality is more important than reality? You will then later on find out that there is such a thing as table meetings of the corporation. The board is said to have met but they actually did not meet. But all the directors are made to sign beforehand that they already met.

A corporation is a juridical person. That means, by fiat of law, by consent of the state, it is a person – it has rights, it has obligations. Because it has rights and obligations, it can file suit and it can be sued. And precisely because it is a person, no stockholder can say – even if he owns 99% of that outstanding shares of the corporation – that he owns that corporation.

What is the reality? There was no meeting. But formally, there was a meeting because everybody signed an ostensive minutes of the meeting. Who will question whether or not there was a meeting? If you sign that there was a meeting and you were not there, can you say that there was no meeting – why did you sign?

How can you own a person? You cannot own a person.

If in that meeting, there was a crucial resolution that was passed, what is the status of that resolution? Is it binding on the corporation or is it not?

How is that expressed in Civil Law?

It is binding because the formality is there.

The stockholders’ interest in the corporation is always inchoate.

Where is the reality?

What is inchoate?

It is prima facie presumed that that there was a reality because there was a formality.

Dependent upon a condition that should the corporation dissolve, the corporation has enough assets to be liquidated to answer for its legally binding and valid obligations. After which, there is still something left to be divided among the stockholders in proportion to the ownership of the outstanding shares. That is the ownership of shareholders.

Why is it that that is the NATURE OF CORPORATE ACTS? Because, going back to the Civil Code, a JURIDICAL PERSON is an artificial being. Unlike natural persons (like you and me), we have a physical existence. The corporation does not have a physical existence. The corporation exists in contemplation of the law. It is a creature. In fact, it cannot act without the agency of natural persons like you and me.

So strict language, you say na tag-iya na cyas corporation. Do you use that language? NO! But there is a caveat there. That is legally deficient in language. When you are in a formal setting, you cannot use that language because it betrays your lack of grasp of basic principles in Corporation Law. No one can own a corporation. Bisag si Gokongwei, Henry Sy pa. Bisag ikaw pa nagimbento anang korporasyona. Have you heard of Double Dragon? It is a corporation, the controlling stockholders of which are Batman ad Robin. Bat man is Caktiong – the founder and president of Jollibee. Robin is Mr. Sia – the former owner of Mang Inasal. Together, they came and form this corporation (Double Dragon). Double Dragon Story: (Why is Caktiong suddenly forming Double Dragon? Because he does not own Jollibee. He founded Jollibee, it was his idea, he founded it, he pushed it, but it was funded by the family of his wife. So it is the Lim family who controls Jollibee. And now Caktiong and the wife are estranged. So he decides to form his own corporation where he knows he is in control. His partner is Mr. Edgar Sia is the owner of Mang Inasal. Cokationg went and offered him a price that he cannot refuse – P900M for 50% of Mang Inasal. Those are the magic numbers. Mr. Sia could not refuse because even if she sells 50%, he still runs Mang Inasal. He increased the branches from 300 to 700. Jollibee was the one financing the expansion. By the time he reached 700 branches, Jollibee said that it is now time for us to buy you out – to buy your remaining 48%. This time it was over a billion pesos. He was paid over P1.4B, because it was already bigger than the original. Together they formed Double Dragon. What are they selling? Katol? (Haha). Unsa man ilang ginabaligya? Have you not heard of Double Dragon? The price of its shares of stock has already doubled in 3 yrs from the time that there was an initial public offering. Their strategy is to capture, retail, upper retail of business through secondary source. They put up City Mall. Wa na dris Davao because this is not considered as a secondary city. But if you go to Tagum, etc. there is City Mall – a lower cost mall. BCD market. Retail is a very tricky business.

How does a corporation enter into contracts? It cannot sign because it has no arm. The Board of Directors pass a resolution approving the corporation’s entrance into an agreement, and designates the person who will sign for and in behalf of the corporation. Without that natural person who will sign, there is no contract. In other words, the corporation is dependent on an AGENT. That is the only time that you see that a principal must act through an agent. It cannot act by itself. It has no arms, no mouth, no feet. It does not exist, except in contemplation of the law. Now, that is why formality is very important. Formality: Whether or not there was a meeting. If there was a meeting, whether or not there was a a quorum in that meeting – because quorum determines validity. Whether or not the resolution was passed by the required majority – whether it be absolute majority or simple majority or qualified majority (2/3 of the stockholders __ because there are different gradations in the corporation). Now that it the forest – the details. You have to pay attention to those details. You have to know all those details, esp. when you are a corporate secretary of a corporation because that is your job. The lawyer in the Board is the one who thinks of the worst so that he can defend the corporation. So that is the reason why details and formality is very important. Now, we go back once more to the Civil Code. We go back to the notion of PERONALITY. We are taught in Civil law that a Page 1 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno So, you have Uber valued at $70B more than any taxi company in the world and not owning a single taxi. You have Air BnB that makes available millions of goods without owning a single hotel. That could not have been done post-industrial revolution. It’s only done because we are now in the 3rd industrial revolution and that is the digital age. You will later on find out that the certificate of stock which in law is a good evidence of ownership of shares is actually a barrier for trading. As long as you keep the roster of your shareholders by the certificate of stock, you discourage trading. Now, it is de-certified shares. It’s now digital shares.

akoang klase. It’s not just a simple case of missing the point; you are supposed to be enlightened kay kahibalo ka sa balaod.

What made the industrial revolution?

Why? Because Gamboa, in the case of Wilson Gamboa vs. Secretary of Finance, that is how they questioned the Filipino composition in the share holders. Gamboa went straight to the Supreme Court for an order of prohibition against Secretary Teves, asking the court to order Teves not to sell those shares. Because that sale would make PLDT a foreign corporation. The SC entertained it and entered an En Banc decision, by Senior Justice Carpio who wrote that decision in 2011 and 2012.

There’s a case here which the Supreme Court removed from its Supreme Court records. Ngano man? Kay naulaw sila. Ridon vs. AXN Networks Philippines, it is an En Banc Resolution but Per Curiam. It is just the Clerk of Court and Vidal who says this decision is En Banc. It was for 1 week in the website of the Supreme Court but not in the SCRA because it was removed. Ngano man? Nauwaw ang Supreme Court.

Technology they say, made the industrial revolution. The invention of the spin engine and the cotton gin. So that now instead of a family making thread and sowing it into cloth, now it’s a factory that does it. They say that is what makes the industrial revolution. Except that, supporting that is the juridical person of limited liability – the corporation. Without the corporation, there would have been no large-scale projects, because it is very difficult to martial huge amounts if you do not have limited liability.

In 2014, Ridon et.al. went straight to the Supreme Court and questioned why AXN, Fox News and all those foreign corporations are allowed to function in the Philippines and even broadcast.

CORPORATION v. PARTNERSHIP CORPORATION 1.)

Ownership of shares can be easily transferred

2.)

You cannot deny transferability of shares in the articles of incorporation of the parties. You can only put some limitations.

PARTNERSHIP 1.)

2.)

What is the rule with respect to communications media? The corporation allowed to stream in the Philippines by the Constitution is 100% Filipino.

You cannot transfer its shares. The transferee may not be agreeable to the partners. What binds the partnership is utmost trust and confidence.

The SC issues an En Banc resolution dismissing the petition unlike in Wilson Gamboa. It is premature and it should go through the right channels. Why is it that they allowed Gamboa to go straight to the SC? Even the SEC in Wilson Gamboa followed and issued a memorandum this is how we measure a corporation 60% Filipino, 40% foreign. It was questioned again directly to the SC in ROI vs. SEC and PLDT November 22. 2016. They questioned again the memorandum and said that it does not follow the ruling in Gamboa.

The moment that a partner dies, the partnership is dissolved.

Why do you need to study corporation law? Because it is the mistress of taxation. It helps taxation. The ultimate aim is tax. You want to lower taxes, you have to go through importation. You know that there are so many corporations who have engaged into tax avoidance, like Shell, etc? there are also Ivy League schools which have also these endowment funds which are all in banks. Discussion about Mighty Corp. tax avoidance – P25B. Attorney’s fees of P250M will go to Fortun and Narvasa and Narvasa. These gal who who will pocket it will be dancing and smiling all their way to the bank will get P100M – Talks about the alumni of ADDU. I’m not bullshitting you (Haha).

Who said it does not follow? The same people in the SC who wrote the in Gamboa. Carpio, Sereno, Leonnen, Jardeleza. They still entertained it. Why? They should have dismissed it following Ridon. Gitangtang kay uwaw man kaayo. Let us move to the first attribute that a corporation is an artificial being. That is why you cannot say that a stockholder owns a corporation because it is a person even if that person has no being. You cannot own a person because it is a free- center, subject to rights and obligations. In other words, it is the only entity in reality that is given standing by the court. He can sue and be sued-that is standing.

November 16, 2017 (Jennifer Lim)

What is the difference of standing and the personality to sue? ‘Pag about sa personality, cause of action na. You might have standing but you are not the proper person to sue. You have not suffered a wrong. You have no cause of action that is why you have no personality to sue.

We parted yesterday with the nationality of a corporation. The most important issue on the nationality of a corporation is with respect to the control test.

Muingon gani ang POEA that there should be no deployment to Iraq and Afghanistan, kinsa man mu-sue? Association of Recruitment and Manning Agencies. Daghan mi mag suffer ani, wala na mi mapadala sa Iraq. The court says you have no personality to sue. It should be the OFW who should sue because they are the ones standing to suffer directly to suffer a wrong.

I give to you a decision of the Supreme Court – PCGG vs. Pea in relation to Yuchengco vs. Sandiganbayan wherein Supreme Court says “In PCGG v. Pea, this Court, describing the rule of Marcos as a well-entrenched plundering regime of twenty years, noted the magnitude of the past regimes organized pillage and the ingenuity of the plunderers and pillagers with the assistance of the experts and best legal minds available in the market. The evidence presented in this case reveals one more instance of this grand scheme. This Court guardian of the high standards and noble traditions of the legal profession has thus before it an opportunity to undo, even if only to a certain extent, the damage that has been done.”

WHAT ARE THE FULLY OR PARTIALLY NATIONALIZED CORPORATIONS? 1. 2.

So, it is official pronounced by the Court. Mao na inig mitindog kani na si Ferdinand Jr. basaha ning PCGG vs. Pena. Official na! It’s in the books. Dapat sagpaon na siya ni-ini. Organized plunder village, magnitude of which has never been seen. Basta dili gani ka mubasa ning kaso ni ug dili ka katubag… HAGBONG KA sa

3.

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Mass media except recording studios – Article 15 Section 7 of the Constitution. Retail trade business with trade-up capital of less than 2.5 million dollars under RA 8762. Private security agencies under RA 5487. Section 4 provides “Private security agencies must be Filipinos if they operate within the country.”

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

4.

5. 6.

7. 8.

Ngano man nang American executives nagdala ug foreign security along with helicopters to the Davao Coal Plant? We can only brush aside. We cannot question that to court. It was said to be a diplomatic relation. Small scale mining under Section 3 of RA 7076. One of the most abused laws. It is not small scale at all but hiding under this law. You must be 100% Filipino. Utilization of natural resources under Article 12 Section 2 of the Constitution Cockpits under Section 5 PD 449. Should be all Filipino. Pilipino lagi nang ni dagan dira pero ang manok foreign man. Puros man imported. Manufacture, stock-repair and/or distribution of nuclear weapons under Article 2 Section 8 of the Constitution. Manufacture of firecrackers and other pyrotechnic devices. Section 5 RA 4783. Very unsafe!

Because Del Monte obtained ownership of the property in Bukidnon in 1899 before the LLA. They are not covered by it. Of course, they transferred it later on to Campos. Del Monte now is owned by Mr. Campos and his group – the Maveric group. Datu Puti, Mang Tomas. Where did he get his money? You read Yuchiengco. Because his father was a friend of Marcos even before he became congressman. Mr. Campos was the one who was first to return hidden wealth entrusted to him by Marcos. He owned the biggest pharmaceutical company in the Philippines, UNILAB. It became really big because at the time of Marcos, the DOH was directly transacting with them. They did tollmanufacturing. Unlike in India, they just copy the composition of medicines and produce their own. They say “To hell with copyright!”.

*Talks about the current US President.*

This is why I’m so wary about nationality laws because it protects abusive Filipinos. They have an unfair advantage. The Filipinos suffer!

November 17, 2017 (1st Half) (Therese Candolita)

25% FOREIGN- EQUITY 1. 2. 3.

We are still in Section 2. The section which gives us the definition of a Corporation.

Private recruitment local or overseas Article 27 PD 447 Labor Code. Must be 75% Filipino. Construction and repair of locally funded works. Construction of defense related structures. 25% foreign maximum.

Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes ad properties expressly authorized by law or incident to its existence.

FILIPINO CORPORATIONS- 40% FOREIGN, 60% FILIPINO 1. 2. 3. 4. 5.

Attributes of corporations discussed in the first hour: A. It is an artificial being B. Its legal personality is separate and distinct from the personality of its stockholders. C. It is created by operation of law.

Exploration, development and utilization of natural resources under Article 12 Section 2 Constitution Realty Corporations that own private lands under Article 12 Section 7 Operation and management of public utilities under Article 12 Section 11. Culture, milling, processing, trading except retail of rice and corn and by products. Section 5 PD 194. Adjustment companies. i.e. appraisers

A. The first attribute is that a corporation is an artificial being. It has no physical existence. But it is a being nonetheless. How many here have taken up metaphysics? To exist you must be something, either a stone, an animal, a tree. You have to be something. But here, we postulate an existence that is a creature of the state by mere consent of the law. It does not occupy space, does not have weight, you cannot touch it, you cannot smell it but it is there by legal postulate. It has no physical existence. Now, most of the Bill of Rights apply to the corporation as a person, but the right against self-incrimination does not apply to a corporation. Why? Because the corporation has no mouth and the freedom against self-incrimination is freedom against testimonial evidence. The one who can invoke it is somebody who can express himself. The corporation cannot express itself except through an agent. It needs to go through the formality of passing a resolution. Now, suppose you are paralyzed, such as when di ka katingog, di ka kasulat, pero gasiga pa ng mata nimo. Di ka kasulti kay paralyzed ka, makapirma ba na sya ug contract? Di na sya kapirma ug contract pero makuha nimo iyang thumbmark. Makacommunicate sya kay naa sya’y physical existence, ang corporation, wala man. The only way to go is through the formality of a resolution, that’s why resolutions are important. A corporation as an artificial being also means that it cannot accept new agents if it has no agents anymore. They cannot act. To give you an example, suppose here is a corporation with 5 incorporators, they are all classmates and they are the same stockholders who are also in the Board of Directors. 5 sila incorporators/stockholders/sa Board kay sila ra nag-piliay sa ilang kaugalion. They love each other, no complications. Unya karon pagbakasyon nila sabay 5, ni-crash ilang gisakyan, namatay ang 3. What happens? The corporation is paralyzed. 2 na lang man ang nahibilin. You cannot be elected a Director unless you are the owner of at least 1 share, meaning you are a stockholder of the corporation, so the Board of Director has no quorum, it cannot act, it cannot pass a resolution. This is why the corporation has to be dissolved. When the formalities can no longer be done than it could end up that the corporation will have to be dissolved. It’s not like a person, amang na sya and paralyzed, naa pa man sya. Makalihok gihapon, thumbmark gihapon. Maski comatose pa, maka-transact pa. That is when he needs an agent,

They are different from asset valuators who are employed in mergers and acquisitions that come with value of machineries and buildings and how they are to be reckoned with. There is a different body that controls it just like CPAs, CNAs they are asset valuators. In the Philippines, if you are an appraiser, the maximum capital is 25%. If you exercise the profession is 100%. That is why SGV split because they are beginning to be controlled by Ernst and Young. Wa sila gisumbong ilahang founder na si Washington Sycip who is an American citizen. Born in the Philippines but never changed his citizenship after he stay in Colombia. It was allowed by the Laurel-Langley Parity Act – Americans have the same rights as Filipinos for 30 years.

In Quasha vs. Republic, Quasha was an American lawyer who came to the Philippines and started practicing here during the Commonwealth period. When the LLA was passed, he continued practicing even after the 2nd World War. He bought properties one of which was in Forbes Park. Then, the LLA was about to end in 1965. He went to the Supreme Court with a petition for declaratory relief. He was saying “I bought it in good faith. I am the owner of the land in feesimple which I call home. What will happen after Parity ends? Will I be stricken-off my land? Dili mo maluuy nako na I am a simple lawyer from Delaware”. The one who wrote the decision was JBL Reyes, that was his valedictory decision, his last decision. He says when the parity ends, your right to own ends. So you better disinvest it. Transfer it. That want Americans did. Except, one person recognized by the Court, Del Monte International. Page 3 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno General Rule: Doctrine of Corporate Entity (meaning separate legal personality)

you go to court to be appointed as guardian of his properties and another appointment to be the guardian of his person. B. Second attribute: The corporation has a separate personality from the personality of its constituents, whether members or its stockholders or its offices. That is the DOCTRINE OF LEGAL ENTITY. Mainly that the corporation has a personality separate and distinct from the personality of its stockholders or officers or other constituents. What is the exception to that rule? 1. Piercing the veil of corporate entity – Laid down by the US Supreme Court in the case of United States vs Milwaukee Refrigerator Transit Company; 142 Federal Reports 247 (1905) as follows:

Exception: Piercing the Veil of Corporate Entity C. Third attribute, that a corporation is created by operation of law. It is not created by law. Historically, a corporation was created by law, in the days where the King had all the great powers, executive, legislative and judicial. All the King had to do was issue a decree that the following group of people are now to be accepted as a corporation of limited liability, and shall be called, let’s say “East India Company Ltd.” So all those who put their money there, they are the stakeholders. Now that is prohibited by the Constitution. Section 16, Article XII on National Economy and Patrimony which stated that “Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned and controlled corporations may be created or established by special charters in the interest of common good and subject to the test of economic viability.”

“When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will disregard the corporation as an association of persons.” There are 2 ways where Piercing The Veil has been applied: 1. the first way is you have the corporation and you have a dominant, overwhelming, controlling stockholder and he uses the corporation either to defeat public convenience, justify wrong, protect fraud or perpetrate crime. That is why the law will disregard the separate legal entity of the corporation and the veil is pierced. The dominant stockholder using the corporation as a conduit and he will be the only person considered by the court. 2.

By law means there is a charter. Baluyot vs Holganza; 324 scra 248 (2000) where the SC said “The test to determine whether a corporation is government-owned and controlled or private in nature is simple: Is it ceated by its own charter for the exercise of a public function or by incorporation under the General Corporation Law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission and are compulsory members of the GSIS.”

The 2nd way is that you have 2 corporations, the mother and the subsidiary, and it ends up that the subsidiary is just used by the mother corporation. In fact the funds of the subsidiary are not placed in a separate bank account but co-mingled with the mother corporation. For all practical purposes, the officers of the mother corporation considers the officers of the subsidiary corporation as a division of the mother corporation and in so doing they avoid payment of tax, they disregard their obligations under contract, or they perpetrate crime. What does the court do? The court cancels out the separate and distinct personality of the subsidiary and only the mother corporation is considered.

That is the Charter Test. The charter test is applied prospectively, it does not apply retrospectively. So it does not apply to the Philippine Society for the Prevention of Cruelty to Animals, because it was issued a charter by law on January 19, 1905. How does the coporation act? By passing its own laws equivalently through a resolution. In Liban et al vs Gordon; January 18, 2011 en banc resolution by J. de Castro. In 2010 the decision was penned by J. Abad. The original decision as its stands is that the Red Cross is neither private nor public, it has the characteristics of both. Why public? Because its work is governmental, to respond to victims of human tragedy, either natural or man-made calamities. But when Red Cross responds to victims of man-made tragedy such as terrorism, kidnapping of hostages, that is their private aspect. The court says neither public nor private but it has aspects of both.

So those are the 2 ways by which Piercing the Veil is exercised. What are the cases that you have to remember? 1. Mother corporation and subsidiary corporation - PNB vs Ritratto; 362 scra 216 (2002) 2. Then a corporation as a mere conduit of a dominant overwhelming stockholder – Francisco vs Mejia; 326 scra 738 (2001) The SC says in the case of a person dominating a corporation, what are the elements that must be present to justify piercing the corporate veil on the ground that the corporation is a mere alter ego: 1.

2.

3.

Begin to distinguish by law or by operation of law. All you have to do is comply with the requirements of the general enabling law. Please take note that there is not just 1 general enabling law. Not just the Corporation Code. The Labor Code is also a general enabling law. Because a group of persons can so constitute themselves and apply to be issued a cert of registration to be a union. And that union has a separate and distinct personality from its members. That is also creation of a juridical person by operation of law.

Control, not mere majority or complete stock control, but complete domination not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal breach of duty, or a dishonest and unjust act in contravention of plaintiff’s legal right; and The aforesaid control and breach of duty must have approximately caused the injury or unjust loss complained of. (Carillo vs PCMC; GR 224099; June 21, 2017)

In the Cooperative’s Code, when a group of persons at least 15, constitute themselves into a cooperative they are issued a certificate of registration by the Cooperative Development Authority then you have another juridical personality. There are many ways to have a separate juridical personality, not just one. But for us, that is the Corporation Code. Whether it be by law or by operation of law, what is common with the two is government intervention. The consent in corporations created by law is direct. The consent of government in private corporations is indirect. You comply with the requirements than you are granted.

Question: Is the corporation that is disregarded ceases to be a corporation? Does it mean that the said corp is cancelled as to its registration? The application of piercing the veil of corporate entity in a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance of which the doctrine is invoked. It is a reference to a particular transaction.

If you are not granted but you think you have fully complied with the law, what is your remedy? Mandamus. Because for SEC to grant a certificate of registration is not discretionary, it is purely ministerial.

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno November 17, 2017 (2nd Half) (Marry Suan)

Section 21. Corporation by estoppel. – 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: Provided, however, That 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. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. (n)

So as we said, whether it is a corporation created by law or created by operation of law, the common denominator of the two is the consent of the state. That is the theory of concession, to the point of saying that the corporation is really a corporation of the state. Without the consent of the state, there is no corporation. Is that true? Many commentators say that there are exceptions to the rule. What are some of the exceptions? First, you have a de facto corporation. A de facto corporation is defined in the Corporation Code in Section 20.

This one clearly does not have a consent of the state. They just pretend to be a corporation but they are not and they know they are not.

Section 20. De facto corporations. – The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n)

What happens? They cannot deny that they are a corporation. They are a corporation because they are estopped from denying that they are not, even if in reality they are not. They have the liabilities of general partners. That means they absorb the liability of the corporation – every single one of these persons that are involved in the simulated corporate existence.

De facto corporation has at least four elements: 1. There is a general enabling act – the Corporation Code. 2. There is a xxx attempt to incorporate under such law. 3. There is an assumption of corporate power. 4. Despite the fatal defect, a serious defect, it is issued a certificate of incorporation.

One who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation. So if you deal with this ostensive corporation and it is not really a corporation, you cannot later on say that you are not obligated because you’re not a corporation. Your obligation is valid.

So a de facto corporation has a certificate of incorporation but it is fatally defective. It is really not a corporation.

Again, that is an exception to the concession theory – that the corporation exists only by the concession of the state. So you already see two exceptions.

Now what is the effect? It lacks consent of the state and yet the law says that nobody can attack this collaterally. You must attack it directly. In other words, it stands as a corporation until it is impugned. You cannot attack it indirectly.

The third exception is the so-called corporation by prescription. There is only one corporation by prescription and that is pronounced by the Supreme Court in Barlin vs. Ramirez 7 Phil. 41. This is in the 1990s.

What is an example of a de facto corporation? An example is Sawadjaan vs. CA 459 SCRA 516 (2005). This corporation is in Loyola Heights Villa. This is homeowners association versus the corporation. That the party employee is Sawadjaan. What was the defect of that corporation? it functioned for thirty years but it did not file any by-laws with the SEC. It just presumed it had all the laws but it did not have any by-laws. It just followed the Corporation Code. So there’s a big question mark as to the validity of all its acts. And yet, Sawadjaan acknowledge it as a true corporation and became a member of it when he bought a piece of land there. He cannot just say, you have a fatal defect so I will stop paying my subdivision dues. You must bring an independent suit to attack the invalid corporation.

Barlin was the archbishop of Manila. Ramirez was the one who questioned why the archbishop is allowed to organize and coordinate the activities of the police in the city of Manila in order to celebrate the first international Eucharistic congress. (chika)

How do you do that? You must bring a quo warranto petition. Who brings the quo warranto? It’s the solicitor general. This is a permissive quo warranto. You must xxx the solicitor general to bring the action. You must prove your cause of action and its merits to the solicitor general. Once you have convinced him, then you must put up a bond which is at the disposal of the solicitor general if he loses the case, that is to protect him against damages that may be awarded. And then, he files the quo warranto proceeding.

So according to the SC, the Roman Catholic church is a corporation by prescription. It is in reality part and parcel of the Philippine society. Where a body of men have been for a long time in the exercise of corporate powers, a presumption arises of an ancient character that a charter was granted to their predecessors making the exercise of such powers by them lawful and right. So this is the Roman Catholic church.

There’s another way to attack it. You convince the SEC and the SEC brings a cancellation proceeding under Section 6 of P.D. 902-8, the expanded powers of the SEC.

FOURTH ATTRIBUTE: POWER OF SUCCESSION

So why was public money used to commemorate a religious event? That is the whole issue. It’s sectarian and then you put up a stand. It is a public corporation using government funds to glorify a religious event. That is when the SC says, it is no longer religious. Suwayig saway ang mga tao na dili ta magcelebrate ug pasko sa gobyerno. It is religious from the beginning but by long tradition and practice, it has become culture. It is part of the culture. And it has even antedated the republic.

(chika about the Jesuit’s corporate name)

The fourth attribute is that the corporation has the power of succession. Disabuse yourself of the notion that succession which means that which it put out under the xxx. No, that’s not the succession.

So de facto corporation, in effect, there is no state consent and yet it is protected. You cannot attack it indirectly. Because of that principle in labor, unions cannot also be attacked indirectly. You have to bring the action to cancel union registration. That is now the uniform xxx with respect to juridical persons.

Succession here means continuity. You have a corporation. You have the persons that originally formed it. Even after the persons who originally formed it died and then replaced, it is still the same corporation. Let’s say that the first 50 years is expired and then it renews its term for another 50 years, that corporation that is in existence in the next 50 years is still the same corporation. There is continuity.

And then you also have corporation by estoppel. What is this? Under Section 21, you have the definition of corporation by estoppel.

Page 5 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno But the corporation cannot write a will. Only a natural person can write a will.

So even if there is no more law, it is still there. Because it is part and parcel of being a corporation. What are those powers? The power to sue, the power to acquire and dispose of properties (real or personal, tangible or intangible), the power to enter into contracts, and so on. These are all inherent, incidental powers. It cannot be xxx, it can only be recognized.

So that is to the advantage of the corporation – that the corporation can be perpetual by just renewing its term for an indefinite number of 50-year terms. It is capable of perpetual existence by the power of succession.

Now, that is the fifth attribute. And many times that is necessary for projects that have very long gestation periods. Let’s say the making of Suez Canal. That was more than 50 years. (chika about Suez Canal and Mr. Nobel)

Now we go to Section 3, classes of corporations. Section 3. Classes of corporations. – Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a)

Soon, we will have that reality. Next year they say they will sign a contract with the Japanese to build the subway in Manila. The subway will cost something like P35 billion. (chika about drilling holes for subway and issuing 60 year bonds to fund it) What is the legal reality that you negate? When you are a corporation, the longest you exist according to your term is 50 years. And yet you issue 60 year bonds. The last 10 years, kinsay muservice ana? You review and amend your Articles for another 50 years. That is the power of succession.

So we come to the first classification of corporations: 1. Stock, or 2. Non-stock

But the Philippine SC says, a corporation cannot enter into usufruct for more than 50 years because its term is only 50 years maximum. Pagkakitid sa utak. The corporation has power of succession!

What is the key difference between the two? The proviso in the Articles of Incorporation that the corporation is allowed to distribute dividends. If it is allowed to distribute dividends to its stockholders, it is a stock corporation. If there is no such provision, then it is a nonstock corporation.

In the States, they are issuing 100-year bonds. (chika about Branson and Virgin Airlines, rocket ships) Giilugan ng iyang bonds! So it is deemed viable by many business savants.

You are a non-stock corporation. You are not allowed to distribute dividends. But you make profits. Your revenues that you derive from your activity is larger than your expenses so you have accumulated profits. Does that make you a stock corporation? No, it does not make you a stock corporation.

So why is our SC xxx? They just xxx service to power of succession. FIFTH ATTRIBUTE: POWERS, ATTRIBUTES AND PROPERTIES ARE EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE

That is why the SC berated the BIR. Just because you make profits, you already tax his income. Di man! You are non-stock, non-profit. Kung masayop ang BIR niini, sa ato pa murag lisodlisod ni sya sabton.

Then there is the fifth attribute – that a corporation’s powers, attributes and properties are those expressly authorized by law or incident to its existence. 1. 2. 3.

Ngano man na si Henares nanggukod na man na sya? Ang iyang gigukod, ang San Juan de Dios Hospital. That is non-stock nonprofit. It has paid rooms and it has free wards for indigents. But their revenues exceed their expenses. So they have profit. The BIR wants to tax them. The lawyers of this corporation fought the BIR. Does that make us stock corporation just because we make profits? No. It is the proviso that you can distribute dividends.

Express Implied Inherent

Express are those that you can read from its Articles, those that are provided by the Corporation Code, those that are provided by other special laws. Those are the express powers.

You are taking up taxation now. First semester, you took income tax. Now you are taking up business tax. For income to be taxable must be realized income. Unrealized income is not taxable. So if you are given stock dividends, there is no realization of income. There is no tax. When are you taxed on that dividend? Only when you dispose of that dividend. Then that’s capital gains tax.

Now, implied powers are those powers that are necessary if you have to exercise the express power. Example, purpose clause of this corporation is to organize, xxx, operate, maintain a cement factory. That is the express power. It cannot operate, maintain and build a cockpit. It’s not there in the purpose clause. What is there is the cement factory. Now, how can you do it? Implied powers! You can hire people, enter into contract with people, employer-employee relationship. Because if you cannot do that, how can you build your cement factory? That is the meaning of implied powers.

Now, stock and non-stock. Later on, we will come to discussion on non-stock corporations. There are only the purposes listed in Section 88 that allow you to be a non-stock corporation. Because if the purpose is other than those listed in Section 88, you are a stock corporation.

Incidental powers or inherent powers are the powers that define a corporation. All corporations necessarily have this power because otherwise, it is no corporation.

Section 4. Corporations created by special laws or charters. –Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n)

It’s like police power or power to tax or power of eminent domain of the state. Without those powers, it is not a state. The Constitution does not grant those powers. It merely recognizes those powers because those are what defines a state. It’s not that you are a state first then you have those powers. It is the power that makes you a state.

We have taken this up – created by law, created by operation by law.

It is inherent for water to wet. If it does not wet, it is not water. Labayon kag ice, di ka mabasa pero mawad-an kag panimuot kay naigo man ka. Solid man ng ice. It is not water. Wetness is inherent in water. The longer it is no longer wet, it’s ice. It is no longer water.

So we are now beginning formation of a corporation. Section 5. Corporators and incorporators, stockholders and members. – Corporators are those who compose a corporation, whether as stockholders or as members. Page 6 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)

November 22, 2017 (Ria Lumapas) Before we move on to our topic, I’m gonna give you a copy of a bill now pending in Congress. It’s HB 4501 authored by Congressman Arthur C. Yap. Does he ring a bell? He was the former Agriculture Department Secretary of Gloria Arroyo. He replaced this guy. (Fr. can’t seem to remember the name) Came from the family of the owners of La Panday. He’s very famous because he cannot come home from the US. He was involved in the fertilizer scam. But somebody up there in the stratosphere was machinating, and he was just the signatory of the checks. He’s indicted but he is a person of interest that’s why he is not coming back. I’m beginning to forget names now. The same family that owns pancake house. And then Arthur Yap took over. He was the student of Gloria Arroyo. He ran for governor when GMA ended her term and now he is congressman.

The significance of this terminology must be understood together with what is said in Section 15 of the Corporation Code. Section 15. Forms of Articles of Incorporation. – Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: xxx So they give you a form here in the Articles. The standard is not literal compliance. It is just substantial compliance. More or less, you comply with the language here. But there are several terminologies that must be used and it cannot be changed.

This house bill proposes to redefine the meaning of the word public utility. This is the pertinent provision: the term public utility shall mean electric power transmission, so national grid is covered; electric power distribution so Davao Light and Meralco; water pipeline distribution, so Maynilad, Manila Water is included; and sewerage pipeline system unless otherwise subsequently provided by law any existing law to the contrary notwithstanding, no other business or service shall be deemed a public utility unless otherwise subsequently provided by law upon recommendation by the National Economic Development Authority.

What are those terminologies? The first one is Section 5. 1. Corporators 2. Incorporators 3. Stockholders 4. Members These terminologies cannot be substituted. A corporation has constituents, persons who make up the organization. A sole proprietorship has only one constituent. A partnership has the partners as constituents. In a corporation, the constituents are either shareholders or stockholders if it is stock and profit corporation, or members if it is a non-stock non-profit corporation.

So what happens? By a stroke of pen, telecommunications is no longer public utility. Bus transportation, rail, no longer public utility. You have the super majority? Lusot ni. Digong wants all these people to invest, unsaon nya pagpa-invest na 40% ra man ang foreign? Wa na ron! Tungod ani, ang mga pikot makasulod na. Telecommunications, they are no longer covered by the 6040. Kaingon kag buang2x na si digong, kaingon kag unggoy na si digong? Tanawa ni o! Lusot ni sa majority. Basaha ninyo ug magagik-ik mo ug katawa o diba maghilak mo. As far as I’m concerned all nationalism laws are stupid!

Members and stockholders are called corporators. But if you are a corporator that signs the Articles of Incorporation, then you are an incorporator. Not all corporators are stockholders but all stockholders are corporators. All the corporators are corporators but not all corporators sign and so, they are not all incorporators. Why is it important? It is important to determine where the seat is of the primary franchise. What is primary franchise, as opposed to secondary franchise? Secondary franchise is awarded by a government agency to a corporation, like public utility, the right to ply the roads between Davao and Tagum. That is your franchise.

Tanawa the city of Tokyo. I told you it has 125,000 cell sites. The entire Philippines has 25,000 cell sites that’s why you understand ngano hina kayo atong telecommunication. Why don’t they put up more cell sites? Because the return of investment of adding more cell sites will not be sufficient to justify it business-wise. Kay unli man tanan. Now, there’s another issue, most of us when we use the internet, when we go surfing, we go all the way to the States. And you need trunk lines for that, undersea cable, because the internet is the most wired system of communication, only the last line is not wired: your smartphone to the cell site is not wired. But everything else is wired, in between cell sites, even the cloud that they say, there are huge computer storage machines. Close to a hundred gud ng Google, Facebook. Hain man nila gibutang ilang storage? Tua si kinatugnawang country kay init man kayo na. So bisag ang atong housemates adto sa America kung magsurf sa net, FB man. Ang hapon di man kabalo mag English, di tua lang sila nagutyok2x sa Japan. Naa pud sila kaugalingong FB sa Japan pero dira lang sila kutob sa Japan. Kita ron, pirti ng grabeha kay ultimo maid or guard ga-FB.

How about the right and privilege to exist as a corporation? That is a primary franchise. What is the difference between primary franchise and secondary franchise? Secondary franchise, with the consent of government, can be sold for a consideration. But the primary franchise to exist as a corporation cannot be sold. It is not commercially viable. Now, where is the seat of right to exist as a corporation? where is that located? It is located among the incorporators. So who can bring a petition for mandamus to compel the SEC to issue a certificate of registration? Even if you have complied with all the requirements but the SEC has not issued you a certificate of registration, you file a mandamus. Who can file that? The one who has the right to be corporation. The seat where the right is vested, those are the incorporators.

Kadungog mo anang ARPU, average revenue per user. US, it’s between 30-50 dollars a month. Diri sa Pilipinas, ang ARPU, may gani makaabot 100 pesos. Kay register ka man lang dayun ug unli, 3 days unli surfing ug muadto pa gyud ka ug laing number ma extend pa gyud ug one day. Di na nimo buhaton masuko man nimo ang mga tao human mangutana dayun, nganung hinay man? There will be a 3rd or 4th that will come in, sa sinugdanan gwapo kayo. Wa pa may sud. Abtan na ug unom ka buwan o isa ka tuig, wa na sad. Kabuang na sad.

Articles of Incorporation of XYZ Corporation. “Know all men by these presents, we the undersigned incorporators have this day constituted and organized ourselves into a stock and profit corporation under the following terms and conditions, to wit: (a) the name of the corporation shall be XYZ Corporation, (b) the term of the corporation is 50 years from and after the issuance of the certificate of incorporation.” Sugod na. We are here now, formation of a corporation. That’s from Section 5 up to Section 15. Ayaw lang mog basa ining sample ini. Read as many Articles of Incorporation as you can hold of. Naa na tanan sa internet. (chika about articles of incorporation of BDO and all its corporate name in the articles)

You know how much 25,000 cell sites cost? Asset base sa PLDT, which is 15 billion US dollars, Globe is about 8-9 dollars, icombine na nimong duha, 25,000 cell sites. Pila man diay ng naa sa Tokyo? Pirting mahala diay ana! More than 100 billion dollars diay na! Mangutana ko, naa bay foreign investor muingon na bundakan nako ni ug 100 billion kay mabawi man nako na. pero diri, mabawi na nimo ug unli? Ay sus. Maabtan kag syam2x, Page 7 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno tubuan kag side burns do! Di pa gihapon na. Mao na istoryang mingaw.

for it. So, if you are an incorporator, your name appears and then you sign.

Let it not be said that I did not tell you about this. Sulod na na, mga Intsik, Hapon. I’m all for building infrastructure, sige buhata na. You know at the turn of the century, katung 1800-1900, that’s when New York built its subway. Katung panahon na gipusil si Rizal sa Luneta, nagkalot sila sa New York pagbuhat sa subway nila. Kita diri, gipusil si Rizal. Pila ka kompanya nakadaog sa bidding? Walay nadaog kay walay bidding. Kutob sa gusto mukalot, hala kalot mo. Unsa may imo? Hoboken to Manhattan buhat ko subway, 32 sila nagkalot, nag away2x na gud sila sa ilalom. Unsay nahitabo? Nahapay sila tanan except for 3 unya gobyerno mu-take over kay most of them were bonds guaranteed by the government. That is why New York is the most provided by way of public transport. That’s why the population of New York has stabilized for more than 100 years. Wa na nagtubo. It’s just not even 8 million people. Nganu man? Because there’s so much transport that you can live in the outskirts. Nya muadto ka, buhata ng riles diri, bagsak ng presyo sa yuta sa Davao. Magpuyo ka bisan Tagum ka pa o Digos, makaabot ka dinhi in less than 30 mins, wa man trapik. Abot ka diri trabaho ka, pauli ka sa inyo, maayo pa ang hangin na gihanggab nimo. Gibuhat pa ng Digong samtang mayor sya, 30 years gud sya mayor diri, nothing to show for!  Ug kinsa tung mga advisers sa kilid, ang Cebu dugay na kayo sige float ug bonds, si Osmena na naglakaw2x nagkupot sa iyang tae, nag colonoscopy naman na sya. Naa naman nay bag. Sya mismo nag ingon “ako ray mayor gadala-dalag tae maski asa.” Mao nay tao nag-float ug bonds. O karon, way approval sa Congress, buhat sila ug bridge, ikatulong bridge. Ako dili ko against ana. Akong inahan sultian ta mo, 1960s pa, palit sya ug yuta dira sa Mactan. Piso ra ang yuta ikaw pa magpatitulo. Nya wa man nya gibaligya hantud sa ni-70 years nalang. Tagpila naman ang yuta ron? 6-7k per square meter, piso, ngadto sa 6-7 thousand, walay investment manager makalupig ana.

How many incorporators when you form a corporation? Not less than 5, not more than 15. But the original subscribers of shares of stock or the original members in case of nonstock can appear in the articles but they are not incorporators if they do not sign. Now, why do we belabor this? If you are a minor, can you be an incorporator? You cannot be because you are not sui juris. You are limited in your personality, in your capacity to act. So you cannot be an incorporator if you are a minor, less than 18. Can you be a shareholder? A subscriber? Yes. Ownership does not discriminate with respect to age. You can be an owner of shares of stock even before you are born. Your parent can donate to you while you are still in the womb provided later on you are born. So you can be a shareholder but you cannot be an incorporator. You are made an incorporator, your name appears there and there are only 5 of you, the certificate of incorporation is issued. What happens if later on you are convicted of plunder? Niapil ka sa gobyerno human naapil ka sa fertilizer scam. Convicted ka. Nya ang imong corporation, ang isa ka incorporator kani, convicted na sya of plunder. Kangil-ad sad ani. So i-amend nato aron mawala ng ngan anang tawhana na makauulaw. You cannot amend that part of the articles because it’s historical. Ma-amend ba nimo ang imong amahan? Ilisddan ni nako. Wala. Di na nimo, maski adopted pa ka, natural father nimo magpabilin na. Di na nimo mailisdan ang historical facts. Mao nay bahin sa corporation na dili ma-amend. Mao na that’s one thing you have to keep in mind. Ikaw ang abogado gipabuhat sa dokumento, unya you foresee that this corporation will live for many years. Huna-hunaa nimo. Pilia ng mga tiguwang na hapit na mamatay ba. Mao na ibutang dinha na founders. After pirma nila, patay sila, wa na. Kabaw na ka sa record. Di na madaot ang corporation. Pero batan-on imong gibutang, naa pa na sya dugang panahon na magbuhat ug binuang. Nya ikaw ang pasangilan. Sa kadaghang tao na atong pilian nganu kato man gyud sya? (Talks about Charles Manson, the serial killer as example).

Karon sige ra gihapon ta ug istorya, buhat ta ug bridge didto sa Samal, sige lang gihapon ug istorya. Ang importante ana ang kwarta man. Float kag bonds, baligya kag bonds. Cebu, baligya man ug bonds, di gani paliton sa Cebu adto sila sa Hongkong, Singapore. Toll hantud mabayran. Utility, gwapo ni. Gawas ani ron, wa nay utility.

May gani ang dagan way mutan-aw. Naa gani gamayng ligas tanang tao mahimong expert sa articles of incorporation. So, you have to reckon with that.

Now, naa pa ni giingon diri:

Now, aside from these corporators, incorporators, stockholders, members, we said that we have these two characters that play a role in the formation of a corporation if your corporation sells shares to the public. The SEC has come out with a plan when you sell shares to the public. If you sell shares to more than 19 people then it’s like banking. If you accept deposits of more than 19 people then you are already engaged in banking. Wa gani kay lisensya priso ka because there is a criminal liability for engaging in banking without a license. So if you sell shares to more than 19 people it means you are violating the Securities Regulation Code and there is also a criminal liability if you sell shares without a license.

Any existing law to the contrary notwithstanding the following shall not be considered public utility operation: electric power generation, electric power supply in sec. 29 of RA 9136, crude oil and petroleum production, transportation in this Act and EO 202, broadcasting, telecommunications and value added services in RA 7835, other public services in this Act. Not content na gi-change ang definition, gibutang na gyud, explicit. This is not public utility. Unsa may epekto ana? Do you think the price of the shares of stock of PLDT or Globe will rise? If you think it’s going up you better buy now. Kay once this becomes a law it will be too late. Naa nay naghuwat dinha.

Who is the most famous person in the Philippines who sold shares without a license and went scot-free? El Shaddai, Brother Velarde. He sold shares of his broadcasting corporation because he needed money. But nobody prosecuted him. All the politicians are afraid of him because he will only say one word to his followers that means you do not vote for him. But he really sold shares.

So first we will go to shares of stock. Humana man ta sa name of a corporation, articles of incorporation. (FGN asks Ms. Domingo what topic the class was in) FGN: Okay we are still in constituents of a corporation. We are still in section 5. Corporators, incorporators, stockholders and members.

Now if you sell shares to the public, you will need a promoter and an underwriter. What is the function of a promoter? In what way does he differ from an underwriter?

You will try to put this in modern math, what is the set? The subset, and the sub subsets. The biggest set here, the biggest genus is corporators, which may be divided into two subsets: members and shareholders. You are a shareholder if it is a stock and profit corporation. You are a member if it is a nonstock corporation. Kaning incorporator is also a shareholder or a member. But he is so at the inception of the corporation’s existence. In other words before the corporation is formed he already intervenes, his name is in the articles and he signs the articles of incorporation. He has liabilities with respect to what appears in the articles of incorporation. If there's something illegal there then he is legally responsible. He can be made to account

A promoter brings together those who issue securities, whether shares of stock, bonds, derivatives, futures contracts and then there are those who are investors who buy these instruments. Who are these? They are retirement funds, insurance companies, mutual funds, hedge funds, he brings them together. He rents a place in Wall Street. He sends out invitations to the ones he knows are investors. And he prepares a buffet. Mangadto na sila and there is a presentation. So let’s say you are one of these entrepreneurs, you have a new business that you are proposing. You are proposing this new toilet that can be maintained without water. There was a contest sponsored by Bill Gates to solve the Page 8 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno problem in Africa. Apil tanan, MIT, Harvard. Kinsay nakadaog? Wa gyud mo. Toilets are the last thing for you. Toilets are just something, a matter of fact that you’d rather not include in your conversations because they are toilets. Dako kayo ng problema sa India. Sa Cannes, a foreign movie about toilets. A woman suddenly finds out on the night that she’s married that there’s no toilet in the house. Half of the houses in India have no toilets. You bring a bottle of water, you walk down the railroad and you do it somewhere there. Tutal ang makakita nimo muagi man lang. And the untouchables in India are those tribes exclusively whose jobs are to clean toilets. Father whispers: naa bay Indian diri? Wa ma nay silay quota sa gobyerno. Mao na nanganhi na sila kay nakakwarta na sila pero di sila kasulod sa mga medical schools didto kay wa na sila quota. They are discriminated against by traditional practice. Mga lagum gyud sila. There is a gradation of darkness even among the dark! (Fr. talks about mga kabaw na)

McMicking to class. Story about the Ayala family. Father asks to look up the biggest 100 stockholders of Ayala)

November 24, 2017 (1st Half) (Florienne Melendrez)

So if you are selling shares of the corporation still to be formed and you engage an underwriter, with whom is the underwriter in contract with? it is in contract with the corporation but it is negotiated by the incorporators. Upon the formation of the corporation, the corporation assumes the obligations, the rights that the incorporators agreed to.

now we discussed 2 persons who are not in section 5 but are just as important--- the promoter and underwriter. If the corporation you are forming tries to sell to the public shares of stock, then you cannot help but employ the services of a promoter and underwriter. Underwriter enters into contract with the corporation as to the sale of shares—how much he gets as a commission. If it is a corporation still to be formed, then once you really enter into contract with the promoter and underwriter are the incorporators. When is the corporation in existence? after the issuance of certificate of incorporation by the SEC. it is by consent of the state and the agent of the state is the SEC.

We are in formation of corporation. Forming a corporation. A corporation whether stock or non-stock has constituents. And it is these constituents that make up the corporation. As it is placed in section 5, the constituents are divided into subsets from corporators.

Is there a violation of contract law? The corporation is the successor-in-interest of the incorporators. The incorporators act in and for behalf of this corporation still to be formed.

Section 5. Corporators and incorporators, stockholders and members. – Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

So this promoter and underwriter are bound to the corporation. They must answer to the corporation. The underwriter may agree to the so-called

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)

English type agreement- that in the event that the public does not take all of the number mentioned in the agreement of shares of stock, the underwriters will take shares which the public will not take. So there is an assurance that all the shares they will issue will be bought.

Corporators are the basic constituents of a corporation. You are a shareholder or stockholder of a corporation if it is stock and profit corporation. So you are a corporator. But not all corporator are shareholder or stockholder because if it is non-stock, the corporator is a member, not a stockholder.

(Father talks about Wallstreet having a mathematical calculations of all the shares which may be bought)

Now, if in the by-laws your name appears and you sign the bylaws, you are a corporator but you are also more importantly an incorporator.

Best efforts type Vs. Firm commitment type – paliton na nako tanan. Wala pa nagsugod gipalit na, sya na bahala retail ana. (Father did not explain further huhu)

What is the difference between a corporator and incorporator? The promoter is one that brings the sellers and buyers together. Sya na muadto kung nay mga biddings, buhat siyag presentations, nay pagkaon diha. These are the rituals of selling shares of stock in the market. Once you go into a certain amount, you have to sell it in the big market so you go abroad.

incorporator- has certain liabilities attached to the articles of incorporation which is a public document because it eventually ends up with the Securities and Exchange Commission (SEC). it is possible that your are telling an untruth there. You can say that this number of shares is already paid-up even when it is not. That is falsification of public document. That is a notarized document.

So you have section 6 Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board

So that is the difference between an ordinary corporator and incorporator. that is why you may be an ordinary corporator if you are a minor. You can be a stockholder. But you cannot be an incorporator if you are a minor because you must assume liability and age is one of the limitations of the capacity to act of the person. If you are to find out who are the stockholders of a corporation, where do you go? Repository of all the stockholders(?) in the corporation is the stock and transfer book of the corporation. That is where everything about the incorporators and shareholders is recorded. The subscription, the balance, everything is there. Is it open to everybody? No. However, if you are listed in the stocks exchange, you are obligated to maintain a website. Or the Philippine Stocks Exchange makes available a list of 100 biggest stockholders of a corporation. (Father tells about the list of the biggest stockholders of Ayala Corporation as can be seen in the internet. MerMac Corp has been the biggest stockholder since 2005 with 58% of the total outstanding capital stocks. Shows the obituary of Mercedes Ayala Page 9 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

that is the maximum number of shares that you can issue. But take note that that is not the maximum amount that you can issue because you may sell it at higher than par-value. What determines the issued price? It is your understanding of the market’s capacity to buy. Kung inilog imong share, patas-an nimo. Kung wa jud kisaw imong share then kutob r aka sa par-value. Mao nang kelangan jud ug presentation.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

(talks about presentation)

Double Dragon corporation having a good

but what is really the value of the shares? The par-value is just the starting value, what is called the nominal value.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

(talks about inflation. 100 peso 10 years ago vs now)

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 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; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)

All consideration received in the issuance of no par-value shares are considered the full payment of the shares. No par-value shares that are issued are issued as non-assessable until entire consideration is already given. So you cannot purchase shares on installment if it is no par-value share.

After you give the name of the corporation, you give the place of its office, then you have the purpose of the corporation, the term of the corporation, now you have to put the authorized capital, subscribed capital, paid-up capital of the corporation.

3 kinds of capital: authorized subscribed paid-up

Capital stock is divided into shares. So you enter into classification of shares.

NO. You do not have to pay 25%. The obligation is in the aggregate. That the entire subscribed capital is at least 25% of the authorized and the paid-up capital is at least 25% of subscribed. The whole obligation not the individual shareholders.

you cannot issue shares at lower than par-value. If there is no par-value, what is the amount that is critical? The issued value. The law says if you have no par-value shares, you cannot issue no par-value shares at lower than 5 pesos.

Par-value: you can have subscription of installment. Mubayad kag allowable downpayment and balance is to be paid on the date stated in the contract or on the date on call of the board. Those are the two possible dates when you can pay the balance of the subscription. Now if the articles of the incorporation says: 1. “this is the authorized capital stock” 2. “this is the subscribed capital” then the subscribed capital is at least 25% of the authorized capital stock. Now if you as a subscriber have a subscription of 100 shares, are you obliged to pay at least 25% of your subscription? That is Php25 that is equivalent to 25 shares of the 100 shares total.

CLASSIFICATION OF SHARES First you have to divide shares whether they are par-value shares or no par-value shares.

Kung sugtan ka sa treasurer of the corporation na 20% imong bayran, okay. Some might pay the entire subscription. As long as the aggregate paid-up capital is 25% of the subscribed, and the subscribed is 25% of the paid-up, that’s enough.

What is a par-value share? Classification of shares Par-value share – has a nominal value as to its share. No par-value share – does not have a nominal value. It is just one unit. Now the rule says if you have par-value shares you cannot issue or sell it initially from the corporation to the subscriber at lower than par-value. The minimum price of a par-value share upon issuance is the par-value. Can you sell it at higher than parvalue? Yes you can. The difference between the issued price and the par-value is the premium of stock. You identify that in the balance sheet. Example: Authorized capital at 10 million Divided into 10 million shares at Php1.00 par-value per share (So 1 peso is 1 share) And you multiply it by 10 million = authorized capital Page 10 of 112

    

Common shares – not found in the corporation code. Preferred Redeemable Founder’s shares Treasury shares – not a classification in the articles. You have a treasury share because of what happens to you. If the corporation repurchases or reacquires you, you become a treasury share. You stay in the treasury of the corporation. It is not by virtue of presentation but what happens to you.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno November 24, 2017 (2nd Half) (Althea Astrid Gopo)

Please keep this in mind clearly: no company, no corporation can guarantee the payment of dividends every year. You cannot. But a company may be able to issue guaranteed cumulative preferred shares.

PREFERRED AND REDEEMABLE SHARE– According to section 6, you cannot classify preferred or redeemable if there are no par value shares. They must be par value shares. You cannot classify redeemable and preferred shares if there are no par value shares. They must be par value shares. Thereby, section 6 says, “only redeemable shares and preferred shares may ble classified as non-voting shares.” So, only par value shares may be deprived of voting rights.

What’s the meaning of that? NOT that the same company who issued the shares is guaranteeing preferred dividends every year, with or without profits. But that there is another company that guarantees it. This company will come to the rescue if this subsidiary cannot pay the dividends. It may borrow money, because that is his expense, because he guaranteed this subsidiary. But the company itself who owns the shares cannot guarantee the preferred every year.

Okay, let’s go to PREFERRED. PARTICIPATING PREFERRED. Q: What do you mean by “preference”? Q: What is the meaning of participating preferred? a.

b.

Preference as to distribution of assets at the time when the corporation is dissolved. So liquidating dividend. You can have preference there. You will be first paid if the corporation is dissolved, ahead of the common shares or other shares. Or you can have preference in the distribution of dividends. When the corporation makes money, before any other share receives dividends, you receive. And it’s a percentage. Let’s say: 8% preferred dividend. So 8% of par, that is what you get as dividend preferred.

Now, time and again the Supreme Court has said: dividends can only be taken from profits, and profits is the result of the strenous and ordinary course of business operation of a company. So if the corporation has no profits, it cannot issue dividends. Q: Can a corporation borrow money in order to pay dividends?

You get your preferred dividends. There is profit, you get your preferred dividends. After you get it, there is still profits remaining. So now the common shares will get their profits after you’ve gotten yours. But because you are participating, you also go with the common to receive dividends. So kaduha ka muigo. Preferred ka pa, common ka pa. Sa ato pa, in earning terms, you are actually two shares: you are common and you are preferred. Kay participating man ka. Kinsa may buang nga corporation nga mu-issue ana? Mao na nang mga gwapo gani kaayo nga shares. Buot pasabot ana, nagkagidlay na nang corporation kay way mupalit kung ordinary shares ra. So butangan nila na’g daghan kaayog features dira para paliton nimo. Kay nanginahanglan silag capital pero way mupalit ana ug ordinary lang ang shares, way daghang buloloy. So butangan nilag daghang features – cumulative, participating, naa pa gani nay voting. Kay kasagran sa mga preferred, they are classified as non-voting. Preferred na gud ka, unya muboto pa ka. Mura na sad kag common stock. Wa kanay apil sa boto. Nonvoting ka. Pero wa may mupalit nimo. Hala! Butangan nalang natog voting aron paliton gyud. VOTING, NON-VOTING.

That is a trick question. But because a corporation may register profits, but because of cash flow, it cannot pay out dividends if it does not borrow. So it borrows in order to have cash, to pay cash dividends.

Q: What is the presumption.. if you are preferred shares and there is common shares, are you voting or are you nonvoting? What is the assumption?

Now, if the corporation does not have accumulated retained earnings it cannot issue dividends. So it cannot borrow if it has no accumulated retained earnings. It does not have profits. Asa may corporation nga nag-ganansya pero way kwarta nga ikabayad? Cash flow ba. Cash flow. Kamong mga dili accountant, pa-explain mo sa inyong mga accounting nga classmate kung unsa ning cashflow. That’s a problem of cashflow. Diri sa Pilipinas o, the government needs money everyday, every month; it has to pay salaries. But then they only get collection from taxes, periodic times: when income tax is paid, at the end of the year. How do they manage in between? Ah, that’s why the government floats treasury bills every Monday, the Bangko Sentral. Because that is a problem of cash flow. Ang imong kinahanglan kada adlaw, unya ang imong kita periodic. So wa kay panggasto so kinahanglan manghuwam ka. What does the law prohibit? It prohibits issuing dividends without profits. You might have profits but you don’t have the cash flow. So you have to borrow and be able to pay it. You might be preferred. Bayran kag una. If you are preferred cumulative, cumulative prefered shares. Whats the maning? If in one year the company cannot make the issuance of dividends. It has profits but it cannot issue dividends. What happens? Purdoy ka ana! Unya preferred man ka? Cumulative man ka? The following year, you can ask payment for the dividends paid for that year plus the year before that was not paid you. That is called dividends in arrears. Mu-cumulate na. Kay cumulative preferred man ka. Page 11 of 112

The assumption is you are VOTING! Why? Because there is an assumption that all shares have equal rights, UNLESS otherwise provided in the articles of incorporation and when it comes to limitations to transfer shares also in the certificate of stock. Feature of a corporation shares are found in the articles of incorporation. You are an original share holder who bought shares. Nagkahina na ang corporation. Walay mupalit sa iyang common shares. Muingon nang corporation: we will create preferred shares, and they will be voting shares. So mabotohan na; i-amend na ang articles. You reclassify shares. There are still remaining 1M common shares unissued. Then you will amend it, and you will say 200K of these shares are now reclassified as preferred, voting shares. When that resolution is passed, and you are a dissenting stockholder, you can exercise what is called “APPRAISAL RIGHT”. Muingon kag “I want out in the corporation because you are giving more privileges to somebody other than me. Nauna gud ko dinhi!” so I can ask the corporation to value my shares then pay me because I am leaving this corporation. That is appraisal right. Mag-usab gani sila..

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Preferred shares: 1.

Must be voting; cannot be non-voting. Maski pag valued up (?) It’s the only share that can be deprived of vote;

2.

Like the redeemable shares, must be par value; cannot be no par value shares;

3.

Gets preferrence as to being paid out in dissolution. It’s the senior proprietary interest senior to the common shares. In terms of dividends, it’s also senior to the common shares;

4.

It may be convertible. Convertible preferred. What do you mean by convertible shares? Convertible shares are preferred shares or some other share that may be converted to common shares either at the option of the shareholder/owner or at the option of the corporation. Convertible shares.

So, daghan na tag nakit-an: preferred, cumulative, participating, convertible.

ordinary,

In that instance, what is said in the articles is already no longer true. There is this amount that is subsribed, there is 25% that is paid-up – no more! Giuli man nimo! It’s no longer true. So what do you have to do? You have to amend the articles of incorporation. You have to retire the shares that you have redeemed. So that the articles will reflect the true state of your capital stock. Q: But if you redeem with profits, do you have to retire the shares that are now with the treasury? They are now treasury shares because you have redeemed/re-acquired them by paying the stockholder. You do not! Why? Because what is written in the articles remains true! You did not give back the articles that you paid. You paid out the profits. So the capital stock still remains intact. So you do not have to amedn the articles of incorporation. – Break – Section 6 says that at all times there must be a classification of shares that must have COMPLETE VOTING RIGHTS. You cannot split voting by classifying shares.

REDEEMABLE SHARES. Q: What are redeemable shares? In the articles of incorporation, it says, “these shares may be put back by the corporation at a pre-determined price. Now, it could be at the option of the stockholder or it could be at the option of the corporation: a.

At the option of the corporation, that is DIRECTORY.

b.

At the option of the stockholder, that is MANDATORY.

Now, the GENERAL RULE is: no corporation can pay the stockholder and get his shares if it does not have unrestricted retained earnings or accumulated profits. That is the rule. Why is that the rule? Because if it were not the rule, what would prevent the corporation from forming? Formed na sya. Nangutang sya’g daghan kaayo. Unya paghuman niyag pangutang, niingon sya “paliton nako’g balik tanan ninyong mga shares. Hala panagan na mo!” Paliton niya. Unya, wa na na’y kwarta ang corporation, kay giuli man niya ang kwarta didto sa mga nag-increase ang shares. Wa pa ma’y ginansya. There is no unrestricted and retained earnings. And then in your articles you say, “this is subscribed. Mao ning amount. This is paid up.” And the public reads that, and they rely that the corporation has money to answer for its validly incurred obligations. Unya diay gisekreto diay’g uli ngadto sa mga stockholders katong ilang kwarta nga gibayad sa shares. That is a violation of what is called the “TRUST FUND DOCTRINE”. That is why redemption of shares, the buy-back of shares by the corporation is not allowed unless there is unrestricted retained earnings. However, if the shares are redeemable shares classified under the articles as such, that at certain point will be put back, then even if the corporation does not have unrestricted retained earnings, it may be purchased/re-acquired by the coporation. So long as the corporation’s capital is not impaired, or the corporation’s operation is not fatally injured by the redemption even if it does not have unrestricted retained earnings. Q: What happens when a corporation redeems the shares even if it has no unrestricted retained earnings? Page 12 of 112

Let’s say, these shares can only vote in the election of directors; these shares can only vote when it is for questions of amending the corporation for increase or decrease of capital stock. You cannot split voting that way. If you do that, there must still be a class of shares that has complete voting rights. This is important because when we come to Founder Shares - Section 7, a corporation may classify shares as founder shares that have exclusive right to vote (exclusive voting rights) and be voted for in the Board of Directors, but only for a limited period of five (5) years, non-renewable. I’ll give you something from other jurisdictions that it not true in the Philippines and which makes our securities here by contrast, different from others. For instance, in the US, you incorporate according to the State. Most corporations in the US that were big, were incorporated in the State of Delaware. And the Stae of Delaware allowed enhanced voting rights for certain classes of shares. So this is what Ford Motor Company did before it went public: it created founder shares of Ford. But these founder shares have 10 times more vote than the rest of the shaes. Now, these founder shares were owned by the Ford family. And because of this feature, it is the only car company that remains under the control of its original founder today while all the rest have already – the founders have already lost control of the corporation. Like General Motors, the original founder had long lost control. Ford still controls it because Ford created founder shares. Shares of stock that have ten times more voting rights than the others. And that is allowed. That is owned by the family. Actually it is owned by the Ford Foundation. Now, if you are a member of the Ford Family, unya naa man gyud kay right. “Cash out na ko! Ibaligya na nako akong shares unya kwartahon na nako. Bahala na mo. I will go forth somewhere.” What is the solution of Ford Foundation? Ford Foundation has, in the meantime, bought ordinary shares. They bought ordinary shares. So if you have Ford shares that has 10 votes, you are equivalent to 10 shares. But Ford has bought ordinary shares. Kung ikaw gusto na ka mucash out, they will sell the equivalent number of shares in ordinary shares and give you the cash. But then Ford Founder Shares that have 10 times voting rights, they did not give you that. So it’s still intact. So kinsa to’y mulaban nila, lisud kaayo. Ka-napulo kadaghan na shares imong kinahanglanon aron mutumpag sa isa nila ka buok na

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno share. That’s why they remain under control, the Ford family.

is a cost to borrow money. So the ideal cost picture for a corporation is just enough money. Then you are efficient.

Alright. That is not allowed in the Philippines. You classify a share with ten votes more than the ordinary. That is not allowed because of the principle of equality.

Pareho na sa car racing driver Formula One. Ingon bitaw na sila, mupakusog kag dagan, ika’y kinakusgan, kinapaspasan mupadagan. Di man ikaw mao’y makadaog ana. Ang makadaog sa Formula One, those who can take on average, maximum speed all the curbs. This particular curb is taken at 120, 119, 120, 118. Ang uban lagyo kaayo. But just enough. Why? Because if you go more than the maximum, lagpot ka. If you go less than the maximum, overtake-an ka. So enough ka lang. So the trick of the best Formula One driver is memory. Gwapo kaayo kag memory. Kada corner, kada curb, naa kay memory. Sugod ka nag tapak ug brake, buhian nimo diri. Kakapoy ana. Mga maayo na sila’g memory. Kanang makadaog ana, di na sila pinaka-paspas.

Europe. They decided in the 70s and 80s that public owned corporations, government owned corporations, are very inefficient because the officers are appointed by politicians, and they are answeable to their appointing powers. So they were not profit-oriented. They were not efficiency-geared. So they decided to privatize – privatization, shrinking of governments. But they said, there are certain corporations, public utilities, that are crucial to national security. We cannot afford to lose control. Communications. Petroleum. Water. So what they did was, they still went private but they provided in the articles of incorporation what they called a Golden Share – one share that can veto in the name of national security. If it casts its vote against a particular measure in the name of national security, pildi ka na. That golden share is held by the government. In all other instances of voting, wa na syay round, usa ra sya ka vote. But when it exercises its veto vote, bisag pila pa mo kabuok dira, di mo makapildi niya. That is the Golden Share. German Telecom. Telefunken. Naa nay Golden Share. The Petroleum company of France. Naa nay Golden Share. In certain instances, the government will just whip out that single share and announce that this is the exercise of the veto power of the Golden Share. And that measure cannot prosper. Diri sa Pilipinas, is it possible here? Can be. All we have to do is just legislate.

350kph. Mubo pa gyud kaayo. Ang naga-separate sa imong sampot ug sa dalan, 4 inches ra. (LOL) Mukibra (?) lang nag gamay, pangos imong sampot ana! That is the ideal finance-wise. Karon kay daghan mag sigeg takeover. If you become very profitable, you become the target. Non-profitable also, kining mga profitable nga gusto muexpand, manguha nalang na sila. They will just acquire by merger. Kung controlling interest ka, naa kay daghang treasury shares. Naa na gani’y gusto mu-takeover, release your treasury shares at less than par value. Kinsa ma’y mupalit? Ikaw ra sad! Kinsa may mupalit, ang board may magbuot! Ikaw may nag control sa board. Baligya nimo ang treasury shares. Ang katong mu-takeover nimo, mupalit man at market rate. Mag sige syag gukod nimo ug daghan ka nang shares. It becomes very expensive for him. After a while, mugive up na na sya. Kay daghan man ni syag bala. See? That’s one of the uses of treasury shares. That is why people keep treasury shares.

TREASURY SHARES. Corporations have a buy-back policy once the market price does not reflect what they think is the real market value. If the real value from their estimate is $100 per share. And the market is trading your shares at $80. Muingon dayon na sila’g, well, my shares are trading at a discount of 20%. Why should we invest on someone else. Let’s invest on ourselves – let’s buy our shares!

If you are reacquired by a corporation, shares are reacquired, they go to the treasury. They have no voting rights, they have no dividend rights, they just stay in the treasury. But they can be re-issued. “Re-issued” for me is a common inaccurate term. Because issuance is only once. That’s actually sold. And treasury shares can be sold to the public for a consideration less than par value. You can resell those shares for a consideration less than par value or less than issued value before. Because it is presumed that the original capital that you contribute to the corporation when it issued is still remaining there. In other words, you already acquired with the use of accumulated profits. So there is no impairment of the capital stock of the corporation by selling less than par value. Q: What is the use of treasury shares? The man in the street thinks that the more money you have in business, the better for you. Kinahanglan mag-negosyo ka, kinahanglan 5M capital padagan sa negosyo. Pero naa kay 10M, ang extra 5M nimo gibutang nimo sa bangko, for siguro ra ba. Magkuha kag pedicab, dali ra kaayo ka kahulbot, di ka kinahanglan manghiram. Safe kaayo ka. Muingon ang mga tao, “mao nay negosyo”. Beh, palista ka sa stock market. Daghan kaayo kag cash. The market will punish you! What are you doing with all that cash? Lost opportunity! Buang-buang ba ka nga magsugod kag business, diba mag expand ka? Because the ideal financial situation is you just have enough cash, enough capital to run your business. Not more. Because if you have more, you lose opportunity! That money could have made more money somewhere! If you have less money that is needed to run, then your cost of operation increases because you have to borrow money. And there Page 13 of 112

What is the effect? You reduce the number of outstanding shares that will divide the profits. So gamay nalang ang shares na mudivide sa profits. Mutaas ang earnings per share. Pag taas sa earnings per share, kita ang mga investors, musaka ang price traded. O diba, edi kaduha ka muginansya. Saka ang earnings per share, saka ang price at which it is traded, meaning, ana ka na mu-unload. Kay kaduha man ka muigo. But it will take time because you have to play with the public perception of your value and what is relative to the price of your shares. You know there is a corporation in the US that has never declared – since its beginnings in the NY Stock Exchange in the mid 1960s – it has never declared profits, either stock or cash. Never declared. Par value, 5 pesos per share. Now, it is trading at over $200K per share. Mupalit kag usa ka share – and many do that, there are so many analysts who buy just one share. Why? So they can attend the annual stockholders meeting and listen. It is $200K per share. Wa may declare-declare ug profits. Now, di man na mahimo sa ato. You have declare dividends – either stock or cash – the moment your accumulated unrestricted and retained earnings is as much as your paid up capital. The moment it is 100% of your paid up capital, you are required to declare profits UNLESS there is a reason for you to justify. Naay disaster or something like that – then maybe you will be given postponement by the SEC.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno But that is the rule in the corporation. You cannot not declare. If you want to know, go to Youtube. Tyoe there and search Warren Buffet. Very famous guy. He’s already in his 80s. He can survive just on burgers and coke. Unhealthy food. 80s na siya. He runs Berkshire Hathaway. It is just a ___ company now. And there is not right or reason for the way he buys subsidiaries. But he is the most successful investor in the stock market. Warren Buffet. You will see him lecturing to Harvard Business Students, Stanford Students. Simple kaayo na’g mga rules si Warren Buffet, makatawa ka. Okay, let’s continue next meeting.

November 29, 2017 (Carra Tito) So there is a stock in the Philippines’ listed corporation, not in pesos. So what does this make Del Monte? Del Monte is a foreign corporation. It’s listed in Singapore but it is making its shares available in the Philippines. The owner of Del Monte in Bukidnon is Nutri Asia. It’s the holding company. Del Monte is listed in Singapore but it is owned by a Philippine corporation, Nutri Asia, one of the groups of Mr. Campos, the eldest main son of the original founder of Unilab. So that’s where they get their money. Now it says “preferred series A-2. How many of these series A-2 are issued? 8 million series. Assuming that it is issued at $10 million, what is the gross amount that they’re supposed to get? $80 million dollars. But there is a proviso. It says oversubscription of up to 8 million series A-2 preferred shares. So they can issue more if there are more who are willing to buy. You are off bringing 8 million but h ten there are so many lining up. How will they know that they are called? Because their underwriters are swapped with first to buy. WHO ARE THE UNDERWRITERS?

WHAT IS THE DIFFERENCE BETWEEN A CLASS OF SHARES AND SERIES OF SHARES? The class share is preferred redeemable. The series is preferred redeemable A-2 first class. Una pa to baligya. Mahalin gani tanan, naa pa guro gusto ug up to another 8 million release, that is it. Another series. Because it says here 8,000 series A-2 preferres shares with oversubscription option of up to 8 million series into preferred shares. So naa pa gani gusto mupalit, mao na ginatawag sa Wall Street “GreenShoe.” Green shoe provision. Now, the Philippine stock exchange can approve anyone. Details of the offer can be found in the supplement uploaded on the company’s website. The Philippine Stock Exchange approves the listing of the abovementioned securities on November 24, 2017. While the Philippine Securities and Exchange Commission (SEC) issued an updated permit to sell the securities of Del Monte’s Series A-2 preferred shares on November 27, 2017. Bag-o pa lang ni. Init kayo ni. How much interest do you get in the bank? Wa pa 1%. Kini, 6.5%. Why profit? Unsaon man nila paghatag ug preferred shares.. When shares of stock are entitled to dividends only when there is profit. You can only issue dividend profits. And yet they are compelling it with bonds as if it were a bond. But the giving of preference of 6.5% and is not unconditional unlike a bond. It is still conditioned on the registration of profits. So you can have preferred shares series A, series B. if you go to PLDT, you can have preferred shares series A, B, up to A. And then they start again, AA, BB, etc. Preferred shares that are nonvoting. This one, is this voting or non-voting? Since there is no disclosure as to whether or not there ___, it must be voting. The presumption of stocks have the same rights and properties unless it is so provided in the articles or by-laws of the corporation. Diba there was as time was when Del Monte was ruled by the technical team. Now, all agricultures are ruled by finance. They have it passed around at one time. AKR was the owner of Del Monte but they sold it so that now it is very huge.

BDO, Capital Investment Corporation, Chinabank. What else? All those listed there. (refer to handouts) PNB Investment Corporation, Chinabank, BDO Securities Corporation. Now what is the preference exactly? First of all, what kind of shares are these? It says preferred shares but did you read the fine print (in the handout)? The corporation has an option that upon the 5th anniversary, it can redeem its shares. So redeemable. Preferred redeemable. WHEN IS IT REDEEMABLE? On the 5th anniversary. So 5 years. What happens if the corporation is showing the issuer, Del Monthe, does not redeem? There is a step-up date. Musaka ka. Unsa man isaka nimo? Your preferred rate of return can go up. How? The benchmark rate is the 10-year US Treasury Bond Rate. It says here, the dividends shall be adjusted on the step-up date to the sum of the 10-year US Treasury Bond Rate as of the step-up date + initials spread + margin of 2.50% per annum. So if the 10-year bond rate is already higher than the rate provided here. What is the dividend rate? 6.5%. if it is already higher, dungagan pa jud ug 2.5%. however, if the dividend rate is higher than the applicable step-up rate, then there shall be no adjustment of the dividend rate. So if the 10-year US Bond nibagsak, lower than that 6.5, and 10-year needed the margin of 2.5, it is lower than 6.5, what will happen? So you can only go higher. You are already guaranteed 6.5%. but is that really a guarantee? Of these are shares and the benchmark is a bond rate. WHAT IS THE DIFFERENCE BETWEEN A BOND AND A SHARE? The return of the share is dependent on the existence of retainer on its profits. The returnable bond, regardless of whether you make profits or not, you have to pay the interest to the creditors. That is the big difference between a bond and a share of stock. Page 14 of 112

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for nonvoting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1) Amendment of the articles of incorporation; 2) Adoption and amendment of by-laws; 3) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 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; and 8) Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

So what will the corporate secretary do? Mangolekta lang daan ug proxy. Koletkahon nimo dayon ang proxy. Naa na gani ka 2/3, you can already start mailing. Sigurado na b aka? Ayaw pag-gasto-gasto kung wa pa ka kaibaw. Di man ni lumba sa kabayo na mangpusta ka. In fact, you could not call a meeting the results of which you do not know. Siguraduha na daog ka. If you are willing to pass a resolution, they they give you a proxy. Ikaw corporate secretary amn ang pangutan-on, “O, do we have the numbers?” Corp. Sec: “I don’t know.” Patay. Mao na imong trabaho. So I give you an example. Before, you only have common shares in your AOI. 25% of that are already issued and subscribed which is the basic requirement. So if 1 billion authorized capital share at 1 peso par value, 240,000 shares at 1 par value each share has already been issued by way of subscription. Of that 24%, 50% is paid up. 12.5% is paid up. Now, you want to raise more capital. You are thinking of issuing the remaining 750,000 shares but your corporation is not making money. In fact, it lost money. So what is the book value now? The book value now is lower than the par value. So naa kay problema. You cannot issue your shares at a price lower than the par value. Kinsa kaya mupalit? At even par value when your book value is lower than par value, way mupalit sa imong shares. Langawon ka. Unsa may solusyon ani?

Alright, we have taken up the Articles of Incorporation (AOI), the name, the principal office, the purpose, the term, and then the capital, the classification of shares, under Section 6. Now there is Section 6. I keep telling the class, it is a kind of corporation. You have to know this Section 6. You cannot understand it? Outline it. There are rules about voting rights, what shares are voting rights, in relation to par on par value, in relation to preferred redeemables, in relation to treasury shares. So you must be familiar with the different ways of classified shares . Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters 1) Amendment of the articles of incorporation; 2) Adoption and amendment of by-laws; 3) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 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; and 8) Dissolution of the corporation. 1) AMENDMENT OF THE ARTICLES OF INCORPORATION (AOI) Now we said in the amendment of the AOI, the 2/3 vote that is necessary to approve the amendments of the parties ‘ stockholders can be either in the form of secret ballots in a meeting duly called for the purpose or just written assent. You read about that in \section 16, amending the AOI. Unless otherwise provided by this Code or other special law and for legitimate purposes, any provision or matter stated in the AOI may be amended. I told you, the incorporators cannot be changed. The directors cannot be changed. They are historical in nature. Now what if it is discovered that one of you incorporators is Jack the Ripper (one of America’s serial killers)? Di na nimo ma-change. Wa na ka mahimo ana. Mamatay tao. Dili na nimo mailisdan sa AOI. So not any provisions but in the ___ that is changed does not suffice a a meeting of the stockholders or secret ballots change it by written consent then send forms to stockholders and they will mail back. They will think of the amendment if they agree or disagree. If they do not agree, they will say so. If they agree, they give their written assent.

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#1 Solution: You do a road show. Pareha bas a Dayang Dayang sa imong kaugalingon. Mag make-up ka, palit ug gwapo na sanina, etc. Don’t laugh because these are the terminologies in the finance world. Do a road show. Once they say an international roadshow, you cover the most likely source of capital – New York, London, Zurich, Singapore, Hong Kong, Tokyo. Kada lugar, mangita kag promoter kay muhimo kag imbestigasyon sa investors. Then make a presentation. Unsa imong role as CEO, CFO or COO? After the presentation, you sit down and they ask clarificatory questions. You are selling your corporation. That is #1. #2 Solution: the other solution is send preferred shares in a preference that is attracting. Common sharese lang ))) voting. Unya way siguro. Makakuha b aug dibidendo basig way gawas na kwarta? Wa may obligsasyon and corporation to issue cash dividends even if there are profits. So it’s not attractive. So unsaon man niya paghatag ug preferred shares na wa man preferred shares? Then the consultant says, “amend your Articles.” Naa man gud ka 750,000 shares, magkuha ka 50,000 or 100,000 shares ba, buhaton nag preferred. Unya, mao na imong i-issue ug bag-o. now, so you are now to go through the process of amending the article. INSTANCE OF AMENDING THE AOI. Pangutan-on nimo ang corporate secretary, “Do we need a stockholder’s meeting?” If the secretary knows the Corporation Law, no need. Mere written assent is enough. Why? Because it is not one of the cases provided for a meeting duly called for the purpose. It is a minor change. So, ingon nimo ang secretary na get the proceeding going. Kuhaon nimo ang proxies. Kung daghan na, anha pa ka magpadala ug forms for written assent. Assuming of course, that the controlling interest in the board has already a minimum of majority vote of all the members of the board. Because of the cases mentioned in Section 6, it requires majority votes first of directors or trustees. It is an absolute majority. If there are 11, then 6 are needed for a quorum. If you only have 5 attendees, all 6 must vote because that is the absolute majority of 11 people to vote. So that is an instance where you only need written assent to amend the AOI. INSTANCE WHEN VOTING BY SECRET BALLOT IN THE MEETING DULY CALLED FOR THE PUROSE IS REQUIRED What is an instance when you need voting by secret ballot in the meeting duly called for the purpose? Increase or decrease of capital stocks. You will increase authorized capital. Once you increase authorized capital, you change that number. Once you change the number the subscribed capital must also change. Why? Because for every

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno increase, 25% of the increase must be subscribed. And then, of the subscribed, 55% must be paid up. It is here in Section 6, number 5.

eat it too. Ila rang i-publicly sell ang mga shares of stocks. Pero naa gihapon silay PC Ownership power because they can veto actions in the name of public necessity. So when they exercise that vote, pildi ka na.

So that is an instance where you cannot use written assent. You have to have a meeting duly called for the purpose. In any case, the stockholders have a role to play. It is an indispensable role depending on whether or not the stockholders are voting or non-voting shares. Let us leave that for a while. Let us go Section 7. Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The fiveyear period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. This classification of shares is temporary. You cannot have founders’ shares for the entire time you have a corporation. The shares are good up to 5 years because that is what the Section 7says. Founders’ shares, classified as such in the AOI, is given certain rights and priviliges not enjoyed by the owner’s other stocks or by where their right to vote and be voted for in the election of directors is granted, it must be for a limited period not exceeding 5 years. Some object to the approval of the SEC. The 5-year period shall commence on the day of said approval of the SEC. FOUNDERS’ SHARES DO NOT APPLY TO NON-STOCK CORPORATION. Christian School Inc., nagbutang sila ug proviso. Ang kadtong founder, is honorary trustee for life kay siya man nagsugod sa Christian School. For life siya non-stock, non-profit corporation. But for 20 years, they operated that way until somebody questioned it before the SEC and finally, it went to the Supreme Court. The Supreme Court says that is VOID. They cannot make somebody a director or trustee without voting. So founder shares must be provided in the Articles. Kaning “added to the articles’ amendment,” there is no proviso prohibiting it. So it can be added. Ako pa, founder ko, di ko mag founders’ shares dayon. Tig 5 years lang na. Mupalit ka ug shares, amend ka dayon, muhatag ka dayon sa imong kaugalingon ug another 5 years. Ikaw na ang muboto ug botohan as directors. I told you about Ford Motors Company. There is a reason why it is still controlled by the Fords. Because before, Henry Ford, the founder, listed the share of stock in Wall Street. He amended the articles. He created a class called “founders’ shares” and 2 shares had 10 times more voting rights than the ordinary shares. Then he transferred it to Ford Foundation, nonstock, nonprofit, ang tag-iya sa share. And who are these in the Ford Foundation? Only if you are a Ford. If you’re not a Ford, you cannot af-Ford! (HAHAHA!) So naa ka dinha. Now you want to cash out. Ingon ka ang equivalent sa akong shares dinha, kwartahon na nako kay di na ko gusto ani niya. Unsa man buhaton sa Ford Foundation? Mukuha sila sa reserves nila kay as they gain profits, they set aside a sinking fund. Mamalit sila ug ordinary shares na equivalent sa imong 10 voting shares. Unya, ibaligya nimo ang imong shares sa market, kwarta na nimo. Pero intact gihapon ang ilang Ford Shares na 10 times voting rights. So hantod karon, 5th generation na, sila gihapon ga-control. Ang GM ug Chrysler, wala na. Thus, the CEO there is elected by the Ford Company. Di na sila gabutang ug Ford na CEO. They are not hungry for that anymore. Di na sila kinahanglan mutrabaho. Mahimo man na diri. Muhimo ka ug class of shares of stocks with 10 times voting rights. It’s allowed by the SEC. Voting for the ___. Now I also told you about the so-called “golden share.” Mao nang golden shares sa gobyerno. Thy want to have their pie and Page 16 of 112

In Asia, they say that there is 1 corporation that has that kind of power. Siam Cement of Thailand. It is 10 times beigger than San Miguel.But cement is not even 1/10 of the sale of Siam. Who is the controlling owner of Siam Cement? The Royal Family of Thailand. They have a veto power as to its direction. So unsa ang number 1 sales nila? candy resins. So that’s how the Royal Family finance its life standing. Unlike in the UK, the Royal Family has approproations. Kanang mga kabayo nila, gikan na sa taxpayer’s money.

December 1, 2017 (Miles Buhay) Let us go to this very exciting process of creating a corporation. We have gone through the different classifications of shares of stock because that is how the capital stock of the corporation is divided. You have authorized capital and there’s a figure there. Then you have subscribed capital and you’ll have a figure there. And you have a paid-up capital, and you also have a figure there. Alright, what do you have to remember? The authorized capital, the figure there, is always bigger or best equal to the subscribed capital. You cannot have the subscribed capital bigger than the authorized capital. The paid-up capital can only be equal to the subscribed capital but cannot be bigger than the subscribed. Sa accounting, ang kinadak-an, mag-una. Unya musunod ang mas gamay. Now, this is what you have to reconcile because commentaries say, the authorized capital is the limit that a corporation can brace by way of capital. So it’s a ceiling no. Is it true? [No.] The number is not the ceiling. It is the number of shares derived from the authorized capital. That is the ceiling. Is it possible to raise more money that the authorized capital? The answer is yes. Why? Because a corporation can issue shares higher than par value if the market can take it. The authorized capital is the amount that is the result of the total no.of shares that a corporation can issue multiplied by the par value. That is the authorized value. You divide that authorized capital with the par value of shares then you have maximum no.of shares. Is that the hard and fast rule? Not exactly because a corporation can issue different classes of shares at different par values. You can have preferred shares with a par value of 10. You can have common shares at a par value of 5. But most corps will not do that because you will just confuse the market. But there is no prohibition against a corporation from classifying shares according to different par values. There is even no prohibition in issuing par value shares and no par value shares. You can classify in your articles of incorporation par value shares and no par value shares. But you will end up confusing the public and so, no too many corps. If you want an example of different par values, and it’s a successful corporation, you go to Warren Buffon Berkshire Hathaway. He has different par value shares that he has issued after he was successful. People put in there money in Berkshire Hathaway because of Warren Buffon and not because they know where he is going because nobody does. Story… Warren considers what is profitable. Classification of Shares Suppose you sell shares at higher than par value. Is it possible to sell shares at a premium that is several times more than par value? It is. So much so that in the balance sheet you will have common stock (Let us say 100M) and premium on stock; that excess of par value at which you issue shares. It might be 200M. It’s possible. Rare but possible. Now when you have that par value at premium of a stock, the perception of people will already [be that they will] win because you are already selling at above par value and you declare dividends out or premium on stock that you issued. Sobra-sobra naman ang inyong kwarta. Premium on stock is in excess of par value that you issued your stock for and because people have such great faith in you, your premium on stock is double your capital stock. Can you declare dividends out of premium on stock?

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

The general rule is, you declare your dividends out of profits. What is profit? Profit according to the SC is the positive result of recurring business in the ordinary operation of the corporation; the strenuous operation of the corporation. Ginansya gani, results from the day to day operation of the corporation by which its revenues exceeds its expenses. Mao nang naay profits and it is from there that you declare dividends. That is the main traditional source of dividend. When you sell capital of the corporation; the corporation sells assets and realized profit from the sale of assets, is that part of profit? What’s an example? In the olden days, technology was such that when you were a telephone company, you needed huge buildings because the switches were big and you had to have generating power; you had to have big transformers because the telephone machinery needed bigger machines so you had to have bigger real properties. With the advent of new tech the switches became smaller; switches became smaller. You did not need real property anymore. PLDT now is selling its real properties. They sold one here to a developer. Obviously, when they bought that 15 years ago, it was inexpensive. But now, they are selling it several times higher than their acquisition price. Is that profit? Is that the result of strenuous day to day work? Security and Exchange Commission (SEC) says, that is part of profit. You can declare dividends out of capital gains. Cash and stock dividends. But premium on stock, you need the permission of SEC if you have to declare dividends out of premium on stock and you can only issue out of premium on stock NOT cash dividend, but stock dividend only. If in the formation of the corporation you already make money, you’re not operating yet the corporation. But because you are already selling the corporation at so much higher than par value, your premium is higher than your realization of consideration of stock at par value. That is rare. But that happens. You will find out later on that if your unrestricted retained earnings (these are capital accounts in the balance sheet) is already in excess 100% of paid-up capital, you have to issue/give out dividends. You cannot accumulate profits more than the paid-up capital unless you have a very good reason and you have to prove that to the SEC. After authorized capital, subscribed capital and paid-up capital in the articles of incorporation, you have the provision that names the treasurer who shall act as such until his successor is fully elected and qualified. So he is the interim treasurer. He is named in the articles of incorporation. Actually, “treasurer” of the corporation is a misnomer because there is still no corporation. It is still a corporation in the process of coming into being. It begins to exist the moment the SEC issues a certificate of incorporation. So he is the treasurer of the interim corporation. The period from the signing of the articles up to the day the SEC issues a certificate. The moment that there is a certificate of incorporation issued, the corporation must organize. Then the corpo elects the directors and then the directors elect now the treasurer. The interim treasurer may be elected so that he will also become the treasurer of the corporation.

3.

4.

am the successor of the one who passed away and so I will take charge. I am the treasurer.” The Board will pass another resolution that the corporation will open a bank account in this particular bank. It could be the bank where the deceased interim treasurer put the money or it could be another bank in which case the treasurer will transfer the money to the new bank. With that resolution will be provided the signatories to the official account of the corporation. Not just one (1) signatory, a juridical person cannot risk just one (1) signatory. Normally, corporations have several signatories.

If the corporation is not formed (denied a certificate of corporation): Who can act? Without the certificate of incorporation, all you have is the contract entered into by the incorporators. 1. So the incorporators have to go to the bank and say, “This is the list of those who had subscription and who put in money. You have to help us give this money back to their lawful owners because the corporation did not go through. Pareho ra nag Donation propter nuptias. When the marriage ceremony did not go through, unsa may mahitabo atong mga donation? What happens to those donations propter nuptias? The donations are ineffectual because it is given by reason of marriage, and there is no marriage. So you give it back to where it came from. If the father of the groom donated a condominium unit, it must be returned (ouch) to him. So that is what the incorporators do. They go to the bank. They give a list and they contact these people and they say, “Get back your money from the bank. Appear in the bank with proper identification.” That is what will happen. How about the theory that if a corporation does not go through, a de facto partnership is formed? Is that correct? Is there a de facto partnership created if a corporation that is formed fails to acquire a certificate of incorporation? No. The SC said that the intent to form a corporation does not contain within it a partnership. So there is no implied partnership formed if the corporation does not succeed. Implied partnership is not within the intent to form a corporation. What will happen is the paid-up capital will be distributed. Now if there is somebody who donates to the corporation, let us say a piece of land which the corporation needs. Who is the donor? The parent of one of the incorporators whose subscription and paid-up portion of his subscription is the biggest among all the incorporators and subscribers. What happens to the donation? The donation is ineffectual and it will be reconveyed to the donor. There is reconveyance. If you need to count it as part of the capital, the donation must be registered with the Registry of Deeds then the title is transferred to the corporation. But the corporation is not given a certificate of incorporation. So, there will be reconveyance.

What is the duty of the interim treasurer? He is the one who collects the paid-up capital and deposits it in the bank. He tells the bank, “I am a trustee because this is for the corporation the papers of which are still with the SEC and it’s not yet formed. So I am the trustee of the funds of this corporation still to be formed because these are all pre-incorporation (before being a corporation) payments of the subscription. Q: If that interim treasurer is suddenly hit by lightning and dies, what happens to the money? If the corporation is formed: 1. The Board will pass a resolution appointing the treasurer after the Board is constituted by the stockholders in the organization. 2. With that resolution and appointment he [new treasurer] will just go the bank and say, “Here am I, I Page 17 of 112

If the interim treasurer runs away with the money, what is that? Is that theft? Is that estafa? Does the interim treasurer have the right to the physical possession of the money? Yes! Asa pa may lain nilang butangan ug kwarta? If he puts himself as the sole signatory as the trustee, does he have the right to title to the monies? Until the corporation is formed, he has the right. That is why he is the signatory. No other incorporator is the signatory; He alone. Therefore, that is estafa because he is the trustee. The treasurer executes the treasurer’s affidavit. The treasurer’s affidavit is separate and distinct from the articles of incorporation although it is always attached to the articles of incorporation. Why? Because he takes personal responsibility and liability criminal and civil - as to the compliance of the corporation. The treasurer says “under oath that at least 25% of the authorized is subscribed.” And then “the 25% of the sub is paid-up”. Not only

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno paid-up but “received by me”. Walay lain nidawat, ako ra. In cash or property, in the amount of not less than 5K in accordance with the Corporation Code.” Then he signs it. Minus gani anang gisulti sa treasurer; less than 25% of the authorized is paid-up, who is to blame? It is the treasurer. The assumption is he pocketed the difference. He is the only one who received it, he says. That is the weight of the treasurer’s responsibility. (5 min break. Chika ni Clemm and friends sa recording. LOL) Let us take a look at the grounds for rejecting or disapproving a corporation under Section 17. Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. – The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: (1) That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; (2) That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; (3) That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; (4) That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (n) (1)

That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein;

Remember that the compliance is not necessarily literal, but just substantially the same as to its form. (2)

That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

What is your purpose? To develop 100 hectares of Cannabis for medicinal purpose. Is that recognized here in the Philippines? No, walay mutuo nimo. 100 hectares for medicinal purpose? Ay, negosyo. What is your purpose? To enable desirous single Filipina to the brides of western and other foreign gentlemen. Declared by SEC to be illegal because it is immoral. Mail-order brides as a purpose is immoral according to the SEC. What about those in the internet? Those are foreign-based corporations. They are not allowed here to form a corporation for that purpose. You cannot put up a corporation whose purpose is to practice a profession. You can only have a partnership. That is why law firms have partners. Accounting firms, they are partnerships. The relationship between clients and attorneys is personal. It is based on trust and confidence. It is personal. You cannot have a corporation acting as your counsel. The corporation cannot be subjected to criminal liability whereas a lawyer (natural person) can be made to answer criminally if he violates the canons of professional ethics. Page 18 of 112

So those are the grounds for rejecting the articles of a corporation as to their purpose/s. Your primary purpose might be lawful and your secondary purpose is not lawful. Or both your primary and secondary purposes are lawful but they are not legally combinable. Ex. Imong primary purpose: ospital. Secondary purpose nimo: funeral parlor. Illegal na. But you won’t find that illegal in the US. Department for ICU for babies and department for abortion in the same building. (Chika on visiting a former student who is a neonatal specialist in Toledo.) (3) That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; How can he determine if it is false? The treasurer has to execute a waiver of his rights under the Secrecy of Bank Deposits Act. So he gives his account no. and executes the waiver. So the SEC can verify and call the bank. “This is the SEC and we are on verification. Please call this number after we put the phone down.” Tawag ang banko balik. “We are interested in this corporation still to be formed. How much money is in the bank account of the interim treasurer?” Mailhan kung namakak. Bahala nag masobra, dili lang makulang sa 25%. (4) That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. This might be a thing of the past. A law limiting public utilities is about to be passed. You will place in your articles that you will be paid the proportionate ownership of Filipinos because this particular corporation is engaged in public utilities or the development of natural resources or whatever reason. SEC will check that. The SEC is usually very patient with articles of incorporation. They usually don’t reject. Ipa-usab lang kung niay mga mali. They’re very patient and yet some corporations still get past them and there is a fatal defect. So you still end up with a de facto corporation. They are especially very meticulous with respect to banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws. They are closely scrutinized. Suppose you have complied with everything and the SEC still does not issue a certificate of incorporation and they did not give a reason. What is your remedy? This is different from when you submit an amendment on your articles. When the SEC does not act on it for a period of 6 months and the reason why the SEC has not acted is not attributable to you who filed the amendment, then the amendment becomes effective for inaction by the SEC. That is Section 16, last paragraph. But if it is articles of incorporation, unya unom (6) na ka buwan wala lang giyapon certificate of incorporation, do you become a corporation by the inaction? No. You need to get that certificate of incorporation. How do you get it? You need to file a mandamus. If the SEC has objection to your name, it will be returned to you. You must not have confusingly similar or similarly confusing corporation name. All corporations now must have “incorporated” or “incorporation”. You cannot use an already protected name. You cannot use somebody else’s name. (Story about Brother Eddy who was expelled from Iglesia ni Kristo Haligi ng Suhay at Katotohan and put up his own corporation with the name Iglesia ni Kristo, H.S.K. This was considered confusingly similar to an already protected name) If your name is objectionable, the certificate of incorporation shall not be issued. Now, you already know beforehand that the name is acceptable because when you go to the SEC office and you pay a certain amount and you give your preferred name, they communicate

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno with the data bank in SEC Manila and find out if the name is already taken and word will come back to you on the same day. You have this name for 30 days for an amount of 200 Pesos. So you have that name, dali dali na dayon ka ug buhat ug Articles ana. If you can file your Articles within 30 days, that name is yours. If you fail to submit, you pay another 200 Pesos to extend to another 30 days to have that name reserved. You are allowed an extension. Wala na gani, it’s up for grabs. That is how you find out whether the name is already restricted or already owned or is no longer open to be appropriate. Sec. 19. Commencement of corporate existence. A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. From that time that you have been issued your certificate of incorporation, you have 30 days to organize. You have 2 years to commence your business. If you have commenced your business and you have organized and for some reason you stop the works of your business, you have 5 years continuous non-operation. If you do not work as a corporation for 5 years, what happens? It is a ground for revocation or cancellation of your certificate of incorporation. If you do not begin your work within 2 year after you have organized, then you are also in danger of revocation or cancellation of your certificate of incorporation. You must begin or you ask the SEC to condone your non-operation or non-inception of business because your reason is valid. What is a valid reason why you cannot begin your business? Ex. You want the business of rehabilitating the rubber plantation in Basilan. The Philippine marine commander however does not give you the clearance to do so. You communicate this situation to SEC. Is it a valid reason? It is up to SEC. Once a certificate of incorporation is issued it cannot be cancelled or revoked unless there is notice and hearing. (Section 6, PD 902-A) There has to be notice and hearing before the cancellation or revocation of the certificate of incorporation. (Story on Father Gus being the lawyer of Maryknoll Fathers and Brothers, Inc. which is non-stock, non-profit. Father suggested to work towards the dissolution of the corporation but letting the government do the job. He suggested non-operation for 5 years). The SEC will put you in the twilight list. This corporation has not been in operation for 5 years or more. They will send you notice that you are in the list and you will be directed to show cause why your certificate of incorporation should not be cancelled. And when we receive that, we will not act upon it. You can have a corporation dissolved this way if you have no debts. Otherwise, mag-una2x ug file ang imong creditors ug involuntary insolvency. The last paragraph of Section 22 says: This provision shall not apply if the failure to organize, commence the transaction of its business or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. The SEC can still make you continue in existence if the cause is not within your control. Wala na moy bag-ong member, is that within your control? No. Can the SEC consider that as a valid or reasonable excuse? I doubt it because it goes to the very essence. You need at least 5 to function as a corporation. When you erase a corporation; when you cease as a corporation, it is just as, if not more than, complicated with its formation.

We will begin with BOARD OF DIRECTORS. Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

What is the term of Board Of Directors? It is not right to say 1 year. It is 1 year until their successors are elected and qualified. What is the meaning of elected? It means that the stockholders or members of the corporation cast a vote to elect you. What is the meaning of qualified? It means you accept it and sit down as BOD. You are elected and qualified. You called for a director/stockholder’s meeting; and then there is no quorum because less than 50% of the share holders +1 is represented in the meeting. What happens? Can you go on to elect the BOD? (Because Every annual meeting you elect the BOD.) Usually if it is a stock and profit corporation, you do not have a stock holder’s meeting that failed to have a quorum. But if you have a non-stock non-profit corporation, like the corporation that is made up of the homeowners of Bell-Air Subdivision I, that is more than 1k houses. And they do not bother to send a proxy; proxy is allowed by the specific provisions of Bell-Air Homeowners Corporation. What happens if they do not have a quorum? They have given notice so let’s go ahead with the election. Is that valid? No it is not valid. What happens is the entire Board becomes a hold-over board. That is when the second part of the last sentence of 1st paragraph of section 23 takes effect. They continue to hold office because there is no successor that has been elected and qualified. The problem is, if a hold over director dies, does he have an unexpired term? No, he does not have unexpired term because he is just a holdover. The Board of Directors cannot elect another to replace him to serve the unexpired term. It has to be the stockholders to elect him or the homeowners who will elect the replacement. But they can’t get a quorum, what happens? I-abort. Next meeting, wala gyapon quorum so hold-over gyapon. Hantod maghinay hinay na silang kamatay, wala na gyuy quorum na mabilin. But I am telling you it is a problem of 90% of Home Owners Association that are high end. The problem of condominiums. They are so busy with some other businesses that their Homeowners Corporation is given second priority or no priority at all. The Only corporation meeting of homeowners which is non-stock non-profit but has always with quorum is Forbes Park. Why? Because the owners are not individuals but corporations. The owners of lots and homes in Forbes Park are all corporations. Ingon ka, why? Why in heaven’s name is it a corporation?

December 6,2017 (April Pareno) Page 19 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Because nobody sells land in Forbes Park. If you want to sell your land, you sell the corporation who owns the land. Why? So that your capital gains tax will not be punitive in size.

You own 95%, you have to allow co-ownership by at least other 4 people, so that you will be at least be followed. The business language is accommodating. 95% is wholly-owned already.

Ever since Pacquiao bought property in Forbes Park, the price of property in Forbes Park is 400,000/sq.m. The size of the property is 2,500 sq.m minimum; how much is that at 400,000/sq.? 1 billion. Why is it that expensive? Because BGC is already 450,000/sq.m. Ayala, the other side, is also 450,000/sq.m. That’s Forbes Park in between. In Forbes Park, there is an annotation: you cannot build more than two stories. It is limited, but the first 25 years is over. And it’s already 10 years into the next 25 years when they reviewed the annotations in the titles by the subdivision owners. They elected to renew it. Pagkahuman 15 years to go na lng, there is a potential it becomes an extension of BGC or extension of Ayala. That’s why corporations are the ones positioned in them

Let us say you are 95% owner of outstanding capital stock, and then, all of a sudden, you die. And in your will you already bequeath the shares of stocks of the corporation to your only daughter. You have other business and you disposed according to your will. Let us say you die in February, just a week after the annual meeting of the corporation and all 5 directors are already elected and you chose not to be one of the directors. You have a nominate, all, in fact, are your nominates. You die, your daughter becomes the stockholder that owns 95%. Can she say, I demand to attend the BOD meeting? Can she demand attendance to a meeting of the BOD legally? Unless she is elected to the Board, she cannot demand.

Do you know that UP has three lots there? You may ask why? If you have studied your Property laws then you would have come across the case of Quasha vs Republic of the Philippines. They have land in Forbes Park. Two years before the end of parity, they filed a case straight to the SC. What was the case? Petition for Declaratory relief. I am an American under Parity; I own a residential land in Forbes Park. What is the scope and extent of my right post-parity? Can I continue to own? Am I still the owner? That is the question he brought up. And it was JBL Reyes who wrote the decision.

Why? Because the powers are directly given by Section 23. It is not a derivative power. It is a power granted by law, directly by law. “xx the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors xx”. Make no mistake bout that. Can the majority stockholder, 95% owner of the outstanding capital stock, can he remove all the directors? We go to section 28.

JBL Reyes said you had parity while the amendment lasted. After the amendment expired, that is the end. You have to disinvest. What the SC pronounce becomes law of the land. So all the Americans in Forbes Park that had property had to think what are we going to do. What did they do? They conveniently donated the property to the Universty of the Philippines; but not before the UP signed a deed of assignment so that executives will continue to live there for a sum of money, 25 years renewable for another 25 years. That is why the UP is an owner of property next to the property of Senator Boxer Manny Pacquiao. The rule in Forbes Park is that you can only build of 60% of the lot; the rest is easement and that includes for another development like swimming pool. *Fr talks abt prop of Napoles* If the sale of 2,500 is according to market value, it will be 1 billion. How much is capital gains plus doc stamps? What is 7.5% of that? 75 million. Maghilak ka. Whereas if it is owned by a corporation and you sell the corporation, you sell the shares of stocks of all the stockholders there who are under your control at par value, that is the extent of your capital gains. Let us say you are 95% owner of an outstanding capital stock of a corporation. The moment you are 95% owner, the business parlance term is that corporation is wholly-owned by you. That is business parlance ha, that is not legal. The moment you own 50% + 1 of the outstanding capital stock of a corporation, that corporation is called A SUBSIDIARY OF THE OWNING CORPORATION. Wholly-owned, subsidiary, the next term is an affiliate. If the corporation outstanding capital stock is owned less than 50% by another corporation, this corporation is said to be an affiliate of the owning corporation. Why is it wholly-owned when it is only 95%? It’s not 100%. Because you cannot own 100%.

Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: From that first sentence, there is possibility that you can remove because you have 95% of the shares and not only 2/3. But let us continue. Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote.

So the 95% owner can demand a special meeting. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code.

What is qualified notice? It contains not only the time, ate place of the meeting but also of that item in the agenda for which the meeting is called. If it is for removal, then you must state in the notice that this is a meeting for the removal of the directors, so and so. Notice must be qualified.

Why? Because you need a Board of directors. And a Board Of Directors constitutes, the smallest number is 5. You cannot be elected as a member of Board of Directors unless you own 1 share in the books of the corporation.

Must be given by publication and by written notice as prescribed in this code. The vacancy resulting pursuant to this section may Page 20 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno be filled by election at the same meeting without further notice or at any regular or special meeting called for that purpose.

padaghanay shares. You can have control even if you have the smallest number of shares.

Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.

If you are swing interest, 40% and 40% magka- away gyud na sila gikan sauna. Musulod ka naa kay 20%, ikaw naay control. Kay kung kinsa imo dapigan, mao man ng madaog.

95% ka stockholder, ang tulo ana matangtang nimo without cause because they are deemed to be your representative, if you call a meeting. But the two, you cannot remove without cause, because they deem to be the minority representation. It has to be for cause that they must be removed. How do you guard against it? In most corporations, if you are the controlling investor, when you invite somebody to become a director, make him sign a letter of resignation that is undated. Ready na ka, aron dili ka mamoroblema aning section 28.

If you are the swing vote and you do it very well in the articles of the corporation, even if you are the minority, you will control. Classification of shares is very important because in the end what determines is control.

Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.

Can you provide for a higher requirement for quorum than simple majority? The Securities and Exchange Commission’s opinion is: Yes, you can provide for a higher requirement for quorum but you cannot reduce the quorum to less than majority.

This is not asked in the Bar exam but please memorize the formula for the number of votes that is required to elect directors. What is the formula? (AB/C + 1) +1 = number of votes that can be shares or proxies that is required to elect directors.

The election must be by ballot if requested by any voting stockholder or member.

What does A stand for? AB over C. Is the election to be by ballot? No. Only if requested.

A = total outstanding shares that are voting shares B = desired number of directors

I will tell you how most elections are carried out. W corporation, they require cut-off of the stock and transfer vote one month before the annual meeting of the stockholders. The by-laws also require that those who want to put themselves up as candidates to be directors must be nominated by at least 10% of the outstanding capital stock and the names must be submitted before the cut-off.

C = total number of directors you want elected or voted

You have to memorize this formula if you are the secretary. PLDT has more than 2 million stockholders. Ngano kadaghan? Kay Marcos passed a law favoring the Coangcos. If you wanted a telephone connection, part of the fee you paid PLDT for that telephone connection is for the purchase of preferred non-voting shares. ½ of the 2M stockholders of the PLDT has no votes; only 1 million has voting powers. So you count; but how can you count when everyday it is being bought and sold in the stock market? How can you identify the value of A? PLDT has this thing called a “cut-off date”. 1 month before the annual meeting, the stock transfer book is closed. If you buy or sell, it is not recorded. Because that day freezes the number of voters for the annual meeting.

Ang mga minority they have to organize themselves so they can submit somebody in voting. The Corporation Code requires that you must allow for cumulative voting. You cannot deny cumulative voting in a stock and profit corporation. What is “cumulative voting”? If you’re a stock holder, your maximum number of votes is your number of shares multiplied by number of director to be elected. That is your total number of votes Pila man imong shares? 10 Pila ka directors ang pillion? 11 11 x 10 = 110 that is your maximum number.

Is that valid? The SC already said it is valid. What is the reason for holding the validity of the cut-off date 1 month before the annual meeting? Because it will be chaotic if you do not have that cut-off date. Suppose all 1 million decide to transfer their sales the day before election, how can you process that? And you must grant because theoretically they have the right. It is a way of solving the orderly transfer ownership and the keeping of the stock and transfer book.

How do you cast it? You can cast it all on one candidate; you can divide it equally; or divide it according to the proportion that you want. Why is it allowed to cumulate all its votes and put it in one candidate? To allow or give chance to minority to have representation. That is why cumulative voting cannot be denied in the by-laws in a profit and stock corporation. In a non-stock, non-profit corporation, if the by-laws is silent, there’s only one vote per person, you cannot have cumulative voting.

Corporation law, especially, stock and profit corporation is all about control. Who controls the corporation? Muingon ka, magbuhat kog corpo na walay ga control. 33% diri, 33% sad diri, 33% diri. Walay ga control. Do you know what you’re doing? You are inviting chaos. Your proposal is that the purpose of the corporation is not fulfilled kay magsigeg away. Equal force man sila. In the formation of the corporation, drawing up of the articles, you make sure that there is control and control is not necessarily Page 21 of 112

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If you are the representative of the majority, you can be removed by two-thirds vote of the Stockholders with or without cause. Cause? nangawat ka, tangtang ka. Without cause? wa ka, gisumhan ra sila sa imong hitsura!

Board of Directors or Trustees If the corporation were a ship, the BOD is the captain of the ship. Remember that analogy. The captain of the ship, mao nay tinood nga manager, gusto ka makakitag tinood nga manager, kapitan sa dakong bapor nga overseas. Wa kay tabang ana ikaw ra, naay magbuang buang ana nimo nga tripulante unsa man imong buhaton ana makiglayog nimo? desiplinahon nimo kay kon d na nimo desiplinahon manunod nang uban. So the BOD is the captain of the Corporation. Who elects the Board? As a general rule, it is the stockholders or the members of the corporation. But there are times when it is the BOD that elect the members of the Board. In case a member dies, is incapacitated, resigned, or is disqualified, the one who elect is the board itself. I will summarize it to you; there are five (5) instances when the stockholders elect the board: First Instance. Annual Meeting - usually Fiscal year. The annual meeting is dictated by the by laws, you cannot just change the date of the annual meeting. It is provided in the by-laws and normally it coincides with the cycle of the fiscal year. Fiscal Year meaning the twelve month period not necessarily coinciding with the calendar but it is the accounting period to recon the financial story of the corporation. Usually 2 to 3 months at the end of the fiscal year, that is the annual meeting in the by laws Why 2 to 3 months? Because you have to give time to the independent external accountants to review the Financial Statements of the Corporation Because one of the items in the agenda of the annual meeting after you elect the directors is to present the financial statements. The President together with the treasurer, they make a report. Why did we register laws? They explain. Why did we make less money? They also explain. Why did we make a lot of money? that's when they also explain. And then the stockholders vote to accept the financial statement. After they have voted, then that is the Financial Statement of the Corporation. But that is already audited. What is the significance of audited Financial Statements? The significance of the audited FS is that a third party that is respected in his field certifies that the number in the FS, Balance Sheet, and Profit and Loss Statement reflects accurately the financial story of the Corporation in accordance with Generally Accepted Accounting Principles (GAAP). Then you are not afraid to present it to anybody. If there are investors, dia ra ang FS namo! naay magsukit sukit diha nga Government Agency? Dia ra sagpaon nimo ana :) kay audited naman. Mao nay purpose ana nga di ka mag tago-tago. You have an election then, annual meeting. One year man ang term or until the successor is elected and qualified, one year ang term. Unya mapatay sya in the middle of the term? patawag kag stockholder's meeting para mupili sa mupuli nya? dili! Only the directors choose the replacement. If incapacitated? If napiang sya? Incapacitated ba na? dili! He can still attend meeting by teleconferencing, by video conferencing, mahimo man. So he is not incapacitated. Kani adto, incapacitated ka ana, marayuma ka, ma gout ka, d naka kalakaw, incapacitated ka na. Karon dili na! dili ka incapacitated ug buhi lang imong utok.

When do you elect the replacement? You can elect the replacement at the same meeting of his removal. Fourth. When a director resigns, dies or is incapacitated, and the remaining directors no longer constitute a quorum. The example is Texas Instruments Philippines Inc., five directors in their corporation, nag inaugurate sila ug ika-duhang factory sa Baguio. Ngano sa Baguio man? Bacause higher altitude and ostensibly the air in Baguio is contains less pollutants, they manufacture, not ordinary chips but they manufacture intelligent controlling chips. In fact the likelihood of the Texas Instruments controlling chips in your smartphone is 70% because Texas Instrument manufactures 90% of all controlling chips. Mao nay technology nga gitaguan sa Amercano. Japan and China? puro na memory pero pag abot na sa controlling chips, wa pa na nila buhi-i. How about the 5 Directors of the Texas Instruments? The law requires that the majority in the BOD must be a resident of the Philippines. There is no citizenship requirement, majority is residents. That is what is required by the law. Now they were inaugurating a factory, the 3 Americans choose to fly, the 2 Filipinos decided to go by tag. but ang gisakyan sa Americano na-crash man, patay ang 3.When a director dies, it’s only the BOD who elects the replacement but the replacement is to be elected by at least the majority of the Board. Absolute majority or at least 3. Duha naman lang nahibilin? So they have to call a stockholder's meeting. So that is the work. Fifth. Recently decided case (2 years ago) - The case of Bel-Air vs. SEC. Bel-Air is one of the subdivisions created by the Ayalas. Pila mana ka subdivision diha sa Makati? Forbs, Dasmarinas, Bel-Air 1, Bel-Air 2,San Lorenzo. Residential Subdivisions created out of the Ayala estate. In the middle is the Ayala Central Business District. This is one of the most expensive Real Estate. Aron makabawi ka naa kay dapat at least 30 stories nga building, naay 600 to 650T per square meter. Ang Bel-Air mao na ila problema, walay quorum kada magmeeting sila homeowners. Bel-Air Homeowners Associations, Inc. Unsa may meetingan ana? Gasto sa garbage, repair, security, discipline (husay) sa subdivision. What happens? 3 na ka-tuig walay quorum, so all the directors were so called "hold-over directors" because a director is supposed to have a term of 1 year or until the successor is elected and qualified. Toa na sya sa "until elected and qualified". Ni-resign man sya, ang director ni resign, pag resign niingon ang nahibilin nga sige magpili ta ug replacement. Unya naa may bag-o abogado, gichallenge nya, niingon nga dili namo makapili kay hold-over man mo. Wa man xay term nga nahibilin, naghulat nalang sa puli. Wa man paminawa abogado, nagkaso sila hangtod naabot sa SC. SC said correct, the Board cannot elect the replacement if there is no unserved portion of the term that is left behind because he is a holdover director. So, that is what happens. When the director resigns, dies, disqualified, incapacitated or in any way cannot continue to serve a remaining portion of his term and the remaining director also are hold-over directors, they cannot elect the replacement. It must be the stockholders. Those are the 5 instances that a director must be elected by the stockholders or the members of the Corporation.

Second Instance. When the numbers of BOD is increased - by an amendment to the Articles. Even if it's in the middle of the term, it is the stockholders who elect the additional BODs

Remember if the director dies, you have 30days to report. If he disqualified himself?, here is a question. There is a disqualification provision, Section 27.

When can they do that? When the amendment is approved How is it approved? When the SEC issues a Certificate of Filing

Section 27. No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this code, committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee, or officer of any corporation

Third. When the Director is removed - First of all, to remove a director you need a meeting duly called for a purpose. Di na mahimo ang written assent ha. And 2/3 must vote to remove you.

This is a disqualification. So if na-priso na gani ka ug 6 years, di naka ma director or if you violated any provision of the Corporation Code or directive of the SEC within 5 years from your

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno election, you cannot serve as a director or trustee. Can the Articles or the By Laws add qualification or disqualification to a Directorship in that Corporation? The Leading case is Gokongwei vs. SEC 89 SCRA 336. I remember this case because that was 1977, I was still in Ateneo de Manila Law school and the lawyer of Gokongwei was teaching us and the lawyer of San Miguel was also teaching us. This is their issue, Gokongwei slowly accumulated shares of San Miguel. All you need to be elected to San Miguel, you need only onefifteenth of Outstanding Capital Stock. The story here is Gokongwei, after he has accumulated about one-twelfth of the Outstanding Capital Stock, he started getting proxies and one month before the annual elections, they already submitted his name and nominations to be a director. So he is registered 1 month before, so San Miguel started floating articles in the newspaper that Gokongwei has antagonistic business against San Miguel, that Gokongwei is in San Miguel precisely to spy on the product developments of San Miguel so that he could have advance knowledge of where San Miguel is now. Now, even before that, San Miguel already passed an amendment to their Article. The amendment was this, if you have an interest, personally or in another Corporation, financially or indirectly of a business that is in competition with San Miguel or of any of its product lines, then you are disqualified from becoming a member of a BOD. So they said, you Gokongwei, you have antagonistic business. What is SMC's antagonistic business? Nakahinumdom mo atong Presto Ice cream? Gokongwei had Presto IceCream, SMC had Magnolia. Gokongwei had Robina Feeds, SMC had BMeg Feeds. So in competition. So they said, Gokongwei, you cannot run for Board of Director of SMC. But d man nila mapugngan naa naman siyay one-fifteenth, you just cumulate that, dba cumulative voting? You cumulate that lingkod jud ka di ka ma prevent. So Gokonwei did not accept the warning of the secretary. He filed a case with the SEC, the SEC ruled in favor of SMC. The decision of the SEC is appealable to the CA but the lawyer decided to go to the SC for the question of law. Can a stockholder be disqualified from becoming a member of the BOD when he has enough shares to be voted as director? First, the SC divided the issue, can there be a disqualification added in the by-laws preventing a stockholder to become a director? SC says yes. A corporation is free to add disqualification or additional qualification. Second, is there a valid disqualification here when his disqualification was voted upon by the stockholder when the Outstanding Capital stock was only one-third of the present number of shares that is in__? gamay pa tong corporation niadto when this disqualification was set. The SC says yes, the disqualification still operates later Is Gokongwei disqualified from running? SC answered, the presumption is Gokongwei can run. If as the controlling share says that he is disqualified then he must be given his day in __. He must be investigated, he must be heard, and there must be an investigation as to whether he really fits the disqualification. So it is not automatic. If there is a disqualification in the by-laws, that still has to go to an investigation. The order is to remand to the SEC but itw as settled amicably. Gokongwei was first made a director of San Miguel International in Hong Kong and afterwards they offered him price he could not refuse and so he made a lot of money. The money he got, he bought PCI bank together with the Lopez’s. Later on, they sold PCI bank to Equitable Bank. Say, there were people in the board who are also disqualified but they did not raise the objection later. One of them is Jaime Zobel de Ayala, used to sit on the board of SMC and yet the Ayala's at that time owned Pure foods because SMC bought them up and SMC had Monterey. Ngano gi-allow man nila si Ayala na mulingkod diha? Naa sila BMeg, Ayala also had a Joint Venture with Harvel(?), high breed corn. They allow Ayala because Ayala and Soriano are first cousins. Director’s Compensation has a limit in the Corporation. What is the limit? It cannot be collectively more than 10% of the Net Income of the Corporation before tax. When you are given a Page 23 of 112

problem about this, make sure that is a pure director because there are directors who are also officers of the Corporation. Let's see you are President and CEO of the Corporation and you are also a director, your compensation as an officer does not have a limit, but your compensation as a director has a limit. The limit is not more than 10% of the net profit before tax. That ceiling does not include per diem. Per Diem is the expenses that you must incur in order for you to perform the Director's duties. Probably you remember that PNB was still a GOCC, it was the President who appointed the directors and during the time of Ramos, he was very grateful with this Dabawenyo, because he helps during the elections, he appointed him as the director of PNB. PNB has a meeting once a month. Director’s fee? 100k per meeting excluding per Diem. The per diem is not included in the ceiling of 1/10th of the net income before tax. What is the Director's fee in PLDT? 250K, one board meeting. If you are called in a committee meeting, it is 150K. So once a month you have a meeting 250k, tawgon sad ka ug committee meeting 150K.

December 8, 2017 (1st Half) (Lizette Estillore) Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1.

2. 3. 4.

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; That the vote of such director or trustee was nor necessary for the approval of the contract; That the contract is fair and reasonable under the circumstances; and That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

SELF-DEALING DIRECTOR are those who enter contract with the corporation of which they are directors. Technically speaking, it is an anomalous dealing. A director is an agent of the corporation who acts for the corporation. Yet, a self-dealing director also acts for himself. REQUISITES: 1. His presence in the meeting, which approved the transaction, must not be counted for purposes of quorum. 2. He cannot vote on said issue. 3. The contract is fair and reasonable under the circumstances 4. In case of an officer, the contract has been previously authorized by the board of directors (SELF-DEALING OFFICER e.g. president of the corporation, general manager who is not a director) If the 1st and 2nd requisites are not met, for as long as the contract is fair and reasonable (In NIRC, it is termed as arms length transaction), there is no fair advantage that is given to the director. Illustration: You are a director of Bachelor Bus. You are also one of the biggest dealers in second hand tires and brand-new tires in Davao. As a director, you offer it to Bachelor Bus. This

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno transaction must go through Section 32 of the Code. There’s a meeting. The presence of the director is not counted. Tangtang na siya sa minutes for this particular discussion on the transaction because in the end the BOD will pass a resolution approving the transaction. That’s how a corporation acts! Put it in record that he did not vote. The others who voted shall still constitute as the majority of the BOD. Have a comparative pricing of others. “These are the pricing of others. This is the price that he gives. Therefore, it is fair and reasonable.” It’s another story when this self-dealing director owns 2/3 of the outstanding capital stocks because even with the absence of the 1st and 2nd requisites, these transactions can be ratified by the stockholders. What is the assumption behind this rule? If the self-dealing director is a stockholder with 2/3 of the outstanding capital stock, he is less likely to take advantage of the corporation. Mura ka ug nag-dunggab sa imong kaugalingon – imo na gud na ang 2/3 unya imo pang lawgawon ang corporation! Maluoy ka man sa imong kaugalingon. Charity begins at home!

Normally, it is the corporation who enters into a contract of which the director is also a director because he is also a stockholder, and he is entering into contract with the corporation of which he is also a director. This is what we call INTERLOCKING DIRECTOR. There is an INTERLOCKING DIRECTOR in a croprations where one or some, or all of the directors of one corporation is/are a director in another corporation. If the interest of the interlocking director of a corporation are both substantial where stockholdings exceed 20% of the outstanding capital stock, you become a substantial interest in the corporation, as far as interlocking directors is concerned, then a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone, except if the contract is fraudulent or not fair or reasonable. The contract, as a general rule, is voidable if the interest of the interlocking director in one of the corporations is nominal, while substantial in the other stockholdings in another corporation. It will only be valid if the following conditions are present: 1.

2. I’d like to point this out to you because there is another applicable assumption applicable to directors. Now, the Securities Regulation Code requires of certain corporations to have independent directors at least 20% or at least 2, whichever is lower, in the Board. These are Listed 1. Listed Corporations 2. Corporations with at least P50M assets and at least 200 stock holders, 100 of the stockholders owning at least 100 shares 3. Banks, financial institutions, and quasi-banks

3.

The presence of such director/trustee in the board meeting in which the contract is approved was not necessary The vote of such director/trustee is not necessary or not counted in the approval of the contracts The contract must be fair and reasonable

The corporation where that interlocking director has only nominal interest needs to be ratified by 2/3 of the outstanding capital stock or 2/3 of the members of the corporation. There has to be full disclosure of the adverse interest of the directors and the contract must be fair and reasonable. Kanusa man naa’y ratification kinahanglan 2/3? If your interest is less than substantial or if it is nominal, the assumption is that you may favour the corporation where your interest is substantial.

Who is an INDEPENDENT DIRECTOR? 1. He cannot own more than 10% of the outstanding capital stock of the corporation. The PSE raised the requirement. The law says not 10%. The PSE says not more than 5%. 2. He cannot be related to any of the controlling owners 3. He cannot be an employee of the corporation or the external auditor, or consultant of the corporation, its mother or subsidiary

A director might act as an agent for another corporation and that other corporation has nothing to do with that, but he brings in to the director. That is not covered. (Huh?)

The whole thinking is you can think better for the good of the corporation if you are not related to the corporation – you are thinking of the general welfare of the investing public. In Section 32, if you have 2/3, you are thinking about the good of the corporation that is why you can ratify the transaction. Asa ma’y tinuod ana? If you ask me, none of those two. It’s the actual running of the corporation. It’s the oversight! In the end, good governance is good governance in any language provided that it exists. Q: Are the directors prohibited from entering into contracts with the corporation?

Illustration: For example a corporation is putting up a building. They are opening it for bidders. One of the directors is related to a well-known construction company because his brothers are architects and engineers. So dad-on niya ang corporation sa iyang brothers. Is he a stockholder there? No, he is not! How do you handle that? Then you enter into *** because *** requires full disclosure if a director brings a business opportunity to the corporation through the board, then he must make full disclosure. Muiingon siya – “Kini akong giduso, I am related to them. My brothers are officers of the corporation and a major stockholder.” For delikadeza, muingon siya – “I better refuse myself so you can freely discuss the merits and demerits of this transaction.” Sibat siya! Ang iyang proposal debatehon sa BOD and wala siya diha kay related man siya. Mao na ang full-disclosure, honest, and transparent. Kinsa man muingon ana? Ang corporate secretary. *Father talks about SMC and derivative suit* DERIVATIVE SUIT is filed by a stockholder in the name of the corporation.

A: No, they are not. But there is a formality that has to be done. Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Page 24 of 112

Who files the suit for the corporation? It’s not the corporation because it has no hands to sign the complaint. It has to be the BOD who files the suit. It files the suit by passing a resolution where a natural person, normally the President, is named who will act for and in behalf of the corporation. This is approved by the majority of the BOD. If the corporation acts against the very agents who are supposed to act for him, the suit shall be filed through a derivative suit. A stockholder can file the suit in the name of the corporation. The stockholder is the representative party to the corporation because the mortal representatives of the corporation are themselves the respondents. Only one share is needed for a stockholder to validly file a derivative suit. At the time the controversy arose, you must be a

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno stockholder. At the time you file the suit, you must still be a stockholder. *Fathers talks about the whereabouts of Danding Conjuanco and SMC* Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. December 8, 2017 (2nd Half) (Zarah Domingo) Section 31 lists down the 3 ways in which a Director is liable. 1.) 2.)

When he votes for or consents to a patently illegal act; Willfully and knowingly vote for or assent to patently unlawful acts of the corporation;

It was reported a week ago that the Mayor of the IGACOS (Samal) said he has money for microfinance and he appointed the multi-purpose cooperative of Samal that it will process the applicants, after which they will release the microloans. The cooperative passed a resolution which provided that in gratefulness to the Mayor, it is giving the mayor a gift of P100,000. The following year, they passed another resolution giving P100,000. This is in violation of the Anti-Graft and Corrupt Practices Act-“gifts by reason of office.” The Mayor received the check and subsequently encashed it and deposited it in his account. The check was recorded in the cooperative. There is no way he can deny that he has not received the money.

sell them, and at the same time, you will be made to sign trust receipts because Avon is the owner of the beauty products (papula) and you are merely an agent. If you cannot pay and you cannot return the beauty products, you are deemed to have appropriated these products for your benefit. You have committed estafa. The provision of law states that if it is the corporation who is the trustee in a trust receipts contract, the officers, the members of the board, they are criminally responsible. They will answer for the fine or imprisonment that is meted out to the corporation, jointly and severally liable. What is the “DOCTRINE OF CORPORATE OPPORTUNITY”? Section 34. Disloyalty of a director. – 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, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. ‘Nangilog ko ug business sa corporation.’ You are all directors, you went to Australia. Cattle-fattening is your business. As long as the cattle is still increasing its weight, you do not yet kill it. When it stops growing, that is the time you slaughter it. While you were choosing a cow, somebody came near you and told you they were looking for leather. It made an offer that the former will make leather from their cattle and they will buy it. You as director, you say this is my chance, I will not give this to the corporation. When you went back to the Philippines, you put up a leathertanning business. You get the skin of the cow that will be slaughtered. Is that a violation of the Doctrine of Corporate Opportunity? No. THE REQUISITES OF THE DOCTRINE OF CORPORATE OPPORTUNITY: The Doctrine says that if there is presented to a corporate director a business opportunity which: 1.) 2.) 3.)

Give a law that makes the director and the office liable, criminally. An example is the violation of the Trust Receipts Law. If the corporation is the trustee, the officers are the ones who serve the prison term, not the corporation because it cannot be put in jail. Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Thirteen hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. For instance, you import a machine (8-color printing machine from Italy). You obtain a loan from a corporation. You open a letter of credit in the name of the corporation (bank), assigned to you. You will be made to sign a trust receipt which provides that the proceeds of that, if you are a printing press, go directly to the corporation to service the debt. If you cannot pay, that will amount to estafa. The proceeds belong to the bank because it is the owner of that machine. That is the same case with Avon. You will be asked to open an account and issue postdated checks so that you will work hard to Page 25 of 112

The corporation is financially able to undertake; From its nature is in line with the corporation’s business and is of practical advantage to it; One in which the corporation has an interest or a reasonable expectancy.

And then, wala nimu gihatag, imuhang gi-solo. Then you must account for the profits, even if you spent you money in that business. The Supreme Court said that it is not a case of violation of the Doctrine of Corporate Opportunity. Cattle-fattening and LeatherHide/Cattle-Hide Tanning, Curing and Selling, are 2 different businesses. What is an example of a violation of the Doctrine of Corporate Opportunity? Bitong vs CA (1998) Bitong was the President of Jaka Corporation (the holding company of Juan Ponce Enrile).The corporation was named after Enrile’s two children. It was the 2nd biggest owner of real property along Ayala Avenue, the main avenue of the Central Business District in Makati. Jaka was in the development of high-rise condominium and a law was passed than when you are a highrise developer, 10% of your project must also be in low-cost housing. They looked for lot where they will be putting up the lowcost housing project. They found 3 prospects: the first one was flat, already with electricity and NAWASA connection; the second one was also flat but without water and electricity; and the third one will require high cost of development because it is not in a flat area, which although having access to electricity, had no access to water. Bitong said that Jaka will get the third option. He got the first one for his own corporation which was also involved in real property development. The SC said that it was a violation of the Doctrine of Corporate Opportunity because it was no longer speculative, the corporation needs that, it was in-line with the business. There are no ifs and buts.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno If you compare this case with the previous example, layo pa, daghan pa itranslate, agian. There is a way of slaughtering to produce leather—there is curing and stretching. In other words, the process of producing leather is not part of the business of cattle-fattening. Hence, there was no violation of the Doctrine of Corporate Opportunity. There is a corporation that has a debt with another corporation. The latter calls the directors for a meeting. It was found out that although all the former’s properties in the Philippines were already attached, a special information was received that the debtor corporation owned a plane in Burbank, California. The directors agreed that they will hire a lawyer to attach the property. Now, one of the directors stands up and goes outside and makes a phone call. He called his lawyer in LA and told him that since the debtor corporation also had debts to him, he instructed the said lawyer to go to Burbank and attach the same property which the creditor corporation has agreed to attach. He is a director of a corporation. He used his knowledge for his own benefit/ That I disloyalty. If you are a director of a corporation, it is like partnership, if the debtor has a debt to a partnership and a debt to you personally, not as a partner, but in your other business, and both obligations have ripened. Naa siya gihatag na payment pero dili paigo sa duha, sa usa ra. Asa man na i-apply kung ikaw ang mukulekta? To his debt to you or to the corporation? (But, charity begins at home.) You have, first and foremost, a fiduciary duty, which is higher than your personal duty. It is higher. In the same way, when a friend requests that he parks his car in your parking space while he is away for a conference and your house got burned and you chose to save your own car before your friend’s car, are you liable. Yes, you are liable for it. That is a contract of deposit. You have an obligation as the depositary to attend to what is deposited ahead of your own. That is the obligation that you accepted when he deposited it to you. When you deposit in the bank, it is fungible so it is not a true deposit. It is a mutuum. Contract of Deposit, Contract of Partnership, Fiduciary nature of a corporation, mau ra na. It’s a common thread. If you are not careful, you will end up betraying the corporation because you obtain an interest to your benefit, at the expense of the corporation. EXECUTIVE COMMITTEE Section 35. Executive Committee. –The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filling of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividend to the shareholders. Those are the exceptions which the Executive Committee cannot act. There are so many corporations who do not want to call it Execom. They call it Mancom (Management Committee). The problem with that is that it is the terminology that is found in FRIA (Financial Rehabilitation and Insolvency Act of 2010). It is a technical group which may be appointed by the SEC in a distressed corporation. So, the correct term is Executive Committee, not Mancom. It says here that the by-laws of the corporation may create. Suppose there is no provision in the by-laws, can the board create an Execom? The Supreme Court said YES. Why? Because the powers of the Board is plenary. It is supposed to exercise such powers and create such committees to enable it to Page 26 of 112

govern and administer the affairs of the corporation. So even if there is no provision in the by-laws, the board can create an Execom. I will tell you the story of the Execom of the old PCI Bank. PCI Bank was bought by the Lopez Group and the Gokongwei Group. They teamed up together, equal shares sila and they bought it right after EDSA Revolution. The way it was bought is, the Romualdez shares, most of it, were sequestered by government and the government said, since the Romualdez’s did not contest, we are selling it. The way they sell it is by obtaining dollar credits. At that time, the Philippines had so much foreign debt. If you pay the foreign debt, you obtain credits equivalent to the debt that you paid. And that is how they gained control over these different corporations that were for sale. So since Lopez did not have enough money to pay for everything, he teamed up with Gokongwei who had money, but did not have enough to buy everything. So pareho sila, they teamed up. 35%-35%, so 70% sila. Karun, gipalit nila, pagkahuman palit nila, ingun dayun si Gokongwei kay Eugenio Lopez “ since you are more used to the public, you be the Chairman and President, tapos ako, Execom ra ko.” Lipay kayo si Eugenio kay siya man ang starring, siya man ang chairman. Si Gokongwei, Execom ra siya. Sa ngadtu-ngadtu na, nakamatikud na si Lopez na ang mga corporation ni Gokongwei ang sige kahuwam sa kwarta because it is the Execom that processes the loans, they meet every week. Ka-isa ra man magmeeting every month ang board. Nothing reaches the board unless it is approved by the execom. So nawala na sa passing si Eugenio Lopez Jr. Mauna niingun siya na ibaligya na natu. Who wants to buy 35% when you do not control. So, niduol siya kang Gokongwei ingun siya “let’s sell together” so it’s 60%, they have to pay a premium for control, not only the buying of the shares, but you add a price to being in control of the corporation, that is the premium, because you get 70%. Ingun si Gokongwei “no I am not interested in selling.” So what did Eugenio Lopez Jr do? He did the unthinkable, he went to Romualdez (mau nit u siyang gipriso ni Marcos unya gipaeskapo sila) who was a minority stockholder with 20%. Giingnan niya si Romualdez “I am approaching you, I am asking for your help (hinay na tu sila, wala na man tu sila sa Board), let us organize and let us sell togather because the Equitable Bank is interested in buying.” This is the time of Estrada. Gipahuwam ni Estada sa SSS and GSIS ang Equitable Bank, so naa siya kwarta ikapalit. So Romualdez said “Go atu ni ibaligya arun maka-kwarta ko kay I will have a premium. If I sell by myself, there will be no premium because there will be no control, but if I sell together with Lopez, there will be control, it will be 55%.” Lopez told Romualdez wait for my signal. Lopez went to Gokongwei and he told him “you don’t have to attend the meeting because if you do, you will just be embarrassed. You will no longer be in the Executive Committee, and I am and Romualdez will sell to Equitable Bank-Mr. Go, and that will be the end of you, you are just 35%, no premium, you will only be 2nd beadle to Mr. Go of Equitable Bank.” What did Gokongwei say “Okay I am selling with you.” Lopez said “Okay, we were in this together when we came in, we will exit together.” And than was te ultimate stabwound to Romualdez because Romualdez grabbed Meralco from the Lopez’s so Lopez did not have any qualms at all to betray Romualdez. That is the story of how it became Equitable Bank, then afterwards, it got into trouble because of bankrun (remember that vice-president who testified that it was Velarde himself who signed it but that was Estrada, edi, bankrun). Who got Equitable Bank? BDO. Equitable Bank is lost in BDO who bought it. Sometimes, it is the Executive Committee who runs the corporation. Naa man na resolution ang Board of Directors, let us say for loans, P5 Million and below, approval of the Executive Committee is enough and it is just ratified in passing, paspas ra na kaayo. The Board begins to look at the loans once it is above P5 Million. So for a big bank like Unibank or PCI Bank, higher

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno tingali ang threshold, P10 Million or P20 Million. So that was how Gokongwei made PCI Bank the financing company of his corporations kay siya man ang sa Execom, siya man gakupot. Is it not covered by the Interlocking Directors? It is covered supposed to be if it was the Board that approved it, but it is not the Board that approved it, it was the Executive Committee. Alright, we are finished with the Board of Directors. We are now with Powers of a Corporation (Father hands in a handout to the class).

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

SECOND EXAM COVERAGE December 6, 2017 (April Liz Parreno) TITLE III - BOARD OF DIRECTORS/TRUSTEES/OFFICERS Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

The only corporation meeting of homeowners which is non-stock non-profit but has always with quorum is Forbes Park. Why? Because the owners are not individuals but corporations. The owners of lots and homes in Forbes Park are all corporations. Ingon ka, why? Why in heaven’s name is it a corporation? Because nobody sells land in Forbes Park. If you want to sell your land, you sell the corporation who owns the land. Why? So that your capital gains tax will not be punitive in size. Ever since Pacquiao bought property in Forbes Park, the price of property in Forbes Park is 400,000/sq.m. The size of the property is 2,500 sq.m minimum; how much is that at 400,000/sq.? 1 billion. Why is it that expensive? Because BGC is already 450,000/sq.m. Ayala, the other side, is also 450,000/sq.m. That’s Forbes Park in between. In Forbes Park, there is an annotation: you cannot build more than two stories. It is limited, but the first 25 years is over. And it’s already 10 years into the next 25 years when they reviewed the annotations in the titles by the subdivision owners. They elected to renew it. Pagkahuman 15 years to go na lng, there is a potential it becomes an extension of BGC or extension of Ayala. That’s why corporations are the ones positioned in them Do you know that UP has three lots there? You may ask, why? If you have studied your Property laws then you would have come across the case of Quasha vs Republic of the Philippines. They have land in Forbes Park. Two years before the end of parity, they filed a case straight to the SC. What was the case? Petition for Declaratory relief.

What is the term of Board of Directors? It is not right to say 1 year. It is 1 year until their successors are elected and qualified.

I am an American under Parity; I own a residential land in Forbes Park. What is the scope and extent of my right post-parity? Can I continue to own? Am I still the owner? That is the question he brought up. And it was JBL Reyes who wrote the decision.

What is the meaning of elected? It means that the stockholders or members of the corporation cast a vote to elect you. What is the meaning of qualified? It means you accept it and sit down as BOD. You are elected and qualified. You called for a director/stockholder’s meeting; and then there is no quorum because less than 50% of the share holders+1 is represented in the meeting. What happens? Can you go on to elect the BOD? (Because every annual meeting you elect the BOD.) Usually if it is a stock and profit corporation, you do not have a stock holder’s meeting that failed to have a quorum. But if you have a non-stock non-profit corporation, like the corporation that is made up of the homeowners of Bell-Air Subdivision I, which is more than 1k houses. And they do not bother to send a proxy; proxy is allowed by the specific provisions of Bell-Air Homeowners Corporation. What happens if they do not have a quorum? They have given notice so let’s go ahead with the election. Is that valid? No it is not valid. What happens is the entire Board becomes a hold-over board. That is when the second part of the last sentence of 1st paragraph of section 23 takes effect. They continue to hold office because there is no successor that has been elected and qualified. The problem is, if a hold over director dies, does he have an unexpired term? No, he does not have unexpired term because he is just a holdover. The Board of Directors cannot elect another to replace him to serve the unexpired term. It has to be the stockholders to elect him or the homeowners who will elect the replacement. But they can’t get a quorum, what happens? I-abort. Next meeting, wala gyapon quorum so hold-over gyapon. Hantod maghinay hinay na silang kamatay, wala na gyuy quorum na mabilin. But I am telling you it is a problem of 90% of Home Owners’ Association that are high end. The problem of condominiums. They are so busy with some other businesses that their Homeowners Corporation is given second priority or no priority at all.

Page 28 of 112

JBL Reyes said you had parity while the amendment lasted. After the amendment expired, that is the end. You have to disinvest. What the SC pronounces becomes law of the land. So all the Americans in Forbes Park that had property had to think what are we going to do. What did they do? They conveniently donated the property to the Universty of the Philippines; but not before the UP signed a deed of assignment so that executives will continue to live there for a sum of money, 25 years renewable for another 25 years. That is why the UP is an owner of property next to the property of Senator Boxer Manny Pacquiao. The rule in Forbes Park is that you can only build of 60% of the lot; the rest is easement and that includes for another development like swimming pool. (Fr talks about prop of Napoles) If the sale of 2,500 is according to market value, it will be 1 billion. How much is capital gains plus doc stamps? What is 7.5% of that? 75 million. Maghilak ka. Whereas if it is owned by a corporation and you sell the corporation, you sell the shares of stocks of all the stockholders there who are under your control at par value, that is the extent of your capital gains. Let us say you are 95% owner of an outstanding capital stock of a corporation. The moment you are 95% owner, the business parlance term is that corporation is wholly-owned by you. That is business parlance ha, that is not legal. The moment you own 50% + 1 of the outstanding capital stock of a corporation, that corporation is called a subsidiary of the owning corporation. If the corporation’s outstanding capital stock is owned less than 50% by another corporation, this corporation is said to be an affiliate of the owning corporation. Why is it wholly-owned when it is only 95%? It’s not 100%? Because you cannot own 100%. Why? Because you need a Board of directors. And a Board of Directors constitutes the smallest number of 5. You cannot be elected as a member of Board of Directors unless you own 1 share in the books of the corporation. You own 95%, you have to allow co-ownership by at least other 4 people, so that you will be at least be followed. The business language is accommodating. 95% is whollyowned already.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Let us say you are 95% owner of outstanding capital stock, and then, all of a sudden, you die. And in your will you already bequeath the shares of stocks of the corporation to your only daughter. You have other business and you disposed according to your will. Let us say you die in February, just a week after the annual meeting of the corporation and all 5 directors are already elected and you chose not to be one of the directors. You have a nominate, all, in fact, are your nominates. You die; your daughter becomes the stockholder that owns 95%.

or members of the right of representation to which they may be entitled under Section 24 of this Code. 95% ka stockholder, ang tulo ana matangtang nimo without cause because they are deemed to be your representative, if you call a meeting. But the two, you cannot remove without cause, because they deem to be the minority representation. It has to be for cause that they must be removed.

Can she say, I demand to attend the BOD meeting? Can she demand attendance to a meeting of the BOD legally? Unless she is elected to the Board, she cannot demand.

How do you guard against it? In most corporations, if you are the controlling investor, when you invite somebody to become a director, make him sign a letter of resignation that is undated. Ready na ka, aron dili ka mamoroblema aning section 28.

The powers are directly given by Section 23. It is not a derivative power. It is a power granted by law, directly by law.

This is not asked in the Bar exam but please memorize the formula for the number of votes that is required to elect directors.

“xx the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors xx”.

What is the formula? (AB/C + 1) +1 = number of votes that can be shares or proxies that is required to elect directors. A = total outstanding shares that are voting shares B = desired number of directors C = total number of directors you want elected or voted

Make no mistake about that.

You have to memorize this formula if you are the secretary.

Can the majority stockholder, 95% owner of the outstanding capital stock, can he remove all the directors? SECTION 28 provides: Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: From that first sentence, there is possibility that you can remove because you have 95% of the shares and not only 2/3. Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote.

So the 95% owner can demand a special meeting.

PLDT has more than 2 million stockholders. Ngano kadaghan? Kay Marcos passed a law favoring the Cojuangcos. If you wanted a telephone connection, part of the fee you paid PLDT for that telephone connection is for the purchase of preferred non-voting shares. ½ of the 2M stockholders of the PLDT has no votes; only 1 million has voting powers. So you count; but how can you count when everyday it is being bought and sold in the stock market? How can you identify the value of A? PLDT has this thing called a “cut-off date”. 1 month before the annual meeting, the stock transfer book is closed. If you buy or sell, it is not recorded. Because that day freezes the number of voters for the annual meeting. Is that valid? The SC already said it is valid. What is the reason for holding the validity of the cut-off date 1 month before the annual meeting? Because it will be chaotic if you do not have that cut-off date. Suppose all 1 million decide to transfer their sales the day before election, how can you process that? And you must grant because theoretically they have the right. It is a way of solving the orderly transfer ownership and the keeping of the stock and transfer book. Corporation law, especially, stock and profit corporation is all about control. Who controls the corporation?

Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. What is qualified notice? It contains not only the time and the place of the meeting but also of that item in the agenda for which the meeting is called. If it is for removal, then you must state in the notice that this is a meeting for the removal of the directors, so and so. Notice must be qualified.

Muingon ka, magbuhat kog corpo na walay ga control. 33% diri, 33% sad diri, 33% diri. Walay ga control. Do you know what you’re doing? You are inviting chaos. Your proposal is that the purpose of the corporation is not fulfilled kay magsigeg away. Equal force man sila. In the formation of the corporation, drawing up of the articles, you make sure that there is no control and control is not necessarily padaghanay shares. You can have control even if you have the smallest number of shares. If you are swing interest, 40% and 40% magka- away gyud na sila gikan sauna. Musulod ka naa kay 20%, ikaw naay control. Kay kung kinsa imo dapigan, mao man ng madaog.

“Must be given by publication and by written notice as prescribed in this code.” The vacancy resulting pursuant to this section may be filled by election at the same meeting without further notice or at any regular or special meeting called for that purpose. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders Page 29 of 112

If you are the swing vote and you do it very well in the articles of the corporation, even if you are the minority, you will control. Classification of shares is very important because in the end what determines is control. Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

Can you provide for a higher requirement for quorum than simple majority? The Securities and Exchange Commission’s opinion is: Yes, you can provide for a higher requirement for quorum but you cannot reduce the quorum to less than majority. The election must be by ballot if requested by any voting stockholder or member. Is the election has to be by ballot? No. Only if requested. W corporation, they require cut-off of the stock and transfer vote one month before the annual meeting of the stockholders. The by-laws also require that those who want to put themselves up as candidates to be directors must be nominated by at least 10% of the outstanding capital stock and the names must be submitted before the cut-off. Ang mga minority, they have to organize themselves so they can submit somebody in voting. The Corporation Code requires that you must allow for cumulative voting. You cannot deny cumulative voting in a stock and profit corporation.

Why 2 to 3 months? Because you have to give time to the independent external accountants to review the Financial Statements of the Corporation Because one of the items in the agenda of the annual meeting after you elect the directors is to present the financial statements. The President together with the treasurer, they make a report. Why did we register laws? They explain. Why did we make less money? They also explain. Why did we make a lot of money? That’s when they also explain. And then the stockholders vote to accept the financial statement. After they have voted, then that is the Financial Statement of the Corporation. But that is already audited. What is the significance of audited Financial Statements? The significance of the audited FS is that a third party that is respected in his field certifies that the number in the FS, Balance Sheet, and Profit and Loss Statement reflects accurately the financial story of the Corporation in accordance with Generally Accepted Accounting Principles (GAAP). Then you are not afraid to present it to anybody. If there are investors, dia ra ang FS namo! Naay magsukit sukit diha nga Government Agency? Dia ra sagpaon nimo ana :) kay audited naman. Mao nay purpose ana nga di ka mag tago-tago. You have an election then, annual meeting. One year man ang term or until the successor is elected and qualified, one year ang term. Unya mapatay sya in the middle of the term. Patawag kag stockholder's meeting para mupili sa mupuli nya? Dili! Only the directors choose the replacement. If incapacitated? If napiang sya? Incapacitated ba na? Dili! He can still attend meeting by teleconferencing, by video conferencing, mahimo man. So he is not incapacitated. Kani adto, incapacitated ka ana, marayuma ka, ma gout ka, d naka kalakaw, incapacitated ka na. Karon dili na! Dili ka incapacitated hangtud buhi pa imong utok.

What is “cumulative voting”? If you’re a stock holder, your maximum number of votes is your number of shares multiplied by number of director to be elected. That is your total number of votes Pila man imong shares? 10 Pila ka directors ang pillion? 11 11 x 10 = 110 that is your maximum number. How do you cast it? You can cast it all on one candidate; you can divide it equally; or divide it according to the proportion that you want.

2.

Why is it allowed to cumulate all its votes and put it in one candidate? To allow or give chance to minority to have representation. That is why cumulative voting cannot be denied in the by-laws in a profit and stock corporation. In a non-stock, non-profit corporation, if the by-laws is silent, there’s only one vote per person, you cannot have cumulative voting.

When can they do that? When the amendment is approved How is it approved? When the SEC issues a Certificate of Filing 3.

December 7, 2017 (Janice Molina) If the corporation were a ship, the BOD is the captain of the ship. Remember that analogy. The captain of the ship, mao nay tinood nga manager, gusto ka makakitag tinood nga manager, kapitan sa dakong bapor nga overseas. Wa kay tabang ana ikaw ra, naay magbuang buang ana nimo nga tripulante unsa man imong buhaton ana makiglayog nimo? Disiplinahon nimo kay kon d na nimo disiplinahon manunod nang uban. So the BOD is the captain of the Corporation. Who elects the Board? As a general rule, it is the stockholders or the members of the corporation. But there are times when it is the BOD that elect the members of the Board. In case a member dies, is incapacitated, resigned, or is disqualified, the one who elect is the board itself. I will summarize it to you. There are five (5) instances when the stockholders elect the board: 1.

Annual Meeting - usually Fiscal year. The annual meeting is dictated by the by-laws, you cannot just change the date of the annual meeting. It is provided in the by-laws and normally it coincides with the cycle of the fiscal year. Fiscal Year meaning the twelve month period not necessarily coinciding with the calendar but it is the accounting period to recon the financial story of the corporation. Usually 2 to 3 months at the end of the fiscal year, that is the annual meeting in the by laws Page 30 of 112

When the numbers of BOD is increased - by an amendment to the Articles. Even if it's in the middle of the term, it is the stockholders who elect the additional BODs.

When the Director is removed - First of all, to remove a director you need a meeting duly called for a purpose. Di na mahimo ang written assent ha. And 2/3 must vote to remove you. If you are the representative of the majority, you can be removed by 2/3 vote of the stockholders with or without cause. Cause: Nangawat ka, tangtang ka. Without cause: Wa ka, gisumhan ra sila sa imong hitsura!

When do you elect the replacement? You can elect the replacement at the same meeting of his removal. 4.

When a director resigns, dies or is incapacitated, and the remaining directors no longer constitute a quorum. The example is Texas Instruments Philippines Inc., five directors in their corporation, nag inaugurate sila ug ika-duhang factory sa Baguio. Ngano sa Baguio man? Bacause higher altitude and ostensibly the air in Baguio contain fewer pollutants, they manufacture, not ordinary chips but they manufacture intelligent controlling chips. In fact the likelihood of the Texas Instruments controlling chips in your smartphone is 70% because Texas Instrument manufactures 90% of all controlling chips. Mao nay technology nga gitaguan sa Amercano. Japan and China? Puro na memory pero pag abot na sa controlling chips, wa pa na nila buhi-i.

How about the 5 Directors of the Texas Instruments? The law requires that the majority in the BOD must be a resident of the Philippines. There is no citizenship requirement, majority is

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno residents. That is what is required by the law. Now they were inaugurating a factory, the 3 Americans choose to fly, the 2 Filipinos decided to go by tag. But ang gisakyan sa Americano na-crash man, patay ang 3. When a director dies, it’s only the BOD who elects the replacement but the replacement is to be elected by at least the majority of the Board. Absolute majority or at least 3. Duha naman lang nahibilin? So they have to call a stockholder's meeting. So that is the work. 5.

The case of Bel-Air vs. SEC (Recently decided case, 2 years ago). Bel-Air is one of the subdivisions created by the Ayalas. Pila mana ka subdivision diha sa Makati? Forbes, Dasmarinas, Bel-Air 1, Bel-Air 2, San Lorenzo. Residential Subdivisions created out of the Ayala estate. In the middle is the Ayala Central Business District. This is one of the most expensive Real Estate. Aron makabawi ka naa kay dapat at least 30 stories nga building, naay 600 to 650T per square meter.

Ang Bel-Air mao na ila problema, walay quorum kada magmeeting sila homeowners. Bel-Air Homeowners Associations, Inc. Unsa may meetingan ana? Gasto sa garbage, repair, security, discipline (husay) sa subdivision. What happens? 3 na ka-tuig walay quorum, so all the directors were so called "hold-over directors" because a director is supposed to have a term of 1 year or until the successor is elected and qualified. Tua na sya sa "until elected and qualified". Ni-resign man sya, ang director ni resign, pag resign niingon ang nahibilin nga sige magpili ta ug replacement. Unya naa may bag-o abogado, gichallenge nya, niingon nga dili namo makapili kay hold-over man mo. Wa man xay term nga nahibilin, naghulat nalang sa puli. Wa man paminawa abogado, nagkaso sila hangtod naabot sa SC. SC said correct, the Board cannot elect the replacement if there is no unserved portion of the term that is left behind because he is a holdover director. So, that is what happens. When the director resigns, dies, disqualified, incapacitated or in any way cannot continue to serve a remaining portion of his term and the remaining director also are hold-over directors, they cannot elect the replacement. It must be the stockholders. Those are the 5 instances that a director must be elected by the stockholders or the members of the Corporation. Remember, if the director dies, you have 30 days to report. If he disqualified himself? Here is a question. There is a disqualification provision, Section 27. Section 27. No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this code, committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee, or officer of any corporation This is a disqualification. So if na-priso na gani ka ug 6 years, di naka ma director or if you violated any provision of the Corporation Code or directive of the SEC within 5 years from your election, you cannot serve as a director or trustee. Can the Articles or the By-Laws add qualification or disqualification to a Directorship in that Corporation? The leading case is Gokongwei vs. SEC 89 SCRA 336. I remember this case because that was 1977, I was still in Ateneo de Manila Law school and the lawyer of Gokongwei was teaching us and the lawyer of San Miguel was also teaching us. This is their issue, Gokongwei slowly accumulated shares of San Miguel. All you need to be elected to San Miguel, you need only 1/15 of Outstanding Capital Stock. The story here is Gokongwei, after he has accumulated about 1/12 of the Outstanding Capital Stock, he started getting proxies and one month before the annual elections, they already submitted his name and nominations to be a director. So he is registered 1 month before, so San Miguel started floating articles in the newspaper that Gokongwei has antagonistic business against San Miguel, that Gokongwei is in San Miguel precisely to spy on the product developments of San Miguel so that he could have advance knowledge of where San Miguel is now. Now, even before that, San Miguel already passed an amendment to their Article. The amendment was this, if you have an interest, personally or in another Corporation, financially or indirectly of a business that is in competition with San Miguel Page 31 of 112

or of any of its product lines, then you are disqualified from becoming a member of a BOD. So they said, you Gokongwei, you have antagonistic business. What is SMC's antagonistic business? Nakahinumdom mo atong Presto Ice cream? Gokongwei had Presto IceCream, SMC had Magnolia. Gokongwei had Robina Feeds, SMC had BMeg Feeds. So in competition. So they said, Gokongwei, you cannot run for Board of Director of SMC. But di man nila mapugngan naa naman siyay one-fifteenth, you just cumulate that, dba cumulative voting? You cumulate that lingkod jud ka di ka ma prevent. So Gokongwei did not accept the warning of the secretary. He filed a case with the SEC, the SEC ruled in favor of SMC. The decision of the SEC is appealable to the CA but the lawyer decided to go to the SC for the question of law. Can a stockholder be disqualified from becoming a member of the BOD when he has enough shares to be voted as director? The SC divided the issue: 1. Can there be a disqualification added in the bylaws preventing a stockholder to become a director? SC says Yes. A corporation is free to add disqualification or additional qualification. 2.

Is there a valid disqualification here when his disqualification was voted upon by the stockholder when the Outstanding Capital stock was only onethird of the present number of shares that is in__? Gamay pa tong corporation niadto when this disqualification was set. The SC says yes, the disqualification still operates later

Is Gokongwei disqualified from running? SC answered, the presumption is Gokongwei can run. If as the controlling share says that he is disqualified then he must be given his day in court. He must be investigated, he must be heard, and there must be an investigation as to whether he really fits the disqualification. So it is not automatic. If there is a disqualification in the by-laws, that still has to go to an investigation. The order is to remand to the SEC but it was settled amicably. Gokongwei was first made a director of San Miguel International in Hong Kong and afterwards they offered him a price he could not refuse and so he made a lot of money. The money he got, he bought PCI bank together with the Lopez’s. Later on, they sold PCI bank to Equitable Bank. Say, there were people in the board who are also disqualified but they did not raise the objection later. One of them is Jaime Zobel de Ayala, used to sit on the board of SMC and yet the Ayala's at that time owned Pure foods because SMC bought them up and SMC had Monterey. Ngano gi-allow man nila si Ayala na mulingkod diha? Naa sila BMeg, Ayala also had a Joint Venture with Harvel, high breed corn. They allow Ayala because Ayala and Soriano are first cousins. COMPENSATION OF DIRECTORS Director’s Compensation has a limit in the Corporation. What is the limit? It cannot be collectively more than 10% of the Net Income of the Corporation before tax. When you are given a problem about this, make sure that is a pure director because there are directors who are also officers of the Corporation. Let's see you are President and CEO of the Corporation and you are also a director, your compensation as an officer does not have a limit, but your compensation as a director has a limit. The limit is not more than 10% of the net profit before tax. That ceiling does not include per diem. Per Diem is the expenses that you must incur in order for you to perform the Director's duties. Probably you remember that PNB was still a GOCC, it was the President who appointed the directors and during the time of Ramos, he was very grateful with this Dabawenyo, because he helps during the elections, he appointed him as the director of PNB. PNB has a meeting once a month. Director’s fee? 100k per meeting excluding per Diem. The per diem is not included in the ceiling of 1/10th of the net income before tax.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno What is the Director's fee in PLDT? 250K, one board meeting. If you are called in a committee meeting, it is 150K. So once a month you have a meeting 250k, tawgon sad ka ug committee meeting 150K.

It’s another story when this self-dealing director owns 2/3 of the outstanding capital stocks because even with the absence of the 1st and 2nd requisites, these transactions can be ratified by the stockholders.

December 8, 2017 (1st Half) (Lizette Kaye Estillore)

What is the assumption behind this rule? If the self-dealing director is a stockholder with 2/3 of the outstanding capital stock, he is less likely to take advantage of the corporation. Mura ka ug nag-dunggab sa imong kaugalingon – imo na gud na ang 2/3 unya imo pang lawgawon ang corporation! Maluoy ka man sa imong kaugalingon. Charity begins at home! I’d like to point this out to you because there is another applicable assumption applicable to directors.

SELF-DEALING DIRECTOR Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1.

2. 3. 4.

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; That the vote of such director or trustee was nor necessary for the approval of the contract; That the contract is fair and reasonable under the circumstances; and That in case of an officer, the contract has been previously authorized by the board of directors.

INDEPENDENT DIRECTORS Now, the Securities Regulation Code requires of certain corporations to have independent directors at least 20% or at least 2, whichever is lower, in the Board. These are: 1. 2.

3.

Listed Corporations Corporations with at least P50M assets and at least 200 stock holders, 100 of the stockholders owning at least 100 shares Banks, financial institutions, and quasi-banks

Who is an INDEPENDENT DIRECTOR? Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

SELF-DEALING DIRECTOR are those who enter contract with the corporation of which they are directors. Technically speaking, it is an anomalous dealing. A director is an agent of the corporation who acts for the corporation. Yet, a self-dealing director also acts for himself. REQUISITES: 1. His presence in the meeting, which approved the transaction, must not be counted for purposes of quorum. 2. He cannot vote on said issue. 3. The contract is fair and reasonable under the circumstances 4. In case of an officer, the contract has been previously authorized by the board of directors (SELF-DEALING OFFICER e.g. president of the corporation, general manager who is not a director) If the 1st and 2nd requisites are not met, for as long as the contract is fair and reasonable (In NIRC, it is termed as arms length transaction), there is no fair advantage that is given to the director. Illustration: You are a director of Bachelor Bus. You are also one of the biggest dealers in second hand tires and brand-new tires in Davao. As a director, you offer it to Bachelor Bus. This transaction must go through Section 32 of the Code. There’s a meeting. The presence of the director is not counted. Tangtang na siya sa minutes for this particular discussion on the transaction because in the end the BOD will pass a resolution approving the transaction. That’s how a corporation acts! Put it in record that he did not vote. The others who voted shall still constitute as the majority of the BOD. Have a comparative pricing of others. “These are the pricing of others. This is the price that he gives. Therefore, it is fair and reasonable.”

Page 32 of 112

1.

He cannot own more than 10% of the outstanding capital stock of the corporation. The PSE raised the requirement. The law says not 10%. The PSE says not more than 5%. 2. He cannot be related to any of the controlling owners. 3. He cannot be an employee of the corporation or the external auditor, or consultant of the corporation, its mother or subsidiary. The whole thinking is you can think better for the good of the corporation if you are not related to the corporation – you are thinking of the general welfare of the investing public. In Section 32, if you have 2/3, you are thinking about the good of the corporation that is why you can ratify the transaction. Asa ma’y tinuod ana? If you ask me, none of those two. It’s the actual running of the corporation. It’s the oversight! In the end, good governance is good governance in any language provided that it exists. Are the directors prohibited from entering into contracts with the corporation? No, they are not. But there is a formality that has to be done. INTERLOCKING DIRECTORS Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Normally, it is the corporation who enters into a contract of which the director is also a director because he is also a stockholder, and he is entering into contract with the corporation of which he is also a director. This is what we call INTERLOCKING DIRECTOR. There is an INTERLOCKING DIRECTOR in a croprations where one or some, or all of the directors of one corporation is/are a director in another corporation. If the interest of the interlocking director of a corporation are both substantial where stockholdings exceed 20% of the outstanding capital stock, you become a

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno substantial interest in the corporation, as far as interlocking directors is concerned, then a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone, except if the contract is fraudulent or not fair or reasonable. The contract, as a general rule, is voidable if the interest of the interlocking director in one of the corporations is nominal, while substantial in the other stockholdings in another corporation. It will only be valid if the following conditions are present: 4.

5. 1.

The presence of such director/trustee in the board meeting in which the contract is approved was not necessary The vote of such director/trustee is not necessary or not counted in the approval of the contracts The contract must be fair and reasonable

The corporation where that interlocking director has only nominal interest needs to be ratified by 2/3 of the outstanding capital stock or 2/3 of the members of the corporation. There has to be full disclosure of the adverse interest of the directors and the contract must be fair and reasonable. Kanusa man naa’y ratification kinahanglan 2/3? If your interest is less than substantial or if it is nominal, the assumption is that you may favour the corporation where your interest is substantial. A director might act as an agent for another corporation and that other corporation has nothing to do with that, but he brings in to the director. That is not covered. (Huh?) Illustration: For example a corporation is putting up a building. They are opening it for bidders. One of the directors is related to a wellknown construction company because his brothers are architects and engineers. So dad-on niya ang corporation sa iyang brothers. Is he a stockholder there? No, he is not! How do you handle that? Then you enter into *** because *** requires full disclosure if a director brings a business opportunity to the corporation through the board, then he must make full disclosure. Muiingon siya – “Kini akong giduso, I am related to them. My brothers are officers of the corporation and a major stockholder.” For delicadeza, muingon siya – “I better refuse myself so you can freely discuss the merits and demerits of this transaction.” Sibat siya! Ang iyang proposal debatehon sa BOD and wala siya diha kay related man siya. Mao na ang full-disclosure, honest, and transparent. Kinsa man muingon ana? Ang corporate secretary. (Father talks about SMC and derivative suit) DERIVATIVE SUIT is filed by a stockholder in the name of the corporation. Who files the suit for the corporation? It’s not the corporation because it has no hands to sign the complaint. It has to be the BOD who files the suit. It files the suit by passing a resolution where a natural person, normally the President, is named who will act for and in behalf of the corporation. This is approved by the majority of the BOD. If the corporation acts against the very agents who are supposed to act for him, the suit shall be filed through a derivative suit. A stockholder can file the suit in the name of the corporation. The stockholder is the representative party to the corporation because the mortal representatives of the corporation are themselves the respondents. Only one share is needed for a stockholder to validly file a derivative suit. At the time the controversy arose, you must be a stockholder. At the time you file the suit, you must still be a stockholder.

December 8, 2017 (2nd Half) (Zarah Donna Domingo) WHEN IS A DIRECTOR LIABLE Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

Section 31 lists down the 3 WAYS IN WHICH A DIRECTOR IS LIABLE. 1.) When he votes for or consents to a patently illegal act; 2.) Willfully and knowingly vote for or assent to patently unlawful acts of the corporation; It was reported a week ago that the Mayor of the IGACOS (Samal) said he has money for microfinance and he appointed the multi-purpose cooperative of Samal that it will process the applicants, after which they will release the microloans. The cooperative passed a resolution which provided that in gratefulness to the Mayor, it is giving the mayor a gift of P100,000. The following year, they passed another resolution giving P100,000. This is in violation of the Anti-Graft and Corrupt Practices Act-“gifts by reason of office.” The Mayor received the check and subsequently encashed it and deposited it in his account. The check was recorded in the cooperative. There is no way he can deny that he has not received the money. Give a law that makes the director and the office liable, criminally. An example is the violation of the Trust Receipts Law. If the corporation is the trustee, the officers are the ones who serve the prison term, not the corporation because it cannot be put in jail. Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Thirteen hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. Illustration: For instance, you import a machine (8-color printing machine from Italy). You obtain a loan from a corporation. You open a letter of credit in the name of the corporation (bank), assigned to you. You will be made to sign a trust receipt which provides that the proceeds of that, if you are a printing press, go directly to the corporation to service the debt. If you cannot pay, that will amount to estafa. The proceeds belong to the bank because it is the owner of that machine.

(Fathers talks about the whereabouts of Danding Conjuanco and SMC)

That is the same case with Avon. You will be asked to open an account and issue postdated checks so that you will work hard to Page 33 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno sell them, and at the same time, you will be made to sign trust receipts because Avon is the owner of the beauty products (papula) and you are merely an agent. If you cannot pay and you cannot return the beauty products, you are deemed to have appropriated these products for your benefit. You have committed estafa. The provision of law states that if it is the corporation who is the trustee in a trust receipts contract, the officers, the members of the board, they are criminally responsible. They will answer for the fine or imprisonment that is meted out to the corporation, jointly and severally liable. DOCTRINE OF CORPORATE OPPORTUNITY Section 34. Disloyalty of a director. – 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, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. “Nangilog ko ug business sa corporation.” Illustration: You are all directors, you went to Australia. Cattle-fattening is your business. As long as the cattle is still increasing its weight, you do not yet kill it. When it stops growing, that is the time you slaughter it. While you were choosing a cow, somebody came near you and told you they were looking for leather. It made an offer that the former will make leather from their cattle and they will buy it. You as director, you say this is my chance, I will not give this to the corporation. When you went back to the Philippines, you put up a leather-tanning business. You get the skin of the cow that will be slaughtered. Is that a violation of the Doctrine of Corporate Opportunity? No. The requisites of the Doctrine of Corporate Opportunity; The Doctrine says that if there is presented to a corporate director a business opportunity which: 4.) The corporation is financially able to undertake; 5.) From its nature is in line with the corporation’s business and is of practical advantage to it; 6.) One in which the corporation has an interest or a reasonable expectancy. And then, wala nimu gihatag, imuhang gi-solo. Then you must account for the profits, even if you spent you money in that business. The Supreme Court said that it is not a case of violation of the Doctrine of Corporate Opportunity. Cattle-fattening and LeatherHide/Cattle-Hide Tanning, Curing and Selling, are 2 different businesses. What is an example of a violation of the Doctrine of Corporate Opportunity? Bitong vs CA (1998) Bitong was the President of Jaka Corporation (the holding company of Juan Ponce Enrile).The corporation was named after Enrile’s two children. It was the 2nd biggest owner of real property along Ayala Avenue, the main avenue of the Central Business District in Makati. Jaka was in the development of high-rise condominium and a law was passed than when you are a highrise developer, 10% of your project must also be in low-cost housing. They looked for lot where they will be putting up the lowcost housing project. They found 3 prospects: the first one was flat, already with electricity and NAWASA connection; the second one was also flat but without water and electricity; and the third one will require high cost of development because it is not in a flat area, which although having access to electricity, had no access to water. Bitong said that Jaka will get the third option. He got the first one for his own corporation which was also involved in real property development. The SC said that it was a violation of the Doctrine of Corporate Opportunity because it was no longer speculative, the corporation needs that, it was in-line with the business. There are no ifs and buts. If you compare this case with the previous example, layo pa, daghan pa itranslate, agian. There is a way of slaughtering to produce leather—there is curing and stretching. In other words, the process of producing leather is not part of the business of Page 34 of 112

cattle-fattening. Hence, there was no violation of the Doctrine of Corporate Opportunity. DISLOYALTY There is a corporation that has a debt with another corporation. The latter calls the directors for a meeting. It was found out that although all the former’s properties in the Philippines were already attached, a special information was received that the debtor corporation owned a plane in Burbank, California. The directors agreed that they will hire a lawyer to attach the property. Now, one of the directors stands up and goes outside and makes a phone call. He called his lawyer in LA and told him that since the debtor corporation also had debts to him, he instructed the said lawyer to go to Burbank and attach the same property which the creditor corporation has agreed to attach. He is a director of a corporation. He used his knowledge for his own benefit/ that is disloyalty. If you are a director of a corporation, it is like partnership, if the debtor has a debt to a partnership and a debt to you personally, not as a partner, but in your other business, and both obligations have ripened. Naa siya gihatag na payment pero dili paigo sa duha, sa usa ra. Asa man na i-apply kung ikaw ang mukulekta? To his debt to you or to the corporation? (But, charity begins at home.) You have, first and foremost, a fiduciary duty, which is higher than your personal duty. It is higher. In the same way, when a friend requests that he parks his car in your parking space while he is away for a conference and your house got burned and you chose to save your own car before your friend’s car, are you liable? Yes, you are liable for it. That is a contract of deposit. You have an obligation as the depositary to attend to what is deposited ahead of your own. That is the obligation that you accepted when he deposited it to you. When you deposit in the bank, it is fungible so it is not a true deposit. It is a mutuum. Contract of Deposit, Contract of Partnership, Fiduciary nature of a corporation, mau ra na. It’s a common thread. If you are not careful, you will end up betraying the corporation because you obtain an interest to your benefit, at the expense of the corporation. EXECUTIVE COMMITTEE Section 35. Executive Committee. –The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filling of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividend to the shareholders. Those are the EXCEPTIONS WHICH THE COMMITTEE CANNOT ACT.

EXECUTIVE

There are so many corporations who do not want to call it Execom. They call it Mancom (Management Committee). The problem with that is that it is the terminology that is found in FRIA (Financial Rehabilitation and Insolvency Act of 2010). It is a technical group which may be appointed by the SEC in a distressed corporation. So, the correct term is Executive Committee, not Mancom. It says here that the by-laws of the corporation may create. Suppose there is no provision in the by-laws, can the board create an Execom? The Supreme Court said YES. Why? Because the powers of the Board is plenary. It is supposed to exercise such powers and create such committees to enable it to govern and administer the affairs of the corporation. So even if there is no provision in the by-laws, the board can create an Execom.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno I will tell you the story of the Execom of the old PCI Bank. PCI Bank was bought by the Lopez Group and the Gokongwei Group. They teamed up together, equal shares sila and they bought it right after EDSA Revolution. The way it was bought is, the Romualdez shares, most of it, were sequestered by government and the government said, since the Romualdez’s did not contest, we are selling it. The way they sell it is by obtaining dollar credits. At that time, the Philippines had so much foreign debt. If you pay the foreign debt, you obtain credits equivalent to the debt that you paid. And that is how they gained control over these different corporations that were for sale. So since Lopez did not have enough money to pay for everything, he teamed up with Gokongwei who had money, but did not have enough to buy everything. So pareho sila, they teamed up. 35%-35%, so 70% sila. Karun, gipalit nila, pagkahuman palit nila, ingun dayun si Gokongwei kay Eugenio Lopez “since you are more used to the public, you be the Chairman and President, tapos ako, Execom ra ko.” Lipay kayo si Eugenio kay siya man ang starring, siya man ang chairman. Si Gokongwei, Execom ra siya. Sa ngadtu-ngadtu na, nakamatikud na si Lopez na ang mga corporation ni Gokongwei ang sige kahuwam sa kwarta because it is the Execom that processes the loans, they meet every week. Ka-isa ra man magmeeting every month ang board. Nothing reaches the board unless it is approved by the execom. So nawala na sa passing si Eugenio Lopez Jr. Mauna niingun siya na ibaligya na natu. Who wants to buy 35% when you do not control. So, niduol siya kang Gokongwei ingun siya “let’s sell together” so it’s 60%, they have to pay a premium for control, not only the buying of the shares, but you add a price to being in control of the corporation, that is the premium, because you get 70%. Ingun si Gokongwei: No I am not interested in selling. So what did Eugenio Lopez Jr do? He did the unthinkable, he went to Romualdez (mau nit u siyang gipriso ni Marcos unya gipa-eskapo sila) who was a minority stockholder with 20%. Giingnan niya si Romualdez “I am approaching you, I am asking for your help (hinay na tu sila, wala na man tu sila sa Board), let us organize and let us sell togather because the Equitable Bank is interested in buying.” This is the time of Estrada. Gipahuwam ni Estrada sa SSS and GSIS ang Equitable Bank, so naa siya kwarta ikapalit. So Romualdez said “Go atu ni ibaligya arun maka-kwarta ko kay I will have a premium. If I sell by myself, there will be no premium because there will be no control, but if I sell together with Lopez, there will be control, it will be 55%.” Lopez told Romualdez wait for my signal. Lopez went to Gokongwei and he told him “you don’t have to attend the meeting because if you do, you will just be embarrassed. You will no longer be in the Executive Committee, and I am and Romualdez will sell to Equitable Bank-Mr. Go, and that will be the end of you, you are just 35%, no premium, you will only be 2nd beadle to Mr. Go of Equitable Bank.” What did Gokongwei say “Okay I am selling with you.” Lopez said “Okay, we were in this together when we came in, we will exit together.” And that was the ultimate stabwound to Romualdez because Romualdez grabbed Meralco from the Lopez’s so Lopez did not have any qualms at all to betray Romualdez. That is the story of how it became Equitable Bank, then afterwards, it got into trouble because of bankrun (remember that vice-president who testified that it was Velarde himself who signed it but that was Estrada, edi, bankrun).mWho got Equitable Bank? BDO. Equitable Bank is lost in BDO who bought it. Sometimes, it is the Executive Committee who runs the corporation. Naa man na resolution ang Board of Directors, let us say for loans, P5 Million and below, approval of the Executive Committee is enough and it is just ratified in passing, paspas ra na kaayo. The Board begins to look at the loans once it is above P5 Million. So for a big bank like Unibank or PCI Bank, higher tingali ang threshold, P10 Million or P20 Million. So that was how Gokongwei made PCI Bank the financing company of his corporations kay siya man ang sa Execom, siya man gakupot. Is it not covered by the Interlocking Directors? It is covered Page 35 of 112

supposed to be if it was the Board that approved it, but it is not the Board that approved it, it was the Executive Committee. Alright, we are finished with the Board of Directors. We are now with Powers of a Corporation (Father hands in a handout to the class). DECEMBER 13, 2017 (Shahata Tagtagan) Before we leave DIRECTORS, I just like to bring to your attention what is not in the Corporation Code: the requirement of INDEPENDENT DIRECTOR. CORPORATIONS THAT REQUIRE INDEPENDENT DIRECTOR: 1) Publicly listed corporations – those which shares are listed in the stock exchange. 2)

Corporations that, although not listed, have sold securities to the public, which securities required to be registered with the SEC under R.A. 8799. – If you sell bonds, then you have to have independent director. It means you are dealing with the public. Public has a stake, so you must have an independent director sitting on the Board.

REMEMBER: An independent director must NOT own more than 10% of the outstanding capital stock. 3)

A private corporation not listed, but has at least P50Million assets, has 200 or more stockholders, 200 of whom at least own 100 shares of any class of its equity securities which has been sold and registered.

4)

Banks – Required by the General Banking Law.

5) Other financial institutions – e.g. investment banks, quasibanks, deposit taking institutions. WHO IS AN INDEPENDENT DIRECTOR? An independent director shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. (R.A. 8799, SECTION 38) If you are a parent, consultant or director of a holding corporation of your corporation, or subsidiary, or sister corporation [up, down, sideways – covered], you cannot be an independent director. HOW MANY INDEPENDENT DIRECTORS ARE NEEDED? At least two independent directors or such independent directors shall constitute at least 20% of the members of such Board, whichever is lesser. Many corporations even add to the requirement. They make take three, like MERALCO, PLDT, SAN MIGUEL. Why? Because that is the number required by the Sarbanes-Oxley Law, and they are bound to comply with the Sarbanes-Oxley Law, because they sell securities in the New York Stock Exchange. If you are that corporation, you cannot be approved to sell securities if you do not comply with the rules and requirements of Sarbanes-Oxley Law. PUBLIC UTILITIES are also required to have independent directors, because normally, they are listed under the Public Utilities Act after they have been in existence for ten years, at least 10% of the outstanding capital stocks must be sold to the public. There is a pending legislation. They are narrowing down the corporations that will be deemed to be public utilities. The rest may not be public utilities anymore, but it does not mean that they are not covered anymore by the independent director requirement. They might be, because they might be P50Million in assets, at least 200 or more stockholders, 200 of whom at least own 100 shares. Under that classification, they may still be required to have independent directors.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno I was once an independent director for 15 years with a bank (ONB). Many times, the BSP requires that the independent director makes a comment on a particular subject. It got to a point where I have to ask, “Does the BSP have open access to whatever is discussed in the Board? Isn’t the Board, in the end; at least has privacy to be able to discuss things freely?” There were DOSRI at the time. BSP: Why does the independent director not make any comment about the DOSRI? Father: Why should I?! At the time, the Consunes (?) were putting in more deposits than borrowing. Of course they borrowed money but their deposits were bigger than the money they borrowed. Sometimes, the oversight office of the government, they become paranoid, especially at a time when there were so many banks that were failing. Look what happened to Metrobank. There’s a lady there, Leonor Lopez. She got away with P1.14Billion. As a consequence, Metrobank was fined P4.4Billion, because this officer was able to steal from the bank. How did that happen? You will be surprised. The assumption behind independent director is completely different from the assumption of a good director in the Corporation Code. Many self-dealing transactions of the director are ratified by 2/3 votes of the stockholders. You own at least 2/3 of the capital stock; you are less likely to hurt the corporation. The reasoning why they want independent director is, the less connection you have with the corporation, the clearer and more objective your judgment is. That is from the point of view of Sarbanes-Oxley Law. That is from the point of view of ENRON Corporation. ENRON was an unknown corporation. Ang napaon atong ENRON, wa kahuman college. The U.S. deregulated the power market, which means that a state can no longer say “We will determine our production and use of electricity”. Any company distributing electricity, like Davao Light or MERALCO, they can buy electricity from anywhere. The national grid (?) is obliged to transmit that electricity. Suppose the electricity is cheaper in Naga, because it is geothermal, and they have excess electricity there. Davao Light says “Kana among paliton”, the national grid, now owned by the Chinese and SM group, they must be forced to transmit that electricity from Naga down to Davao. Who did the buying and selling of electricity? ENRON in the US. Out of nowhere, kalit lang sila nigawas, ENRON number ten of all the corporations of the Fortune 500, after just two years of operation. Why? Their actual sales is their commission from getting the electricity and selling it to the distributor. But then, they recorded as sales the price of the electricity which they bought, which is gross. Dili man net commission ang ilang gi___. The way they arranged it was, every purchase is done by a joint venture. They put up a partnership. Kadtong power company somewhere in Naga, before it sends the electricity, it passes it on to a partnership which is already ENRON and local managers of the power company. Then they pass it on to ENRON. Why did they use that structure? Muganansya gani, ganansya will be reflected on ENRON. Malugi gani, adto na sa partnership, because the partnership is offshore. Dugay wa mahibawi, ang losses, hain man dapita? Wa ka kahibaw. Wa man sa libro si ENRON. Kinsa may nag-engineer ana? Si Mr. Lei (or Lee?). Mr.Lei was from Anderson-Cooper, what used to be the big five. He was the biggest of the five. Tungod atong iyang gibuhat, Anderson was dismantled. Big four na lang naa ron. Katong si Mr. Lei gikan sya sa Anderson, sya ang nagsuggest kay gikuha man nya tong buang buang na high school graduate na Texan na maayo sigeg yawyaw. The government was wary from coming in, because it says DEREGULATED MARKET. Electricity is known in the monopoly of big power producers, daghan kaayo complaints. Atras ang gobyerno, unya sigeg maniobra diri katong Texan na maayo musulti. Mr. Lei was former internal auditor of ENRON from Anderson. Then he resigned from Anderson. From internal auditor, gihimo syang Vice President sa ENRON, then nahimong President, then Chairman. Mao nang no connection at all. Independent director. The best you should read about what happened to ENRON is “The Congressional Investigation Report of the ENRON Scandal”. It’s in the web, you can download it. Page 36 of 112

[Story about Napoles who engineered the PDAF, na wala daw sya natapos ng college like the Texan guy.] [Father talks about bitcoin. Two days ago it was $17,000.00 per bitcoin. That it was so bad in South Korea. That it was a medium of transaction in some industries. Whole point is that the public determines the value. There is no Central Bank. The trouble with bitcoin is, if it is a store of value, it is still reckoned in dollars. Murag depende sya sa value in dollars. You do not say “Let me buy this for two bitcoins”. It is still a commodity. 2/3 of the 21Million bitcoins is still held by the founder. Kung mudailos na na, katong tag-iya buhia nya na tanan, kuhaon nya ang dollars. Warren Buffet and others say that it is a bubble.] The rule is, if your transaction, merger or consolidation of the corporation is P1 Billion or more, you have to ask permission from the Philippine Competition Commission. Karon, gi-hold nila ang merger sa SM group and Goldilocks. Unsa may competition ana na mahimong monopoly? Kay more than P1Billion man, giscrutinize nila. Sobra ra, over-regulation. [Father talks about PHILSAT.] We are talking about the extraordinary power of the corporation that requires a more elaborate system of formalities. The formalities are summarized in this two-paged matrix [Consult Father’s notes]. The powers are vertical, the requirements are horizontal. Each exercise has a requirement. Some, not all, do not need all the requirements. The corporation extends its term, is it written assent or vote? Non-voting stock, can they vote? When the corporation decides to give out cash dividend, do the stockholders vote? There are some powers when they are exercised, that the corporation says, the stockholders have a right to exercise APPRAISAL RIGHT, which means they want out of the corporation. You exercise this power and they are in disagreement, they vote against it, pildi sila, the corporation will go ahead with this particular decision, then the stockholder has the appraisal right. The question is how much? The stockholder says, “I think my shares are this value”. Corporation says, “No, this is the value”. What happens when they disagree? It’s all outlined in the Corporation Code. What exercise of powers gives you appraisal right? There’s also a list. When you extend the corporate term of the corporation, remember what is the maximum? 50 years. When can you extend normally? You cannot extend earlier than 5 years before the end of the term, but only for good reason (e.g. When you are loaning for the bank. The bank may not feel secure because your life term that is remaining is less than the term of your loan, then the bank will say “You better extend your term now!”, even if it is before 5 years, because you ‘re borrowing money for 15 years. The SEC will probably grant you.) The law says in Section 37, if you extend the term, you have appraisal right as a stockholder. You disagree, you have appraisal right. But if you SHORTEN the term, it does not say that you have appraisal right. Why is that? Because if you can amend the Articles to extend the term, you can also amend the Articles to reduce your term. WHY IS THERE NO APPRAISAL RIGHT IF YOU REDUCE THE TERM? Because reduction of term is another form of dissolution. When you dissolve a corporation, normally what happens is, it is followed by liquidation. The shareholders will be valuated as to how much is owing to them according to their proportionate share of outstanding capital stocks. So necessarily, when you shorten the term, there is liquidation; there is payment to the stockholders of the value of their shares. WHAT IS QUALIFIED NOTICE? Many exercises of extraordinary power under Title Four require qualified notice. Qualified notice is notice of the meeting, not only as to date, time and place, but also the notice includes the particular item in the agenda, namely the exercise of this extraordinary power. Why? Because that item of information is

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno crucial for the stockholder to determine whether or not he/she should attend the stockholders meeting. DECEMBER 14, 2017 (Jennifer Mortejo) TITLE IV - POWERS OF THE CORPORATION The Corporation Code now lists the powers of a corporation and some of those listed are incidental or inherent powers. What is the significance of the listing of inherent powers? First of all, it is superfluous because even if it’s not listed, the power exists. Why? Because that power is definitive of a corporation. It is not that you’re a corporation first, then you have that power. It is the very fact of that power that makes you a corporation. (Fr talks about political law: the 3 inherent powers of the State are not granted by the Constitution, the Constitution merely recognizes those powers. So even with the disappearance of the Constitution, whether there’s a revolutionary government, that government would still exercise those 3 powers because that is inherent in government.) Same goes with the inherent powers of the corporation; there is no need to put these down in Section 36. Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. So even if all these presentations of inherent powers in section 36 are legislated out of existence, let us say the code is amended and the amended code no longer reflects these powers, the corporation still has these powers because they are inherent. (Fr: Just like it is inherent for rain to wet, if it does not wet, it is not rain. The essence of rain is it wets. Makabasa. But is anytime you are wet, is it rain? What if nagbaktas ka sa kilid sa dalan tapos kalit lang gisabligan ka unya nabasa ka, is that rain? No! Mao na, it belongs to the essence but it is not exclusive) For a corporation to sue and be sued is (…) of essence of being a person, because to be a person is to be a subject of rights and obligations. Only a person can sue kay naa man siyay katungod. Page 37 of 112

(Fr talks about dogs, that no matter how intelligent and talented they are, still they cannot sue since they are not persons.) The only one subject of rights is a person and a corporation is a person by fiat of law. We are persons by birth. All we have to do is to be born to be a natural person, then you have rights. The inclusion of inherent powers in Section 36 is superfluous. Then you will later on find out, it maybe superfluous but for purposes of legal fees, it enhances your capacity to demand legal fees. There are lawyers now that if you make them draw up articles of incorporation, when it comes to the purpose clause, they will put down the purpose and then to make the purpose clause longer, they recite all the inherent powers. Why do they put it down? Aron mabaga-baga ang articles of incorporation ug ma-dako ang attorney’s fees. (Fr talks about an SPA signed abroad.) We said that this first presentation, “the power to extend or shorten corporate term”, the last sentence of Section 34 (I think Fr meant Section 37) says that: Sec. 37. Power to extend or shorten corporate term. – xxxx Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. But it does not say that in case of shortening the corporate term, any dissenting stockholder may exercise his appraisal right. So, there is no appraisal right for shortening the corporate term. Why? Because it is a form of dissolution. And when you go through dissolution, what follows is liquidation. You will ultimately liquidate the value of your shares. Why is there an appraisal right when you extend the corporate term? Because assuming you are a pre-incorporation subscriber or even if you are a subscriber after the corporation has already been (..), the terms of your agreement as to the investment is the articles of incorporation. You are presumed to have read the articles. And you know the end of your investment is marked by the term. So you are expecting that by this date, you will already get the principal value of your investment. Not just the dividend, you will also get back your principal. So if you extend the term, you are novating that contract. It still follows the Civil Code, any change as to the term is novation. A change of a term of the contract, the length of time within which the contract is to be existing or the obligation to ripen, the extension of the term is a novation. So when you change the basic terms of an agreement, it must have the consent of the parties. A subscriber is a party. So if you do not agree, you exercise your appraisal right. “Buy me out”. The next power is provided in Section 38: Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and

When can you increase capital stock? When all the authorized capital stock has already been issued, is that the only time that you can increase? The answer is NO. Even if there is still sub-authorized capital, you can already increase sale. The only requirement is when you increase authorized capital, at least 25% of the increase must be subscribed and at least 25% of the subscribed is paid-up. ILLUSTRATION: Authorized capital stock = 1 million pesos divided into 1 million shares at 1 peso value Subscribed capital = 750,000 (that is ¾ already of the authorized capital); out of the subscribed capital, 500,000 is already paid. You have been in business for 3 years and the Board passes a resolution to increase the capital stock to 2 million instead of 1 million. Why? Because you are going to borrow. How much are you borrowing? 10 million. And your capital base, at most, is only 1 million. The bank is saying “contribute sad mog equity, dobleha inyong equity kay 10 million gud na inyong huwamon”. So, pasaka ka from 1 million to 2 million authorized capital stock. Can you tell the SEC, 2 million na ang authorized capital stock, unya ang subscribed kay 750,000 man, that is more than 25% of 2 million. Unya pag-abot nimo sa paid-up, 500,000, that is 25% already of 2 million. Kinahanglan pa ba ko mudugang ug subscribers? The SEC will tell you that the basis is the increase. Your increase is 1 million, the 25% that must be subscribed must be based on the increase. Thus, the subscribed capital of your increase must be at least 250,000. And out of that 250,000, the minimum requirement is that the paid-up must be 25% (meaning 25% of 250,000).

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

So, it must be based on the increase and not on the increased amount of authorized capital stock.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof.

INCREASE OF CAPITAL STOCK Is it necessary that all the shares be first issued before you can increase capital stock? Remember, capital stock has three distinct classifications in the articles of incorporation: authorized capital, subscribed capital and paid-in/paid-up capital.

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DECREASE OF CAPITAL STOCK When do you decrease capital stock? You decrease capital stock when your capital stock has in fact decreased. Over the years you have sustained these losses, so much so that your capital is already impaired. Your external auditors will tell you that your original capitalization no longer holds because you have lost a lot of money. So you better tell the truth. Decrease your capital stock and put down the real capital (status?). ILLUSTRATION: A corporation has 1 million capital stock, 500,000 is in redeemable shares. Par value is 1 peso. Suppose your entire 500,000 redeemable shares is fully subscribed and fully paid-up. After 3 years, it is mandatory that you should redeem it. The redemption is at the option of the holder, and the holder says “I want my money back”. But what happens is after 3 years, you did not make any money. There are no unrestricted retained earnings. You are not yet so depleted that redemption will impair your operations. So, redemption will be around you but you are now using capital stock to redeem because you have no unrestricted retained earnings. It is as if the capital you got from the issuance of the shares, imong i-uli ngadto sa redeemable shareholders (500,000 worth). Tinuod pa ba na imong articles of incorporation which says, “paid-up capital: 500,000 redeemable shares”? Gi-uli naman nimo tong 500,000 na imong nadawat kay wa man kay unrestricted retained earnings. What happened to the redeemable shares? It became treasury shares. So, the capital you stated in the articles of incorporation is not true anymore, it is lessened by 500,000 shares. That is why now, you have to reflect your true capital stock. What do you do? Retire your treasury shares and when you retire it, you decrease capital stock. Tangtangon na nimo ang redeemable shares sa imong articles of incorporation. Ang authorized capital stock, subscribed and paidup, tangtangan sad nimo ug 500,000 to reflect the true state of your capital stock. But that requires approval by 2/3 vote of the stockholders in a meeting duly called for the purpose. Stockholders include voting and non-voting shares.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno INCURRING, CREATING OR INCREASING BONDED INDEBTEDNESS Every time you borrow money by bonds, you have to get 2/3 vote of the stockholders.

Back to the example, in 10 years, what happened to your money? After 6 years, it should become 300,000. After 12 years, it should become 600,000. In our example, it is only 10 years. So the interest rate here is about 11-12%.

In decreasing bonded indebtedness, do you need 2/3? It does not say. Why? Because decreasing means paying your bonds and that is included in incurring bonded indebtedness. Muingon gani kag mangutang ka, impliedly muingon man ka mu-gamay sad na imong utang kay mu-bayad ka man. Mao man nay magpa-gamay sa utang. (Fr talks about “buwangan” being an institution in the Philippines and the meaning of “pago”. In Spanish, it means “you have paid” while in Filipino, it means “escape of payment”.)

Now MERALCO, by issuing 10 billion 10-year bonds, has to choose a TRUSTEE. What is the purpose of the trustee? 1. The trustee holds the collateral for the loan because the bond holders, they hold small amounts (daghan man sila, so mag-away sila kung kinsay mu-gunit sa collateral). The trustee will hold it. 2. If the bond should fail, it is the trustee who executes on the collateral and liquidates the collateral and divides it among the bond holders.

If increasing bonded indebtedness requires 2/3 votes of the stockholders, how can a corporation evade this very burdensome formality? Is there a way that you can circumvent this requirement? YES, there is a way. De Leon, Villanueva, all those people will not tell you this. How do you escape?

So sa sugod if it is with interest, the bond holder will go to MERALCO. If it is an interest-bearing bond and it happens to be a COUPON BOND, there are coupons attached to the bond. And the bond normally gives interest twice a year and its coupon corresponds to a payment period. Pag muabot na ang payment period, laksi-on na nimo ang coupon. Then you go to the ISSUER and they will pay you the interest.

ILLUSTRATION: San Miguel Corp (SMC) is the issuing corporation. To avoid the 2/3 requirement, SMC creates another corporation called the SMC bonding corporation. Who are the stockholders of SMC bonding? The stockholders are selected from the officers of SMC. The Board is the controlling interest in SMC bonding corporation, 5 members. SMC has 15 members of the Board. SMC bonding will issue the bond. Kinsa may mutuo sa SMC bonding in the financial market? Why will you believe it? Because SMC will unconditionally guarantee the bond of SMC bonding. At any time it could increase. Ngano man? 15 na gud na ka members ang mu-boto ratifying the issuance of the bond. Unanimous. All 5 members of the Board of SMC bonding corporation will always vote. (Transcriber’s note: Sorry wala ko kasabot diri na part guys kay absent ko. Naa atay gi-drawing si Father sa board). Why do you need 2/3 ratification when you borrowby bonds but when you borrow through the bank, you do not need? You cannot borrow 2 billion from a single bank because most likely that is already beyond the single borrower’s limit. Sulti na gani kag 2-3 billion, you are talking about a syndicated loan (Fr further explains the structure of a syndicated loan.) In a bond, you have at least 3 parties, the BOND ISSUER, TRUSTEE and BOND HOLDER. ILLUSTRATION: Bond issuer – MERALCO MERALCO wants to issue a 10 billion bond and it is a long-term bond for 10 years. MERALCO will engage the services of a financial adviser, normally an investment bank and the investment bank will structure the bond. First of all they will choose if it is an interest-bearing bond or no interest-bearing bond. Now, you have the bond and its smallest denomination is 500,000. It is sold at a discount, 10 years. For a 500,000 face value bond, this will end up with you paying only 150,000. Ang gihatag nimo sa MERALCO kay 150,000, ang imong gi-dawat kay 500,000 face value. Huwat ka ug 10 years, pag-adto nimo sa MERALCO kay magpa-bayad ka na, pila may ibayad? 500,000. Ang difference ana is the interest. So this is a no-interest bearing bond. Maka-agwanta ba kag 10 years? Kung maka-agwanta ka, naa kay 500,000, imo nang i-gapos dira. Ug gawas pa ana, ang 500,000 nimo karon, 10 years from now ambot pilay mapalit ana. Naa man nay depletion. Do you know about the “rule of thumb”? It is the rule of 72. You divide 72 by the average interest rate of your money. The interest rate is measured annually, you divide it and the answer that you get is the number of years it would take to double your money. (Ex. If the average interest rate of your money is 12%, you divide 72 by 12. The answer is 6 years. So every 6 years, your money doubles)

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BAR QUESTION: What is a coupon bond? It is an interest-bearing bond to which is attached coupons corresponding to the payment periods of the interest of the bond. The moment the payment period matures, you detach the coupon and go to the issuer and the issuer pays you the interest. So a 10 years’ bond have 20 coupons since interest is paid every 6 months. There are also some bonds with WARRANTS instead of coupons. What is a Warrant? It is the right to purchase shares of the issuer at a given strike price. In other words, it is an added feature to the bond to make it attractive to investors. It is a promise that you are not only a creditor; you can also become a proprietor shareholder. ILLUSTRATION: MERALCO now is traded at P270. They will say this bond has a warrant, that for every 100,000 of the bond, you can buy 100 shares at a strike price of P270. MERALCO gains price because it has now greater sales. Why do its sales increase? Because it borrowed money to put up a power plant. It does not only distribute electricity, it now produces the electricity that it distributes. So mu-saka ang ilang revenues and its net profits. Let us say, by the time that the 5th year comes around, the price of stock is already P370. Imagine that your warrant says you can buy at P270, mu-ingon ka mangita na sad kog P270. Ayaw kung di ka gusto mangita, ibaligya ang warrant because that itself is a right. You don’t have to exercise it. That’s precisely why it is a DETACHABLE WARRANT. (Transcriber’s note: Please read other materials about this topic. Medyo confusing gyud ang akong pagka-transcribe since absent ko ani na date .) January 4, 2018 (Eliza Den Devilleres) Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings xxx

WHAT IS UNRESTRICTED RETAINED EARNINGS? WHAT ARE INCLUDED IN UNRESTRICTED RETAINED EARNINGS? Under Sec. Memo. No 11, Series of 2008: UNRESTRICTED RETAINED EARNINGS is the accumulated profits realized out of normal arid continuous operations of the business after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts and which is: 1.) Not appropriated by its BOD for corporate expansion projects – cross refer to Sec. 43 :

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Sec. 43. Power to declare dividends. xxxxx Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) 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; xxxxx So a creditor can limit a corporation’s power to declare dividends by including in the loan agreement that prohibition against the declaration of dividends, unless or till the loan is paid. Sec. 43. Power to declare dividends. xxxxx or (3) 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. (n) xxxx With emphasis on: “reserve for probable contingencies” WHAT IS THE DIFFERENCE BETWEEN POSSIBLE AND PROBABLE? You must know that because when you examine a witness, you must clearly know when it is possible or probable.  

PROBABLE – Statistical POSSIBLE – A matter of proving from potential to actual

Illustration: 1. Is it possible for a dog to be a doctor? There is NO possibility. 2.)

Is it possible for you to become a doctor? POSSIBLE, but improbable kay naglaw ka naman. The chances of you being a doctor is as improbable for a medical student to become a lawyer. It’s possible but layo kaayo. Pero for a dog to be a doctor, that’s NOT POSSIBLE.

Sec. 43. Power to declare dividends. xxxxx or (3) 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. (n) xxxx 

PROBABLE CONTINGENCIES – statistical na.

Naay mining corp. sa Palau Island. They are setting aside money for their highly profitable Guano operations – a huge chunk. Because of the probable contingency of being overtaken by the sea. Unsaon mana pagka probable? The sea is now rising 1 meter a year. They are just 1 meter from the shoreline. Naa dira ang langob nila kung asa sila gakuhag guano. Is that possible or probable? Unless you are like Trump who denies that there is global warming, you put it in the level of possibility. But if you are together with 90% of respectable scientists, you say that there is global warming and sea levels are rising; the fact that it has been rising for the past xxx and your cave where you get your guano will be underwater. WHEN THE CORPORATION IS JUSTIFIED BY DEFINITE CORPORATE EXPANSION PROJECTS, WHAT’S THE DIFFERENCE BETWEEN THAT AND PLANS FOR THE CORP?? This one is manmade – the corporation has already decided on it. it has passed a resolution to expand its mining site. It has decided to purchase the adjoining site mining plain. Because by the advice of the geologist, that next door mining claim is probably homogenous to the mining claim that is now currently Page 40 of 112

already assessed as healthy percentage of the mine xxx. Nagbuslot-buslot ka dira, an aka na possible na mao ning nia. Didto 1 ka kilometro nasad, possible nana na gold na. pero magbuslot ra gani ka ug tag 10 metros ra, dli gani na possible ore. Dli gani na probable but actual nana na ore. Mahimo nanag ikargada nimo sa libro nimo na asset na. That’s an asset. So make sure you know the difference because those are all includible in the limitation of the corp’s power to declare dividends. Once again we will go to the definition that UNRESTRICTED RETAINED EARNINGS – The bulk of it is the result of profits and gains. From what? Normal, continuous, strenuous (NCS_ operations of the company – Ex: Sa operation sa company nakakita sila sa backhoe us aka cartoon na pagabri gold – Yamashita gold/treasure. Can that be included in unrestricted retained earnings? It cannot! Because it is not continuous and ordinary operations of the corporation. Muingon ka grabe man pud, there can still be a lot of controversy over that gold! The sovereign gov’t still has claims over that unya imo nang ibutang saimong libro? Kuyawa. Muingon ang gobyerno, naa miy katungod niana. Kinawat na gikan sa Central Bank! For example, kakita kag gold diadto sa may Manila Bay, can you put that in your unrestricted retained earnings? If you are a salvage company, you can, kay mao mana imung negosyo. Pero kung scientific corp. ka na nagmopping diadtos ubos unya kakita ka niana, unya imung ibutang na saimong libro, it has to be Normal, continuous, strenuous (NCS) operations of the corporation (TAKE NOTE!) What cannot be included in unrestricted retained earnings? There are still no definite decided cases locally but the SEC have issued circulars based on foreign cases. For instance: 1.) Revaluation surplus – for the increase of the value of assets cannot be considered earnings of a corporation. They are not income from operation. They are by nature subject to fluctuations. What is an example of revaluation surplus? ADDU – it has a building. This building was completed in 1980, 39 yrs na. This building is supposedly fully depreciated, but it has been revalued. Why? Every 10 yrs this building is revalued for purposes of insurance and revaluation as directed by mgt of the university to the appraisers is replacement cost. Kay kung masunog ni, kinahanglan magput up dri ug building na mupadayon ang eskwela for purposes of contingency. Karon pagrevalue niini muingon tung appraisers “300M na ni. To put up this bulding we need 300M. Therefore you have to insure it for 300M.” Pero pagtukod niini, 60M ra ni! Naa kay ginansaya niana. Pila? 240M! Ana ka, declare tag dividend niana. Mahimo ba na? No! You cannot declare dividends on revaluation surplus. Revaluation surplus is not the result of the Normal, continuous, strenuous (NCS) operations of the corporation (TAKE NOTE!) 2.

Paid-in surplus cannot be declared as dividend. Paid in surplus is the difference between the par value and the issued value or selling price of the shares and are not there as considered profits earned for the conduct of the business of the corp. they are considered as part of the CAPITAL.

IN THE CAPITAL ACCOUNTS YOU HAVE: Common stock, Premiums and Accumulated unrestricted retained earnings/profits. EXCESS OF THE PAR VALUE OF THE ISSUED PRICE Let’s say the par value say P10.00. What is the rule? You cannot issue shares that are lower than par value. It must be at least par value. Now if you issue it higher than par value it is PREMIUM OF STOCK – ganansya na ba na? Dli na ganansya pag paingon naimo idistribute as profits. That belongs to capital. There is however another circular of the SEC which says that, “in such cases, at the discretion of the SEC, the SEC can allow distribution of paid in surplus as stock dividends and NOT as cash dividends kay wa may mubiya ana sa corp. just as stock.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno 3.

UNREALIZED FOREIGN EXCHANGE GAINS (emphasis) except to attributable cash and cash equivalents for the time being that they are not yet actual income prior to realization of such foreign exchange gain.

Illustration: You’re a bank. You applied to the BSP to be a trustee. So you become a trust company – you manage the assets of others. For your trust license to be approved, you are required to put up a surety deposit in the BSP assets that are valued at a fair market value. Let us say one of your assets are shares of stock of Apple because you have foreign partners that are willing to supply shares of stock which their foreign corp. owns. So that is assigned to the corp. here and that is put in the BSP as surety. BSP says, if you’re trust business is worth 100M worth of shares that you are managing, then 20% of that must be secured financially. So you need to put up 200M of assets as surety. So it can be in the form of: a.) Actual cash; b.) Shares of stock bought in the Phils; or c.) Shares of stock that are listed in respectable foreign exchange markets – Apple shares, accepted mana. Mao na ang gibutang sa BSP. So it’s valuation is at the time of the listing. Let us say $100/share, mao na ang value na gibutang diha. Naa saimong libro pero naa sa BSP as surety. As time goes on the value of the shares of stock goes up and it’s in dollars! Nahimo naman ug $200, na double naman ang value. Mahimo naman gani nimong kuhaan tung shares na gibutang nimo sa surety kay mitaas naman ang value saimong surety. Muingon ka na ipabilin na dinha unya ang value niana ibalhin nato sa libro nato kay ginansya na nato aron madistribute nato as dividends. Can be? CANNOT! Because it’s still unrealized value! What goes up can also go down. What happens if for some reason Apple Corp. mubagsak, edi imung shares of stock imbes musaka, mikanaog nasad, kay naa mana dinha di man nimo mabaligya. Naa mana diha as surety with the BSP. So UNREALIZED FOREIGN EXCHANGE GAINS cannot be part of unrestricted retained earnings that can be the source of declaration of dividends. 4.

The amount of unrecognized deferred tax assets that reduce the amount of income tax expense, can increase the net income and retained earnings of the corp. You cannot include it as part of unrestricted retained earnings. Oncce it is realized, you can!

Illustration: You are assessed of the payment of tax. Gi-fight nimo ang gobyerno – you fought Henares and the case went on for 5 yrs and you won all the way to the SC. You’re victory is equivalent to P100M – just like Lucio Tan. Lucio Tan won something like 3B – daog cyag 3B kadtong tax na gicollect ni Henares worth 3B! Unlawful collection diay to! The trouble is, the gov’t, the BIR will not refund it. How will you get back the taxes? It will be charged to your account and the BIR will pay whatever is charged to that amount. Daog kana sa SC and in the dispositive portion of the decision says 3B ang daog nimo. Mauna ka bulahan! Mudeclare ta niini ug extraordinary dividend. Di mahimo dong! Why? It has not been realized! Every year naa kay bayrunon na tax, mareduce ang imong payment of tax kay naa naman kay ngadtoy charged account! Mao ranay imong maapil sa unrestricted retained earnings – as if xx but not the entire decision. So unrestricted retained earnings, pagampo lang na simple lng nang question na musud unyas BAR EXAMINATION. Kay ug kuti-kutihon jud ni, unsa may gamiton nimo na rule? YOU STICK TO THE DEFINITION! Bisag sayop paka, stick lng sa definition – that it is not a product of STRENUOUS, CONTINUOUS and ORDINARY operation of the company, naa kay points! Pero wa jud gani kay gibasihan jud kay matintal ka jud, kay naa naman ni. UNREALIZED – kasabot sa sila naa kay nasabtan saimong taxation na not all income is taxable. If you have an income which is not realized, it is not taxable! Ngano gi-income man? INCOME IN NAME! Naka-income ka but it has not been realized yet. *TIP: So you show the examiner that you have an understanding of realized, and unrealized How about GAINS ON SALE OF CORPORATION’S REAL PROPERTY, is that ordinary business? Page 41 of 112

It’s NOT ordinary business. Corporation sells a property, but since it bought it 50 yrs ago – just like the corner lot where the EuroTowers is rising. Tanawa nang opisina sa EuroTowers unsay may nahitabo diha? Sirhan na nila kay nakabaligya na sila ug igo na unita, unya irelease nas bangko aron pambayad aron pagconstruct ana. Nanira na sila! We have fooled enough people that’s why we closed this office. Tan-awa gud na. paspas na nang construction nila. Wa jud ta kahibaw na 3rd flr na sila. Wa mo makaagi ana? But another foreign standard di jud na makalusot! Ibaligya na, that’s xx of land originally of PLDT! That was the orig. office of PLDT. Until it bought DCCT. (Chika about Duterte St. The Chinese believe that it’s the luckiest street in Davao. Abot na nag P100K per sqm. dira! Very expensive! There’s a place there that’s selling dried fish! Gatupad pa na sila) Unsa ma nay ila gikuan? Capital gains! Patubo na nila ang value sa real property. Gatubo mana unya gasaka ang imong real property tax. Unya ireflect na nimo saimong financial statements na nisaka na ang value ana. FROM THE INCREASE OF THE VALUE, CAN YOU DECLARE DIVIDENDS OUT OF THAT? You cannot! Because it is still unrealized – the GAIN there! But the moment that you sell it, the gain that is realized becomes part of UNRESTRCITED RETAINED EARNINGS. If the corporation has shares of stock in other corporations – I’m not saying that it is engaged in Sec. 42 because it is an extraordinary power to engage/invest in another corporation. TO INVEST IN ANOTHER CORP. REQUIRES 2/3 VOTE OF THE STOCKHOLDERS. But treasury, may indirectly do that without the need of complying Sec. 42. Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) If you put the extra cash of the corp. with an ITF, mura ra nag UTF (Unexchanged Traded Fund). Alangan ibutang na nimos bangko. Pulpol ka na treasurer kung dra nimo ibutang – millions gud na. So, why don’t you put it in an UNEXCHANGED TRADED FUND? The value of the fund that is invested is in other corporations. And it is divided into units and it is traded in the stock market. And at anytime the money that you put there can be retrieved by just selling the units. And you are informed by your financial adviser na ang fund nimo, niadtong pagbutang nimo nganha par value ra xxx P100/unit. Karon it’s already 140/unit – naa nay deperensya, and the financial statement must carry market-to-market value – ibutang naimo dinha 140/unit. THAT DIFFERENCE, CAN IT DECLARE DIVIDENDS OUT OF THAT? You cannot because that is just a nominal value. It has not been realized, unless when you sell it, you REALIZED the amount, DEDUCT the expenses, then you can put it in your UNRESTRCITED RETAINED EARNINGS. Mao na ilang giingon, “What goes up, goes down.” Masakpan ka misaka tuod unya miubos. Mao na. So until realized, CAPITAL GAINS, either from revaluation, risk assessment or whatever measure, you cannot source it as for purposes of cash.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno STOCKHOLDERS ARE ENTITLED TO DIVIDENDS PRO-RATA BASED ON THE TOTAL NUMBER OF SHARES AND NOT ON THE AMOUNT PAID FOR THE SHARES. Ang imo ganing basehanan amount gani, naa paka sa last two. Dili na ingon ana. Naa nay per share.

contact each board member or board of trustee and convince him. And to know whether or not he accepts you, you let him sign the minutes first. Di gani na siya mupirma, wa gyud kay majority. So make him sign the resolution because it is a requisite. You take a look at the exercise of the powers right at the very start.

STOCKHOLDER AT THE TIME OF THE DECLARATION ARE ENTITLED TO DIVIDENDS. What happens if there is a transaction and then there is a declaration? Who has the right to the dividends?

Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n)

PLEASE TAKE NOTE: • Dividends declared before the transfer of shares belongs to the transferor. • Dividends declared after the transfer of shares belongs to the transferee. WHEN IS THERE A TRANSFER OF SHARES? As far as the corp. is concerned, the moment the stock cert. covering the shares of transferred is surrendered to the corporate secretary and the transfer is registered in the books – that is when the transfer happens. Before that, even if gibayran na ang transferor, the transfer has not yet occurred for the purposes of the corporation. RECKONING POINT: Not the transaction with the stockholders but it is with the stock and transfer book – the moment it is recorded there, there is a transfer. Muingon ka na wa man ni naka-record! Ngano man? Nabayran na namo cya pero closed naman ang books. There are some corporations that close their book 1 month before the annual meeting. That is provided in their by-laws. So all transfers are frozen. You cannot register it with them. Why? To make an orderly determination of the number of shares that should participate. Illustration: Kanang PLDT, they have 2M shareholders, you have to determine how many stockholders on which we base the majority xx to constitute a quorum. Mag cge pakag dawat hangtod sa day before the meeting, you cannot compute because there’s so many transactions everyday! So they close the books 1 month before. The transactions happen after the close of the books. Where do the stock dividends go? Because it has not been recorded, it still goes to the TRANSFEROR even if he has the stock cert., he has already given the stock cert. to the transferee, the transaction as far as he is concerned is complete because he has received the consideration, he still receives the dividends. So, that is the baseline: the recording in the books of the corporation for purposes of who is entitled to the dividends – cash dividends or stock dividends. January 5, 2018 (First Half) (Miles Buhay) You have that matrix with you on the exercise of the fundamental powers of the corporation and the requisites for the exercise? Most of those instances, the vote that is required of the board of directors or the board of trustees is absolute majority. What is the difference between absolute majority and ordinary majority? Ordinary majority is the majority of the quorum. Suppose the board of directors hold a meeting. What is the quorum that is need ordinarily? Six (6). Now the by-laws require simple majority. If you want to pass an ordinary resolution, you just need the majority of the quorum even if it is not the majority of the incorporators. So if four (4) of the six (6) vote, then the resolution is carried. But, if it is one of those instances mentioned in Section 8 of the corporation code, then it must be the absolute majority of the board of directors or trustees. What is the absolute majority? It is not less than six (6). [If the number of those present is] eleven? The absolute majority is six (6). So if there are only six (6) present, then all of them must vote to pass the resolution. A word of advice to you, if you are a secretary of a corporation: you do not hold a meeting unless you know you have the absolute majority. If you do not have that certainty, then you Page 42 of 112

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) So it is majority of the board NOT majority of the quorum. That’s how you do it. When you go to the stockholders’ meeting, and there are other resolutions to be approved by the stockholders, then you cannot do a wholesale (?) vote. Illustration: “We shall now vote on all the resolutions.” You cannot do that because there are some resolutions where the non-voting shares can vote and there are other resolutions where the non-voting shares cannot vote. For instance, in the issue of dividends, when you declare cash dividends, you just need the vote of the board of directors. But when you pass a resolution for issuing, instead of cash dividend, you issue stock dividend, then it requires 2/3 vote of the stockholders. It does not include the non-voting shares. So if you have a resolution to approve the issuance of stock dividends and then also a resolution to increase capital stock (remember that the issue to increase capital stock is one of the instances mentioned in Section 6), non-voting shares have the right to vote. So you cannot conduct the wholesale voting. You need to have separate voting. Not just one ballot, but separate ballots because that is the formality required by law. Alright, this is very important because this is formality; it is the only thing that will tell the world that the corporation has acted. If there are no formalities, the corporation has not acted. Take note that the corporation is a person. It is an artificial person. I’m telling you, the more sophisticated the management, the more there is a need for a strong corporate secretary. There will come a time when there will be a controversy. When in doubt, papirmaha na dayon. The minutes of the meeting are already there and they have signed. The last act of the corporation is the power to enter into management contracts. Management contracts are standard in many corporations. Why? Because it is a way of decreasing taxable income. It is also a way of isolating gross. So for both profitability and gross, it is advantageous. You may begin with one business. And then you have another business. Instead of making a division of that corporation you already have, you make another corporation. What is the purpose? In terms of loss, if this becomes unviable for this (first) business, then it is the only one that is perished. But if it is a division of the corporation that you already have, it is very difficult to slice it out because it affects that corporation. So most likely, if you branch out to another business, you create a separate corporation. And then you have several corporations. What happens is you create a management corporation; a corporation that manages the other corporations. Page 43 of 112

Ex. AnFloPo – managing corporation of Cadeco, JEA (Jesus E. Ayala) management corporation They could have just made divisions of, let’s say, the bigger banana corporation. But they made it into separate corporations. Why? If there if loss, it will be limited. Costing? It is easier to observe if it is a separate corporation. Now what is required to put up a management corporation? That is provided Section 44. Sec. 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: The stockholders’ confirmatory vote is just majority. It is not 2/3. Or in the case of non-stock corporations, the confirmatory vote of the members is just majority. Sec. 44. Power to enter into management contract. xxxxxx Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least twothirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. xxxxxx So remember, if (1/3) of the total outstanding capital stock entitled to vote of the managing corporation, and is listed in the managed corporation, the law will require 2/3. Why? Because the managing corporation has less equity interest in the managed corporation and it might abuse the managed corporation. That is why it requires 2/3 vote of the managed corporation. Sec. 44. Power to enter into management contract. xxxxx The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: xxxxx Do you see the implication here? You know very well that the exploitation of natural resources have to be 60% Filipino and 40% foreigner-owned, maximum. Many times, the one who obtains the franchise develops the natural resources, or do mining, or do public utility. They enter into operating agreements whereby it’s the foreigner that operates. The corporation that manages can be 100% owned by foreigners. They supply money, they do the marketing, and do the technical services. They practically run the corporation. That is how you run around the nationality requirements. For instance, the Malampaya; that’s natural resources. The Malampaya is offshore drill and they take out natural gas. They ___ it all the way from Palawan to Batangas. And the electric plants are there that are fired by natural gas. Very few people realize, but that saves more than one half of the ___ requirement because they do not pay for the natural gas. It is these power plants that pay and consume. (Story on oriental petroleum)

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

Sec. 44. Power to enter into management contract. xxxxxx Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n)

An officer of the corporation has not been authorized by the corporation to enter into an agreement with another corporation and he enters and signs even if there is no resolution from the board allowing the corporation to enter into such an agreement. Is that valid? What is that called in civil law? That is an unauthorized act, is it not? Acts [were] done by an agent lacking authority from the principal.

You will see that this is an admission that you cannot do it just by yourself. We do not have the capital. These are very expensive projects.

Who is the agent? The president of the corporation. Who is the principal? The corporation.

Know the requirement: majority vote of the board of directors, majority vote (confirmatory) of the stockholders or members unless there is more than 1/3 ownership of the total outstanding stock of the managing corporation and the managed corporation has less than the 1/3 significant portion of the controlling ownership of the managing corporation. So you manage the corporation in order to safeguard its welfare extensively when they are obliged to have a confirmatory vote of 2/3. Now there is still a way from getting around this. What is that? Usually, the managing corporation will __ the exact negative contracts from the managed corporation. (Editor’s Note: Audio distorted in this part). Necessary to develop the franchise of exploiting natural resources, you will have to borrow by yourselves, these small mining companies, from the big companies. So it will be a sponsorship of the managing corporation. The managing corporation will say, “For every peso that we will be able to borrow at our behest then we will be asked a management fee, 10%.” Kay kung sa imo lang kaugalingon, dili man gyud nimo makuha. Then, there are these other requirements: You will not issue stock dividends or cash dividends unless you have serviced the loans. And then you are committed to extend upon the renewal of the management. Why? Because the management agreement that you signed according to the Corporation Code must not be longer than five (5) years. It says: “No management contract shall be entered into for a period longer than five (5) years for any one (1) term.” That’s what the last sentence of the first paragraph of Section 44 says. So, mandatory renewal with foreign corporation who is managing with SEC. there will be mandatory renewal. And so these are the so called NEGATIVE COVENANTS. And sometimes, they even ask for a VOTING TRUST AGREEMENT as to how the managed corporation will be run. The stockholders there will have to sign a voting trust agreement as part of the consideration of obtaining the __. [EN: Sorry, guys. Nawala jud ang voice ni Fr.then sabay ring sa bell ] [Fr. mentions a case which according to him was long and was reversed by the Supreme Court.] The old decision was no foreign corporation can exploit natural resources. That was the old decision. Then it was revisited. They reversed. Now, there can be service contracts and in the exploitation of natural resources, it’s supposed to be 100% but with that radical ruling, which is about scrap, which tells you right then and there that it is bad law. So much needed contortions to change their mind about an earlier decision affording that Constitutional provision which says that only the State can develop natural resources. Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) Ultra vires acts is the act above; infra is below [latin]. Ultra vires is “beyond the powers of the corporation”. There is a distinction. You have to distinguish ultra vires powers of the corporation and illegal acts of the corporation. Then you have to distinguish ultra vires acts of officers of the corporation as to ultra vires acts of the corporation. Page 44 of 112

How does the principal give the agent authority? By resolution. “Be it resolved as it is hereby resolved that the corporation enters into a loan agreement not exceeding Php120 million with MetroBank and Trusting Company, and further assigning the president of this corporation to sign all the necessary papers for and in behalf of the corporation.” In one resolution you have the corporation entering into an agreement with MetroBank. And then, in that same resolution, the corporation appoints the agent; the president. The SC has said it is not enough that the by-laws says that the president has power to sign for and in behalf of the corporation to a contract. That is not enough. [ano po ba ang enough Fr.?] There must be a separate and distinct resolution by the board as to a specific transaction and as to the authority of the president as to that specific transaction. Suppose the president signs without authority from the board of directors. What is that? That is an ultra vires act of the officer of the corporation. That is not an ultra vires act of the corporation. Now, just like all unauthorized acts under the Civil Code, unauthorized acts may be subsequently ratified. It is voidable but can be subsequently ratified. How can it be ratified? It can be ratified expressly or impliedly: Expressly – the corporation passes a resolution recognizing the act entered into by the president and further approving it. Impliedly – There is no resolution, etc. But when the president signs the agreement in the board room itself of the corporation with all the directors present. Picturetaking. Lamano lamano. That is an implied ratification of the authority of the president. That is what is called apparent authority. Make sure you have the correct terminologies. It is as if the corporation issued a resolution because all the directors were there. If they were opposed, they should not have been there or they should have said no. Their presence there is a sign that they approve of the act of the corporation and therefore the corporation is bound by that agreement with all its containing obligations. If it is an illegal act, there is no ratification possible. Illustration: Magtanum ta ug Marijuana. So the president orders the planting of Marijuana; the acquisition of land for the purpose of planting Marijuana. What motivated [the president]? Ingon sila, “He (president) just came from California. There is already a law in California allowing for the, not only medicinal use, but for the recreational use of Marijuana.” (Story: Marijuana in California. Dako ang kita besh. Dako pud ang tax) Now if a president of a corporation here in the Philippines orders the planting in anticipation of the legalization of Marijuana in the Philippines, unsa man na? That cannot be ratified because that is illegal. Know the distinctions in the ultra vires acts of the corporation. Suppose you’re a corporation that has in its articles the purpose of retail business; to engage in retail business; the selling of commodities, merchandise, all manner of goods, food,

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno clothing, and other articles of commerce to end-users. And then all of a sudden, the corporation goes into real estate. What is that act? Illegal or ultra vires? Nothing in the purpose clause of the articles (of incorporation) says that the corporation can engage in real property development. Kalit lang nisulod ug real property. Not allowed because the majority stockholder is also has his own business of pawnshop. Unya sa pawnshop nia man gicollateral niya na yuta sa nangutang niya. Unya kay naforeclose man niya. So naan a siyay yuta. Ingon siya himuon nalang nako ni nga subdivision. Apply na siya ug subdivision permit. So naa na plano, nagkuha na ug architect, impact study… No impact na. tan-awa nang Jade Valley Subdivision. Wala gyud kay makita nga nahuman nga atop dira. You call a stockholders’ meeting. Amend the articles and add real property business. Ratified. (When) you do not have it yet in your purpose clause in your Articles and then you start the business, and then you amend the articles. Then it is ratified. An unauthorized ultra vires act is ratified. Ang problema lang kung wala naapprove kadtong imong amendment. Imong negosyo hospital unya nisulod kag kalit ug punerarya. Nagpasa ka ug amendment. Muingon ang SEC, “Dili ni compatible.” Unsa man na, kanang dili mabuhi kay dal-on sa pikas? Mao nay ginatawag na conflict of interest. Dili gani na maratify ug approve, it remains an illegal act. It will ripen from an ultra vires act into an illegal act because it cannot be ratified. January 5, 2018 (2nd half) (Marry Suan) TITLE V – BY-LAWS There are two possibilities for the adoption of the by-laws: 1. The incorporators draw up the by-laws and they submit it, together with the Articles, to the SEC. So that once the certificate of incorporation is released by the SEC, the by-laws, together with the Articles, are already in effect. So it’s only the incorporators who draw up the by-laws. 2.

[Submission of the Articles to the SEC without including the by-laws] But if you just submit the Articles without any by-laws, the certificate of incorporation will still be issued. But within one month, according to Section 46, of the issuance of the certificate of incorporation, you must have an organizational meeting to elect the members of the Board of Directors or Trustees. And then, you elect the officers and then you adopt the by-laws.

Section 46. Adoption of by-laws. – Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. In that adoption of the by-laws as well as the amendment of any of the provisions of the by-laws, there are two ways of doing it: a. Either doing the long way—Board of Directors by majority vote (absolute majority) approve the bylaws, and then majority of the stockholders or Page 45 of 112

members ratify the by-laws. Remember, this includes voting and non-voting shares. b.

Or 2/3 of the stockholders or members of the corporation delegate the adoption of the by-laws to the Board of Directors

For the approval of the by-laws, only absolute majority is needed. But if you entrust it to the BOD or BOT, you require 2/3 vote of the stockholders. Now, Section 48 says that the delegation to the BOD to adopt amendment or new by-laws may be revoked by the vote of majority of the stockholders or members of the corporation. So to delegate the adoption of the by-laws to the board, you just need 2/3. To revoke, you just need majority. Section 48. Amendments to by-laws. – The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. xxx Now, what should be in the by-laws? The by-laws are considered the internal rules of the corporation. You will have the officers there, their functions, powers, duties. You will have the manner of meetings, etc. The qualifications, duties and compensation of directors. Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) The public is not expected to know the by-laws. It is supposed to be an internal agreement. So when xxx this person is authorized by the by-laws to act for the corporation, there is no such provision in the by-laws. And then the third party enters into transaction with that person as an officer of the corporation, even if he has no authority delegated to him in the by-laws, the fact that he has no such authority in the by-laws does not put the third party xxx because he does not know. Apparent authority, again, is very important. If the surrounding circumstances of that transaction was with the presence of other officers in the premises of the corporation and xxx acted as if the officer, who had no authority under the by-laws, acted as if he had authority, then the corporation is estopped. Because they

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno have misled an innocent public who has no obligation to verify in the by-laws whether or not this particular officer has authority. Because the by-laws is just an internal document or internal rules of the corporation. Now, in Loyola Grand Villas vs. Court of Appeals (1997), the SC declared that the corporation that has been operating for at least 10 years without any by-laws is a de-facto corporation. That means that there is a general enabling act. The corporation made attempts to comply with the general enabling act but there is a fatal defect. There is an absence of the by-laws. So even if the corporation is issued a certificate of incorporation but it has been operating without by-laws, that is a de-facto corporation. The failure to file by-laws is not automatically a ground for cancellation of registration of the corporation. It is a ground for cancellation but it is not an automatic ground. So that is the by-laws. What is required for the by-laws to be valid? 1. It cannot contradict the Corporation Code. So if you are drawing up by-laws of a stock and profit corporation and you provide there that you cannot cumulate votes in the election of directors, you contradict the Code. So that proviso in the by-laws is void. Remember, the Corporation Code, in the election of directors, allows for cumulative voting and that cannot be deleted in the by-laws. 2.

Once again, the by-laws cannot contradict the Articles of Incorporation. If there is a conflict between the Articles and the bylaws, when it is specifically the province of the by-laws like classification of shares, preference of shares, voting power of shares, if that is defeated in the bylaws and it is in conflict with the Articles, it is the Articles that will prevail and not the by-laws. The bylaws prevail with respect to time, date and place of meeting, manner of service of notice to stockholders or members as to the meetings. That is not provided in the Articles. So the by-laws cannot contradict the Articles.

So that is the by-laws, up to Article 48. What happens if the by-laws are silent as to the compensation of directors? Does that mean that the directors cannot be compensated? The directors can pass a resolution as to their own compensation, unless the by-laws say that there is absolutely no compensation for directors or trustees. But normally, for the bylaws of a stock and profit corporation, they cannot provide that there is no compensation for directors. If you’re non-stock and non-profit, you can provide that there is no compensation for the trustees. The by-laws are silent as to the compensation then the BOD or BOT can pass a resolution as to the compensation of the directors or trustees. Remember, what is the limit of the compensation? It cannot be more than 10% of the net profit before tax. Section 30. Compensation of directors. – xxx. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year. TITLE VI - MEETINGS What do you have to remember with respect to meetings? You have to read the case of Expert Travel and Tours vs. Court of Appeals, 459 SCRA 147 (2005) because this is judicial legislation. The SC says this court takes judicial notice of the practice common in corporate affairs of teleconferencing or videoconferencing in the meetings of directors. Here, the Corporation Code assumes that the meetings are, there is a social intercourse. Nagtagbo gyud mo ana. Nagkitaay mo. Nagbinayloay mo. But now, I think De Leon has it. There is the SEC’s circular on teleconferencing. Page 46 of 112

You can have teleconferencing for meetings of directors but there can be no teleconferencing for meetings of stockholders. The meetings of stockholders or members of the corporation must be actual, social. I’ll leave it to you. You better read that. What is the obligation of the secretary of the corporation before he will… you know, the way meetings are… kasagaran meeting sa mga corporation naay mga items gyud na naa ra gyud nato, wala na sa uban. Una ang opening prayer. Naa gyud na. Why is it there? Because there’s always somebody who’s religious among the members or stockholders. Hadlok man sila mu-against nimo kay tingali musukol ka batok sa Ginoo. Naa gyud ng opening prayer. But actually, legally, when does the meeting of the corporation begin? The meeting begins once the secretary responds positively to the exhortation of the presiding officer, whether he be president or chairman of the board. The president of chairman will say, “Mr. or Ms. secretary, do we have a quorum?” then the secretary will say, “Present in this meeting, Chairman, in person 58% of outstanding capital stock. Present here by proxy is an additional 15%. This meeting has a quorum.” Then the chairman will xxx. And that’s the meeting. The pronouncement of the quorum. Way quorum, way meeting. Caucus rana. Storya-storya ra mog mingaw ana. So that is the beginning of the meeting. Kanang pag ingon sa secretary that there is a quorum. And then normally the meeting is begun by either reading the minutes of the previous meeting. Then the board or stockholders will uphold it or the president will make a report as to the events, decisions, the workings of the corporation that has taken place in between the previous meeting and this meeting. He makes a report. Normally that is how it is done. You look first at the past and then you will say, “we have the following resolutions to consider.” Now, many people believe that naa diha ang dispute. I am against this… wala nana sa meeting sa corporation. Wala nana dispute. You express that in the caucus. Magsige ka pag diskurso dinha. Gubot kaayo. PLDT, 2 million stockholders. Aha mang discussion mahimo nimo ana? Sobra pa gani na sa masa sa Luneta. 1 million gud tong ningtambong ato unya 2 million ang stockholders. Ug mupresent na sila tanan, naa ba kay discussion mahimo ana? Wa. Muabot na gani nag 50 katao, wa nay discussion na. Naa nay mutindog representing the controlling shares. Tindog man na sya. “Point of order, Mr. Chairman. I am Mr. so and so. Fernando Zobel Ayala. I have with me the votes of the Ayala listed in the top 100 stockholders of Ayala Corporation as consisting 42% of the outstanding capital stock. I have also with me the proxies representing an additional 20% of the outstanding capital stock. Therefore, we have 66.66% [I don’t know how Father arrived to this sum] of the outstanding capital stock, which means 2/3. The entire votes, which I have, have already been prequalified to vote for the resolutions that have been tabulated in the agenda for deliberation in this meeting.” Nibuto na daan dinha. Di na ni musimang. Para ra gyud ni sa resolution as it is worded in the agenda. What is that declaration? That declaration is telling everybody that tapos na ang labanan. Wa na. Nia ra ang boto sa tanan na muapprove ana. Kung supak ka, pasensya ka. 66.66% gud. The possible vote is mutugpa ka ana, must be more than that. Di ka na ka ka-more than that. xxx Padaghanay man nig kwarta. Gamay gani imong kwarta, gamay ra imong tingog. Dako imong tingog, dako imong kwarta. Simple. Now, the Corporation Code says that if anyone raises his hand and says that he would like to have secret balloting. Pag gusto kag secret balloting, mas sayon. Isa ra man ng ballot diha ng 66%. Isa ra man sya. Dali ra. Human na. You can ask for secret balloting. REGULAR MEETING What are regular meetings? Those that are provided in the bylaws – annual meeting, monthly meeting. There are ways of determining the types of which the meeting is to be held.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno There is a discussion that is important as to when the annual meetings xxx. In the annual meeting, you have an election of the directors or trustees. You have the election of the officers. That is determined by the controlling shares. Kanang 66.66%. Tingali mapasok ng minority representatives, duha kabuok. Sa kinse kabuok, naay chance na duha masulod. Lower than 15 gani, 11. Usa ra tingali imong masulod. Pero ug 5 or 7 ra gani, lower than 10%, wa na gyud kay minority na masulod ana. That is why in the very famous case of Ayala Corporation, when Ayala Corporation decided to lower the number of directors from 15 to 5, niay ning-alsa. Ingon sila, we are minority stockholders. You are equally rendering it impossible for minority representation in the board. Ngano man? When you talk about 5, you need at least 20% of the outstanding capital stock to cumulate it to have 1. Kinsa may naay 20 sa minority, wa man. Adtua ra gud ninyo sa Philippine Stock Exchange, letter (a) Ayala Corporation. Tua na. Nakalista na. Top 100 stockholders. Way makasulod na minority. Ang gipasulod sa Ayala na minority token, ang mga Hapon – Mitsubishi. Pero all the rest are Ayala. Pito ra gud ang member sa ilang board kay nag-compromise man sila. Pag reduce sa 15 to 5, nagcomplain man. Nagtagbo sila sa 7. Ayala Corporation now has been reduced from 15 members of the board to 7. So, cumulative voting ha? Now, you do the election in the annual meeting. Another important act is the stockholders approve the annual audited financial statements. So the president, together with the treasurer or the chief financial officer, reports on the financial story(?). And then stockholders vote. Until the stockholders give their approval, it is not the financial statement of the corporation. It may be the financial statement of the officers but it is not the financial statement of the corporation. Now, when you have a corporation as complex, as big as Ayala, which is the holding company of BPI, Globe, Ayala Land, Manila Water, kinahanglan mahuman ng financial statement sa subsidiaries. Unya iconsolidate na nimo sa holding company. Kinanhanglan ka ug igo na panahon. So when is the annual meeting? The annual meeting of Ayala, just like Meralco, PLDT, is 6 months after the end of its fiscal year. Kay di man sila makapresent ug annual financial statements that are audited. Di lang man na kamo lang mubuhat ana, i-audit pa man mo ug reputable, independent auditors. So when you decide the fiscal year, what is the fiscal year? It is 12 months accounting period which may or may not coincide with the calendar year. Kining sa Ateneo, unsa man ang fiscal year dinhi? Fiscal year diri follows the academic year, June 1 and ends in May 31. Naa nay grade school, high school, senior high school, college, graduate school. Kana tanan, consolidate na nimo. So it takes about 4 months. That’s why the annual meeting is about September. So that is important when you consider putting the annual meeting in the by-laws because you have to specify in your meeting. Kinahanglan ready ang financial statements. You can imagine international companies. Coca-Cola International. (chika about Coca-Cola) Normally, di pa magsugod ang meeting, ihatag na ng mga resolution, ang copies sa annual financial statements. There is no problem if it is a listed corporation because this is supposed to be public and can be given to the public. But if you are a private corporation not listed, you might not want your audited financial statement to be shared with non-stockholders. So you will put a notice there, that the financial statements given to you are for your personal disposable(?) and copies thereof must be returned to the secretary of the corporation. Tanawa ninyo ang Cargill. That is the biggest private corporation in the world, not listed in any stock market. (chika about Cargill) xxx and you are required to submit your financial statements to the BIR. If you do not, what happens? SEC gives you a fine which is daily. Every day that you are delayed and it is the portion of your total sales of your corporation. You are obliged. Mao man na niadto, a very famous guy who’s always late in submitting his financial statements to the SEC is Mr. Lucio Tan. That is the Lucio Tan circular. Karon, ma-late gani ka, every day ang fine. After 30 days, there is a surcharge over and above the fine unya Page 47 of 112

naa na sad penalty after 60 days. Ah, surrender si Lucio Tan. Karon on time na sya. Who can attend a stockholder’s meeting? Before we break up, is there an instance where you are not named as a stockholder, you are not a transferee of shares, and yet you can attend the stockholder’s meeting. Mahitabo ba na? Your name is not in the stock and transfer book. You do not have a certificate but you can attend and they cannot deny your presence. Is that possible? You find that in your commentaries. Who is that person? January 10, 2018 (Ria Lumapas) Proxies and Voting Trust Agreement If you are not a stockholder, a proxy, a trustee in a voting trust agreement, you cannot enter or join a stockholder’s meeting. Is that correct? You are a stockholder named in the books as the owner, you are the titular owner, you can attend. You are in the books. You are given a proxy, a proxy can be the instrument and it can also be a person. It can either be of the two: the instrument by which you are appointed to take the place of the rightful stockholder who should be there in the meeting. Now if you are a trustee in a voting trust agreement, voting trust agreement is different from a proxy. First of all, what is their common denominator? Both are the instruments by which a titular stockholder gives way to someone else to exercise the vote for him or her. It is the instrument by which the main stockholder gives way to another to attend and vote. What isn’t common? Both must be in writing but the difference is, the voting trust agreement but must be in a public document. It must be in writing but with the intervention of a notary public, so when you draw up a voting trust agreement, what do you put below? A jurat or acknowledgement? Jurat is for affidavits. Acknowledgement is for a contract. Voting trust agreement is a contract. The stockholder is the trustor. He surrenders his certificate of stock to the secretary together with a voting trust agreement. Now, the secretary of the corporation issues a trust certificate after which the trustee issues another certificate to the trustor. From now on the one who is listed in the certificate in place of the titular owner is the trustee. In fact, the trustee in a voting trust agreement can run for office. He can be elected as director. So the big difference is that in a voting trust agreement, the trustee votes by his own right. The titular stockholder makes a public act of divesting himself of that voting right. In a proxy, the proxy exercises the vote of this titular stockholder. That stockholder can tell the proxy to vote a certain way because it is his vote. What happens if he does not follow the instructions of the principal, is his vote nullified? No. That is between the two of them. But it is the vote of the principal. General Rule: Both proxy and the voting trust agreement cannot be for a period longer than 5 years. Exception: Voting trust agreement can last longer than 5 years if it is incorporated in the conditions of a loan agreement. Because a voting trust agreement can be part of those negative covenants that cover a loan agreement. Illustration: Here is a bank which lends money to X Corporation but together with that loan requires that the controlling stockholder issues a voting trust agreement to the bank for the duration of the loan. Nganu man? Because he owns more than 66.66 percent of the shares of stock of the corporation. Dako kayo iyang utang. Dugay kayo iyang duration. Gihakot na nya tanang assets. Manigurado ang banko. Co-signatory ka. Unya you execute a voting trust agreement and it is the bank now who exercises your vote. What happens in that instance? Tag iya ka sa corporation pero gihubuan na diay ka because it is the bank who votes for the duration of the loan. And the bank will vote in accordance with its peculiar interest in the corporation. So in a proxy, you do not surrender your shares. Voting trust agreement: you surrender your stock certificate and the treasurer will issue you a voting trust agreement certificate. And you also

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno issue a certificate to the trustee. It contains the term, the date of expiry of the voting trust agreement. Once the voting trust agreement expires, he gives it to the secretary and the secretary will issue the stock certificate and that ends the voting trust agreement. Kanang voting trust agreement, usually the debtor there is in bad straits. The financial markets no longer believe him but the business is otherwise very good. Muingon ka unsa man intawon ng negosyoha nga gwapo kaayo pero wa na mutuo nimo? I’ll give you an example. Masbate. It’s an island. Because it’s an island it’s off the grid. So it must produce its own electricity. Its production cost of electricity is high because it has to generate by itself. It cannot resort to coal because consumption is less than what it takes to put up a large coal plant. So it does it with bunker fuel. Mas hugaw pa kesa coal pero cheap. It’s brought in by barges. Now to get tax incentives the power plant is organized as a cooperative. Wa kay income tax. Wa kay customs tariff. Exempt from minimum wage. You make all the workers of the power plant members of the cooperative and you are exempt from minimum wage. So kay coop man, the articles say that it is the provincial board that appoints the officers of the coop. Tanang users man myembro. Unsaon pag election? It’s the provincial board. It is the provincial board that guarantees the loan so it appoints. The provincial board is the first one who does not pay the electric bills. Kanang mga suga sa dalan. Magkagidlay. Kada utang tubuson nasad ug laing utang. Unya di nasad kabayad. Finally gusto na sila mangutang wa nay mupautang nila. Ingon sila ibagligay nato, wala sad mupalit unless you amend the articles. So finally here is a bank who will say this business is a good business. Di man ka muingon na ‘di nalang ko mupalit ug electricity’. Ang imong anak maghimo ug homework pag gabii, maoy mutulisok nimo ug una. Palit gyud ka ug electricity aron naa kay suga, naa kay tubig. Sure market. That’s why you don’t hear of a marketing department in a power corporation. The one in control is not the one who is fully responsible. The province is the one abusing so the bank says voting trust agreement for as long as this loan. General resolution by the members of the coop. Board resolution by the provincial board. They exercise the vote. Kuyaw na. Bad credit, good business so you have voting trust agreement. Now, it is possible for somebody who is not a trustee in a voting trust agreement, who is not a proxy and who is not a stockholder and yet he can attend a stockholders’ meeting. Who is that person? That person is the one found in section 55, 2nd paragraph. Section 55 – xxxx Executors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. The law is very deceptive. The law says without need of written proxy. Actually, it is not a question of need, it is a question of possibility. Receiver, administratrix ka appointed by the court, who can write a proxy for you? Not the court because the court is not a stockholder. The one who can write a proxy for you is already 6 feet underground. How can a proxy be produced? No proxy can be produced? So who is the rightful substitute? The administrator of the estate. So you go that meeting and you submit your appointment by the court that you are the administratrix of the estate of Juan dela Cruz. If there is no cut-off date you can do it at any time. Tunga ka didto, dal-a imong appointment. Btw, proxies have a peculiar set of rules. The stockholder may write multiple proxies. Is he allowed? Yes. Is he likely to do that? The moment he reaches senior age at which imbecility begins, chances are he or she will appoint multiple proxies. Makalimot naman sya na nag appoint diay sya. How do you decide between multiple proxies? Who is the rightful proxy? Page 48 of 112

Your commentaries, they have the circular of the SEC with respect to proxies. Unlike double sale of real property, kinsay palabihon? The earliest to register with the ROD. Ang nakauna. Ang proxy, baliktad. Kinsa tung latest mao tuy favored. He has the better right. The assumption behind that is that the principal changed his mind. The latest one is the rightful proxy. Now proxies, according to the Code, maybe revoked expressly or impliedly: Expressly - musuwat na sad sya sa secretary. “I changed my mind. So and so is no longer my proxy.” He signs it. That is express. Implied - if the principal stockholder shows up in the meeting, that means the proxy is already removed. But that cannot happen if there is a check off date. If the by-laws of the corporation especially corporations listed in the stock market, they will say all proxies must be in before such and such a date. After which the books of the corporation are already closed for all possible registration. So before that, you take back the proxy. If you don’t it stays and implied revocation no longer works beyond that period for listed corporations. Normally those provisos are present in cases of listed corporations that have a very wide stockholder base. Can the by-laws provide that proxies for that corporation to be in a public instrument? YES! But if there is no such proviso, what is needed? Just an ordinary writing signed by the stockholder. That is enough. Now is there such a thing as proxy with consideration? There is a war, normally they call it a proxy war. Muingon gani sila proxy war, there is no one who has majority of the outstanding capital stock of a corporation. And they are fighting for control of the board. So iyahay mo ug kuha ug proxies. Your stockholdings plus proxies should be above the 50 percent mark of outstanding capital stock if you want to control the board. Now as you can see the proxy can be changed. Now, you are an owner of shares of stock. The shares of stock that you own are considerable and since they are traded in the stock market there is always a daily price as to which the shares of stock are traded. So more or less there is an agreement as to the market value of the shares of stock that you own. Now, suppose you borrow from the bank and you use the shares of stock as collateral and so you pledge the shares of stock. Now who has the right to vote now? The mortgagor or mortgagee? Look at the law. Section 55 says: Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n) Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. (27a) But if the mortgage contract says that it is the mortgagee that will exercise the right to vote then it is the mortgagee. That proviso in the contract becomes a statutory proxy. That must be registered with the secretary of the corporation because unless it is registered, it does not bind the corporation. The corporation will continue to recognize the mortgagor because he is the one named in the books. So it must be registered. What is the most famous voting trust agreement in Philippine history? The voting trust agreement written by Danding Cojuangco. That is the most famous. When Andres Soriano decided to unload his shares to Danding, Danding said okay I am going to buy but I don’t have enough money. So I will pay you one half and you transfer the shares of stock to me and now I have the certificate and I write the voting trust agreement for your son to exercise the

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno votes until I can pay. And those were the shares declared by government to be the coco levy funds. Wa pa nya natiwas ug bayad, Marcos fled to the US and he brought along Danding Cojuangco. So in the meantime Andres Soriano III tried to recover the shares. He thought of borrowing money to pay Danding so he could get back the shares but since he did not have money he borrowed money from Hongkong Shanghai Bank and he passed a resolution that San Miguel Corporation would guarantee that loan. Who is the borrower? Not San Miguel, Andres Soriano et al. will guarantee that loan. That is why Eduardo Delos Angeles opposed that resolution. Why would the corporation guarantee a loan from which it would not benefit anything? And that’s why he filed that derivative suit. That is the most famous voting trust agreement. Wa pa to gi-file di unta mugawas tung coco levy shares.

Now we are in this contract called subscription. It is the acquisition of shares of stock by which an individual who acquires it—the transferee, becomes a stockholder. He might already be a stockholder because he has other shares in that corporation.

TITLE VII – STOCKS AND STOCKHOLDERS

The one who sells it is not called a seller. The corporation who sells it is called an issuer. The one who buys it is called a subscriber. It is not called a buyer. Why? So that it will be removed from the general contract of sale that is covered by the civil code and covered by the jurisdiction of the ordinary court.

Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. What is a subscription contract? Disabuse your mind of what you used to know of subscription. In corporation law, subscription is a contract and what makes it a subscription is that the subject matter of the contract is unissued shares, new shares. If it is old shares it is no longer a subscription, it is a contract of sale. But if it is unissued shares that means that the transferor of the shares is the corporation itself. When he transfers it for the first time to a stockholder that is a subscription no matter what the name is according to section 60. Why is that important? Third year namo. You must have a differentiated understanding because there are two forums fighting for jurisdiction over subscription. When you say it’s a subscription, the terms of a subscription is a sale and therefore it is under the regular courts. But because it is a subscription the formalities of the contract the one who has jurisdiction is the intra corporate court. Because it is an intra corporate dispute. When do you know? Look at the facts and when you see clearly that the law that is used to resolve the dispute is the corporation code then you go to intra corporate court. If the law that is going to be used is the civil code then you go to the regular courts. So duha na gaaway sa jurisdiction. All these caveats here of the law, that is the cause of twilight zone issue of jurisdiction. So formalities, is the subscription valid? Tan-aw ka dinhi. The trouble with subscription is that there is no specific form that is required. Does not require anything. Which is more a solid evidence of stock ownership? A certificate of stock or somebody’s receipt from the corporation for the same set of shares of stock? Di gani sya kaproduce sa iyang receipt sa ato pa kinawat to niya iyang certificate of stock from the stock stub. Kanang certificate of stock, numbered na, naa man nay stub.nya ibutang na didto ang receipt. Kanus-aa na gisi-on? Kung nakabayad na ka sa tanan. Certificate ra gani imo, sa ato pa gikawat na nimo. Sya na wala pa kabayad totally, naa pa syay balance, syay tag-iya ato. Because a stock certificate is issued based on primary documents, original documents. Remember, the stock certificate is not synonymous to the stocks themselves. There are different laws covering the right to own a stock certificate, different from the laws owning the stock itself. So you have to read the provisions here carefully. January 11, 2018 (Florienne Melendrez) Section 60. Subscription contract. – Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)

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That’s not the only way you can become a stockholder. You can also buy shares from another stockholder. That is not subscription. But if you purchase it from the corporation and the corporation is selling you newly issued shares-- not treasury shares then it is subscription. This is the dilemma because a subscription is actually a sale. Yet, it is under the jurisdiction of the intra-corporate court and not the regular court because it involves a specific subject matter that takes it away from ordinary sale. It involves newly issued shares or shares that have not been transferred before originating from the issuer.

Let’s talk about a peculiar kind of subscription: the preincorporation subscription. Section 61. Pre-incorporation subscription. – A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n) The issuer is not yet an existing person. It is still a corporation to be formed. So it is a peculiar kind of subscription. It defies the rules of contract. Can a non-existing person sell something? Under the civil code? No. But how is it that it can sell? Because the law says so. It is allowed by the law to do that because how else can it become a person if it cannot sell shares. Because a corporation is composed of constituent shareholders. Kung di sya makakuha’g shareholders di sya mahimong corporation. So therefore the law allows pre-incorporation subscription defined under section 61 as a subscription for shares of stock of a corporation still to be formed. It is a peculiarity when a corporation that does not yet exist enters into a pre-incorporation subscription, it is irrevocable for a period of at least 6 months from the date of subscription unless all others subscribers consent to the revocation or unless the incorporation of said corporation fails to materialize within the said period or within the longer period as may be stipulated (?) in the contract of subscription. It is irrevocable for the subscriber. How about for the corporation? It is not irrevocable for the corporation. Suppose the corporation is not allowed by SEC, there is no subscription. Walay mahitabo na shares na ma-issue sa corporation. It is not allowed to be formed. So what happens to the subscription? It is unenforceable. Now in the meantime, if you have a pre-incorporation subscription you already handed over your money. To whom do you give out your money since the corporation still does not exist? The interim treasurer! He deposits it in the bank in trust for the corporation still to be formed. So the stockholder subscriber has already performed partially if it is subscription by installment. When can you have subscription by installment? If it is par-value shares. But if it is no par-value shares, you have completely performed your obligation. It is fully paid. Now that you have partially performed your obligation, what stage of a contract does it fall under? Negotiation-perfection-execution. Naa na ka sa execution phase. For its part, the corporation must obtain the certificate of incorporation. Pag kuhaon na niya, corporation na siya, it has done its part. The other party now is a complete person.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

If what he issued are no par-value shares, the subscriber can now go to that corporation, look for a secretary and say “give me a certificate of incorporation because the subscription is fully paid and now has a right to a certificate of stock.” When do you have a right to the certificate of stock? If you have fully paid the subscription. Sa subscription, you have right to certificate of stock after you have fully paid. But if it is a sale—stockholder to stockholder, do you have a right to this certificate of stock after you have fully paid the stockholder? Ihatag niya ang certificate of stock niya. Pero muadto ka sa secretary, isurrender to nim, ipakita nimo nga giendorse niya sa likod na transfer na niya. Karon makapangayo ka sa secretary ug certificate of stock.

prejudice. There is no res judicata in there. It is a purely ministerial act. The SEC might question your capital either paid-up or authorized. How? If the consideration that is used is other than cash. Because the normal consideration for the issuance of shares is cash but the law allows for other forms of consideration. Section 62. Consideration for stocks. – Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; xxx

Lahi ra ha! In a sale, there are three persons involved: 1. Buyer of shares of stock 2. Stockholder who sells 3. Secretary of corporation who recognizes the transfer and cancels the certificate of stock that was transferred and issues a new certificate of stock to the transferee.

Remember the rule: if it is property that you will give to the corporation in consideration for the issuance of the shares of stock, you can undervalue the property but you cannot overvalue the property.

Lahi ra. In an ordinary sale, buyer and seller man na. kung mubaligya ka ug yuta nga titulado, what is involved is the register of deeds. [Father talks about hangers and cabinets inside our brains while studying law. Lol]

UNDERVALUE VS. OVERVALUE For example, land. The corporation needs land to put up its buildings and office since it is a corporation supposed to create digital games to be sold in the web. So you can say you will subscribe to shares of stock in exchange for a real property (land). At how much will you value the land? Market price. Market price is not just one. It is a range.

Pre-incorporation subscription: Why is it irrevocable for a 6month period? Actually the subscription transaction is recorded in the articles of incorporation (AOI) because the AOI submitted in the SEC contains a) Authorized capital; b) subscribed capital. Because you have to account for the subscription total that you say it is. subscribed capital: that is that part of authorized capital that is already answered for. c) paid-up capital – ilista sa na nila pila ang sa subscribed ang gibayran na. assuming you are talking about parvalue shares. Now, if it were not irrevocable, suppose the subscriber cancels the subscription, you cannot take back your subscription because after you submit it (AOI) to the SEC, it becomes public document. That is the particulars of a corporation. Once the corporation does business, if the public wants to know about the corporation, they can go to the SEC and request a copy of the AOI. Paunsa ka musalig ani nga corporation? Ang capital naa didto! Number of subscribers naa didto! If you take back your subscription, there will be a deduction in the number of subscribers then the AOI will no longer be true. That is why it is irrevocable for 6 months. If the corporation articles are not approved and no certificate of incorporation issues from the SEC after 6 months, then you can remove because it is assumed that the corporation is not incorporated. And the reason why subscribed does not exist, there is no corporation. That is the time when you can revoke your subscription. No pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission unless the SEC issues a disapproval of the AOI. Normally it will not issue a disapproval. It will just give it back to the corporation for them to amend. They will give you time to correct. Unlike cases in court, there is no dismissal from the SEC with prejudice. It’s not a complaint not a petition, it is asking for the certificate of incorporation to enable it to function as a corporation. The SC has said the SEC’s function is not discretionary but merely ministerial. That’s why if you think the SEC is not allowing to be corporation for no reason at all whether legal or rational, you can go to higher authorities—such as the CA—for mandamus for them to get the SEC to issue you a certificate of incorporation. Because there is not such thing as the SEC dismissing your petition for certificate of incorporation with Page 50 of 112

The trouble with market value is it has to be certified. So you ask an appraiser because the SEC will tentatively accept your valuation. But if it has doubts, it will reject your articles of incorporation then you will have to an appraiser’s certification of the correctness of the value that you have pegged to the property you surrendered to the corporation in exchange for your shares of stock. But if you say you are valuing your property according to the assessor’s value--- provincial assessor, that is lower than the market value! You are actually undervaluing your property. way problema ang SEC ana, dawaton dayun na kay government man ang ga peg sa value. Another value you can peg from the government is zonal value. BIR ra na. That is for purposes of capital gains tax. This is normally higher than assessor’s value. It is permissible. SEC will not question it. But if you give higher than assessor’s or zonal valuation, you will have problem with the SEC unless you accompany it with an appraiser’s certification. Appraisers do not give their appraisal for free. Bayran na ninyo sila. Mugasto nasad ka. Who will pay the assessor? The corporation who will be receiving the property or the subscriber? Normally it is the issuer. Muingon ang corporation “nagsugod pa, wala pa gani miy kwarta pagastuhon pa mi”. ikaw nay una gasto ana! That is normally the situation. There are people who purposely undervalue their property in exchange for shares of stock. [father writes on the board]

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno INDOFOODS

stock dividends. SC said the agreement between Nielsen and the corporation was valid. This remuneration should be paid in cash out of the expense of the corporation and the measurement is 10% of the net profits.] 49%

Now most corporations, kanang nagkagidlay na corporation, mangita silag talents na muressurrect ana nga corporation. [father talks about the famous Google employee pirated by Yahoo who was offered the CEO post and given stock options proportionate to the success he is able to generate. Success then is measured by the stock price of Yahoo.]

50+1%

48% (public)

If you are given an option, you are given a right to purchase shares of stock, of the corporation at par value, not at the price it is traded at the stock market. Even if it is traded at $50 per share in the stock market, you are only obliged to pay the par value, let us say, $5. Now what is the consideration there? Cash. These are new shares that are given to you as compensation for work, for labor performed. Kung makapasaka ka sa price of stock, rewardan ka ug shares of stock at strike (?) of price that is way way lower than the traded price. Wa nakay capital ana.

50%+1 (Salim) 1% (management)

Before it became Indofoods, it was a private corporation by the Salims in Indonesia. This is what they did: they sold the entire corporation and they still became in control of it. First, Salim forms a small corporation. Minimum capital is 1million dollars. And then, since he is the owner of Indofood, out of 10 million dollars, he uses 50% of the shares of stock of Indofood. He is the owner of 99.9% outstanding capital stock of Indofood. He gets 50% + 1, then transfers it to this (small) corporation for 1 million dollars. The total assets of this is probably 5 million but he transfers it for only 1million. So, you have this corporation holding assets that are grossly undervalued then he starts selling new shares of this corporation at 10 times par value because it is undervalued. People start buying it because even at 10 times par, lamang man gihapon sila. Dako man kaayog asset na gibutang dinhi. So you have the public 48% owning this corporation and Salim now owning 50% + 1. The other percentage is management. Then what happens? He goes over to the bank and he borrows money so that this corporation can pay Salim for this 50% + 1. Kanang 1 million na gitransfer diri, initial payment ra diay. How will he pay the bank? He will pay the bank through the earnings of the 50% here (smaller corporation). So ultimately he is paid a value. Initially he is not but ultimately he is paid. What happens to the other 49% here? Then he sells it to the public. You see he is paid completely! He sells it to the public, borrows money from the bank but remains in control 50% + 1 of this because it is corporation. But he has sold all the shares. We have the term “unlocking the value” of this (smaller) corporation. He controls it through a Holding Corporation by which he first undervalues it because that is the (inaudible.

Sometimes when they you give options, they give you minimum holding period. Why? Outsiders will interpret it na dili to tinuod imong pagpasaka sa profitability kay namaligya ka naman. Sa atoa pa nagparachute naka kay magcrash na ang eroplano. You are not allowed to sell your options immediately. Because of the abuse that has been committed with respect to options given to executives, now the SEC has a new rule based on the obsolete Usury Law that was passed by congress: that if you give options you must cost it. It must be reflected in your profit and loss statement. Because the whole idea of giving options is not reflected—the cost and all. Many times, the revenue office will not accept your costing so corporations in the United States now say that it is better to just give you outright. They buy shares in the market, put it in escrow, and then distribute it to the CEO annually based on certain targeted achievement by the CEO. Why? Because when you buy it from the market, it is actual cost. Mulakra guyd imong gasto. If you put it in escrow, say put it in a bank, the bank is the trustee. And the condition is this: hold it, and if the price of the shares of stock goes up by 20%, he also gets 20% of this number of stock. If it gets higher, 50%, then he also gets that. So the bank is the trustee which holds the shares. These are no longer newly-issued shares ha. These are shares which the corporation buys in the open market therefore can be costed. Shares that are give, no longer brand new, no longer unissued shares, to compensate labor performed that benefited the corporation. Section 62. Consideration for stocks.Xxx 4. Previously incurred indebtedness of the corporation; xxx This is Dacion en Pago - Previously incurred indebtedness.

So is it possible to sell all the shares of stock of a corporation and you still control it? YES. But you have to have the confidence of the market. Section 62. Consideration for stocks. xxx 3. Labor performed for or services actually rendered to the corporation; xxx The operative word is performed labor--- past tense! It is not labor still to be performed. Why can you not issue shares to a subscriber for promised labor? Because promised labor, under the terms of the civil code, is a personal obligation. And if you do not pay by performing the promised labor, you cannot be compelled by an order by the court because that would be involuntary servitude. So, it is very difficult to enforce it. So the shared of stock cannot be issued without any consideration. [father talks about Nielsen case wherein a geogolist was engaged by Baguio gold mine promising him 10% of the profits of the corporation. Upon payback, Nielsen was issued 10% cash dividends prompting the protest of the other stockholders arguing that Nielsen wasn’t a stockholder thus shouldn’t be issued the Page 51 of 112

Illustration: The corporation borrows money from the bank and is no longer able to pay for the loan, it eould convince the bank that it would pay through shares of stock instead. If the bank agrees, the bank is transformed from a creditor to a shareholder. So the past indebtedness is considered payment for the shares of stock they issued to the bank and the bank now becomes a stockholder. Section 62. Consideration for stocks.- xxx 5. Amounts transferred from unrestricted retained earnings to stated capital; and xxx That is Stock Dividend. Accumulated profits are the consideration for the issuance of the shares of stock. Proportionate according to your proportionate shares of the outstanding capital stocks. Example, 10% ka sa outstanding capital stock, makakuha sad ka ug 10% sa profits nga gidistribute sa corporation. That’s why it is always percentage. Section 62. Consideration for stocks.- xxx 6. Outstanding shares exchanged for stocks in the event of

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno more shares to divide the capital stock dapat. More shares to divide para lipay ang stockholders.

reclassification or conversion. xxx You have convertible shares. Or you have preferred shares convertible to common shares. The new common shares that are issued are issued for consideration of the preferred shares that are surrendered because preferred shares are now converted to common shares where before they have no votes, now they have voting power. So are the considerations allowed in exchange for shares of stock. You cannot issue without consideration. If you do, that is called watered stock and the directors who assented to the issuance are liable. Namakak ka na. guba na sad imong AOI. Wa may consideration. Section 62. Consideration for stocks.- xxx Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission.

So, that is why what is provided in the AOI and by-laws of preincorporation is most likely one-time only unless the corporation is neither losing or gaining or for example if it gains then loses again, so that the book value is still the same with the issued value. Very important to realize that if you look at financial statements, balance sheets, profit and loss statements, it is always denominated on top. Illustration: Balance Sheet of XYZ Corporation as of and then they put the date which is the last day of the fiscal year usually December 31. Now the probity of this financial statement is that it is good only for that date. Beyond that date, that statement is no longer accurate. It is a snapshot of that date. There is money going out, there is money going in and the overall snapshot financially which is the balance sheet will be changed and the external auditor will not certify that beyond that date.

Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16)

Now you go to par value shares. Par value shares you have: par value and you have an issued value. The only prohibition is that you do not issue shares at lower than par value. Issue shares at higher than par value but not lower. This is possible for pre-incorporation subscription. The corporation at that time is not yet formed. If you are already issuing shares at higher than par value, yes, it is possible. Because sometimes people have a way of reading the future that may be based on what they believe is the prospect of this particular corporation.

January 12, 2018 (1st half) (Therese Candolita) So now we are in the important section of stocks and stockholders. Our last discussion was centered on the consideration for the issuance of the shares of stock. You have to think of 2 kinds of stocks: 1. No par value shares - you talk about one value for purposes of consideration and that is the issued value. 2.

So in the very least the succeeding issuance of the par value shares will be pegged at book value. It will be higher than the original issued value. If the corporation is not making money, the book value will go down. In the very least, it will be the lower book value that will be the next issued value. Why? Because nobody will buy your shares if you sell at higher than book value considering the corporation is not making money. Unsa man, mura ra ka galabay ug kwarta ana.

Par value shares - you talk about 2 kinds of values, the par value and the issued value.

For par value shares, the issued value cannot be lower than par value. It can be higher but not lower. When you talk about no par value, you only talk about issued value and yet there is a statutory meaning of issued value. What is it? That is 5 pesos. You cannot issue shares of stock that are no par value for lower than 5 pesos because that is the lowest issued value. Now, shares of stock that are issued the moment they are issued the value is not frozen because we are talking about an ongoing concern. The corporation, it operates. If it loses money, the book value goes down. The beginning book value is the issued value. Always. Whether it be no par value or par value shares. Why? Because the issued value is what is received by the corporation. Now if you say par value shares, you receive higher than par value. It’s still the capital counts. You have capital stock and the excess of par value is in another entry. That is premium of stock. Now if the corporation is losing money, the book value goes down. If the corporation makes money, the book value goes up. So let’s zero our attention on no par value shares. Particularly the no par value shares pre-incorporation subscription. The issued value is fixed in the Articles Of Incorporation, because that is what is presented to the pre-incorporation subscribers. You have that issued value, if the corporation decides to issue more shares, certainly the issued value will not be the same with what is provided in the AOI and by-laws because the corporation is out of my concern. If it makes money the book value goes up. If you say the succeeding stocks that will be issued will be the same as the issued value, the existing stockholders will complain. There are Page 52 of 112

What happens if the corporation issues at higher than par value? It will get more money and certainly it will more than qualify for purposes of basic requirements of the AOI. Illustration: AOI says authorized capital stock is 1 million divided into 1 peso par value shares of 1 mil shares. If you issue shares of stock pre-incorporation, 25% must be subscribed. So, what is 25% of 1 million, it is 250,000. That is if it is bought at 1 peso. But let us say it is bought at 2 pesos. So how much did the corporation bring in? The corporation brings in 500,000. It does not mean that the corporation sold 500,000 shares. No, it did not. It just issued 250,000 shares. That is why it is important to remember that the authorized capital stock is not the ceiling of the peso value that the corporation can raise. The authorized capital stock is the ceiling for the number of shares that the corporation can issue, not the peso value that the corporation can issue, because it is possible that the corporation can bring in more than the authorized capital if the investing public wants to pay more than the par value of the shares of stock. Now, suppose the corporation issues just the minimum 25% of the authorized capital stock. 250,000 shares of the 1 million. But let us say it is bought at 3 pesos. How much do you bring in? Let us say gross lang. 750,000! And let us say the corporation decided “our business is growing. We need to expand and put up more branches so let’s double our authorized capital stock.” So you double the authorized capital stock. You apply for the amendment and get the majority vote of the Board of Directors and the 2/3 ratification of the stockholders, voting and non-voting, and so you increase the authorized capital stock. So before, 1 million divided to 1 million shares at 1 peso, now it’s 2 million shares. Now you already have 750,000 pesos capital stock and premium. If you consider that as paid up capital what percentage is that of 2 million? That is already over 25% of 2 million. Do you still have to have new subscribers to be able to say that the increased capital is 25% subscribed and 25% of the subscribed is paid up? The answer is yes because the basis is not the

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno authorized capital stock increased. The basis is the increase, the 1 million that is added, the increase itself must be 25% subscribed, and 25% of that subscribed must be paid up. It’s as to the increase. Here’s another very important concept of subscription. Time and again the Supreme Court says that a subscription is an indivisible contract. You say, “So what? What is the consequence?” General Rule: No corporation is allowed to issue a cert of stock unless the subscription is fully paid. Suppose the subscriber gives up after paying 25% of his subscription, and he says he can no longer pay the remaining and he asks if it is possible that he is issued a certificate of stock equivalent to what is covered by his initial payment? You can never do that because a subscription contract is indivisible. Exception: If it is a delinquency sale. Remember it is possible for a corporation to collect the balance of payment and the completion of the balance through a delinquency sale. How does a delinquency sale occur? We discussed this already. When we talk about delinquency sale, you only talk about par value shares. Why, because no par value shares cannot be put on installment. The moment it is issued, it is considered fully paid. So we talk of par value shares and the par value shares is not fully paid, there is a balance. What if 50% was paid and there’s a balance of 50% of the subscription? So 500,000 was paid initially and the half is the balance. When is that going to be paid? The rule is: #1: at the date prescribed in the subscription contract, and; #2: If there is no date stipulated, it is to be paid on call by the directors of the corporation. The BOD issues a call na magbayad sila on or before this date. If you do not pay on or before that date, the corporation gives you another 30 days. If you have not paid within that 30 days then the corporation CAN declare you as delinquent. Remember “CAN” because the corporation can choose to bring an action against you. Which is collection for sum of money before the regular courts, not the intracorporate court because it’s just a forbearance of money. The law used to resolve the controversy is not the corporation code but the civil code. Now 30 days and you have not paid the balance, the board can declare the subscription as delinquent. What are the days to remember? 60 days and 30 days. After the declaration that the subscription is delinquent, count off 30 days. The delinquency sale is between 30 days and 60 days. Not earlier, not later. It requires publication kasi. That is why there is that period. To publish that this subscription is delinquent and those interested can bid for these shares of stock covered by this delinquent subscription. Now here comes the delinquency sale. This is a peculiar way of bidding because the bid price is the same. The bid price consists of: 1. the balance of the subscription, 2. plus interest, if any 3. plus surcharges, if any 4. plus cost of the auction delinquency sale, because the corporation has to rent a place and hire an auctioner and has to do legal notarization of the sale once it is done. Pag-igo anang gavel sa lamesa, it is perfection. Pagpirma sa notary, that is execution. That is the price but the winner of the auction is the one who sets the same price for the least number of shares. So the winner gets a stock certificate. The shares go to the original subscriber. He is issued a certificate of stock. What happened to the indivisible subscription? Natunga diba, kay ang half naa sa original subscriber, ang katunga gi-auction. That is the only exception. Now let me just point out if it is a corporation that is traded in the stock market, then there is a running tabulation of the market value of the shares. Normally there is no instalment in the shares. Mubayad ka dayon ana, no instalment payment. Sometimes it is sold at a discount, sometimes sold at a premium, it all depends Page 53 of 112

but most likely because it is traded at stock market, the public has a gauge as to the market value. There is a subscription that is delinquent, very easy. Ikaw na ang mangita ana ug mupalit sa imong subscription. That is the beauty when listed in the stock exchange. There is a ready measure of the value because the stock market keeps the opening value and closing value. Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-infact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Tan-awa ang first sentence sa section 63, it is a recognition that there is a vice president (see underlined words in section above). People think that there are only 3 kinds of officers: President, treasurer and secretary pero naa’y vice president. Naa pa diay assistant secretary gani, basaha (see underlined words in section above). So why is that important to know? Because even if the by-laws does not provide for a VP or assistant secretary, you can create that office because it is provided for in the corporation code. So let me point out that it says “MAY” (see underlined words in section above). The first paragraph says shares of stock issued may be transferred by delivery… So how are shares of stock transferred? One way is you endorse the back of the certificate and then you deliver. What is the meaning of delivery? Transfer of possession of the thing delivered and it is personal property. Transfer WITH intent to transfer. That is the technical meaning. You do not take delivery. To take delivery is business. You demand delivery. Is there a sale of shares of which cannot be done by endorsement and delivery of certificate that names the shares covered by the transaction? Murag wala na gisulti diri diba? Pero pwede na. Kung ang shares of stock nimo, 1 million shares, mao ang nakabutang sa stock certificate. Ang gusto nimo ibaligya 100,000 ra. How can you endorse at the back? Di nimo mahatag ang 1 million! So in that case what will you do? You need to draw up a deed of sale. Illustration: “This Contract of Sale of shares of stock entered into by and between JD Cruz, seller, the owner of 1 million shares covered by stock certificate number 123 and buyer J Santos, who is interested and is willing to pay 1 peso per 1 share in the amount of 100,000 shares.” Ibutang na dira. You put down in the stock certificate the coverage and the amount of shares taken. So when you go to the secretary of the corporation you bring the deed of sale and the old stock certificate and you surrender that and the secretary of the corporation will issue 2 certificates: 1 certificate covering 900,000 shares of the seller, and the other stock certificate covering 100,000 shares to the buyer. So it’s still 1 certificate that became 2. So there is now the transfer of shares in what is called certificated shares because the movement now for corporations listed in the stock market is towards uncertificated shares. Wala na’y stock certificates. Digital na imong proof of ownership. You

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno have digital evidence of ownership. Why is that resorted to? Because it brings down the cost of transactions.

certificate issued under their name. Capitol says we cannot issue because of Section 63, last paragraph.

January 12, 2018 (2nd half) (Ria Danielle Lumapas)

Unsa man wa mabay-ri? Wa sya kabayad ug country club dues, sa iyang gipangkaon. So he has unpaid claims. Now, the trouble is the lower court believed Capitol Golf and ruled against Chinabank. The appellate court also ruled against Chinabank. Finally the SC says the issue here is what is the meaning of unpaid claims? The Supreme Court said unpaid claims are calims arising from the subscription, not just any claim. Kanang gipangaon dili na mao. It must be claims connected with the subscription and then Capitol Golf was ordered to issue a new certificate. So what happened to the unpaid claims? That remains to be under the account of that gentleman who is no longer a member. So unpaid claim is connected with subscription.

Wa nay stock certificate, digital na ang imong proof of ownership, digital evidence of stock ownership. Why is that resorted to? It brings down the cost of transactions. Palit ka anang shares of stock, pabayron naman sad ka anang certificate so mudako imong gasto. Nya kung sulod gawas ka sa market sige kag bayad ana. Mudako imo gasto. Now of course you can tell your stockbroker, di nako mubayad. You are the trustee. You hold the shares of stock for and in my behalf. Daghan ng ig-ana, mu-save sila. But uncertificated, naa kay pin na ikaw lang nakabalo. Hongkong hapit na na sila ma uncertificated. Kuala Lumpur, last year I think completely uncertificated. Singapore, Japan, Wall Street. Muingon ka “I want my shares traded in the stock market. Any requirements?” One of the requirements, are you willing to spend for uncertification of shares? So that is an additional onetime expense. Diri sa atoa, what percentage is uncertificated? Wa pa. Papel pa ta. That’s why gamay kayo ang galihok. So kining terminologies na street certificate, that was asked in the bar exams a couple of years back. What is a street certificate? A street certificate is a certificate of stock endorsed at the back and delivered to the transferee which then the transferee subsequently delivers to another transferee to whom he sells the shares of stock without need of endorsement kay di pa man sya ang main stockholder. So a street certificate can be sold in the street just by mere delivery without endorsement. So the next question is, is a certificate of stock a negotiable instrument? Of course you know Sec. 1 of the Negotiable Instruments Law. Although it has some characteristics in that it can be negotiated in a similar manner as a negotiable instrument, it is not. When do I get my stock certificate? If it is a subscription, you get it from the corporation after you have fully paid. If it is a transaction between stockholders you don’t get it from the stockholder, you get it when you register the sale with the secretary of the corporation. Now, if it is listed in the stock market, your broker is your agent and he goes thru the clearing house until he reaches the stock and transfer agent. So the stock and transfer book is no longer held by the secretary. It is held by the stock and transfer agent who is considered the agent of the secretary. Technically speaking the one who has the rightful possession of the book is the secretary of the corporation. That will be one of your problems if you are the secretary of the corporation. You will not have time to do the recordings but it is considered your responsibility. So i-entrust na nimo ug accountant. Now, buang2x gani imong assistant naay mawala na certificate ana. (chika about gikawat na isa ka libro sa stocks sa isa ka mining corporation) . Now, section 63, the last paragraph says: Sec. 63. Certificate of stock and transfer of shares. – Xxxxx No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. That is the case of Chinabank vs Court of Appeals, 270 s 503, 1997. There’s this story. It’s actually not shares of stock; it is transferable membership in a non-stock, non- profit corporation. It was Capitol Golf and Country Club. Now, the owner of the transferrable membership that has been in his possession, nangutang sya for purposes of getting a loan. What was his collateral? Membership certificate in Capitol Golf. Wa sya kabayad. Default. Wa gihapon. So gi-auction. Walay nipalit. Default buyer was the bank of the certificate of membership. So the bank goes to Capitol Golf and demands a new membership Page 54 of 112

January 17, 2018 (Althea Astrid Gopo) *TSN of FR. GUS about the Rappler Issue* (This is from Ana Lapu, so let’s thank her guys) (Father talking about the possibility of this coming out during our Bar exam) If it’s already decided, then it will be dependent on the ruling. If the ruling is outrageous, it will be a decision which the SC would like to be forgotten, just like the decision on the futures contracts that are traded in the futures commodity. That’s in the dust bin of history, the “boo boo” on the part of the SC because this one is, it’s either Calida is uninformed, nobody giving him the correct information, because he is a criminal lawyer and this is corporation, because he is now looking for the criminal aspect of the case. And the same is true with Herbosa and the guys in SEC. It’s either they are severely misinformed or they have culpable ulterior motive. There’s a decision by the SEC that the registration should be cancelled. PD 902-A contains the list of cases that the SEC has its jurisdiction, one of them is cancellation of registration. There should be no cancelation of registration unless there is notice and hearing. That is questionable if they were given sufficient notice and hearing under the rules of SEC, because the SEC just went on the ruling en banc, normally it is first in division then it is raised en banc. That is one of the side issues. The 2 most important issues, (did give it to you?) is #1 IS RAPPLER MASS MEDIA. Because the constitution says, it is mass media that must be 100%Filipino owned. Now, Rappler as you know, you have to subscribe to Rappler in order to avail of their news. And their news, they not only report on the news but they use all other resources that are already available as the news uncovers, so much so that the traditional owners of news agencies just like Murdox, FOX news, AP or Reuters, they call this set-up of “news aggregators”, they are called “news aggregators, that they are abusing the resources that they needed because they report the news, and they already use whatever is news, whatever is said, whatever is reported of that particular event they are writing to do so. They aggregate, so tha is an issue. Now as to that, if you want to get the “dole out” of that, you can get it from Ronie, you can get the authoritative discussion of that in the Harvard Law review, “The rise of the news aggregators the legal implications and Responsibilities”. That is the prevailing article now about this whole thing about WON it is Mass Media. Because if it is MM, then FB is MM, or this other entities. There is now technical word that qualifies them, they are called SOCIAL MEDIA, they are not MM. Kay kanang MM, kanang way tumong ba. ”Shot gun” mag broadcast kag radio, oh, wala man ka kahibawo ug na bay naminaw o wa. It’s possible na walay naminaw nimo. Pero naa ka diha, that’swhy it’s called MASS. Now kaning imong computer. Naa man jud kay makit-ang hits. Kay muadto ka ug website, it’s a hit! So there is difference. Now is that covered by MM. Now if you will say that is the issue. If you are saying that it is covered, then you have to cover other things.By common sense. So that is one issue. That's a technical issue that is info tech issue that is also a legal issue. The issue for us who are taking up Corp Law is, is there foreign ownership because of PDRs? Phil Depository Receipts. I discussed that with you, but i used ADRs because that is what San Miguel and Meralco uses.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno This is what happened. It sells about 5% of its outstanding capital stocks to a depository. Phil Stock Depository that is a corporation. What is its job? One of its jobs is to precisely float PDRs. So these shares of stocks (over there) are in here. No change has occurred in the stock and transfer book, ha! Why, because you are delivering it to them not for the purpose of ownership. You are delivering it to them for purpose of assignment in order to create another security. The PDR. A PDR is actually a derivative, why because the underlying asset is another security. Now what is our definition of derivative? A security, the underlying asset of which is another security. Normally it’s a security, the underlying assets of which are physical assets, like shares of stocks. What are the underlying assets? The capital of the corp less its liabilities, then you have something solid. Now these PDR's are issued by the depository and are traded in NY or in the local stock exchange. Now, foreigners bought 5% of the total PDRs of the OCS. For every one PDR there is one share of stock of Rappler. That is their issue, that is why the price of one PDR tracks the price of one share of Rappler. The price of 1 ADR of PLDT tracks the price of one share of PLDT that is traded in NY stocks exchange. The trouble is there is another feature, foreign currency. It is traded there in dollars. The shares of stock, The underlying security is traded here in Pesos. Sometimes there can be a difference between the two. Wa ka mu react, ang price, according to the strengthening or the weakening of the peso. So you can make money out of the discrepancy that is called Arbitrage. Kung mupalit ka dollar didto, kay ang kinahanglan nimo pagpalit pag exchange ug dollar, gamay ra ang pesos, muginansya ka ug mupalit u shares of stock ADRs didto sa NY, in a space of a few hours. Kay sunod pag adjust ana, ibaligya man nimo dire sa Pilipinas, mas daghan pesos imong makuha. That is the "makemoney" of the Foreign Exchange. But here, the PDRs are traded here in the Philippines. What does one PDR entitle the holder thereof? 1. You are entitled to all the interest, all the dividends that equivalent share attach to that PDR. So imo tana dividendo, imo tanan interest, appreciation. 2. You are entitled to demand delivery of the security. So one PDR equals one security, one share of Rappler. You can say, deliver me that security. Why? In the bylaws of the PDR it says, if you do not qualify to hold Rappler's shares, what the depository will do, is it will sell the security and their dividends thereat, get the proceeds, and that is what is delivered. So that is how you replicate the PDR. Ingon ana ka ug mubaligya ka sa PDR. Muingon ka " I demand the security" ibaligya na niya ang security, to whom? To a Filipino who is qualified to hold it. Question: Do you own shares of stock because of the PDR? Wa pa! It is between you, you are the owner, and the depository! Can you attend the meetings? You cannot! Can you move? You cannot. Those are the critical aspects of ownership which is not monolithic but a bundle of rights. That is the ( ). Now this is not a phenomenon that just started with Rappler. PDRs, depository receipts, 1920 pa. That's the reason why there are depository receipts and they are traded as a security, because there are CDRs, Chinese Depository Receipts. There are JDR, Japanese Depository Receipts. Certain markets in EU are on the rise, they are willing to trade GDR Global Depository Receipts. What's the purpose of that? The purpose is, many foreigners do not want to be bothered with having to adjust to local markets and buy securities. So they would like a medium. And then ma (agihan na nila) makasabot na sila unsa ilang buhaton. So that is translated into depository receipts. It is a medium between locals and them. Now why would they want to invest there? They want to invest there because they want to be known as an international investor. If you have a pool of money that you are investing and you campaign for more to invest with you, you will say " We are very stable, we are diversified!" Mubagsak ang dollars, Naa mi Yen, Malaysian Ringgit, naa mi Peso, mubalanse gid dayon. That is the strength of an international investor. Page 55 of 112

Now ngano man sad ng mga corporation, why would they engage. Even if they can get money already as permanent investors locally, why would they go to that trouble? Because they also want to be known as an entity that is already worthy of an international attention. Why? Because the next time that you want to expand, you might want to borrow from a foreign bank, and you go to the foreign bank, and you tell the foreign bank "we are already in the radar of many international investors, so you can lend us, no problem with us, we are already established." So it is not just a question of circumventing local ownership laws. It has been long there. Pero kung karon ra ka nahigmata,unya muingon ka, violating na na sa ownership rules, mahimokang kataw-anan ana sa Europe mahimo kag kataw-anan sa America. So, if the decision here will be correct, it might be asked in your examination. If it is wrong, then try to forget it. *CLASS DISCUSSION PROPER* So we have finished the stocks and stockholders except for this last provision – SECTION 73: LOST OR DESTROYED CERTIFICATES. Cerrtificates of stock, if they are lost, you have to reconstitute them – just like a title to real property or an old decision of the Supreme Court. So you go through a legal process. And that process is IN REM because it is binding against the whole world. So that Certificate of Stock is issued to you, recognizing your ownership, shares of a property. That is binding against the whole world. So if you lose it, that is replaced by another procedure that establishes your ownership. And so it requires publication. Just like titles to real property, you better keep it in a safe place, under lock and key, because you do not want to go to Section 73. Now, there is a peculiar case: Philex Mining versus Reyes, where the Supreme Court says, it does not matter who lost it. If it has already been issued and it was lost by the stockholder who was named there, then it goes through Section 73. If it is the corporation who lost it, according to the claim of Reyes – because Reyes says, “I am entitled to stock dividend because I am already a stockholder of Philex.” He writes the office of the President of Philex. And they say, “as far as we know, we have already mailed your stock certificate covering your stock dividend.” And it did not reach Reyes. So he says, you issue me a new one. They said, “No, we cannot issue another one because we have already issued a Stock Certificate covering your dividend.” Finally, after many months, he demands from Philex. Because he says, “I did not lose it. It’s you who lost it. You mailed it and it did not reach me.” But then Philex says, “No. You have to go through 73.” That is why Reyes went to Court. The lower court sided with Reyes. Di man sya mao’y nakasala. Di man sya’y nakawala sa Stock Certificate. That is why Philex went to the Supreme Court to see who is correct. The Supreme Court says: Section 73 of the Corporation Code applies no matter who lost it, who is at fault. You have to go through it. It’s basically bureaucratic. Affidavit in triplicate describing how you lost the Stock Certificate; the stock certificate’s particulars: the number of shares, serial number, etc. And then you have to publish a Notice in the newspaper – 3 consecutive weeks, at the expense of the registered owner of the certificate. And then you wait for one (1) year. Now, if you cannot wait for 1 year, then you can file a surety bond with the treasurer of the corporation, the secretary of the corporation, to answer just in case somebody is damaged by the release of the new stock certificate in place of the old one.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno TITLE VIII - CORPORATE BOOKS AND RECORDS 3 Kinds of Books and Records 1. A record of all business transactions (1st paragraph of Sec 74); 2. minutes of the meetings of stockholders or members, or of the Board of Directors (2nd paragraph of Sec 74); 3. Stock and transfer book (third paragraph of Sec 74). Now, there are some corporations that are broadly owned – so many stockholders and so many transactions. And the transactions are _____. So the natural person who is the secretary of the corporation – even if he has assistants – they could not possibly cope with the work, and it requires a compliment of personnel to handle it. That is why the law allows the engagement of the services of a STOCK TRANSFER AGENT. STOCK TRANSFER AGENT. That is the case when the secretary of the corporation can then endorse the Stock and Transfer Book to the Stock Transfer Agent, who is engaged to maintain the stock transfer. STOCK TRANSFER BOOK contains all the transactions of the shares of stock, beginning with subscription, payment, chattel mortgage, pledge, disposition, sale, etc. It’s all recorded there. And the transfer of ownership. Also recorded there are the stock certificates that are issued. Although the stock certificate is a different book consecutively numbered with a stub so that you will know where the stock certificate went. Take note, the title of real property is different from a stock certificate in that the stock and transfer book does not contain an original of the certificate. The certificate of stock does not have an original unlike the Torrens title, you have an original with the Register of Deeds. What do you have as a land owner? You have an Owner’s Duplicate. Those are the correct terms: and Owner’s Duplicate. Except for the Register of Deeds or his/her staff, most landowners do not see the original of their land title. Gusto ka mupalit ug yuta, gusto ka masiguro bisag gihatagan ka na sa owner’s duplicate, ug wa ba na’y encumbrances. Kung muadto ka sa Register of Deeds, mangayo ka ug Certified True Copy. So they will go to his book, get the original, iyang i-xerox. Human niyag Xerox, stampahan niya: “Certified True Copy”. Kanang gipa-xerox, wala gani nay annotation, or ang annotation didto cancelled na, clean na. Nganong naka-hibalo man kang clean? Kay naa man kay copy sa original didto. Nakakita ka sa original? Wa gyud. Tagaan ka lang sa Certified True Copy. Certificate of Stock, ikaw ra ang nay stock certificate. There’s a record that it was issued to you. But there is not an owner’s duplicate; that is the original, kanang naa nimo. That is why you surrender that, and a new one is issued in favor of the transferee. Now, the Stock Transfer Agents is aware of so-called cut-off dates. If it is a big corporation – thousands of stockholders – they normally have a cut-off date before the annual meeting to be able to rationally determine how many shares are outstanding. Sirhan na gani nang libro – wa nay dugang, wa nay subtraction – and then they will count outstanding shares. How do you compute outstanding shares? Outstanding shares is issued shares net of Treasury shares. Kadtong mga gipamalit na shares sa corporation that are in the treasury, that is deducted from the issued shares because they are issued but they are no longer outstanding. Now, on the basis of that outstanding shares you determine what is the quorum. Cut off date, then you determine what is the minimum number of votes that is needed to elect one. And so these are the figures that the secretary must have upon the annual meeting of the stockholders.

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Beyond the cut-off point, the Stock Transfer Agent will no longer accept proxies. All proxies are already not allowed after the cutoff date. Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n) You can ask to inspect the books of the corporation. You must request it IN WRITING. Written request, and then the corporation shall allow you to inspect the books during business hours. EXCEPT that, if you have abused that privilege in the past, then the corporation may deny you from exercising that right. For instance, you steal in the shared secrets of the corporation by exercising the right of inspection. Now, you can have a copy of the financial statement also upon request and the corporation is obliged to grant you the copy of the last year’s Financial Statements, Balance Sheet, and Profit and Loss Statement that is already audited as of last year. And the last paragraph says, “if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation.” Need not be an external independent public company (?) if it is paid-up capital of less than P50,000.00. WHERE SHOULD THE STOCK AND TRANSFER BOOK BE? It should be kept, according to the provisions here, in the principal office of the Corporation. BUT if there is a Stock Transfer Agent, it should be with the Stock Transfer Agent because he is now the one in-charge of the stock transfer book. WHERE SHOULD THE MINUTES OF THE MEETINGS OF THE STOCKHOLDERS AND THE BOARD OF DIRECTORS? It should be with the Secretary of the corporation and the it should be in the Principal Office. Some years back, when stock options were the main incentive for the compensation of executives of a corporation, there used to be doctoring of the minutes. Now, very difficult to do that. Because the moment you declare, you must enter the cost of that particular option. But before there was doctoring. Why was doctoring necessary? Ilang isingit ba. When was the resolution passed to grant the CEO the options. Because the options are granted at a discount of the traded price. You are given, let’s say, 600,000 options; that means you can buy 600,000 shares of the company. Suppose, it’s trading at 200 dollars. You are given a 50% discount; so you can purchase it at 100 dollars. What is the par value? It would be 5 dollars. But since it has been operating for so many years, the value has gone up. Now, suppose, they want a lower strike price. They will look at the days when the stock price was down. They will trace it. “Ah nia diri oh, niabot ug 150.” So ma-lower pa ang imong strike price. Let us say by 25. Because they will give you a 50% discount. So you search the number of days, where the price by which it is traded in the market is low. That is when you say “there was a meeting of the Board of Directors and the options

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno were granted at 50% discount, so therefore, it will be at this price.” Wa guy meeting! Pero gisingit na nimo didto, to lower the strike price. Papirmahon na tanan BOD. Nganong mu-pirma man sila? Gusto man sila nga ang CEO mudawat aning posisyona… kay nagkagidlay naman ang corporation; kay kinahanglan mana siya. So they will sign. Now, there is no need anymore to doctor because the moment you grant options, you must cost it. You must reflect the cost. That is why the practice has shifted slowly from options to shares of stock – actual shares of stock – held in escrow to be granted upon the happening of the condition stated that merits the award. WHAT IS THE EQUIVALENT IN THE NON-STOCK, NONPROFIT CORPORATION OF THE STOCK AND TRANSFER BOOK? The equivalent is the MEMBERSHIP BOOK. Stock and transfer corporation has these three books; the nonstock corporation has also three books: 1. Book of business transactions; 2. Book of minutes of the trustees and members; and 3. Book of members – that is where the members are listed, not stockholders. DO YOU HAVE A MEMBERSHIP TRANSFER AGENT? No, there is none. Wala mana’y magbalhin-balhin. It’s not like a stock transfer book, where there are so many transactions. Alright, next time we will take up Merger and Consolidation. Try to look up in the internet: What is a reverse verdict? January 18, 2018 (April Liz Parreno) TITLE IX – MERGER AND CONSOLIDATION Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 
 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n) Merger means there are at least two corporations. These two are all constituents to the merger. When they merge, the one that survives is the surviving corporation and those that no longer have their corporate personality that is the constituent. If there is a survivor and a constituent corporation, it is called a MERGER. If all the constituent corporations die, and a new corporation emerges, it is called CONSOLIDATION. That is what the statute provides. However, Bank of Commerce vs RPN INC., April 21, 2014, points out that there may be a de facto merger. What is a DE FACTO MERGER? This is not a merger contemplated under the Corporation Code. A de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. The Page 57 of 112

acquiring corporation would end up to be the business enterprise of the target corporation. Whereas the target corporation would end up, would basically, its only remaining assets being the shares of stock of the acquiring corporation. Or if it is not paid a shares of stock, the money that was paid in order to acquire the assets of the corporation. Is there an example to that? Yes. Very clear example is Magnolia Ice cream of San Miguel Corporation. Sometime, 15 years ago, San Miguel under the new leadership, they decided to sell all the assets of Magnolia Ice cream. Who was the very eager and willing buyer? Nestle! Together with the purchase, Nestle had the temporary use of Magnolia brand for one year. They had an agreement of noncompetition for 5 years. Nestle had a privilege of taking over all the facilities of Magnolia Ice cream and San Miguel: all the preserves, their ice cream machinery, but not their brand. The brand is temporarily only for one year. After that, they changed into Nestle. That’s why their logo, murag pareha. Five years later, San Miguel revived its Ice cream business and put up Magnolia again. There was an ice cream company in Manila that had the rare product of selling ice cream made up of carabao milk. Patay naman ang founding parents, ang mga igsuon decided to sell. Some children who were deeply involved in the running of the business did not want to sell. Unsay nahitabo? What they did was just to sell their assets and the one who bought the assets is this Go-negosyo guy, Concepcion. And he made the Selecta ice cream. Goldilocks was also acquired but the constituents did not lose their corporate personality. Who was the buyer? SM! But since Goldilocks is a well established brand in the Philippines, they get it as separate corporation. Holding corporation is SM Investments, then you have Goldilocks. The original owners of Goldilocks, nagbahin na. ang uban gusto maka kwarta, ang uban not interested. Many of these who are not involved, magduda pa ba. Mangutana kung sakto ba ning bahin nako? Ngano ang mga igsoon nako na nagpadagan ana kay sigeg ilis ug sakyanan kada tuig. Ikaw naa na ka sa States, kuntahay nag practice ug Medicine. They charge it to the company, and the company amortizes their vehicles because they use it ostensibly for the company. And yet there is ostensible asset of a brand. Ilado man kaayo imong brand. Naa sad imong trabahante; you are also concerned that the buyer will have the same spirit as you have to continue promoting the business. You are bought or acquired by the acquiring company and many times if the acquiring company is already a leading company in the Philippine stock market, you don’t mind being paid in terms a shares of stock. For the acquiring company, that is not expensive because there is no out of the pocket stock, you just put out more shares. The issue is the valuation of the shares. If the acquiring company ratio in shares, both the acquired and acquiree have to be audited and audited very costly because there is a valuation that is not fixed. The shares used to buy is not fixed, it’s a moving, on-going enterprise. And the one that is purchased is also a moving, on-gong enterprise. The auditing that happens before the merger, consolidation or acquisition is already the most __ audit. The most common audit is audit for fraud. How is it committed? That is the most expensive kind of audit. the next to that is for merger and acquisition. Kanang mag annual audit, something ra na. (chika about accounting) Mergers and acquisition: How does it begin? Does it begin here in Section 76? No. The most crucial legal is before the plan or merger. Naa man gyud isa ka tao ana either ang mupapalit or mupalit ang mumerge. Diha man magsugod. Now and then, in sophisticated market, the one who begins the process of merging are investment bankers. Pati ng mga pharmaceuticals, mgbantay man na sila kanang mga investment bankers. Kinsay daghan kwarta, kinsay prospect.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno When it is still negotiating, this is where you have to be conscious of two legal concepts: 1) Non disclosure agreement or Secrecy agreement 2) Due diligence period

So you already appoint a president to vote for articles of merger; to vote for amendments to the articles of merger. Because even a single amendment in the articles of merger based on the plan of merger, that must be approved by the stockholders. Tawgon pa nimo ang mga stockholders mag meeting to amend one provision and then ugma na sad ug lain, wa na. di na mahimo; that’s why you need a proxy and get more than 2/3 aron diretso na.

What is NON-DISCLOSURE AGREEMENT? If the 2 corporations are involved in merger talks, actual parties who are involved must sign an agreement that there will be no disclosure. Whether or not the transaction is successful, there shall be no disclosure.

In the merger, I personally went through ONB and BDO. Wa may problema because they have ownership of 70% of outstanding capital stock so more than 2/3. 2/3 is 66.666.

Illustration: I examine na nimo siya, imo diay nang isulti na pungkol diay ni siya kay nahibal-an na nimo iyang weakness. Magsabot mo, waay sulti-anay kng unsa man imong nakit-an diha. Pag interviewhon na dayon sila sa press, unsay tubag ana? Sorry we cannot talk. Dili na sila muingon na naay nondisclosure, kay unsay pasabot ana? Nag merger na diay mo? So muingon ka, sorry we cannot speak. The problem is, if you are a member of stocks exchange. There is a rule in the stock exchange, the INSIDER TRADE RULE. If you know of a significant material fact that has a bearing on whether or not a stockholder should sell, buy or hold a shares of stock, then you are under obligation to disclose it to the stockholder. Now, normally those who are involved in Mergers & Consolidation would say there is nothing definite yet that is why we cannot disclose. When the time comes that we will disclose to you, that is when it is material. And by the time we will ask for a trading __. Suspend the trading of our shares because we will now disclose what is happening. (Father talks about Smart PLDT & Gokongwei) Gokongwei says we don’t need cash, we are willing to accept shares of stocks. How many seats are you willing to give? Si Pangilinan muingon, naa man kayay mga hapon diha? Naa may gobyerno diha, SSS, GSIS, mga investors. Muingon si Pangilinan we can only afford one seat. Okay, one seat is good enough. So what happens? Since theoretically the price of Sun is more than 1 seat, you will have to sell the extra shares because you cannot have more than 1 seat. Agree na ang board sa price, sa currency, what is the medium? What happens next? Mao na na ang due diligence and no disclosure. What is a DUE DILIGENCE AGREEMENT? A due diligence agreement is to agree that we will run the corporation that is part of this transaction as close as possible to the last audited financial statement that was presented to you; that we will not make a drastic change and we promise that with due diligence. Dili mi magsugod ug bag-o na investment ug maghatag ug bag-o na benefits or unsa ba diha na appreciably will result to failures. The basis is the latest financial statement from which your company will be evaluated. What is the difference between CERTIFIED BUSINESS VALUATOR and AN APPRAISER? Appraiser ka, tangible property ka kutob: yuta, building, factory. Mao na imong i-appraise. Valuator gani ka, tanan covered nimo. Patents, shares of stock, intangible properties, goodwill. Makahatag kag presyo ana, certified man ka. Once that is done, they have to have an agreement in principle. That is the plan of merger and consolidation, that is the first thing voted upon by the directors and by the stock holders, 2/3 votes and that includes voting and non voting stockholders. Apil na sila. So you have to send a letter of explanation. Ngano man ka magmerge? Lisod kaayo magbaligya ka kung di gani kasabot ang mga stockholders within 2 mins, wa na. Once you win the 2/3 votes, included in that vote normally are what we called omnibus proxy. In the voting, if you approve, you also approve an omnibus proxy for the successful completion of the merger or consolidation. Page 58 of 112

Kung minority ka, ang problema, wala kay apil sa merger. So ang mga dagko lang, ikaw bale wala ka. What happens to you? Di man ka kamaligya kay walay mupalit because there is no premium in your shares; no power results from your shares. So you are a minority, pagsugod gyud sa Obispo muapil siya sa ONB, I made sure that there is this agreement between the majority stockholder and the Roman Catholic of dieces of Kidapawan that we have the right of first refusal to sell our shares. If the majority of controlling shareowners are going to sell their shares, they cannot do so unless they bring along the minority shareholders. And whatever shares that results as dividends from the original composition, you register that with the secretary of corporation and it is annotated in books and certificates of shares of the majority owner and the certificate of stock of the minority owners. For your benefit, I am telling you that. If you want control of the company, why would you spend money more than what is necessary? All you need is 50 + 1 of the shares of stock of that company and you already control that company. Ngano paliton pa man nimo ang minority? Pagpalit nimo, apil naman na sila. Minority man na sila, dili man na sila maka pirde nimo. The first that is treated in the Corporation Code is the plan of merger. Agreement na na in principle. It is voted upon by the board. It requires majority vote of ALL the members of the Board. Not majority of quorum, but majority of ALL. And then 2/3 vote of a stockholders in a meeting duly called for that purpose. The third voting is on the articles of merger and consolidation. The new name, or the surviving name, and then the shares of stock. What is now the new par value of these merged shares? And then subsequently, if there is an amendment, why would there be an amendment? For example, all of a sudden, Duterte will say this is now a monopoly, this must be examined and reviewed by a committee. All mergers and consolidation would have to be approved by the Competition Board. Technically that is one of the condition for the merger. If the Competition Board does not approve, you file a notice with the Competition Board and you tell them that they are merging in one month. If they have no objection, at the end of one month then go ahead. If there is objection, there will be hearings. That is how a competition board works. Sometimes muingon na sila sa press na they opposed, wa pa gani sila kapadala ug letter sa ilang gi oppose. If you already agreed and there is a legal barrier, what will happen? Dili na matuloy ang merger. The Competition Board should decide that this unduly restricts competition and freedom in the particular industry, you cannot proceed with the merger. No vote of the stockholders or the board can override the legal impediment. Wala pa may implementing rules. Sa states, dili gani approve duha ka oil companies, unsay need? The commission will say sell all your gas stations, para 20% na lang ka sa industry once you do that then you can go ahead and merge. Wala pa man na dinhi. Unsaon man nato ni? How much do we have to shed off or can you remedy it by shedding off businesses in the Philippines? That is another topic.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno na nabilin sa wala ba nabayran. Unya, muingon tung mupalit na corporation na we have to lower the price because what we are actually getting is not what is written in the articles of incorporation. Pagamyan natu gamay. Muingon sila tagai mi ug 1 month, gukdon namu ni amuang subscriber ug stockholders, di pa diay ni nabayran.

January 19, 2018 (1st half) (Zarah Domingo) Effects of Merger or Consolidation Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n) 1.

The constituent corporations shall become a single corporation. Merger: surviving corporation designated in the plan of merger; Consolidation: consolidated corporation designated in the plan of consolidation. 2.

The separate existence of the constituent corporation shall cease except that of the surviving or consolidated corporation. The many shall become one, and the rest disappear.

3.

The surviving or consolidated corporation shall possess all the rights, privileges, immunities, powers, and shall be subject to the duties and liabilities of a corporation organized under this Code.

4.

a.) b.) c.) d.)

(here begins the complexity) The surviving or the consolidated corporation shall thereupon and thereafter, possess: All the rights, privileges, immunities and franchises of each of the constituent corporations; All property, real or personal, and All receivables due on whatever account, including subscription to shares and other choses in action; All and every other interest of, or belonging to, or due to each constituent corporation shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed.

Now, suppose there are subscribers of shares of stock of the constituent corporation that are not yet fully paid, what happens to it? If not resolved by the corporation itself before the actual date of the incorporation, it is supposed to be transferred to the surviving or consolidated corporation without any need for any deed, or act. It becomes automatically transferred. But you can be sure that it will be considered in the articles of merger or consolidation itself. Naa ka gilista dira na subscribed capital, pero out of the subscribed capital diay, 20% ra dira ang gibayran. So daku kaayo Page 59 of 112

That is what I say that sometimes it is settled before the actual effectivity of the actual merger or consolidation because otherwise, it is transferred withut any need for any act or deed. Ingun man sila pagtransfer na natu sa pikas, if they were paid in shares, then you will get your shares of the new corporation if you will come across the balance of your subscription. Otherwise, how can you get the consideration for your shares when you have not yet fully paid for your shares. That’s how it will be put to subscribers who are not fully paid, by the new surviving or consolidated corporation. So bayad muna, so you cannot fix the price, so it can be settled before effectivity, so you can pay your new shares. Or, pay the balance so you can pay its consideration. Otherwise, you still have something owing to the corporation that is a party to the ___. If a constituent corporation has ongoing contracts. Let us say, one of the constituent corporation has a lease contract, it is leasing its property to a third party, what happens to that lease agreement? The lessor is a constituent corporation, the lessee is a third party. The lessor, without any amendment to the contract of lease, substitutes the constituent corporation. It takes over. Now, the third party will say “I entered into a transaction with this corporation, how come you’re here now?” What will the surviving or consolidated corporation show the third party when the third party is not privy to the merger or consolidation? Muingon ang third party, did this corporation execute a deed of assignment to you? (And the surviving or consolidated corporation will say) wala ra ba. The corporation code says “without need of any act or deed.” So when you go to the third party, unsa man imung dad-un? Ang articles of merger or consolidation kay naa man dinha sulat sa Section 80 Effect of Merger Paragraph 4. So that is what you say to a third party who is not privy to the merger or the consolidation. Real or personal property becomes vested in the surviving. All the vehicles of the constituent corporation when they disappear out of their existence, what will happen to them, registration in the LTO? Ang imuhang dad-un sa LTO, ipaannotate sa registration didtu kay ang articles of merger and consolidation. Show them that. How about real property? It is entitled under the name of Corporation A. Corporation A has disappeared because it has been gobbled up by Corporation B. Corporation A gives you all the titles but it is all in the name of Corporation A. Can you go to the Register of Deeds and tell ROD to issue us a new title because we are now the owners by virtue of this merger. The ROD cannot issue a new title. Why? Because he is not called ROD for nothing. He needs a deed. Way deed, way do!!! Asa man ang deed ninyo, deed of sale, deed of donation, deed of exchange kay ako tung tagaan dayun ug lain title! Pero ang nakabutang (sa corporation code) kay “without need of any act or deed” man. Away mo sa ROD? Magdala na pud ka sa articles of incorporation, imo na pud ingnun ROD na magbayad mi for annotating (petition to annotate the title). So all those titles of land owned by Corporation A, will now have annotated therein the articles of incorporation of merger. And it will there be stated in the articles that the constituent corporation that used to be the titular owner of this property has disappeared because there is a new continuation of the merged or consolidated corporation. Pabilin ang titulo. Annotatan. From then on, it’s already as good as owned by the merged corporation or the consolidated corporation. Ang daku gasto, kanang mga karatula. Pagmerge sa ONB ug BDO, defacto merger gali tu. Ang tag-iya BDO naman. ONB man gihapon kay nagsurvey sila, wala man nailhan ang BDO sa kalasangan. ONB man ang nailhan. So we will return

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno and retain the name of ONB. Unya ang tag-iya kay BDO naman. And the Bangko Sentral requires that the BDO new owner must be in the signage “ONB: A Rural Bank of BDO. Kana lang pagbutang ug BDO, usbon nimu tanan sign, tang-tangun nimu, lastik man na, naay siga-siga sa sulod. Mau na ang dako ug gasto… Pero pag-deed, annotation lang man na. If you are the retaining counsel, maligpitan man jud ka sa tanan titulo. Hain man ning mga titulo sa mga yuta nga naa sa mga financial statements? You get the schedule of real properties then immediately you take physical possession of the titles. I-sort out na sa imuhang mga assistants jung asa na dapit kay each of city, each province has its own Register of Deeds…where the properties are located. It is not only the property where the branches are located but the properties that are already foreclosed, consolidated na ang ownership ana sa bangko. Kana tanan, annotatan na nimu because the ownership is vested in the merged or consolidated corporation. Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following effects: xxxxx 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. Now, we go to the famous case of BPI Davao vs BPI Employees Association. BPI vs BPI Employees Union, G.R. 164301, October 19, 2011 (resolution of the case in the Motion for Reconsideration) Pertinent Facts: BPI bought Far East Bank and Trust Company. The problem is Far East Bank (the target corporation) is an unorganized establishment. BPI (the acquiring corporation) is organized. Pag-merge, niana ang organized na “kamu na unorganized, kailangan mu muapil sa organized. We are invoking our union security clause.” Dili gani mu, we will invoke the union security clause and we will ask the employer, BPI, to dismiss you because membership in the union is a condition for continued employment. Issue: Are these people (referring to employees of Far East Bank) obliged to become members of the union of the surviving corporation? Ruling: The basic argument is: at stake here is their Union Security Clause because if they refuse to join the union, they will be terminated. (An argument here is) the Union Security Clause here cannot be superior to the Security of Tenure so they cannot be forced to become members of the Union. This was quoted by the majority.

Now, let’s quote another datum. Suppose mas daghan ang tao sa targeted corporation, they have more workers than the acquiring corporation. The organized disappeared in existence because the surviving corporation is the buyer. Pasagdan sila nisulod diri, it’s unorganized, should this (the unorganized) be unionized? Supreme Court says, they should file a petition for certification election and you will have a certification election and whatever wins is what prevails. But the bargaining unit here is unorganized and it will stay that way until there is the process of making it organized. So, take note ha, it is not a question of number of employees, it is a question of bargaining units. If the surviving corporation is organized, then all the constituents will be organized. But if it is not organized, even if the constituent corporations that disappeared are organized, they cannot be considered as unionized when they move to the new surviving or consolidated corporation. It is a question of bargaining units. How about franchises? What happens to the franchises of constituent corporations? There are franchises that are readily transferrable and are controllable but there are those franchises which might not be that easily transferrable. It might be revoked. For instance: transportation. If you have a franchise of a public utility in one route, and the acquiring corporation has also a franchise over the same route and this corporation buys in one public utility operating in that route. The franchise most likely of the acquired corporation will be cancelled and LTFRB will bid it out to third parties so there will be competition. Makaingun ka binuang, tanawa ng Bachelor Express, ilaha man na tanan pero nganu wala nila patya ang corporation—they went only to what is called a de facto mergers. They never merged in such a way that the acquired corporation, the constituent corporation will die. They keep it going. They buy the shares. (i.e. Rural Transit, Ceres, Land Car—all these are now owned by Bachelor Express—so they still have a semblance of competition—it is just competition by name). That is one kind of public utility. But, as to other public utilities (i.e. telecom), they did not fully merge, they only went to a de facto merger. Some remain a separate corporation (i.e. PLDT, SMART) but it all has the same controlling interest. What is crucial there is the allocation of frequencies. (Fr talks about frequencies of telecom companies… Duterte might reapportion all these different frequencies. Can do Duterte say “I will get back all these, re-bid it, and all of you will be bidding. The third one that has come in is Smart, Sun and Globe, we re-bid the entire spectrum. Dugay kayo na mahimu, they will file cases–cause of action is impairment of contracts. Can the next administration reappropriate those frequencies? (No) You are impairing the obligations of contracts. What is superior to the non-impairment clause? Police Power. Is this an exercise of police power or is this pushing business interests? (Father talks about the 3G becoming outdated and the rise of 4G). These different properties that are consolidated in ownership with the surviving or consolidated corporations, are problems in themselves and can keep busy any resident counsel of the new surviving corporation or consolidated corporation. Ang uban, mau na ang solution, de facto merger. That is Bank of Commerce vs RPN (April 21, 2014).

This was subject to a Motion for Reconsideration and it took more than a year. Senior Justice Carpio was the one who wrote this decision. He said: What happened is there are 2 bargaining units—1 unorganized, the other organized. The survivor is organized. Nawala naman tung bargaining unit kay nawala na tung corporation. So their employees should be members of the union because now they are in the bargaining unit that is organized. So, balihun nimu. Let’s say what was organized is Far East Bank, unorganized is BPI. Kung ang BPI pa nipalit nila, nibalhin didtua ang workers, wala na unta silay union kay ang bargaining union man kaha ang deperensya. Balihun nimu, there is no obligation to become members of the Union. Page 60 of 112

The one who gave that name ‘de facto merger,’ the Supreme Court merely took that from Dean Villanueva of Ateneo de Manila Law School. He has written a book on Corporation Law.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno January 19 (2nd half) (Lizette Kaye Estillore) RA10067 A National Competition Policy Prohibiting Anti-Competitive Agreements, Abuse Of Dominant Position And AntiCompetitive Mergers And Acquisitions, Establishing The Philippine Competition Commission And Appropriating Funds Therefor Section 17. Compulsory Notification. – Parties to the merger or acquisition agreement referred to in the preceding section wherein the value of the transaction exceeds one billion pesos (P1,000,000,000.00) are prohibited from consummating their agreement until thirty (30) days after providing notification to the Commission in the form and containing the information specified in the regulations issued by the Commission: Provided, That the Commission shall promulgate other criteria, such as increased market share in the relevant market in excess of minimum thresholds, that may be applied specifically to a sector, or across some or all sectors, in determining whether parties to a merger or acquisition shall notify the Commission under this Chapter. An agreement consummated in violation of this requirement to notify the Commission shall be considered void and subject the parties to an administrative fine of one percent (1%) to five percent (5%) of the value of the transaction. Should the Commission deem it necessary, it may request further information that are reasonably necessary and directly relevant to the prohibition under Section 20 hereof from the parties to the agreement before the expiration of the thirty (30)-day period referred. The issuance of such a request has the effect of extending the period within which the agreement may not be consummated for an additional sixty (60) days, beginning on the day after the request for information is received by the parties: Provided, That, in no case shall the total period for review by the Commission of the subject agreement exceed ninety (90) days from initial notification by the parties. When the above periods have expired and no decision has been promulgated for whatever reason, the merger or acquisition shall be deemed approved and the parties may proceed to implement or consummate it. All notices, documents and information provided to or emanating from the Commission under this section shall be subject to confidentiality rule under Section 34 of this Act except when the release of information contained therein is with the consent of the notifying entity or is mandatorily required to be disclosed by law or by a valid order of a court of competent jurisdiction, or of a government or regulatory agency, including an exchange. In the case of the merger or acquisition of banks, banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, a favorable or no-objection ruling by the Commission shall not be construed as dispensing of the requirement for a favorable recommendation by the appropriate government agency under Section 79 of the Corporation Code of the Philippines. A favorable recommendation by a governmental agency with a competition mandate shall give rise to a disputable presumption that the proposed merger or acquisition is not violative of this Act. There is now a requirement of compulsory notification for mergers and acquisition. Kung di ka gusto maapil sa competition law, you will downgrade your valuation aron di ka masulod anang P1 billion. If you want to be good to the public, you want your valuation to be as high as possible. One way of raising the value – suppose the target corporation has an existing debt, and you assume that debt when you merge with that corporation. I-dugang man na nimo sa value. Imbis na pag exchange ninyo sa shares of stock it’s only P22B, but because there is a P9B debt, ibutang na na nimo ug P31 or P32 B worth sa merger. Kay kuyaw man paminawon. The public is always in awe with large numbers and size. But for the Anti-Competition Commission, kung mahimo pa, ayaw paabta P1 M para di ka maapil sa restrictions of the law. Page 61 of 112

What are the grounds by which the Anti-Competition Commission can go against a merger or consolidation? It says in RA 10667, if a merger or acquisition agreement is to be anti-competitive, in which case he is either: 1. Prohibit the implementation of the agreement; 2. Prohibit the implementation of the agreement unless and until it is modified by changes specified by the Commission. 3. Prohibit the implementation of the agreement unless and until the pertinent party or parties enter into legally enforceable agreements specified by the Commission. The Commission is empowered to suggest binding restructuring agreement in order to safeguard healthy competition and unrestraint trade in that particular industry. Section 21, RA10067. Exemptions from Prohibited. Mergers and Acquisitions. – Merger or acquisition agreement prohibited under Section 20 of this Chapter may, nonetheless, be exempt from prohibition by the Commission when the parties establish either of the following: a.

The concentration has brought about or is likely to bring about gains in efficiencies that are greater than the effects of any limitation on competition that result or likely to result from the merger or acquisition agreement; or

b.

A party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the agreement represents the least anti-competitive arrangement among the known alternative uses for the failing entity’s assets:

Provided, That an entity shall not be prohibited from continuing to own and hold the stock or other share capital or assets of another corporation which it acquired prior to the approval of this Act or acquiring or maintaining its market share in a relevant market through such means without violating the provisions of this Act: Provided, further, That the acquisition of the stock or other share capital of one or more corporations solely for investment and not used for voting or exercising control and not to otherwise bring about, or attempt to bring about the prevention, restriction, or lessening of competition in the relevant market shall not be prohibited. “(b) A party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the agreement represents the least anti-competitive arrangement among the known alternative uses for the failing entity’s assets” Sa ato pa, in order to save the corporation, ipa-merge na nimo kay mahapay man na sila even if the result is a monopoly or *** Monopoly is really a bad word. But there are certain industries, even internationally, that is by force of circumstances really monopolized. Take a look at the makers of airplanes for passengers. There are only two in the world. It’s Boeing and Airbus. Airbus is a consortium, British and European, and all of Europe participates in making the parts of Airbus. Boeing is just U.S., and yet it is Airbus which is about to put out a white flag. It was about to declare bankruptcy. Until the Middle-Eastern countries that have so much invested in shares of stocks in Airbus, decided to save Airbus. It is the Arabs who saved Airbus. How? They ordered planes. Now, it is off the endangered list. What is the mistake of Airbus? Airbus is really bound to die. It just postponed its death. Pag-order sa Qatar, trying to save its own self because they have shares of stock in Airbus, the moment they are out of that, wala na sila’y suporta. Ang ilang consenses sa Airbus – “You make us as big as possible a plane so that you can divide fuel costs to as many as the passenger seats.” What Boeing did, it says – “The size of the plane has reached its limit,” which is the terminal in the airport. Kaning other countries magbuhat na sad diay sila ug new terminal? Wa na’y mupalit nimo. Mas dako ug gasto. So they concentrated on smaller planes that can fly longer distances with fewer passengers.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Karon, niubos man ang presyo sa aviation fuel, eh di dagma ang Boeing. Unya, daghan pud ka madala na passengers pero naa ma’y limit ana. Ang daghan madala, kanang lowhold. Unya mas daghan man sad mulupad dinha, eh di kompitensiya na sad. So that is what brought Airbus down. Unya in the whole world, isa nalang gabuhat eroplano, Boeing nalang! China is already building their own. That is why China has at least 50 patent cases in aviation. Pangawaton nalang gyud na nila! Naa’y spareparts buhaton didto sa China, pagsugod buhat sa factory dinhi, simultaneous. Dili kaayo layo, naa na’y laing factory gabuhat. Theft by instalment! Hinay-hinay na nila ug buhat. Unya, di na nimo mahunong! Muingon ka there is a violation of intellectual property. Unsaon man pagpahunong nga ang head nganha member man sa Police Bureau. (Father talks about manufacturing in China of motorboats) If you become a lawyer, you may find yourself on the side of the regulator, on the side of merger and acquisition, or on the side of those acquired. Sometimes, an industry cannot stand competition. It is a luxury because it is so expensive. Now, there is a very big issue in U.S. on the internet. That is the internet neutrality. It seems that Trump is throwing overboard the so-called internet neutrality. Now, he is throwing the regulation so that.. Kung mubayad ka ug mahal, mahimo ka nga tagaan ug paspas na internet connection. Before, pareho lang tanan. You can make searches without any forced advertisement. Now, it is possible with Trump. For more money, you can have a better internet. For less money, you will be at the bottom of the internet. Trump is really for the big corporations because they want to further *** because they say service now is for the poor. TITLE X – APPRAISAL RIGHT Sec. 81. Instances of appraisal right.Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2.

In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and

3.

In case of merger or consolidation.

Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. How do you exercise the right? Follow Section 82. Sec. 82. How right is exercised. – The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and

APPRAISAL RIGHT. The right of any stockholder of the corporation to dissent to a fundamental action of the corporation and demand payment of the fair value of the shares.

Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.

But there are only specific grounds that give you the right to be bought up, UNLESS it is a closed corporation where you can ask to be bought up for any reason. But for a *** corporation, you must proved that it is one of the reasons that are cited in Article 81.

(1) (2) (3)

In shortening the term, there is NO appraisal right. Extending it, then THERE IS APPRAISAL because shortening the corporation term, we will later find out, is dissolving a corporation. When you dissolved, you are paid your shares. So, there is no appraisal right in shortening the corporate term. “(2) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code” “(3) In case of merger or consolidation.” “(4) Section 42 – Investment in another corporation or another business. ” Page 62 of 112

VOTE AGAINST IT. Dapat pildi ka. Kung makadaog gani ka, wala kay appraisal right. YOU LOSE. INVOKE APPRAISAL RIGHT within 30 days after the date on which the vote was taken for payment of the fair value of his shares. You surrender your stock certificate.

Sec. 83. Effect of demand and termination of right. From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n)

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno The moment you surrender, all your rights cease as a stockholder. You cannot vote, attend meetings – the only right to be left with you is to be paid the fair value of your shares Sec. 85. Who bears costs of appraisal. – The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n) In case of conflict as to the value of the shares, it will be decided by a panel which consists of three disinterest person one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. In the end, usa ra gihapon mupili. This three people will not be serving out of the goodness of their hearts. Kinsa man mubayad ana? The law says that in the end if the price agreed upon the by the panel is closer to the proposed price of the management, then it will be the stockholder who will pay. If the considered price by the panel is closer to the price invoked by the stockholder, then it will be the corporation that shall pay.

cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. Those listed in Section 88 can be listed as non-stock. If your purpose/purposes in the articles of incorporation is other than any of these or any combination of these, then you cannot be nonstock non-profit corporation. Non-stock corporations can be formed or organized for: (1) Charitable (2) Religious (3) Educational (4) Professional (5) Cultural (6) Fraternal (7) Literary (8) Scientific (9) Social (10) Civic service (11) Other similar purposes What is the ESSENCE OF NON-STOCK? That the corporation cannot distribute to its members or officers surplus profits or accumulated surplus of the corporation. The said shall be thrown back to the corporation to be distributed.

Once the corporation has decided by a vote of approval by the stockholder of this fundamental action, can the corporation change its mind and say – “We will not go ahead with creating new shares of stock that has superior right over those that are presently owners of share, or we will not extend anymore the corporate term, or we will not anymore invest with another corporation.” YES. The moment the corporation changes its mind, then all the bets are off. They return your surrendered stock certificates and your rights are resumed. Your appraisal right are in no longer in effect. That is one instance where the appraisal right is nullified because the corporation refrains from taking the fundamental action which it decided before. Sec. 86. Notation on certificates; rights of transferee. – Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. Is there appraisal right if you stocks are traded in the stock market? As a matter of practicality, there is none. The value that is sold in the stock market reflects the proper valuation of the shares because it is the market which decides the value. At anytime gusto ka mu-disown, dagan ka sa market kay wala ka makaangay sa corporation, then your shares are readily ***. TITLE XI - NON-STOCK NON-PROFIT CORPORATION Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. Sec. 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, Page 63 of 112

The essence of non-stock, non-profit, is cannot make profits. It can. PROFIT is the excess of revenues over expenses. Whenever you have excess, you have profits. It is a mark of a good enterprise because you can survive. Otherwise, you will die. “For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution” Why subject on dissolution? Because a non-stock non-profit corporation can provide for the way it will distribute its excess profits. If you do not have a plan, it will be the government which will decide what to do with your excess profit and it will normally award it to a non-stock non-profit similar to the corporation. “any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.” So plow back! “The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title.” So, suppletory application of all other provisions of the Corporation Code when it comes to Non-stock Non-profit corporations. January 25, 2018 (Paul Jordan Berguia) *According to Chairperson Herbosa what makes the PDRs of Rappler fatal is the provision that says rappler cannot change its structure, activities, and management without first discussing in good faith with the holders of the PDR.* So we are finished with Appraisal Right. We are also done with some provisions of Non-stock corporations. Unlike a stock corporation, in case of distribution, non-stock corporations can provide in its articles of incorporation a so-called PLAN OF DISTRIBUTION. Remember what is prohibited in the dissolution in a nonstock non-profit corporation? That none of the members, nor the directors or trustees can receive any of the assets because if they do receive that would be an indirect circumvention of the distribution of profits. This is so because these corporations, in essence, are not allowed to distribute surplus accumulated profits unlike a stock corporation wherein you can distribute from unrestricted retained earnings,

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno dividends. So if these non-stock non-profit corporations makes a profit, what would they do with the profits? They are plowed back to the operations of the non-stock non-profit corporation. So at the time of dissolution, if you allow distribution to members that would be tantamount to circumvention. Now, however, a plan of distribution of asset is allowed in section 95. Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. (n) A plan providing for the distribution of assets, not inconsistent with the provisions of this Title – so as long as the plan does not say that the distribution is made for the members, officers and trustees that can be allowed.

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) 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 two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. There is therefore a limit as to the no. of shareholders. The articles can limit it but it can not make it beyond 20. It can only provide of maximum 20 stockholders. Nothing more. Can it be corporations also that holds shares? Yes, provided that the corporation holding such shares is also a close corporation.

*father reads 2nd paragraph – so it can be incorporated in the articles or it can be made through a resolution. Because if there is no such plan, it can be the state or the government that will decide. It can say that the assets shall be given to the same corporation having the same or similar purpose. Like for example, educational. Mangita sila ug non-stock non-profit corporation unya tagaan nila. (chika about Jefferson Library (?), then why naabot sa Ateneo ang mga libro and wala sa laing school kay kato lage daw dili daw sila corporation with the same purpose ug ang Holy Cross dili daw University, shubi. Then naabot na siyag Israel, Jews, USA. Naabot na pud siyang Trump lol. Then karon kay DMSF donated buildings, scholarship funds. Ug ang mga LAGOM sa DMSF kay doble daw ang tuition, huhu ouch. Caste System, Brahmins. Hala uy taas taas pud ang cheka diri nga side) Non-stock non-profit corporation, remember you can have a plan of distribution. Have it approved and then my suggestion is make an amendment of your articles of incorporation not just a resolution, gather majority votes of the members – that is good as an amendment. Submit it so that it can be incorporated in the articles of incorporation. Remember, articles of incorporation- stock and non-stock, kung gusto ka madugay ug approve inig apply nimo- pag buhat ug imong kaugalingon, abtan kag 9 ka buwan di gihapon na ma approve. Ipadala man na sa Manila. Then it has to be reviewed in Manila. Pero palit sa ilang ready made form, 500 pesos kada copy, usa r aka copy palita unya pagpa Xerox nimo, dili na dawaton didto, A4 man nang papel nila. Fill in the blanks, approve dayon na nila and then dira dayon nimo na i-amend. TITLE XII – CLOSE CORPORATIONS This title is entirely new – up to Section 105. What is the purpose of this? They are trying to make a hybrid corporation that has a feature of a partnership and that of a corporation. The best of both worlds and so they come up with this. What makes a Close corporation? What are the essentials? That is answered by Section 96

Sec. 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. What is another feature of a close corporation? The corporation shall have restrictions as to the right of transfer. It can not be sold openly, it can not be sold to anybody. It has a restriction. Later on we will find out that these restrictions shall mean that these transfers can not be more onerous than giving the corporation and or any of the existing stockholders the right of first refusal. Sec. 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves.

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors.

January 26, 2018 (Jennifer Marie Lim)

5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

What is the objectionable part of the closed corporation? There are two objectionable parts. 1st: SECTION 104 ON DEADLOCKS.

There could be restrictions between specific shares of stock as to other shareholders because the corporation code says that the agreement between stockholders shall be valid even after the incorporation of a close corporation. Magsabot mo nga iincorporate na, your side agreements remain effective even after incorporation. So if there are agreements limiting transferability among parties, then that continues. So, the 3 features of a close corporation are not more than 20 owners, limitation as to transfer and third, that the corporation shall not list in any stock market. Ibutang nato nga 20 mo kabuok stockholders, one of them dies without a will, 7 iyang anak apil asawa, leaving these shares of stock. What will happen? It passes to his legal heirs by operation of law. What is the limit of shareholders? 8 (anak ug asawa replacing him) + 19, 27 na? That cannot be. What will happen? It is my submission, wala pa ni nigawas sa BAR ning pangutanaha, that the corporation should give ample opportunity to the heirs to either: 1. Constitute themselves into a close corporation - in which case they will be qualified to incorporate. Then they apply all the features of a close corp. 2.

the articles and stock certificate then it can be conclusively presumed that the transferee has prior knowledge as to the restrictions of the transferability of shares. The restriction is already there, sala na nimo na ngano wa nimo na gibasa. The law will leave you where you are. Ignorance of the law excuses no one.

Reduce their ownership into one – how will they do that? Ang isa nga kwartahan siya na lang mupalit in behalf sa tanan.

That is my suggestion in a way that gives effect to corporation code- close corporation, and provisions of succession under civil code. There are certain industries that cannot admit of close corporations; they are the same industries that cannot admit of no par value shares corporation - mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest. They cannot organize a close corporations. So, you can structure your close corporation such that it does not have any board of directors. The law allows that. In which case all the stockholders shall have all the liabilities of a BOD. If there is no BOD, then there are also no board meetings, there are only stockholder’s meeting. These stockholders are all considered as managing partners - they are liable as such and liable as a member of the board. Sec. 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Restriction as to transfer must be in the articles, by laws and stock certificate- so as to bind innocent transferee. If it is both in Page 65 of 112

Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. When there is a deadlock in a closed corporation, the Securities and Exchange Commision has the power to arbitrate against you. Towards the middle paragraph, it says “In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order:” 1. Canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; Imagine that if the corporation amends the articles, what does it have to do? Majority of the board of directors – absolute majority. 2/3 of the stockholders’ votes. Voting lang pirmi. Kini(sa closed corporation)? Commission can amend or alter any provision in the agreement. 2.

Canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; It can countermand any decision of the stockholders or the board. 3.

Directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno other persons party to the action; Cease and desist order 4.

Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders;

5. Appointing a provisional director; Can you imagine that? The commission appoints a provisional director.

It says “..any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation….” So, the stockholder on his own can even compel the dissolution of the corporation, whenever any of the acts of the directors for these grounds: 1. Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, 2.

6.

Dissolving the corporation; or the commission can dissolve the corporation; or

7.

Granting such other relief as the circumstances may warrant

So, the Commission is a complete outsider and all of a sudden it has all these almighty powers. It can countermand the board, it can countermand the stockholders, it can amend the articles, it can order the *dissolution*, it can appoint a provisional director. That is a big problem, because big brother is behind your shoulder and if there is any deadlock, big brother comes in and you have no power anymore.

Whenever corporate assets are being misapplied or wasted

So these are the grounds for demanding the dissolution. But to demand you be paid the value of your shares of stock, right of appraisal. What is the ground? Any reason that’s what 105 says, “for any reason, compel the said corporation to purchase his shares at their fair value”. Those are the two difficulties of a closed- corporation. In a closed corporation, there is somebody there who is discontented; he can exploit 104 deadlocks to 105 dissolution. That makes a closed corporation unstable. If it is unstable, it is not a reliable platform for building up a business enterprise. Mag lisod ka ana. TITLE XII - SPECIAL CORPORATIONS

2nd: SECTION 105 ON WITHDRAWAL OF STOCKHOLDERS OR DISSOLUTION OF CORPORATION. The second objectionable part of a corporation is section 105. This is the problem in ordinary corporations; the withdrawal of stockholders is through the exercise of the right of appraisal and on grounds found in the articles – creating a term, creating shares of stock, rights over existing stock holders, investment in another corporation, entering into another business, etc. There are grounds. Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. Sec 105 says, “In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value…” In marriage law, this is called divorce. Of all countries which instituted divorce law, they became very strict. In the end, they came up with no-fault divorce. Muingon gani ang usa nga dili na ko gusto, divorce na. Unsa may hinungdan? Bad breath, snoring or what. Las Vegas is a famous place because for purposes of divorce, in Las Vegas if you stay for 24 hours, you are considered a resident of Las Vegas. That is why you can have drive-in divorce. That is why there are those who say hold or fight divorce law in the Philippines. Once it comes, the next step is the no-fault divorce. Way problema na unta kung kaya nimo because you have a job, pero if you have no means, I’m talking about the economic aspect, on the feminine gender. If you go beyond the city, the traditional act is that the wife is the one who stays at home and take care of the children. She does have the means of income. If you are a judge, the husband will support unsaon man pag gukod ana. Mag lisod man gani madakpan ang wanted. Tell me if I’m wrong if you are going to practice family law. Page 66 of 112

There are two special corporations – Educational corporation and Religious corporation- sole or aggregate religious society. 1st: EDUCATIONAL CORPORATION Sec. 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code. (n) This provision forgets that there is a specific provision in the Constitution on educational institutions that are non-stock nonprofit which have constitutional tax exemptions. Can you remember? They do not pay RPT. They do not pay income tax. They are also free from tariff and special assessments. Educational institutions that are non-stock non-profit, the first law you have to look at when dealing with educational institutions is with the Constitution. What article? These are the institutions that must be 100% Filipino. Educational, unya 100% Filipino. Do you mean that a foreigner cannot educate you? What does the Constitution say? ARTICLE 14 SECTION 4. xxxx (2) Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines. No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one-third of the enrollment in any school. The provisions of this subsection shall not apply to schools established for foreign diplomatic personnel and their dependents and, unless otherwise provided by law, for other foreign temporary residents. (3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. GENERAL RULE : EDUCATIONAL INSTITUTION MUST BE 100% FILIPINO. Both the ownership and administration. EXCEPTION: IF IT IS A MISSIONARY SCHOOL. Out in the boondocks or the valleys. The Commander of the 66th Infantry Battalion that covers Davao Oriental and the 67th that covers Compostela Valley, they made a report that the NPA’s average educational attainment of recruit militants is GRADE 3. Mao na dali kaayo sila matunto sa mga seminar. “Kamo pubri mo, ngano pubri man mo tungod kay naa mga dato nagpahimulos ka ninyo, magpabilin mo diha sa ka way hinungdan.” Tatlo ka bulan ra ka swelduhan dayun dalhons layo. Ngano grade 3 raman? Layo man kayos skwelahan. Unsa man recommendation of the military? Put up schools. That is one exception, if you are a missionary school, you can be Non-Filipino. Didto kas layo put up kag skwelahan. The other exception is if you put up a school for diplomatic deterrents or members of the Foreign Service. They can put up their own schools. Like the English foreign school in Makati or the American school in Fort Bonifacio. That is foreign and its purpose is to qualify you for schools abroad. They also have foreign and Filipino teachers. Wa ko kasabot ana. Open it up. Education. Tan awa na si Father Mcnamara. Puti man na siya, na-Dean man na siya diha. Why? naturalized Filipino citizen. PhD in Astrophysics from the University of Colorado, not a soft PhD like education. Suwayi muPhD astrophysics maka-libang kang tingga. (Long chika about Mathematics) January 26, 2018 (2nd half) (Janice Molina) Educational Corporation Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a) Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a) What do you have to remember with respect to education Institution, you can be non-stock or you can be stock and profit. Of course the Articles must be endorsed by the appropriate educational oversight agency government. You are opening up an educational institution that is elementary and high school then it is the Department of Education. If you are opening a college institution then you will need the endorsement of the CHED but if you open a pre-school, you'll require no endorsement either in the (?) or the CHED. If you open a trade school, you will require the endorsement of TESDA. The peculiar requisite for Educational Corporation is that their Page 67 of 112

Board must be multiples of 5, so you can only have 3 in number; you can have 5, 10, and 15. And then every year 1/5 of the term of the director expires. That is the requisite. You are a director of an educational institution non-stock non-profit, for 3 years. It’s not like the director under section 23, where you have a 1 year term. There is always a holdover of 5 or 1/5 of the directors. For institutions organized as Stock Corporation the number and term of directors shall be governed by the provisions of Stock Corporation. Educational institutions must be lucrative business propositions. Why? Because many business interest groups are xxx to education. What is this education? National University. If you are going into educational, if you are stock and profit then you will be governed just like any ordinary corporation, you do not have tax exemption privileges. In Philippines, mostly higher education is in private hands. The minority in higher education is government and the problem is we are very weak in STEM (Science, technology, Engineering and Mathematics). There is not one single university that can run PhD’s instead. It has to be a consortium in Manila. We do not have enough. The people we send abroad have a tendency not to come back or if they comeback they get employed in industry, they did not stay in education. I guess they are not compensated enough. So mao nay problema. There are many problems and most of them are taxation problems because of this particular provision. The income and properties of this educational institution, nonstock and profit provided it is used directly, exclusively for educational purposes shall be exempt from tax. What is directly and exclusively used? That is the problem of taxation. Many times, you study that and there are so many cases. Naa pay dormitoryo nagbayad ang mga studyante diha, Is that income that is free of tax or not? This university has properties that have tenants, is that free of tax or deducted from the xxx. The Supreme Court wasn't given a chance to rule on issues like that because the technicality of applying for tax exemption every year which was imposed by Henares. xxx Regional Trial court was dismissed on appeal for being moot and academic. Why? Henares just recalled their circular xxx do not have to apply for tax exemption certification from the BIR every year. It is in the constitution that you are tax exempt if you are Non-stock Corporation. Wa sya kahibawo sa constitution, that is why she was xxx for issuing a circular that is ultra vires, beyond her powers. So on appeal, it was not raised to the SC anymore because it was moot and academic. That is a question of transcendental importance, the SC should rule upon it. Bisan pag moot and academic na, the issue is of transcendental importance. That is education. You should put a special body to oversee these educational institutions that are for profit. In the US, the only institutions that are for profit are review centers. Universities can only be organized in the US if you are non-profit. They have the biggest endowment funds. It has a special significance. Why of all kinds of corporation, why is educational institution has special treatment? xxx in the constitution and in corporation code. Religious Corporation 1. 2.

Corporation Sole under 109; and Religious society. Religious society is covered by the same provisions as other non-stock non-profit corporation.

Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. (n) Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a)

the bishop dies, the successor will just submit his appointment to the SEC and he takes the place of the former incorporated sole. The SEC supplied the particular appointment together with the translations and the translator’s affidavit and then he takes over.

Corporation Sole The origin of corporation sole is the Napoleonic Code which became the origin of codigo civil of Spain and then it was picked up and copied common law practice in the UK and transferred to the US. So corporation sole is a contradiction in terms, when you say corporation it necessarily involves more than one natural person and yet when you look at corporation sole you are incorporating the holder of office. The office of bishop, rabbi and elder only it has to be religious.

Now, section 113 deals especially with the acquisition of property: Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a)

Now, what does the Articles of Incorporation of a corporation sole consist of when the ordinary articles says, “we the undersigned incorporators have this day constituted ourselves to be a corporation under the name of XYZ Corporation, witnessed and then you put down the terms. What is the AOI in corporation sole? Wa may "we","i" lang man na. It's an affidavit actually executed by the bishop, rabbi, minister, priest because that is what section 111 says. Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole; 2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n) So you executed an affidavit and then you attached the manner, the reason why you are the bishop. You are the bishop because you are appointed by the Holy See. The problem is the appointment a paper of the bishop is in Latin. So you have it translated because the SEC even as learned as they are cannot read Latin. You also attached the affidavit of the translator, to the effect that he has done the translation faithfully and accurately to the best of his knowledge. Here is one thing you should remember about religious corporation specially corporation sole. Take a look at 111. It does not mention the term of the corporation. There is no term. There is a circular in the old SEC which says that religious corporation are considered perpetual person. So even if it is a religious society and it has a term and the religious society corporation forgets to extend the term, the corporation is deemed not thereby dissolve because Religious Corporation are considered perpetual. They found out about that because some of the corporation sole were listed as already defunct because they did not renew their term, they allow it to expire and then the SEC in Manila that religious corporations are presumed to be perpetual and do not have to renew the term. As proof of that they point out section 111 of the corporation code does not mention any term of the corporation sole. Unsa man mahitabo ani? The corporation sole still continues if Page 68 of 112

The corporation sole is supposed to be the administrator of the temporalities of the religious corporation, it's the administrator because the property is said to be owned by the corporation collectively. That is why the citizenship majority of the members of congregations determine the citizenship of the corporation sole and not the bishop. That is the ruling of Roman Catholic Administrator of Davao vs. ROD of Davao City. So therefore the law says, section 113 that if he should dispose real property and personal property for its church, it must go to court and obtain the clearance and permission to dispose because he is just an administrator. What does he do with the court? He must prove that the disposition or acquisition is for the benefit of the corporation. Then it says, provided that in cases where the rules, regulations and discipline of the religious denominations sector, church, religious society or other concerned represented by such corporation sole regulate the method of acquiring, holding, selling, mortgaging real property and personal property such rule, regulation and discipline shall control and the intervention of the court shall not be necessary. So under canon law, the bishop has full authority to dispose of the property. He needs to inform the bishop of Rome, the pope, but he has the authority to dispose. So therefore, he does not have to go to regular court. To tell you there are many internal legal counsel of xxx,manghuwam ug kwarta ang obispo ky ngano man mutukod syag building, so mortgage sya property sa simbahan. Is mortgaging act of administration or act of disposition? Disposition. Mao bitaw nang manginahanglan kag special power of attorney. Muingon mana na ang internal legal counsel, we need a court order because that is what the corporation code says. Sa ato pa wa pa gyud diay kay experience, daghan mana, wa pa gyud diay ka ka experience ug mortgage sa simbahan. Kay wa manay kinahanglan muadto sa court because according to the rules of the religious society or religious denomination the elder has the authority. So that is what is followed not 113 of the corporation code. Now if the corporation sole dissolves, that is covered by section 115. It does so by submitting to the SEC a verified declaration of dissolution and that declaration should contain the following: 1. The name of the corporation 2. The reason for dissolution and winding up 3. The authorization of the dissolution of the corporation by the particular religious denomination or church 4. The names and addresses of the persons who are to supervise the winding up of the affair of the corporation;

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Upon approval of such declaration of dissolution by the SEC the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. But you can do this by not following section 115. I can tell you that from experience. I dissolve the Mary xxx Fathers and Brothers of the Philippines, Inc. by not following section 115. What did I do? I followed section 22. Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) Non-user of Corporate charter for 2 years or continuous inoperation for 5 years shall be a ground for revocation of corporate franchise. File a notice that you cannot continue operation because we are reduced in number, the minimum number of which is required under the corporation code. What is the minimum? At least 5 members of the BOD. Religious society, 5 members. They elect themselves as members of the BOD because there are already 5 and their average age is 79. Wa na, delikado naman na sila bisag they want to replace wa na. wa nay mapili because to be a member you must be a member of the religious community. So continuous inoperation after 5 years you will be put in the list of the defunct corporation. After 3 more years you will have pro forma notice and hearing. wa man mutunga. dissolve! wa kay gasto. Musud gani ka aning 115, imo nang e-file, musiga mata sa BIR, sugoon dayon na nila task force, utingkayon mga libro ngano man mo tingali you are escaping tax? So mangita kag labad sa ulo sud ka aning 115. Religious Society If you are religious society you cannot dissolve except the board vote’s majority and the two thirds of the members vote to approve the dissolution. Then you have publication then you submit the schedule of your creditors and then you submit the plan for liquidating your assets. TITLE XIV - DISSOLUTION So now we are in Dissolution, title XIV. SC has said dissolution has only one proceeding but it has 2 phases. What is the first phase? The dissolution proper. Who handles that? SEC. Is there substantial compliance with the procedure for arriving at the dissolution? They can examine the book of the BOD or trustees. Absolute majority. Is there a two thirds vote of the stockholders, voting and non-voting, or of the member of the corporation in case of non-stock non-profit. Where was the meeting held? Was there proper notification? Qualified notice is needed. After that is verified, the SEC is convinced that all the legal requirement under the corporation code is xxx then the SEC will petition the court. The court can ask jurisdiction over the principal office of the corporation, will petition the court to assist the SEC on the liquidation phase. That is where the corporation will submit its list of creditors. That is where the corporation will published the fact of its dissolution and give the time frame 60 days for all those that are not listed as creditors to appear before the court and prove your credits otherwise you will be forever barred. Now question, why can't the SEC handle it? Because the sec is not the forum of general jurisdiction, the sec is just the specialized forum. The court can handle all the contracts that are nominate or innominate under the civil code. So go to the court to prove your claim. Now dissolution can be voluntary or involuntary. Voluntary pertains it is the corporation itself that brings the petition or one of the stockholders. Close corporation diay, pabuang buang stockholder mao nay mungadto mag file ug dissolution. Page 69 of 112

Dissolution by creditor, by stockholder, by anyone other than the corporation, voluntary without creditors or with creditors. Naa may voluntary dissolution petition without creditor. Sa ato pa pa they have paid all the creditors. Is publication still required? Yes, even if without creditors. Sel-serving mana kung ikaw mu petition nga wakoy creditor, that is not proof, that is mere allegation and dissolution is binding against the whole world. The only way you can summon the world is by publication. Pahibaw on nimo kadaghanan. So there is still publication even if you have no creditors. The judge will examine the evidence of the creditors. Once the judge is satisfied, he will account a receiver in liquidation. Sya na ang bahala, bayran xa sa corporation and he distributes the proceeds according to the credit. That is the last three years of the corporation to liquidate, wind up. Naa pa bay BOD ana? Wana because you are no longer operating as an ongoing concern, you are already on your way to legal death. So you just need a receiver. Now, can you still retrieve assets during the 3 years? Can you still file cases against your debtors to recover assets that belong to the corporation? Yes. Who will file the asset? The receiver, he will file it because he is now the assignee. The court will approve the assignment of the asset to the receiver, so that the receiver can dispose of it. Assignment in bankruptcy, it has to be in the name of the receiver. January 31, 2018 (Marry Suan) Remember the SC says that dissolution is one procedure. Although one, it has phases. There is the phase up to dissolution. Then dissolution is always followed by liquidation. Now, all the way up to dissolution, it is the SEC. Is it not the intracorporate court? No, it is the SEC. After the SEC, then it is the courts, intracorporate courts. Now, can it happen that dissolution begins in xxx? It can happen if the dissolution is based on a fatal defect of the corporation. In which case, it is through the so-called quo warranto proceeding that is initiated by the Solicitor General. When that happens, the Sol-Gen brings the suit to the court. That is a specific special proceeding: quo warranto. Special proceedings always begin with a verified petition. That is because it is based on a defect, a defect that is fatal. It’s not just an ordinary defect. Likewise, the SEC can also bring this dissolution proceeding because that is divided in P.D. 902-A. If there is a culpable violation of the Corporation Code and it is a serious violation, then the SEC can bring the proceeding of dissolution. There is a general principle. There can be no dissolution unless there is notice and hearing. And the SC has ruled that not any hearing can xxx into dissolution. There must be a notice that this is a serious violation that could result in dissolution. Not just an ordinary notice or ordinary hearing. That is one of the issues in the Rappler case because they were just called on a possible breach of the rule on ownership. And they were heard not en banc. They were heard in division and all of a sudden, here comes the ruling. So the issue is: did they have due process? The SEC said that to be a corporation is a privilege; it is not a right. There is substantial compliance because you were given your day in court for purposes of this defect – to verify as to whether or not this defect had caused us to lose our right to exist as a corporation. That is the issue. You could lose your franchise to be media but you can still exist as a corporation because a dissolution proceeding means you lose your right to exist as a corporation. You are juridically dead. Is there a proceeding: whether or not a natural person should die? Yes, there is. If it is heinous crimes. That is why, in proceedings of a natural person, once the lower court makes a penalty of death, what happens? There is mandatory appeal. Di man ka muingon ana, patya na lang ko. The court will not allow that. you have to go up and it will be the court en banc who will review. Di na pwede na mag-division lang. That enjoys the highest protection: no person shall be deprived of life, liberty, property. That is mandatory. So it seems that the Constitution sees to it that nobody is meted with finality of execution by

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno accident. (chika about death penalty and the life of a person) When you come to dissolution and it is legal death for a juridical person, then it demands publication. Di man na automatic ka lang. One of the effects in Section 22 – failure to commence the transaction of its business or the construction of its works within two (2) years from the date of incorporation, or so-called continuous inoperation for a period of five (5) years. You have already begun your business. You have already constructed your works and all of a sudden, you stop. No more business. So the board no longer meets and no more reports to the SEC. If you do that for five years, look at the language of the law. Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. – If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. The same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. Is that automatic? That cannot be automatic. In Chung Ka Bio vs. IAC, 163 SCRA 534, it is not automatic but only a ground. This is prosecuted under Section 6(i) of P.D. 902-A. This case is a SEC proceeding and yet it leads to dissolution. Now, the moment there is an order of dissolution that is issued, after of the lapse of the period to file a motion for reconsideration under the rules of the SEC, then the SEC will petition the court to now handle the liquidation. Then it endorses everything to the intracorporate court. Then the court will appoint a receiver in liquidation. [Father said ‘receiver in dissolution’ but in previous TSNs and commentaries, it is ‘receiver in liquidation.’] What does the receiver in liquidation do? He will sell the assets because after the order, the properties that do not belong to the corporation but are entrusted to the corporation for its use according to its specific purpose, they must be returned to their owners. That normally happens if it is a non-stock non-profit corporation. Many times they receive donations on the condition that it may be used only for the purpose of the corporation. So you have to return. Is it possible that a non-stock non-profit corporation is donated property and then the property is to be used exclusively for that purpose? And it is returned because it is no longer used for that purpose? That is possible. That is what happened to the property where the People’s Park is now. That property used to belong to Monteverde. And according to the donation, it’s to be for educational purpose. What happened? Before it was the athletic facilities of the school. (chika about the property) So dissolution can start from SEC, from the Solicitor General and from a private citizen. The private citizen can bring a suit through the Sol-Gen on a permissive quo warranto. The Sol-Gen can bring a case directly if public interest is affected, like this Rappler. The Sol-Gen says it affects public interest. Now if you are a private citizen and you allege a fatal defect in the constitution, you can ask the Sol-Gen to bring the suit by way of permissive quo warranto. Remember there are two kinds of quo warranto – mandatory and permissive. But then when you do that, you have to put up a security [bond] for the Sol-Gen to answer for any damages that the respondent might allege and prove, that your suit was not meritorious. So the Sol-Gen has to have that security so he can bring the suit without fear that he cannot answer for counterclaims that the respondent might prove. Page 70 of 112

Can you bring a dissolution through the so-called Financial Rehabilitation and Insolvency Act of 2010 (FRIA)? This is when dissolution and insolvency are two different animals. Dissolution is not insolvency. Insolvency is entirely different. That brings us to the question, because there is a provision in FRIA which says that once the liquidation of the debtor(?) has been completed, then the court may be asked to also cancel his registration of incorporation in the SEC. One of these days, there will be a case brought up. That that is not the proper court to handle dissolution because there is a provision in FRIA which says that the dissolution may be asked after the liquidation by the debtor has been completed. Unsa pa may buhaton na wa na man syay property tanan? Gihatag na sa iyang mga creditors. Wala nay nahibilin. And then you can ask the court for dissolution. Mura bag incidental. It’s just one more speck. Tantangan na ka sa imong corporate personality. One of these days, the validity of that provision will be questioned because there are many corporations that undergo dissolution and either way, to go get back to business even after they have declared insolvent. So the law declares that there is three (3) years from and after the time that you are declared dissolved that you wind up the operations of the corporation. Section 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. So the winding up, which is three years after there is a declaration of dissolution, that is already in the hands of the courts, not with the SEC. Because it is no longer for the purpose of continuing the business for which is was established, there is no more board of trustees if non-stock non-profit, no more board of directors if it is stock and profit. So who is there? It is the receiver in liquidation. That is appointed by the court. And he runs the liquidation. He/she engages the services of legal counsel to retrieve properties of the corporation because once it is retrieved, it is sold. The proceeds are first applied to the creditors according to the concurrence and preference of credits. So sya nay mangita ug mga xxx, file sa kaso aron mabawi tong mga properties. Syay mu-organize sa public auctions. Naay property ang corporation, he/she engages the services of an auctioneer and the auction of the property. Then the proceeds will be divided according to the plan approved by the court because by then, the court already declares who are the creditors to be paid, who are stockholders who are junior claimants to the creditor. So the court merely oversees that it’s really the xxx is the receiver in liquidation. Sya na ang mangusog ana. Because the judge has no time.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Now, what happens if the three years are over and a case began by a receiver in liquidation continues? It has already been adjudged in the lower court; the petitioner wins, namely the corporation; then it is appealed to the CA; the case is continued hantud nahurot na ang three years unya niretire na ang receiver. Finally, after five years, daog. What are they going to do with the judgment? If the lawyer is still there and the lawyer move for execution and gets back the property. Finally when the property is gotten back, it is in the name of, supposed to be the receiver, because there is no more corporation. The lawyer of the corporation presents the final order of the court, that the corporation has been dissolved. Kinsa mang ngalan tong property? That is where the SC says that the de facto trustee is the lawyer and he has the obligation to hold the property for the benefit of its rightful beneficiaries. Kung naa kay dinha creditors na wala pa mabayri, kana sila ang tagaan sa proceeds. Kung nasatisfy na ang tanan creditors, it should go to the next in line. Who are the succeeding beneficiaries? The shareholders, is it not? And then the lawyer should xxx because he is the trustee. The court who handled it is still there. So paghuman nimo ug kuan ana, ihatag na sa shareholder. And then you make a return to the court. Unsa man ng return? Report na. Imo nang ihatag sa court. This is in accordance with your court order. Kasagaran ana, patay na ng judge na originally nagpreside ana. Hain man ang records? Ang uban ana, gisunog na. Di na makit-an ang records. Kita ba mo anang court? (chika about court) You have to refresh the mind of the court. There is no more receiver in liquidation. There are no more stockholders presented. Maybe the original stockholders are already dead and their estates have already been settled. Dili na dakog problema kung dako na nga proceeds. Kay naa man kay ikagastos. Ang problema ana, kung igo-igo ra ng proceeds. But if the proceeds are considerable, then it is worth the trouble. TITLE XV - FOREIGN CORPORATIONS

court. Remember, you are an artificial person. Therefore, you must have a place where you can be served(?). What is the effect if you do not have a license and you conduct business? You can be sued but you cannot sue. When can a corporation, who does business without a license, sue in the courts? If someone conducts business with you, he cannot later on claim that you, a foreign corporation, cannot demand from him by way of court action on the basis that you do not have a license because he is estopped. But as to third parties, he cannot sue. Now the big problem here is “doing business”. You have to go through some cases where you get a good understanding about “doing business”. One transaction, is that doing business? Some cases, the SC says it’s not doing business. Other instances, the SC says it is doing business. So you have to make a differentiation. Importation, exporting, is that a business? Muingon ang SC, he was just importing, so there was no business. He was just exporting, therefore there was no business. You are in California and you exported goods here in the Philippines. And then, there is another corporation which receives it and distributes it. Are you doing business? No, you are just exporting. Wa ka may agent ba. You are importing. You have a consignee here. But then that’s it. Somebody else takes over. Is that doing business? SC says no, it’s not doing business. Xxx. A lease contract is doing business. It is preparatory to succeeding transactions. Nag-invest ka. Palit ka ug shares sa Rappler. Are you engaged in doing business? We will continue. February 1, 2018 (Jennifer Lim)

Are there foreign corporations composed of 100% Filipinos stockholders? Yes, there can be because what makes a corporation foreign? It is the laws under which it is incorporated. That is the Corporation Code of a foreign corporation. Foreign corporation in the Corporation Code is contrasted with a domestic corporation, not a Filipino corporation.

Take a look at the provisions on how we register foreign corporations; you will see that it is much more cumbersome that is practical and less expensive to organize than the domestic corporation.

Section 123. Definition and rights of foreign corporations. – For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. Domestic corporation is a corporation incorporated under the laws of the Philippines. Foreign corporation, under the Corporation Code, is a corporation incorporated under laws other than the Corporation Code.

Section 125 is a kilometric provision. It is longer than section 6. It speaks of the application of a license to be a foreign corporation. Sec. 125. Application for a license. - A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation;

So it can happen na puros mo mga Pilipino, nag-incorporate mo sa California. Ngano nag-incorporate man mo? Kay gusto mo magnegosyo dinhi sa Pilipinas. What brought you together? Classmate man mo unya nag-retire namo. Dugay mo nagtrabaho sa America. Dual inyong citizenship pero nag-incorporate man mo sa California. Unsa ba gyud ning inyong negosyo, nganong naa man mo sa California? Kay tua man ang source sa inyong negosyo. Mag export mo niini sa Pilipinas ug mga itlog para sa fighting cock. Unya pag abot dinhi, anhi ninyo ipapusa ang itlog unya ipamaligya nana sa mga training farms. (chika about training farms, and eggs of fighting cocks being a regulated item and not a prohibited item) Does that require 100% Filipino? Must it be a Filipino corporation? are you dealing there with natural resources?

3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporation;

Now what is the rule if you are incorporated outside the Philippines? To do business here, you must have a license. What is the purpose for having a license? That purpose is so that you are within the court processes. So you can be reached by the Page 71 of 112

7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares,

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno shares without par value, and series, if any;

this Code or other special laws.

8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any;

Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. (n)

9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law. (68a) It provides for the date and term, the application to be filed under oath. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation; 3. The name and address of its resident agent authorized to accept summons;

After you have set up a bond which can be in cash or in acceptable securities like government bonds, treasury bills or shares of stock traded in the stock market. After filing the initial bond worth 100 thousand, within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. Gross income is your sales and revenues. The moment you exceed it exceeds 5 million, your initial 100thousand bond is not enough. You have to put an additional bond of at least 2 % of the excess.

4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines 6. The names and addresses of the present directors and officers of the corporation.. etc. You have to file your certificate of incorporation and by-law then, you have to put up a bond. How much is the bond? Initially 100 thousand pesos under Section 26 2nd Paragraph. Sec. 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with Page 72 of 112

Now, it says that if the value of your bond decreases in market value, you have to put an additional bond. Let us say your bond is the original bond is a stock certificate of PLDT and you put it up as 3 thousand pesos. Now, the share of stock of PLDT is not even 1500 or 1600. So the opposal value is by 50%. You have to add additional security. So, very cumbersome. That is why legally, it is a benefit business to have a warehouse corporation. That is the bread and butter of the big law firms like Sycip Salazar, Corpuz Masanta. They have this wareouse corporation. EXAMPLE: Coca-cola na planta. It supplies Coca-cola bottling here in the Philippines, the syrup for Coke. And you pay for that plus royalties. You can choose to operate here as a foreign corporation or make your own corporation. If you are operating here as a foreign corporation, it will be Cocacola Atlanta Incorporated in Delaware. Your business here is the

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno sale of Coca-cola syrup. Unsa man nang syrup? Kita ka anang sa Tibungco nang mga van nga blue mao na. la-i-non man na pag padala diri aron mix na lang. kanang Coca-cola Bottling lain man na na kumpanya, mao nay mudistribute man. Is CC Atlanta registered here as a foreign corporation? NO. nag buhat na silag sariling corporation kanang Cocacola Philippines Export Import Corporation. Pangita-a na sa SEC 500. SEC annually issues the top 500 corporation. Now they added the next 500 so it is the top 1000. Naa dinha ang Coca-cola Import Export Corporation. Dako man kaayo na but it is just a shoebox in Sycip Salazar Gaitmaitan Law Office. All those people in the bottling company traded and they remit it to Coca-cola. It’s called import export. They import it and sell it to Coca-cola bottling. It is an import export company set up here as a Philippine corporation because it is so cumbersome to have a foreign licensed corporation. Then you have to appoint a resident agent and finance na sad na nimo and you have to execute an undertaking that says that if the resident agent is somehow incapacitated, it has to prove its capacity as a resident agent. Then your default resident agent is the Securities and Exchange Commission. Sec. 127. Who may be a resident agent. - A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. (n) Who may be a resident agent? Resident agent service of process. What is the concept of a resident agent? Since you are not domiciled here as a resident corporation, it is the resident agent which will receive the processes of the law. If you are given a notice, it is given to the resident agent corporation. If you are sent summons by the court, it is the resident agent that is the entity which you will serve summons. Service to the resident agent is service to the foreign corporation. If you make amendments in a contract, you have to inform the SEC of the equivalent amendment. If there is a merger or consolidation that happens abroad, you have to again inform the SEC about the particular process and the result of the merger or consolidation. So it is very cumbersome. That is why it is easier to put up a Philippine corporation or a domestic corporation if you are a foreign corporation. You get lawyers and pay them; they will do the work for you. The capital can be owned 100% foreign corp. why? They do not need that. It’s just a shoebox in the office of the employer. Of course, you have to pay the lawyer and that is the steady income of the law firm. There is also a process of recognition and revocation of a license. Its grounds are found in Sec. 134. Sec. 134. Revocation of license. - 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: 1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;

report, affidavit or other document submitted by such corporation pursuant to this Title; 6. 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; 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 8. 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 9. Any other ground as would render it unfit to transact business in the Philippines. (n) There are nine grounds and the 9th ground is the most comprehensive which says “Any other ground as would render it unfit to transact business in the Philippines” Any other ground. This is all-embracing. If you are unfit, kinsa man muingon na unfit ka? Now if you withdraw, there is also a process. You have to secure a certificate of withdrawal from the SEC. Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met; 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines. You must show proof of the following: 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation This is not used to much because it is much simpler to form. Nevertheless, there are several decided cases. They normally focus on a foreign corporation’s ability or capacity to sue and be sued. There are also foreign corporations which are not registered and they sue in the Philippines. It is claimed that they are doing business but they deny the decision of the Supreme Court.

3. 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; Imagine that if you fail to report something your license can be revoked as a foreign corporation under Philippine Laws. 4. 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; 5. A misrepresentation of any material matter in any application, Page 73 of 112

The whole issue hinges on WHAT IS DOING BUSINESS? What is the definition of doing business? The decided case for this is Agilant Technologies Singapore Ltd vs. Integrated Technologies Philippines. 427 SCRA 593. As to the question, what is doing business? The SC in MR Holding vs. Bajar 180 SCRA 617 said “The Corporation Code of the Philippines, is silent as to what constitutes doing or transacting business in the Philippines. Fortunately, jurisprudence has supplied the deficiency and has held that the term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno object for which the corporation was organized.”

concept of continuity.”

This has led the SC in later cases say that the dual test. There are two tests to determine what doing business is.

There is a new decision in this shoal in Palawan called the Malampaya. Oil exploration when it happens, it is always a consortium of oil companies. No oil company can conduct an oil exploration by itself. Its very expensive ug matumba na sakit kaayo. It always daghan sila. Although there are many, it is always one who will take the lead and it is always the one who normally the biggest one na magdala. The question is, are those in investment are they doing business? If you are not involved in the operations, if you are not a service contract or technical agreement, if you have no certificate as a board of director, you are not doing business because you are not involved in the business.

1. 2.

Substance test Continuity test

What is the substance test? SC says “The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another.” Naga export ka diris Philipines pero nay mudawat na distributor. Nag appoint kag distributor. Is that doing business in the Philippines? Unless it is proven that the distributor is fully under the control of the exporter abroad, it is not doing business in the Philippines. The distributor might be distributing other products and it might be a separate and distinct corporation of its own. It might be already conducting its own business and not that of the exporter. The mere fact of exporting is not doing business. What is the continuity test? This implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object for which the corporation was organized. Continuity test means that there are several acts which are continuous to the purpose and goal of the foreign corporation. Continuity and if not for that one act then it is not doing business. That was the basis of the SC when it said that when the foreign corporation has entered into a lease contract for an office, not the office for which the distributor has used, but its own office. The foreign corporation itself signed the contract that it is going to be their office. That is intent to start a business. Continuity of works. It might be a single transaction that is doing business. Again, the SC said Corporation Code of the Philippines, is silent as to what constitutes doing or transacting business in the Philippines. Fortunately, jurisprudence has supplied the deficiency. That was an old ruling of the SC. There is already a law passed. RA 7042 otherwise known as the Foreign Investment Act of 1991. There is a definition there for doing business. What is it? (copied from the MR Holding case earlier cited) d) The phrase doing business shall include soliciting orders, service contracts, opening offices, whether called liaison offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eight(y) (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization; This answers the question you are a foreign company and you communicate with a broker in Makati and you say buy me Meralco and you buy Mercalco upto 4% of the outstanding shares of Meralco with voting shares. Foreigner ang muanhi kay muexercise sa vote. 4% of the total shares of Meralco is already 1 billion pesos. Are you doing business? Do not confuse the term stain(?) economics to the term foreign investment. You buy from the stock market that is foreign investment that is not direct foreign investment. Direct foreign investment is you put up a factory. If you put up assets that does not define doing business. Whether or not you are a direct investor or you are just a stock market investor if you do not have a say in the operations management who have made an investment you are not doing business. That is the definition in RA 7042 “e term doing business in the same tenor as those above-quoted, and as may be observed, one common denominator among them all is the Page 74 of 112

But what about a clause in the investment contract which says you stand ready to provide whatever technical assistance as maybe called upon for you to exercise all management assistance or help should be needed by the consortium. The interpretation of the SEC now is that is doing business so therefore, you must apply foreign investment. That is a new decision. Sa basketball pa, wa pa ka mushoot andam na ka pero bench pa ka andam na ka muduwa. Is that fair? Ang malipay ni-ini ang Sycip Salazar etc kay shoebox ra may ilaha nya income na sad. Intellectual property ba, Cocacola registered man na dinhis ato. Coca-cola Import Export ang registered owner ana tanawa pa nang lubot sa Coca-cola nay PATREO- Patent Registry Office. Walay ana ang can. That is why top 20 ang CCIE Corporation sa SEC of the SEC 1000, 500. Check SEC.com.ph. apil ang NCCC Top 100 baya na mas dako pas burger king pero ambot lang karon kay tungod anang sunog they are not doing business. Some case given of consignee of cargo where the cargo is for transit and took cargo into another destination. Mayan Ship, transport to the US, passed through in the Philippines for Vietnam. Nagubot ang cargo diris Philippines, ang tag-iya sa cargo gi assign ni ya iyang insurance sa cargo to another corporation somewhere in the US. Kiha siyan diris Philippines ingon siya invalid cause of action, dinhi nahitabo sa Philippines. Kanang crane niya naputol kanang mga refrigerator didto wala na. it is insured so one the original indorsee or assignee by the discounting kanang mga kumpanya na mudawat ug insurance liabilities. Let’s say rediscount ka, 30% makuha nimo and satisfied ka. Dinhi nahitabo sa Philippines nakapark dinha. Can you sue? You took the place of the owner as the owner of the goods. Is that doing business? That is a single isolated transaction which is not doing business. But if you pay to establish a corporate character of foreign corporations. The SC says that is fathom. Dili ka kalusot. The old doctrine says the isolated transaction everybody knows that diba. If you pay to allege and establish the corporate character as foreign corporations then you lose the case on technicality. SC says a foreign corporation not engaged in the business in the Philippines may not be denied of their right to file an action in the Philippine courts for a time-isolated transaction. But the isolation transaction rule refers only to foreign corporations, the consignee failure to prove the legal existence or juridical personality as foreign corporation absent such proof they are far from invoking the right to sue in the Philippine jurisdiction under the isolated transaction rule since they do not qualify for the availment of such. Commissioner of Customs vs. KMK Gani Corporation 52 S 594 February 1990 (not sure with citation  inaudible) Jurisdictional- alleging that you are a foreign corporation and proving that you are a foreign corporation. In a case where a corporation is foreign and has a license to do business, but the complaint which the corporation’s license to do business in the corporation is filed; the complaint failed to allege that the plaintiffs were foreign corporations duly licensed to transact business in the Philippines. The action was dismissed on the ground of lack of capacity to sue. Was the dismissal correct? Once again the SC says where the law denies a foreign corporation to maintain a suit unless it has previously complied with certain requirements, then such compliance or exemption there from, becomes a necessary averment in the complaint. The case was properly dismissed. You have to allege in your complaint that you are a foreign corporation that you have a

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno license and if you are suing as a foreign corporation, license to do business. If you are a foreign corporation availing the isolated transaction rule you also have to aver that you are a foreign corporation not licensed and you have to note that you are a foreign corporation. Sayop nis mga abogado. They should not be able to collect their attorneys fees. Kay when it comes to the issue on jurisdiction ignorance na. Ignorance of the law. Pasaka lang ug complaint nya kuwang diay jurisdictional averments. Those are the thing you have to watch out for. The case which contains a summary discussion of isolated transaction is Agilant Technologies Singapore Ltd vs. Integrated Silicon Philippines Corporation 427 SCRA 593 2004.

(5) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; (6) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; (7) Collecting information in the Philippines; and (8) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services. By and large, to constitute “doing business”, the activity to be undertaken in the Philippines is one that is for profit-making. By the clear terms of the VAASA, Agilent’s activities in the Philippines were confined to (1) maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to be used in the processing of products for export. As such, we hold that, based on the evidence presented thus far, Agilent cannot be deemed to be “doing business” in the Philippines. Respondents’ contention that Agilent lacks the legal capacity to file suit is therefore devoid of merit. As a foreign corporation not doing business in the Philippines, it needed no license before it can sue before our courts

AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., vs. INTEGRATED SILICON TECHNOLOGY PHILIPPINES CORP et al G.R. No. 154618 April 14, 2004 **The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is doing business in the Philippines. However, there is no definitive rule on what constitutes “doing”, “engaging in”, or “transacting” business in the Philippines. The Corporation Code itself is silent as to what acts constitute doing or transacting business in the Philippines. [Jurisprudence has it, however, that the term “implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to or in progressive prosecution of the purpose and subject of its organization.” In the Mentholatum case this Court discoursed on the two general tests to determine whether or not a foreign corporation can be considered as “doing business” in the Philippines. The first of these is the substance test, thus: The true test [for doing business], however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The second test is the continuity test, expressed thus: The term [doing business] implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in the progressive prosecution of, the purpose and object of its organization.] ** The Foreign Investments Act of 1991 (the “FIA”; Republic Act No. 7042, as amended), defines “doing business” as follows: Sec. 3, par. (d). The phrase “doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in the progressive prosecution of, commercial gain or of the purpose and object of the business organization. An analysis of the relevant case law, in conjunction with Sec 1 of the IRR of the FIA (as amended by RA 8179), would demonstrate that the acts enumerated in the VAASA do not constitute “doing business” in the Philippines. The said provision provides that the following shall not be deemed “doing business”: (1) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; (2) Having a nominee director or officer to represent its interest in such corporation; (3) Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account; (4) The publication of a general advertisement through any print or broadcast media; Page 75 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

THIRD EXAM COVERAGE February 2, 2018 - 1st half (Jennifer Lim) Today we begin with Republic Act 8799 otherwise known as the Securities Regulation Code. Took into effect in the year 2000 (July 17, 2000 ingon ni Father but July 19, 2000 sa codal. Please check na lang.) Securities Regulation Code Amended took over the Revised Securities Code. The Revised Securities Code took over from the Securities Code which was enacted by an act of Congress. In 1906 together with ____ after the enactment of the US Securities Act. It was a legal act when the Americans took over the century. It was one of the things they introduced other than Coca-Cola, securities. What is the law of the US? The Law of the US up to now is still the Securities Code. Tiguwang na. Revised Philippines Code, Securities Regulation Code. Parehas sa ilang Consittution wa gyud minglahos pa, kita? Katulo o kaupat. Ganahan kaayo ta mamanday ug balaod ug Constitution. Now, the SRC is classified as a blue-sky law. It has been asked in the bar examination. What is a blue-sky law? That terminology “blue-sky” came from the US Supreme Court. The US SC in one case laid down the rule that the Securities Act of the US is meant to protect the unwary investing public of conartists and chiselers who try to peddle defective if not inexistent securities which purport to sell nothing more than a blue feat of the blue sky. Ang atong termino dinhi sa Pilipinas, there are so many chiselers who purport to sell Jones Bridge sa Manila. Kapila na nabaligya unya kapila na pud nay mupalit. The language of the SC cannot be applied to securities because inig pangilad nato bisan tangible property mailad man ta ana. Ang ilaha lang mailad (sa US) kay kana man intangible properties such as a security. We need a special protection (PH) because the normal caveat emptor or principle cannot be applied. Palit kag kabayo, maexamine man nimo ang kabayo. Muingon ang tao na kining kabayu-a milabay nang tatlo ka tuig, you can verify that. Tanawon nimo ang kabayo. Nigawas na bang wisdom tooth niya ig mugawas na gane tiguwang na nah. You can examine it physically but if you buy shares of stock, unsaon man nimo pag tan aw? Caveat emptor na. It’s the underlying the physical aspects that are involved. What is this corporation? Does it have assets? They produce financial statements and these financial statements are audited. An independent external auditor certifies that this inexistent risk corporation accurately and timely tells the financial store of the corporation in accordance with the generally accepted activity. You can look at the financial statements. You can rely on the financial statements that it is issuing shares of stock. Technically speaking, there should be a basic soundness of the securities that are being sold. No security that is based on standard and disclosure policy requires the law should be required to be bought and sold. The law seeks to establish that securities. How? By the system of registration. You cannot sell securities unless you register. Then, all the people associated with it must be registered – issuer, broker, dealer, salespersons, natural persons associated with the dealer, persons associated with the broker. DEFINITIONS Who is the issuer? He is the one who originates the security. It is not only the corporation. The person who has control of the corporation that issues the security is also an issuer. He must be registered also. So, it is a system of registration.

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The facility that enables the buying and selling is also registered. The security is also registered. Muingon ba ka aron na the place where the securities are bought and sold are __. Muingon gani kag place, it is still tangible property. Wa pa gyud diay ka mu-tugkad sa gi lawmon sa Securities Law. Facility na ron dili na lugar. Muingon gani kag stock market dili na lugar because now it is possible for you to trade securities online. Dili na ka kailangan muadto sa Wall Street. Kaniadto, nya nay wall mag dala kag lata mutindog kas one side ang buyers and the seller on the other side. Mag singgit2x siya niya, makita siya sa tanan. Mao man nang Wall Street. Have you seen it? How wide is it? Wa mo na intresado ana? Jacinto is wider than Wall Street. . I’ve been to Wall Street, gitan-aw nako ang kamubo gamay diay dalana. Kaniadto cobblestone gud big part of the Central Bank ilaha nang gipreserve. Kanang bato nga murag bricks nya gitaod2x.. Mao man na kaniadto ang dalan kinakugsan. (Chika about 12 kilometers for a week travel of Henry VIII) Very few of us realize the convenience of the facility we now enjoy. Si Henry VIII musugot makigbalyo sa ordinary worker. Wa gud sine niadto. Nya karon on demand naa na. Daghan kaayo ug convenience. Cobblestone of Wall Street is only equity of the New York Stock exchange. Ang Pilipinas wa gani mi-1 percent. It is a volumeinflated stock exchange. Kadako sa New York Stock Exchange. Makati Stock Exchange wa gani maka 1%. Sunod sa New York? Unsa may kinadak-an? Tokyo. Then we go down the line Zurich in Switzerland, Frankfurt in Germany, and Paris in France. Those are the world above capital. Stock Exchange mao nay gabaligya ug shares of stock, baligya ug option. Option is a right to purchase shares of stock within a given period at a fixed price. Duna kay option, naa kay katungod mupalit let’s say 1000 shares of PLDT at this price within this period usa ka buwan. Ikaw mag kupot ana mag huwat2x ka asa muy ginaubsan. Maupos na usa ka bulan nya ang price nimo at which you buy the share is strike price as they call it is 1500 katapysan sa bulan mahimo na man nang 1400 is bought and sold. Unsa man buhaton nimo anang imong option? Gision nimo nang imong option kinsa may buang mupalit ug 1500 nga naa man diay 1400 sa gawas. PLACES TO RAISE CAPITAL 1.

Stock Market

If you want capital adto ka sa stock market because that is the cheapest capital. Muadto ka sa Bangko mag bayad kag interest kada bulan muginansya man ka o dili. To put it in simple terms, this is OPM not original Filipino music but other people’s money. Dili man ka mubayad ug interest og gusto ka muhatag kag dividend ug muginansya ka. Gusto ka taguan ang ginansya issue kag stock dividend. This is the cheapest way to run your business by using other people’s money. Of course, the people must trust you. Adto ka to raise capital. Didto man sila tanan sila Bill Gates Warren Buffett, mga dagko nga negosyante bisan pa kanang Instik na murag naatrasan ug Volkswagen Jack Ma.  Adto na si Jack Ma dira to raise capital. 2.

Bond Market

Another place to go where you raise capital is the bond market or the money market. Kasagaran na muanhi corporation na. Wala na man silay control ug mag sige anhi mag sige ug issue stock, lami ta dinhi pero mag sige kog issue wa na control dili na ko makapagusto ug dagan sa akoang kumpanya. Mao na anhi ra ko diri sa bond market. Lapas na gani kag 1 year maturity, bond na. Ang maturity period less than one year, money market na. Bond market naay collateral, money market way collateral within one year man mag mature. This is the place where you also raise capital. Kini is only second fiddle market. Hasta man lisura musulod you have to prove to be profitable for 3 years and prove a certain volume. Mao na sila dili muanha. Asa man sila? Microsoft, Facebook, Google? Naa gihapon na sila sa gamay na exchange.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno DISTINCTIONS

contract. I will pay you dollars on such a date pagkamature sa

NASDA it is an exchange just like the NY Stock Exchange. National Association of Security Dealers and Quotes, kanang mga gamay na capitalized na corporation dinha mingsugod. Microsoft dinha promoted now to Dow Jones. Dow Jones is an index made up of 30 to 50 companies chosen to somehow represent the entire money market. Daghan na nawala dinha niadto ang kinadak-an diha Bethlehem Steel/US Steel pero wala naman steel ang US karon. Napildi naman sa (EM) emerging countries niadto tawag ani kay underdeveloped countries. Developed countries are US and Japan. Under-developed murag Pilipinas ba. Mao na ang terminologies kaniadto pero wala na na karon- first world, second world, third world. In emerging markets, there is neither emerging nor developed markets that is the special market of BRICS – Brazil Russia India China Spain pero nagkagidlay man ang Spain, BRIC na lang. They say it is characterized with countries which huge money markets. Second, they have huge natural resources. Philippines have huge natural resources; forget it that’s fake news. Nitoo gani ka ana fake news sa inyong maestra, we do not have oil. If you do not have oil, you lack the very essence of energy, no plastics, cannot make our own car. Oil is our mother industry that gives other industries. Wala tay iron, iron ore napuno na unta nag railway kay steel man na ug skyscraper buildings, cars, appliances. It’s not the US that is the richest in natural resources, it is Russia. Mas dako pa ang Russia. It is so big that it is said to have a small extension of Europe. China has natural resources, ang mga tao. (Talks about the war between North Korea and South Korea when NK asked for China’s help) China sent 1 million people. If a million people die that is only statistics. US wala naki-alam. Truman was president that time, he listened to the clamor of the people na dili na ganahan ug war. 40 years later niapil ug Vietnam War, nakalimot na man sa gera. When I entered the society, I had a classmate who was a metaphysics graduate. He worked for Atlas Mines – copper. In the 60’s the start of Vietnam war. He was the head for quality control. During Vietnam war. Nahurot nang mga copper Himuon man bala sa Vietnam. Wala nay quality control, it was all about volume. You can still see the open pit mines in Cebu if you ride a plane from Bacolod. When you say bond market taas-taas ang lugway unlike money market mubo. (Father compared the two na gisulat sa board) for operating capital. For long term capital, for IOU, for equity. Equity is for ownership, IOU creditor. 3.

Futures market

The third kind of capital market is the futures market. There are many kinds of futures market- commodities, metals which are either bass or precious, and currency. As to commodities - grains, rice, oats, barley. Sold through futures certificate, which says I can sell you 1 million bunions of rice at this price at 6 months from now. Kinsa man imong baligyaan ana? Kanang gabaligya anang Kellog cornflakes kay everyday man gabuhat ana. Palit na kag futures contract kay biyaan ka inig mag lahi2x kag presyo. Association and cooperatives of farmers to make sure sa ginansya sa presyo na ihatag nimo nako na makasigurado makabawi ko ug 10 or 15% okay na. How of your contract would be futures contract? Pwede siguraduhon nimo 100% pero alkanse ka ana kay bayran man nimo ning certificate. You play your risks. You go to these markets not to raise capital but working capital, you minimize risks. As to currency, mga termino sa futures contract ginatawag ug foreward cover. Kadungog gani mog foreward cover sa ato pa futures contract na for currency. Nanghulam kag dollars kay barato man iyahang interest rates ug peso kay 7 pesos. Mag huwam kag dollar aron makabayad unya ug mubayad na ka muweaken man ang peso mao na gamiton nimo ang futures Page 77 of 112

Money Market

Bond Market

Maturity period is less than 1 year.

Maturity period exceeds 1 year.

No Collateral.

With Collateral.

For operating capital

For long term capital

For IOU For Equity utang at a price when you began the loan so forward cover. Kini tanan except this (pertaining to futures contract), wa sa Philippines. There is one SC decision which says that this futures contract is gambling. It is gambling because the way you sell is settle futures contract is a risk (?). Example: Dollar forward cover, somebody agrees to sell you 1 million dollars at 45 pesos pero dollar rate 6 months from now. After 6 months nagkupot ka na sa papel nya karon kay 40 pesos na lang man ang 1 dollar. Gision na lang nimo. Gision na lang nya charge to experience ang 5 pesos. Nakaraos ka. 6 months from now, dollars went up to 53 pesos per dollar imohang gikuptan 45 pesos per dollar. Lipay kaayo ka. How do you settle? So 8 pesos difference. So 8 million pesos ang ihatag. Bayran man gihapon nimo. SC says that is gambling when that is the way futures contract is settled all over the world! Chicago, London, Odessa. Mao na wa gyud ta mag sugod kay maapil unta sa SRC each contract must be registered. All these contracts and facilities must be registered. All the people behind these- issuer, persons behind the issuer, broker, and dealer. What is the difference of a broker and a dealer? Broker Sells and buys for another

Dealer Buys and sells for this own account

He buys and sells for another; dealer buys and sells for his own account. Dealer i.e. SSS mamalit ug shares intended for itself; broker kay 5 Jewels maunsa ba kay lisensya to buy for others. But the law says no person or natural or juridical can be granted a license as dealer and broker. You cannot be a broker and dealer at the same time. Why? Because it is the person who holds both licenses and there is strong temptation, broker gud ka you begin to establish relationships with your clients and they trust you. Inig dealer sad ka nakapalit niya ni sour man. Matental ka mutawag sa imong client kay nakakita man kag saka. Gipasa nimo sa imong kliyente ang bati nga stock na makita nimo. US Supreme Court says there should be a Chinese Wall because of the Great Wall of China. In dealership and brokership, there should be a Chinese wall. Daghan man anomaly ang Securities Regulation Code. But sometimes when the company is in a do drowns, pahulay ang transaction, ubos kaayo. Kung mutaas ang interest sa mga bonds sa money market edi ang kwarta mudagan diri. Ang US, Europe Japan, China, taas man pirmi? Kay ang kwarta na gibo na Federal / Central banks because of the financial crisis at Hague. Ilahang problema mabalik ang kwarta to reduce the so- called quantitative raising. You read Warren Buffett muubos gani ang bond market- ubos ang bonds, saka ang stock market- ubos gyud ang bonds. This is the entire system handled by the entire SRC.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno February 2, 2018 - 2nd half (Marry Suan) What is to be registered is a security. The problem on a security is that RA 8799 does not define a security. RA 8799 merely enumerates securities. Section 3. Definition of Terms. — 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; c) Fractional undivided interests in oil, gas or other mineral rights; d) Derivatives like option and warrants; e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; f) Proprietary or nonproprietary membership certificates in corporations; and g) Other instruments as may in the future be determined by the Commission. They specified here electronic evidence of shares because once you have traded in the stock market in many jurisdictions, you do not have shares of stock certificate. It’s too cumbersome. Kanang mubaligya ta ron tapos mubaligya na sad tapos mubaligya na sad. Perminte na lang ug baligya. Unsaon nimo pag issue ug shares of stock [certificate] ana? Sige kag issue ana. Dako kaayog gasto. Ibutang na lang na nimo sa computer. Mahibal-an na nimo kung breakeven ba ka. Ginansya na ba ka gamay. Muandar na man ang computer. Computer na man maoy muorder. Mao nay ginaingon nila na muubos gani ang presyo, mas musamot na ron ang deceleration of prices because of program xxx. Ug musaka gani ang presyo, it is now going up at very unrealistic pace because xxx of program. So the first set of enumerations for securities are ownership, equities because it says: a)

Shares of evidences securities;

stock, bonds, debentures, notes, of indebtedness, asset-backed

And then, you have: b)

Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription;

Now when you go into so-called investment contracts, then you have what is probably the number one case for securities. The case of SEC vs. W.J. Howey Company, 328 US 293 (1946). That is a U.S. case. This has been asked in our bar examination because of the so-called Howey Test. What is this case? This is a corporation – Howey Company. They sold what was later on decided by the SC as securities without registering. So they were penalized. What is the reason they did not register? According to them, we are selling not securities. So the issue is what were they selling. What are the factual configuration of that xxx? This is the story. Originally, Howey owned a huge orange orchard. By the way, fresh orange juice is one of the commodities that is subject to futures contract. The American breakfast always include orange juice. (chika about orange juice and Americans) That is the standard in the American breakfast. So much so that there must be orange juice always. Ngano mang problematic man na? Because they can control water supply, insecticides, fertilizer but sometimes they cannot control health(?). The best orange juice kana gyung mahinog na. Winter na mahinog, mao na ang kinalamian na orange. (more chika about orange juice) Page 78 of 112

Unsa may gibuhat ni Howey? Dako kaayo iyang orchard. Iyang gi-subdivide. Tag tulo, tag lima ka acres. Unya nag advertise sya. Sometimes, mapul-an na mog syudad gusto mo mag garden. Diri namo. Ug kapuyan na ka, ihatag ug ibalik namo. Ang imong gipalit namo nga 3 or 5 acres of orange trees. You give it back to us by way of lease. And the consideration is bahin ta sa ginansya. Kami maoy mutrabaho. Ikaw maoy tag-iya. Wa na kay buhat. Pasagdi na lang mi kay kami kabalo na mi. Now, question: is that a security? Kanang ilang offer na gihatag sa public na mupalit ug 5 hectares. Human ug gusto ka ibalik nimo nila by way of lease. Unya 50-50 mo. Is that a security? Ang ilang ingon, it’s not a security because you are free to return it to us or not. Mahimo bang ikaw mismo maoy mubungkal ana. Mahimo man. You can do it. You are not forced. There is no compulsion. This is where the SC comes out with a ruling and says that there are four elements that make an investment contract a security for purposes of the Securities Act: 1. 2. 3. 4.

There is an investment of money. Palit ka anang farm. Investment of money man na. There is an expectation of profits arising from the investment. [The investment of money is in] a common enterprise. The profits depend solely on the efforts of a promoter or third party. It is not you, who is the owner.

Naay bago kaso karon sa Philippines, which has somewhat changed this. It’s a realty case where the SC ruled that it is a security also, an investment contract, but what was modified is that the expectation of profits depends primarily on the efforts of a third party. Not “solely” but “primarily.” So mao nay change nato sa Howey Test. Remember, Howey test does not apply to any security. This test applies only to a security as an investment contract. But securities are very varied. For instance, in the Philippines, we consider pre-need plans as security. That is explicit in the Securities Regulation Code, section 3.9. 3.9. "Pre-need plans" are contracts which provide for the performance of future services or the payment of future monetary considerations at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve. Naa naman roy pre-need retirement plan, pre-need educational plan, pre-need funeral plan, pre-need graduate studies plan. Lahi na ha kaysa pre-need educational plan because that only normally covers just college. Ikaw, karon ka magminyo unya nangambisyon ka na aduna kay anak na madoctor. Unya karon medyo nalisa ka na kay dia may xxx. Hundred thousand na man ang semester. Kintahay manganak mo dayon after sa wedding ninyo. The tuition fee is increasing. Pag abot sa akong anak na madoctor na, P300 thousand per semester na ang tuition. Perting pataya ana. Asa man na pangitaon? Pre-need! Mao nay tubag. Bayad ka na. When the need comes, the issuer of this security will now make your plan real. Unya muingon kag unya kong mamatay diay ko, ayaw kabalaka kay naay insurance feature anang pre-need plan. If the owner is overtaken by an untimely death, all his obligations are erased, considered fully-paid. Is this a security or an insurance policy? Remember insurance is covered by the Insurance Commissioner and the Insurance Code. Mao ning nakaproblema because in other jurisdictions, pre-need plans are not classified as security precisely because of the insurance [feature]. Again, Section 3.1(d): d)

Derivatives like option and warrants;

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Derivatives are securities. It is a security the underlying asset of which is also a security. The abstraction is already the xxx. Example: PDR (Philippine Depository Receipt). Underneath a PDR is a share of stock of Rappler and the share of stock of Rappler represents an inchoate interest in the assets of Rappler. The shares of stock are not derivatives. They are shares of stock. But PDR is a derivative. Kinsa man nag-imbento aning derivative? Katong mga physicists, PhDs in Math, atong 1970s. (chika about space race, etc. and Credit Default Swaps) Credit Default Swaps (CDS) This is the kind of derivative that emboldened the mortgage aggregators in the U.S. Naa kay mortgage. Mahuman ning mortgage in 20 years. Gipahulam nimo sya ug kwarta kaning nag mortgage. Unya ang balay ang gimortgage. 20 years pa na nimo makuha. Mahimo man na nimo idiscount. Bangko ka unya muadto kag laing bangko unya ibaligya nimo ning mortgage. Tagaan na lang kag 50% sa madawat nimo aning 20 years. Naa nakay 50%. Ngano man na na gusto man ka ana? Kay nagkagidlay na man imong bangko unya wala nakay ipahulam. Maayo na lang nang naay gamay makuha kaysa zero gyud ka. So liquidate nimo ang receivables nimo. Karon, kung dili lang kay usa ka mortgage imong gibaligya, daghan na mortgage unya girambol nimo. Pareha rag last two. Magkuha kag 10% na maayo na mortgage unya kuha nasad ka ug mga 30% bati na mga mortgage. Imong irambol. Unya iwholesale nimo. Mangita kag bangko na dako. Nganong mudawat man sad ang bangko ana? Sa katapusan, ang dakong bangko ang mudawat ana. Naa sad diay lain na security na gipadagan sa mga insurance company. Muingon sila, mupaltos gani ng mga mortgage dinha, kami maoy musalo ana. When there is a credit default swap, kami maoy musalo. (chika about credit default swaps and mortgage in the U.S.) Over-the-counter securities are securities not traded in the stock market and not valued. How do you register a security? You do not file a petition for registration of security. Instead, you file what is found in Section 3.12. A registration statement. 3.12. "Registration statement" is the application for the registration of securities required to be filed with the Commission. Una ka mufloat ug shares of stock, you have to file a registration statement. You file the articles and by-laws of the corporation that is issuing the shares of stock. You write the biography of all the major stockholders, what their business activity is. And under oath, you say that they have never been involved in any irregularity in any stock market anywhere in the world. Mahibaw-an gani na involved sila in any irregularity, not necessarily in the Philippines but outside, you will be penalized. So imo nang isuwat. Imong isuwat unsang gamitan sa kwarta, unsang plano aning nag issue ug security. Karon ma-approve na na. Di na i-approve na. The SEC will only say that the security is now “in effect.” The SEC will never say that the security has been approved because it might be mistaken as endorsing the security. It does not want to be the agent of the issuer. So it will only say that it is in effect. Makabaligya ka na. if there is a complaint, muinvestigate gihapon ang SEC and it can order the temporary suspension of that security. While they are being investigated, the investigation is confidential. It cannot be covered by the press. It is not open to the general public. It is just the SEC that will investigate. Pareha na ug disbarment proceedings, diba. Wala may maka-attend ana. What is the reason why it is confidential? Because the reputation in business takes years to build and it can be lost by a careless disclosure, even if untrue.

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Many times, it is the issuer itself who will ask for the suspension of trading of their securities. They will say, we are asking the Philippine Stock Exchange to stop trading Aboitiz Ventures and Equities, Inc. Ngano man? Daghan na mag xxx. That there is a new partner coming in, that they are going to embark to a massive expansion xxx. Give time to the general public to digest the news that can influence the ordinary investor to either sell, buy or hold securities. From the registration statement, you make the brochure. Kanang brochure, mao na nang naang pictures. Para na sa mga pareho ni Trump. Magbaligya kag funeral plans, naay mga kahoy, garden, langgam na naglupad-lupad. Bayad ka para sa imong kamatayon pero wala gyuy patay dinha [sa brochure]. The brochure must not distort the registration statement. That is the rule. Usbon gani nimo, suspended na sad nang trading. That is why they now ask the SEC to have the brochure registered. February 7, 2018 (Therese Candolita) INTRODUCTION The markets have been increasing since 2009 with the intervention of the Bangko Sentral to prop up liquidity in the markets. There has been excess cash. It started about a year ago when Bangko Sentral decided to decrease money supply, and they do that by basically increasing the discount rate of the banks. There have been several discount rate increases and the base of the increase has been measured so as to prevent deflation; to prevent panic. So most central banks coordinate but all of a sudden everybody thinks it’s good, the return of profits of corporations is very good and Trump just inaugurated his new law: the tax cuts. Why does this happen? One explanation is that the market is seeing an increase in wages because the corporations are doing well and they are adding incentives, so because of that there might be more money than wages. If there is more money, than there will be inflation. People are now getting their money out of the stock market. If you are an optimist, you look in the market and it’s going down, you will see this as a buying opportunity. That is if you have complete control of your source of money. The Securities Regulation Code is really a regulation for the stock market because our bond market is not really that well developed. Our bonds are also traded in the stock market so it’s not a pronounced market in itself. We don’t have a futures market, well, there is a little futures market. In other words, there are brokers who sell futures contracts for currency but they are acting for the Singapore or Hongkong market. You can get protection for your foreign currency denominated loans if you want to hedge your loans but aside from that no more futures market. Now let me tell you something about futures market. Agricultural communities, those that are really holding the physical assets, they say more than 60% of agricultural commodities are controlled by 4 corporations. They are called the ABCD. The 4 corporations that run the agricultural commodities market: A is Archer Daniels Midland. B stands for Bunge. C is Cargyll. D is Dreyfus. 60% of agricultural market, sila nag-gunit. The said market is mainly grains, wheat, rice, corn, soya beans. As of last night, it might become 3 na lang, because Archer Daniels is already in advanced negotiation to merge with Bunge. Cargyll, of all this 4, is the biggest and it’s not rated in the stock market. It’s a family corporation and they say it’s the biggest private corporation in the world. What makes Cargyll unique is that it has its own satellite system enough to cover the world and so it knows exactly where the harvest is good and where there is no harvest and how much the harvest will be. So it has greater efficiency to deploy its capital, and its satellite system is also leased out to these other three. They help each other. Let’s say they have to supply grain to South Africa and they are asking for corn and Cargyll has no corn, so they borrow from each other. That’s why they are ABCD

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno together because together they form a close-knit fraternity and they run the world. Want to know how well they work together? Read the book Merchants Of Grain. They say there’s a 5th one trying to come in. Glencore. LESSON PROPER We said that before you can offer your securities to the public you must register. And you register it by filing a registration certificate. Are all securities brought and sold registered? Not all. There are at least 2 kinds of securities exempt from registration: 1. Exempt securities (Sec 9) 2. Securities involved in exempt transactions (Sec 10) RA 8799 Section 9. Exempt Securities. – 9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the following classes of securities: (a) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. Ang gobyerno gud ang nagpagawas sa kaugalingon niya na securities, unya, pa-rehistrohon pa diay nimo sya? There’s an old saying that the crown does not pay taxes because it is impossible to pay to yourself. A king does not tax himself. Give an example of a government security: Land bank bonds. They are used to pay landlords and the government takes over their property or agricultural estate and divides it to parcels of three except for the retention area and then it is distributed to the landless. These bonds are negotiable and brought and sold in the secondary market. If you are the landlord and you have a land bank bond, you can use that to pay the government for like, your taxes. There used to be a controversy. Let’s say you have 1M worth of bonds that does not mature until 10 yrs from now. If you pay that to the BIR, the BIR will say “It’s 10 yrs from now! So I will receive it at 10% of its value because it’s not yet mature.” A Ione landlord complained and he brought it to the Supreme Court. The SC said that Land bank bonds must be accepted by the government when used as payment at its own face value. Land bank bonds are securities because they can be traded in the stock market and exempt because it is issued by a person controlled/ supervised or acting as an instrumentality of the state. (b)

Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content for disclosures the Commission may prescribe

So, if the US floats a bond here, that need not be registered provided we can also float bonds there in the US as a form of reciprocity. (c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. (d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. (e) Any security issued by a bank except its own shares of stock. Why is the bank’s security need not be registered? Because it is already scrutinized by the Bangko Sentral ng Pilipinas. The exception is the shares of the bank itself. Why? Because when Page 80 of 112

the bank is formed, it is still not open to be scrutinized deeply by the Bangko Sentral, so it’s still in the SEC. So when a bank sells its own shares, it has to register. Section 10. Exempt Transactions. – 10.1. The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions: (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. Note, at any judicial sale. Please do understand this. Because there is an estate--- it has securities and the executor sells it in order to liquidate and divide it among the heirs. Is that it? NO. Because those shares were before in the market and they were registered. This means that if you are an executor of an estate and you say you need money to run the estate, the best way to raise money is to float a bond. So you float a bond, meaning you borrow money from the general public to continue the estate. Let’s say you have several real properties to be rented out. It is the executor who decides that and he floats the security. Before that bond is issued by the estate, it is scrutinized by the court. (b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security for such debt. (c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner therefore, or by his representative for the owner’s account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. You have a corporation and that corporation is in need of money to expand and operate. No bank will lend it money so they go to the substantial stockholder there and ask “Are you willing to buy all the issuance of shares? We will increase the Authorized Capital Stock then we will issue you fully paid shares of stock and this will cost you 5M” So you increase capital stock by 25% and suppose this substantial stockholder will say “Ok”. Because the other stockholders do not have the money. Usa ra man sya kabuok. Baligyaan sya’g shares sa company, do you have to register that? NO. Exempt, because the public is not involved. Diba, sya ra man. Exempt, not from the nature of the security itself but because of the transaction. (d) The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. Same reasoning with above. So when a corporation gives out stock dividend, it is actually issuing new security. That is an exempt transaction because the public is not involved, these are already veteran stockholders. Stockholders na sila daan, they are just given more shares. So stock dividends of corporations are normally exempt transactions and the securities involved need not be registered. So to get the common denominator what an exempt security is, go through the examples in section 10 because that is where you find the list of exempt transactions. Know the common denominator so that when you are asked in the Bar, you have a way of judging. When the market is not involved, such as when a stockholder receives a stock dividend, that is exempt. Those need not be registered.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno BUT, just because you are exempt from registration, that does not mean that you do not have to pay a fee. You still have to pay a fee. Mas barato lang. But there is not escaping payment of a fee to the SEC. The rest of Sec 10 not discussed: (e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. (f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. (g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. (h) Broker’s transaction, executed upon customer’s orders, on any registered Exchange or other trading market. (i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase. (j) The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. (l) The sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment house; (iii) Insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) Investment company or; (vi) Such other person as the Commission may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.

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February 8, 2018 (Miles Buhay) So we have seen… 1. Registration of Securities; 2. Securities that are exempt from registration; and 3. Exempt transactions. An exempt transaction is a sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12-month period. When does that happen? When there is a small group that begins a corporation. What is the minimum number of incorporators? 5-15. Even if you have 15, it is still exempt because it is “a corporation selling to fewer than 20 persons.” So when you file your articles of incorporation with the SEC, together with that is an application for exemption from registration. And for the exemption that you are asking is letter (a) of Section 10: Exempt Securities. Section 10. Exempt Transactions. – 10.1. The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions: (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.

Section 10.3 says: 10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by the rule may prescribe and with such notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum value aggregate price or issued value of the securities. So 1/10 of 1%. That is the exception. Now, the fee for registration is much higher. Registration of securities are filed and who signs the registration statement? Section 12. 4 says: 12.4. The registration statement shall be signed by the issuer’s executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. Where the registration statement shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall be filed. So almost everybody of importance signs: CEO, COO, CFO, comptroller, chief accountant, corporate secretary; all of them sign. And also the Board of Directors because they pass a resolution. When you are a corporation still to be formed and naturally, you get subscribers. Who will sign the registration statement when there is still no corporation? It is my submission that the incorporators sign, the treasurer, the interim treasurer and the interim secretary because it says “persons performing similar functions accompanied by a duly verified resolution of the board of directors xxx.” So [they’re] the equivalent person: the incorporators, the interim treasurer and the interim secretary of the corporation. 12.5. (a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be offered. The Commission shall prescribe by the rule diminishing fees in inverse proportion the

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno value of the aggregate price of the offering. (b) Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall prescribe, reciting that a registration statement for the sale of such securities has been filed, and that aforesaid registration statement, as well as the papers attached thereto are open to inspection at the Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the Commission may prescribe. 12.6. Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto, is on its face complete and that the requirements have been complied with. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection of the investors. Notice that the Commission (SEC) does not approve the registration statement. The SEC only declares it effective or rejected unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof.

(c) The issuer, any officer, director or controlling person performing similar functions, or any under writer has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws. For the purposes of this subsection, the term "competent judicial or administrative body" shall include a foreign court of competent jurisdiction as provided for under Rules of Court. Untrue statement. Untrue statement as to whom? Letter (a) as to the issuer. You did not state there that the issuer has been judicially declared insolvent. Unya nahapay naman diay na siya. Ah, when they find out, that is fraud. The security which has already been registered will be stopped from being bought and sold. Or that the issuer has violated any provisions in this Code (SRC) or that the issuer has engaged or is about to engage in fraudulent transaction or the issuer has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities. (Father continues to read enumeration in Section 13..) Now, if the issuer or any person in charge of the issuer, has been found upon a plea of guilty or otherwise of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body which, according to this provision, includes a foreign court of competent jurisdiction.

12.7. Upon affectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission to state a material fact required to be stated herein or necessary to make the statement therein not misleading shall constitute fraud.

So if you are a member of the Board of Directors of the issuer, and you have discovered you have shares that are in trouble in, let us say, the stock exchange of Singapore. Then you would be guilty of fraudulent statement. The security will be stopped from being bought and sold.

If it is found out later that there is an untrue statement of fact or omission to state a material fact required to be stated, necessary in order to make the statement therein misleading, this shall constitute fraud. Then that will be the cause for rejection and revocation of the registration of securities.

REMEMBER! Forty-five (45) days; in substance and form, okay na ang imong registration statement; the SEC will issue a pronouncement: “The security is now effective.” So you begin to trade. Unya naay musumbong. Kining tawhana (This person) mao man ning gikasab-an (scolded/reprimanded) sa SEC sa Singapore. The SEC will have no choice but to order the suspension of the trading of the security.

Section 13. Rejection and Revocation of Registration of Securities. – 13.1. The Commission may reject a registration statement and refuse registration of the security there-under, or revoke the affectivity of a registration statement and the registration of the security there-under after the due notice and hearing by issuing an order to such effect, setting forth its finding in respect thereto, if it finds that: (a) The issuer: (i) Has been judicially declared insolvent; (ii) Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed (iii) Has been or is engaged or is about to engage in fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or (b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact required to be stated therein or necessary to make the statement therein not misleading; or Page 82 of 112

I told you that one time, this very famous Richard Wee of HongKong who’s reportedly the most wealthy overseas Chinese. (Storytelling… It was claimed (by the corporation) that Richard Wee graduated, when in fact he did not. The corporation was fined for the inaccuracy) Alright, suspension of registration; you read that. It’s up to you. Reportorial requirements and then the specific provision that includes pre-need plans, Section 16. CHAPTER IV REGULATION OF PRE-NEED PLANS Section 16. Pre-Need Plans. – No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. xxx The pre-need plan is a security. It is not registered with the insurance Commission even if it has an insurance feature. Example: Kanang gapamaligya ug pre-need plans, muingon na sila: “Pila ka kandila ang gusto nimo sa imong haya?” “Gusto ba nimo naay red carpet?” “Kanang naay libro na magpirma-pirma kanang mga [mamisita]?” Apil na tanan sa imong plan, magbayad lang ka every month for three (3) years. Kung mamatay ka wa pa mahuman ang three (3) years? Okay na because it has an insurance feature. Let’s say your pre-need plan is for your wife. Ikaw may nipalit ana for your wife, so you own the plan but the beneficiary is your wife. Mamatay na imong wife, bayran ka kay imong mang gitagaan ug

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno plan. Unya kung ika’y mamatay unya wa pa man nimo mabayri tanan. Okay lang; insurance feature. Those who sell that plan must be registered because all salespersons according to the definition of terms, all the salespersons/salesman in 3.13 … 3.13. "Salesman" is a natural person, employed as such as an agent, by a dealer, issuer or broker to buy and sell securities. They must be registered. Pangutan-a nang nagabaligya nimo ug plan kung naa ba na silay registration. Wala. Kinsa may muregister? Kadtong mupirma didto sa opisina. Once he signs then the company is already bound with the plan that you bought. Kadtong nipirma, mao tuy registered with the SEC. But technically speaking, the law says “associated persons” must also be registered; associated persons of the broker or dealer is an employee thereof who directly exercises control of supervisory authority but does not include a salesman or an agent or a person whose function is merely clerical or miniscule. An associated person must also be registered. CHAPTER IV REGULATION OF PRE-NEED PLANS Section 16. Pre-Need Plans. – xxx Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and recording keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans. What happened to CAP (College Assurance Plan)? What happened to PetPlans? What happened to these plans? They are no longer around. So many people left holding an empty bag.  I bet some of you here had CAP. Mao may uso sa una. Ginikanan intawon nipalit ug CAP. Now, there is a requirement in the SRC that you must have an independent director in your corporation. The SRC requires the following corporations to have independent directors: 1. Corporations that are listed in the stock market; So, they sell. 2. Corporation who, though are not listed in the stock market, sell securities that are required to be registered; Let us say you float a bond. Then you registered your bond. Your shares of stock are not registered because you are not selling shares of stock in the open market. But you borrowed money so, therefore, your security must be registered. Once you have sold the security that will require registration, then you must have an independent director. 3. The requirement is present here in Section 17: 17.2 xxx (c) An issuer with assets of at least Fifty million pesos (P50,000,000.00) of such other amount as the Commission shall prescribe, an having two hundred (200) or more shareholders each holding at least one hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminated ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) shares reduced to less than one hundred (100).

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If the corporation has o at least P50 million in assets and you have o 200 or more stockholders o with at least 100 shares each of a class of equity, then you must have independent directors.

“Independent Directors” is described in Section 38.

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How many independent directors are required to be present in the board of the corporations required to have them? A: Section 38 says: xxx shall have at least two (2) independent directors or such independent directors shall constitute at least twenty percent (20%) of the members of such board whichever is the lesser. xxx So if you are required to have independent directors, you cannot have less than two (2) of them. What is the meaning of an Independent Director? Section 38 says: xxx a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. So if you are a director, you cannot have more than 5% of the outstanding capital stocks of the corporation. [If] you have more than 5% of the outstanding capital stock of the corporation you hope that ? ? ? If you are in a relationship with that corporation or with its parent or the subsidiary, that makes you no longer independent. Then, you cannot be an independent director. Example: Suppose you are the auditor of the holding corporation. You cannot be an independent director of the subsidiary. Suppose you are the auditor of the subsidiary. You cannot be an independent director of the holding corporation. This is a requirement that the Philippines copied from the Sarbanes-Oxley (SOX) Law. PLDT is SOX-compliant; Meralco; ABS-CBN; Ayala Corporation; San Miguel Corporation… What is the thinking behind this? If you are a publicly listed company you have obligations to the investing company. Who will answer for the obligations of the corporation to the investing company? Not those who are substantial stockholders. They have their own interests to protect. They are even willing to sacrifice the welfare of the investing public just to advance their own interest. So you must pick somebody who is not connected with the company. Is that not a contradiction, because to be connected with the company you must have some proprietary interest in the company? So they put: you cannot be an independent director if you have more than five percent (5%) of the outstanding capital stocks. Ikaw maoy magbantay para sa investing company. That is your job as an independent director. Banks have to have an independent director by virtue of the General Banking Law. I was an independent director for fifteen (15) years. Sometimes, you have to express your comment explicitly in the minutes of the meeting because it is required by the Banko Sentral. Why? Because Banking is replete with public interest. The secretary of the corporation makes sure, especially if it involves a DOSRI loan, the independent director must sign first. The independent director is made to sign first. So he makes an independent judgment. Dili lang kay musunod sila sa kadaghanan. The rule of the BSP is una mu-sign ang independent director. Sa ato pa, there is something wrong with that rule. Alright, we come now on the Rule on percentages. A number of percentages that you have to remember: five percent (5%).

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno February 14, 2018 (Paul Jordan Berguia)

percent (10%) to twenty percent (20%) of the companies’ issued and outstanding shares.

What are the numbers, figures and percentages that you need to remember in the securities regulation code? In the Philippines, if you buy shares of stock and you end up buying at least 5% of the outstanding capital stock of a corporation. What happens? You need to make a disclosure.

In a proposed SEC Memorandum Circular (MC), disseminated for public comment, the securities regulator will require, starting July 01, 2017, all companies filing a registration statement pursuant to Sections 8 and 12 of the Securities Regulation Code and with intention to list their shares for trading in an Exchange, to apply for registration with a public float of at least twenty percent (20%) of the companies’ issued and outstanding shares.

What is the disclosure you have to make? The disclosure as to the beneficial owners of the shares of stock that you are buying. Kadaghanan gusto mupalit, dili man sila gusto mukuha ug certificate. Palit sila, naa ra sa kamot sa broker. Your shares remain with the broker. Why? Because you are just a “panther” (kini ba ang term? Lol. Wakanda forever ni siya nga Panther or another term? Basta Panther daw ana si Father) you buy now, then later on you sell. Dula dula ra man ka. That’s why you are called a panther. So kada mupalit ka and mangayo kag certificate of stock, mubayad ka? Sa kada palit nimo mubayad ka? Taas ang imong costs sa transaction eh. So, mag loan ka? Sa records ana kinsa may mu-appear didto nga titular owner? It is the broker because he holds this street certificate. This certificate of stock of the seller indorsed in blank. The broker now needs to reveal who is the beneficial owner of this stock.

Public Float of a company shall refer to the portion of the issued and outstanding shares that are freely available and tradable in the market and are non-strategic in nature or those not meant for the purpose of gaining substantial influence on how the company is being managed. Significant shareholdings of 10% or more of the total issued and outstanding shares of the company are considered strategic and thus, excluded in the public float of the company. (Taken from: http://www.sec.gov.ph/wpcontent/uploads/2015/10/2017_PressRelease_ToIncreaseMPOT o20Percent.pdf)

Another number: 15%. (Again, review your ownership terminologies. What is the contracting terminology of the beneficial owner? Civil law term, naked owner. Why is he called naked? As we all know, ownership is a bundle of rights. Wala siya anang uban nga rights dira, ang naa ra iya ang titular ownership. Owner in title only. Kinsa may makahimulos ana? The beneficial owner) Once you have purchased at least 5%, you need to make a disclosure. So the SRC, does not assume that the titular owner is the beneficial owner. Now, here is the problem - here is a foreign investor, sitting somewhere in London, he calls his corresponding broker in Hongkong. Ana siya “buy PLDT Philippines, 25K shares, AT THE MARKET” what is the meaning of that? That means whatever price it is trading in the market at the time of making the order, paliton nimo na. Execute it! Now, he is in Hongkong, he cannot buy it in the Philippines. So what does the HK broker do? He calls a broker in the Philippines and he tells a broker “buy PLDT Philippines, 25K shares, at the market” Execute dayon ang broker, karon let us assume nga 5% na siya sa outstanding capital stock, unsa may i-report sa broker? He will say the HK broker is the beneficial owner. The Philippine stock market will then communicate this fact to the HK broker. “Who is the beneficial broker?” Muana dayon ni si HK broker, “HONGKONG SHANGHAI BANK-LONDON”. Follow up na pud siya (Philippine stock market) didto (HONGKONG SHANGHAI BANK-LONDON) “Who is the beneficial broker?” Muingon na pud didto, “it is FIDELITY BONDS” (institutional investor, so institutionalized that it is divided into units, that is also traded in the London stock exchange) Ma-question na pud siya, nganong mamalit man ni siya? Is there a question of nationality, now? WALA, kay nangayo ra man ni siya. Wa man siya nangayo ug Certificate of stock. Sa ato pa, ang broker gihapon didto ang listed as the owner. Another number: 10% (PSE increased it to 15% as of today) The rule under PSE until 3 days ago was if you are a corporation whose shares of stocks are listed in the SE, at least 10% of your outstanding shares of stock must be floated. FLOATED, meaning available siya sa stock market. Why is it 10%? The rule in the Philippines, if you are a public utility, within 10 years from the beginning of your utility, you must sell to the public at least 10% of your outstanding shares of stock. But now the rule is, the PSE increased the float. IT MUST BE 15%. That must be the number available to the public. What is the consequence? Until you bring it down to more than 15%, it means it would be up for grabs. Anybody can gain control to that corporation just by buying and selling in the stock market. SEC TO INCREASE THE PUBLIC FLOAT OF LISTED COMPANIES The Securities and Exchange Commission will increase the public float of Philippine listed companies from the current ten Page 84 of 112

SEC. 19. Tender Offers. – 19.1. Any person or group of persons acting in concert who intends to acquire at least fifteen per cent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty per cent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders. (a) Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and regulations as the Commission may prescribe. (b) Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn by or on behalf of the depositor at any time throughout the period that the tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after sixty (60) days from the date of the original tender offer or request or invitation, except as the Commission may otherwise prescribe. (c) Where the securities offered exceed that which a person or group of persons is bound or willing to take up and pay for, the securities that are subject of the tender offer shall be taken up as nearly as may be pro rata, disregarding fractions, according to the number of securities deposited by each depositor. The provisions of this subsection shall also apply to securities deposited within ten (10) days after notice of an increase in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first published or sent or given to security holders. (d) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for whether or not such securities have been taken up by such person before the variation of the tender offer or request or

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno invitation. So, unsa man ning TENDER OFFERS? It says here, “any person or group of persons acting in concert who intends to acquire at least fifteen per cent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty per cent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect;”

The SEC ruled in favor of the respondent by reversing and setting aside its 27 July 2004Resolution and directed petitioner Cemco to make a tender offer for UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in accordance with Section 9(E), Rule 19 of the Securities Regulation Code. On petition to the Court of Appeals, the CA rendered a decision affirming the ruling of the SEC. It ruled that the SEC has jurisdiction to render the questioned decision and, in any event, Cemco was barred by estoppel from questioning the SEC’s jurisdiction.

So, 15% outright acquisition or 30% creeping acquisition. Nganong creeping man? Because it is over a period of 12 months. This a terminology of the stock exchange. You must make a tender offer. Meaning, you must announce that you are willing to buy at least 15% of existing stockholders. So all stockholders are given equal opportunity to avail of the price that you are offering within a given period. What happens if everybody wants to sell? Then it must be proportionate. Ang limit ra pud ana niya is 15%. Give everybody a chance equally of the price.

It, likewise, held that the tender offer requirement under the Securities Regulation Code and its Implementing Rules applies to Cemco’s purchase of UCHC stocks. Cemco’s motion for reconsideration was likewise denied.

In the case of CEMCO HOLDING VS. NATIONAL LIFE INSURANCE, G.R. No. 171815, this is about a local corporation – Union Cement. It was owned by PHINMA, part of the del Rosario group. Right after Ramos’ administration, everybody thought that Philippines is already taking off and no turning back. So they doubled their borrowing capacity to the US, but the problem is, they borrowed using the foreign currency and they’re earning in pesos. Ug sa dihang nibaliktad man ang agi sa Pinas, imbis pataas, nibaba man na. nagkabuang sila karon ug bayad eh. Dili sila makabayad, so ilang gibaligya ang ilang corportation sa Holcim. Now, when Holcim decided that they will buy, they wanted to escape this clause – tender offer. Since there is an intermediate corporation here which is wholly owned by PHINMA. (nag draw siya sa board diri guys, huhu wa koy copy) and then this CEMCO holdings is 55% owner of Union Cement. Instead of buying this shares by CEMCO, they bought CEMCO itself and they said we are not obliged to tender our offer since what we purchased is not the shares of stock of Union Cement which was traded in the stock market. Kining CEMCO man among gipalit. Ang sakyanan among gipalit dili ang ligid! Are they exempted from the tender offer rule? The SC said, they are still bound. Because the law says, DIRECTLY OR INDIRECTLY, subject ka sa tender offer rule.

2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the shares in UCHC, a nonlisted company.

CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC. GR No. 171815, August 7, 2007 Chico-Nazario, J. FACTS: Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders – UCHC, a non-listed company, with shares amounting to 60.51%, and petitioner Cemco with17.03%. Majority of UCHC’s stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks. In a disclosure letter, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco BCI’s stocks in UCHC equivalent to 21.31% and ACC’s stocks in UCHC equivalent to 29.69%. As a consequence of this disclosure, the PSE inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC. The SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule. Feeling aggrieved by the transaction, respondent National Life Insurance Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer. Cemco, however, refused. Respondent National Life Insurance Company of the Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. Page 85 of 112

ISSUES: 1. Whether or not the SEC has jurisdiction over respondent’s complaint and to require Cemco to make a tender offer for respondent’s UCC shares.

HELD: 1. YES. In taking cognizance of respondent’s complaint against petitioner and eventually rendering a judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to Rule19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code, to wit: “ 13. Violation If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code.” The foregoing rule emanates from the SEC’s power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with the Securities Regulation Code, more specifically the provision on mandatory tender offer under Section 19thereof. Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. 2. YES. Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. A public company is defined as a corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company . Stated differently, a tender offer isan offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders. The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule. The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company isobtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies. As appropriately held by the Court of Appeals:

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance, as a result of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership acquisition to mean both direct and indirect. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. The bottom line of the law is to give the shareholder of the listed company the opportunity to decide whether or not to sell in connection with a transfer of control. x x x Now, 30% creeping, karong buwana palit kag 5%, declare ka sa beneficial interest. March, palit na sad kag singko, edi 10 na. palit na pud ka Mayo, Agosto, baynte na. hinay hinay na hantod sa naabot ug 30% before the year ends, subject na dayon ka sa tender offer rule. Imoha untang ipahibalo ang kadaghanan para tanan maka avail sa presyo. That’s the idea- transparency.

February 15, 2018 (Carra Tito) RECAP OF LAST MEETING’S DISCUSSION: Now, we said that we must remember 5%, 15%, 30% and finally 50%. If you buy 50% of the outstanding capital stock of the corporation, then you must make a general offer, it is not just a tender offer. Example of General offer: “I am buying everybody else.” transaction when I hit 50%.

If you’re looking for proxies, you must put it in writing. You write who are the people available. And it must be explicit that you are asking for a proxy. In other words, there is no implicit proxy solicitation. Proxy solicitation must be express and in order to do that, you must submit a proxy statement. You must say what is the proxy for. Because you are interested in amending the articles to raise the capital. You must make this available to everybody. If you are the controlling stockholder at that time, then it will be at the expense of the corp. because all you need is a resolution from the bod. But, can somebody make a proxy solicitation to counter your proxy solicitation? YES. If you so do it, then an adverse proxy solicitation, then the corporation must open its books to these adverse proxy solicitations. You must give them the addresses of all the stockholders. You must give them the reckoning of their holdings according to their cut-off date. As to the mailing of the proxies that are for the minority, it will be after ____. Now, it is no longer expensive. Why? When this was made, there was no internet. Mailing expense. So anybody can counter your proxy solicitations. How about the shares of stock of the corporation that are long. In other words, we _______ because the certificate of stocks was _____. What happens to those? Can they be issued voting proxies? The rule is under 20.4. (I think Father meant. Section 20.11.2.18) 20.11.2.18. No member of the Stock Exchange and no broker/dealer shall give any proxy, consent or authorization, in respect of any security carried for the account of a customer to a person other than the customer, without the express written authorization of such customer. The proxy executed by the broker shall be accompanied by a certification under oath stating that before the proxy was given to the broker, he had duly obtained the written consent of the persons in whose account the shares are held.

It is the price of my last

Why is this rule in the Securites regulation? To give a chance to the minority stockholders to avail of the market price. Market price is that which the particular share is bought and sold. So you make a general offer if you purchase 50%, within the 1 year period. So take note that is the 1 year period. Lapas na ka sa 30, maghinay hinay na ka palit. Di nimo dayonon ug 50. You will have to buy the other 50%.That is very expensive. If you pay for a corporation more than 50% of its outstanding capital stock, that is very expensive because you don’t need the 50% anymore. You control it 50% +1. That’s how they look at it in finance.

So, you solicit proxy through the broker but ultimately to the owner. It is the owner who will tell the broker “my shares of stock with you under your name will vote for these following people as my proxy.” So the broker cannot issue proxy by his own authority.

Remember, tender offer, you will buy according to their percentage of outstanding capital stock if everybody makes a tender offer. They cannot expect to be bought all their shares. If there is many, you have to allocate. Give a chance to everyone.

Now, in 20.5, “A broker or dealer who holds or acquires the proxy for at least 10% of such percentage as the commission may prescribe in the outstanding shares of the issuer shall submit a report identifying the beneficial owner within 10 days after such acquisition or its own account or customer to the issuer of the security to the exchange where the security is traded and to the commission.

PROXY SOLICITATION RULE Now, we come to the proxy solicitation rule. That’s section 20. What are the rules with respect to proxies in publicly traded corporations?

What is a dealer? A dealer is one who buys or sells shares for his own account. What is a broker? A broker buys or sells for the account of others

1.

Proxies must be issued and proxy solicitation must be made in accordance with the rules and regulations to the issuing commission.

10% ha. But under the Philippine stock exchange, it is 5%. The rule in the Philippines now under the Phil. stock exchange, if you purchase 5%, you must disclose the beneficial owner. They can do it because the Philippine Stock Exchange is the so called SRO (Self-Regulating Organization).

So if you solicit proxies from the others, you must follow these rules: a) Proxies must be in writing b) Signed by the stockholder or his duly authorized representative and c) Filed before the scheduled meeting with the corporate secretary.

There is a very important case: GSIS vs. CA & ANTHONY ROSETE (G.R. No. 183905, April 16, 2009) NOTE: FATHER GAVE A VERY LONG DISCUSSION OF THIS CASE SO I’M GIVING A LONG VERSION OF THE DIGEST.

As I told you, most of the corporations that are broad-based stockholder, they have a cut-off date. Normally it is 1 month before the meeting. The stock and transfer book is closed. There are no transactions after the cut-off date that are recognized. Why? It is from there you determine what is the majority is, and determine the proxies. You can no longer get proxies beyond that date. Page 86 of 112

GOVERNMENT SERVICE, INSURANCE SYSTEM, Petitioner, vs. THE HON. COURT OF APPEALS, (8TH DIVISION), ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES PUNO, Respondents. x - - - - - - - - - - - - - - - - - - - - - - -x

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno G.R. No. 184275 April 16, 2009 SEC COMMISSIONER JESUS ENRIQUE G. MARTINEZ IN HIS CAPACITY AS OFFICER-IN-CHARGE OF THE SECURITIES AND EXCHANGE COMMISSION and HUBERT G. GUEVARA IN HIS CAPACITY AS DIRECTOR OF THE COMPLIANCE AND ENFORCEMENT DEPT. OF SECURITIES Petitioners, vs. ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES Respondents. FACTS: The annual stockholders’ meeting (annual meeting) of the MANILA ELECTRIC COMPANY (MERALCO) was scheduled on 27 May 2008. In connection with the annual meeting, proxies were required to be submitted on or before 17 May 2008, and the proxy validation was slated for five days later, or 22 May. In view of the resignation of Camilo Quiason, the position of corporate secretary of Meralco became vacant. On 15 May 2008, the board of directors of Meralco designated Jose Vitug to act as corporate secretary for the annual meeting. However, when the proxy validation began on 22 May, the proceedings were presided over by respondent Anthony Rosete (Rosete), assistant corporate secretary and in-house chief legal counsel of Meralco. Private respondents nonetheless argue that Rosete was the acting corporate secretary of Meralco. Petitioner Government Service Insurance System (GSIS), a major shareholder in Meralco, was distressed over the proxy validation proceedings, and the resulting certification of proxies in favor of the Meralco management. On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay City, docketed as R-PSY-08-05777-C4 seeking the declaration of certain proxies as invalid. Three days later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the complaint. On the same day, GSIS filed an Urgent Petition with the Securities and Exchange Commission (SEC) seeking to restrain Rosete from "recognizing, counting and tabulating, directly or indirectly, notionally or actually or in whatever way, form, manner or means, or otherwise honoring the shares covered by" the proxies in favor of respondents Manuel Lopez, Felipe Alfonso, Jesus Francisco, Oscar Lopez, Christian Monsod, Elpidio Ibañez, Francisco Giles-Puno "or any officer representing MERALCO Management," and to annul and declare invalid said proxies. GSIS also prayed for the issuance of a Cease and Desist Order (CDO) to restrain the use of said proxies during the annual meeting scheduled for the following day. A CDO to that effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the same day the complaint was filed. During the annual meeting held on the following day, Rosete announced that the meeting would push through, expressing the opinion that the CDO is null and void. On 28 May 2008, the SEC issued a Show Cause Order (SCO) against private respondents, ordering them to appear before the Commission on 30 May 2008 and explain why they should not be cited in contempt. On 29 May 2008, respondents filed a petition for certiorari with prohibition with the Court of Appeals, praying that the CDO and the SCO be annulled. The petition was docketed as CA-G.R. SP No. 103692. Many developments involving the Court of Appeals’ handling of CA-G.R. SP No. 103692 and the conduct of several of its individual justices are recounted in our Resolution dated 9 September 2008 in A.M. No. 08-8-11-CA (Re: Letter Of Presiding Justice Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692). On 23 July 2008, the Court of Appeals Eighth Division promulgated a decision in the case with the following dispositive portion: WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the SEC is hereby DISMISSED due to SEC’s lack of jurisdiction, due to forum shopping by respondent GSIS, and due to splitting of causes of action by respondent GSIS. Consequently, the SEC’s undated cease and desist order and the SEC’s May 28, 2008 show cause order are hereby DECLARED VOID AB INITIO and without legal effect and their implementation are hereby Page 87 of 112

permanently restrained. The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being considered, out of equitable considerations, as an election contest in the RTC, because the prescriptive period of 15 days from the May 27, 2008 Meralco election to file an election contest in the RTC had already run its course, pursuant to Sec. 3, Rule 6 of the interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, due to deliberate act of GSIS in filing a complaint in the SEC instead of the RTC. Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the Chief Justice and three (3) copies to the Office of the Court Administrator: (1) for sanction by the Supreme Court against the "GSIS LAW OFFICE" for unauthorized practice of law, (2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella ElamparoTayag, Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for violation of Sec. 27 of Rule 138 of the Revised Rules of Court, pursuant to Santayana v. Alampay, A.C. No. 5878, March 21, 2005 454 SCRA 1, and pursuant to Land Bank of the Philippines v. Raymunda Martinez, G.R. No. 169008, August 14, 2007: (a) for violating express provisions of law and defying public policy in deliberately displacing the Office of the Government Corporate Counsel (OGCC) from its duty as the exclusive lawyer of GSIS, a government owned and controlled corporation (GOCC), by admittedly filing and defending cases as well as appearing as counsel for GSIS, without authority to do so, the authority belonging exclusively to the OGCC; (b) for violating the lawyer’s oath for failing in their duty to act as faithful officers of the court by engaging in forum shopping; (c) for violating express provisions of law most especially those on jurisdiction which are mandatory; and (d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately splitting causes of action in order to file multiple complaints: (i) in the RTC of Pasay City and (ii) in the SEC, in order to ensure a favorable order. The promulgation of the said decision provoked a searing controversy, as detailed in our Resolution in A.M. No. 08-8-11CA. Nonetheless, the appellate court’s decision spawned three different actions docketed with their own case numbers before this Court. One of them, G.R. No. 183933, was initiated by a Motion for Extension of Time to File Petition for Review filed by the Office of the Solicitor General (OSG) in behalf of the SEC, Commissioner Martinez in his capacity as officer-in-charge of the SEC, and Hubert Guevarra in his capacity as Director of the Compliance and Enforcement Department of the SEC. However, the OSG did not follow through with the filing of the petition for review adverted to; thus, on 19 January 2009, the Court resolved to declare G.R. No. 183933 closed and terminated. The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No. 183905 pertains to a petition for certiorari and prohibition filed by GSIS, against the Court of Appeals, and respondents Rosete, Lopez, Alfonso, Francisco, Monsod, Ibañez and Puno, all of whom serve in different corporate capacities with Meralco or First Philippines Holdings Corporation, a major stockholder of Meralco and an affiliate of the Lopez Group of Companies. This petition seeks of the Court to declare the 23 July 2008 decision of the Court of Appeals null and void, affirm the SEC’s jurisdiction over the petition filed before it by GSIS, and pronounce that the CDO and the SCO orders are valid. This petition was filed in behalf of GSIS by the "GSIS Law Office;" it was signed by the Chief Legal Counsel

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno and Assistant Legal Counsel of GSIS, and three self-identified "Attorney[s]," presumably holding lawyer positions in GSIS. The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its petitioners the SEC, Commissioner Martinez in his capacity as OIC of the SEC, and Hubert Guevarra in his capacity as Director of the Compliance and Enforcement Department of the SEC – the same petitioners in the aborted petition for review initially docketed as G.R. No. 183933. Unlike what was adverted to in the motion for extension filed by the same petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is one for certiorari under Rule 65 as indicated on page 3 thereof, and not a petition for review. Interestingly, save for the first page which leaves the docket number blank, all 86 pages of this petition for certiorari carry a header wrongly identifying the pleading as the non-existent petition for review under G.R. No. 183933. This petition seeks the "reversal" of the assailed decision of the Court of Appeals, the recognition of the jurisdiction of the SEC over the petition of GSIS, and the affirmation of the CDO and SCO. ISSUE: We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has sought to enjoin the use and annul the validation, of the proxies issued in favor of several of the private respondents, particularly in connection with the annual meeting. RULING: A. Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions of Rep. Act No. 8799, otherwise known as the Securities Regulation Code (SRC), its implementing rules (Amended Implementing Rules or AIRRSRC), and other related rules to support their competing contentions that either the SEC or the trial courts has exclusive original jurisdiction over the dispute. GSIS primarily anchors its argument on two correlated provisions of the SRC. These are Section 53.1 and Section 20.1, which we cite: SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The Commission may, in its discretion, make such investigations as it deems necessary to determine whether any person has violated or is about to violate any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association, clearing agency, other self-regulatory organization, and may require or permit any person to file with it a statement in writing, under oath or otherwise, as the Commission shall determine, as to all facts and circumstances concerning the matter to be investigated. The Commission may publish information concerning any such violations, and to investigate any fact, condition, practice or matter which it may deem necessary or proper to aid in the enforcement of the provisions of this Code, in the prescribing of rules and regulations thereunder, or in securing information to serve as a basis for recommending further legislation concerning the matters to which this Code relates: xxx (emphasis supplied) SEC. 20. Proxy Solicitations. – 20.1. Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by the Commission; The argument, stripped of extravagance, is that since proxy solicitations following Section 20.1 have to be made in accordance with rules and regulations issued by the SEC, it is the SEC under Section 53.1 that has the jurisdiction to investigate alleged violations of the rules on proxy solicitations. The GSIS petition invoked AIRR-AIRR-SRC Rule 20, otherwise known as "The Proxy Rule," which enumerates the requirements as to form of proxy and delivery of information to security holders. According to GSIS, the information statement Meralco had filed with the SEC in connection with the annual meeting did not contain any proxy form as required under AIRRSRC Rule 20. Page 88 of 112

On the other hand, private respondents argue before us that under Section 5.2 of the SRC, the SEC’s jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902A was transferred to the courts of general jurisdiction or the appropriate regional trial court. The two particular classes of cases in the enumeration under Section 5 of Presidential Decree No. 902-A which private respondents especially refer to are as follows: xxx (2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members, or associates; or association of which they are stockholders, members, or associates, respectively; 3) Controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations; xxx In addition, private respondents cite the Interim Rules on IntraCorporate Controversies (Interim Rules) promulgated by this Court in 2001, most pertinently, Section 2 of Rule 6 (on Election Contests), which defines "election contests" as follows: SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity of elections and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a nonstock corporation where the articles of incorporation or bylaws so provide. (emphasis supplied) The correct answer is not clear-cut, but there is one. In private respondents’ favor, the provisions of law they cite pertain directly and exclusively to the statutory jurisdiction of trial courts acquired by virtue of the transfer of jurisdiction following the passage of the SRC. In contrast, the SRC provisions relied upon by GSIS do not immediately or directly establish that body’s jurisdiction over the petition, since it necessitates the linkage of Section 20 to Section 53.1 of the SRC before the point can bear on us. On the other hand, the distinction between "proxy solicitation" and "proxy validation" cannot be dismissed offhand. The right of a stockholder to vote by proxy is generally established by the Corporation Code, but it is the SRC which specifically regulates the form and use of proxies, more particularly the procedure of proxy solicitation, primarily through Section 20. AIRR-SRC Rule 20 defines the terms solicit and solicitation: The terms solicit and solicitation include: A. any request for a proxy whether or not accompanied by or included in a form of proxy B. any request to execute or not to execute, or to revoke, a proxy; or C. the furnishing of a form of proxy or other communication to security holders under circumstance reasonably calculated to result in the procurement, withholding or revocation of a proxy. It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the securing and submission of proxies, while the latter concerns the validation of such secured and submitted proxies. GSIS raises the sensible point that there was no election yet at the time it filed its petition with the SEC, hence no proper election contest or controversy yet over which the regular courts may have jurisdiction. And the point ties its cause of action to alleged irregularities in the proxy solicitation procedure, a process that precedes either the validation of proxies or the annual meeting itself. Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion "to make such investigations as it deems necessary to determine whether any person has violated" any rule issued by it, such as AIRR-SRC Rule 4. The investigatory

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno power of the SEC established by Section 53.1 is central to its regulatory authority, most crucial to the public interest especially as it may pertain to corporations with publicly traded shares. For that reason, we are not keen on pursuing private respondents’ insistence that the GSIS complaint be viewed as rooted in an intra-corporate controversy solely within the jurisdiction of the trial courts to decide. It is possible that an intra-corporate controversy may animate a disgruntled shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio basis. At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul or invalidate improper proxies issued in contravention of Section 20. It cites that the penalties defined by the SEC itself for violation of Section 20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the first offense, and pecuniary fines for succeeding offenses.43 Indeed, if the SEC does not have the power to invalidate proxies solicited in violation of its promulgated rules, serious questions may be raised whether it has the power to adjudicate claims of violation in the first place, since the relief it may extend does not directly redress the cause of action of the complainant seeking the exclusion of the proxies. There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential Decree No. 902-A, which states: SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: xxx (g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members; xxx As promulgated then, the provision would confer on the SEC the power to adjudicate controversies relating not only to proxy solicitation, but also to proxy validation. Should the proposition hold true up to the present, the position of GSIS would have merit, especially since Section 6 of Presidential Decree No. 902-A was not expressly repealed or abrogated by the SRC. Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary to the "exercise of such jurisdiction." Note that Section 6 is immediately preceded by SECTION 5, which originally conferred on the SEC "original and exclusive jurisdiction to hear and decide cases" involving "controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations." The cases referred to in Section 5 were transferred from the jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section 5.2. Thus, the SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers. Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the cause of action of GSIS before the SEC is intimately tied to an election controversy, as defined under Section 5(c) of Presidential Decree No. 902-A. To answer that, we need to properly ascertain the scope of the power of trial courts to resolve controversies in corporate elections. B. Shares of stock in corporations may be divided into voting shares and non-voting shares, which are generally issued as "preferred" or "redeemable" shares. Voting rights are exercised during regular or special meetings of stockholders; regular meetings to be held annually on a fixed date, while special meetings may be held at any time necessary or as provided in the by-laws, upon due notice. The Corporation Code provides for a whole range of matters which can be voted upon by stockholders, including a limited set on which even non-voting stockholders are entitled to vote on. On any of these matters which may be voted upon by stockholders, the proxy device is Page 89 of 112

generally available. Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to election-related controversies is specifically confined to "controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations." Evidently, the jurisdiction of the regular courts over so-called election contests or controversies under Section 5(c) does not extend to every potential subject that may be voted on by shareholders, but only to the election of directors or trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code. This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the TRIAL COURTS by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree No. 902-A. The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the election of corporate directors must be seen as intended to confine to one body the adjudication of all related claims and controversy arising from the election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term "election contest" as encompassing all plausible incidents arising from the election of corporate directors, including: (1) any controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation, (2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of candidates, including the proclamation of winners. If all matters anteceding the holding of such election which affect its manner and conduct, such as the proxy solicitation process, are deemed within the original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing jurisdictions between that body and the regular courts becomes frighteningly real. From the language of Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of voting shares, or the validity of votes cast in favor of a candidate for election to the board of directors are properly cognizable and adjudicable by the regular courts exercising original and exclusive jurisdiction over election cases. Questions relating to the proper solicitation of proxies used in such election are indisputably related to such issues, yet if the position of GSIS were to be upheld, they would be resolved by the SEC and not the regular courts, even if they fall within "controversies in the election" of directors. The Court recognizes that GSIS’s position flirts with the abhorrent evil of split jurisdiction, allowing as it does both the SEC and the regular courts to assert jurisdiction over the same controversies surrounding an election contest. Should the argument of GSIS be sustained, we would be perpetually confronted with the spectacle of election controversies being heard and adjudicated by both the SEC and the regular courts, made possible through a mere allegation that the anteceding proxy solicitation process was errant, but the competing cases filed with one objective in mind – to affect the outcome of the election of the board of directors. There is no definitive statutory provision that expressly mandates so untidy a framework, and we are disinclined to construe the SRC in such a manner as to pave the way for the splitting of jurisdiction. Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory power of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly granting as it does "original and exclusive jurisdiction" first to the SEC, and now to the regular courts. The fact that the jurisdiction of the regular courts under Section 5(c)

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno is confined to the voting on election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the SEC to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than the election of directors. That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed. The controversy was engendered by the looming annual meeting, during which the stockholders of Meralco were to elect the directors of the corporation. GSIS very well knew of that fact. On 17 March 2008, the Meralco board of directors adopted a board resolution stating: RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby delegates to the Nomination & Governance Committee the authority to approve and adopt appropriate rules on: (1) nomination of candidates for election to the board of directors; (2) appreciation of ballots during the election of members of the board of directors; and (3) validation of proxies for regular or special meetings of the stockholders. In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with the SEC pursuant to Section 20 of the SRC, states: REASON FOR SOLICITATION OF VOTES The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the directors named under the subject headed ‘Directors’ in this Statement as well as to vote the matters in the agenda of the meeting as provided for in the Information Statement of the Company. All of the nominees are current directors of the Company. Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation or validation of proxies bore no relation at all to the scheduled election of the board of directors of Meralco during the annual meeting. GSIS very well knew that the controversy falls within the contemplation of an election controversy properly within the jurisdiction of the regular courts. Otherwise, it would have never filed its original petition with the RTC of Pasay. GSIS may have withdrawn its petition with the RTC on a new assessment made in good faith that the controversy falls within the jurisdiction of the SEC, yet the reality is that the reassessment is precisely wrong as a matter of law. So, proxy is an ancilliary issue to an election contest. And the one that has jurisdiction over the election contest necessarily has jurisdiction over the proxy issue related to the election contest. That’s the ruling of the Court. If it were in another setting, SEC. But because it is an election contest, it is the intra-corporate body. So correct si Anthony Rosete. Wa makalusot si Winston Garcia. Wa makalusot si Gandingco(?). A proxy is similar to a registration statement. You must complete data – what is the purpose of the proxy, what is the purpose of the action you are seeking approval, who are the people behind it, etc. You must describe it. Otherwise, you are not authorized.

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February 21, 2018 (Lizette Estillore) 17.2. The reportorial requirements of Subsection 17.1 shall apply to the following: (a) An issuer which has sold a class of its securities pursuant to a registration under section 12 hereof: Provided however, That the obligation of such issuer to file reports shall be suspended for any fiscal year after the year such registration became effective if such issuer, as of the first day of any such fiscal year, has less than one hundred (100) holder of such class securities or such other number as the Commission shall prescribe and it notifies the Commission of such; (b) An issuer with a class of securities listed for trading on an Exchange; and (c) An issuer with assets of at least Fifty million pesos (50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holder each holding at least one hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminate ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) share reduced to less than one hundred (100). We said that the Revised Security Code requires any (?) of failed securities that reach at least 10% of the outstanding capital stock to make known, disclose the beneficial owner. However, the PSE has lowered the requirement. It now requires 5% and that has been sanctioned by the SEC. Not only for listed corporations, but it also include corporations once their total assets reach P50 million and there are at least of two hundred (200) of which are holding at least one hundred (100) shares each. You are also required once you pay at least 10% of the outstanding capital stock to disclose the beneficial ownership. At any times proper to this is if the purchase is outside the Philippines and uses intermediaries - that is when this requirements sometimes become difficult to comply with. Example: You are a retirement fund in Germany. You employ wealth manager of an investment bank - HSBC. The manager contacts a Singapore brokerage. The stock broker contacts a broker here in the PSE because they want to buy PLDT or Jollibee shares of stock. So when they ask the broker who bought the shares in excess of 5% of the OCS of Jollibee, can he tell who the beneficial owner is? They will only say that it is from the broker in Singapore. The moment that they go out the Philippine territory, the problem is that this law is a municipal law and not an international law. Muana ka sa Singapore – “Who is the beneficial owner here?” “We do not know. This was just asked by the wealth manager in Singapore.” Pangutan-on na sad nimo ang Singapore wealth manager and he will just answer “Wala man. Gitawag lang man mi to work on this retirement fund.” Finally, when you go to the retirement fund and ask – “Who is the benfecial owner.” Muingon na sila – “Kadaghan ani among mga retirees.” Because the retirement fund is not the beneficial owner, isn’t it? It is for some other people. That is the problem of this requirement. Section 19. Tender Offers. – 19.1 Any person or group of persons acting in concert who intends to acquire at least 15% of any class of any equity security of a listed corporation of any class of any equity security of a corporation with assets of at least fifty million pesos (50,000,000.00) and having two hundred(200) or more stockholders at least one hundred shares each or who intends to acquire at least thirty percent(30%) of such equity over a period of twelve months(12) shall make a tender offer to stockholders by filling with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all request or invitations or tender offer or requesting such tender

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not alter than the time copies of such materials are first published or sent or given to security holders. (a) Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and regulations as may be prescribe. (b) Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn by or on behalf of the depositor at any time throughout the period that tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after sixty (60) days from the date of the original tender offer to request or invitation, except as the Commission may otherwise prescribe. (c) Where the securities offered exceed that which person or group of persons is bound or willing to take up and pay for, the securities that are subject of the tender offers shall be taken up us nearly as may be pro data, disregarding fractions, according to the number of securities deposited to each depositor. The provision of this subject shall also apply to securities deposited within ten (10) days after notice of increase in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first published or sent or given to security holders. (d) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation. 19.2. It shall be lawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made in the light of the circumstances under which they are made, not mis-leading, or to engaged to any fraudulent, deceptive or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation for any security holders in opposition to or in favor of any such favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, define and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive and manipulative. Once you buy 15%, then you must make a tender offer. You must make an announcement. So any stockholder who wants to sell, even if the small ones, they can have this benefit. If there are so many who want to sell, then it will be on pro-rata. Here is somebody who owns 10% of the OCS. He wants to avail of the tender offer. You get 10% of the 15% - that is extent that you will buy from that offer. How do the investors treat this? They try to scurry around it. Instead of buying 15% at any one time, you just by 14.5%. Then you wait for one year. Then you buy again up to 29.5% so you will not be under the 30% rule because if you also buy 30%, you end up to make a tender offer. Hulat na sad ka another year. By the time, people will already know that you want to take over the company. Patas-anay man na siya sa presyo. Mahal na kaayo pagsulod nimo. They say that this tender offer rules put a premium on what otherwise would be unbridled trading of shares of stock because people *begin to know*, then they will put a premium. Mu-mahal nuon ang shares of stock. When you buy at least 50%, you must make a general offer. You will be committed to buy everybody else at the same price of your last transaction. So once again, what do you do when you want to increase from 29.5% to 50%? After one year, palit ka ug 49% of the OCS so you do not have to make a general offer. Page 91 of 112

How do you control the company when you only have 49%? Mangita ka ug proxy. Mao na na. Section 20. Proxy solicitations. - 20.1. Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by the Commission 20.2. Proxies must be in writing, signed by the stockholder or his duly authorized representative and file before the scheduled meeting with the corporate secretary. 20.3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid only for the meting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at one time. 20.4. No broker or dealer shall give any proxy, consent or any authorization, in respect of any security carried for the account of the customer, to a person other than the customer, without written authorization of such customer. 20.5. A broker or dealer who holds or acquire the proxy for at least ten percent (10%) or such percentage as the commission may prescribe of the outstanding share of such issuer, shall submit a report identifying the beneficial owner of ten days after such acquisition, for its own account or customer, to the issuer of security, to the exchange where the security is traded and to the Commission. Proxy Solicitation We said that as to the proxy, the substantial and formal requirements are under the jurisdiction of SEC. But because of the land mark case of GSIS by PGM Winston Garcia vs. Anthony Rosete and CA, in the context of an election contest – in view of the annual election of the members of the board – that does not fall under the jurisdiction of the SEC but under the jurisdiction of the intra-corporate court because of Section 5.2 which says: 5.2. The Commission’s jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed. Notice that the RTC is a court of general jurisdiction. But then the SC is given authority of the SEC to designate a specific sala to hear and decide cases that have been enumerated in Section of PD 902-A. One of those cases is election contest because those election contests have been placed by the SRC Section 9.2 under the jurisdiction of the intra-corporate court so named and designated by the SC, then ancillary issues by solicitation of proxies or the sufficiency of proxies will now be under the jurisdiction of the intra-corporate court and not the SEC. The moment a broker or dealer who holds or acquire the proxy for at least ten percent (10%) or such percentage as the commission may prescribe of the outstanding share of such issuer, the broker or dealer shall submit a report identifying the beneficial owner of ten days after such acquisition. Section 21. Fees of Tender Offers and Certain Proxy Solicitations. – At the time of filling with the Commission of any statement required under Section 19 for any tender offer or Section 72.2 for issuer purchases, or Section 20 for proxy or consent solicitation, The Commission may require that the person making such filing pay a fee of not more than one-tenth (1/10)(1%) of; 21.1. The propose aggregate purchase price in the case of a transaction under Section 20 or 72.2; or

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno 21.2. The proposed payment in cash, and ion value of any securities or property to be transferred in the acquisition, merger or consolidating, or the cash and value of any securities proposed to be received upon the sale disposition of such assets in the case of a solicitation under Section 20. The Commission shall prescribe by rule diminishing fees in inverse proportion to the value of the aggregate price of the offering. There are certain fees that are required. Even if your securities are exempt from registration, you pay a certain fee much lower. If not exempt, then with all the more reason you pay certain fees. Every year this fees increase because the SEC is granted authority to raise the fees. *not discussed Section 22. Internal Record Keeping and Accounting Control. – Every issuer which has a class of securities that satisfies the requirements of Subsection 17.2 shall: 22.1. Device and maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (a) Transactions and access to assets are pursuant to management authorization; (b) Financial statements are provided in conformity with generally accepted accounting principles that are adopted by the Accounting standards council and the rules promulgated by the Commission with the regard to the preparation of the financial statements; and (c) Recorded assets are compared with existing assets at reasonable intervals and differences are reconciled. Section 23. Transactions of Directors officers and Principal Stockholders. – 23.1. Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any class of any equity security which satisfies the requirements of subsection 17.2, or who is a director or an officer of the issuer of such security, shall file, at the time either such requirement is first satisfied or after ten days after he becomes such a beneficial owner, director, or officer, a statement form the Commission and, if such security is listed for trading on an exchange, also with the exchange of the amount of all the equity security of such issuer of which he is the beneficial owner, and within ten days after the close of each calendar month thereafter, if there has been a change in such ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month. 23.2. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director or officer by reason of his relationship to the issuer, any profit realized by him from any purchase or sale, or any sale or purchase, of any equity security of such issuer within any period of less than (6) months unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such profit may be instituted before the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but not such shall be brought more than two years after the date such profit was realized. This Subsection shall not be construed to cover any transaction were such beneficial owner was not such both time of the owner or the sale, or the sale of purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection. 23.3. It shall be unlawful for any such beneficial owner, director or officer, directly or indirectly, to sell any equity security of such issuer if the person selling the principal: (a) Does not own the security sold: or (b) If owning the security, does not deliver not deliver it against such sale within 20 days thereafter, or does not within five days after such sale deposit Page 92 of 112

in the mails or the unusual channels of transportation; but no person shall be deemed to have violated this subsection if he proves not withstanding the exercise of good faith he was unable to make such delivery in such time, or that to do so would cause undue inconvenience or expense. 23.4. The provisions of subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and the provisions of Subsection 23.3 shall not apply to any sale, of an equity security not then or thereafter held by him and an investment account, by a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the public interest, define and prescribe terms and conditions with respect to securities held in an investment account and transactions made in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market. PROHIBITIONS AND FRAUD, MANIPULATION AND INSIDER TRADING Section 24. Manipulation of Security Prices; Devices and Practices. – 24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market (hereafter referred to purposes of this Chapter as "Exchange"): (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership. (b)

(c)

(d)

(e)

To affect, alone or with others, a securities or transactions in securities that: (I) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of sale of such security. To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this Code or by rules of the Commission.

24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors.

upon any person. INSIDER TRADING

24.3. The foregoing provisions notwithstanding the Commission, having due regard to the public interest and the protection of investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section. Wash Sales, Section 24(a) You effect any transaction with such securities which involves no change in the beneficial ownership thereof. Example: Mutawag ka sa Broker A to sell(?) Manila Mining 500,000 shares at 1 centavo per share. Unya tawag nasad ka lain broker – Broker B – to buy 500,000 shares of Manila Mining at 1 centavo per share. Ikaw nibaligya, ikaw ra sad nipalit. Ikaw nibaligya, ikaw ra sad nipalit kay natulog naman tong Manila Mining. Wala man gyud nag buy or sell ana. So you are making it appear that there is transaction. That is called a manipulative transaction. Imong gitunto ang market. Ang mga tao sad “Uy, nilihok naman ang Manila Mining. There must be something going on which I do not know. Sulod na ta ana kay mauwahi man ta.” Kinsa ma’y mabulahan ana? The stock brokers because they charge you commission and the government also taxes you – capital gains tax. Here, you simulate a transaction. That is called Wash Sale. Madani nimo ang mga tao. This is different with the Wash Sale in Taxation. Take note. (Talks about TRAIN LAW, casino, betting games) There is also an improvement of that which is called a MATCH ORDER. This time duha ka ka-tao. You will act as seller. Your friend will act as buyer. Your order to sell is matched with his order to buy. 30 minutes later, he will sell and I will buy. Daghan na. You just go through Section 24. Section 25. Regulation of Option Trading. – No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. The terms "put", "call", "straddle", "option", or "privilege" shall not include any registered warrant, right or convertible security. What is the difference between put-option and call option?  CALL OPTION. An option to buy certain shares at a given price  PUT OPTION. An option to sell certain shares at a given price  STRADDLE. An option to buy and sell. What is MARKING THE CLOSE? The stock market section in the newspaper mupagawas na sila na mao ni ang shares of stock of SMC and indicate there the opening price and closing price. The opening price is the first transaction and the closing price is the last transaction. Makita na nimo kung nisaka or niubos. Kung interesado ka, kung musaka, bantayan nimo ang time. Pag mag close na ang market, palabyon na nimo gamay tapos muhabol ka ug order – patas-on nimo ang price arun musaka ang close kay mao man na ang basehan the next day. So you mark the close, purposely patasan nimo ang presyo kay ugma mo-unload na ug daghan unya nagkagidlay naman ang price ana. *not discussed Section 26. Fraudulent Transactions. – It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: 26.1. Employ any device, scheme, or artifice to defraud; 26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or 26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit Page 93 of 112

Section 27. Insider’s Duty to Disclose When Trading. – 27.1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was aware of the material nonpublic information at the time of the purchase or sale. 27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. 27.3. It shall be unlawful for any insider to communicate material nonpublic information about the issuer or the security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information 27.4. (a) It shall be unlawful where a tender offer has commenced or is about to commence for: (i) Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and (ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsection 27.4 (a)(I). (b) For purposes of this subsection the term "securities of the issuer sought or to be sought by such tender offer" shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities. WHO IS AN INSIDER? 3.8. "Insider" means (a) the issuer; (b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer;

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno (c)

(d)

(e)

a person whose relation or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or a person who learns such information by a communication from any forgoing insiders.

INSIDER INFORMATION This is a material information about the issuer or the security which is not available to the public, but is material because it influences any reasonable person in deciding whether sell, buy, or hold the particular security. Example: Malampaya in Palawan traded in the stock market. Oriental Petroleoum is one of the players there. Kintahay nag sige sila deal. Gawas na ang oil. Ang isa sa mga engineer nga nakakita, hulbot sa iyang cellphone tawag sa iyang asawa nga tua sa Makati na mupalit na shares kay naa na naigo nga oil. That is insider trading. He is in possession of material information about the issuer and it will influence any objective investor as to his decision to buy, sell, or hold. Now the problem is STRUCTUCAL INSIDER TRADING. Many of these big firms, they give advance disclosures to the big investors which are normally institutional funds. Tawag sila Investors Conference. They present a big product that Apple is going to launch – iPhone 13. Papilion ka nila. Why? Because you are an institutional investor. You have a big stake. You pullout from Apple, it will influence the price of the stocks. That is the problem because there is such a thing as advanced investors’ conference that somehow give them an advance notice of material information not otherwise known to the general investing public. The US SEC wants to put an end to that but it is very difficult because some of the biggest investors are the government itself.

street level and then he goes to an ordinary telephone booth (in the 80s, there are no messages or text), and he has a pocket full of coins and dials to his bank in Switzerland (in which he has an account) and he says ‘buy me this shares of stock traded in Wallstreet’, magsugod na ug broker ani na shares kay naa na man siya account didtu palit siya shares didtua. Pagkahuman sa merger, saka ang presyo sa surviving corporation or the new corporation if it is a consolidation, ginansya siya, baligya na sad niya. Datu na kayo siya, 10 years na niya ginabuhat. Until one afternoon, naay nituktok sa iyahang opisina na men in black holding a warrant of arrest for Insider Trading. Wala siya’y nahimu pero ngadtu sa presohan, nagcompromise agreement siya, nareduce iyahang sentence, paggawas niya nakasulat siya ug libro, nadatu na pud siya kay na best seller man. Karun naa na balaud na you cannot profit from your crime. Nganu nasakpan man siya? Wallstreet and the New York Stock Exchange, they now have a program that tracks business transactions in the New York Stock Exchange for purposes of tracing insider trading. Let us say this is the stock and it is trading. Naa na gali good news that will enhance the value of the shares of stock, let’s say there is now a merger, saka dayun na. So this is the time when the merger finally occurred. They trace it back, kini, this is a spike, somebody bought shares of stock here, can this be explained? If it cannot be explained because there is no good news, it means there is insider training. Tan-awun nila kung kang Boysky, dili man ni kang Boysky kay kang Boysky gamay ra man kayo, only a couple of million, gamay ra kayo na. Mau na ilang pangitaon.diri—kinsa man ni, ang Swiss Bank man diay ni kay sa tanto niya sige ug tawag, nakakita man ang bangko na nidatu man ning tawhana, kita bangko tig-sunod lang ta niya, unya daku man ang kwarta sa bangko, mau nan ni spike. Nakit-an na siya, ma-trace naman iyahang pangalan sa stock because the beneficial owner must be disclosed. There are millions of transactions a day. How do you trace it? Naa sila mga tao na maganalyze lang ani na transactions. That is how they trace insider trading. Do you remember Mr. Ongpin. A famous case here. He used to be an accountant. He worked for SGV, he became the managing partner of SGV and pirated by Marcos. Then he was made trade secretary, then finance secretary, until Marcos was deposed. He had money with him.

February 22, 2018 (Zarah Domingo) Insider Trading The whole idea of the Securities Regulation Code, all transactions are made known to the public that is why there is a ticker-tape. Now it is an electronic tape. All transactions in the stock market are recorded. All issued shares there have a symbol. There is a number there and a smaller number above, that is the number of shares that were involved in this one transaction. Then there is the price, nagdagan na, sige dagan. Sunod na sad na transaction. So, because it is open to the public, then the real price of the shares of stock will come out, because all the seller and buyers are supposed to be there in the market. So if you have information but you do not let the market know about it, you take advantage of that. That is not allowed, if your shares of stock are traded. Illustration: Exploration for oil company: You are exploring for oil, you already know you hit oil. So nobody else knows about that. You buy shares and then the rest of the public begin to know, and they find out that you knew about it already at the time that they transacted. That is insider trading. The most famous insider trading story was Mr. Boysky. He was an MAA (Mergers and Acquisition’s Bank) Lawyer of an Investment Bank. He is hired by consolidated banks that enter into mergers. Sila ang in-charge sa pagpangita ug source of funds to buy shares and also the correct valuation of the thing you are about to purchase, that requires a lot of work. Mr. Boysky, paghapit na magconclude ang transaction, what does he do? He quietly goes down to the levator and goes down to the Page 94 of 112

Philex Mining –Gold. At the time, 3000 dollars per tri-ounce, that was the peak. Philex was the biggest gold mining in the Philippines, so much so that the big investors have placements in Philex because they have shares of stock. The investors are indirectly the government like GSIS, SSS, Landbank, Development Bank, they have investments in Philex. Philex was in doldrums because people knew that thy have not found new ore. Then, all of a sudden, somebody became interested to gain control over Philex. So DBP, SSS, GSIS, suddenly came together and they sold their holdings of Philex at a very hefty price of the traded price in the stockmarket. (Say, the traded price in the market is only P3, but the substantial sotckholders sold at P6). So in the news, it was reported that the government finally got its investments. Suddenly, it was revealed that the one who bought it was Roberto Ongpin. 2 months later, Ongpin turns around and sells his shares to Manuel V. Pangilinan at P15 per share. Mas daku pa siya ug ginansya. They also found out that Ongpin bought those shares out of a loan granted by DBP. So ang DBP, tagiya gud siya ug Philex Shares, gitagaan ni niyang tawhana ug kwarta arun ipalit niya aning shares, gi-gisa siya sa iyahang kaugalingung mantika. Nahimu na nga kaso karun on insider trading. He was acquitted. There was no proof that he knew that Pangilinan was interested, but everyone knew. Kay si Pangilinan kung interesado siya, 15% pa lang he has to disclose already, if you buy 50% you have to make a general offer. But they say the real power behind it is the First Gentleman (who ordered it). The thesis is Insider Trading in the Philippines is harapharapan. During the time of Erap, there was an ambitious guy by the name of Edward Go, he was the owner of Equitable Bank and Trust Company, somewhere in the bottom 10 of commercial banks.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Nagdamgo siya na ma-Top 3 siya, that he will be in the stratosphere of BPI etc. Equitable Bank thought of slowly buying up other commercial banks. He knew that there was a big clask in PCI Bank. The original owners of that Bank were Montelibano who was part owner of Meralco together with the Lopezes and Montinola of Ammon Trading. When Marcos took over, Lopez fled, gikuha na ni Marcos ang shares ni Lopez. To make the story short, the Lopez shares became sequestered shares and the government became the owner of these. The Cory government said that those shares can be bought by dollar credits. Lopez wanted to buy but he doesn’t have enough so he went to Gokongwei, they paid the dollar debt in the US then they came back and they bought PCI Bank so they gain control (30% si Lopez, 30% si Gokongwei, and the remaining were those owned by Montinola, Montelibano, etc) Now, here comes Edward Go who wants to buy PCI Bank to make him Number 4. Guduol niya si Erap and Erap told SSS and GSIS to buy shares of PCI Bank but you go in tandem with Edward Go. Edward Go became 45% of that vehicle (30% SSS, 20% GSIS, then 100% na sila). SIla ang nipalit sa 60% share ni Gokongwei and Lopez). This is layering. Nadakpan man tu si Erap na naay ghost account (Jose Velarde). Bagsak ang equitable bank due to bank run. Mau tu gibaligya ang Equitable PCI Bank, nahimung BDO na mau nan a-number 1. Ingun pa ni Henry Sy, “sometimes, the one who wins is the counter-puncher.” Those transactions, they are all insider trading. There were no disclosures. They don’t even track the trading to explain why it is going up. BDO did not say stop the trading of my stocks so that I can explain why my shares are going up. It is not told in the public.

na duulun ning tawhana na naa sa sulod. Nakita niya mga computation, share price and assets unya arguments, nakita niya na merger ni. Sugo dayun siya papalit ug shares of stock. Nangutang siya palit shares of stock. Is he guilty of insider trading? Remember, the trade, you buy or sell because you are in possession of information. Is he in possession of information? No, he was only guessing. Naay share price, naa duha ka company—pangagpas tu niya. Dili tu information na nakuha na nagmerge mi. This one is intelligent guess work. That is not insider trading. So be careful when you are given a problem in the Bar Examination. It might be because the defenses are: 1.) The information that I used was not a secret, it was already available. The information has long been disclosed. 2.) The one I sold it to or bought from me, knew at that time the transaction was made kay ako siya gisultian, gipairma nako siya. So I did not take advantage. 3.) I was not in possession of the information. The material information might have been in existence at the time of the transaction but I did not possess it. Sulagma lang tu. Those are the defenses against insider trading. Be familiar with the defenses. February 23, 2018 1st half (April Liz Parreno) These are the three practices that our outlaw in the Security Regulations Code:

In the US, the moment your shares of stock go up to 10%, there must be something. Do you know something which the general public does not know?

1.) 2.) 3.)

As retailer, Walmart is 10 times bigger than Amazon. It is so big that 20% of the total exports of China is Walmart. Its shares of stock suddenly went down by 10%, shares of stock has been going down, 3%, 4% 10%, 20%. Their actual shares are going down because people are already beginning to buy in the web. Gamay ra kayo ni in comparison sa Walmart pero the trend, naa na. 2 years ago, gi-pirate sa Walmart ang Number 2 sa Amazon sa ilahang website trading. Gi-pirate nila ang IT sa Amazon sa ilahang web trading. Karun wala man nisaka sa web sales sa Walmart pareho kapaspas sa Amazon. So ang conclusion sa mga investors “wala na paglaum ni na mga tawhana, patay na ni, unload na.” Nganu kusog man kayo? Because the institutional investors received data in the slow rise of their web sales earlier than the general public. So they had the chance to dump their shares of stock of Walmart, ahead of everybody else. Ang uban tao, kusog man kayo so apil na lang pud sila. Now, that is insider trading. Now there was an investigation, kana tanan mga big funds why you were able to dump ahead of everybody else. That is how the pressure is on portfolio managers. Mau na mga na-convict 3 years ago, fastest going funds in New York. There were 3 Asians then (Father refers to them as “bunguton”). Tung isa, naa siya gihire na mangulitao (Father meant that a man was hired to court) sa assistant secretary ni Steve Jobs, General Manager of Apple, para lang makakuha sa strategy. Nadakpan, Insider trading. If you have insider trading muginansya ka, mutubo imung portfolio, you attract other investors. Mudaghan imung funds, mangita na pud ko ani ug insider trading. Ikaw ang pinaka-ngilngigan, adtu tanan nimu. Samut ka ug kapressure (kay musunod man sila nimu.) There must be material information. There was a problem given sometime in the Bar Examinations. Naa giabangan ni na function room ni na top hotel in Manila. They were made up of 2 of the top corporations involved in Plastics in Manila. They were discussing mergers. So gitawag sila sa inhouse restaurant na naay musulod na waiter. This waiter, he was asked, gisugo siya Page 95 of 112

Manipulative Practices Fraudulent Practices Insider trading Practices

OBLIGATION TO DISCLOSE If you are a listed issuer in the securities stock market, you have the obligation to disclose any event or change of the circumstances in your issuer or of the securities which may influence the investors in their judgment whether to sell, buy, or hold the security. If you go to the Philippine Stock Exchange, in a sale, then you go to Disclosures and it is listed there that the disclosures that are being made by the different corporations that are listed. For example, Century Pacific Group makes a disclosure: “We have purchased the controlling shares for Shakeys.” They announce that. So Shakeys is now part of Century Pacific group. CPG is listed in the Stock Exchange. Do not confuse that with Pacific Century, that is a Hongkong Corp. Before that, SMIDC made an announcement that they are already in advance stage to acquire Goldilocks. Just recently they made announcement that they decided to discontinue their negotiation and are parting as friends. Wala natuloy. You must make a disclosure if it has dependency to be a material information that could influence the investor in his decision to buy, sell, or hold the particular security.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno MARGIN TRADING What is margin trading? It is the practice of buying and selling shares of stocks on the stock market on credit.

Buy low, sell high. That is if the market is going up. When the market is going down, people will sell high and buy low.

Who provides you the credit? The one who provides is the broker himself. Why would the broker give you credit so you can buy and sell shares of stock? Because you have collateral with the broker. Shares of stock which you asked the broker to buy for you and it is in a long position, in other words, you do not ask a certificate over that shares of stock and you just let the broker hold it. Those shares of stocks may be used as collateral if you’ve already ran out of money. Just in case you want to trade in the Stock Market, the first thing you do is look for broker. For example, Metrobank. They have stock agency. If you’ve found a broker to your liking, you establish contract. The broker would say, “I do not know you.” Unless you are Henry Sy. Obviously you are not lol. So you’re not known, the broker will tell you, “I suggest you open an account with us”. So you open an account, you deposit 1M pesos. You now have money with the broker. You can now call the broker and say, “get me Century Pacific 1,000 shares ‘at the market’ ”. Whatever its price at the market, you are willing to pay – that is what “at the market” means. So he will use your deposit and buy your shares. He will either send you a text according to your instructions, if you want via text or via phone call. So he will ask you if you want certificate of Stock. And you say “No”, because you do not want to pay extra for the certificate so he holds it for you. Can you receive dividends? Yes, he gives you the dividends. He holds it. Suppose your 1M is already totally spent and you still want to buy some shares. You want to buy it on credit. Can you now tell the broker, “can I buy shares of stock on margin?”. The broker can extend you credit. In which case you are now buying shares of stock on borrowed money from the broker. What is the limit of the broker in extending credit for you to buy shares of stock? The limit is found in Section 48.1 of SRC

Pag abot na diri 90 na, muingon ka sell 1,000 San Miguel shares, wala pa ka ana. Tagbuon nimo diri sa hapon, palit ka, mao na gamiton na and ideliver nimo ganihang buntag na wala pa ka. That’s called “SELLING SHORT”. Muingon gani sila, “the market, people are shorting San Miguel”. That means there are already many people who are selling San Miguel shares na wala pa sila, hoping to catch if it naa na sa ubos. Ang problema nimo if di nimo pagpadayon, mukalit lang saka. Ibaligya nimo diri, palit ka diri. Mas taas na nuon imong gibaligya. Unsay mahitabo sa naga speculate? Mga bankers ba, mahurot man ilang gideposito sabroker unya active kayo ang market. Sige ka lang saka, bagsak, saka na sad, bagsak. Maka apas ka ana, ma milyonaryo ka ana kay paspas man kayo. The problem is wala na kay kwarta kay nahurot naman so on credit na ka. Muingon ka sa broker, “sell”. Tagbuon nimo nisaka sa taas, “buy”. Aron matagbungan nimo imong giballigya. This is more prevalent in the Philippine exchange because we are still using stock certificate. So our clearing period is three days. Kay i-deliver pa man, tan-awon pa ang certifiacte kung genuine ba ni then dal-on pa sa settling apparatus -- registered na tanan sa SEC ha. But shorting, you can even do it in two separate days because the clearing is three days. Whereas, if it is already uncertificated, you have to do it within one day, kanang shorting. Kanang imo gibaligya na wala pa ka, kailangan before the day ends you have to cover it kay ang clearing period is one day kay uncertificated man. That now answers the question. Yes, you can sell securities which you do not own yet. You can short provided you do not violate the clearing requirements. Ma violate gani ka, wala kay shares na ipakita, nipusta ka na wala diay kay kwarta. In the stock market that is fraudulent but selling shares at the moment which you do not have but which later on you can cover before the clearing requirement, which is alright. You can do it.

xxx Know the restrictions on trading on margin. For the extension of credit, such rues and regulations shall be based on the following standard: An amount not greater than the whichever is the higher of – a.)

Sixty five per centum (65%) of the current market price of the security, or

One hundred per centum (100%) of the lowest market price of the security during the preceding thirty six (36) calendar months, but not more than seventy-five per centum (75%) of the current market price.

According to section 48.2 of SRC Section 48.2. No member of an Exchange or broker or dealer shall, directly or indirectly, extend or maintain credit or arrange for the extension or maintenance of credit or for any customer: a.) On any security unless such credit is extended and maintained in accordance with the rule s and regulations which the Commissioner shall prescribe under this Section including rules setting credit in relation to net capital of such member, broker, or dealer; Gitawag ka na sa broker, you have made transaction of credit. When your collateral which is long held by the broker, the current value goes down, it goes down lower than 75% of market value. What happens? Broker will make a broker’s call.

Can you sell securities which you do not own yet? Muingon ka sa imong broker, “sell San Miguel at the market”. “Wala man kay San miguel sir.” “Basta sell lang, akong order na nimo”. Locally that happens when the price of shares of stocks are going down. That is what you do, you sell short the security. *NOTE: I think Fr wrote an illustration on the board but absent ata ko ani na day so sorry guys, use your imagination na lang sa hehe* This is the number of securities; this is the price. Let say the price of shares of stock is starting here and hinay hinay na kanaog and sige pa gyud kanaog. So muingon ka “I will make money while the market is going down”. Page 96 of 112

Unsay may pasabot ana? Dugangi imong collateral kay its already insufficient according to the rules of SRC. How do you reduce your debt and put it under the limits of the SRC? a.) You can take part of your credit aron your collateral will be securing smaller amount kay niubos man ang value; or b.) you can add to the collateral. Take note that is a broker’s call. Section 49. Restrictions on Borrowings by Members, Brokers, and Dealers –

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno It shall be unlawful for any registered broker or dealer, or member of an Exchange, directly or indirectly:

shall file with the commission a salesman or associated person.

49.1 To permit in the ordinary course of business as a broker or dealer his aggregate indebtedness including customer’s credit balances, to exceed such percentage of the net capital (exclusive of fixed assets and value of Exchange membership) employed in the business, but not exceeding in any case two thousand per centum (2,000%) as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors.

You are a registered salesman of a particular broker or dealer; you are a registered associate of a particular broker or dealer. The moment you disassociate, you lose your registration. Mubalhin ka ug laing broker, apply na sad ka ug laing registration under that broker.

This is now the limit of the broker or dealer as to how much credit he can avail. To exceed 2,000% of the net capital exclusive of fixed assets and value of exchange membership, Your exchange membership is an asset ha but its not included in the computation of how much you can extend. Why? If the stock market is very active, the stock market seat is very expensive. The running price of seat of stock market is 3550million. Your fixed assets, your house, your land, your building, that’s not included in the determiantion of your assets in excessive of which you cannot go beyond 2,000% of whatever you lend to the customers. How about professionals?

notice of separation of such

Why is that? To avoid so called “rogue salesmen, row associates”. Kanang mu operate lang on their own. Maayo pa ng naay broker, kay naa man nay sureties na gi-file sa stock exchange to be answer for any damages that they may be responsible for because of trading. Kanang mga associates, mga salesman, mga empleyado na, wala man silay bond. Tingali manikas sila, nibalhin na sila, sige na silag tubag sa telepono, sige silag order, di na kabntay ang kliyente. That is why it is employer-specific. The registration of sales person, associates, they are employer-specific. February 23, 2018 2nd half (Shahata Tagtagan) We have practically taken up the salient points of SRC. Let us now move to PD 912-A, also known as the SEC REORGANIZATION DECREE. It’s called that because when it was passed in March 11, 1976, it transferred the SEC from the jurisdiction of the Finance Department to directly under the President of the Republic. It was given quasi-judicial jurisdiction.

What is an ODD LOT DEALER? In stock market floor, there are specialists. The common lot in the stock market is you cannot buy less than 100 shares. 100 shares is 1 lot. But let’s say PLDT, since its 15000/share, 1 lot of PLDT is 10 shares. Dako naman. That’s an exception. The normal lot kung mupalit ka is 100shares. Naay estante diha ug elchon, mupalit kag lechon. What is the common lot in lechon kung mupalit ka? ¼ kilo, kapalit ka? Unya nihapit kag kan-on diha. Palit kag duha ka gramo, ibaligya na sad nimo. Duha ka gramo kay naa naman kay kan-on, ikaw lang man isa mukaon. Ibaligya nimo, dili na bitaw kag magtigba tigba. Mao ni siya, odd lot dealer. Naay mga salin salin na shares of stock, paliton na niya, isa or diha ka buok, magtigom na siya. Ikaw, nagbaligya ka tanang shares of stock nimo, wa pa nabalhin, nagdeclare silag stock dividend, makadawat kag duwa tulo ka shares because you are still listed as the owner even after you had the transaction. So naa kay dividend 4 ka shares, unsaon man nimo pagbaligya na kailangan man 100 shares? It will not be transacted in the stock market. Muadto ka sa odd lot dealer. Muingon ka, “Naa man koy upat ka shares”. Muingon siya, “sige pangitaon ta kag lain”. Magtigom siya until mabuo niya ang 100, then there can already be a lot and he can already be listed and transacted. Tanda-i na ninyo kay dili na isulti diha. There are specialists. They concentrate on a particular industry, let’s say banking. There are many issues in the PSE. If you are somebody from abroad, you will contact these specialists if you want to make a sizeable investment in the banking industry. Floor reader Professional speculator acting for himself and as agent for others. He depends entirely upon profits derived from trading for his own account and does not receive commissions. Have you seen the movie trading places? *Talks about the movie starring Eddie Murphy whose role was floor reader *

What were the cases placed under the jurisdiction of the SEC? It is mentioned in Section 5. SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devices and schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission; xxx That’s the first class of cases. Then there are three others. These cases are now being transferred to the intra-corporate court which is supposed to be one of the branches of the RTC that is designated by the SC as an intra-corporate court. So, this was transferred by Section 5.2 of R.A. 8799 (SRC) Second group of cases: SECTION 5. xxx b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; xxx

This is called INTRA-CORPORATE Controversies within the corporation.

Broker, dealers, sales man, associated person, they are all registered in the SEC.

DISPUTES.

SECTION 5. xxx c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations; xxx

When will they terminate their registration? The registration shall be automatically terminated upon cessation his affiliation with said registered broker dealer or with an issuer in the case of salesman employed, appointed, authorized by the issuer; promptly following any sub cessation of affiliation with the registered broker, dealer, as the case may be, Page 97 of 112

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno These are called ELECTION CONTROVERSIES/INTRACORPORATE ELECTION CONTROVERSIES.

membership fee than the actual sale of these products, it is a pyramiding scheme. (Class: Aaahh… )

SECTION 5. xxx d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.

Adto dayon sila manguha, mangwarta, tanan mga tao ilang kumbinsuhon. Hala pamaligya mo, madatu mo, tan-awon imong balay. So that is the ruling now. You google it, Herbalife pyramiding scheme.

Suspension of payments cases of corporations. It is now transferred to the jurisdiction NOT of the intra-corporate court, but now because of the passage of FRIA Law 2010, it created an insolvency court to be designated by the SC. It’s one of the branches of the RTC solely for insolvency proceedings. Involuntary and voluntary, including suspension of payments and rehabilitation. 1ST GROUP OF CASES [Refer to Section 5 (a)]. The popular shortcut for these cases is PYRAMIDING CASES. Why is it called such? Because once the fraud is fullblown, a pyramid structure becomes evident. [Fr. draws something sa board.] You tell the public, you sell it to the public. Place your money with us, you will get 2% a month, which means 24% interest that we will pay every month. 2 x 12 = 24. Interest rates are normally reckoned in annual terms. When we say that the ten-year treasury US bond will now yield 2.9%, that’s not for the whole ten years. Annually, makakuha ka 2.9% based on the money you parted with to buy that treasury. That’s the yield. Muingon ning pyramiding scheme, butangan namig kwarta namo, 2% imong makuha kada bulan. Then they will say, P100,000.00 minimum. Unsaon man pag bayad diri, kanang 2% a month? Kaya pa na, kay P100,000.000 gud ang minimum na ihatag nimo. Pila may 2% sa P100,000.00? P2,000.00. Makabayad pa sa first month maski wala kay negosyo, out of the principal na iyang gihatag. Mulapas na gani mga walo kabuan, lisod na ka ana. Manguha pa gyud dugang pa na mga tao. As you can see, it becomes a pyramid. Unsa may ilang negosyo? WALA! Tinonto na, unsaon man nila pagbayad sa interest, gikan na sa sa principal sa musulod. Hastang naa pay sigeg butang ug kwarta, muapil diri, dili ni sila mahutdan kwarta pamayad kay gamay lang man kayo ilang gibayad, 2% lang man out of the principal, bayad kada bulan. Muundang na gani ang recruitment, din a, mabulilyaso na sila, wa diay mo negosyo. That’s why it is called a pyramiding scheme. Actually, it is originally called PONZI SCHEME (an Italian man from the 19th century. He carried his pyramiding scheme in New York. Story about Mr. Ponzi.) Here comes the so-called NETWORKING SCHEMES e.g. Amway, Herbalife. It used to be the ruling of the US SC, that these schemes, magrecruit ka, attend ka seminar nila etc, maengganyo kag apil hantod mubayad ka sa fee aron makabaligya ka ng products nila. You get a hefty commission for selling. If you recruit others, you also have an overriding commission of his __ sales. Kato sila makarecruit gani sila, you also have overriding commission. Where are they getting all these commissions? Nganong maka afford man ning kumpanya muhatag ug commission? The normal answer given is, because there is no indirect cost. They do not have a warehouse, they do not have stores. Kamo may tig baligya. US SC said, for as long as there is a substance, whether it’s a product or a service that has commercial value, it is NOT a pryramiding scheme. Daghan man gihapon gareklamo. The new subject of complaint is Herbalife. July 18, 2016. This is Reuters (?). Herbalife settles pyramiding scheme case with the regulator. After the Herbalife case was brought to the regulators of the SEC, they passed this ___. If the networking scheme resembles the pyramid, even if there’s commercial value, commodity or service that is involved, if the organization earns more from Page 98 of 112

2ND GROUP OF CASES [Refer to Section 5 (b)] When is it an intra-corporate controversy? It seems that in the definition, it’s enough if the protagonists are all constituents of the corporation. Stockholder vs. officer, members of the corporation vs. trustee, director vs. director. That is just one question. The so-called PARTY REQUIREMENT. The status or relationship of the parties. If it is stockholder vs. director, you are already halfway there. You still have to answer a second question. What is that? The nature of the question that is the subject of the controversy. That is what the SC said in the case of MATLING INDUSTRY AND COMMERCIAL CORPORATION VS RICARDO CORUS. 633 SCRA 12 , October 13, 2010. If it is the Corporation Code or the SRC that is used in order to resolve the dispute, then it is an intra-corporate proceeding. So, you already have the constituents. Stockholder vs. stockholder, all the stockholders vs. the corporation, etc. If the issue as to the parties is already complied with, now it is the nature of the controversy. To resolve the controversy, what is needed, the application of the Civil Code, or the SRC? If it is SRC, then it is intra-corporate controversy. Illustration: Ako stockholder. You are stockholder. I send you my shares of stock. I signed the deed of sale you drew up. Then I tell you, “I will surrender to you the certificate of stock covering the share I sold to you as soon as my brother who comes from Cebu arrives here”, kay sya magdala ato. In the meantime, xxx (sorry guys di klaro) Issuehan ko nimog cheke. Wa man mutunga ang brother from Cebu. Sige kag gukod. Unya di naman mutubag ___ diri ra gihapon ko sa Davao. The issue is, which forum has jurisdiction over our dispute? Kung ikiha tika, i-file diretso sa intra-corporate court? Wala namay raffle dira, the jurisdiction of the sala is specific. If it is not an intra-corporate controversy, there must still be a raffle. You go down the checklist in the Matling Corporation case: 1) Parties – are they corporate parties? In the example, yes. Both are stockholders. It fulfills the first test. 2) What provision of the law is going to be used to settle or resolve the controversy? Is it the Corporation Code? The SRC? NO. It is the Civil Code, because it is a SALE, a controversy as to a sale. The contract has been perfected. Nipirma naman ko. Then, it is partially executed. Gibayran naman ko. Now, it’s my turn to produce the evidence of that which was __. Unsa man ang kasuhan? Specific performance na, ordinary court. That is not an intra-corporate controversy. 3RD GROUP OF CASES [Refer to Section 5 ( c)] Somebody has been appointed as vice president for personnel of this big corporation. He is also a stockholder. He’s been appointed for ten consecutive years. All of a sudden, the next year, he is no longer appointed. He’s dismissed. File sya ug illegal separation complaint with the Department of __ (Labor?). Regular employee man ako, ten years na pud ko personnel. Unya bigla nila ko gipahawa, wa koy sultihi unsay sala nako. Nalagot ba sila sakong nawong? It is not a ground for dismissal under the Labor Code, so I am illegally dismissed. There are many cases like that. SC said: You cannot make it powers to the Labor Arbiter to look into the internal workings of the Board of Directors. That is beyond its jurisdiction. So that jurisdiction case is within the jurisdiction of the intra-corporate court, because it has to do with the inner workings of the Board of Directors and Board of Trustees. REMEMBER, there are two exceptions. 1) That administrator of Araneta University Corporation, who was a regular faculty member before he was appointed by the Board to be Vice President. After ten years, he was no longer appointed. He brought the case to a labor court. The Labor

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Arbiter said, yes I have jurisdiction. Upheld by the SC, because he was not only managerial employee appointed by the court, he was also a regular faculty member. He cannot be dismissed from the university, but he can be removed from his position as Vice President. In this case, he goes back to teaching because he is a regular faculty employee. Therefore, his rights to security of tenure were violated. 2) The Insular Life Subdivision case. They changed their Articles of Incorporation and By-Laws to make his position a board-appointed position. They appointed him first for one year. The following year they no longer appointed him and said “You are out”. SC said: That amendment was actually a way to circumvent his security of tenure right which is already vested. Therefore, the Labor Arbiter can disregard the vote of the Board of Trustees, because there is deprivation and violation of security of tenure. 4TH GROUP OF CASES - suspension of payments [Refer to Section 5 (d)] This is a recognized proceeding in FRIA. If you are a corporation and you have sufficient assets to meet your liabilities, but your assets are not ripening at the same time as your obligations becoming due. So what will you do? You ask for an order suspending payments. Aron mahinog imong assets, tagaan kag lugway na panahon aron makabayad ka sa imong mga obligations. That is why the proceeding is called PETITION FOR SUSPENSION OF PAYMENTS. Under the old Insolvency Law, you have: 1) Suspension of payments of corporations; and 2) Suspension of payments of individuals. The suspension of payments of individuals has been erased from FRIA. It’s no longer there, so there is no more of this petition. Who has jurisdiction over suspension of payments of corporations? The FRIA courts. Not the intra-corporate courts because that is now one of the insolvency proceedings. Before, when it was the SEC who has the jurisdiction, dako kaayo na na problema. Supposed the SEC finds out in the proceeding, in the inventory of assets, di man diay tinuod, you actually have sufficient assets to meet your liabilities. Therefore, this is not a petition for suspension of payments, this is an insolvency proceeding. Unya wala man jurisdiction ang SEC. SEC dismisses the case. Maayo lang kung muapply na sad siya with the regular courts, because the regular courts at the time has jurisdiction. If he does not apply, edi magkabuang ang mga creditors. You need to have at least 1/3 of the credits and you file a petition and it becomes an involuntary petition for insolvency. Now, that is solved because that is now in the same court. If the court finds you have less assets than liabilities, he just converts it, he just issues an order. “Order amending the petition”. Muingon ang petitioner, “I don’t want to amend!”. But he has less assets than liabilities, so this is now converted into a petition for insolvency, NOT for suspension. So those are the four classes of suits that are being transferred to the regular courts from the SEC. Also included are those that were involved in the quasi-judicial powers exercised by the SEC. Gamay na lang ang jurisdiction sa SEC. That was because Marcos wanted to control the corporations when he issued P.D. 902-A We are ready for another exam 

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

FOURTH EXAM COVERAGE February 28, 2018 (Eliza Den Devilleres) TIPS BY FGN BEFORE THE DISCUSSION: The emphasis now by the Bar examiners are in Corporation Law. Bag-o na ang mga examiner, mga batan-on na. Before, the bread and butter are Insurance, Negotiable Instruments, wa nana run. Dali naman kayo run. Most payments now are electronic! Wa namay cheke, so less emphasis. (Emphasis also on the topics to be included in the 2018 BAR exam. Discussion on how the Philippine BAR and the US BAR are different.) There, subjects such as Labor, Transportation, Negotiable Instruments, Securites are just electives, way labot sa exams. Here in the Philippines, it’s encyclopedic since you have to master all the laws learned. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 (RA 10142) So today we begin with the FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 (RA 10142). This law replaced the INSOLVENCY ACT OF 1905. One of the first provisions was applied which was the Insolvency Act of the US which was brought in the Philippines. But, there was a big change in the Insolvency Act. 1.) The change is, the insolvency court was not the court where all monies and property claims of the debtor was settled. In other words, it did not cover secured debtors. So, next to impossible to get an insolvency pronouncement, but still you have to meet your secured debtors. 2.) There was no restraining order covering the debtor and there was no final dismissal. In other words, you are not finally freed. So nobody took advantage of the insolvency law, but it continued to be covered by the BAR examination. There is no decided yet regarding the Insolvency Law. Now after the Financial Crisis of 2008, they finally discovered this big hole in our legal system – that we do not have an effective insolvency law. That is why they passed the FRIA. So pareho rata tanan. Indonesia and Thailand also passed its own laws, otherwise there would be no foreign investor who would go to your country and make direct investment because you do not have an effective financial insolvency act. So this was passed in 2010 – the FRIA. WHAT IS THEE NATURE OF THEN PROCEEDINGS IN THE FRIA? It is an in rem proceeding. Jurisdiction over all persons affected by the proceedings shall be considered upon the publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines as prescribed under the SC Rules of Procedure. If you are familiar with the Rules of Procedure of the SC that was passed in October 27, 2013, it should be in your Rules of Court. That is the Financial Rehabilitation Rules of Procedure. Passed by the Court in August 27, 2013. It’s in your Rules of Court. That is supposed to be codal. It should be there! A.M. No. 12-12-11SC. Make sure that it is there. Signed by ALL the justices. FRIA Rules of Procedure is following RA 10142. CHARACTERISTICS OF THE FRIA: (Check: Sec. 3, AM No. 15-04-06-SC) SEC. 3. NATURE OF PROCEEDINGS. – The proceedings under these Rules shall be in rem. In voluntary liquidation proceedings of both juridical and individual debtors, jurisdiction over all persons affected by the proceedings is acquired upon publication of the Liquidation Order as provided in these Rules. In involuntary liquidation proceedings of juridical debtors, jurisdiction over all persons affected by the proceedings is acquired upon publication of the petition or motion under Section 7, Rule 2 (B) of these Rules.

In involuntary liquidation proceedings of individual debtors, jurisdiction over the person of the debtor is acquired upon service of summons in accordance with Section 15, Rule 3 (C) of these Rules; whereas jurisdiction over all other persons affected by the proceedings is acquired upon publication of the Liquidation Order under Section 2, Rule 4 (A) of these Rules. In suspension of payments proceedings, jurisdiction over all persons affected by the proceedings is acquired upon publication of the Suspension of Payments Order as provided in these Rules. 1. It is in rem – there is a need for publication. The result of the publication is, ALL persons named are considered informed and served their summons and notices for the legal processes of the court after the publication. Consistent with the in rem nature of the proceeding, FRIA provides for the ff. definition of party to the proceedings: (bb) Party to the proceedings shall refer to the debtor, a creditor, the unsecured creditors' committee, a stakeholder, a party with an ownership interest in property held by the debtor, a secured creditor, the rehabilitation receiver, liquidator or any other juridical or natural person who stands to be benefited or injured by the outcome of the proceedings and whose notice of appearance is accepted by the court. So daghan kayo ning parties dinhi. It’s not just the debtor and the creditor, it’s ALL these parties that are named here. 2. It is summary in nature – what do you mean by that? If summary in nature, there are these ff. pleadings that are prohibited: a.)You cannot file a motion to dismiss; b.) You cannot file a motion for a bill of particulars; c.) You cannot file a petition for relief; d.) You cannot file a motion for extension; e.) You cannot file a motion for postponement and other motions of similar intent; f.) You cannot file a reply; g.) You cannot file a rejoinder; h.) You cannot file a motion for intervention; i.) Any pleading that is similar to or of like effect as any of the foregoing. The proceedings shall be summary and non-adversarial in nature. The following pleadings are prohibited: (a) motion to dismiss; (b) motion for a bill of particulars; (c) petition for relief; (d) motion for extension; (e) motion for postponement and other motions of similar intent; (f) reply; (g) rejoinder; (h) intervention; and (i) any pleading or motion similar to, or of like effect as, any of the foregoing.

For stated and fully supported compelling reasons, the court may allow the filing of motions for extension or postponement, provided, the same shall be verified and under oath. Any pleading, motion, or other submission by any interested party shall be supported by verified statements that the affiant has read the submission and its factual allegations are true and correct of his personal knowledge or based on authentic records, and shall contain supporting annexes, which the submitting party shall attest as faithful reproductions of the originals. An unverified submission shall be considered as not filed. An improperly verified submission may be considered as not filed, at the discretion of the judge. Upon motion, the court may order that the originals of the annexes to a submission be produced in court for examination or comparison by a party to the proceedings. So, you do not submit the originals anymore. You just submit the xerox, photocopy and there is a need of verification. I fact, all the exhibits there, you do not submit anymore to the other parties. It

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno is they who will copy it from the court. Naa kay mga financial staements, ipaphotocopy ba na nimo na baga na kayo. This is to avoid unnecessary duplications. We are talking about financial statements, supporting schedules, etc. So besides being in rem, it is summary and non-adversarial. 3. It is non-adversarial – Because it is non-adversarial, you have to pay attention to all these pleadings that are prohibited. You cannot file these pleadings. Muana ka na mufile diay ko aning mga prohibited pleadings. Unsa man ka ana? Contempt because you are supposed to read the Rules of Court. Naa mana na sa rules – the pleadings that are prohibited. So you’re supposed to know the law. When you file, you can be fined. The court may decide matters on the basis of the pleadings and other documentary evidence, and conduct clarificatory hearings when necessary. Any order issued by the court under these Rules is immediately executory. Review of any order of the court shall be in accordance with Rule 5 of these Rules. Provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of the proceedings in a just, equitable, and speedy manner.

NATURE OF THE PROCEEDINGS What is the final order in a petition for voluntary dissolution/insolvency? The final order is case dismissed. Wa naka. Go away. Be happy. There’s no creditor who will run after you. You are dismissed! You can start business again! That is the final order of an insolvency proceeding. There are several terminologies which are denoted in the rules for definition. This is especially important for accountants. Tanawa pareho ba ning definition sa inyong naandan na definition. For instance, asset. What is the meaning of asset in the insolvency proceedings? (b) Asset is anything of value, which may be either tangible or intangible. Tangible assets can be current assets or fixed assets. Current assets may include cash on hand, money in banks or inventory, while fixed assets may include plant, building, property and equipment. Intangible assets may include intellectual property (such as copyrights, patents, and trademarks) and financial assets (such as accounts receivables, subscriptions receivables, and bonds and stocks). The value of these assets must appear in the latest audited financial statements immediately preceding the filing of the petition. In case the debtor is less than three (3) years in operation, it is sufficient that the book value is based on the audited financial statement/s for the two (2) years or year immediately preceding the filing of the petition, as the case may be. Goodwill is it recognized as an asset? Wala dinhi. Wala. Good faith diay, di diay na goodwill? The value of these assets must appear in the latest audited financial statements immediately preceding to the filing of the petition. So the last nearest audited financial statement. In case the debtor is less than three (3) years in operation, it is sufficient that the book value is based on the audited financial statement/s for the two (2) years or year immediately preceding the filing of the petition, as the case may be. WHAT IS THE COMMENCEMENT DATE OR ORDER? (c) Commencement date shall refer to the date on which the court issues a commencement order in a rehabilitation case. The effects of the commencement order shall retroact to the date of filing of the petition for voluntary or involuntary proceedings.

Commencement order – the case has commenced. What is the significance of the commencement order? That the court finds the petition, whether involuntary or voluntary, sufficient in substance and form. That’s like saying, there is a cause of action! It is parallel/equivalent to that there is probable cause. Duna kay kaso ini. Magsugod na. That’s the commencement order. That commencement order is granted and the moment it is granted, together with it is a stay or suspension order. r. Stay or Suspension Order shall refer to an order issued in conjunction with the commencement order that shall suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.

So kanang commencement order, pagsugod ana, sufficient in substance and in form, unya naa dayon stay order – tanan mugukod nimo di na makaapas nimo kay naa naman xx tanan na nay claim nimo, muagi na sa court. It will require a separate claim even if they are secured debtors! They cannot foreclose a mortgage. Let us say, you have another case, pildi kana. They cannot enforce the judgment. Kuyaw ka ani. If you are going to file an involuntary insolvency proceeding, that is called in the US as Chapter 11 proceeding because the Federal Laws, that is found in Chapter 11. Chapter 11 gani ka, it is called seeking the protection of Chapter 11. Wa namay makasumbong nimo adto naman tanan diadto. Imagine, you are relieved. Di naka kabayad saimong mga utang. File ka ug involuntary insolvency, undang tanan mga kaso nimo, adto nakas insolvency court. Kadako saimong kuan niana. Mahuwasan ka! Kay magfile mana silag kaso bisan asa man dapita maghire paman ug abogado. Karon wa naman. Ari nlng man diri. It’s a burden that is lifted from your shoulders. Because everything has to be xx down. Muingon ka kining mga trabahante mufile nag kaso nimo. Muadto na silas Labor Arbiter – nonpayment of wages, violation of minimum wage law, filan kag kaso, madayon pa ba to? Di nana mapadayon. Adto na sila magtagbo sa insolvency court. It is effective even against the workers. Meaning, stay order, suspension order. The Bankruptcy Law is a stayed order. Ngano stay man? Why is it called a stay order? It is taken from a metaphor of a pet dog. Unsaon man nimo nang iro, muana ka na “Stay!” Mao mana sa dog training school na Up! Stay! Muingon kag Stay! Kanang mga kaso wa na sila tanan, hunong na sila tanan maskig asa. The court is like a school obedience of pets. And the parties here are liken to pets. They have to stay. This is a stay order. So far, our ROC are patterned after the old Spanish system. This one is patterned after the Federal System of the US, even the terminologies. What do you mean by insolvency? INSOLVENCY shall refer the financial incapacity of the debtors to pay their liabilities as they are due in the ordinary course of business. Meaning, the liabilities are greater than the assets. ORDINARY COURSE OF BUSINESS -- Keep that in mind! What is ordinary course of business? You are an Insurance company and naga-insure ka against fire and natural calamities. Ang imong policy holders kay naa sa Metro Manila unya naay bagyo, storm signal no. 5 niharos sa MLA, nangaguba tung tanan xx nimo. File dayon kag insolvency, ana ka, di nako kabayad nila kay due sa act of God. Extraordinary circumstance. There is such a thing as force majeur -- ACT OF MAN. And there is such a thing as ACT OF GOD -- typhoon, earthquake, storm, etc. Muingon ka na “I cannot pay the obligations because of the act of God.” Is that correct? IT’S NOT CORRECT! Because this is insurance. That’s just in the ordinary course of business! Insurance man ka.

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno tinonto diha! Naa kay buwis na bayran sa gobyerno, naa kay income tax, VAT ug unsa pa nang naa. Unya muingon ka nga wa kay creditor? Namakak nasad ka, walay tawo nga way creditor.

Then, there is the PUBLICATION REQUIREMENT. Publication notice shall refer to notice of publication in a newspaper of general circulation in the Philippines on a business day of 2 consective weeks.

So sa business day nimo ipagawas ang publication. Sa ato pa, di na nimo buhaton ug Domingo. The law requires the publication be on a working day. Who is the vendee of the proceedings under FRIA? Section 6. All petitions pursuant to this Rule shall be filed in the Regional Trial Court which has jurisdiction over the principal office of the debtor alleged to be insolvent as specified in its Articles of Incorporation or Partnership or in its registration papers in the Department of Trade or Insdustry in cases of sole proprietorship, as the case may be. When the principal office of the corporation, partnership or association was registered in the SEC, if it is in Metro Manila, the action must be filed in the RTC of the city or municipality where the head office is located. This is very important ha! National Corp (??) Makati jud na (RTC) kay naa man didto ang head office, if the address is only Metro Manila. New corps. now, it is not sufficient to put down the address as Metro Manila. The new SEC circular is that you must specify your address in the Articles of Incorporation. Di na parehas una sa Metro Manila, Davao City -- before that was allowed. So that, kung wa kay building, nag-abang ka lng, ug nagbalhin.balhin ka, di ka magpaamend saimong articles kay naa man. It’s easier to amend. It’s just a notice that we are here. That can be put down there as your place of office. But it’s not enough just to put your place of office. You must put the specific number, street of the city where your principal office is located. March 1, 2018 (Janice Molina) So we are still in FRIA. We have taken up the petition of the xxx in FRIA and the petition is solely determined by the court validly in the specially designated court for insolvency, the FRIA court. So, the court will determine whether it is sufficient in substance or form. If it is not then it will not be dismissed because of the term of the petition. Try to comply in the form or the substance, then if it is sufficient in form and substance within 30 days the court will issue a commencement order. And the commencement order retroacts to the filing of the petition. The commencement order contains stay order. Stay order, adversaries of the debtor, those who have claims against the debtor, cease and desist, and you cannot file anymore. You have to go to the insolvency court. It is the only court that has jurisdiction, only the court now has jurisdiction. Now, we know that the case is in rem. It is binding against the whole world, so there is publication. What is published there? But the court has issued a commencement order and there is this stay order and all parties that have any claims against this particular debtor must go before the court and validate you claims. And you have 60 days to do that, from and after the publication in the newspaper of general circulation, twice a week for 2 consecutive weeks. Now, if it is a voluntary petition for insolvency, it is the debtor who files it. The petition of the debtor attached the list of creditors. So in the publication you can be singled out, you are a creditor listed in the attached list of the creditors of the petitioning debtor you are informed, you are served a notice. Come before the court; claim your claim, your credits. Is it correct that the petitioner only cost you 2million and muingon sya dili 4million ni. So you have to go to the court, you have to prove the excess amount which is not admitted by the debtor. So it's important that the petition contains a list of creditors. Wa gani list of creditors, it is not sufficient in form and substance. It will not be accepted by the court. (So list your creditors, unya muingon ka nga wa man koy creditors, kalooy sa diyos gibayran nko tanan akong utang,

An insolvency court is a court when you are dealing with an insolvency you are dealing with a condition, you are not dealing with who is right, who is innocent. A court is a deliberative body that renders a decision. How can a court administer insolvency when insolvency requires administration? There is this devise called appointing a receiver that is why a receiver is appointed by the court because it is the receiver who liquidates property, who pays out the different creditors. Di man ang court kada naay bayran, order, di man mahimo nang naa. It is the work of a receiver, that is why if all his proceedings in FRIA, voluntary insolvency, involuntary insolvency, suspension of payments, rehabilitation xxx they have receivers because the court cannot assume the functions of an administrator. So the receiver is the court's agent who will perform the administrative function which the court is supposed to do but it cannot because of the nature of this xxx. So what are the rules with respect to receiver? Who can be a receiver? How can the receiver be appointed? Etc. Must a receiver be a natural person? Section 28 provides that if the receiver is a juridical entity- that means that the juridical entity can be a receiver but if you are a juridical person and you are appointed as a receiver, the juridical entity must designate a natural person or persons who possessor possesses all the qualifications and none of the disqualifications as its representative, It being understood that the juridical entity and the representative are solidarily liable for all the obligations and responsibilities of the receiver. A juridical person cannot be criminally liable, so mangawat diay kanang receiver, that is a criminal offense. How can you put to jail a juridical person? So he must designate a natural person. Now, here's the question, the receiver's function is as to the estate or to the corpus of properties of the debtor in relation to the creditor. Suppose it is a petition not for insolvency, voluntary or involuntary insolvency, but for suspension of payments or for financial rehabilitation that means that the business can still be going on because it is the point to liquidate, it xxx creditors that has not been paid but there is still the business of the debtor to be managed. It is the receiver also in charge of managing the business in such a proceeding. Can the court appoint a manager? Yes! The court can appoint a receiver and at the same time a management committee to assume the powers of management of the debtor. That is section 37 Section 37. Role of the Management Committee. – When appointed pursuant to the foregoing section, the management committee shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities. The specific powers and duties of the management committee, whose members shall be considered as officers of the court, shall be prescribed by the procedural rules. Both management committee and receiver can engage the services of specialized professionals and other experts to assist them in the performance of their duties. That is done upon approval of the court and after notice of hearing. As a general rule, the management of a juridical debtor shall remain with the existing management unless there are grounds for the appointment of a management committee. So, the court can appoint a receiver, can appoint a management committee in those cases where there is no liquidation but there is the dealing on the part of the debtor with the creditors and at the same time the obligation to keep the debtor functioning as a business.

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Now, Qualifications of a receiver as a requisite: 1. Knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant training and experience necessary to enable it to properly discharge the duties and obligations of a receiver.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno to pertain to the causes of the debtor's problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement.

2. No conflict of interest. This may be waived expressly or impliedly by the party who may be prejudiced thereof. Now, the court appoints the receiver if a qualified natural person or entity is nominated by more than 50% of the secured creditors and the general unsecured creditors and satisfactory evidence is submitted. The court shall appoint a creditor's nominee as receiver. So 50% na gani sa secured creditors, unya 50% sad sa general unsecured creditors, they are in agreement as to this receiver, mao ni ila gusto, the court has to appoint that natural person or juridical person as receiver. Remember, he is for the sake of doing justice to the creditors. He scrutinizes the credit, mu-recommend mana siya sa court, then ang court either accepts its recommendation or modifies it or rejects it entirely and makes another decision. Then the receiver may be remove at any time by the court, either motu proprio or upon motion of any creditor/s holding more than 50% of the total obligation of the debtor on grounds listed in the act. That is section 32. Section 32. Removal of the Rehabilitation Receiver. – The rehabilitation receiver may be removed at any time by the court either motu proprio or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of procedure may provide which shall include, but are not limited to, the following: (a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers; (b) Lack of a particular or specialized competency required by the specific case; (c) Illegal acts or conduct in the performance of his duties and powers; (d) Lack of qualification or presence of any disqualification; (e) Conflict of interest that arises after his appointment; and (f) Manifest lack of independence that is detrimental to the general body of the stakeholders. Section 26, taas kau ning duties ning Rehabilitation receiver. A.

To verify the accuracy of the petition and correct if necessary the annexes such the schedule of debts and the liabilities and the inventory of assets submitted in support of the petition.

B.

To accept and incorporate when justified amendments to the schedule of debts and liabilities.

C.

to evaluate the validity, genuineness and true amount of all claims against the debtor and to recommend to the court the disallowance of claims and rejection of amendments to the schedule of debts and liabilities that lacks sufficient proof and justification

D.

E.

to submit to the court and make available to the creditors review the revised schedule of debts and liabilities To investigate the acts, conducts, properties, liabilities, financial condition of the debtor, the operation of his business and the desirability of the continuance thereof and any other matter relevant to the proceeding or the formulation of a rehabilitation plan.

F.

To sue and recover with the approval of the court.

G.

To examine under oath the directors and officers of the debtor.

H.

To make available to the creditors the documents and all that is necessary

I.

To report to the court any fact as obtained by him

So, the receiver is very important, if buang-buang gani nang receiver, the court will not make any progress. That is why, whether you are counsel for the debtor or counsel for the creditor, tutok jud ka daan sa appointment of a receiver. Now, there is a rule, paminawa ragud, we said that if a receiver is the choice of more than 50% of the secured creditor and more than 50% of the general creditors, then the court must appoint him. What happens if usa sya ka creditor but the sum of his credits is actually more than 50% of all the debts of the debtor? So siya appointed as receiver? Mao nay dakong problema kay creditor man sya so siyay mu recommend sa iyang kaugalingon labi nag bangko muingon sya. That is the problem. Pag-abot sa iyang credit approved tanan ang iyang mga claims sya may receiver, i-recommend nya sa judge, approved tanan, katong uban denied tanan. Mao nay problema sa insolvency proceedings. The next important function that we have to remember is exceptions to the stay order. Section 18. Exceptions to the Stay or Suspension Order. The Stay or Suspension Order shall not apply: (a) to cases already pending appeal in the Supreme Court as of commencement date Provided, That any final and executory judgment arising from such appeal shall be referred to the court for appropriate action; (b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim; (c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver; (d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities; (e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations; (f) the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and (g) Any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commend under this Act. The first exception is all appeal cases pending before the Supreme Court against the debtor. Those are no longer included in the stay order. Why they are not included in the stay order? Because you cannot restrain the Supreme Court, all the other court mahimo marestrain na nimo, supreme court you can no longer retrain.

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno Second, pending cases before specialized court or quasijudicial agencies. Third, claims against sureties and other person’s solidarily liable, accommodation mortgagors and issuers of letters of credit. The landmark case there is JAPRL Development Corporation v. Security bank 650 SCRA 645 (2011) the creditor can demand payment from the surety-solidarliy liable with the corporation seeking rehabilitation, it being not included in the list of stayed claims. Surety, solidarily liable, co-principal ka na, solidary to the entire sum. Manghud sa solidary is surety, when the obligation becomes due, you go to the debtor and if the debtor does not pay, you go straight to the surety basta dili mubayad ang principal. Guarantor, the obligation becomes due and wala ni bayad ang principal. Can you go to the guarantor? Not yet, because the guarantor has the benefit of excussion, you have to prove first that the principal is insolvent before you can go to the guarantor. Mao na sila, hinumdumi na. March 2, 2018 (Althea Astrid Gopo) You know, in Hongkong there are many trading houses that used to be started by the original corporations… limited liability. (Very long chika on opium trading, some unheard of Asian history lol.) What are the kinds of proceedings that are available under the Financial Rehabilitation and Insolvency Act of 2010? FIRST. FINANCIAL REHABILITATION. Actually, you are bankrupt. You are insolvent. What is the accounting definition of Insolvent? If you have less assets than liabilities, you are insolvent. You can go through a Financial Rehabilitation. You call in all your creditors. Suppose the creditors are convinced to surrender their credits, and make them owners – shares of stock. So the company no longer has debts. All of a sudden, their assets become more than their liabilities. Wa na silay bayrunon nga utang. So the company is rehabilitated financially. 

In the mid-1990s, PLDT formed a corporation to begin the cellular business. That is Philtel. Philtel chose the known technology: that is analog. Ayala began Globe. Ayala chose the correct – but more expensive – technology: that is not analog, but digital. What happened? Philtel was saddled with so many clones. Ang numero nimo daghan kaayog makakuha hantod wa na ka kahibalo naa na diay nag gamit sa imong plan. Were you already around when that happened? (Story about Philtel being number one, and first generation of cellular phones the size of a brick.) But because Philtel was doing very well, the original owners, the Cojuangcos – they borrowed to the _______. And they put up this fist National _____. Optic fiber. And they borrowed more than half a billion pesos. Paid interest. It became 800 billion. Wa na mabayri. All the creditors wanted payment but Philtel was already incapable. Will Philtel declare insolvency? Mr. Pangalinan who, at that time, already ____ PLDT, Philtel, chose not to go the insolvency way. So they tried to convince the creditors. Took some time – more than a year of negotiations – that would fit prenegotiated Rehabilitation. That was a negotiation, restructuring of debt, the biggest restructuring of debt that was completed without the intervention of the courts. Sugot nalang sila. And all the creditors made a lot of money because they were paid in PLDT shares. PLDT shares went up because ____ went up. Nag-piesta sila. Their bonds, which were supposed to be worthless already, all of a sudden was valued at 100 times more than their original purchase price. They made a lot of money, the creditors. Because they consented to a restructuring. And their consent was an informed consent. Because SMART was already going up. Wa pa ma’y unli kaniadto. One text message costs one peso. And then the phone calls, they were still… That is why the creditors consented to a restructuring. SECOND. INSOLVENCY

You have to submit your Financial Rehabilitation plan. If you petition for financial rehabilitation, then you have to present your plan. How do you plan to rehabilitate? Now, if you are the majority owners of that corporation, do you think you can submit a Financial Rehabilitation Plan? Because, in all likelihood, you will lose control of the corporation. Ug pasudlon na na nimong mga creditors, they will not come in on your terms but their terms. They will say, “the value of my credits is this much.” Musugot ka ana? Di man ka makaingon, “unsa may sala nako? Ah ikaw mao’y sadan, kay you drove the corporation to debt, to insolvency! You were managing this corporation.” So you have to give up.  Financial Rehabilitation is a generic proceeding. There are many kinds: 1. Court - supervised rehabilitation (Chapter 2). It can be voluntary or involuntary. 2.

3.

Pre-negotiated Rehabilitation. The debtor already negotiates with the creditors. And the creditors already accept. This is easier. Except the issue of valuation. You still have to crack all the valuation. Out-of-Court or Informal Restructuring Agreements and Rehabilitation. Dako kayo kag utang, and then you cannot pay the debt anymore. What happens? Can you re-negotiate again? Can you restructure again? It all depends.

a.

Voluntary – The one who petitions is the debtor himself.

b.

Involuntary – it is the creditors who bring the action to declare the debtor insolvent.

Now, kung ikaw pa ang giutangan, why would you ask the court to kill the one who is going to pay? Diba? Nganong muadto man ka sa court, mupetition ka didto to declare a debtor insolvent. Why? Simple. Because ug mamatay siya, dako man ka ug makuha. If your security for your loan, for your credit, is more valuable than the credit that you extended as a loan. Secured ka, mortgage. Napulo na katuig unya wala man sya kabayad, unya nagsige nag saka ang value. Bahala na mahapay sya, total secured bitaw ko. Mao nang muadto ka sa court, to petition na “declare him insolvent.” Pero siya, ang tubag niya, FINANCIAL REHABILITATION. Naa pay lain ini nga pwede musulod ani, mutabang nako. Magusgod na sad kog bayad. (Chikka) Involuntary insolvency is brought by the creditor. They will always oppose financial rehabilitation. Why? Because –  if you are in this proceeding (Financial Rehabilitation), pending the rehabilitation of the debtor, the debtor is still operating as a corporation. 

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It’s not like insolvency. If the proceeding is insolvency, no more. It is already dead, and you already liquidate the property. The commencement

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno order allows them to obtain the necessary raw materials from their creditor who is their prosecutor. Dili unta nimo bayaran tong imong niaging utang, pero kung makabayad gani ka sa current utang, iadmit ka na ilang gihatag nimo while you are operating, you can continue to operate and they cannot deny you the necessary raw materials. You are the creditor, you are asking payment, and yet the court says “Okay, in the meantime, you must continue to supply raw materials to this debtor and set aside your right to be paid the past, so long as you are paid the current, you must continue supplying.” Can you imagine that? How the court protects the debtor. 

The creditor cannot deny extending more credit; provided, during the pendency of the proceedings, they will pay the current liabilities.

THIRD. LIQUIDATION. 

It is in fact the end phase of the insolvency proceeding.



There is no liquidation in Financial Rehabilitation. It only occurs in Insolvency – whether voluntary or involuntary.



But the court, once satisfied that the debtor can be rehabilitated – when it appears to the court that the plan for rehabilitation is reasonable, doable, etc. – the Court can change the proceeding from Insolvency to Rehabilitation.

FOURTH. SUSPENSION OF PAYMENTS That is Sections 94 to 102. That proceeding envisions that the debtor here is normally the petitioner. He goes to the court and alleges that he has more than enough assets to answer for his liabilities. But the assets are not ripening at the same time as the liabilities are ripening. That is why he is asking for more time. Huwaton niya nga mahinog tong iyang mga assets, aron makabayad sya sa iyang mga liabilities. Ang liabilities, stay usa. Bisag due na, ayaw sa. Wa pa mahinog. Suspension of payments is asking for an order suspending his obligation to make payment; he’s asking for an order suspending the creditor’s right to demand payments. Because his assets are forthcoming. 

What happens? You are supposed to give a schedule of your assets in your petition. Also a schedule of your liabilities, all your creditors.

Pagtan-aw sa court, wala man gyud diay: your liabilities are really more than your assets. What happens to the proceeding when it was begun as a Suspension of Payment? The Court can order converting the proceeding into an Insolvency Proceeding. Mubalik nasad ka sa court, muingon kag “hulat usa, himuon ko ning Financial Rehabilitation. Because I have a third party who is coming in to inject more assets to revive me financially. Can the court still change it to financial rehabilitation? Yes. Kay isa nalang man ni ka court. Before – a. Suspension of payments was under the jurisdIction of the SEC; b. Insolvency was under the jurisdiction of the Court.

possible. The case can start as suspension of payments, then it can become insolvency. What will bring them about? The receiver will inform the court, “the assets of the debtor is actually less than the liabilities. There is no choice. We cannot suspend payments. If we keep suspending the payment, the assets will deteriorate further, mas gamay lang makuha sa mga creditors”. So the court will issue an order upon recommendation of the receiver. ANCILLARY PROCEEDINGS. There are several ancillary proceedings: a. b. c.

Sequestration, Attachments, Appeals

Those are all ancillary proceedings secondary to the main proceedings. Now, the Court, as a general rule, according to Section 92 has the power to convert proceedings into liquidation proceedings. When? Section 25C a. Upon a finding that the debtor is insolvent, and b. Second, that there is no substantial likelihood for the debtor to be successfully rehabilitated, as determined by the Court in accordance with the rules to be promulgated by the SC. Section 72 c. If no rehabilitation plan is confirmed within the period of one (1) year from the date of filing of the petition to confirm the plan. The proceedings may, upon motion, or motu proprio, be converted into one for liquidation. One year na to produce a credible rehabilitation plan. Normally, this hinges on somebody willing to put fresh funds on the debtor, and the debtor, willing to use this for control of the control. (Chikka.) 

If the rehabilitation proceedings are ordered terminated by the Court due to failure of rehabilitation, or dismissal of the petition for reasons other than technical grounds, the proceedings shall be immediately converted to liquidation as provided in Section 92. Failure of rehabilitation.

“Intertwined with the legal issues are very human issues. What you will find will stretch your imagination and your skills on how to successfully deal with them.”- FGN (*heavens open* LOL) Section 90. In cases where the petition for voluntary liquidation, or the motion, as the case may be, is sufficient in form and substance, the Court shall issue a liquidation order. Voluntary liquidation. Give up na man siya, gusto na siya ug voluntary insolvency. Gamay ra man iyang assets kaysa liability, he has mentioned all his creditors. Pag publication, wala na may nitungha nga bag-ong nga creditors. Sufficient na. So liquidation na. Time is not the friend of assets. It’s not an ally of assets. The longer the time it takes, the assets deteriorate. Wa kay gibuhat sa imong assets. The passage of time makes assets deteriorate. Liabilities luxuriate, become more grave, with the passage of time.

If the SEC finds out that there are less assets than liabilities, it cannot say I will convert it to insolvency. It can only dismiss it. Unya file nasad ka sa court, bayad nasad kag filing fee. Doble doble. Magproduce nasad mong bagong records. Katong records didto di man to ihatag, because it’s not part of the court system.

Another instance where the court may order liquidation – at any other time upon the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible. Thereupon, the court shall issue the liquidation order mentioned in Section 112.

Now, it’s simpler because it is just one court. Kaniadto gidivide mana kay si Marcos wanted control of the SEC. Now it is

When it becomes impossible, improbable, the rehabilitation must be abandoned.

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d.

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno

March 7, 2018 (Jennifer Mortejo) We said last time that the defenses against the stay order are contained in Section 18 of FRIA (RA 10142). Section 18. Exceptions to the Stay or Suspension Order. The Stay or Suspension Order shall not apply: (a) to cases already pending appeal in the Supreme Court as of commencement date: Provided, That any final and executory judgment arising from such appeal shall be referred to the court for appropriate action;

financial straits. And then he sells the shares of stock that are in possession of the broker because it is not certificated. Before an investor chose to keep it, it’s street certificates in the possession of the broker. The broker is now petitioning for insolvency or rehabilitation. Can be a stay order applied to that particular transaction, whether the foreign investor sells his shares of stock? Cannot be. He must be allowed to withdraw his proceeds out of the sale and the securities, which are held by the debtor but actually belongs to the foreign investor, must not be stopped from being transferred. It must be allowed to do transactions.

(b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim; (c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver; xxxx According to this 2011 case of JAPRL Dev. Corp vs Security Bank (GR No. 190107), a creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation, it being not included in the list of stayed claims. So the corporation is either voluntarily suing for insolvency or rehabilitation and the corporation has a surety. The creditor of this corporation that has a surety and this corporation has already gone to court on voluntary insolvency. Stay order is issued together with the commencement order. Technically speaking, the creditor is included in the stay order. But the creditor can go after the co-principal of the voluntary insolvency petitioner who is a corporation. If it has a surety, it can be proceeded against independently because it is not included in the list of stay order. xxxxx (d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such securities market participant or the appropriate regulatory agency or selfregulatory organization to pay or settle such claims or liabilities; xxxx

xxxxxx (e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations; (f) the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and xxxxxx An example of this are checks, they are transacted thru clearing agencies. They cannot be stopped by the stay order. They must be allowed to continue. Why? For the interest of the reliability of the commercial transactions. xxxxxx (g) any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commend under this Act. One of the creditors selling his interest in the debt is not allowed but if there’s a solidary debtor to the petitioner, that solidary debtor is not covered unless there is a joinder ordered by the court. If related to that is the case of estafa, because according to the creditor, this debtor who is now hiding behind FRIA misled them into giving them these credits. How did he misled them? He said, “Sigurado na lagi ang bayad. Pirmahan tikag cheke 12 kabuok in advance, postdated.” And then those checks bounced. That becomes bouncing checks; that is criminal liability. That can no longer be stopped by the stay order. The debtor can be pursued. The latest case to illustrate this is Umale vs ASB Realty Corp (652 S 215, 2011). The SC said there is no reason why criminal proceedings should be suspended during corporate rehabilitation. (A) Initiation Proceedings

We are talking here about the debtor, whether it’s voluntary or involuntary insolvency. He has traded in the stock market; he’s a participant in the securities market. Let us say that the debtor is a broker and he is a subject of involuntary insolvency proceeding. Commencement order is issued together with the stay order. As to his general businesses, he is covered by the stay order. All his creditors cannot, in an independent action, sue this particular debtor whose shares are traded in the stock market and is a participant in the stock market; he’s a broker.

(1) Voluntary Proceedings. Alright, in the filing of cases, let’s say voluntary insolvency, there’s no problem if it is a single proprietor. He alone decides whether I will file for involuntary insolvency. How about if you are in a partnership? How is it decided? Whether the partnership will file and seek protection under FRIA? Section 12 says:

All his creditors must come to the insolvency court. During the hearing, if there is a declaration of insolvency, his business continues or if it is only a petition for suspension of payments, his business still continues. Or if it is a petition for financial rehabilitation, his business continues. What is his business? Buying and selling shares of stocks for the account of others. Now, what is meant here is all these transactions in the ordinary course of business or any settlement of claims by the stocks exchange cannot be stopped. Why is that rule adopted? In order not to prejudice foreign investors that still continue with the transaction before an investor sees that the broker is already in Page 106 of 112

Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by the owner in case of a sole proprietorship, or by a majority of the partners in case of a partnership, or in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds hereinafter specifically provided. The petition shall be verified

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno to establish the insolvency of the debtor and the viability of its rehabilitation, and include, whether as an attachment or as part of the body of the petition, as a minimum the following: xxxxx

supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the five (5) working days provided above for the issuance of the Commencement Order shall be reckoned from the date of the filing of the amended or supplemental petition or the submission of such documents.

PARTNERSHIP Majority of the partners, is this numeric or pro-rata? It could be that there are 5 partners, 3 decide then it is a go. But let us say, one of the 5 owns 90% of the shares. Others just own 10%. What happens? Does this partner still need the vote of the other partners in order to file a petition for insolvency or rehabilitation? Here, it must be the majority of the partners, not the partnership.

Section 16. Commencement of Proceedings and Issuance of a Commencement Order. - The rehabilitation proceedings shall commence upon the issuance of the Commencement Order, which shall (among others): Xxxxx (h) appoint a rehabilitation receiver who may or not be from among the nominees of the petitioner/s and who shall exercise such powers and duties defined in this Act as well as the procedural rules that the Supreme Court will promulgate; Xxxxx (q) includes Stay or Suspension Order which shall: (1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.

STOCK CORPORATION The filing of petition must be decided by a majority vote of the BOD and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a stockholder’s meeting duly called for the purpose. This is what FRIA says, not the Corporation Code. This is not just majority vote of the quorum of the BOD; it must be the Board as it stands in full complement. If there are 9 members of the BOD and all are present, 5 must vote. But if only 5 members are present, all 5 must vote. And then that vote of the BOD authorizing the filing of a petition for insolvency must be confirmed and authorized by at least 2/3 of the outstanding capital stock in a stockholder’s meeting duly called for the purpose. Is it just voting stock? It must be 2/3 of ALL the stockholders (includes voting and nonvoting). NON-STOCK CORPORATION The filing of the petition must be decided by a majority vote of the BOT and then authorized by the vote of at least two-thirds (2/3) of the members, in a member's meeting duly called for the purpose. QUALIFIED NOTICE is required for both. (2) Involuntary Proceedings. Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or partners' contributions, whichever is higher, may initiate involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if: xxxxxx This involves a stock corporation. What are the circumstances necessary to initiate involuntary proceedings? xxxxxx (a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due; or (b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent. (B) Action on the Petition and Commencement of Proceedings Section 15 says: Section 15. Action on the Petition. - If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within five (5) working days from the filing of the petition, issue a Commencement Order. If, within the same period, the court finds the petition deficient in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend or

Example (As to #3): X filed a petition for financial rehabilitation. Unsa man iyang negosyo? Cebu Lechoneros. Mga lechon ang iyang produkto. The moment there is a commencement order, within 5 days, stay order is included. The stay order retroacts to the date of filing. You cannot file against this lechonero. He continues his business. Those that he has not paid must continue to supply him, provided the petitioner pays current supply. Not necessarily the past, but the current. So the suppliers of pigs or piglets cannot renege of their obligation to supply because he has not yet paid them in the past. All he has to do is pay them for every delivery. That is the meaning of stay order. You, you cannot refuse to supply. You must continue to supply. 1. Once there is a commencement of the proceedings and the issuance of a commencement order, all actions or proceedings in court or otherwise, for the enforcement of claims against the debtor are suspended. 2. All actions to enforce any judgement, attachment or other provisional remedies against the debtor are also suspended. 3. The debtor is also prohibited or stayed because he cannot sell, encumber, transfer or dispose in any manner any of its properties, except in the ordinary course of business. So, the transactions in the ordinary course of business continue, that might involve disposals and commitments. You’re a real property owner and you’re a petitioner in these insolvency proceedings. You have properties because you are a real property developer. Let us say, real property developers have landbank and land involved in a conduit project. What is a landbank? Mamalit na silag yuta daan, they set aside. Wa pa nay project. On-going project, humana silag environmental impact study, approved na ang subdivision plan, na-survey na daan. After the commencement order, naa nay stay order, can you continue to sell subdivision lots? If it is rehabilitation, that’s ordinary course of business. So you can sell. Can you sell landbank properties? You cannot. That is not yet an on-going project; that is still in the balance sheet. Bakery ka, padayon kag pamaligya ug tinapay. Ang imong truck, sigeg deliver ug tinapay. You are already in the middle of a proceeding for financial rehabilitation but you can still go on with the ordinary course of business. Pabaligyaon nimo ug tinapay to imong truck, unya gi-hunghungan ang driver na “dagan nalang didto sa Iligan, unya itago nalang na”. Unsa na man na? You are already hiding and absconding property for fraudulent purposes.

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno You cannot do that. So, you must identify what is ordinary course of business. 4. The debtor is prohibited from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein. The debtor can only make payment in the ordinary course of business. But he cannot make payments as to the outstanding liabilities to the creditors. Mulinya pa nang mga creditors. The credits must be determined first. He cannot make any payments although he can continue the regular business. The problem arises when there is a person with dual capacity: he is a creditor and at the same time, an employee of the debtor. He has reached his retirement. Is paying his retirement benefits in accordance with the CBA payment in the ordinary course of business? Yes, it’s ordinary course of business.

xxx The rehabilitation receiver shall be deemed an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court--so the judgment of the court with regards to the rehabilitation is largely dependent on the endorsement and recommendation or the lack thereof by the rehabilitation receiver. (continues the provision) implementing the approved Rehabilitation Plan. When you say implementing, how long does it take? Sometimes it can take ten years. That is what happened to Maynilad Water. The rehabilitation of UCPB took six years. So dugay kayo ning receiver who functions as an officer of the court representing the court. Section 32. xxx To this end, and without limiting the generality of the foregoing, the rehabilitation receiver shall have the following powers, duties and responsibilities: (a)To verify the accuracy of the factual allegations in the petition and its annexes; xxx

Unya kung muingon siya na “apila nalang pud ning bonds na akong gikuptan issued by the company which I bought, bayri nalang sad ni kay ma-wagtang naman ko dinhi”. You cannot pay the bond because that is payment that is still prohibited. That’s liabilities of the corporation. Section 19 tells of the applicability of the FRIA to national and local government units. General rule: It is not applicable to government financial institutions. If the charter is silent, then it is not applicable. Exception: Unless the charter of the government financial institutions allow for the inclusion of the privileges of FRIA. The charter controls. It must explicitly provide that it is covered by FRIA. Example: SSS, GSIS, Pag-Ibig - there is no explicit provision in these financial institutions that roots them under the coverage of FRIA. But Section 19 says: Section 19. Waiver of taxes and Fees Due to the National Government and to Local Government Units (LGUs). Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees including penalties, interests and charges thereof due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation.

Hastang dugaya ana. What has to be verified? Assets. You have to determine the accuracy of the assets. First, kung mao ba gyud niy assets, basig naa pay laing tinaguan. Maybe the CEO of the debtor has hidden some of the assets. (father talks about the case of Manila Hotel wherein the CEO hid very valuable assets. That Manila Hotel is famous because of the SC ruling that it is part of the cultural treasure of the country. The MacArthur Suite in Manila Hotel where Gen. MacArthur stayed. Father further talks about Gen. MacArthur’s life.) All the assets and liabilities, he has to approve. If you have liabilities you have to argue it before the receiver. Then the receiver will make a recommendation to the judge and the judge then issues an order approving let’s say, ten of the creditors. That is a judgment nunc pro tunc. What is this? nunc pro tunc. Judgment ba. Insolvent. Kanang nahuman na and it is decided with completeness as to one party, the court can issue a judgment. That is appealable on the part of the creditors whose credits has not been approved or approved only partially and not in toto (?). But the hearing as to the others will continue and normally the court just relies on the recommendation of the receiver. That’s why it is important for the receiver to be objective (?).

So pag-commencement order ana, wala nay bayad sa buwis ana. Government waives until the rehabilitation proceedings are ended. There is a waiver so you won’t have additional burden.

March 8, 2018 (Florienne Melendrez) We’re still in this Financial Rehabilitation and Insolvency Act (FRIA) 2010: Grounds for the removal of the rehabilitation receiver. What are the grounds? It is provided in section 32. Before we go into the grounds—because one of the grounds is incompetence and gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers--we should go into the duties and powers of the rehabilitation receiver. It is provided in Section 31. Section 31. Powers, Duties and Responsibilities of the Rehabilitation Receiver. - The rehabilitation receiver shall be deemed an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan, Page 108 of 112

[from the web: A judgment nunc pro tunc is an action by a trial court correcting a clerical (rather than judicial) error in a prior judgment. A nunc pro tunc may be signed even after the trial court loses its plenary power.] xxx (b)To verify and correct, if necessary, the inventory of all of the assets of the debtor, and their valuation; (c)To verify and correct, if necessary, the schedule of debts and liabilities of the debtor; (d)To evaluate the validity, genuineness and true amount of all the claims against the debtor; (e)To take possession, custody and control, and to preserve the value of all the property of the debtor; (f)To sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor; (g)To have access to all information necessary, proper or relevant to the operations and business of the debtor and for its rehabilitation; (h) To sue and recover, with the. approval of the court, all property or money of the debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or which constitute undue preference of creditor/s; (i) To monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other than in the ordinary course of business;

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno (j) With the court's approval, to engage the services of or to employ persons or entities to assist him in the discharge of his functions; xxx Remember that the court can appoint a management committee or a manager of the business because it will continue during the rehabilitation period. The receiver has an oversight function over the manager that the manager does not favor existing creditors in its payments that the payments are only in the ordinary course of business.

general body of the stakeholders. Scenario: Receiver kana, ikaw muexamine sa tanang assets, sa tanang mga debts. The biggest creditor lends you his car kay naluoy sya nimo layo kayo kag balay. Unsa mana? Manifest lack of independence that is detrimental to the general body of the stakeholders. Ang tag-iya gud sa sakyanan kay ang creditor. Unsaon man nimo pag balibad ana? Bantay ka kung receiver ka. Is the receiver paid?

xxx (k) To determine the manner by which the debtor may be best rehabilitated, to review) revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court for approval; So the court depends on the rehabilitation receiver as to the rehabilitation plan. The court cannot decide the rehabilitation plan unless the receiver endorses it, recommends it. The court has no direct access to the rehabilitation, it is always the receiver. The receiver is very important. He will have a big say in the recommendation and approval. Why? Because it is the receiver himself who will implement the rehabilitation plan. The rehabilitation proceedings only end when the rehabilitation plan has been fully implemented. When it is fully implemented, the receiver will tell the court and then the receiver will tell the debtor to move for dismissal of the case. Then it will be the court who will order the petition dismissed. This is because the rehabilitation plan has been fully implemented. xxx (l) To implement the Rehabilitation Plan as approved by the court, if 80 provided under the Rehabilitation Plan; (m) To assume and exercise the powers of management of the debtor, if directed by the court pursuant to Section 36 hereof;

Section 33.Compensation and Terms of Service. The rehabilitation receiver and his direct employees or independent contractors shall be entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing. Prior to such hearing, the rehabilitation receiver and his direct employees shall be entitled to reasonable compensation based on quantum meruit. Such costs shall be considered administrative expenses. So apply ka with the court, petition as to your compensation. The court will conduct a hearing. The creditors will have a say for how much. What is the rule with respect to the receiver or conservator placed under conservatorship? How much is the compensation? ¾ of the compensation of the CEO. That is for one year. if he is able conclude the consolidation of the property for a time less than one year, the entire one year of the compensation is given to him so that he will not delay the restoration of the financial health of the bank just to he can the compensation. Receiver, the gist (?) is that is receiver is a conservator because if you remember, the bank that is placed in receivership it is the PDIC who *inaudible*.

But if it is very complicated, they can appoint a management committee or somebody else to run the business. But the court has a choice if it is a very simple business. xxx (n) To exercise such other powers as may, from time to time, be conferred upon him by the court; and To submit a status report on the rehabilitation proceedings every quarter or as may be required by the court motu proprio. or upon motion of any creditor. or as may be provided, in the Rehabilitation Plan. Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation receiver shall not take over the management and control of the debtor but may recommend the appointment of a management committee over the debtor in the cases provided by this Act. So those are the duties, responsibilities and power of the rehabilitation receiver. The rehabilitation receiver is the heart and soul and machine of the proceedings. Masakit lang ang receiver wa nay hearing. Masakit ang judge, padayon! Dili maundang, Section 32. Removal of the Rehabilitation Receiver. – The rehabilitation receiver may be removed at any time by the court either motu proprio or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of procedure may provide which shall include, but are not limited to, the following:

Section 34.Oath and Bond of the Rehabilitation Receiver. Prior to entering upon his powers, duties and responsibilities, the rehabilitation receiver shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities. Now under section 34, the rehabilitation receiver takes an oath and puts up a bond in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities. Sa ato pa, mumahal ang sweldo niya tungod ra anang bond! That is in addition to the premium. So if you are going to be chosen as rehabilitation receiver, medyo dako dako ka kay naa kay property na imong imortgage so that the bond will be set up. Section 35.Vacancy. - Incase the position of rehabilitation receiver is vacated for any reason whatsoever, the court shall direct the debtor and the creditors to submit the name/s of their nominee/s to the position. The court may appoint any of the qualified nominees or any other person qualified for the position. Masakit siya, muresign sya, naigo syag kilat. Mao na. if vacated, the court will have to appoint again.

(a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers; (b) Lack of a particular or specialized competency required by the specific case; (c) Illegal acts or conduct in the performance of his duties and powers; (d) Lack of qualification or presence of any disqualification; (e) Conflict of interest that arises after his appointment; and (f) Manifest lack of independence that is detrimental to the Page 109 of 112

Section 36.Displacement of Existing Management by the Rehabilitation Receiver or Management Committee. – Upon motion of any interested party, the court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint a management committee that will undertake the management of the debtor. upon clear and convincing evidence of any of the following circumstances: (a) Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties; (b) Paralyzation of the business operations of the debtor; or

CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno (c) Gross mismanagement of the debtor or fraud or other wrongful conduct on the part of, or gross or willful violation of this Act by existing management of the debtor Or the owner, partner, director, officer or representative/s in management of the debtor. In case the court appoints the rehabilitation receiver to assume the powers of management of the debtor, the court may: (1) require the rehabilitation receiver to post an additional bond; (2) authorize him to engage the services or to employ persona or entities to assist him in the discharge of his managerial functions; and (3) authorize a commensurate increase in his compensation. So if you are not acting just as an receiver but also as management, then the compensation will be (father did not continue) The only fee that prevents the receiver from being abusive is the bond. Kay isumbong man sya then the court will execute on the bond. Wala na iyang collateral. Section 40.Conflict of Interest. - No person may be appointed as a rehabilitation receiver, member of a_ management committee, or be employed by the rehabilitation receiver or the management committee if he has a conflict of interest. An individual shall be deemed to have a conflict of interest if he is so situated as to be materially influenced in the exercise of his judgment for or against any party to the proceedings. Without limiting the generality of the foregoing, an individual shall be deemed to have a conflict of interest if: (a) he is a creditor, owner, partner or stockholder of the debtor; (b) he is engaged in a line of business which competes with that of the debtor; (c) he is, or was, within five (5) years from the filing of the petition, a director, officer, owner, partner or employee of the debtor or any of the creditors, or the auditor or accountant of the debtor; (d) he is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; (e) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sale proprietorship-debtor, partners of a partnership- debtor or to any stockholder, director, officer, employee or underwriter of a corporation-debtor; or (f) he has any other direct or indirect material interest in the debtor or any of the creditors. Any rehabilitation receiver, member of the management committee or persons employed or contracted by them possessing any conflict of interest shall make the appropriate disclosure either to the court or to the creditors in case of outof-court rehabilitation proceedings. Any party to the proceeding adversely affected by the appointment of any person with a conflict of interest to any of the positions enumerated above may however waive his right to object to such appointment and, if the waiver is unreasonably withheld, the court may disregard the conflict of interest, taking into account the general interest of the stakeholders. It is not true that just because a person has a conflict of interest that he cannot be appointed as rehabilitation receiver because the law says if he discloses the conflict of interest and despite that, the creditors vote him to be rehabilitation receiver then he can still be rehabilitation receiver. Section 41. Immunity. - The rehabilitation receiver and all persons employed by him, and the members of the management committee and all persons employed by it, shall not be subject to any action claim or demand in connection with any act done or omitted to be done by them in good faith in connection with the exercise of their powers and functions

under this Act or other actions duly approved by the court. So masayop ka, you are not liable if it is just simple negligence, simple error. When do you become liable? The measure is gross negligence. Honest mistake is allowed. Naa man gani mga managers masayop. So you are given the same latitude. Sa bisaya pa sobra kadanghag. (father talks about gross negligence in the Civil Code as in cases when you let someone be your passenger, such as an 80 year old but you let him sit on the corner of the pick-up truck so he fell.) So that is the rehabilation receiver: from the moment he is appointed tuloy-tuloy na until the end of the case. Because he even recommends the end of the end of the implementation of the rehabilitation. He is the one who tells the court the plan is completed. It’s back to its financial health. Then the court will issue an order dismissing the case. So the rehabilitation receiver is all the way there. The court is just overseeing. Why? Because the court is a deliberative body not an administrative body. It is the receiver who is administering. March 9, 2018 (Ria Danielle Lumapas)

So as we said, rehabilitation plan is initially attached in petition of a rehabilitation plan. The rehabilitation plan may be approved by creditors if they present or put up claims under sec 84. And then confirmed by the court, that is Sec. 86. Sec. 86 is the CRAM DOWN EFFECT. Section 86. Cram Down Effect. - A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal workout framework referred to in this chapter shall have the same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the notice thereof.

If there are difficulties the court may decree a standstill period. The proceedings in court are suspended. A standstill period, according to Sec. 85, may be agreed upon by the parties pending negotiation and finalization of the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not only against the contracting parties but also against the other creditors: Provided, That (a) such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor; (b) notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; and (c) the standstill period does not exceed one hundred twenty (120) days from the date of effectivity. The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement and notify them that said agreement will be binding on all creditors if the required majority votes prescribed in Section 84 of this Act are met. So, you give people a chance to arrive at a rehabilitation plan. There can be a standstill period of 120 days. Mangita ka ug pasudlon ug bagong kwarta. Shopping ka. Adto ka sa mga tagiya, atras sila. Mangita ka, mangutana ka ug pila man ang imong i-give up. Now if standstill period after consultation, after publication, wa lang gihapon and then the receiver is of the conviction that the rehabilitation plan is wise and doable, he

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno recommends it to the court and the court can then cram down this rehabilitation plan. The rehabilitation plan including renegotiated plans confirmed by the court are binding upon the debtor and all persons who may be affected by it including creditors whether or not they participated, whether or not the claims have been scheduled. When can you do this? A restructuring or work out agreement or rehabilitation plan that is approved pursuant to an informal workout framework referred to this chapter shall have the same legal effects as confirmation of a plan under Section 69 hereof. Gibotohon na, majority of the creditors, more than 50 percent, then the court can cram it down. The debtor will say: “no, I want to remain in control, I am rejecting this plan. I am still trying to raise money.” No more. Your time is up. You’re no longer in control. Cram down. LIQUIDATION Liquidation is done by a liquidator. Liquidator is normally elected and elected right after or upon the declaration or order of liquidation. What does it contain? Section 112. Liquidation Order. - The Liquidation Order shall: (a) declare the debtor insolvent; (b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved; (c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution; (d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; (e) direct payments of any claims and conveyance of any property due the debtor to the liquidator; (f) prohibit payments by the debtor and the transfer of any property by the debtor; (g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure; (h) authorize the payment of administrative expenses as they become due; (i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and (j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication. 1. The declaration that the debtor is insolvent. 2. The order directing the liquidation of the debtor and in the case of a juridical debtor, it must also be declared dissolved. This is questionable. Section 134 says: Section 134. Order Removing the Debtor from the List of Registered Entitles at the Securities and Exchange Commission. - Upon determining that the liquidation has been completed according to this Act and applicable law, the court shall issue an Order approving the report and ordering the SEC to remove the debtor from the registry of legal entities. Tungod kay nahapay ka na, dissolved na ka. Pero unsaon nalang ang Corporation Code, grounds for dissolution. The main purpose of this is to relieve the debtor of the burden of being insolvent so it can start again. Unya nganu mag-dissolve naman hinuon? It’s another issue to dissolve you. In the US you can be insolvent so many times. Di man ka madissolve. Ang uban dira in the business for 10 years pero nadeclare insolvent 4 times. Almost every other year it is insolvent. Wa man lagi nadissolve. So this is questionable. Just because you are insolvent you have to be dissolved. What happens after you are liquidated there is a new party which

comes in with fresh funds? Muingon sya, mu-sud nako karon kay wa nay gubot. Musud nako. Supposed somebody comes in, that is especially true if the insolvent debtor is the owner of the franchise. *chika about third telecomm franchisee* So there is a declaration that the debtor is insolvent, there is the order to dissolve the debtor. This is the liquidation order. Then there is the order to the sheriff to take possession and control of all the properties of the debtor except those that may be exempt from execution. Then there is the order to publish the petition or motion in a newspaper of general circulation once a week for 2 consecutive weeks. Then there is the order directing payments of claims and conveyance of any property due the debtor to the liquidator. Order the conveyance of any property due the debtor to the liquidator. What does that mean? Title is transferred to the liquidator of the property of the debtor. Why? Why is there an order of conveyance? Unsaon man pagbaligya sa liquidator sa property na property man na sa debtor? Unsa man, naa sya SPA? Di man na mahimo ug SPA. It’s really conveyed to him as a liquidator. Now he can sell it. He decides the price. What is the mode of disposition? The mode of disposition is normally a public auction. That is the mode. Can there be private sale? There can be. Section 131. Sale of Assets in Liquidation. - The liquidator may sell the unencumbered assets of the debtor and convert the same into money. The sale shall be made at public auction. However, a private sale may be allowed with the approval of the court if; (a) the goods to be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or maintain; or (b) the private sale is for the best interest of the debtor and his creditors. With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his claim or part thereof. So there can be a private sale. Ang nahapay banana corporation. Nya naa na silay mga saging na hinog na, nya mag public auction pa ka. Langawon na imong saging. Baligya dayon. Private sale. “Expensive to maintain” Give an example. Part of the assets are these pedigrees, pets, dogs. Mangita pa kag magbantay ana, swelduhan pa nimo, paliguan adlaw2x. Expensive to maintain. Maglisud man ka ana ug public auction. Mulingkod ka anang Bankerohan ibaligya nimo? Mga great dane, dagko kayo. Expensive pets. Naa pay mga Alaskan huskies, butangan nimo ug ice pirmi. Panington na sila ma-stroke. Ug ang imong assets ing-ana, private sale dayun. Makakita gani ka ug mupalit, baligya. Those are the kinds of assets of the debtor that may be disposed of by a private sale. Private sale is for the best interest of the debtor. That is why those properties are conveyed to the liquidator. Conveyed by what instrument? Deed of sale? Deed of conveyance! It is transferred to you for a specific purpose in order that you can sell it for the benefit of the debtor. Deed of conveyance, that’s the same deed that a trustor signs and conveys the purpose of the trust to the trustee. . Again what is conveyed in the liquidation order? Direct all creditors to file their claims with the liquidator within the period set by the rules of procedure. Unsa man ni na claims? Kanang naapprove na. Okay iyang credit. Nya nalipat ka, wa ka nikubra, ah wala. Goodbye na. Authorize the payment of administrative expenses as they become due; state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and set the case for hearing for the election and appointment of the liquidator, which date shall

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CORPORATION LAW TSN 2017 Based on the Lectures of Fr. Agustin Nazareno not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication. That is contained in the liquidation order. So the court either appoints or elects. Appoints or elects the liquidator. Who elects the liquidator? Section 115. Election of Liquidator. - Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless: (a) he waives his security or lien; or (b) has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim. The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of amount of claims, ad who is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator. Only the unencumbered property are sold. Now dili gani magkasinabot ang creditors kung kinsa ilang pillion, ah that is when the court will appoint the liquidator. The court may appoint a liquidator if: Section 116. Court-Appointed Liquidator. - The court may appoint the liquidator if: (a) on the date set for the election of the liquidator, the creditors do not attend; (b) the creditors who attend, fail or refuse to elect a liquidator; (c) after being elected, the liquidator fails to qualify; or (d) a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the court may instead set another hearing of the election of the liquidator. Provided further, That nothing in this section shall be construed to prevent a rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, from being appointed as a liquidator. Fails to qualify? Nganu man? Because once you are a liquidator you must post a bond. That is post-election qualification. Pareha na sa oath. So just like the receiver the liquidator has to post a bond. So the liquidator takes up oath and files a bond. What are the qualifications? Section 118. Qualifications of the Liquidator. - The liquidator shall have the qualifications enumerated in Section 29 hereof. He may be removed at any time by the court for cause, either motu propio or upon motion of any creditor entitled to vote for the election of the liquidator. Compensation of the liquidator. There is a standard fee. Section 120. Compensation of the Liquidator. - The liquidator and the persons and entities engaged or employed by him to assist in the discharge of his powers and duties shall be entitled to such reasonable compensation as may determined by the liquidation court, which shall not exceed the maximum amount as may be prescribed by the Supreme Court.

Then the court orders the discharge of the liquidator. Section 122. Discharge of Liquidator. - In preparation for the final settlement of all the claims against the debtor , the liquidator will notify all the creditors, either by publication in a newspaper of general circulation or such other mode as the court may direct or allow, that will apply with the court for the settlement of his account and his discharge from liability as liquidator. The liquidator will file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator. Why will the creditors be notified? Because naa may wa nabayri. Wa taga-i ug bahin. The accounting will be set for hearing, if the court finds the same in order the court will discharge the liquidator. So muingon gani kag discharge, maayo na. Sa ato pa correct ang gibuhat nimo. Sa military gi-discharge ka, mali imong gibuhat. Ma-discharge gani ka as liquidator, korek imong gibuhat. Wa kay sayop. You are ordered discharged by the court. The liquidator has to file a liquidation plan. That’s a very complex plan. But normally you will sell the assets and you will comply with the concurrence and preference of credits. Section 133. Concurrence and Preference of Credits. - The Liquidation Plan and its Implementation shall ensure that the concurrence and preference of credits as enumerated in the Civil Code of the Philippines and other relevant laws shall be observed, unless a preferred creditor voluntarily waives his preferred right. For purposes of this chapter, credits for services rendered by employees or laborers to the debtor shall enjoy first preference under Article 2244 of the Civil Code, unless the claims constitute legal liens under Article 2241 and 2242 thereof. Notice this ha, credits for services rendered by employees or laborers to the debtor shall enjoy first preference under article 2244 of the Civil Code which is distinct from Article 110 of the Labor Code. What is this preference? 2244 of the Civil Code, unless the claims constitute legal liens under Article 2241 and 2242 thereof: these are called mechanic’s lien. This goes back all the way to craftsmen. Kanang mga highlyskilled workers. Nya wa pa sila mabayri, gi-commission man sila ug kuha. Pagbaligya ana, ang unang bayran katung nagbuhat. Then it devolved to things not as sophisticated as statues like shoemakers. Kasagarang sapatos ngadto custom made. Sukdan gyud imong tiil. So nahapay gani to imong shop human ikaw craftsman ka didto, ikaw naa kay mechanic’s lien of the goods that you made. So ma-liquidate gani na una ka bayran. Article 110 is general wages of workers over unencumbered property and then there’s already a declaration of insolvency. And it is superior to sovereign claims. The claims of the sovereign that are not based on sovereign powers but proprietary. So when all these have been done then the final order is order of discharge of the debtor. The debtor is discharged from all these obligations because he has no more property and all the creditors have been satisfied. Rehabilitation proceedings is not discharge ha. What is the final order in rehabilitation proceedings? Motion to dismiss is granted. Lakaw, ayaw na pag gasto2x. Balik ka sa imong negosyo. That’s the difference between the order of dismissal and order of discharge.

Now under Sec. 121: Section 121. Reporting Requirements. - The liquidator shall make and keep a record of all moneys received and all disbursements mad by him or under his authority as liquidator. He shall render a quarterly report thereof to the court, which report shall be made available to all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final report at the end of the liquidation proceedings.

So we are finished with FRIA. The last exam is FRIA then you are free. 

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