Corporation-law.docx

CLASSIFICATION OF CORPORATIONS Stock corporation – capital stock divided into shares; created for the purpose of making profit which may be distributed in the form of dividends on the basis of their invested capital; Non-stock corporation – does not issue stock; created not for profit but for the public good and welfare; As to number of persons composing them: Corporation aggregate; Corporation sole; As to whether they are for religious purpose or not: Ecclesiastical corporation; Lay corporation; As to whether they are for charitable purpose: Eleemosynary corporation; Civil corporation; As to where they have been created: Domestic corporation; Foreign corporation; As to the legal right to corporate existence: De jure corporation; De facto corporation; As to whether open to public or not: Close corporation; Open corporation; As to their relation to another corporation: Parent or holding corporation; Subsidiary corporation; As to whether they are corporations in a true sense or only in a limited sense: True corporation; Quasi corporation; o Corporation by prescription; o Corporation by estoppel;

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CAPITAL Entire property or assets of the corporations; includes the amount invested by the stockholders plus undistributed earnings less losses and expenses; in a strict sense, the net assets paid by SH as consideration for the shares issued to them;

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Authorized capital stock – synonymous with capital stock where the shares of the corporation have par value; Subscribed capital stock – the amount of capital stock subscribed whether fully paid or not; connotes an original subscription contract for the acquisition of subscriber of unissued shares in a corporation; Outstanding capital stock – the portion of the capital stock which is issued and held by persons other than the corporation itself; Section 137 The term "outstanding capital stock", as used in this Code, means the total shares of stock

CAPITAL v. CAPITAL STOCK Concrete (actual corpo property); abstract (amount); Fluctuates day to day; fixed in the AOI; Belongs to corpo; belongs to SH; May be real or personal; always personal;

STOCK or SHARES OF STOCK Units into which the capital stock is divided; Represents the interest or right which the owner has o in the management of the corporation in which he takes part through his right to vote; o in the portion of corporate earnings; o upon dissolution and winding up, in the property and assets thereof; CERTIFICATE OF STOCK written acknowledgement of the corporation of the interest, right and participation of a person in the management, profits, assets of a corporation; formal written evidence of the holder’s ownership over his shares;

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SHARES OF STOCK v. CERTIFICATE OF STOCK incorporeal/intangible; concrete/tangible; represents right or intereset; written evidence of such; issued even if not fully paid; must be fully paid;

CLASSIFICATION OF SHARES: 1.

par value / no par value; a. par value - specific money value fixed in the AOI and appearing in the certificate; b. no par value – no stated or par value appearing on the face of the certificate; does not state how much money it represents;

2. 3.

voting / non voting; common / preferred; a. preferred as to assets; b. preferred as to dividends; i. cumulative / non cumulative; ii. participating / non participating;

4. 5. 6. 7. 8. 9.

promotion share; share in escrow; convertible stock; founder’s share; redeemable share; treasury share;

As to whether they are for public or private purpose: Public corporation; Private corporation; CAPITAL STOCK The amount fixed in the AOI, to be subscribed and paid in by the shareholders of a corporation, either in money or property, labor or services, at the organization of the corpo; Represents the equity of the stockholders in the corpo assets; Limits the max amount or number of each class of shares that may be issued by the corpo w/o formal amendment of the AOI; Remains the same; even if actual value of the share as determined by the assets of the corporation is diminished or increased; unaffected by profits and losses;

issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares; Paid up capital stock – portion of the subscribed or outstanding capital stock that is paid;

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

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SEPARATE PERSONALITY -

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A corporation, upon coming to existence, is invested by law with a personality separate and distinct from those of the persons composing it. o Ownership by a single or a small group of stockholders of nearly all of the capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate corporate personality. Thus, obligations incurred by corporate officers, acting as corporate agents, are not theirs but direct accountabilities of the corporation they represent. Solidary liability on the part of corporate officers may at times attach, but only under exceptional circumstances, such as when they act with malice or in bad faith.

GRANDFATHER RULE -

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Also, in appropriate cases, the veil of corporate fiction shall be disregarded when the separate juridical personality of a corporation is abused or used to commit fraud and perpetrate a social injustice, or used as a vehicle to evade obligations.

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Under the doctrine of piercing the veil of corporate fiction, the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the same. Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives. doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1. defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2. fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3. alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.[54] In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.[55]

NATIONALITY CONTROL TEST

the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership -

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PIERCING THE VEIL -

‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."

DISTINCTIONS: Corpo to partnership; to sole proprietorship to conjugal

COMPONENTS OF CORPORATION 1. 2. 3. 4. 5. 6. 7.

Incorporators Corporators BOD Stockholders/members Promoters Subscribers Underwriters

POWERS OF CORPORATION AMENDMENT OF AOI (1) By a majority vote of the BOD or trustees (2) And the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, OR 2/3 of the members if it be a non-stock corporation. AMENDABLE ITEMS The following items are amendable under Sec. 16: (1) Change of name of the Corporation (2) Adding to or changing the purpose/s (3) Change of principal office (4) Change in the number of directors or trustees (5) Increase or decrease in authorized capital stock [subject to Sec. 38] NON-AMENDABLE ITEMS The following items state accomplished facts, therefore, cannot be amended:

(1) The names, nationalities and residences of the incorporators. Otherwise, an amendment would go against the definition of “incorporators” in Sec. 5 (2) Treasurer-in-trust (3) First set of directors or trustees (4) Original stock subscriptions and paid-in capital (5) Place and date of execution (6) Witnesses [De Leon] Right of appraisal

BOARD OF DIRECTORS TENURE Directors shall hold office for 1 year until their successors are elected and qualified [Sec. 23] QUALIFICATIONS (1) If STOCK, director must own at least 1 share of the capital stock, which stock shall stand in his own name [Sec. 23] Exception: Trustee in a voting trust may be elected director/trustee. (2) If NON-STOCK, trustee must be a member in good standing. Other Qualifications: (1) Majority of the directors/trustees must be residents of the Philippines. (2) Natural person (3) Of Legal Age (4) Other qualifications as may be prescribed in the by-laws of the corporation. DISQUALIFICATIONS [SEC. 27] (1) Convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years; or (2) A violation of the Corporation Code, committed within 5 years prior to the date of his election. This includes violations of rules and regulations issued by the SEC to implement the provisions of the Corporation Code. ELECTIONS CUMULATIVE VOTING FOR ONE CANDIDATE A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. ILLUSTRATION If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate. CUMULATIVE VOTING BY DISTRIBUTION A stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. ILLUSTRATION In the illustration above, Pedro instead may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to candidate 5. STRAIGHT VOTING Every stockholder may vote such number of shares for as many persons as there are directors to be elected. REMOVAL GR: Any Director or Trustee of a corporation may be removed from office, with or without cause. [Sec. 28] EX: Directors who have been elected by minority stockholders exercising cumulative voting can only be removed for cause. 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 Sec. 24. Other requisites: (1) by a vote of the stockholders holding or representing 2/3 of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of 2/3 of the members entitled to vote (2) At a regular or special meeting after proper notice is given FILLING OF VACANCIES VACANCY: (1) BY REMOVAL; OR (2) BY EXPIRATION OF TERM; OR (3) WHEN THE REMAINING DIRECTORS DO NOT CONSTITUTE A QUORUM Vacancy/ies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. VACANCY BY REASON OF INCREASE IN THE NUMBER OF THE DIRECTORS/TRUSTEES Vacancy/ies must be filled by the stockholders: (1) in a regular or special meeting called for that purpose; or (2) in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. VACANCY BY OTHER CAUSES Vacancy/ies may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum. CONTRACTS BY SELF-DEALING DIRECTORS WITH THE CORPORATION GR: A contract of the corporation with one or more of its directors or trustees is VOIDABLE, at the option of such corporation. [Sec. 32] EX: Such contract is VALID if all of the following conditions are present: (a) That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; (b) That the vote of such director or trustee was not necessary for the approval of the contract; (c) That the contract is fair and reasonable under the circumstances; and (d) That in case of an officer, the contract has been previously authorized by the BOD. Ratification In case of absence of the first two conditions above, contract may be ratified if: (a) Stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract. (b) Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. (c) Contract is fair and reasonable under the circumstances BETWEEN CORPORATIONS DIRECTORS

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INTERLOCKING

If the interests of the interlocking director in the corporations are both substantial (stockholdings exceed 20% of outstanding capital stock). GR: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. [Sec. 32]

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EX: If contract is fraudulent or not fair and reasonable under the circumstances

If the interest of the interlocking director in one of the corporations is nominal (stockholdings 20% or less) while substantial in the other, the contract shall be VALID, if the following conditions are met: a) The presence of such director or trustee in the board meeting in which the contract was approved was NOT necessary to constitute a quorum for such meeting b) That the vote of such director or trustee was not necessary for the approval of the contract c) That the contract is fair and reasonable under the circumstances. -

Where (a) and (b) are absent, the contract can be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract, provided that: (a) Full disclosure of the adverse interest of the directors/trustees involved is made on such meeting; (b) The contract is fair and reasonable under the circumstances.

SOLIDARY LIABILITY FOR DAMAGES (1) Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; [Sec. 31] (2) Gross negligence or bad faith in directing the affairs of the corporation; [Sec. 31] (3) Acquiring any personal or pecuniary interest in conflict of duty; [Sec. 31] (4) Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with secretary; [Sec. 65] Watered Stocks – stocks issued for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value. (5) Agreeing or stipulating in a contract to hold himself liable with the corporation; or (6) By virtue of a specific provision of law

BY-LAWS ADOPTION OF BY-LAWS By-laws – has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or corporation for its internal governance, including rules for routine matters such as calling meetings [SMC v. Mandaue (2005)]. BY LAWS v. AOI Indeed, the articles of incorporation of Forest Hills defined its charter as a corporation and the contractual relationships between Forest Hills and the State, between its stockholders and the State, and between Forest Hills and its stockholder; hence, there could be no gainsaying that the contents of the articles of incorporation were binding not only on Forest Hills but also on its shareholders. On the other hand, the by-laws were the self-imposed rules resulting from the agreement between Forest Hills and its members to conduct the corporate business in a particular way. In that sense, the by-laws were the private “statutes” by which Forest Hills was regulated, and would function. The charter and the bylaws were thus the fundamental documents governing the conduct of Forest Hills’ corporate affairs; they established norms of procedure for exercising rights, and reflected the purposes and intentions of the incorporators. Until repealed, the by-laws were a continuing rule for the government of Forest Hills and its officers, the proper function being to regulate the transaction of the incidental business of Forest Hills. The by-laws constituted a binding contract as between Forest Hills and its members, and as between the members themselves. (Forest Hills v. Gardpro) ADOPTION OF BY-LAWS [Sec. 46] May be done either:

(1) Prior to incorporation - approved and signed by all the incorporators and submitted to SEC together with Articles of Incorporation; or (2) After incorporation - within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. REQUISITES OF VALID BY-LAWS Approval requirement: Must be approved by the affirmative vote of the stockholders representing MAJORITY of the outstanding capital stock or majority of members If filed pre-incorporation: must be approved and signed by all incorporators Record-Keeping: Must be kept in the principal office of the corporation, subject to inspection of stockholders or members during office hours [Sec. 74] BINDING EFFECTS When Binding: ONLY from date of issuance of SEC of certification that by-laws are not inconsistent with the Code Pending approval, they cannot bind stockholders or corporation. Effect to 3rd parties: Mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of the same. AMENDMENT OR REVISION Effected by: majority vote of the members of the board and majority vote of owners of the Outstanding Capital Stock or members, in a meeting duly called for the purpose DELEGATION TO THE BOD OF POWER TO AMEND OR REPEAL BY-LAWS: By vote of stockholders representing 2/3 of the Outstanding Capital Stock or 2/3 of the members HOW DELEGATION REVOKED: Any power delegated to the BOD or trustees to amend or repeal any by-laws or adopt new bylaws 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.

MEETINGS MEETINGS OF BOD/TRUSTEES REGULAR OR SPECIAL Who May Attend? The members of the Board themselves; directors in Board meetings cannot be represented or voted by proxies. When? [Sec.53] (1) Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise. (2) Special meetings of the BOD or trustees may be held at any time upon the call of the president or as provided in the by-laws. Where? [Sec. 53] Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. NOTICE Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting, unless otherwise provided by the bylaws. A director or trustee may waive this requirement, either expressly or impliedly WHO PRESIDES The president presides, unless the by-laws provide otherwise. [Sec. 54]

QUORUM GR: Majority of the number of directors or trustees as fixed in the articles of incorporation. [Sec. 25] EX: (1) Unless the articles of incorporation or the by-laws provide for a GREATER majority, or (2) In case of election of officers where a vote of a majority of all the members of the board is needed. MEETING OF SH/MEMBERS GR: Stockholders’ or members’ approval is expressed in a meeting duly called and held for the purpose. EX: In case of amendment of Articles of Incorporation, approval may be expressed by referendum or written assent of the stockholders or members (Sec. 16) Who May Attend and Vote?  Stockholders, either in person or by proxy  Pledgors or mortgagors (Sec. 55)  Pledgee or mortgagee, IF expressly given such right by the pledgor or mortgagor in writing which is recorded on the corporate books(Sec. 55)  Executors, administrators, receivers, and other legal representatives duly appointed by the court, without need of any written proxy(Sec. 55)  ALL joint owners of stocks, or any one of them with the consent of ALL the co-owners, unless there is a written proxy, signed by all the co-owners(Sec. 56)  Any one of the joint owners of shares owned in an "and/or" capacity or a proxy thereof(Sec. 56) REGULAR OR SPECIAL When and Where When? (Sec. 50) Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the BOD or trustees. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Where?  Stock: City or municipality where the principal office of the corporation is located, or, if practicable, in the principal office of the corporation: Provided, Metro Manila shall be considered a city or municipality. (Sec. 51)  Non-stock: Any place even outside the place where the principal office is located, within the Philippines (Sec. 93) Notice (Sec. 50)  Regular Meeting—written notice sent to all shareholders or members at least 2 weeks prior to the meeting, unless a different period is required by the by-laws  Special Meeting—written notice sent at least 1 week prior to the meeting, unless otherwise provided in the by-laws.  Subject to waiver, expressly or impliedly (i.e., attendance despite no notice) Effect of Failure to Give Notice: Failure to give notice would render a meeting VOIDABLE at the instance of an absent stockholder, who was not notified of the meeting (Board v. Tan, 1959). WHO CALLS THE MEETINGS Any petitioning stockholder or member upon order of the SEC when there is no person authorized to call a meeting. (Sec. 50) WHO PRESIDES AT THE MEETINGS The president, unless the by-laws provide otherwise.(Sec. 54) The petitioning stockholder or member (when there is no person authorized to call a meeting) shall preside thereat until at least a majority of the

stockholders or members present have chosen one of them as presiding officer.(Sec. 50) QUORUM GR: Stockholders representing majority of the Outstanding Capital Stock or majority of the members EX: The Code or the by-laws provide otherwise where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority. (However, stockholders can break the quorum for justifiable causes.) (Johnston vs. Johnston, 1965 CA decision) PROXY Stockholders and members may vote in person or by proxy in all meetings of stockholders or members (Sec. 58). Requisites for a Valid and Enforceable Proxy: (1) It must be in writing; (2) Signed by the stockholder or member of record; and (3) Filed with the corporation before the scheduled meeting with the Corporate Secretary VOTING TRUST An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any time (Sec. 59). Under a voting trust arrangement, a stockholder of a stock corporation parts with the naked or legal title, including the power to vote, of the shares and only retains the beneficial ownership of the stock. A voting trustee is a share owner vested with colorable and naked title of the shares covered for the primary purpose of voting upon stocks that he does not own. A voting trust agreement shall be ineffective and unreasonable unless: (1) It is in writing and notarized; (2) Specify the terms and conditions thereof; and (3) A certified copy of such agreement shall be filed with the corporation and with the SEC. PROXY v. TRUSTEE 1. Principal–agent -- Trustee-beneficiary 2. Proxy cannot exceed delegated authority. -- The only limit to authority is that the act must be for the benefit of trustee. (fiduciary obligation) 3. Must be in writing -- Must be in writing and notarized 4. Copy must be filed with the corporation. -- Copy must be filed with SEC and the corporation. 5. No transfer. -- Transfer of legal title to trustee. 6. Proxy exercises voting rights only for a specific meeting (unless otherwise provided) -- Trustee exercises absolute voting rights continuously, subject only to fiduciary duty. 7. Proxy cannot be director -- Trustee can be director because he holds legal title over the shares 8. Revocable at will in any manner, EXCEPT if coupled with an interest. -- Irrevocable, as long as no misconduct or fraud. 9. Max of 5 yrs at a time -- Max of 5 yrs at a time (unless the voting trust is specifically required as a condition in a loan agreement)

STOCKS AND STOCKHOLDERS SUBSCRIPTION AGREEMENT Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract (Sec. 60) PRE-INCORPORATION SUBSCRIPTION (SEC. 61)

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It is a subscription for shares of stock of a corporation still to be formed. When pre-incorporation subscription is IRREVOCABLE: (1) For a period of at least 6 months from the date of subscription, UNLESS (a) all of the other subscribers consent to the revocation, or (b) the incorporation fails to materialize within 6 months or within a longer period as may be stipulated in the contract of subscription; or (2) After the submission of the Articles of Incorporation to the SEC.

POST-INCORPORATION SUBSCRIPTION It is entered into after incorporation.

 Notice of delinquency issued by the BOD upon failure of the stockholder to pay within 30 days from date specified.  Service of notice of delinquency on the non-paying subscriber, PLUS publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for 2 consecutive weeks. NOTE Requirements on notice and publication are mandatory. Lacking such requirements, the stockholder may question the sale as provided under Sec. 69. -

UNPAID SUBSCRIPTIONS PAYMENT OF BALANCE OF SUBSCRIPTION (SEC. 66 AND 67) The BOD of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment shall be made on the date specified in the contract of subscription or on the date stated in the call. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided for in the by-laws. If within 30 days from said date no payment is made, all stocks covered by said subscription shall become delinquent and subject to sale under Sec. 68 unless the BOD orders otherwise. -

There are 2 instances when call is not necessary to make the subscriber liable for payment of the unpaid subscription: (1) When, under the terms of the subscription contract, subscription is payable, not upon call, but immediately, or on a specified day, or when it is payable in installments at specified times; and (2) If the corporation becomes insolvent, which makes the liability on the unpaid subscription due and demandable, regardless of any stipulation to the contrary in the subscription agreement. SALE OF DELINQUENT SHARES(SEC. 68) Delinquent Shares - These are shares for which the corresponding subscription or balance remains unpaid after a grace period of 30 days from the date specified in the contract of subscription or from the date stated in the call made by the BOD. (Sec. 67) EFFECT OF DELINQUENCY(SEC. 71) No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholders’ meeting. The holder thereof shall NOT be entitled to any of the rights of a stockholder except the right to dividends. But the dividends it will receive will be subject to Sec. 43, that is, cash dividends shall first be applied to the unpaid balance on the subscription plus costs and expenses, and stock dividends shall be withheld until the unpaid subscription is fully paid. Such shares shall be subject to delinquency sale. CALL BY RESOLUTION OF THE BOD (SEC. 68) The BOD may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks became delinquent, which is 30 days after the date specified in the contract of subscription or on the date stated in the call. Procedure for delinquency sale (Sec. 68)  Call for payment made by the BOD.  Notice of call served on each stockholder.

The delinquent stockholder may stop the auction by paying to the corporation on or before the date specified for the sale the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of the sale. Otherwise, the public auction shall proceed and the delinquent shares shall be sold to the bidder that will pay the full amount of the balance of subscription with accrued interest, costs and expenses of the sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchases in the books of the corporation and a certificate of such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.

Irregularities in the delinquency sale (Sec. 69)  Action to recover delinquent stock must be on the ground of irregularity or defect in the notice of sale.  Party seeking to recover must first pay or tender to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate.  The action must be commenced within 6 months from the date of sale. LOST OR DESTROYED CERTIFICATES Section 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, o unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1)

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year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)

INDIVIDUAL SUIT A suit brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him. REPRESENTATIVE SUIT A suit brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders. DERIVATIVE SUIT A suit is brought by a stockholder for wrongful acts committed by directors/trustees of the corporation, when the stockholder finds that he has no redress because the directors/trustees are the ones vested by law to decide whether or not to sue. RIGHT TO INSPECT As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs. A stockholder’s right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-ownership. Such right is predicated upon the necessity of self-protection. [Gokongwei Jr. v. SEC (1979)] Records/Books to be Kept (Sec. 74) (1) Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc; (2) Minute book for meetings of the stockholders/members; (3) Minute book for meetings of the board/trustees; (4) Stock and transfer book Financial Statements (Sec. 75) Within 10 days from written request, the corporation shall furnish its most recent financial statement (balance sheet and profit or loss statement as of last taxable year) At a regular meeting, the Board shall present 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 CPA. Requirements for the exercise of the right of inspection (Sec. 74) (1) It must be exercised at reasonable hours on business days and in the place where the corporation keeps all its records (i.e., principal office). (2) The stockholder has not improperly used any information he secured through any previous examination.

(3) Demand is made in good faith or for a legitimate purpose. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section: o that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, o or was not acting in good faith or for a legitimate purpose in making his demand.

RIGHT OF APPRAISAL -

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Right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure (Sec. 81). The amount paid to the stockholder is the fair value of his shares as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of the corporate action (Sec. 82)

Instances of appraisal right (1) Extension or reduction or corporate term (Sec. 81) (2) Amendment to Articles of Incorporation which involves change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder (Sec. 81) (3) Investment of corporate funds in another business or purpose (Sec. 42) (4) Sale or disposal of all or substantially all assets of the corporation (Sec. 81) (5) Merger or consolidation (Sec. 81) Requirements for exercise of appraisal right (Secs. 82, 86) 1. Stockholder must have voted against the corporate act. 2. Stockholder must make a written demand on the corporation within 30 days after the vote was taken for payment of the fair value of his shares (failure to make demand within such period shall be deemed waiver of the appraisal right). 3. Stockholder must submit his certificates of stock to the corporation for notation within 10 days after demand for payment. Otherwise, right to appraisal may be terminated at the option of corporation.

DISSOLUTION Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate existence or business purpose. However, for the purpose only of winding up its affairs and liquidating its assets, its corporate existence continues for a period of 3 years from such dissolution [Sec. 122]. Upon dissolution, the corporation ceases to be a juridical person and consequently can no longer continue transacting its business [Campos]. Note: If no dissolution papers are filed with the SEC by a

corporation claiming dissolution voluntarily, such corporation is still deemed legally existing, notwithstanding the fact that it has ceased to operate. [De Leon]

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MODES OF DISSOLUTION Based on jurisprudence, the methods of effecting dissolution as prescribed by law are exclusive, and a corporation cannot be dissolved except in the manner prescribed by law. [De Leon]

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A voluntary dissolution may be effected by amending the Articles of Incorporation to shorten the corporate term; and upon approval of the expired shortened term, the corporation shall be deemed dissolved without any further proceedings. A publication of notice of dissolution is required and cannot be dispensed with by alleging that it was not required in Sec. 120 and that no creditors will be prejudiced by its dissolution.

INVOLUNTARY VOLUNTARY -

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WHERE NO CREDITORS ARE AFFECTED [SEC. 118]  Notice of the meeting should be given to the stockholders or members by personal delivery or registered mail at least 30 days prior to the meeting.  The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place where the principal office of said corporation is located. If no newspaper is published in such place, then in a newspaper of general circulation in the Philippines.  The resolution to dissolve must be approved by the majority of the BOD/BOT and approved by the stockholders representing at least 2/3 of the Outstanding Capital Stock or 2/3 of members. o Non-voting shares are entitled to vote in this matter [Sec. 6. Par 6(8)]  A copy of the resolution shall be certified by the majority of the BOD/BOT and countersigned by the secretary.  The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution. WHERE CREDITORS ARE AFFECTED [SEC. 119]  A petition shall be filed with the SEC containing the following: o signature by a majority of its BOD or BOT or other officers having management of its affairs; o verified by its president, or secretary or one of its director or trustees; o all claims and demands against the corporation; and o resolved upon by affirmative vote of the stockholders representing at least 2/3 of the Outstanding Capital Stock or 2/3 of members;  If the petition is sufficient in form and substance, the SEC shall issue an order fixing the date on or before which objections to the petition may be filed. Such date shall not be less than 30 days nor more than 60 days after the entry of the order.  A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation, or if there is no newspaper in the city or municipality of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient.  A hearing shall be conducted 5 days after the lapse of the expiration of the time to file objections.  If the objections are insufficient or the material facts in the petition are true, judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment may include appointment of a receiver. o As long as 2/3 vote is obtained, no member/ stockholder can prevent such dissolution unless the majority stockholders acted in bad faith. The latter may be held liable for damages [Campos]. o Even where there are creditors of the corporation who may be prejudiced by the dissolution, it is still possible for the corporation to terminate its existence prior to the expiration of its term, provided said creditors are given the opportunity to present their claims and objections so that their interests may be protected [Campos]. BY SHORTENING OF CORPORATE TERM

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BY EXPIRATION OF CORPORATE TERM Once the period expires, the corporation is automatically dissolved without any other proceeding and it cannot thereafter be considered a de facto corporation.

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FAILURE TO ORGANIZE AND COMMENCE BUSINESS WITHIN 2 YEARS FROM INCORPORATION Failure to formally organize and commence the transaction of its business or construction of its works within 2 years - its corporate powers shall cease and the corporation shall be deemed dissolved [Sec. 22]

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LEGISLATIVE DISSOLUTION The inherent power of Congress to make laws carries with it the power to amend or repeal them. Involuntary corporate dissolution may be effected through the amendment or repeal of the Corporation Code. [implied from Sec. 145, De Leon]

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DISSOLUTION BY THE SEC ON GROUNDS UNDER EXISTING LAWS A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and hearing, on the following grounds [Sec. 6, par. i, PD 902-A]: (1) Fraud in procuring its certificate of registration (2) Serious misrepresentation as to what the corporation can or is doing to the great prejudice of or damage to the general public (3) Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise (4) Continuous inoperation for a period of at least five years (5) Failure to file by-laws within the required period (6) Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period (7) Other grounds Other grounds: (a) Violation by the corporation of any provision of the Corporation Code [Sec. 144 BP 68] (b) In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the corporation as the only practical solution to the dispute (Sec. 104 BP 68)

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LIQUIDATION Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. It is a proceeding in rem. -

BY THE CORPORATION ITSELF Under Sec. 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for 3 years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the 3-year term, appoint a trustee or a receiver who may act beyond that period.