Understanding the Structure and Nationality of Corporations in the Philippines, Summaries of Law

Download Understanding the Structure and Nationality of Corporations in the Philippines and more Summaries Law in PDF only on Docsity! Page 1 of 22 REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS [ REPUBLIC ACT NO. 11232 ] REVISED CORPORATION CODE OF THE PHILIPPINES Corporation A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. (Sec. 2, RCC) Classes of Corporation 1. As to whether their membership is represented by shares of stock or not: a. Stock – one which has: i. Capital stock divided into shares; and ii. Are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. b. Non-Stock – is one which does not issue shares and is - created not for profit but for public good and welfare and where no part of its income is distributable as dividends to its members, trustees, or officers 2. As to the number of persons who compose them: a. One Person Corporation – corporation consisting of a single stockholder: Provided, that only a natural person, trust, or estate may form a One Person Corporation b. Corporation Aggregate – corporation consisting of more than one member or corporator. The RCC requires that these corporations must be formed jointly with others c. Corporation Sole - Religious corporation which consists of one member which is the head of the religious sect or corporator only and his successor 3. As to state or country under or by whose laws they have been created: a. Domestic - incorporated and organized under the laws of the Philippines. b. Foreign - 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 4. As to their legal right to corporate existence: a. De jure - existing both in fact and in law. b. De facto - existing in fact but not in law. 5. As to whether they are open to the public or not: a. Close - limited to selected persons or members of the family. b. Open - open to any person who may wish to become a stockholder or member thereto. 6. As to whether they are corporations in a true sense or only in a limited sense: a. True - exists by statutory authority b. Quasi - exist without formal legislative grant: i. Corporation by prescription – has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law, is given the status of a corporation; ii. Corporation by estoppel - in reality is not a corporation, either de jure or de facto, because it is so defectively formed, but is considered a corporation in relation to those only who, by reason of theirs acts or admissions, are precluded from asserting that it is not a corporation. 7. As to whether they are for public (government) or private purpose: a. Public - formed or organized for the government of a portion of the State (like cities and municipalities) for the purpose of serving the general good and welfare. b. Private - one formed for some private purpose, benefit or end. It may either be a stock or non-stock Tests in determining the nationality of corporations 1. Control Test - In determining the nationality of a corporation, the control test uses the nationality of the controlling stockholders or members of the corporation. 2. Grandfather Rule – It is used in determining the nationality of a corporation engaged in a partly nationalized activity. This applies in cases where the stocks of a corporation are owned by another corporation with foreign stockholders exceeding 40% of the capital stock of the corporation. Page 2 of 22 Doctrine of Separate Juridical Personality The doctrine of corporate juridical personality states that a corporation is a juridical entity with legal personality separate and distinct from those acting for and, in its behalf, and, in general, from the people comprising it. 1. Liability for acts or contracts – As a general rule, the obligation of the corporation is not the liability of the stockholders, officers or directors. 2. Liability for torts or crimes - Since a corporation is a mere creation of legal fiction, it cannot be held liable for crimes committed by its officers; in such case 3. the responsible officers would be criminally liable 4. Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons. However, rights belonging to the corporation cannot be invoked by the stockholders (or directors and officers) even if the latter owns substantial majority of the shares in that corporation and rights of the stockholders, directors and officers cannot be invoked by the corporation. 5. Acquisition of jurisdiction – service of summons may be made only on the president, general manager, corporate secretary, treasurer or in-house counsel. 6. Recovery of damages - A corporation is not entitled to moral damages because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. Exceptions: a. In cases of libel, slander, or any other form of defamation. b. When the corporation has a reputation that is debased, resulting in its humiliation in the business realm. Doctrine of Piercing the Corporate Veil The doctrine of piercing the corporate veil is the doctrine that allows the State to disregard, for certain justifiable reasons, the notion that a corporation has a personality separate and distinct from the persons composing it. Grounds for Application of Doctrine 1. If the fiction is used to perpetrate fraud (Fraud Test) 2. If the complete control of one corporate entity to another which perpetuated the wrong is the proximate cause of the injury (Control Test) 3. If a certain corporation is only an adjunct or an extension of the personality of the corporation (Alter ego or Instrumentality Test) 4. If the fiction is pierced to make the stockholders liable for the obligation of the corporation (Objective Test) Test in Determining Applicability 1. 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 (Instrumentality or Control test); 2. 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 duty, or dishonest and unjust act in contravention of plaintiff’s legal right (Fraud test); and 3. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of (Harm test). Page 5 of 22 Non-amendable Items in the Articles of Incorporation Those matters referring to accomplished facts, except to correct mistakes, such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid-up capital; 3. Names of the original directors; 4. Treasurer elected by the original subscribers; 5. Members who contributed to the initial capital of then on-stock corporation; or 6. Witnesses to and acknowledgment with AOI Corporate Name Limitations on Use of Corporate Name 1. No corporate name shall be allowed by the Commission if it is not distinguishable from that already reserved or registered for the use of another corporation, or if such name is already protected by law, or when its use is contrary to existing law, rules and regulations. 2. If the name applied for is similar to the name of registered corporation, the applicant shall add one or more distinctive words to the proposed name to remove the similarity or differentiate it from the registered name. 3. The corporate name shall contain the word “Corporation” or “Incorporated,” or the abbreviations “Corp.” or “Inc.” respectively. The corporate name of a foundation shall use the word “Foundation”. 4. The name of a dissolved corporation or whose registration has been revoked shall not be used by another corporation within five (5) years from the approval of dissolution or five (5) years from the date of revocation, unless it has been allowed at the time of the dissolution or revocation by the stockholders, members or partners who represent a majority of the outstanding capital stock or membership of the dissolved corporation. 5. For as long as a corporation is existing regardless of whether or not it is in operation, its corporate name cannot be used by any other group or corporation. 6. The practice of a profession regulated by special law which among others provides for the permissible use of the profession’s name in a firm, partnership or association shall govern the use of the name. Registration and Issuance of Certificate of Incorporation Basic requirements for the registration and issuance of a certificate of incorporation of a stock corporation 1. A person desiring to incorporate shall submit the intended corporate name to the Commission for verification slip. 2. AOI and by-laws. A corporation comes into existence upon the issuance of the certificate of incorporation by the SEC under its official seal, except in case of a corporation sole which commences existence upon the filing of the articles of incorporation. Election of Directors and Trustees Requirements and limitations for the election of directors or trustees 1. Presence of Stockholders representing a majority of the outstanding capital stock of the corporation or majority of the members, either in person or by proxy. New ways to vote in RCC, Sec 24: Through remote communication or in absentia Note that it must be provided in the by-laws except in corporations vested with public interest 2. The election must be by ballot, if requested by any voting stockholder or member. 3. The total number of votes cast by him must not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected. 4. No delinquent stock shall vote or be voted for. 5. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. 6. The candidates receiving the highest number of votes shall be declared. Quorum – it shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of nonstock corporations, unless otherwise provided. Page 6 of 22 Adoption of By-laws The by-laws supplement the AOI. The function of by-laws is to define the rights and duties of corporate officers and directors or trustees, and of stockholders or members towards the corporation and among themselves with reference to the management of corporate affairs and to regulate transaction of the business of the corporation in a particular way. Contents: 1. Time, place and manner of calling and conducting regular or special meetings of directors or trustees. 2. Time and manner of calling and conducting regular or special meetings of the stockholder or members. 3. The required quorum in meeting of stockholders or members and the manner of voting therein. 4. The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes; 5. The form for proxies of stockholders and members and the manner of voting them. 6. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation of directors or trustees and officers, and the maximum number of other board representations that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the Commission; 7. Time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof. 8. Manner of election or appointment and the term of office of all officers other than directors or trustees. 9. Penalties for violation of the by-laws. 10. In case of stock corporations, the manner of issuing certificates. 11. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs for the promotion of gouvernante and anti-graft and corruption measures. Binding Effects The following are the binding effects of by-laws: 1. As to members/ stockholders, officers, trustees/directors and corporation, they are bound by and must comply with it. They are presumed to know the provisions of the by-laws. 2. As to third persons, they are not bound, unless they have knowledge or notice of the bylaws at the time the contract was executed. Amendments 1. Amendment may be made by stockholders together with the Board – by majority vote of directors and owners of at least a majority of the outstanding capital stock/members; or 2. By the board only after due delegation by the stockholders owning 2/3 of the outstanding capital stock/members. Provided, that such power delegated to the board shall be considered as revoked whenever stockholders owning at least majority of the outstanding capital stock or members, shall vote at a regular or special meeting. Effects of Non-use of Corporate Charter 1. If a corporation does not formally organize and commence its business within five (5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five- year period. 2. If a corporation has commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the Commission may, after due notice and hearing, place the corporation under delinquent status. 3. A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the Commission shall prescribe. Upon compliance by the corporation, the Commission shall issue an order lifting the delinquent status. Failure to comply with the requirements and resume operations within the period given by the Commission shall cause the revocation of the corporation’s certificate of incorporation. Page 7 of 22 Corporate Powers 1. Express powers – granted by law, the Corporation Code, and its Articles of Incorporation or Charter, and administrative regulations; 2. Inherent/incidental powers – not expressly stated but are deemed to be within the capacity of corporate entities; 3. Implied/necessary powers – exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter. General Powers; Theory of General Capacity The general powers of a corporation also called Theory of General Capacity are the following: 1. To Sue and be sued; 2. To have perpetual existence unless the certificate of incorporation provides otherwise; 3. To adopt and use of corporate seal; 4. To amend its Articles of Incorporation; 5. To adopt its By-laws; 6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for non-stock corporations: admit members; 7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds subject to the Constitution and existing laws; 8. To Enter into merger or consolidation, (To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons); 9. To make reasonable Donations, including those for public welfare, or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, that no foreign corporation shall give donations in aid of any political party, candidate or partisan political activity 10. To establish pension, Retirement, and other plans for the benefit of its directors, trustees, officers and employees – basis of which is the Labor code; and 11. To exercise other powers essential or necessary to carry out its purposes. Specific Powers; Theory of Specific Capacity The specific powers of a corporation, also called Theory of Specific Capacity, are the following: 1. Power to extend or shorten corporate term 2. Increase or decrease capital stock 3. Incur, create, or increase bonded indebtedness 4. Deny pre-emptive right 5. Sell, dispose, lease, encumber all or substantially all of corporate assets 6. Purchase or acquire own Shares 7. Invest corporate funds in another corporation or business for other purpose other than primary purpose 8. Declare dividends out of unrestricted retained earnings 9. Enter into management contract with another corporation (not with an individual or a partnership– within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than five (5) years for any one term 10. Amend Articles of Incorporation Power to Extend or Shorten Corporate Term 1. Majority vote of the BOD or BOT 2. Ratification by 2/3 of the stockholders representing outstanding capital stock or by at least 2/3 of the members in case of non-stock corporation. 3. Required notice duly complied with. 4. Copy of the amended AOI shall be submitted to these for its approval. Note: The extension must be done during the lifetime of the corporation not earlier than 3 years prior to the expiry date unless exempted. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness 1. Majority vote of the BOD; 2. Ratification by stockholders representing 2/3 of the outstanding capital stock. 3. Required notice duly complied with. 4. Prior approval of the SEC. Note: The required 25% subscription shall be based on the additional amount by which the capital stock increased and not on the total capital stock as increased. Page 10 of 22 Stockholders and Members A person becomes a shareholder the moment he: 1. Enters into a subscription contract with an existing corporation (he is a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not); 2. Purchases treasury shares from the corporation; or 3. Acquires shares from existing shareholders by sale or any other contract, or acquires shares by operation of law like succession. Rights of a Stockholder and Member 1. Management Right a. To attend and vote in person or by proxy at a stockholders’ meetings b. To elect and remove directors c. To approve certain corporate matters d. To adopt and amend or repeal the by-laws of adopt new by-laws e. To compel the calling of the meetings f. To enter into a voting trust agreement; and g. To have the corporation voluntarily dissolved 2. Proprietary rights a. To transfer stock in the corporate book b. To receive dividends when declared c. To the issuance of certificate of stock or other evidence of stock ownership d. To participate in the distribution of corporate assets upon dissolution; and e. To pre-emption in the issue of shares 3. Remedial Rights a. To inspect corporate books b. To recover stock unlawfully sold for delinquent payment of subscription c. To be furnished with most recent financialstatements or reports of the corporation’s operation d. To bring suits (derivative suit, individual suit, and representative suit); and e. To demand payment in the exercise of appraisal right. Participation in Management Acts of management pertain to the board; and those of ownership, to the stockholders or members. Proxy While stockholders and members may vote in person or by proxy in all meetings of stockholders or members, this right may be denied under the articles of incorporation or by-laws of a non-stock corporation. Requirements of Valid Proxy 1. Proxies shall be in writing and shall be signed by the stockholder or member concerned. Oral proxies are NOT valid; 2. The proxy shall be filed within a reasonable timebefore the scheduled meeting with the corporate secretary; 3. Unless otherwise provided (continuing in nature) in the proxy, it shall be valid only for the meeting for which it is intended. The authority may be general or limited; and 4. No proxy shall be valid and effective for a period longer than 5 years at any one time. Voting Trust A voting trust agreement (VTA) is an agreement whereby one or more stockholders transfer their shares of stocks toa trustee, who thereby acquires for a period of time the voting rights (and/or any other specific rights) over such hares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, to the trust agreement. Requirements: 1. The agreement must be in writing and notarized and specify the terms and conditions thereof. 2. A certified copy of such agreement shall be filed with the corporation and with the SEC, otherwise, itis ineffective and unenforceable. 3. The certificate/s of stock covered by the VTA shall be cancelled. 4. A new certificate shall be issued in the name of the trustee/s stating that they are issued pursuant tothe VTA. 5. The transfer shall be noted in the books of the corporation, that it is made pursuant to said VTA. 6. The trustee/s shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. Page 11 of 22 7. No VTA shall be entered into for a period exceeding 5 years at any one time (i.e., for every voting trust) unless it requires a longer period as a condition in a loan agreement, the period may exceed 5 years but shall automatically expire upon full payment of the loan. 8. No VTA shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade. 9. The agreement must not be used for purposes of fraud. Cases when a Stockholder’s Action is Required Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent undersection 67 of the Corporation Code. Corporate powers exercised jointly by the BOD and stockholders 1. Amendment of the articles of incorporation; 2. Adoption and amendment of bylaws; 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 authorized 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. Proprietary Rights The following are the proprietary rights of the stockholders: 1. Appraisal Right - It refers to the right of the stockholder to demand payment of the fair value ofhis shares, after dissenting from a proposed corporate action involving a fundamental change in the charter or articles of incorporation in the cases provided by law. 2. Right to Inspect - The stockholder’s right of inspection of the corporation’s book and records is based upon his ownership of shares in the corporation and the necessity for self-protection. The mere fact that the shareholdings of a stockholder is merely .001 per cent of the issued shares of stock does not justify the denial of the request of inspection of the corporate records. 3. Pre-emptive Right- see discussion above. 4. Right to vote - The stockholders can exercise their right to vote through the election, replacement and removal of Board of Directors or Trustees and on other corporate acts which require stockholders ‘approval. It is a right inherent in and incidental tothe ownership of corporate stock, and such is a property right. 5. Right to dividends - It is the right of the stockholder to demand payment of dividends after the board’s declaration. Stockholders are entitled to dividends rata based on the total number of shares that they own and not on the amount paid for the shares. Note: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: a. When justified by definite corporate expansion projects or programs approved by the board of directors; or b. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. Remedial Rights Actions that the stockholders or members can bring 1. Derivative suit – one brought by one or more stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the corporation. Requisites: a. The cause of action must devolve upon the corporation itself; b. The party bringing the suit must be a stockholder at the time the acts or transactions subject of the action occurred; and at the time the action was filed 2. Individual suit – an action brought by a stockholder against the corporation for direct violation of his contractual rights as such individual stockholder, such as the right to vote and be voted for, the right to share in the declared dividends, the right to inspect corporate books and records, and others. 3. Representative suit – one brought by a person in his own behalf and on behalf of all similarly situated. Page 12 of 22 Obligations of a Stockholder 1. Liability to the corporation for unpaid subscription 2. Liability to the corporation for interest on unpaid subscription if so, required by the subscription contract 3. Liability to the creditors of the corporation for unpaid subscription 4. Liability for watered stock 5. Liability for dividends unlawfully paid; and 6. Liability for failure to create corporation Meetings 1. Regular a. Annually on date fixed in the by-laws; or b. If there is no date in the by-laws – any date in April as determined by the board. The notice shall be sent to the stockholder within the period provided in the by-laws or in the absence of provision in the by-laws – at least 2weeks prior to the meeting. 2. Special a. Any time deemed necessary; or b. As provided in the by-laws The notice shall be sent to the stockholder within the period provided in the by-laws or if no provisioning the by-laws – at least 1 week prior to the meeting. Quorum Shall consist of the stockholder’s representing majority of the outstanding capital stock or a majority of the actual a diving member with voting rights, in the case of non-stock corporation, unless otherwise provided in the law or bylaws. Minutes of the Meetings The minutes are a brief statement not only of what transpired at a meeting, usually of stockholders/ members or directors/ trustees, but also at meeting of an executive committee. Remote communication Attendance, participation, and voting through remote communication must be provided in the by-laws. Board of Directors and Trustees Doctrine of Centralized Management It states that all corporate powers are exercised by the BOD or BOT. Board is the body which: 1. Exercises all powers provided for under the Corporation Code; 2. Conducts all Business of the corporation; and 3. Controls and holds all the properties of the corporation Term of Office of BOD/BOT Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Term - time during which the officer may claim to hold the office as a matter of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. It is fixed by statute and does not change simply because the office may have become vacant, nor because the incumbent holds office beyond his term when a successor has not been elected. Tenure - represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. Hold-over Period - the time from the lapse of one year from member’s election to the Board and until his successor ‘selection and qualification. It is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Duties of Directors/Trustees: 1. Duty of Obedience 2. Duty of Diligence 3. Duty of Loyalty Page 15 of 22 By Corporations with Interlocking Directors A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Provided that: 1. Contract is not fraudulent; 2. Contract is fair and reasonable under the circumstances; and 3. If the interest of the interlocking director in one corporation or corporations is merely nominal (not exceeding 20% of the outstanding capital stock), he shall be subject to the provisions of Sec. 32 insofar as the latter corporation or corporations are concerned. Executive Committee An executive committee is a body created by the by-laws and composed of not less than three (3) members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws. The committee may act by a majority vote of all of its members. Executive committees provided in the Revised Code of Corporate Governance 1. Audit Committee; 2. Nomination Committee; 3. Compensation and Remuneration Committee Creation of Special Committees The Board of directors may create special committees of temporary or permanent nature and determine the members’ term, composition, powers, and responsibilities. Meetings Requisites for valid tele/video conferencing R.A. 8792, as implemented by SEC Memo. Circular No. 15 on November 30, 2001, provides that: 1. Directors must express their intent on teleconferencing; 2. Proper identification of those attending; and 3. The corporate secretary must safeguard the integrity of the meeting by recording it. Who Presides? The chairman or, in his absence, the president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise. Quorum Majority of the number of directors or trustees as stated in the articles of incorporation shall constitute quorum, unless the articles of incorporation or the bylaws provide for a greater number. Rule on Abstention No inference can be drawn in a vote of abstention. When a director or trustee abstains, it cannot be said that he intended to acquiesce in the action taken by those who voted affirmatively. Neither, for that matter, can such inference be drawn from the abstention that he was abstaining because he was not then ready to make a decision. Capital Affairs Certificate of Stock A certificate of stock is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named therein is the owner of a designated number of shares of its stock. It indicates the name of the holder, the number, kind and class of shares represented, and the date of issuance. Watered Stocks A watered stock is a stock issued in exchange for cash, property, share, stock dividends, or services lesser than its par value or issued value. These include stocks: 1. Issued without consideration (bonus share); 2. Issued for a consideration other than cash, the fair valuation of which is less than its par or issued value; 3. Issued as stock dividend when there are nonsufficient retained earnings to justify it; and 4. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value (discount share). Page 16 of 22 Payment of balance of subscription Time when the balance of the subscription should be paid: 1. On the date specified in the subscription contract, without need of demand or call; 2. If no date of payment has been specified, on the date specified in the call made by the BOD (Sec. 66, RCC); 3. If no date of payment has been specified in the call made, within 30 days from the date of call; and 4. When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid subscriptions become payable on demand, and are at once recoverable, without necessity of any prior call. Sale of Delinquent Shares If no payment is made within thirty (30) days from the date specified in the subscription contract or on the date stated the call made by the board, all stocks covered by the subscription shall thereupon become delinquent and shall be subject to sale, unless the board of directors’ orders otherwise. Alienation of Shares If represented by a certificate, the following must be strictly complied with: 1. Indorsement by the owner and his agent; 2. Delivery of the certificate; 3. To be valid to third parties and to the corporation, the transfer must be recorded in the books of the corporation; and 4. No shares of stock against which the corporation holds any unpaid claim shall be transferrable. Corporate Books and Records Records to be Kept at Principal Office Every corporation shall keep and carefully preserve at its principal office all information relating to the corporation including, but not limited to: 1. The articles of incorporation and bylaws of the corporation and all their amendments; 2. The current ownership structure and voting rights of the corporation, including lists of stockholders or members, group structures, intra-group relations, ownership data, and beneficial ownership; 3. The names and addresses of all the members of the board of directors or trustees and the executive officers; 4. A record of all business transactions; 5. A record of the resolutions of the board of directors or trustees and of the stockholders or members; 6. Copies of the latest reportorial requirements submitted to the Commission; and 7. The minutes of all meetings of stockholders or members, or of the board of directors or trustees. Stock corporations must also keep a stock and transfer book, which shall contain a: 8. record of all stocks in the names of the stockholders alphabetically arranged; 9. the installments paid and unpaid on all stocks for which subscription has been made, and the date of payment of any installment; 10. a statement of every alienation, sale or transfer of stock made, the date thereof, by /to whom made; 11. such other entries as the bylaws may prescribe. Right to Inspect Corporate Records Corporate records, regardless of the form in which they are stored, shall be open to inspection by any director, trustee, stockholder or member of the corporation in person or by a representative at reasonable hours on business days, and a demand in writing may be made by such director, trustee or stockholder at their expense, for copies of such records or excerpts from said records. Effect of Refusal to Inspect Corporate Records Any officer or agent of the corporation who shall refuse to allow the inspection and/or reproduction of records 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 161 of this Code. Page 17 of 22 Dissolution and Liquidation Dissolution It is the extinguishment of the franchise of a corporation and the termination of its corporate existence. Modes of Dissolution The following are the modes of dissolution of the corporation: 1. Voluntary a. By the vote of the BOD/ BOT and the stockholders/ members where no creditors are affected; b. By the judgment of the SEC after hearing of petition for voluntary dissolution, where creditors are affected; c. By amending the AOI to shorten the corporate term. In case of a corporation sole, by submitting to the SEC a verified declaration of the dissolution for approval and d. Merger or consolidation 2. Involuntary a. Non-use of corporate charter as provided under Section 21 of this Code; b. Continuous in operation of a corporation as provided under Section 21; c. Upon receipt of a lawful court order dissolving the corporation; d. Upon finding by final judgment that the corporation procured its incorporation through fraud; e. Upon finding by final judgment that the corporation: i. Was created for the purpose of committing, concealing or aiding the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices; ii. Committed or aided in the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices, and its stockholders knew; and iii. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal acts by its directors, trustees, officers, or employees. Liquidation It 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. Methods of Liquidation 1. By the corporation itself or its board of directors or trustees; Sec 122 authorizes the dissolved corporation’s board of directors to conduct its liquidation within 3years from its dissolution. Jurisprudence has even recognized the board’s authority to act as trustee for persons in interest beyond the said 3-yearperiod. 2. By conveyance to a trustee within a three-year period; At any time during the 3-year period for liquidation, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of its 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. 3. By a management committee or rehabilitation receiver appointed by SEC. In the case of a dissolution order where creditors are affected, the SEC may appoint a receiver to take charge of the liquidation of the corporation. Corporate Rehabilitation It refers to the restoration of the debtor to a condition of successful operation and solvency, if itis shown that its continuance of operation is economically feasible and its creditors can recovery way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. Page 20 of 22 Foreign Corporations A foreign corporation is done, 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. Bases of Authority over Foreign Corporation The following are the two bases of authority(jurisdiction) over foreign corporations: 1. A corporation may give actual consent to judicial jurisdiction manifested normally by compliance with the State’s foreign corporation qualification requirements (licensing requirements and other requisites to lawfully transact business in the Philippines); and 2. A corporation, even though not qualified (not licensed), by engaging in sufficient activity (doing business) within the State, established judicial jurisdiction over the foreign corporation. Necessity of a License to do Business The purpose of the law in requiring that a foreign corporation doing business in the Philippines be licensed to do so is to subject such corporation to the jurisdiction of the courts. The object is not to prevent foreign corporation from performing single acts but to prevent it from acquiring domicile for the purpose of business without taking the steps necessary to render it amenable to suits in local courts. Personality to Sue As a rule, only foreign corporations that have been issued a license to operate a business in the Philippines have the personality to sue. However, under the rule on estoppel, a party is estopped to challenge the personality of a foreign corporation to sue, even if it has no license, after having acknowledged the same by entering to a contract with it. Suability of Foreign Corporations A foreign corporation, which was granted a license to transact business in the Philippines, is suable before local courts or administrative agencies. It is suable since any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, save and except: 1. Such only as provided for the creation, formation, organization or dissolution of the corporations or 2. Those which fix the relations, liabilities, responsibilities, or duties of stockholders, members or officers of corporations to each other or to the corporation. Instances when an Unlicensed Foreign Corporation be Allowed to Sue: 1. Isolated transaction. 2. A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license. 3. In an action for infringement of patent or other intellectual property rights, provided that the country of the foreign corporation is a party to the Paris Convention. 4. If the foreign corporation is co-plaintiff with a domestic corporation and the domestic corporation is the one who instituted the suit in the Philippines; -or 5. By reason of the doctrine of estoppel. Grounds for 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 SEC upon any of the following grounds: 1. Failure to file its annual report or pay any fees as required by the Code; 2. Failure to appoint and maintain a resident agent in the Philippines; 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; 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of incorporation orby-laws or of any articles of merger or consolidation within the time prescribed by the Corporation Code; 5. A misrepresentation of any material matter in any application, 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 for 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. Page 21 of 22 Merger and Consolidation 1. Sale of assets – One corporation sells all or substantially all of its assets to another. Such sale, usually, though not necessarily made in the course of the dissolution of the vendor corporation. 2. Lease of assets – A corporation, without being dissolved, leases its property to another corporation for which the lessor merely receives rental paid by the lessee. This is similar to the sale of assets, except that under a lease, nothing passes, except the right to use the property leased. 3. Sale of stock – The purpose of a holding corporation is to acquire a sufficient amount of the stock of another corporation for the purpose of acquiring control. The acquiring corporation is called the parent/ holding company. The corporation whose stocks were acquired is the subsidiary. 4. Merger – One where a corporation absorbs another corporation and remains in existence while others are dissolved. 5. Consolidation - One where a new corporation is created and consolidating corporations are extinguished. a. Constituent Corporation – one of the parties to a merger or consolidation b. Consolidated Corporation – A completely new corporation formed when two or more corporations combined. Plan of Merger or Consolidation The plan of merger or consolidation is a plan created by the representatives of the constituent corporations, providing for the details of such merger to wit: 1. The names of the corporations proposing to merger 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 AOI of the surviving corporation in case of a merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the AOI for corporations organized under the RCC; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. Articles of Merger and Consolidation After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; 3. As to each corporation, the number of shares or members voting for or against such plan, respectively; 4. The carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut- off date; 5. The method to be used in the merger or consolidation of accounts of the companies; 6. The provisional or pro-forma values, as merged or consolidated, using the accounting method; and 7. Such other information as may be prescribed by the Commission. Effectivity The merger or consolidation shall become effective upon issuance by the SEC of the certificate of merger and consolidation. Effects and Limitations The merger or consolidation shall have the following effects: a. 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; b. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; c. 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; d. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each constituent corporation; and all real or personal property, all receivables due on whatever account, including subscriptions to shares and other choses in action, and every other interest of, 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 e. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation as though such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any constituent corporation may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of such constituent corporations shall not be impaired by the merger or consolidation. Page 22 of 22 Investigations, Offenses and Penalties Authority of Commissioner The Commission may investigate an alleged violation of this Code, or of rule, regulation, or order of the Commission. Contempt Any person who, without justifiable cause, fails or refuses to comply with any lawful order, decision, or subpoena issued by the Commission shall, after due notice and hearing, be held in contempt and fined in an amount not exceeding Thirty thousand pesos (P30,000.00). When the refusal amounts to clear and open defiance of the Commission’s order, decision, or subpoena, the Commission may impose a daily fine of One thousand pesos (P1,000.00) until the order, decision, or subpoena is complied with. Sanctions for violations Administrative Sanctions If, after due notice and hearing, the Commission finds that any provision of this Code, rules or regulations, or any of the Commission’s orders has been violated, the Commission may impose any of the following sanctions, taking into consideration the extent of participation, nature, effects, frequency and seriousness of the violation: a. Imposition of a fine ranging from P5,000.00 to2,000,000.00, and not more than one thousand pesos P1,000.00 for each day of continuing violation but in no case to exceed2,000,000.00; b. Issuance of a permanent cease and desist order; c. Suspension or revocation of the certificate of incorporation; and d. Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV ofhis Code. Who are Liable? 1. Directors, Trustees, Officers, or Other Employees If the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon such corporation and/or upon its directors, trustees, stockholders, members, officers, or employees responsible for the violation or indispensable to its commission. (Sec. 171, RCC) 2. Aiders and Abettors and Other Secondary Liability Anyone who shall aid, abet, counsel, command, induce, or cause any violation of this Code, or any rule, regulation, or order of the Commission shall be punished with a fine not exceeding that imposed on the principal offenders, at the discretion of the court, after taking into account their participation in the offense. Securities 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. Kinds of Securities 1. Debt instruments – bonds, debentures, notes, evidence of indebtedness, asset-backed securities. 2. Other instruments as may in the future be determined by the SEC. 3. Derivatives– options and warrants 4. Investments instruments – Investment contracts, fractional undivided interests in oil, gas, or other mineral rights. Howey Test For an investment contract to exist, the following elements must concur: a. A contract, transaction or scheme; b. An investment of money; c. Investment is made in a common enterprise; d. Expectation of profits; and e. Profits arising primarily from the effort of others. 5. Equity instruments – Shares of stock, certificates of interest or participation in a profit-sharing agreement, certificates of deposit for a future subscription, proprietary or non-proprietary membership certificates in corporations. 6. Trust instruments – Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments. Insider Trading A purchase or sale made by an insider, or such insider’s spouse or his relative by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to be affected while in possession of materialman-public information if transacted after such information came into existence but prior to the public dissemination of such information, and lapse of reasonable time for the market to absorb such information. Tender Offer Rule Tender offer means a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. It is also an 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.