TleLe or Correrrs

A.or' Faundalion .. .. ...Dedt"aLon......4c4no61ed9nen1

........................................

Pretd.e lhe 20li Edtion --Pterace la 2010 LdilionPrclaL. ta /OOt l-dihon ____Pteld.e--

--- --- --- --------- ----

Tdbte olChaptets --

Shon Abion Forms-------- -

INTRODUCTION

U\e of rhe Tenn corpoate Law"Proper Treatment of the Corporation Code

CHAPTER 2

BRIEF HISTORY OF PHILIPPINE CORPORATE LAW

Histoical Background of Philippine Coryonte Law -...-Socieclades AnonimasCuentas en pani edcon -Thc Corpotalion I anThe Corporaton Codc

CHAPTER 3

NATURE, ATTRIAUTES, AND CLASSIFICATIONSOF CORPORATIONS

Analyzing the Statutory Definitbn ot the Corpomtionrh.aaes on lhe Fotmation oI a Corpontton.. ..... ...

rheory of conces\bn --Iheory ot Enterpise Entiy

fn-Lev?t tx6tence in the Corpotale Seltnqt-oeotation ar a Creaturc olthe I aw ................

Canstilulional Provtsions --- --- --- ---

Ctvtl Code Prcvistons. ... .Fhnchses of Corporanons ................................ ...

677

18191920

1317171718

Annbulas at lhe CoAoratioAnificial Being -...-.............Creatu.e of the Law

:Rlghl of Successlo, . .........

_ ....

Creature af Enumerated Powers, At]ii,butes, and prape.ties... .........:,

Advantages of the Corporate Medium__ .............

Ce ntali zed Ma nageme nl.Limited Liability to lnvestors...._......._...__...

21212222232325252626262727282829

3A33343435363637384042434346

51

DisadvantagFs ot the CoAorate Medium. ....... ..

Free Tmnsferability of Units of tnvestmentAdvanlages over Unrcgistercd Associations

Conplicated and Costty Fomation and MaintenanceLack of Percanal Element and Abuse of Corporate ManagementLtnled uabihry Hns lnnocen! Vctins

Conparing the Corporction with Other Media of Business E deayorsSole Pn prietorships

Does a Defective lncorpora tion Process Result lnto a ,

Entitlement of the Corporation to Constitutional cuaranteesDue Prccess and Equat Protecti,cn Clauses.

Lessons from the Limited partnership Set,lJp.Eus,ness 7rusts....._.........Joint Ventures

_.....................

Cooperatives ............ _..............

__. ___. ___..

Untoasonabl" Searches and Set/ures __ .. _..

I iab ny ot Corporations tot Tons. ___ ______ ... ..

R ig ht Agai nst Self- I ncimin ation.

Energing Dodnne on Corporate Social ResponsibilityCnninal Liability in the Corporate Setting

Natbndhty ol CotporalionsL\plondtion ot Nalunl Resorrces

... ... ..._

Owning and Opeqting public Utilities_

PotLy Consd"alions... . .

Stllange Prcnouncement n Sia.... .... ..._..._...Policy Divergence Between the Cininaland CivilAsr,ects

Arising frcn a Coryomte Cnmjnat Ofrensc ___ ___ _

Corporate Ctiminal Recognizect in the Anti_MoneyLaundeing Law of 2001

Entitlement to Morcl Danages ____....

lnvestnent Test and the Grandfather RulePolicy of lhe Coryontion Code on the Controt Test

Corporattans Disqualitied from Owning Atienabte Lands of the

klvetlsing tndustry .

War-tine Test............................. __. ___. __

Public Donain........._....... _.....

Clasettcdtton ol Corpoattors ... .. .... ...

ln Relation to the StatePublic and Pnvate Corpotarons......

. ... _..

Dislin.tbhs Bef een Pubhc and pnvate Co\o,ationsAu a si Pubti. Cotpora tions

52

5456596162626267

6971717172/57576

Applicability of Civil Setuice Law _. ___. ___.......

As to Place of ln$,eoration ----. --.........................

: -.,::,. carporatlans

::'. ).a!ton De Factoa .::.j..tion by Estappet:.'.tanon by Prescriptian_ d or -rd.ec or Sio I

,.' Si.ck Ca.pomtians: : .: .torship of Management an(t Cantrot

- 1-.,:t arC Substdiary Compantes

CHAPTER 4

CORPORATE JURIDICAL PERSONALITY

-

t Sppa.at-. tutdratpettotE y

-.lrsequences of Percing Doctine. .

.! Appltes Anly When Carpa.ate persoratity Use.)i: Lrablng laot_

. ADplies ta Beneftt Ether Thase Withit an.l Thoseat:!s de the h)tB Carparate Relahans.

Aprtltrat@n ]s lo P.etenl Fraud ot wtong and't.t Avatlable far Othet Purpases. srd.d" ot 4prti.attan Mu.t Be Shawr,o Ac Necessa4/

=..1 Wth Factual Basis:_:,!'Apprcaro, is Essentially a Judlciai pteroqative

/6

78

78797979/981

818T

85869i

95

95

9697

98

104

142144104145146147108149

11211211111511811912i

125

. . . :r Applcatian onty has Res AdJudcata Et'fect

:..:tte Factors and the Three-Tiered Test far Determlnind:.

. 1a - t\ or o--t r.o Do, tn..

. I tdL,o pt-t .rtg I d.e.

- - a'l d^. . Ob-qdrc- 5.. t; ot Officers. .. . ..

'. aase far U ndeLcapitatizatian . ... _.. ...-: Shopping ... ...

.':.t- Su bsi.1iary Reiatansh p..:' .i..) Contpanies

:,:'.ess serse'' Rurrgs a s Temperinll theApplicattan af the Alet Ego piercr)g Dactnne

..

Ttansfer of Business Enterynse ---. ---.---. ----- ---- ----..Disturbins Devetopments Adopting the Unati Doaii..................:;............ln Sunmary-- ------ --- ---- ----.-

127127128129130131135138138

142142143

Pbrang Doctdne and lhe Due P.ocess CiarseEquity Cases

By-Laws

Corpoauons in Sequeslm

CH^PIER 5

CORPORATE CONTRACT LAW

Awlication ofAgency Pinciplas --.-.---.---.---.----.----.--------.---.---...-.... .. .. 143Pre-incoryoration Subscnpfion Agrcements'. 11. -..,:...... 144Other Promotefs Contracts 146

Post-lncoryontion Ratifrcation as the Basis to Hold theCoryoration Liable .......-......).'J:1.-...-...-.'.'l-......................-...-.... 146

Promoter PeBonally Liable in the Event theCorporation ls Not Duly lncorporcted ........._..._........_................. 149

Detectively-Formed and Non-Existent Coryontions -.-----.-.....-................................ 150De Facto Corpontion Doctine....................-........-...-....- 150

Ralonale ofthe Doctrine.. 150Various Scopes of De Facto Coryomtion Doctrine --. 151RequisitEs for De Facto Cworatbn Doctine's Awlication....-.......-.... 152VaId Statute Under Which Oryanized---.-------------.---.. . 153Colorable Conpliance with the Law......._............._..._.. 155User of Corporate Powers 156The lssue of "Continued Good Faith".....-...-.............-. 156

Cotporation by Estoppel Doctrine.....-...-..-.......-..-... 158

Merying Pnnciples ol Cotporate Law and Contact La"Unenforceable Contracf Prcmise

. ......... .....

P G - I n@eoralion Slage s: Pronoler's Contracts - - - - - - -Who ls a PronoteP..-...-.. ......-..:...........................Whal Arc Promolet s Conlrdds?....... .......

Ral ion ale ot lhe Doclrine - - - - - -

- - - - - - - - - - - -

Hi$oncal Devetoryent ot the Doctine..-...-...-.........-.Cunenl Slatus of lhe Doctrine-

Cases Ortslde De Facto Coryoration and Cotpoationby Esloppel Doctines ------

Arldes ol lncoryontbn and 8y.|aws...................... ....... .... ..Arlble s ol I nco@oralion

158159166

Non-Binding Effects of By-Laws lo 'Outs,?ars"....-...-.Pnnciple of Waiver Arylicable to By-Laws ................

Ulka Vrcs DodnneIypes or U/ira Yircs CasesUfta Vnes Acts of the First Type: The Classb Type ....Ullra Vres Acts ol the Second Type ..... .................Uftra Vires Acts ol the Thitd Type ..........-....-........-........Judicial Attitude Towards the Ulta Vires Doctine ..........Conpanson Wfth Pnnciples on Unenforceable Contncts.-......._...................

169171171172

1751761761771781781791AO181

CHAPTER 6. ARTICLES OF INCORPORATION

a.'-!:zctuai Sianjficance of the Afticles of lncoeolation!.c..ved Anicbs of lncorpontian Constituting the Corponte

184

Chader>=astatianoftheAtliclesoflncoryoation..................................................... 185

Exannation and ApprcvalDisapprcval by the SEC . 1 85Special Rules tor Banks--. 187Grounds fot Disapproval of the Atlic'les of lncorporatio 1 87

:...,ents otthe Anicles of Incoaoration ----.----..--..---.---..--..----.---..---.---.---...--..--. .--.- 188.

TreasurelsAfiidavit... 188Olher Documentary Requirenents --.---. ---.----.---.---------. 1A9

Certtlicate of Deposit ----.-- 189Lefter o! Authority to Examine Bank Deposit .. . 1 89Wriften Undertaking to Change Corporate Name 194

Gutdelines an Corpo.ale Names - --Changc ol Cotpotate NamSEC Junsdiction over lssues lnvolving Corporate Nan

>-.ose c/ausetnr estment in Non-Primary Purpose Actit ilies ---.rrte of lntpryGtatian of Putpose Ctausps ...

>-.pciPidce al BusnesRes'dence ot Corporalion -

Corporate Residence fot Intra Coryorate DisplnesCorporate Residence for Coeomte Recovery Cases--

Se^ tce or Su.nmons on a Co@oration ----:!aale lern

C onnenLenenl at Corpomle Er61ence............. ....Enpnqan ot Corporate lcm--- --- --- -- - --- --- -- --- ---- -

-,:. @raling Slochholders ot Members --- ---- -----a.rct Sru.ture at Registralion -:-:

- nDtian and Paid-up Requi@n"nts--- ---- --- ---- ---ts,uance at Pat Value Shares ofsiocA ...

1'-.dnentstoandRevisionsoflheAt7iclesoflncoeoratbn...........................Matters in Anicles That Are Beyond Amentlment --.---..

CHAPTER 7

BY.LAWS

-4.t Basis of Power to Adopt a Set of By-Laws -.--- 211';"t.actual Significance of By-Laws

- ..-.............-.... 212e2ausites af Valid By-Laws ..... ................................ 214

By-Law Provisions Cannol Contmvene the Law..-.... 214By-Law Pravisions Cannot Contravene the Chatter - 21 6By-Laws Must Be Reasonable and Non Discnminatory 217

.-redurc for Adoption ol By-Laws...-...-.......-.-...-..... 217Rule on the By-Laws of 8anks.................................... 219

=sn Cantents of By-Laws .-................................... .... .. 219Matters Ustally Found in the By-Laws .. ---. ---. ---.. ---- ----. .. . 21 IOther Matters that May Be lncludecl in the By Laws... 220

194191194195195197197198199199199200202202202243246207209209210

Matters that May Be Found in Both the Anicles af lncorporauonatf, the By-Laws............. .

Matterc that Cannot Be Provided for in the ay-LawsAnendmenls lo and Revtsions of ,he Bi,_/ al4s ...

. CHAPTER 8

CORPORATE POWERS AND AUTHORITY

Undenyinq Theory on Corpo,ale Po&e,s .Coryorcte Powerc dnd CaPaatY-- -- ... ... ... .

frpft.ss Powers.....Power to Sue and Be Sued ... ........ .......... ... ..Powers to Sel, Lease, Dispose, arEncunber Assets

221222

22722422823023223323323423523523/

240241242242243243245245245246246246247247248248249249250251251252253

253255256

257

257

258

Powet lo Bonow. .lncidental Powers......... ...lmplied or Necessary Pow i- - --

Uhra Vies Acts ol the tir\t TYPe - .....Test to Detennine lf Act or Contmct ls Uftra ViesSuperyening Pohcies in Ul,lE ynes /s'ues .. ..Doclnne of Estoppelor Rattfication...... ... ....lll?gal Acts .........

Powet to Extend ot shoden cotpoatF T?]mNature of Power........Appraisa/ Righis /ssr's

Powet to Tempotary Cease Corpatate Operalons .. ...Power to lncrease ot Decrease Capilal Stock......... ...

Nature of Powet........... -...Apprdisal Rights Issuas...

No Appraisal Right i n l nc rease of Capital Stack.. .. .No Appraisal RQht in Decrease of Capitai Stock .....lmptied Policy undFr Seclion i8 ... ... . .... .. ..

Eftectivity ot lncrcase n Cdp,lr/ Sro, 1...Spec,a/ Ru/cs on LisledShares.. ..

Power to lncur, Create, q lncraase Boncled lndebtednNature ot a Bond ........ .. ... .. ...Requircments of CoAatation Code -- .... ...Padiculat Requircnents of,re SfC.... ...... .. .. ... ...Nature of Power...... -.......

Power to Sell, Dispose, Lease, ot Encumber Assets ...Nalure of Powet ........... ..Naturc ol Tnnsacttons Corercd ... . .. ..Tansactions Not Covercd by Ratificatory Vate Requlrcments .. ... .... ..Sale or Disposition of All Coqatate Assets at PropenySa/e or Disposirb, of Sub stantially All of the Corparate

Assets ot Propeny ... ...Lease or Encumbrance of Allot Substantialy AlloftheAssels... ... ... ... ..Brlk Sa/es Ia'r.. ... ....Consequences of Cont?cts Entered lnto Whout

the Requisite Stockholders ApprovalLegal Effect on Assonee Even When Conttacts Enterctl into With the

Reguisite Stockholde/s'or Menberc' Approval.. ... ..Appraisat Rtght. .... ........ .

Power to Purchase Own Sharc ... ...

'tL-,- ..*e. May Be Exercised -----.---.---.----.---..---..-- .--. . 258\F--:'.. unrcstricted Retained Earnings 258=.:.;. Behtnd the Rule 259=i-.'Ei-a!re Shares 259:a-. =',..1 Ca Aa rate F u nd s i n Anothe r Conoration

260.=17 z e cf Rule..-..--..-- 260:.,.zgeaf'Funds"undetSection42..............-...... 260-,..:-ents that Shauld Be Considered Within Pinary Puryose ..... ... 261--.=s5erts Outsjde ofsecandary Purposes-.---.---..- 262:.:r.ctences of Non-Obtaining af Ratificatary Vote . ---. --..--....... 262

262263263264264265265265265265

:'?, G,cluihe,--a1..c6e of the Pawet to Favor Officers and Enployeea , e.cse of the Pawer to Favor Direclors or Trustees .

>:-a. -- t -lP, tnto d Pdtlnetshe ... ...-)pLoarral Rul?

::: aLles=s-,.r..d Requirenents When Exercising Specific

- 'm2,e powe,r..

Cantralaf lnvolved Corporatians---.----.---.----.---.--- .--- 266::ses Noi Covered by Section 44. --..-...-.--. --.--.. --... 266a ..imatian at the 'Business Enierprise " Lyel o, Retationship. --. ---.. -.. ... 268

=--+'.. l,lake Danations ............................................. 268=.-.-:: G.ant Pension- Retirenenl- and

).:'-atbn of the Business Enterpnse" Level of Relationship -- ---- . ---.. --.. -:L.-': :e..a.e D ,td.nd

=-.--:_aj ot Su.ptu, prot;is ... .. ... .. ...=::o, Io sfc::j--.-ons on 8an{s

:.-+--- :-:e. .ta Mandqenent Contratt __ ___-

,?'ege ot Mdnaqenent ContraLt' - ---.! ..a)e rot Ratificaton Requremenls. ..

a, Pdn atthc Mandgpd Cotpoatian _ __On Pd4 ar A,lanagng Cotporation

..1fi.attan Requirements When There ls Comnan

CHAPTER 9

DIRECTORS, TRUSTEES, ANO OFFICERS

-n--i' . Canlractual Theary on Exercise of:7..p.a,F Pow"rs- -- -- -- --t,a.- ''"ePa e, dnd Auhady ofthe Boad __ ________ __= t'a.atc tot Centuliz.d Managemenf. . ... ....'^dl, Objecli,/e ot the Board... ..

Ma an/alion ot Pralils -- -- -- --- --E.hanrtnotht vatuc ot the Cotpotatian .. ...

- '-1 Yi?s 4.lc orrhP Se^ond lYPe

Policy Basis af Uftra Vires Doctrine of the Second TypDoctnnA of l-stoppet at Ra\tticd\on .. ... ... ... .... .. ...Doctrina of Appaent Authontyftmely and Proper Repudiation of Lack of Officer's Autharity ..........Self-Dealings of Directors and Orficers as Exceptian

la Doctrine of Apparent Authonty ---. ---. --.. -...

270271271272273274

281282283284285

286287289291299

302

'Vctim Standinq for the Doctine to Apply ---...---.---.---.De Faclo Corporata Ofiicers .. ...... ............. ....

Souft e ol Powet of the goard.. ..... ... .............. ..Theory ot Onginal PowerTheory ol Delegated PowePeculiar Agency Role ofthe Boatd.. ......... .... ... ..Boad Power and Fiduciary Obligations Sping Morc

ttum a Trusl Relationshiq -The Businoss Judgment Rule

Theorctical Basis of the Business Judgnent Rule--..Two *anches of the Blsiness Judgment Rule -- .......

Requrcmenl lhat Boad Musl Act as a BodyDhectors or Trustees Cannot Act Individually to Bind the Corpomtion - --- . .Ratification by the Board Does Not Need Fomal MeetingDirectors orlrustees Cannot Bind the Boarcl in a

Stockholders' ot Members' Meeting ....-...-......... . ....Directors or Ttustees Cannot Attend ar Act by Ptoxy or Aftemate ---. --. ......

Ltecutve Comniltee.......Qualifications and Disqualification of Directors and Trustees ... -.... ... -.... -.... ... ... ..

Quahncatons.................Rule on Coryorale Stockholders --- ............. ... ....Dsqudli fic atbns...............Rules on Additional Qualifications and Disqualifications

The lnstitutrcn ot lndepenttent DireclorsDefining the Role of lndepenclent Directors-.-.-. .......,ssues Reratirg to tbe Systen of lndepenclent Directo

Diluling fie Serse of Responsibilty to the Cotpotatbnand lts Variaus Sla^Pholde

Quasi-Public Role of the lndependent Director ---.. -.. .Wrongly Prsumes That Only lndependent Direclors

Can Exercise lndependent Judgment ...........Prcnotes a Culturc of Contuontation --.---. .--...-....-...lndependent Direclors May Come ln Practically

lgnorant of lhe lnduslry .Hection ol lhe Board of DirEclors or Trusfces. ........

CumutatNe Voling-- .--.. . .Ckssic Fomula (The Cole Fomula) -.--------. ---.Glasset ftemtive Procedurc

D' Hontlt Rem ainclers TableEleclbn ot the Board ot Truslees..... ..... ........Alien Membership in the Boad ofDirectors.-............Vacanc y tn Boad - - - - - - - - -Repod on Election of Directots, Trustees and Office

fer,n ol Oflice; Hotd-Over Pinc,p/e.. .. ......... ........ ........Non-Permanency ol Boatd Seai..... .........

Renoval and Disciplne of Directors and Truslees-....Renoval ol Directors and ]7usIees. ........................Board HasNo Power to Discipline or Remove One of lheir Own--.---.---.----.What ConstitL,tes "Cause as Basis for Removal?...-.

Me?tngs ot Drectots ot Trusr6es............ ......... ..........Kincls of Meelings-.-- ..- ...Requisiles tot a Vahd Boa'd Meeling ..... .... ..............Mode ol AnPndance ot Boad Members --------- --. . .

303304305305306308

310s11313316318318319

322322323324324326326327327327331

331332

333334

344345346346347349349349350350

334335336337338339341342342343

Mtnutes af Boad MeetingR.sotution vprsus Mtrutq\ ot Me-tngs..

:.-.ensation of Directors and Officers.... .........

Attendance by Stockhatders at Board Meetinqs

-\eory on Po,/,et at Board to Detegate authonty to

Procedumt Rules on Suts Brought.

Termin ate Coryonte Otf i cerwo Disciptines Diversins in corporate oi;;;;p i;";;; .................Appointnenl or Election of Caryonte Offices....Removal of Cotpomte Officers

. __. __._. _. ........ ....

Jutisdictional lssues over Mafters Caverins

351352352352354

354355

356

356357357358

358359

363365

s67

3743713/137437437/

3/7378379379380

381

398404

441408409449

CorpoHte Okcer\Taa LA\els ot Dis.ussian on ..arpoale Ot'h.e^.. tssues _ __

E)A lian at ApponhFnt and Renovdt ot CotpozleOtticers..........................Theory on Pawer af Board to Appajnt and

Corporate Offrcers.. ..Who Are Officers Within the RTC JunsdictianPasihons Crcaled PurcuanL to Enabhng By Law

Prcvtstons .... __ ___

Branching the Officershe Testf\lent By Whrh Requtdt Couns Can Adpdrcate

on I abar Ctaims ..E\tAnt Br Which Reouldr CoL4s Can AdNtlicdle

on Dama1es........ ............ .....

Adtlressing the Constitutionat tssue .

President.. ..........

Corparate Secrctaty...Functions and Duties under the SEC Revised Code of

Cotpomte Gavemance .. __. ___. _

The Compliance Officet-. ... . .......Corpaate Treasuret..

--. ---. - ......... ...........

tndependentAuditor.......__.___. ...............

-i es and Liabilities of Directors, Trustees and OfficersCanmon Law Dutes of Drcctors. Trustees an.j

Coryoratc OfiiLersCenetal Rute on Duties and Ldbihli1. at Dr"ctots.

Ttustees and OfticersDuty of Obedience..Duty of Dilisence. ......... ._..___.

Crypttc Ruling in Cebu Country Club.Dutt of I aatlt Dactnnc ot Caaomte OppodunnyDealnss or Drectors Trustees ar Office;; wt,n

TheiCaryom on.........__.___............Contracts Betvyeen Corporatons with lntertocking Directors .Divergent St.ains in Labu Law on the Generat Rute

of Liabilty of Corpoate OffjcersEvalving Doctine of Corporate

=4rciary Duty ta Creditors __. ___. __...........

Caearate Fmud or Toft _..___._.

383387348393394

Stakehoklerc' Theory un.ler Carporate Governance Principle....*... ... ......411

CHAPTER 10

STOCKHOLDERS AND MEMBERS

Pohcy Approaches on Rights of Slockholders and Menbers..---..--.---.-----.---..-- ..- .. 416NatureaftheRightsofstockholders----..--.....-.. 416Nature of the Rights of Memberc --. --.-.---.----.---.---...-- 418

The Prc-enptive Righl...... 418Subscflptio, Deposits Not Within Prc emptive Rights Caverage ..--..-- ..- .. 419Exceptions ta Pte4nptive Rights-.-----.---.---..---.---.----..--..--- ..-..---.... ...... 419Distinguished fron the Right of Fist Refusal ...-. --... -- 420ExtentoftheCoverageofthePre-emptlveRtghts--...---.---.---..--..----..--.--.... 421

Rights of Fist Relusal and Othet Resfictions on Transferc of Shares ... .. 422Iypes ofReslnctiors o, Shares .............. ........... .... .'..-...--. --.. ---..--. .-- -- 422Ju sprudentiai Rules on R'ghts ofFi.sl Refusa/..........---.---..--..----..--..-- ..- .. 423

Contacludt Slipulalioos..Reshcnon tn the Bt-La$s --- -Reslictions in lhe ChancrResfictians Must Be lndicated in the Stock CertificatePany Entitled to Exercise Righ,s o,1 Segueslered S/rares.... ... ...Right of First Refusaland Nationaiization lssues..-

Unde ying Dactrine in Restrictiors o,r Irarsfels of Sharcs .---..---..--..--- .-- .-Non-Cam pelition Cl d u se

Rtght la Vole --Vatying the Rqht lo VotF -Voting Rights ot Menbe.sPdny fntilted lo VolP. ....

Right to Vote on Sequestercd Shares............ ..........Valing on ront Own"rsheVotingRightsofPledgots,Modgagors,andAdministrators.......................Tredsury SharFs... ... ...Lle.ron of Dt eclot s dnd Truslees -Anendnenl ot Adicles ot lncorporalian.. ... .... ... ....lnvestnent in Non-Pnmary Pu.oose Bus,iress .... -..... ..M?rgers ond Con sohcl atotncredse dnd Dec,ease otCapital Sla',, ... ... ...lncurring ot Creating Bonded lndebtedness..............Adoption, Amenclment and Repeal of By-Laws . ...... .De.laration of StocA Dttidcnds... ... .... ....Mdndgemenl CanlHcts - -- --Fixing of Consideratian af No-pat Value Shares--------

agealr-Pnt. AffPLnng Vottng R,ghrc... ...Prories. ... ..

Natu.e of Ptoxy R"lationship. .. .. ...Requs ec for Vahd Pro,yPenod oI Lffeclivily ot Pto,y --Who Ma) Be Appoinltd Proxy... .. ... .. ...Prory Rules for Pubii.lt-Ltstcd Comparies -Prccedtral Mallars Retating lo Ptoxics... ...

\ottnq trui Agreements -

423424426426427427428431431432433434434435435437437438438439439440440444444

442442443443443

NatureolvatingTrustAgreenent..--..-........ . 144Requbites af Valid Vating TrustAgreement . 445Differences Betu/een Proxy and Voling TrustAgrcenent 416Pre ternination af Voting TrustAgreement 148Vattng lrustAgreemenl as Paftaf LaanArrangement 448

Poaling Agreement and Other Shareholders Agreenent 450Hierarchy af Enfarceabilitv 451

Stcckhalders'at Mernbers Meetings 451Calls and Types of Meeting. ... 151Place and Time of MeetinS. ..-. .-- --. .-. -... --. .-.. -. --. . -. .. 452Who Can Call a Stackholclers' ar Menbers' Meeting-- ..-- ..-. --- .-...-.....-. --. - 453Ouorum 453f"linutes ofMeettng ... ... 451

qrghts ta lnspectlExamine Corporate Recads

Ddnd.te,- -Crininal SuitPta.edut"t Rules or Sdils B.o"?ht -- -- -- -- -- --

Basis at Rtght ta lnspect - 455Specired Records Sub/'ect to lnspectian. ..-..-...... 456

RighttoFinancialStatenents.-..-.. --.--..-. --.-.-...,. 156Annual Repan af Corporations-. .-. .--. --. .-. 457Summary of Carparate Oblgatians to Repon -. . --. . --. 457

Mannet afAvaillng ofthe Rjght ta lnspect 458Wha May Exerctse Rtghtta lnspecl.-. ... --. ... .. . 458l\lature and Scape of Right to lnspect .--...--. --. .--..--..-- - -- -- - -- - - 159

Sunnary of Dactrinal Rulings an Right to lnspect.-- .. 161Purpases af lnspection 1A2Renedies lf lnspectnn Denied 463

Mandamus................. .. ... 463

455

463464465

Defenses Availableb Dnecbt. Ttustee ar afficerHeld Liable.- ..- 165

Right to lnspect Covers Controlle.l Subsidiaries .--. .--.-.--. -.. .-.. . 466ADpraisalRtght 466

Nature at the Appnisal Right-...-.. -.. . 466Who ls Enftled ta the Exerclse ofApptaisal Right 46/tnstances When Right l\,lay Be Exercised .-.. -.. -.. 467Haw Right Exercised- ..- .- 468EffectafDenandfatPayment..................................... 468Natatian an Cenificates; Right of Transferce 468qai Pd)nonl ot laa Vatut I tte'lPdF\nb1.e or Unrcsdcp.1 Rerdtned tatnngswhan Ptght rc Datnpnt cD"a, Wha B"at, Cost otApp,at.dtD-n.dt ot ADpdndt Riqhr _Sr.,rla^ An4ude Ta\ dtds

'hp F?tqnt ot apptdisdtEneeing Significance at Existence of Appraisal Rights

168469469474474471

472173

475DeivalNe Suils as an

Judgment RuleException to the Business

RequisjtesfarlhePrapetFilingafaDeivativesun............. 48AJurisprudentialRequisnes lAARequisites underthe lntein Rules ............ ......... ... ... .. .... 481

Deiva|ve Suil lnsltuted on APPeal ... .................Proper P_aiy b Bnng Denvatue Suit.....-... -........-... -.Exhausti:onoflntm-CorporateRenedies.........................-...-...-...:...-........

I a.hcs by lnaclion ol Dire.rors...... ...........................Grcnds tot DelvativP sui........... . ....................

Express Alegation that Suil Filed ls Deivative in Nature . ----. ---. ----.. -..Nature oI lhe Rehels Praycd fat -- -- .

Wastage and Divetion of Corpomte Funcls.-... -.........-...............Volalion oI lhe I aws.... ....Enforcement of Pre-emptive Right-.................. .. -............. -........-

VenueandPropetlotumforDai,laliveSuit.........................................Nu,sarce Su/s.................Availabilty of Awmisal RiSrts ........... ....... ............Corporation's Retained Counsel Cannot Defend the

Boatdin a Deivative Suit Btought --------------- ...........withtibwal of Stockholdar ot Demand for Dissolution in

Close Coryorations......-... .....'.... ..--------.--------.----Riqht to Proponionate Share of Ranaining assets

Upon Dissoluti.n... ......... .

SHARES OF STOCK

483484486488488488488490490491491491492492

492

493

493

Nature of Shares of Sfock 497499499

Modes ot Deahngs wilh Shares of Stoc&Modes of Tadilion Applicable lo Sha/es of Slock ...-.Rights of Coeoration wilh Respect lo Shares of Slock

Onginal Deahngs wilh Shares o/ Stoc/. ... ...... ....Subsctiption Agreenent: The Root to slockho/derStaoding... ..- . .

Characteistics of Subscnption Agrcements.......--...-.PrcJncorponfon Subscription Agreements .. ... .. .....when Shares Deened Subscnbed- --..Subsciption Agreement under the Statute of Frauds .

Considealion for lssuance of Sha/es..................Cash and Promissoty Notes lor Subsciption..-...-....-..Propetly Constderation - - - -Debts and Se.,rce as Consclealrcn------------ . -.......Set-olf of Corpontion s lndebfedness.....-...-.........-...-....Unresticled Retainad Eamings or Eisting Capital as

500501501502507514511512513514515516

Considerction-...-...-....-...-- 516ConsequencesotUnlawlulConsidemtion-..............-. 517

Watered Stock ........... ...-. 517Relaases trom Subscnption Obligations..-....-...-...--....-. 520Paynent of Balance of Subsciption...-........-............. 523Call on Unpaid Subsciptions-..-..-..-....... 524

Nature of the call ..--...-...- 524Wen Call Not Necessarf 525

Detinquency s;a1e............. 526Who ls the Highest Bidder?..-........-...-....-...-.....-...-..... 527QuestioningtheDelinquencySale-...-.................-.----- 527Othet Renedies Still Available to Coryontion....-...-... 528

Etfects of Detinquency. ... .Ptescriptian Rule of Subscnption Agreenent

528529530

Nature of a Ceftificate of Stock.. . .... ................ 530Cenificate of Stock is Merely Evidence

ofthe Shares of Stock Covered .._..........................................__ 530Ceniftcate of Stock are Merely Quast-Negotiableincharacter................. s32Probative Value of a Cettifrcatebf Stock...................... 534

When Cenificate of Stack Deemed tssued........ ..... S3SOn OnginalDealings of Shares of Stock... . . ............ 536RighttolssuanceofCetllficateofStack.................... 536

Renedies Available when Corpomtion Refuses to lssueCenificate af Stock .... ..... 538

an Subsequent Deatings af Shares ar 5tock............ . 539No hherent Right to Be lssued Cenificate af Stock

To One Who Merely Bought Shares fron aRegistered Stockhotder..

. : . . . . . . . . . . . . . . . . . . . .. _ ___. 539NegotiatianafCenjficatesofStack........................ S39

Fargecl and legal Transfers of Cedifjcates of Srock . 54ALast or Destrayed Ceiificates .......... . ........_......... 542Spec/a/ Rules o, Reglslered or Listed Sharcs ........... 5,14

Rule on Uncertificated Sh 544Binclng Effect on Shares halisactions ..._..... .............. S4SEvidentiary vatue afthe Recads of the Ctea ngAgency...... s4sPtedgtng a Se.ud, ot tntercst theren. .. ... blh/ssuer's Responslbi/ity fol Wrongful Transter to

Registered Clearing Agency..... ......... ....... . ... .............. 046Power of SEC to lssue Rules Coyerng Sha,s 546

Stack and Transfer Book S4tRegistration with SEC 54AWhereKept .................. s4aWho May Be TtansferAgent.....

. ....... ....... StBWhoMayMakePraperEntnes......................... S4gRegistntian in the Stock and Transfer Book ........... S4gBIR Cenificatian to Effect Trarsfer of Srares SS1Prabative Value of Stack and Trcnsfer Book ............. SS1Stack and Innsfer Book versus the cenent tnfornatio, Sheel .... .. ... ..... SS4Period Withn Which to Enforce Registration Rights.. 554

Subsequent Dealings with Sharesofstock............. SSITrust Relations an Shares of Stock ....................... .._ 554Voluntary Cantracts of Dispositian: Transfea Sate and

Assigrrmeri or Sha/es . __ __ ___ __ . SSs

When Shares Are Nat Fu y paid............. .. ............. 556

Sale of Panian af Not Futy-pajd 9hares........... .___.._..__._. SSISale of Entire Nat Futly-paid Shares.... .............

__. __ __ _ . SSIWhen Shares Are Fully Paid and Cavered by

Cetlificates of 5tock......... 557Noti-Exclustvityof Sectrcn63on Modesof Registrction.__.____..__. _ ... 560Filing of Deeds of Assignment with the SEC. 564Remedy ff Registratian af Transfet is Refused..... 564PrcscriptianancauseofAction....._.......... s67Cldrfl< tot Ddmdqe.. 567

hntunldry Deatngswtth SharF. oi Sioca .. ...... b6/Pledge, Manqage and Other Encumbrcnces 567

When shares Not Covered bv Ceniflcates. .. ... ...... ... ... ... 568WhenSharescoveredbyStockCenificate.............. .. .... -- 570

Mangage Contracts Versus Aftachnents and Levies 576Attachina or Levying Credilors yersus Other Cred,tors 579Voluntary Buyer/Assignee Versus Aftaching Creditots 580

Sunmary of Cunent Doctrinal Ru/rngs on SbaresofStock........-....... . . --. ---. - 583

CHAPTER 12

CORPORATE CAPITAL STRUCTURES

Canlrasting Equity lnveshents from Corpomte DebtsPo,4 er to /ssuF Sha/PsLm tat on. an Powcrlo lssue SharPs... ... ...........Cap dt Stoc^

overissuance of Shares Beyond the Authonzed CaljitalStock.. .. ....Mean'nq of Booh valt" ofshales ......

Crd,s,r.al,o, of Shdres .Patt!es on classlicdlon ot Sh"rcs ...Common Sharcs-.----.---.--- 595

s87590590591593593593593

596596597598598600601601

602603603604606606

Prererled ShrresEntitleme nt to Prefere nce sCumulative and Non-Cumulative Prefened Shares..Padicipating and Non'Panicipattng Preterred Shares

Redee.lrablp Shd/es.. .... ... ...Tdtdoihy ot Slock Reoemp

Founders' Shdrcs.. ... .. ...Whal Constitutes -Founders' Shares

'7

'

lndications hom the lnteim Batasang PambansaP@reedings -

I tlect When t.(tustutry Penod F\pr"s..No Par Yalue Sharer.......Irdsur) SharPs.......

Rute on Treasury Shate tot Banks.. ...'Fs.mw Shares ' .....-...-.... ...Htbtid Sc.unlies....

Trust Fund Docfi ne.. -.......H6lat tcct Bd( Aground ---Apptcation of Doctdne in Philippine Setting ....... .traud TheoltCa\er.gP atl'Jsl I und DoLuine -- ..........

Concept of "Capildl Stoct''Advances in Payment af Futurc Subscriptian

Observdxons.Divtoend. -- ---

Concepts of Surplus Profits and Retained Eamings... .Tea,mPnt o{ Patd-lo Surqlus.... ... ....

Cansideration Received for No'Par Value Shares.. ..D\delian ot Board to Dectarc Dvtdends -

Retenlpn ol Lcess ProtilSEC Rules Governing the Distibution of Excess Prafts ................

606608609611616617618619619624620623624624

625

Concept ot D,.}dends---- --Dnidends Dislinsuished tram Profit.-- -------- --- ---Cash and Stock DividendsP,opent Diadends-- ---- ---

Liablitps for ttlcadlly Recetved Dividends... ... .... ... .Divi.lend Declaratbns for Govemment CoryorationsI iquidatinq Dividends--- ---

Acqusnon by Corpotatbn or ils Ow, ShdlEs. ..... ... .Quasi-Reorganization and Other Specla/ Rules on Sl,ares

626627627624628629630630

635635636637637637639

64664764764764764A648648

650652654658658658659659660660661661661662

Use of Reappmisal Value of 4ssets...........

Debtto-Equtt ConvFrsons - -Spenat hedtments Retating,o Sharps.. ... .. ... ..

Wanants - --SlocA Opi,ons... .. .. .. ... ...Slorl Sprls. ..:..Stack Consolidations . ..... .Sroc/. Re, /ass/,t drion and rrchdnqe... ...

CHAPTER'13

CORPORATE ACQUISITIONS,MERGERS, AND CONSOLIDATIONS

tntroctuc1ion....................... .. ...............Jurisprudential Recognitton of the Three-Levels

of Corporate Acquisifons and Transferc -..-....Companng wnh Contact Law Pnncelas.Rutes an Liability Successbn Rutes in ke Three-Levels of

Corpoate Acquisitions and Transferc . ---. ---- ----. -.... -.AssPls Only Ttansters --

Essence and Motivation in Assefs-On/y }a,rsfe/s.-...-Ralionate tor Nan-Assunp on ot I iabihliesCoverage ol But^ Sales LaSpecial Rule in Corparatc Dissolulion ......

Bus/,ress-f ntFrpn'se l/dnsre/s .. .... ... ... ... ...Nd,ure of a.rsinFss / ,te,pCorporate Law Rocognilion of the "Business-Enterprise

lavrl ot Transactions ___ ___

Slatement of Doctune and /ts Ratiora/e. ..Apptration at lhe Doclnne......... ...rree dnd Harrnless Cla,s

rqu,ty Tran.lercTheEssenceof"Equity"LevelofAcquisitionsandTnnsfels......._..._...........Ratbhate ol he Doclnne .Apphcaton at thc Doctrine

Mc ryers and Con soltdahons..Por,et to Metge ot Consoridate . ... ................ .......Compdnsoh ot Meryet and Consolida\onP,ocedures n MFrycr ot Cansolidatbn .. .

Plan ot Meryet or Consottdation. .. ...............Sto( Ahotderc' ot Members Approvat .. .... .... ... .... ........ ... ...

641641641

644645

Right of Apwisalot Dissenling Stockholders -... . ..-..Athendment of Plan of Meryer or Consolidation ..-...-........::... .. ..-.....Adtcbs ol Meryer ot Consohda\ion..................... ...Requiremerts on Subm,ssion of Financial Statenents...-....-...-........ ..Apprcval by the SLC ......

Lttects of Meryet or Consohdatbn- ------ .-......... .........Sahenl Advantages ot Meget and Consdidatton ....... ............. .... ..Contnry Ruling lor Bol |ncertros... . ........ ...........

De Facto Merge6 ot Consolidaton - .... .... ..... .... ..... .Recognition of De'Facto MeryeDe Facto Meryer inder the Coryoration Code. . .-...:Statdoty Ptovisions Applicabla to De Facto Meryers ..

6636636636636646656676686696696/0670671672672673

677678680641683685

692692693

694

696697697697698698699699700700

701701701702702704

704

Sp/n-offsEllects of Trunsfels on Employees ---.---... ..................

Asssls-Orl( Ir;nsfsrs..-...Bus,iness-Fnlarpnse 7rarsrerc................ .. ...............

Employees Have llo Equity Clains on theEusiress Enterp,se.........

Percing Dochne Appl6atioThe Need for a Cleat "Break" in CrEiEtions......'......-

LquW t ranslers - . -.......... .tlerger, and Consolidation

CHAPTER 14

CORPORATE REHABIL]TATION,INSOLVEI{CY AND LIQUIDATION

|n|oduction ............. ...... .H isloical Background - - -lntoduclion lo the fRlAof 2010----- ... .... .............Two Schods ol Thought on the State of Pure Coqorate

SuspensionofPawentsProceedings...-....-....-.......-.........................Designation of Couts and Pronulgation of Rules of Prccedure

by Supreme Coutl-... .......General Prcvisions Goveming All Prcceedings undu FRIA . ----.. -....

FRIA Proceedings ln Rem. Summary and |lon-Adversaial ... ..... -............ ....ln R"m Nalure ollhe Prccesdhgs ... ... .....................Proceedings Summary and Non-Adversaial in NaturePtohibled Ple adings........Vedfication of Motions and Pleaclings ......-............. .... -Otderc and Rulinqs lmfiediately Executory --... -.... -...Penalties undet F RIA - - - - - - -

Coveage of F RIA - - - - - - - - - - - -Application to Pencling lnsolvency, Suspension of Pawents

and Rehabilta on Cases.ApplicEtion to Pending Conllacls...................... .... ..E\clusion from the Covenge ot FRIA. ---. ---.......... -....-

Substantive and Procedural Consoidation Rules undet FRIA ----..-... .. ...-...-Specific Rules Applicable to Al FRIA Proceedings--.----

co,ponte Rehabililalion..Juisprudential Definition and Significance of 'Corporate

Rehabililalion- -... -... -.... -...

I npottant I ssue s Prc-F Rl A PeiodJunsdictional Requirenent of Debtar Beino Rehabilitable-

/45745706706706707707708748748749/10

Constitutianal Protecton ta Propedy Rilhts.......... ......Detinnion, Scope and Cavemge of Rehabjlitation under FRIA ..... ..__

Bridging the Gap underthe Pre-FRtA Set-Up....Types of Rehabilitation Proceedings under FRIA ... ....

. .1-Supe^/sed Rehdb ttanon tchapter ll). ..1-1iatrcn ot Ptoceedngs.. .

Voluntary Prcceedings (Debtot lnitiated Proceedings)Petitian to lniliate Voluntary proceedings by Debtar .............Conpliance Wilh Carpante Requirements ................... .. __ __Joint Fihng by a Croup of Cartpanrcs... ....lnclusion of Caryatate Officers and Other patlies

as Co Petitioners.__.._.. _ ... 712

lnvaluntary Proceetlings (Creditarlnitiated Proceedtnss)........ ... ...... 714Circumslarces Necessary to tnitiate InvatuntaryPtoceedings---..-............... t14Petilion to lniliate lnvoluntary Proceedings......

............... ... . . 114Venfication Required for the Petition in Debtor-tnitiatecl

Rehabiliration Proceedings ....................... ... ............ .. /15Venue /1sAction on the Petition and Comnencenent of Proceedings... ... ...... ._ .__ 716

Action on the Petition ...... 116When Petition Suffrcient.... 716When Petitian lnsufficient n6

Commencementof Ptoceedings and tssuance of aComne\cenent Otder. ... .... .. ..

Effects of the Conmencement Oder ....................... .__..__. __..__. ..Stay ot Susp.nslon Otder.. .. ...Other Eflects of the lssuance ofthe Commencement Order...__.___.__..Etrects af Comnencement Otder an LGU, and cFls

71A718718719720

Waivet of Taxes and Fees Due to the NationalGovemnent and to LacalGavennent Units (LGU;) __..__. 720

Appli.aliap af Stay ot Susq"nsia4 OderrcGovernmentFinanciattnstjtutions.

..................___ .__.___.__. 72AExceptions ta the Stay and Suspension Order.. 72AEffectivity and Duratnn of Commencenent Otder.. t22

P.9-FRIA lssue on the Duratian of Automatic Stav...__..___..__. . 723IhF Suspens,yc l-fiFcls Ougnt Nat tnpdi Prcpeny

Rights of the Crednars..... 724Rationale of Autanatic Stay and the Stay Orcler__.. ___. /2 /"Claims" Covered by Stay Otder undet FRIA........ nA

Pr9-FRIA Rulings on Covered Ctains .. rcACovetage of Clalns under FRIA.............. . 732lssues Perlaining ta cuararlors ard Surores

and Claims Against Cotporate Officers............_ .____.__. __. t33Securcd Creditors Covered Stay Order. .. 735Adninistrative Expenses. 738Suppliers'Ctedit............. . 739New Loans antlOtherCrcdjtAccomnodations.........

._ .__..__..__ 74ASuspensive Effect on Enployees Clains..... 74AStay Order Does Not Cover Crjminal Case for

Bouncing Checks. ......... . 742

-

Legal Effect of Violatirn of the Terms of the Stay Order-.---..... .. 743Action-at the lnitial HeaingEflecl ol Failu.e to Filc Norrce ot Claim -- -Repott ol the Rphabililation Receiver .......................Giving Due Course to or Disnissal of Petition, or Conversion

of ProceedingsPetitbn Given Due Cours

The Rehabilitation Receivet, Management Commiftee an!1 Creditors'Comminee -..

Histoical Signifi6ance of the Appointnent of the RehabilitationReceiver or the Managenent Conmftee -.--:..---.----.---....-.. 746

FRIA Ptovides deany When he Comnencement OrdetandStayOrderBeconeEtrective...---.---------.---.----.---.---. 749

The Rehabililation Receive 750Wha May SeNe as a Rehabilitation Receivefl.-..----- 750Qualifications of a Rehabilitation Receiver-.. 751lnitial Appointment of the Rehabilitation Receiver....--.-- 751

743744

744745

746

762

763764764

Powers, Duties and Responsibilities of the Rehabilitation751753753753754

754755755757

757757757758759759759

759760760760760764761

761761

Renoval ol the Rehabihtatton Receivet -- ---Conpensation and Tems of Service.---..--..Oath and Bond of the Rehabilitation Receiver ---.------Vacancy........... ........ .......

Displacemenl of Exisling Management by the RehabilitationReceiver or Managemenl Conmiftee............... ... ........ ....

The Management Conmiflee.. ......... ...................... ...Role ol lhe Managenent Conmitlee --Qualifications of Members of the Management Committee --............. .

Ptovisions Comnon ta Rehabilitation Receiver and theManagPmcnt Commtdee......Employmenl ot Professionais.... ............ ...conflict ol lntercst -- ---------

The CrediloE' Cofinttdee .Constitution of the Cretlitors' Commiftee-- -. --.... -. .......Role ol C reclitors' Conmittee

Detemin ation of Clains. - - - - - - - -. - - -. - - - - - - - -. - - - -. - - -.. - -.....':..Registry of Clams---- -------oppostfion or Chaltenge ot ClaimsaDoeat . rl-... ............. ... . .

eovenalnce anl uanagenent of corporate Dbbtot.... .. .].. .... .... ............ .....ManagenenlUsForD'spos/ioror4sseis. ...........................Sd/e ofAssels..Sale or Disposal of Encumbered Propeny of the Debtor and

Assets of Third Panies Held by Debtor-..----.---..---..--.Assels ol Debtor Hekl by Thd Panies--- --- --- --- - ---Resdssrb, or Nu//ity of Sa le, Payment, ftansfet ot

Cofl yeya,ce orAsseis......, ssets SubJect lo Rapid Obsolescence, Depreciation and

D'minution of Value -- -------Post-Comnencemenl Inleresl. .... .... .... .Tedtment ol Contracts - - - -

iI

Avoidance Proceedinqs 765765765765766766766767768768774770

Notice to Creditorsta Exanine the Plan.... ... ... ... .... ... .. . 770Manner of Rejecuon orApprcvalof the Plan.. .... ... ... 770Couhs Cran Dawn Pawer 771

Cram DownPravisionsandCorsrlutioratrlssues.......-... .. .. 771Submissnn of Rehabilitalian Plan to the Caun.... .... . 774Filing of objections to Rehabtlitatian Plan . ... .... .... . 774Hearing on the abjections 775Confirmatian of the Rehabilitation Plan ... ... ......... ... 775Effects of Canfirmatian af the Rehabilitatlon Plan.. ... ... 775Ireatment of Amaunts af lndebtedness ar Obliganons

Rescission ar Nullity of Ceiain Pre-Commencementlnnsaclon- --

A(xons fo.Rpsc,ssron orNulhtt- -- --

Aclion for Rescission Purcuantto an Oft1er ..- ..wten lnnatcd b\, RehdD -ta on RaLeiet

TtedLment ot \..urod C tedilats .Na Dntnut.or ot .at urp.1 c reclitat Rtqhts .. ... ..LoLt at aaeguata ProleLlt

Aon hahon ot ProtecdtnSs.. ..Cantents ot a R?r,abihtclian Pldh .. .. ..Consultalia"

^th Debtot and Creditars ...Crodttat Appn\at of RFhdbititclnn Ptan.

rarglen ot Redu.?d. .. ..Pciatt for confirnatian ofthe Rehabilitatian Plan-- .-At\aunmg Dtnhdee ot Rrhablldt-on RFttvtt .... ..t unos tor Rphdailtdlon ot GOCC' ---

-etf-ndtor at Pro, a..ltnqtarnnd an ar PnccFding5 ..Lhec,s ot lermnator'

^pp.at nam the Dp. ison al the RTc _Otd Rtte an Appattae Re,ipdrFc. .... .. ..Current Rule an Appelate Remedies in Rehabihtatbn Proceedings....... ...

o.--NpgoLbted p.habtndtian (chaplet I I hP.n on Dy D?btat

Yore Necessa4..ConPnr< ol thc Palitnn

t\s"ance ot OrcletAppta,at otlhe Ptan.. ...... ..Abjectian lo the Petitian ar Rehabilitatian Plan-.....- .4-dting on lhd obt.ction. .. ..Darod o Appro\at ot Rehabititatian Ptan.. .....Lqect otApprcDt ..

)Dt af'Coun ar lnfornai Restructuring Agreenents/Rehabilitation

776777777777777

779779779780784784784781781782782783783743

Plans (Chapte. tV) 784autof Coufi ar lnfarmal Restructuing Agreements and

Rehabilitation Plans. .. 784Mtnimum Requirenents of out-of-Cout ar lnfarmal

Restructuring Agreements and Rehabililation Plans..tond\tit Penad -- -- --

Ct"m Donn fffe IAmendnenr ar Mo.1ifi attoEqe t at CounActor or Othet Prcceednq-

784784785785785

fCorltTqssistarce lAOlnsolvencyPr.oceedingsforJutidicalDebtor(ChapterV)....._......._....*_..._.....__.___. 786Voluntary lnsolvency Proceedings (Votuntary Liqujdation)..._..__........__.._.....__ 786

lnitat Pettion tor Votuntary Ltquklation ___ __ .. ... ...... /A6

Conveqion of Rehabilitation proceectings to hsotvencyproceedin9s..................... 786

lssuance ofthe Liquidation OftIer......._......_..___.___._.. tB6lnvoluntary Insolvency Proceedings (lnvoluntary Liquidation)......._............_.. 7A7

ln ial Credtorlninated Liquidalon ___ ___ ........... ........................

_ 7A7Conversion of Rehabjtitation phceedings to tnsotvency

Proceedings. ......_....... 787lssuanceoftheOrdetforpublcation.._..._..__.__.___..__... 7Bllssuanceol Liquidation Ode rEl

Conversion by the Rehabititation proceedings into LkuidationPtoceedings

...._...._.... ._ ._.._... ..

Pie-FRIA Controversies on Conversion of RehabilitationProceedings to lnsotvency ptoceecfings_.__,.___..

. _ .

hvoluntary Coryorate Liquidation with the RTC. ___. __.......Oanficabry Rule under FRIA Regime._.....

___.. ___ ____. _...

Powe6 of the SEC on Coryamte Dissolution and Liauidatjon.............lqudalionin lnsolven.! otJun( cat Debtors............. ................. ......

_

Covenge of the Tem "Debtof ................. _

The Liquidation of the Coryontion.._...... __. _

The Liquidation OrdeL............... ......

Effects of the Liquidation Orclet........Rights of Secured Credjtors.........._..

_.__.____.___......_

Stand ing Foreig n CoAonte Creditots.. _. _ _ _. _ _ _ _. _ _...........

_...

The Liquidator............... ..

Election of Liq uid atoL _... _..Coutl-Appointed Liquidator.........._...

. __. ___. ___.... ......_.

Oath and Bond or the Liqujdator..._.. .__.___._______......._..._.

Qualificalons of the Liquidator......... _.___.____.__. . .

Removal of the LiquidatorPowers, Dutbs and Responsibitities of the LquidatoCampensation of the Liquidatot.._

___

Repoiing Requnements ................

_

Di sch arge of Liq uid ator....Determin ation of Claims_..

Registry of Clains..... _............_...._....

Risht of Set-ofl ......Opposition orChdlenge lo Ctams

__

Subnissirn of Dispded to the Coun. .__..__.____.. .. .Avoidance Proceedings...

Rescission or Nu ity of Cedain Transactions ......_..._........_...._............_.Actions fu Rescission ot NutW

The Liquidation Plan. .. ..The Liquidation p\an.................._..

._

Exenpt Propefty to Be Set Apan._..__ ..__.._______... _

Sale ot Assets in LiquidatioManner of lnplenenting the Liquictation plan

......_.....

Concurrence and preterence of Cre.1its............ ........

788

78879179579579679679679679/79879979979979980080080080180180180280280280240280380380s803804804804805805805

805Ode! Removnq lhe Debtot hon the Lt.t ot Reg,stered

Enftiesalt e SEC

Ternin ation of P roceecltngLiquidation a a Secufiies Ma*et Pafticipant """" """ -'-:--

Recoon ion al Forcqn Ptocc"clings... ...intq ao,,sro"" on c,oss'Boder lnsoltency Pro'eed'ngs" "'

Adoption of UNCITRAL Model Law on Cross-Badetlnsotuency..... .........

FRIAProvisbns on Recognition of Forcign Proceedings "' "'-"' "" 'lnitiatian of Proceedings ..Provision of Relief-.---- .....Factors in Gmnting Reliet

Scoqe of A\Plication. -.... .Petition for Recognition of Foreign Proceedings""""Grcun(ls to Recagnize Fareign Prcceedings ""'"'Notification to the Coutt- .Pravisional Relief That May Be Gmnted "'"" '"""-Effects of Recognition of Fareign Prcceedings""" "' 'Retef That Mai Be Granted After Recognition of Fahign

Proceedings.... ...........'Protection of Creditorc and Other lnterestecl Persons """'-" "" ",' 'lnteruention by Foreign Representative in Philippine

Proceedinqs............. .......Coopentton and Dircct Communicatbn with Foreign

Couns and Foreqn Reprcse,?latives" "' ""-"" "' "'-""""'-"'Commencenent of Local Proceeding Aftet Recognition

of Forcign Proceedings.- 'Concurrent Local and Foreign Proceeclings " " " " " "

CHAPTER 15

CORPORATE DISSOLUTIONS AND LIQUIDATIONS

No Vested Rights to Cotporate Fiction ---......... ........Nature of Dissolution ...... .Methods of Dissolution . ...Voluntarily Dissoluton Wherc No Creditors AffcctedVoluntary Dissolution Where Crcditors AffectedDissolution by Shonening Cotponte Tem...... ........Dissolution by Expiration of Coryorate Term. . ........Obtaining of Tax ClearanceI nvolu nta ry Dis solution ....

Grounds for lnvoluntary Disso|ution...... .............. "When Corporation Deemed "Organized"When CoQoratbn Deemed to Have "Commenced Business"" "'-"""

Procedurc fot lnvoluntary Dissolution..... .... ....... "Under old Rules of CouttUnder Pres. Decree No- 902 A ....... ... . '

Partbular SEC Rules on Suspension/Revocationof Cenificale of Registratio

Right of Mjnorny Sbckholderc to Demand DissalutioJunsuudential Aftitude Towards lnvoluntary Dissolution ..- 'Nature af Liquidatian........Methads af Liquidation - ...

812

812

812

813814

8068A6806806

806806806807ao7807808808809809810810

all

816816817818818819821822823823824825a25825826

828429830832833

Liquidation Through the Board ot Diractors ot TrusteeLiquidation Throuqh a Truslee ... ... ... .....................Liquidati;on fhrough a Receiver----------.-------.-------.----..--..-...-....-...:1.-...-........-

Disposinon of Pending Clains Against Dissolved Cotpomtion .------..--..----.---..--..--..Ceneral Rule on Abatement -- --- -- --- .,P ro c ed u re s Ag a i n st the Olfi c erslstockho/ders

Possess,rg Corporale Alsets.........Effects of Dissoldion and Liquiclatbn on Coeorate Contftcts.......................... . .

No Authotity lo Fnlcr lnto Ncw 4usiress...... ... ...........Sunnary on Dissolution and Liquidation Proceedings............................... ...

Reincorpo.ation .-...-....-...-...-.........-..:-....-....-...-...-........Apptrcabla LegatPrcvision .. ... .... . . .. ..Extension of Coeonte Ue Dunng Peiod of DissolLttioDistinctions Between Extension ot Corporate Life,

Revival, ancl Reincoeodlion . ... .. ... .... .... ... ... .Process of ReinconoratinS.. ... .., ............................

Rights of Opposing Cred oRighfs of Disseflf,ng Sfockholderc....... -...............:......

CH^prER 16

CLOSE CORPORATIONS

lntroduction --------Genenl Concept of Coryoranon Colle on Natura ot Coryoration --- ----. ----- ----. ---.. ---.Concept of Cbse Coryoraton ------------------------- --- -----

Slalutory Definilion ot Close Corporalions .... .... ...Ptoblens wtth the Statutory Defint on -------------------- -----De Facto Close CoryorauoL ely Junsptudenlial so|ulions...... ... ... ........ .........

Nced for d Close Corpomt on.............. .... .......... .... ...Tille Xll on Close Coryotations. ... ..

Classificatbn of Shares and Resfiction ot Tmnsfet -.Classilicalion of Diectors .Provisions lor Greater Qrcrun or Voting Raquirenents --.Stochholde rc as Coaorate Manage r s - - - - - - -... - - - - - - - - - - - - - -Agreemems Among Stochhoidels.. ..........................Boad Meettng s U nnecessary - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Prc-emptive Rights -------- -De adlocks and Di ssolution

Opemtive Prcvisions on Deadlocks and Dissolu{an-The Essence of a Deacllock Situation ....-...-.........-........,. . - ,Appointnent of a Provision al Dnecbr - - -.

- - -.

- - - - -. - - -.

- - -.

SEC Powet to Buy-Back Shares and the Right toWithdraw ol a Stockholder-- ---

Compelling Dissolution of the dose Coryoration---..-Pov/et of the SEC under Sectbn 6 of P.D. 902-A.......Rationale for Deadlock and Dissoldion

Provisions tot Closa Coryomiions........................ .....................The Missed Oppottunq in Ong Yong u nu..----.---.----.

Repur.hase of Shares of Stock-------------------- -------------Piercing the VeiloI Corpomte Fbtion -------------------- --

833833835837837

838839440840842u2843

u3844846446

8488498498508508518528584608608648658668678688698708/0871

871872873

875875879879880

CH^PrER '17

.NON.STOCK CORPORATIONS, FOUNDATIONS, ..

AND COOPERATIVES

E,..n.F or No,r Sio(/. Colpamtions. ... ... ..Eleemosynary Puryose and Non-Distnbutian of PrafitsDistribution of Net Assets and Prafits Upon Dissolutio

TheoO an Non-Stoch Corporchans.... ..MemDP^ ot A/on S/o, /' Cot parations. ... ........... ..

Menbetshtp l\ Pur?lt Pctsonat ... ... ...Prapnela\ Membetsh'p...

Juridical Entities as Menbers of a Non-Stock Corpontion-.... ...: _......... .........Natu/p or

^,lenbets'Valng Rqht-- --

Prc\t R'tlcs tat MembetsEffects on Delinquency in Menbership on Voting Rights ........ .... .......... ........Mdnnet at Votinq --- ---- ---Dtac. ot MeelngsQuarum in Memberc' MeettnS....................................

. . . . . . . . . . .: . . . . . . . . . . . . . . . . . . . . . . .

A5,es-,npnt ot Menbosnp D,Jes... ... ... .... ... ... ....Cotttthon ol Membetshe D

LtsLePs dnd Offi.etc ---- --- - --Riqht and Mdnnet al Vating fat lrusteesNunb?r dnd ttxhah ot /.uslees. ....... ...Juridical Persons as Menbers of Board of Trustees .MPe nqs at tne Boanl ot Tru.I"es..... ..Lle, trcn of Offrtt\ ---Non-Applicability of the Nationalization Laws . ......... ..

Spectfic Rules Applicable ta Non-Stock CotpoQtbns...ApplicabililyafStockCorporatianPravisionsaftheCode...........................Fat Ptofil PLtrpose in Anttcs ot lncotpoqlon

Selling af Raffie nckets and Other Prcfilseeking4' lirr'tes,,,,,, ,,,,,,,,,,, ,,,,'

Paw.r la aoapl Rulps and Regulatons ...Nan Applicabitty af Rutes on Subscnptians and

Pte enptie Rtghts_Rule an tn\rcasps h Capilat Conlnbuttons

Co.Lnralon ol AclL itp, Afrtt Dissohtlian ... ... .Drsr,ibuxon otAsseis o/ lvon-staca coryarations... ..ConversianafNon-StockCorporationtaStockCorporation.........._........_....__.___.._

Foundations Nat a Special Category under the Corporation Cocte ...............ra f\eap, Sdrus .. .. ..Tax Deductibility of Charitable Cantibutions..............Registration as Qualtfied DoneeJnstitutons.......Peqtrrcrnents on Danars to t ouhddlons..

Bl R RP Poda,i at Requ ieme ntsRecent SEC Rules coveminq Foundatians................ln St@nary .. .. .. .....

t a.oantnun CorpontianBas'. tat M?nb.rchip-

Assignnentaf Volng Rights of Delinquent MenbersBtndtnq I h6ct ol lhe Mdstcr Deed...VcLdity ol llausc Rules

883883885845887847887889889890891891892892492893895895896896896897897898898898

898899

899904900900901902902943944946908908909911911911911912

Liabilily far Assessment Dues......cunna-ott of ulilitv seryice

i rnFss Provis,ons rn Bv_idws ......... ........... ......... . "" ::"""""""No Express Provisions in By-laws ...-........""-"" "'--" "

Rubs on Uniformity of Leasing-Out of Units "-" -""Bingo and Other Fund'Raising Activities ... " ""Liabiltty fot Business Taxes-.. .... ...-.. -....-..--..-.'-"'Venue of Aclions -... -.........

Educ ational Corqofttions.lncorpomlion . .... .... ..... .... ..Stoc^ and Non S,ocl i-ducalional lnstitutions " "" "'

conve\ion of Non-stock Educational schoolto Stock Corqoration.... -...

Board of Trustees... .........Benefits and Privileges of Educational lnstittrtions -"'

Relioious Comordions- Siarus ot rre Rom an Catholic Church in Phihwne

.Lrnsdicti.n...-......................---.------ ..-.................. ! -Histotbat Juisprudence on Treatment of Catholic

Churches and Olhet Religious Properties "- " - " " - "-- " - " -- -Ciasses of, and Goveming Rules fot Religious Coryoralions ,'"" ""

Coeoraton Sole -.............Articles of lncoQoratbn. --Submission of Atticles of lncopomtion """-" """-""Amenclnant Io the Atticles of lncorporation ' --- " "" " 'Nationality of Corpomtbn Sola .--.-""-"" " -"" ""-" 'Acquisition, Moigage and Alienation of Property " "'Acquisition of Land in PaticulaFilling'uP of Vacancies .. -..Dissolution........... . .

Rerigious Societies.... -.. . .MembershiP Disciqli ne.....

913914914

9159159159r6916916917

917918919919

919

Secession of Religious Members........

920921922923924924925926926927928928929930930930930930932933933934935935935936

938941

lerm ot txislenee ol Retigtous Corporctrcns - "" ""' "Coopemtives.....,... -.........

Rationale for Cooperative Systen........ '-""-"" '-""Cooperattve Pinctqles

Defi niti,cn of "CooperativeMain Objective of Cooperative System.. ..-....-.... " -'Organization and Members of Cooperatives . '-"" -"'-Denocratic Selup in Cooperatives. -.-........-...-..... . " - "Capital and Disttibution of Net Surp/us....--.. ..""" -"Board of Dnedors .. -.....-...General Assembly-...........Olher tealurcs ot CooqeraIiYcs........ ...........

CHAPTER 18

FOREIGN CORPORATIONS

Nature of the Corporate Creaturc......... ...-.. . "- 'Defrnition of a "Foretgn Corpomtion ..-...... ..-...-.... "

Legal tmplicat:rcns of the Reciprocity Rule'""-""' -'Require;entsto Obtain a ti.erse lo Do Business in the Philiryines " -" "' ""-"'

941912

D-,;o.dtton of Resident AqantAgreenent an Sevice af Summons with SEC...........Adth an q"..pra- y Cornplbn.p .. ... .. .. . .... ... ... . .Depae, at Sa. unhe.Effects of Being lssued License.........................

_... _...

Licensed Foreign Corporation Deened Donesticated .___.___..___.___.......a.nsequences af Nat Oblaining a License to Do Busrness...

_........ _............. _... _.....

On Standing ta Sue and Be Sued. .......... ..................On the Validity of Contracts Entercd tnta..Confltchnq Supren- Cod Rumg.

P.n Dt\tto Rutng...Do.tnne ot E5tappet . .. ... ... .. ..Revoking Pari Delicto Ruling in Favot of Estappet Doctine ..___.__........Eriks Ruling as the Recommended Formula ..........._.

- -nsDru.lpnral rest, at -Donq Busine. s

Need to Distinguish fron "lsolated Tansactions .....Iwin Characterization Tests fat "Doing Business" ...Essence of lntent to Pursue Continuity of Tmnsactjons .. .... _... _..................

_..

Extension of Credn as Essentat lndication of tntent._Ihe Conlract lest

lmplementing Rutes seeking to overcome the contmct Test...........__.Evolring RaF ot the Cantacr Test ..

a.ncept of 'Dalng Business' Under Foreign tnvestmonts Act of tggl ._...._........_...S@tulary Delinttton at -Do,rg EurnossRuhnos an tndentars

-nd Brc^e6... ... ..Lo^ on Rpq,ondt ar Atea Headquanets .

SgecialRules Penaining to Actians on Carporate Nanes,11ade ndma. and ttdlemais

Prc-Srattlary Jufl-ptuden.P .. ..Underthe Tad?nd\ la6 ... ... ..Un.1erthp tnteltet tudt Popeiy Codc

r),etq. Coryoat'ans cs Pefioncts pldintits .Ea.eign Corporatians as Respondents/Defendants

. __

SeNice of Sunmons underthe Rutes af Coutt Hinge(t uponDong Brstness n th1 Phtippn.s.

..

Nexus of Dorrg Buslress in the Philippines"............Valid SeNice of Summons prcnised Upon,,Doing Busl/,ess, ...._.......Service of Sum,j,ans on Counset..._.Designatian of LocalAgents Conctusive on SeNbe of Sumr:lons.......Allegatians on "Doing Business" Merely prclininary_

Cansent ta Lacal Jutisdiction............... .....

The Faclities ManagenentStrai.,.... . ...Suppletory Application of the Contract Test....

.___.___.__

The Signetics Clartfication......... ......

Latest Word on the Mafter......... ....

Cantractual Stipulation on Venue..... . __. ____

Domrcile and Residence af Fotejgn CorporationsLaws Applicabte to Foreign Corporations .... .........Amendment of Anicles of lncorporatian................

. __. _

Ueryet ano ConsatdanoF ... ..qevocation of License to Do 8us/ress.........._......

.....

tvthdrawal of Foreign Corporatjons.... ..... .........

theCasefarlheNanStockandNon-ProfitForednCoryomtons......................

94294394394394494594694694694894895095295295495495996196J963965966968968971979

980980981982983986

987987989990991991992993996998

10001000100110021042100210031004to04

I he lssuc of Rc.iprorityLicense to Engage in Eeemoswary Activities ........._

100510051005

101210131014101610181020

10391039103910401UO1Ul1U11Ul1U21U310431U31U410441045

CHAPTER 19

SPECIAL PROVISIONS AND PENALTIES

SEC Powet and Superyisto ..........-...--..-...-.....-...... . ...... 1008Confrdential Nature of SEC Examination..-.........-...-. 1009Applicability of Code to Special Corporations............ 1010Applicability of Ne\4 Requiements on Existing Corporations..............................-... 101OEffect of Dissolution of the Corporation ot Amendment or

Repealofthecorporationcode.....-...- 1010RepealingClauseoftheCoryomtionCode.------------.---.------- 1011Penal Provisbnsbf the Corporation Code -....-........-...-...-.........-...-....-....-...-........... 1011

The lssue of "Ptesence"

Absence of Malice or Defense of Good Faith

Statutory Limilalons on ProxiesBy-Law Reshctions on PrcxiasRules and Procadures Relating to Proxbs

Cnminal Law Pnnciple s -

- - -

Elements of the Cnninal Offense under Section 1 44 -Meaning oI "Violation Unda Sectbn 144 -- ----.---.----- ---- --Sectu)n 19L1n: Histoncal Backgrcuntl to Section 144........-........-..........

CHAPTER 20

LEGAL THEORY OF PHILIPPINE CORPORATE LAW

Charactenzation of Philppine Legal 5edin9.............. 1022Nature of Philippine Corporate Law---.-------.---------.---.- 1024Proper Role of Corpomtion Code -.---.-------.-----.---.--... 1025RoleofCorporclbninBusinessandSociely......-...-.........-...-....-...-...-.................. 1028Corporate Social Responsibility and the Evolving Corponte

GovemancE Regime.---.--- 1031RobofCorporationsinPhilippineSociety.............-.........-...-...-...--...-....-................ 1034The lmpencling Dominance ofe-Commerce..-...-....-.. 1035

Nature- Concepts and Gene@l tuinciples.. .............Authority of Ptoxy SystemPurpose oI Pro\y ----------- -Coverage of lerm -Prcxy'Proxy ls a fom of AqencyLfiect ot Fraudulent Proxies...... ... .. . .....

Types. Forns and Rcquis,res o/ Proves.. .... ..........

APPENoX APROXY RULES AND APPREC TION

Types of Proxies -. ----. --- -. -------. ---. ---..-..FormsofProxies-.-............._......._..._....._.:::_:;..........._........Vatiance as to Signature--

Li.r,irations on Prones -.---

Situations lhat Do NoI lnvalidate Pm\ics

ReEsltdlian ot Pesentation ofPtores.... ...Ddtes al Prcxtes--- --- -------Duntnn ol Pro^ies..

Wha Ccn Be Appointed Proxt.. .... ... .......Gercrat Pnn, p1"5-- ---- ----Apponlnenl ot lndependenl PtoxiesAppainlner,l at JoinlPrcxres.. ... ... . ... ... .... ... .Appatntnent af Altemate Pro

Wha Mdt Give Protrcs...tn Ceneral ...Joint awners ---.. --.. ---.. ---.. -MattiedWom"n........ ..............................tnfants and Guar:lians-- ---Pb dgors and Mot19 agat s .Administators, l- recutors, antl Recewets -- ---- ---- ---Caeorations and Patlnersh,ps .... ...... ...Banhs dnd Fnancial lnst'lutons

Revocation of Ptoxies...... ..................-'............................F te ctiao of ln spqc lots...pta,y Rules on Pubtich I isled Caeoralions .... ... .... .SLC Junsdictian on PrcxB

APPEr{or BCSR wlTHIN THE PHILIPPINE

CORPORATE GOVERNANCE SYSTEM

t,4aximization of Profits Doctnne As Onginal Norm for CorparateGovendnce --- ---- --- ---- ---

t,la,ing Towatcls the Sldhehotdet fheory: ,rr.,srns Agd,nsr rhF Sra* ehold"ts I heory ------ ---- --- -AssessmentoftheStaleofCSRinPhilippineJurisdiction.....................................

Re Affirnaton of the Pimary Role ot the Board al Directors -. ---.. ----. ----. ---.. --Mixing-up the Principles-Based and Rules-Based AwroachesOn Q ualifications and D isq ual ifi cations -. - - -. - - -. - - - - -. - - -. - -Enpowenng the Board of Directors of Public Conpanies .---..---.---..---.

Protection of Minority Stockholders and Olhet Stakeholders ..---.-.....-...- ...- .Canclusian: Legal Value of the Agency Codes on Corporate

104610461047104714471A4A104910491050105010501050105014511052105310531053105410551058

106110621064146514651066106810691070

Govemance ----.---.---..---.--- 1073

APPE oT C

REVISED CODE OF CORPORATE GOVERNANCE:A REACTIONARY APPROACH

A.andonment ofthe StakeholderTheory".---...---..--..---.---.-----.---.----.---------.---.---.---. 1at5Cavehge of the Revised Corporate Govemance Cade 1075Dropping ot Al References to Stakeholders ---. ---. ---. - 1077Has the Stakeholders Theory Been Fornally

Rejected in Philiwine Jurisdiction?---.---..--..--.-----.---..-- 1081Srsten of "lntlependent Directorc'1......-........-........-.. 1087t,t..oat of Carporate Governance and the Penary Pravision --------.---.---------.---.----.- 1oagliRSyslemforPublicConpanies-.--..--.-.-...--..---..---.---..-.................................... 1O92L/..lusians 1094

APPE Dix D

THE LAWAND PRACTICE ON HOLDINGS COMPANIES

lnpnved Over-Al Corporate Wsion and Managenent Control ..-...-.....-.......-...-..._. 1097Requirementto Prepae Consolidated Financhg Statements_...._..._..._...._.... 1097

Cbtilot Obtaining Bett Terms and Financing..-.... 1098Accommodation of Vaious Padnerc ot Co-VentureE,,......-....-.......-....--...-...-.,...,... 1098

I so I at i n g M i n o it y Stoclk ol d e rc/P a dn; rs ho m Pa tlb i pati ngin Subsidiary Coryorctbns 1099

Aspectof Foreign lnvestment in Nationalized lndustties...,.........._..._...__......._ 1099Advantages ot Separate Juridical Pe6onality..........- 1102Tax l/irplbations of Holding Conpany Structure..-.......................-........-....-...-...--...- 1102

Compatble Provision ofthe Corpomtion Code.........-... 1104SEC Rules Goveming the Disttibution ol Excess Profils .-.....-...... ...... 1105

Revenue Regulations lmplementing Sectbn 29 of 1997 NIRC..--...-.......--.... 1106Cut-off Covetage of the Tax 1106Rationale olthe Tax ------..-.........................-.....-..--:..-. 1106Detemination of "Reasonab/e Needs of the Business 1107Meaning of "Closely-tbld Cotporafons' an.! "Holding

ot Investnent conpanies 1109Tax Base of 10% |AET .... 1110

Estale Planning 1111Ellecting Transletto Holding Conpany...........-...-...-....-. 1111Corporate Structure---.---.- 1112

SHonr Ctranor Fonms

The initials of the following government departments and agencies havebeen used in the book:

- Anti-Money Launderinq Council

- Bangko Sentral ng Pilipinas

- Bureau of lnternal Revenue

- Board of lnvestments

- Department of Education, Culture and SportsDepartment of JusticeDepartment of Trade and lndustry

- lntellectual Property OfficeNational Economic and Development AuthorityNational Labor Relations Commission of the Department ofLabor and Employment (DOLE)

- Office of the lnsurance CommissionerRegional Trial Courts

- Securities and Exchange Commission

- SocialSecuritySystem

The acronyms or initials ofthe following issuances and publications havealso been used throughout the various sections of the book:

Executive OadersLetters of lnslructions

- The National lnternal Revenue Code of the Philippines

- Presidential DecreesThe Philippine Reports, published by the Bureau of Printingof the Republic of the Philippines.RepublicActs

- Supreme Court Reports Annotated, published by the CentralLaw Book Supply. Manila. Philippines.

AMLCBSPBIRBOtDECSDOJDTItPoNEDANLRC

orcRTCSECSSS

E.O.LOtNIRCPDPhit.

RA,SCRA

Throughout the book, case citations always follow the following format::ae name of the case would be in italics using the abbreviated "v." to mean, e.sus The same fomat is followed whether the citation to a case is made in:'e lext or in a footnot'c

Gxneren 1

INTRODUCTION

Use of the Term.lcorporate Law,Proper Treatment of the Corporation Code

Use or rxe Teau "Conpoure Llw,'.

The whole body of laws, principles and doctrines covering private corpo-rations in the Phitippines is referred to in this b ooX as "Corporaie ta*,,ti it:dirnot to confuse the use of such term with the official name of the old Corpora-tion Law, orAct No. 1459.,

The main.statutory provisions governing phitippine Corporate Law arecurrently found in the Corporation Code,, and complemented by specialprovisions on publicty-listed corporations and puOlic companies unOir iheSecurities Regulations Code, or R.A. 8799.

Paopea Taearmenr or rxe Coapoamolr Cooe,Philippine Corporate Law comes from the common law system of theUnited States ofAmerica. Although we have a Corporation CoAe itrai prorijeiforslalu'tory rules and principtes. phitippine Corporit" fu* *u",

"nJ "intinJJ!lo be, the product of commercial developments. Necessarily, the statutorycorporate provisions and principles are representations of a time when suchpnncrptes were the governing. or at best. the general controlling influence; butoy no means can be taken to indicate changes in the field thaahave occurredsince their adaptation, and do not limit fuiure developme"t". Mr;-; il;development in Corporate Law can be expected to happen in jurisprudential

.

Eracled on 1 Marcn t 906 by lhe phrtlppine Comm6sion. and rook eflect on I Ap,it .906 Se, tior' , acl No 14 59 speofict v provdes lnar ihe sho,t riite ol ,r," e., "r,a,

o" i." cJroo,rio. i)*':':Baras Pambansa Bts. 68, t\4ay, 1990.^-. -..

a more doiaited discussion oiih s appbach is found i n Chaptet ZO on Logal fheory af philippine

Iit

PHILIPPINE CORPORATE LAW

rL.rles that apply and adopt corporate principles into the changing concepts andmechanrsm of the commercialworld

The Corporation Code should therefore be seen as suggesting datedprinciples ani practices in Corporate Law, but the real toss and lussle andine boiting pot for current and future Corporate Law development,

-wouldnecessariiy be in commercial practices, most of which would be reflectedin issues ind controversies put forth before the courts of law in iusticiablecontroversies that arise therefrom, and some of which would be synthesizedinto jurisprudential law. Once in a while of course, Legislature comes up withorec;s of leqrslation neant to supplement or amend extstlng Corporate ldwdoct.'nes or rules; but otlen such legislative enactmenls are meant to ofliciallyincorporate already existing commercial practices into statutory language'

The Securities and Exchange Commission (SEC) has ruled: "Further inthe proper exercise of supervisory and regulatory functions over corporationsand partnerships registered with the Commission, the Corporation Codeshouid be given a reasonable or liberal construction which will best executeits purposJ, even though such constrllction is not within its strict literalinte;preiation. A strict co;struction should not be permitted to defeat the policyand purpose of the Code. Therefore, 'a literal interpretation is to be reiectedif it would be unjust or lead to absurd results. ' ' lt is worthy to mentionthat decisions of our coLlrts have frequently enunciated the principle that theinteni of the legislature will govern. Thus, the Corporation Code should begiven a iudicious, not stern and discordant interpretation, which will promoteind uptiit the cevetopment of hade relations and which will encourage friendlycommercial intercoulse among coaporations provided that its primordlal end(protection of public interests) is served.""

ln another way of looking at it, since the Corporation Code has for itssubject matter the "corporation," which is a "medium" or "tool" of doingbusiness, then the Code may be viewed as the "manual of instructions" bywhich to properly operate the medlum or the tool. that is the corporation' Thecorporaiion, however, is not a static medium, but one that is dynamic andcontinues to evolve in response to the needs and demands of businessmen,entrepreneurs and investors, in particular, and society in general, in theever-changing kansactions and fields of the commercial world lt should beexpected ihai afier a given period, some portions of the Corporation Codewould have become outdated or oulmoded, and by its original provisions asa manual of instructions, the Code would not have kept up-to-date with thechanges that have affected the corporate vehicle and the commercial world'The ;updating' of the set of instructions by which to operate the medium ofthe corporation can be located in decisions of the Supreme Court that have

'sEc

-oDi"i""

N"i436j,ating fron sanana v affsharc shippng and l"lannn'g caq 177SCliA5l3 519 (1989), whlch rterpreled provsions olthe LaborCode

INTROOUCTION

reviewed and evaluated the contemporary workings of thein actual conkoversies and commercial transactions thattinkered with its various facets.

corporate vehiclehave applied and

The study of Philippine Corporate Law, and the jnterpretation andapplication of lhe various provisions of the Corporation Code and othersuppletory statutory provisions, should therelore take their approach on whatthe Philippine Supreme Court held in a leading cases thal [t]he Corporation Lawmust be given a reasonable, not an unduly harsh, interpretation which doesnot hamper the development of trade relations and which fosters more friendlycommercial intercourse among countries. The objectives. . . are even mor;relevant today when we view commercial relalions in ierms ofa world economy,when the tendency is to re-examine the political botndaries separating on;nation from another insofar as they define business requirements or r;strictmarketing conditions."6

ln essence, Philippine Corporate Law should be a dynamic system thatmeets the developmental needs ofa country competing in a globalized setting.

--oOo-

v. Eastem shipping Lines,123 scFiq424,435 (1983)

BRIEFPHILIPPINE

Cnaeren 2

HISTORY OFCORPORATE LAW

Historicat Background of Philippine Coryorate LawSociedades AnonimasCuentas en PaiiciqacionThe Coryoration LawThe Corpoation Code

Hrsronrcm Blcxenouxo or Pttrtpptle CoRPoRATE Larv

1- Sociedades An6nimasPrior to the arrival of the American occupying forces in the Philippines,

the main business vehicles underthe Spanish colonial administration thatweresimilar to the Anglo-Saxon corporations were the sociedades adfimas Thesociedades anonimaswere introduced in Philippinejurisdiction on 1 December1888 with the extension to Phiiippine territorial application of Articles 151 to159 ofthe Spanish Code of Commerce.

A sociedad an6nima was considered a commercial partnership' a sortof a corporation, 'lvhere upon the execution of the public instrument in whichits articles of agreement appear, and the contribution of funds and personalproperty, becomes a juridical person

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an artificial being, invisible, intangible,and existing only in contemplation of law

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with power to hold, buy, andsell property, and to sue and be sued

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a corporation -

not a general co-partnership nor a limited co-partnership . . . The inscribing of its articles ofagreement in the commercial register was not necessary to make it a iuridicalp6rson

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a corporation. Such inscription only operated to show that it partookofthe form of a commercial corporation."'

Although there were similarities, granted to such a juridical entity, suchas the features of limited tiability and centralized management, the socledadanonima did not exactly co espond to the notion ol the corporation in

'Mead !. ltccultough- 21 Phtl 95,106(1911)

BRIEF HISTORY OF PHILIPPINE CORPORATE LAW

English and American laws. That was particularly true with respect to matlersconcerning the organization ofthe enterprise, the distribution of dividends. andthose in which equity intervened for the benefit of creditors.

The introduction in late 1BB8 of the sociedades ar6nimas as commercialmedium of doing business did not quite prosper under Philippine setting, slnceby 1898, the American occupation had begun. The American authorities lostno time in inhoducing into the Philippine legal system various aspects of thecommon law system, especially in commercial and procedural matters, toenhance commercial activities between the new colony and the United States.

Harden v. Benguet Consolidated Mining Co.,'gives a vivid description onthe background oflhe enactment ofthe original Corporation Law inlo Philippinejurisdiction:

When the Phiiippine lslands passed to the sovereignty of theljniled States, the attention of the Philippine Commission wasearlydrawn to the factthatthere is no entily in Spanish law exactlycorresponding to the notion of the corporation n English andAmerlcan law; and in the Philippine Bill, approved July 1, 1902,the Congress of the United States inserted certa n provisrons,under the head of Franchise, which were intended to control thelawmaking power in the Philippine lslands in the matter of grantingof franch:ses. pr vileqes a^d conuessions.

Under the guidance of this and certarn other provisionsthus enacled by Congress, the Philipp ne Commission enteredupon the enactment of a general law authorizing the creation ofcorporations in the Philipplne lslands This rather elaborate preceof legislation is embodied rn what is called our Corporation Law(Aci No. 1459 ofthe Philippine Commission) The ev dent purpos-.ofthe cornmission was to iniroduce lhe Amer can corporation ntothe Philippine lslands as the standard commercial entity and tohasten the day when the sociedad an6nima of the Spanish lawwould be obsolete. Ihaf statute is a sort af cadificatton of Amencancorporate law.3

Under Section 75 of the Corporation Law, a sociedad an6nlma existingat the time of the passage of the Law was aulhorized at its option to eithercontinue doing busrness as such entity or to transform and be organizedunder and by virtue of the provisions of lhe Corporalion Law. ln the eventthat it elected to transform and re-organize under the provisrons of said Law,I was provided that lhe entity shalltransfer all corporale interesls to the newcorporation. lf a stock corporation, it was authorized to issue its shares of stock

:58 Phi 141 (1933)'/bid, ar pp ]45-146 enphasis suDplied.

PHILIPPINE CORPORATE LAW

at parto the stockholders or members ofthe old corporation according to theirinterests. The election to transform or to retain stafus quo was to be madewithin a reasonable time from the effectivity of the Corporation Law.'

Under Section 191 of the Corpo"ration Law, $ociedades an6nimas whichdid not opt to reform and,organize under the Corporation Lau continued tobe govemed by the laws that were in force prior to the passage of said Lawparticularlythe provisions ofthe Code of Commetce on sociedades anbnimas'"in relation to their organization and method oftransacting business and to therights of members thereof as between (sid themselves."

Philippinelurisprudence recognized the difference between a corporationand a sociedad an6nima and did not interchange the,two. ln Phil. Products Co'v. Pimateia Society Anonyme Pour Le Commerce Exterieu,''5 the SupremeCourt refused to apply the provisions of Section 68 of the Corporation Lawrequiring'foreign corporations" to obtain a license to do business in thePhilippines to an entity that was deemed to be a sociedad an6nima.

Today, the sociedad ardnima constitutes nothing more than a historicalrelic under Philippine Corporate Law since no new entity can be organized andregistered as a sociedad an6r,ima under existing laws.

2- Cuentas en PatticiPacionEarly on, Philippine jurisprudence recognized the concept or selup

ol cuentas en pafticipacion. Bourns v- Cam)ar,' described it as a sort of anaccidental partnership constituted in such a mannerthat its existence was onlyknown to those who had an interest in it, there being no mutual agreementbetween the partners, and without a corporate name indicating to the publicin some way that there were other people besides the one who ostensiblymanaged and conducted the business, governed underArticle 239 ofthe Codeof Commer@.

Those who contract with lhe percon under whose name the business ofsuch cuentas en padicipacio, was conducted, only had a rightofaction againstsuch person and not against the other persons interested in the venture; andthe latter, on the other hand, did not have any right of action against thirdpeGons who contracted with the manager unless such manager formallytransfened his right to them.7

.knguet Consolilate

BRIEF HISTORY OF PHILIPPINE CORPOMTE LAW

3. The Corporation LawThe Corporation Law, or Act No. 1459, which was in fact the first corporate

statute in Philippine jurisdiction, became effective on 1 April '1906. lt hadvarious piece-meal amendments dLrring its 74 year history. lt rapidly becameantiquated and not adapted,to the changing times.

Certain provisions of the Corporation Law showed an ambivalent appre-ciation of the corporation as a medium of doing business, and associatedcorporations which monopolistic and exploitative activities. There were specialprovisions penalizing conpoEtions for employing persons in involuntaryseNitude,s failure to report cessation of business,! for unlawful investment ofcorporatefunds in another corporation,r0 and forforeign corporation transactingbusiness in the Philippines without a license.,,

Underthe Corporation Law, no coeoration shall be authorized to conductthe business of buying and selling public lands, and no corporation is permilted to hold or own real estate except such as may be reasonably necessaryto enable it to carry out the purposes for which it was created. ln addition,no agricultural corporation shall in anywise be interested in any other agricul-tural corporation;r, and that no non-agricultural corporation shall own in excessof 15% of the outstanding capital stock of any agrlcultural corporation, whichholding shall be for purpose of investment only.,: A mining corporalion mayac{uire and hold not more than 40% ofthe voting capilalstock of another min-tng corporation, or not more than 30% of the voting capital stock of each ofnot more than thrce (3) mining corporations, and subject to other restrictionsof equity ownership.,4 The Corporation Law did not even have direct stalutoryprovisions for mergers and consolidations. and the Supreme Court allowedcriss-crossing use ofvarious provisions of the statute to allow achievement ofsuch ends.6

4. The Corporation CodeThe present Corporation Code, or Batas Pambansa Blg.68, became

effective on 1 May1980. lt adopted various corporate docirines previouslyenunciated by the Supreme Court under the Corporation Law. lt clarifiedthe obligations of corporate directors and officers, expressed in stalutorybnguage, established principles and doctrines, and provided for a chapter onCose mrporations.

isc 15 A.l No 1459S& 16 Acl No 1459-:Sc

17 1/2 ofAct No 1459. in retation lo Sec 6. RA.337-S 69 Act No 145S':Se 13(5), Act No 1459-rse 13(5).Act 1459, as amended by R A.5167 (1967)':Peyes v A/ous,91 Phil 305 (1952)

The Codedid awaywith the various restrictions on corporations' especiallythose pertaining to agricultural and mining corporations, and the limitationson real estate ownership. lt also did not contain the various particular penalclauses found in the old Corporation LaW and merely provided for a generalpenal clause under Section 144 thereof.

The Code was enacted'to establish a new concept of businesscorporations so that they are not merely entities established for private gainbut effective partners ofthe National Government in spreading the benefits ofcapitalism for the social and economic development of the nation."r6

Nevertheiess, like its predecessor, the Corporation Code maintainsthe concept oI "cotpotation as a-creature-oflimited-powers" having copiedthe exact definition under Section 2 of the Corporation Law, and in additionexpressed in statutory language the 4/tra vlres doctrine in Section 45 thereof'Consequently, the common law "duty of obedience" of directors and officerscontinues to be relevant under Philippine jurisprudence as an off-shoot ofthe enforcement of the u/tra vrTes doctrine. As shown in the discussions oncorporate powers and corporate conkact law, lhe ultra vires doctrine hasbeen considered a tedious principle and has a very low level of hierarchicalenforcement vis-d-vis the commercial policy that those who deal in good faithwith a corporation have a right to expect that the contracts and transactionentered into with a corporation would be binding and enforceable.

PHILIPPINE CORPORATE LAW

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r6Erplanatory Not to cabinel Bill No 3, which became the basis for the corPoElion code en_acted by ihe lnterim Baksang Pambansa, and which took effect on 1 Mav 1980.

Cnnpren 3

NATU RE, ATTRIBUTES, ANDCLASSIFICATIONS OF CORPORATIONS

Analyztlg the Statutory Definition of the CarporatianTheories an the Farmatian of a Carporation

Theary of ConcessianTheary of Enteerise Entity

Tri-Level Exislence in the Carporate SettingCarparatian as a Creaturc of the Law

C a n st i t ut ia n a I P rav i sia n sCivil Cade ProvisionsFrcnchises af Carporations

Attributes af the CorcoratianAnificial BeingCrcaturc of the LawR/Erhl of SuccessionCreature of Enumerated Powers, Attibutes, and Propefties

Advantages of the Carporate MediumStrang J uridical Person al ityCe ntra I i zed M a n age m e ntLimited Liability to lnvestarsFtee Transferability of Units af lnvestmentAdvantages aver U nreg istercd Associations

Disadvaitages af the Coryorate MediumCamplicated and Costly Formation and MaintenanceLack af Persanal Element and Abuse of Corporate ManagementLimited Liability Hits lnnocent VictimsDouble Taxation

Campanng the Corporatian with Other Media of Business EndeayorsSale Proprietorships

Daes a Defective lncorporatian Prccess Result lnta a Parlnership?Lessons from the Limited Parlnership Set-Up

BrsDess IrustsJoint VenturesCoaperatives

10 PHILIPPINE CORPORATE LAW

Entitlement of the Corporation to Constitutional GuaranteesDue Process and Equal Protection Clausesl)nreasonable Searches a,d SelzuresRig ht Ag a i n st Self I n ciminatio n

Liabilitv of Coporations for ToisLfieruing Doclrine on Coryorale Social ResponsibllilyCriminal Liability in the Corporate Selling

Policy Considerationsslranoe Pronouncement in Siaiotici oiuergence Betvveen the Cnninal and Ctvil Aspevls Arising from a

Coryorate C ri m i n a I Off ensecorpir'i Criminataecognized in the Anti-Money Laundeing Law of 2001

Entitlement to Moral DamagesN atio n atity of Co ryoration s

Exploitation ol N