Notes on the Corporation Code

Corporation defined	A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Attributes of a corporation (1) It is an artificial being; (2) It is created by operation of law; (3) It has the right of succession; and (4) It has only the powers, attributes, and properties expressly authorized by law or incident to its existence.
Corporation as an artificial personality	A corporation is a legal or juridical person with a personality separate and apart from its individual members or stockholders who, as natural persons, are merged in the corporate body. As a consequence of this legal concept of a corporation: (1) As a rule, a corporation is not liable for the debts of its stockholders, and the latter are not individually liable for the corporation’s debts. They can lose no more than their investment on the corporation. (2) It may acquire and possess property of all kinds, as well as incur obligations and bring civil and criminal actions (Arts. 44, 46, Civil Code.) in its own name in the same manner as a natural person. (3) Property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the members or stockholders as such. (4) All contracts entered into in its name by its regular appointed officers and agents are the contracts of the corporation and not those of the members or stockholders. A corporation cannot be held liable for the personal indebtedness or obligation of a stockholder even if he should be its president. (Smith & Co., Inc. vs. Ford, 63 Phil. 786.) Neither is the latter liable for the indebtedness of the former. (5) A tax exemption granted to a corporation cannot be extended to include the dividends paid by such corporation to its stockholders (Manila Gas Corporation vs. Collector of Revenue, 71 Phil. 513.) if such dividends are not exempted from tax. (6) A corporation has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities. (Sulo ng Bayan, Inc. vs. G. Araneta, Inc., 72 SCRA 347.) (7) Likewise, as an entity distinct from its members or stockholders, a corporation remains unchanged and unaffected in its identity by changes in its individual membership. It has continuous existence since it would exist even if all the stockholders die.
Disregarding fiction of corporate entity.	Being a mere creature of the law, a corporation may be allowed to exist solely for lawful purposes but where the fiction of corporate entity is being used as a cloak or cover for fraud or illegality, this fiction will be disregarded and the individuals composing it will be treated as identical. In other words, the law will not recognize separate corporate existence. This non-recognition is sometimes referred to as the doctrine of piercing the veil of corporate entity or disregarding the fiction of corporate entity. (see Claparols vs. Court of Industrial Relations, 65 SCRA 613; Republic vs. Razon, 20 SCRA 234.) or the doctrine of corporate alter ego. (9-A Words and Phrases, 377.) Creditors of financially troubled corporations benefit when they succeed in piercing the corporate veil for they can go after the assets of the individual stockholders.
Powers, attributes, and properties of a corporation	A corporation, being a mere creation of law, may exercise only such powers as are granted by the law of its creation. An express grant, however, is not necessary. All powers which may be implied from those expressly provided by law and those which are incidental or essential to the corporation’s existence may also be exercised. (1) Thus, a corporation incorporated as a railroad corporation has the incidental power to build railroads because such power is necessary for the accomplishment of the purpose for which the corporation is created. (2) Similarly, a corporation expressly authorized to engage in agriculture has implied authority to buy agricultural lands because such authority is reasonably appropriate to carry out its express authority. (3) Likewise, a corporation engaged in the manufacture of cement could operate and maintain an electric plant for the purpose exclusively of supplying electricity to its cement factory and to its employees living within its factory compound where it appears that the operation of such plant is necessarily connected with the business of the manufacturing of cement. (Teresa Electric and Power Co., Inc. vs. Public Service Commission, 21 SCRA 252.) (4) But a corporation organized for the purpose of supplying electricity to the public has no power to buy and sell agricultural lands because it is not within the power expressly or impliedly authorized by law or incidental to its existence. (see Secs. 36 and 45.) (5) Neither may a corporation be authorized under its articles of incorporation to operate and otherwise deal in automobiles and accessories and to engage in water transportation, engage in the business of land transportation by operating a taxicab service because such would have no necessary connection with the corporation’s legitimate business. (Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCRA 809.)
Advantages and disadvantages	The advantages are the following: (1) The corporation has a legal capacity to act as a legal unit; (2) It has continuity of existence because of its non-dependence on the lives of those who compose it; (3) Its credit is strengthened by such continuity of existence; (4) Its management is centralized in the board of directors; (5) Its creation, organization, management and dissolution are standardized as they are governed under one general incor­poration law; (6) It makes feasible gigantic financial enterprises since it enables many individuals to invest their separate funds in the enterprise; (7) The shareholders have limited liability; (8) They are not general agents of the business; and (9) The shares of stocks can be transferred without the consent of the other stockholders. Disadvantages of a business corporation.  (1) The corporation is relatively complicated in formation and management; (2) It entails relatively high cost of formation and operation; (3) Its credit is weakened by the limited liability of the stockholders; (4) There is ordinarily lack of personal element in view of the transferability of shares; Except general professional partnerships or “partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.” (Sec. 20[a], NIRC.) (5) There is a greater degree of governmental control and supervision than in any other forms of business organization; (6) The stockholders’ voting rights have become theoretical particularly in large corporations because of the use of proxies (Sec. 58.) and widespread ownership; (7) The stockholders have little voice in the conduct of the business; and (8) In large corporations, management and control are separate from ownership.
Classification of corporations under the Code	The Corporation Code classifies private corporations into stock and non-stock corporations, according to whether their membership is represented by shares of stock or not. (1) A stock corporation is the ordinary business corporation created and operated for the purpose of making a profit which may be distributed in the form of dividends to stockholders on the basis of their invested capital. (2) Unlike stock corporations, non-stock corporations do not issue stock and are created not for profit but for the public good and welfare. Of this character are most of the religious, social, literary, scientific, civic and political organizations and societies. Non-stock corporations are primarily governed by Title XI (Secs. 87-95.) of the Code. Other classifications of corporations. (1) As to number of persons who compose them: (a) Corporation aggregate or a corporation consisting of more than one member or corporator; or (b) Corporation sole or a religious corporation which consists of one member or corporator only and his successors, such as a bishop. (2) As to whether they are for religious purpose or not: (a) Ecclesiastical corporation or one organized for religious purposes; or (b) Lay corporation or one organized for a purpose other than for religion. Lay corporations, in turn, may be either eleemosynary or civil. (3) As to whether they are for charitable purposes or not: (a) Eleemosynary corporation or one established for charitable purposes; or (b) Civil corporation or one established for business or profit. (4) As to state or country under or by whose laws they have been created: (a) Domestic corporation or one incorporated under the laws of the Philippines; or (b) Foreign corporation or one formed, organized, or existing under any laws other than those of the Philippines. (see Sec. 123.) (5) As to their legal right to corporate existence: (a) De jure corporation or a corporation existing in fact and in law; or (b) De facto corporation or a corporation existing in fact but not in law. (see Sec. 21.) (6) As to whether they are open to the public or not: (a) Close corporation or one which is limited to selected persons or members of a family (see Secs. 96-105.); or (b) Open corporation or one which is open to any person who may wish to become a stockholder or member thereto. (7) As to their relation to another corporation: (a) Parent or holding corporation or one which is so related to another corporation that it has the power either, directly or indirectly to, elect the majority of the directors of such other corporation; or (b) Subsidiary corporation or one which is so related to another corporation that the majority of its directors can be elected either, directly or indirectly, by such other corporation. (8) As to whether they are corporations in a true sense or only in a limited sense: (a) True corporation or one which exists by statutory authority; or (b) Quasi-corporation or one which exists without formal legislative grant. It is an exception to the general rule that a corporation can exist only by authority of law; and it may be: 1) Corporation by prescription or one which                   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; or 2) Corporation by estoppel or one which 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 their acts or admissions, are precluded from asserting that it is not a corporation. (9) As to whether they are for public (government) or private purpose: (a) Public corporations or those formed or organized for the government of a portion of the State; or (b) Private corporations or those formed for some private purpose, benefit, or end; it may be either a stock or non-stock corporation, government-owned or -controlled corporation or quasi-public corporation.
Components of a corporation	The four classes of persons composing a corporation are the following: (1) Corporators or those who compose the corporation, whether stockholders or members. Hence, the term includes incorporators, stockholders, or members; (2) Incorporators or those corporators mentioned in the arti­cles of incorporation as originally forming and composing the corporation and who executed and signed the articles of incorpo­ration as such. So, all incorporators are corporators but a corporator is not necessarily an incorporator. The principal function of the incorporator is to incorporate the corporation and to enable it to become a body politic and corporate under the law (see Sec. 10.); (3) Stockholders or the owners of shares of stock in a stock corporation. They are the owners of the corporation. They are also called shareholders. They are the corporators in a stock corporation. Stockholders may be natural or juridical persons but only natural persons can be incorporators (Sec. 10.); and (4) Members or corporators of a corporation which has no capital stock. All incorporators in a stock corporation must now own or at least be a subscriber to at least one (1) share of the capital stock of such corporation. (Sec. 10.)
Shares	Stock or share of stock is one of the units into which the capital stock is divided. It represents the interest or right which the owner has — (1) In the management of the corporation in which he takes part through his right to vote5 (if voting rights are permitted for that class of stock by the articles of incorporation); (2) In a portion of the corporate earnings, if and when segregated in the form of dividends; and (3) Upon its dissolution and winding up, in the property and assets thereof remaining after the payment of corporate debts and liabilities to creditors.
Classifying shares	The shares of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incor­poration Rules: (1) No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless oth­erwise provided in this Code. (2) There shall always be a class or series of shares which have complete voting rights. (3) Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be per­mitted to issue no-par value shares of stock.
Classes of shares in general.	Shares of stock may be: (1) Par value or no par value; (2) Voting or non-voting; (3) Common or preferred, and preferred shares may be voting, convertible, or redeemable. (infra.) They may be: (a) Preferred as to assets in case of liquidation; or (b) Preferred as to dividends, and which, in turn, may be either: 1) Cumulative or non-cumulative; or 2) Participating or non-participating; (4) Promotion share; (5) Share in escrow; (6) Convertible stock; (7) Founders’ share (see Sec. 7.); (8) Redeemable share (see Sec. 8.); and (9) Treasury share. (see Sec. 9.)
Par and no par value shares	(1) Par value share is one with a specific money value fixed in the articles of incorporation and appearing in the certificate of stock for each share of stock of the same issue. (a) The primary purpose of par value is to fix the minimum issue price of the shares thus assuring creditors that the corporation would receive a minimum amount for its stock. (b) It is not usually the price at which investors buy or sell the stock.  (2) No par value share is one without any stated or par value appearing on the face of the certificate of stock. In other words, it is a stock which does not state how much money it represents. (a) While a no par value share has no par value, it has always an “issued value,” i.e., the consideration fixed by the corporation for its issuance. (see Sec. 62, last par.) (b) A corporation may issue no par value shares only, or together with par value shares. (c) No par value stockholders have the same rights as holders of par value stock. Shares of capital stock issued without par value Shall be: (1) Deemed fully paid (2) Non-assessable (3) The holder of such shares shall not be liable to the corporation or to its creditors in respect thereto Provided, That shares without par value may not be issued for a consideration less than the value of Five pesos (P5.00) per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.
Voting and non-voting	(3) Voting share is share with right to vote. (a) It is generally customary to give the right to vote to the common stock and to withhold it from the preferred. (b) Under the Code, whenever a vote is necessary to approve a particular corporate act, such vote refers only to stocks with voting rights except in certain cases when even non-voting shares may also vote. (Sec. 6, par. 5, last par.) (c) The rule is not “one stockholder, one vote’’ but “one share, one vote’’ because representation in a corporation is commensurate to extent of ownership. (4) Non-voting share is share without right to vote. (a) If stock is originally issued as voting stock, it cannot thereafter be deprived of the right without the consent of the holder. (b) Under the Code, no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in the Code. (Sec. 6, par. 1.) The proviso refers to fundamental matters enumerated in Section 6 (par. 5[1-8].) on which holders of non-voting shares shall nevertheless be entitled to vote. (c) Note that the enumeration in Section 6 does not include the election of directors or trustees (see Sec. 24.) as one of the matters on which non-voting shares may vote. (d) Where non-voting shares are provided for, the Code requires that there shall always be a class or series of shares which have complete voting rights. (Ibid., par. 1.) Non-voting Shares Where the articles of incorporation provide for non-voting shares in the case allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.
Common and Preferred	(5) Common share of stock is stock which entitles the holder thereof to pro rata division of the profits, if there are any, without any preference or advantage in that respect over other stockholder or class of stockholders. (2 Fletcher 43.) (a) It is so-called because it is the stock which private corporations ordinarily issue; hence, the name. (b) Common stocks are the residual owners of the corporation, i.e., they get only the assets left over in case of liquidation after all other securities holders are paid. (c) A corporation may issue more than one class of common stock, being designated class A, class B, etc. (6) Preferred share of stock is stock which entitles the holder thereof to certain preferences over the holders of common stock. (a) The preferences may consist in the payment of dividends or the distribution of the assets of a corporation in case of its dissolution, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of the Code. (Sec. 6, par. 2.) (b) As already stated, each share shall be in all respects equal to every other share except as otherwise provided in the articles of incorporation and stated in the certificate of stock. (Ibid., par. 5.) (c) Preferred shares are rarely given voting privileges. (d) More than one class of preferred shares may be issued, usually designated “first preferred,” “second preferred,” etc. Common and preferred stocks are the two main classes or forms of stock. “Preference” given to Preferred Shares Preferred shares of stock issued by any corpora­tion may be given preference in: (1) The distribution of the assets of the corporation in case of liquidation (2) The distribution of dividends (3) Such other prefer­ences as may be stated in the articles of incorpora­tion which are not violative of the provisions of this Code. Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of incorpo­ration, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission.
Other kinds of shares	(7) Promotion share is such share as is issued to promoters, or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company, such as advancing the fees for incorporating, advertising, attorney’s fees, surveying, etc. (11 Fletcher 48; Enright vs. Heckscher, 240 F. 863.) (8) Share in escrow is share subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept by the depositary until the performance of a certain condition or the happening of a certain event contained in the agreement. (Cannon vs. Handley, 12 P. 315.) (a) The escrow deposit makes the depository a trustee under an express trust. (see Arts. 1440, 1441, Civil Code.) (b) The issuance of the shares is thus subject to a suspen­sive condition. (c) Before the fulfillment of the condition, the grantee is not yet the owner of the shares and consequently, he is not entitled to the rights belonging to a regular stockholder. (9) Convertible stock is stock which is convertible or changeable by the stockholder from one class to another class, such as from preferred to common, at the conversion ratio, i.e., the price at which the common is to be valued as against the preferred. (a) Except as may be restricted by the articles of incorpo­ration, the stockholder may demand conversion at his pleas­ure. (b) The conversion ratio is the price at which the common is to be valued as against the preferred.
Capital stock	Capital stock is the amount fixed in the articles of incorporation, to be subscribed and paid in by the shareholders of a corporation, either in money or property, labor or services, at the organization of the corporation or afterwards and upon which it is to conduct its operation. (2 Fletcher 12.) It represents the equity of the stockholders in the corporate assets. Capital stock requirement. The Code does not set a minimum authorized capital stock except as otherwise provided by special law as long as the paid-up capital, as required by Section 13, is not less than P5,000.00. Special laws may require a higher paid-up capital, as in the case of commercial banks, insurance companies, and investment houses. Minimum subscription and paid-up capital (1) Pre-incorporation. — Section 13 requires that at least 25% of the amount of the capital stock has been actually subscribed and that at least 25% of such subscription paid. Special laws may require a higher paid-up capital. (2) Post incorporation. — The 25% subscription and 25% paid-up capital is required not only during the incorporation period but also in case of increase of the authorized capital stock. (Sec. 38, par. 4.) ILLUSTRATION: Suppose it be desired that Corporation X be incorporated with a capital stock of P100,000.00 divided into 1,000 shares with a par value of P100.00 per share. In such case, there must be subscribed 250 shares of the par value of P25,000.00 which “shares represent twenty-five percent (25%) of the authorized capital stock” and of the subscription, there must be paid to the corporation “at least twenty-five percent (25%)” thereof or P6,250.00 in actual cash and/or property the fair valua­tion of which equals P6,250.00. (see Sec. 14, last par.) If the amount of the authorized capital stock is only P75,000.00, the 25% subscription would be P18,750.00 and if 25% of the latter amount is paid, the paid-up capital would only be P4,687.50. Sec­tion 13 requires that the paid-up capital be not less than P5,000.00. It is not required for purposes of incorporation that each and every subscriber shall pay 25% of his subscription. The paid-up re­quirement is met as long as “25% of the total subscription” is paid although some subscribers have paid less than 25%, or even have not paid any amount. Computation of the 25% subscription requirement. (1) Where the capital stock consists only of par value shares, the minimum subscription should be 25% of the amount of the authorized capital stock or 25% of the aggregate value of all the shares of stock the corporation is authorized to issue. In par value stock corporations, the percentage subscription requirement shall always be based on the amount of the authorized capital stock irrespective of the class, number, and par value of the shares. (2) Where the capital stock consists only of no par value shares, the 25% requirement shall be computed on the basis of the entire number of authorized shares. Corporations whose shares have no par value have no authorized capital stock. (see Sec. 15 [seventh].) The issued price of no par shares need not be fixed in the articles of incorporation. (see Sec. 62, last par.) (3) Where the capital stock is divided into par value shares and no par value shares, the requirement as to par value shares is as indicated above and for the no par value shares, the 25% is based on the number of said no par value shares.
Authorized capital stock	Authorized capital stock is synonymous with capital stock where the shares of the corporation have par value. (see Secs. 14[8], 15 [seventh].) If the shares of stock have no par value, the corporation has no authorized capital stock, but it has capital stock, the amount of which is not specified in the articles of incorporation as it cannot be determined until all the shares have been issued. (Ibid.) In this case, the two terms are not synonymous.
Subscribed capital stock	Subscribed capital stock is the amount of the capital stock subscribed whether fully paid or not. It connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (see Secs. 60, 61.) and would, therefore, preclude the acquisition of shares by reason of subsequent transfer from a stockholder or resale of treasury shares. (Sec. 9.)
Outstanding capital stock	Outstanding capital stock is the portion of the capital stock which is issued and held by persons other than the corporation itself. The Code defines the term as “the total shares of stock issued to subscribers or stockholders, whether fully or partially paid (as long as there is a binding subscription agreement), except treasury shares.” (Sec. 137.) It is thus broader than “subscribed” capital stock. The terms “subscribed capital stock” and “issued” or “outstanding” capital stock are used synonymously since subscribed capital stock, as distinguished from the certificate of stock, can be issued even if not fully paid. But while every subscribed share (assuming there is a binding subscription agreement) is “outstanding,” an issued share may not have the status of outstanding share. This is true in the case of treasury shares. (Sec. 9.)
Paid-up capital stock	Paid-up capital stock is that portion of the subscribed or outstanding capital stock that is paid.
Unissued capital stock	Unissued capital stock is that portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends.
Legal capital	Legal capital is the amount equal to the aggregate par value and/or issued value of the outstanding capital stock.
Par value	When par value shares are issued above par, the premium or excess is not to be considered as part of the legal capital. (see Sec. 43.) In the case of no par value shares, the entire consideration received forms part of legal capital and shall not be available for distribution as dividends. (see Sec. 6, par. 3.) ILLUSTRATION: Suppose the articles of incorporation of X Corporation provides that the authorized capital stock of said corporation is P1,000,000.00 divided into 10,000 shares of the par value of P100.00 per share. At its incorporation, only P250,000.00 of the authorized capital stock was subscribed. Under Section 13, at least 25% of the subscription is required to be paid; thus, only P62,500.00 was paid to the treasurer of the corporation. Therefore, the authorized capital stock of corporation X is P1,000,000.00, the subscribed, outstanding, or issued capital stock is P250,000.00, the paid-up capital stock is P62,500.00 and the unis­sued capital stock is P750,000.00. The legal capital is P250,000.00. (2) Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the stockholders plus the undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation.
Capital and capital stock distinguished	(1) Capital is the actual corporate property. It is, therefore, a concrete thing. Capital stock is an amount. It is, therefore, something abstract. (2) Capital fluctuates or varies from day to day accordingly as there are profits or losses or appreciation or depreciation of corporate assets. Capital stock is an amount fixed in the articles of incorporation and is unaffected by profits and losses. (3) It is said that capital belongs to the corporation and capital stock when issued belongs to the stockholders, and that capital may be either real or personal property but capital stock is always personal. (18 Am. Jur. 2d. 736.) The term “capital,” however, is frequently used loosely in the sense of capital stock.
Capital stock and legal capital distinguished	Like capital stock, legal capital is merely an amount and remains unchanged except as outstanding shares are increased or reduced in number or amount. But while capital stock limits the maximum amount or number of shares that may be issued without formal amendment of the articles of incorporation (see Sec. 38.), legal capital sets the minimum amount of the corporate assets which for the protection of corporate creditors, may not be lawfully distributed to stockholders. ILLUSTRATION: In the previous illustration, the payment of the subscription of 2,500 shares in the amount of P250,000.00 whether in cash or prop­erty or any consideration allowed by law (see Sec. 62.) constitutes the original capital of corporation X. If the corporation makes a profit of P50,000.00, the capital would become P300,000.00. On the other hand, the capital would be reduced to P200,000.00 if there is a loss of P50,000.00. Suppose the corporation borrows P150,000.00 from a bank. The capital of the corporation would then be P450,000.00 or P350,000.00 accordingly as there are profits or losses. In any case, the capital stock of P1,000,000.00 and the legal capital of P250,000.00 remain constant unless, of course, the arti­cles of incorporation is amended, either increasing or decreasing the capital stock, or the number or amount of outstanding shares is increased by the issuance of more shares out of the unissued au­thorized shares or decreased by the acquisition of previously issued shares. (see Secs. 9, 41.) A decrease of the capital stock may also result in the reduction of legal capital. (see Sec. 38.)
Capital stock and share of stock distinguished	As distinguished from capital stock, the term “stock” or “share of stock” is commonly used in a distributive sense to refer to the stock in the hands of the stockholders. Therefore, it belongs to them. On the other hand, the former is used in a collective sense to signify the whole body of shares of stock in the corporation. (11 Fletcher 18 [1971].)
Certificate of stock defined	Certificate of stock is a written acknowledgment by the corporation of the interest, right, and participation of a person in the management, profits, and assets of a corporation. It is a formal written evidence of the holder’s ownership of one or more shares and is a convenient instrument for the transfer of title. (see Sec. 63.) Share of stock and certificate of stock distinguished. (1) Share of stock is incorporeal or intangible property, while certificate of stock is tangible; (2) Share of stock represents the right or interest of a person in a corporation, while certificate of stock is the written evidence of that right or interest; and (3) Share of stock may be issued even if the subscription is not fully paid except in no par shares. (Sec. 6, par. 3.) As a general rule, a certificate of stock may not be issued unless the subscription is fully paid. (Sec. 64.) The possession of a certificate of stock is not essential to own­ership of stock because the right to stock may exist independ­ently of the certificate.
Founders’ shares.	Founders’ shares have been defined as “shares issued to the organizers and promoters of a corporation in consideration of some supposed right or property. Such shares usually share in profits only after a certain percentage has been paid upon the common stock, but are often given special privileges over other stock as to voting and as to division of profits in excess of a minimum dividend on the common stock.” (Webster’s Second International Dictionary, p. 997.) (1) Special rights and privileges. — The shares of stock of a corporation, close or non-close (see Title XII.), may include founders’ shares classified as such in the articles of incorporation. Such shares may be given special rights and privileges not enjoyed by the owners of other stocks, such as preference in the payment of dividends. (2) Exclusive right to vote and be voted. — Where, however, the exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not exceeding five (5) years and must be approved by the Securities and Exchange Commission, the period to commence from the date of said approval.
Redeemable shares	Redeemable or callable share is share, usually preferred, which by its terms is redeemable at a fixed date or at the option of either the issuing corporation or the stockholder or both at a certain redemption price. (1) When redeemable shares may be issued. — Redeemable shares may be issued only when expressly so provided in the articles of incorporation. In the absence of provisions on redemption of preferred shares in the articles of incorporation and the by-laws, they are deemed irredeemable. Common shares are never “redeemed.” (2) Redemption regardless of existence of unrestricted retained earnings. — Upon the expiration of the period fixed, they may be taken up or purchased by the corporation, regardless of the existence of unrestricted retained earnings (see Sec. 43.) in the books of the corporation. (a) The rule in Section 41 is different. The power of the corporation to acquire its own shares for the purposes stated therein is subject to the condition that there be unrestricted retained earnings in its books to cover the shares, purchased or acquired. In the case of redeemable shares, the shareholder is conferred the right of a creditor to attract corporate financing. (b) The issuance of shares may be likened to the issuance of bonds and debt papers. Since the terms and conditions of the purchase are stated in the articles of incorporation and as well as in the corresponding certificates of stock, corporate creditors and other shareholders are supposed to be aware of the same. (3) Where corporation insolvent. — Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such redemp­tion, sufficient assets to cover debts and liabilities inclusive of capital stock. (Sec. 5, par. 5, SEC Rules Governing Redeemable Shares.) Be that as it may, the rights of the holders of redeem­able shares should be deemed subordinate to the rights of cor­porate creditors. Therefore, redemption may not be made where the corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature. (4) Terms and conditions. — Section 8 requires that all the terms and conditions affecting such shares must be stated not only in the articles of incorporation but also in the certificate of stock representing said shares. Except as otherwise provided therein, the redemption rests entirely with the corporation, and the stockholder is without right to either compel or refuse the redemption of his stock. (5) Voting rights. — Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. (see Sec. 6, pars. 1, 6[1-8].)
Treasury shares.	Treasury share is share which has been lawfully issued by the corporation and fully paid for and later reacquired by it either by purchase, redemption (Sec. 8.), donation, forfeiture or other lawful means. (1) Status. — Section 41 expressly empowers a stock corporation, in the absence of a qualified bidder, to purchase or acquire its own shares for legitimate corporate purposes. Only surplus earnings may be used for the purchase of treasury shares. Under Section 68 (last par.), the corporation, in the absence of a qualified bidder, may bid at the public sale of delinquent shares and title to the shares purchased shall be vested in the corporation as treasury shares. The purchase by the corporation operates, in effect, as a forfeiture of the shares. (a) Treasury shares are not retired shares. They do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or resold by the corporation at a price to be fixed by the board of directors. (SEC Rules Governing Redeemable and Treasury Shares [CCP] No. 1-1982.) Hence, the price paid out of retained earnings for the value of reacquired shares should be treated in the corporate books as payment for the purchase of the shares (SEC Opinion, Feb. 20, 1991.) and an investment on such property. (b) Treasury shares are issued shares but being in the treasury they do not have the status of outstanding shares (Comm. vs. Manning, 66 SCRA 14.), in the sense that they do not constitute a liability of the corporation. (see Sec. 137.) (2) Resale. — They may be resold by the corporation at any price the board of directors sees fit to accept, even at less than par, having once been legally issued as fully paid, provided such price is reasonable under the circumstances. (a) Stockholders may rightfully complain if the price is lower than reasonable. (b) In case of sale or reissue, it again becomes outstanding stock and regains whatever dividends and voting rights it originally held. (c) Section 36(6) expressly authorizes stock corporations to sell treasury shares subject to the provisions of Section 9. (3) Declaration as property dividend. — Treasury shares being unrealized income, are not considered as part of earned or surplus profits, and, therefore, not distributable as dividends, either in cash or stock. But if there are retained earnings arising from the business of the corporation, treasury shares, being the property of the corporation, may properly be distributed as property dividend. (SEC Opinion, April 24, 1979.) (4) Voting rights. — Treasury shares have no voting rights as long as they remain in the treasury (Sec. 57.), i.e., uncancelled and subject to reissue. A corporation cannot in any proper sense be a stockholder in itself, and shares of its own stock, therefore, held by it cannot be voted or be entitled to vote for otherwise the directors could be able to perpetuate control of the corporation. (Comm. vs. Manning, supra.) (5) Right to dividends. — Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself as such distribution would be like taking money or stock from one of its pockets and putting the same in another, which would be pointless. Hence, stock dividend (see Sec. 43.) may not be declared on treasury stock even on the express condition that such dividend will also be treated as treasury stocks. (SEC Opinion, Nov. 2, 1966.)
Requirements for organization	Incorporators: number and qualifications. Section 10 provides that the incorporators must not be less than five but not more than fifteen, all of legal age, and a majority of whom are residents of the Philippines. Notes: (1) These five or more persons must be natural persons. Consequently, a    corporation cannot be an incorporator of another corporation. (2) As an exception to this rule, Section 4 of Republic Act No. 720 provides that duly established cooperatives may organize rural banks and/or subscribe to shares of stock of any rural bank.         (3) The incorporators must have the capacity to enter into a valid contract, the act of forming a cor­poration as between the parties being contractual. (4) A majority of the incorporators must be residents of the Philippines; the rest may be persons who are neither residents nor citizens of the Philippines. (5) Citizens of the Philippines. — By specific constitutional and legal provisions, citizenship is a necessary qualification for incorporators in                   corporations in which a certain of the capital stock is required to be owned by Filipino citizens. (6) Owners of or subscribers to at least one share. — The Code now expressly requires that “each of the incorporators            of a stock corporation must own or be a subscriber to at least one (1) share of                   the capital stock of the corporation.” (7) The requirement of the law regarding the minimum number of incorporators is mandatory and a corporation cannot be legally formed by less than the prescribed number except in the case of a corporation sole.
Term of corporate existence.	The corporation shall exist for the term specified in the articles of incorporation not exceeding fifty years, unless sooner legally dissolved (Secs. 19, 22, 117-122, 144, 145.) or unless its registration is revoked upon any of the grounds provided by law. (see Sec. 6, Pres. Decree No. 902-A; see Sec. 22.) The corporate life may be reduced (see Sec. 120.) or extended by amendment of the articles of incorporation.
Articles of incorporation.	The articles of incorporation is the document prepared by the persons establishing a corporation and filed with the Securities and Exchange Commission containing the matters required by the Code. A copy of the articles filed which is returned with the certificate of incorporation issued by the Commission under its official seal becomes its corporate charter enabling the corporation to exist and function as such. (see Sec. 19.) Contents: (1) The name of the corporation; (2) The specific purpose or purposes for which the corporation is being incorporated.; (3) The place where the principal office of the corporation is to be located, which must be within the Philippines; (4) The term for which the corporation is to exist; (5) The names, nationalities and residences of the incorporators; (6) The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); (7) The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; (8) If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; (9) If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and (10) Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. (11) The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn state­ment of the Treasurer elected by the subscribers showing that at least twenty-five percent (25%) of the authorized capital stock of the corporation has been subscribed, and at least twenty-five percent (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five percent (25%) of the said subscription, such paid-up capital being not less than Five thousand pesos (P5,000.00).
Filipino ownership requirement regarding corporate capital	By specific constitutional and legal provisions, Filipino ownership of a certain percentage of the capital stock or capital is required in certain cases, such as: (1) Corporations for exploration, development and utilization of natural resources. — at least 60% of the capital of which is owned by citizens of the Philippines. (Constitution of the Philippines, Art. XII, Sec. 2.) The word “capital” in the above constitutional provision should be understood to mean “outstanding capital stock” in case of stock corporations; (2) Public service corporations. — at least 60% of the capital of which is owned by citizens of the Philippines (Ibid., Art. XII, Sec. 11.); (3) Educational corporations. — Other than those established by religious orders and mission boards, at least 60% of the capital of which is owned by citizens of the Philippines (Ibid., Art. XIV, Sec. 4[2].); (4) Banking corporations. — at least 60% of the capital stock of any bank or banking institution which may be established after the approval of the General Banking Act (July 24, 1948) shall be owned by citizens of the Philippines (Rep. Act No. 377, Sec. 2.); (5) Corporations engaged in retail trade. — the capital of which must be wholly owned by citizens of the Philippines (R.A. No. 1180, Sec. 1.); (6) Rural banks. — at least 60% of the capital stock of which is owned by Filipino citizens (Rep. Act No. 7353, Sec. 4.); (7) Corporations engaged in coastwise shipping. — at least 60% of the capital stock of which or of any interest in said capital is totally owned by citizens of the Philippines (Sec. 806, Pres. Decree No. 1464 [Tariff and Customs Code].); (8) Corporations engaged in the pawnshop business. — at least 70% of the voting capital stock shall be owned by citizens of the Philippines (Sec. 8, Pres. Decree No. 114.); and (9) Under the Flag Law. — In the purchase of articles for the Government, preference shall be given to materials and supplies produced, made, or manufactured in the Philippines, and to domestic entities. The term “domestic entities” means any citizen of the Philippines or any corporate body or commercial company at least 75% of the capital of which is owned by citizens of the Philippines. (C.A. No. 138.)
Powers of a corporation	Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, con­vey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including secu­rities and bonds of other corporations, as the trans­action of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into with other corporations, merger or consolidation as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Pro-vided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation. (13a)
Classification of corporate powers.	The three classes of powers of a corporation are: (1) Those expressly granted or authorized by law (Sec. 2.); (2) Those that are necessary to the exercise of the express or incidental powers (Secs. 2, 36[11], 45.); and (3) Those incidental to its existence. (Secs. 2, 45.) The powers of a corporation, however, frequently cut across lines of the above classification. Acts or contracts of a corporation outside the scope of its express, implied, and incidental powers are ultra vires.
Expressed Powers	Express powers are the powers expressly conferred upon the corporation by law. These powers can be ascertained from the special law creating the corporation, or from the general incorporation law under which it is created, the general laws of the land applicable to corporations (i.e., Corporation Code), and its articles of incorporation. (6 Fletcher 183.) Section 36 contains an enumeration of powers expressly given to corporations created under the general incorporation law. Other express powers of the corporation are specifically provided in Sections 37-44.
Implied powers	Implied powers are those powers which are reasonably necessary to exercise the express powers and to accomplish or carry out the purposes for which the corporation was formed. Sometimes it is difficult to determine whether a certain activity is an implied power or not. However, the following rough classification embraces most of the implied powers: (1) Acts in the usual course of business. — This includes such acts as borrowing money; making ordinary contracts; executing promissory notes, checks or bills of exchange; taking notes or other securities; acquiring personal property for use in connection with the business; acquiring lands and buildings to be used as places of business or in connection therewith; and selling, leasing, mortgaging or other transfers of property of the corporation in connection with the running of the business. It is evident that all of such acts, under ordinary circumstances, are necessary in order to run a business; (2) Acts to protect debts owing to a corporation. — If a corporation is a creditor, it may do such acts as may be necessary to protect its right as such creditor. Thus, a corporation may purchase property, act as a guarantor or sometimes even run a business temporarily to collect a debt; (3) Embarking in different business. — A corporation may not engage in a business different from that for which it was created as a regular and a permanent part of its business. (see, however, Sec. 42.) This is especially true with respect to those particular kinds of corporate activities which are governed by special laws (see comments under Sec. 14[2].) Thus, a corporation not organized for that purpose cannot go into the banking or insurance business but it may do any isolated act of banking or insurance in connection with some express power. So, it is generally held that a corporation may temporarily conduct an outside business to collect a debt out of its profits; (4) Acts in part or wholly to protect or aid employees. — While the cases are divided, the better view favors such acts as building homes, places of amusement, hospitals, etc., for employees, as within the corporate powers (see Sec. 36[10].); and (5) Acts to increase business. — Thus, a corporation may conduct contests or sponsor radio or television programs, or promote fairs and other gatherings to advertise and increase its business. (see 6 Fletcher 276-277.)
Incidental or inherent powers	Incidental or inherent powers are powers which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to corporate existence and are, therefore, impliedly granted. As powers inherent in the corporation as a legal entity, they exist independently of the express powers. (see Sec. 45.) Some of the powers enumerated in Section 36 are incidental powers which can be exercised by a corporation even in the absence of an express grant. Examples of incidental powers are: the power of succession; to sue and be sued; to have a corporate name; to purchase and hold real and personal property; to adopt and use a corporate seal; to contract; to make by-laws; etc.
Power to extend or shorten corporate term	The corporate term of a private corporation may be extended or shortened by an amendment of the articles of incorporation approved by the majority vote of the board of directors or trustees and ratified at a meeting of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-stock corporations. Appraisal right of dissenting stockholders. Section 37 grants appraisal right to a dissenting stockholder, i.e., right of such stockholder in the cases provided by law to demand payment of the fair value of his shares “in case of an extension of corporate term.” Such right should also be available to a dissenting stockholder if the corporate term is shortened as it is impliedly recognized in Section 81(1). Note that the appraisal right applies only to a stockholder of a stock corporation.
Power to increase or decrease capital stock.	An increase or reduction in the capital stock of the corporation involves a fundamental change in the corporation. The authority of the corporation to take such action exists only when expressly conferred by law. Section 38 prescribes the procedure to be complied with to effect a legal increase or decrease of the capital stock (not capital) which is now subject to prior approval of the Securities and Exchange Commission. (par. 4.) Limitations on the power. (1) As a general rule, a corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable consideration for such release as such an act of the corporation constitutes an attempted withdrawal of so much capital of the corporation upon which corporate creditors are entitled to rely (Phil. Trust Co. vs. Rivera, 44 Phil. 649.); (2) A corporation cannot issue stock in excess of the amount limited by its articles of incorporation; such issue is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value; and (3) A reduction or increase of the capital stock can take place only in the manner and under the conditions prescribed by law. (see Sec. 38.) The Corporation Code contains no prohibition for a corporation to increase its authorized capital stocks even if the same has not yet been fully subscribed. Necessity for increasing capital stock. (1) Increase of corporate assets. — An increase of the amount of the stated capital may be for the purpose of effecting an increase in the corporate assets. It may be effected: (a) by authorizing the creation of new shares to be offered and issued at a fixed valuation; or (b) without any corresponding increase in the corporate assets, by the issuance of stock dividends. (13 Am. Jur. 306.) (2) Issuance of stock dividends. — The capital stock may also be increased without any corresponding increase in the corporate assets by the issuance of stock dividends.
Right of pre-emption of stockholders.	Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing share-holdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. For example, if a stockholder with pre-emptive right owns 10% of the outstanding shares of a corporation, he may subscribe to 10% of any shares of stock issued by the corporation. The principle is known as the right of pre-emption or pre-emptive right of stockholders. ILLUSTRATION: Corporation X has an original capital stock of P100,000.00 di­vided into 1,000 shares with a par value of P100.00. A owns 500 shares. Subsequently, the capital stock is increased to P200,000.00 (to 1,000 more shares). Both the old and new shares are voting shares. (1) Right to vote. — A must be given a right to subscribe to 500 of the new shares before they are offered to others. If A is al­lowed to subscribe to only 100 shares of the increased stock, his voting control would be reduced from 50% (500/1,000) to only 30% (600/2,000). (2) Right to net earnings as dividends. — Suppose the corpora­tion made a net earnings of P50,000.00. Had this entire amount been distributed as cash dividends before the increase, each stockholder, including A, would have received P50.00 (P50,000.00/1,000) per share. After the increase, the dividend would be reduced to P25.00 (P50,000.00/2,000) per share. (3) Right to net corporate assets after liquidation. — Assume that the total assets of the corporation amount to P170,000.00, with li­abilities of P20,000.00 and surplus of P50,000.00. Thus, its net assets or net worth is P150,000.00. Therefore, the actual value per share is P150.00 (P150,000.00/1,000). If the new shares were to be issued at their par value of P100.00, the actual value of the original shares would be reduced to P125.00 (P250,000.00/2,000). If the rule of pre-emption will not be observed, it is evident that existing stockholders who are allowed to subscribe to more than their pro rata shares in the increase of the capital stock and new stockholders will unjustly benefit by P25.00 per share at the expense of the stockholders whose pre-emptive right is violated. In the event of liquidation, each stockholder, old and new, will par­ticipate in the net assets of the corporation at the rate of P125.00 per share. Power to deny pre-emptive right. The pre-emptive right of stockholders of a stock corporation “to subscribe to all issues or disposition of shares of any class in proportion to their respective share-holdings” may be “denied by the articles of incorporation or an amendment thereto.” (Sec. 39.) Unless so denied, the right should be granted to a holder of shares although they are of a class different from those issued or disposed of. For example, holders of common “A” shares are entitled to subscribe to common “B” shares in proportion to their interest, but they cannot be compelled to subscribe to the common “B” shares especially since the latter are of a class different from the class they are holding. A stockholder whose pre-emptive right is violated may maintain an action to compel the corporation to give him that right. If the denial is by an amendment to the articles of incorporation, he may exercise his appraisal right under Section 81(1). Pre-emptive right as to treasury shares. (1) In close corporations, the pre-emptive right of stockholders extends to all stock to be issued, including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provides otherwise. (Sec. 103.) (2) In widely held corporations, it would seem that existing stockholders have also a pre-emptive right as to treasury shares (Sec. 9.) in view of the use of the phrase “disposition of shares of any class” in Section 39.
Power to sell, lease, etc. all or substantially all corporate assets.	A corporation, by the action of its board of directors or trustees supported by the vote of shareholders or members, may sell, lease, exchange, mortgage, pledge, or otherwise dispose of all or substantially all of its property and assets including its goodwill. (see Title IX.) The requisites for the validity of such sale, etc. are as follows: (1) The sale etc., must be approved by the board of directors or trustees; (2) The action of the board of directors or trustees must be authorized by the vote of stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members, as the case may be; and (3) The authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice; The sale, etc., shall be subject to the provisions of existing laws on illegal combinations and monopolies. (see Sec. 140.) Authority of the board. (1) Stock corporations. — Section 40 covers not only sale, but also lease, exchange, mortgage, pledge or other disposition of its properties. (a) The board is given the right to decide upon the terms and conditions of the sale including the consideration for the property sold, for at any rate, the sale is still subject to approval, by the stockholders or members. (b) After such approval, the board may nevertheless, in its discretion, abandon the transaction, without further action or approval by the stockholders or members but subject to the right of third parties under any contract relating thereto. (par. 3.) (2) Non-stock corporations. — Under the last paragraph, the vote of the majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by Section 40 in the case of non-stock corporations where there are no members with voting rights. Appraisal right of dissenting stockholder. It is to be noted that the exercise of the appraisal right of any dissenting stockholder (par. 1; see Sec. 81[2].) is predicated on the “sale or other disposition of all or substantially all” of the corporate assets, the phrase being defined as such which would render the corporation “incapable of continuing the business or accomplishing the purpose for which it was incorporated.” (Sec. 40, par. 2.) Conversely, any disposition which does not involve all or substantially all of the corporate assets made in the ordinary course of business does not require the approval of the stockholders or members and would not entitle any dissenting stockholder to exercise his appraisal right. (Ibid., par. 4.) Sec. 40337
Power to acquire own shares.	Section 41 expressly authorizes a stock corporation to purchase or acquire its own shares subject to the limitation that the acquisition is for a legitimate corporate purpose or purposes and that there is unrestricted retained earnings (see Sec. 43.) in its books to cover the shares acquired. (1) Elimination of fractional shares. — A fractional share is a share which is less than one (1) share. Thus, if a stockholder own 250 shares and the corporation declares 25% stock dividend, his total shares will be 312 and 1/2 shares. Inasmuch as fractional shares cannot be represented at corporate meetings (No. 1.), the corporation may purchase the same from the stockholders concerned or issue fractional scrip certificates to such stockholders who may negotiate for the sale thereof with other stockholders also owning fractional shares so as to convert them into full shares. (2) Satisfaction of indebtedness to corporation. — No. 2 of Section 41 does not authorize a corporation to arbitrarily purchase the shares it issued to any of its stockholders indebted to it, whether at the prevailing market price or at par value for the purpose of applying the proceeds thereof to the satisfaction of its claim against them, and this is particularly true where the consent of such stockholders has not been secured. And even where their consent has been secured, the corporation can buy their shares only if the conditions for the purchase (infra.) are present. (see SEC Opinion, Aug. 11, 1961.) (3) Payment of shares of dissenting or withdrawing stockholders. — No. 3 of Section 41 refers to instances when a dissenting stockholder is given appraisal right (see Sec. 81.) and the right to withdraw from the corporation as provided in Section 16 (Amendment of articles of incorporation), Section 37 (Power to extend or shorten corporate term), Section 40 (Sale or other disposition of assets), Section 42 (Power to invest corporate funds in another corporation or business or for any other purpose), Section 68 (Delinquency sale), Section 77 (Stockholders’ or members’ approval of plan of merger or consolidation), and Section 105 (Withdrawal of stockholder or dissolution of [close] corporation). (4) Other cases. — This power of the corporation to acquire its own shares is not limited to the cases enumerated in Section 41. Thus, it may also be exercised under Section 9 (treasury shares). With respect to redeemable shares, they may be purchased by the corporation regardless of the existence of unrestricted retained earnings in the books of the corporation. (see Sec. 8.) Conditions for the exercise of the power. Briefly, a corporation’s right to purchase its shares according to the weight of authority is subject to the following limitations: (1) That its capital is not thereby impaired; (2) That it be for a legitimate and proper corporate purpose; (3) That there shall be unrestricted retained earnings to purchase the same and its capital is not thereby impaired; (4) That the corporation acts in good faith and without preju­dice to the rights of creditors and stockholders; and (5) That the conditions of corporate affairs warrant it. (SEC Opinion, Feb. 27, 1976.) Sec. 41339 Thus, if the aforementioned conditions are obtained, a cor­poration may acquire the shares of alien stockholders to comply with constitutional or legal requirements prescribing the mini­mum percentage of capital stock ownership of Filipino citizens in certain corporations. (Ibid., see Sec. 12.)
Trust fund doctrine.	This doctrine holds that the assets of the corporation as represented by its capital stock are “trust funds” to be maintained unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first made for the payment of corporate debts and that any such disposition of it is a fraud on the creditors of the corporation and, therefore, void. (1) Corporation generally without power to purchase its own shares. — A corporation has no general power to purchase its own shares of stock. This rule is dictated by the necessity of protecting the interests of existing creditors who might be adversely affected by the stock purchase which, in effect, may operate to reduce its capital stock to the extent of the shares purchased without complying with the formalities required by Section 38. The foregoing is in consonance with the doctrine. (2) Repayment to stockholders, a fraud on corporate creditors. — The purchase, in effect, constitutes a fraud on corporate creditors as it amounts to repayment to the stockholder of his proportionate share from the corporate assets and hence, an impairment of the capital available for the benefit and protection of creditors who are preferred over the stockholders in the distribution of corporate assets. (see Sec. 122, last par.) Note that under the doctrine, the corporation is not prohibited to use its assets for purposes of its business.
Power to invest funds in other corporations or for other purposes.	By virtue of the provisions of Section 42, a corporation may be organized with multiple lawful purposes so long as the primary purpose is indicated in the articles of incorporation. However, the investment of its funds (includes any of its corporate property) is limited to the primary purpose. In order that it may invest its funds in any other corporation or business or for any purpose other than the primary purpose, compliance with the requirements of Section 42 is necessary (see De la Rosa vs. Mao-Sugar Central Co., Inc., 27 SCRA 247.) and, of course, subject to the prohibition against certain corporations from having more than one purpose. But a corporation may invest its funds in another business which is incident or auxiliary to its primary purpose as stated in its articles of incorporation without the approval of the stockholders or members as required under Section 42. In such case, a dissenting stockholder shall have no appraisal right. Sec. 42341
Power to declare dividends.	The board of directors of a stock corporation has the power to declare dividends out of the “unrestricted retained earnings” which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them. (1) Stock dividends. — In case of stock dividend, it shall not be issued without the approval of stockholders representing at least 2/3 of the capital stock then outstanding at a regular meeting of the corporation or at a special meeting duly called for the purpose. (2) Other dividends. — A mere majority of the quorum of the board of directors is sufficient to declare other dividends. The board may declare dividends other than stock without need of stockholders’ approval. (Sec. 43) The dividend is paid to the registered owner of stocks as of a record date usually a date different from the date of declaration. It is stated either at a given percent or a fixed amount for each share. The record date determines the time when the stockholders of record shall be ascertained. Concept of dividends. A dividend is that part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time. It is a payment to the stockholders of a corporation as a return upon their investment. It is a characteristic of a dividend that all stockholders of the same class share in it in proportion to the respective amounts of stock which they hold. (13 Am. Jur. 637-639.)
Classes of dividends.	Dividends that may be declared by a corporation may be classified as follows: (1) Cash dividend or dividend payable in cash. (a) Dividends on par value shares are made at a stated percentage (e.g., 10%) of the par value although they may also be paid as a fixed amount per share. (b) As to no par value shares, dividends are payable in terms of so many pesos or centavos (e.g., P10.00, P0.05) per share since there is no basis on which a percentage can be stated. (c) Dividends are usually paid in money; (2) Property dividend or dividend distributed to the stock-holders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation. (a) A dividend payable in property is actually a cash dividend. The stockholder can take the property, sell it and realize the cash. (b) A corporation may, therefore, pay declared cash dividend in the form of a “property” provided the distribution of the same is practicable, specifically where the surplus is in that form (property) and is no longer intended to be used in the operation of the business; (c) The property must form part of the surplus or retained earnings of the corporation, otherwise it cannot be declared as property dividends; (3) Stock dividend or dividend payable on unissued or increased or additional shares of the corporation instead of in cash or in property. (a) By this alternative to declaring dividends, the corporation can retain earnings. The declaration involves the issuance of new shares to be distributed pro rata to the stockholders; (b) A stock dividend may be declared to the extent of the maximum number of shares authorized in the articles of incorporation. (4) Optional dividend or dividend which gives the stockholder an option to receive cash or stock dividend; (5) Composite dividend or dividend which is partly in cash and partly in stocks. Here, there is no option involved; (6) Scrip dividend or a writing or certificate issued to a stockholder entitling him to the payment of money or the like at some future time inasmuch as the corporation at the time such dividends are declared has profits not in cash, or has no sufficient cash, or has the cash but wishes to reserve it for some corporate purposes. It is in the form of a promissory note or promise to pay and may be issued to bear interest; (7) Bond dividend or dividend distributed in bonds of the corporation to the stockholders; (8) Preferred dividend or dividend payable to one class of stockholders in priority to be paid to another class. (9) Cumulative dividend or dividend payable at a certain rate at statedtimes and if the stipulated dividend is not paid in any dividend period, the dividend in arrears must also be paid the following period. (10) Liquidating dividends which are actually distributions of the assets of the corporation upon dissolution or winding up of the same. Dividends may also be participating or non-participating. (see Sec. 6.) Dividends distinguished from profits or earnings. (1) A dividend, as applied to corporate stock, is that portion of the profit or net earnings which the corporation has set aside for ratable distribution among the stockholders. Thus, dividends come from profits, while profits are a source of dividends. (2) Profits are not dividends until so declared or set aside by the corporation. In the meantime, all profits are a part of the assets of the corporation and do not belong to the stockholders individually. (Ibid., 640.)
Dividends payable out of unrestricted retained earnings.	Under the law, dividends other than liquidating dividends (which are not really dividends as they are from capital) may be declared and paid out of “the unrestricted retained earnings” of the corporation. (Ibid.) A corporation cannot make a valid contract to pay dividends other than from retained earnings or profits and an agreement to pay such dividends out of capital is unlawful and void. The power of a corporation to acquire its own shares is likewise subject to the condition that there be unrestricted retained earnings in its books to cover the shares to be purchased. (Sec. 41.) Note: The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase “unrestricted retained earnings,” which may be considered a more precise term, in place of “surplus profits arising from its business,” in the former law. However, the Code still speaks of “surplus profits” in the second paragraph of Section 43 in fixing the maximum earnings which may be retained by a corporation and in Section 3 in defining stock corporations. The Code deleted the phrase “arising from its business.” It may be argued that the term “unrestricted retained earnings,” as used in the Code, refers to all the excess of assets of the corporation over its liabilities including legal or stated capital. Hence, it is not limited to accumulated net profits of the corporation “arising from its business” but may comprehend also other gains such as those derived from the sale of fixed assets. But it does not include the unrealized increase in value of fixed assets. (infra.)
Unrestricted retained earnings explained.	(1) The retained earnings of a corporation is “the difference between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock.” (see 11 Fletcher 1041.) Capital stock, in this instance, should be understood to refer to outstanding stock (see Sec. 137.) and not the stated or nominal (authorized) capital stock. Stated otherwise, the ordinary way of determining whether a corporation has retained earnings or not is to compute the value of all its assets and deduct therefrom all of its liabilities including legal capital, and thus ascertain whether the balance exceeds the amount of its outstanding shares of capital stock. This may be expressed in the following formula: Retained earnings = Assets - (liabilities and capital) The difference between the total assets and liabilities of a corporation represents its net worth or net assets or the stockholders’ equity consisting of the capital invested and the retained earnings. Thus, the retained earnings will be the balance of the net worth or net assets after deducting the value of the corporation’s outstanding capital stock. They refer to the accumulated undistributed earnings or profits realized by a corporation arising from the transaction of its business and the management of its affairs, out of current and prior years.
Power to enter into management contract.	Under Section 44, a corporation is expressly allowed to enter into a management contract with another corporation, which refers “to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise.” The following are the limitations for the exercise of the power: (1) The contract must be approved by a majority of the quorum of the board of directors or trustees and ratified by the prescribed vote of the stockholders or members, as the case may be, of both the managing and the managed corporations, at a meeting duly called for the purpose; and (2) The period of the contract must not be longer than five (5) years for any one term except that contracts which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by pertinent laws or regulations. In either of the two cases mentioned (par. 1.), the management contract must be approved by the stockholders of the managed corporation owning at least 2/3, not merely a majority, of the total outstanding capital stock entitled to vote, or in case the managed corporation is a non-stock corporation, by at least 2/3, not merely a majority, of the members. ILLUSTRATIONS: (1) Interlocking stockholders. — If A, B, and C, stockholders in both X Corporation and Y Corporation, the managing and man­aged corporations, respectively, own 35% of the total outstanding capital stock entitled to vote of X Corporation, the management contract must be approved by the prescribed 2/3 vote of the stock­holders of Y Corporation. The same vote shall apply where A is the only stockholder in both corporations and he owns more than 1/3 of the total outstanding capital stock entitled to vote of X Corpora­tion. Only a majority vote is required if the more than 1/3 owner­ship of A, B and C, or of A refers to the outstanding capital stock of Y Corporation, the managed corporation. (2) Interlocking directors. — If A, B, C, D, and E constitute the majority of the members of the board of directors of X Corporation and also of Y Corporation, the bigger 2/3 vote by the stockholders of Y Corporation is necessary. This is a case of a contract between two corporations with interlocking directorates. (see Sec. 33.) The extent of the shareholdings of A, B, C, D, and E in X Corporation is immaterial. In both illustrations, the management contract need only be ap­proved by the majority of the outstanding capital stock of X Corpo­ration, or in illustration No. 2, of the members, in case X Corpora­tion is a non-stock corporation.
Ultra vires and intra vires acts explained.	It is well-settled that a corporation is not restricted to the exercise of powers expressly conferred upon it but has the implied or incidental powers to do what is reasonably necessary to carry out its express powers and to accomplish the purposes for which it was formed. Sections 36(11) and 45 give express recognition to these implied and incidental powers possessed by private corporations. According to the strict construction of the term, an ultra vires act is one not within the express, implied, and incidental powers of the corporation. It is an act which is impliedly forbidden, be­cause it is not expressly or impliedly authorized or necessary or incidental in the exercise of the powers so conferred. Acts within the legitimate powers of a corporation are called intra vires. ILLUSTRATION: A corporation was organized for the purpose of engaging in the buying and selling of home appliances. The act of buying and selling motor vehicles would be ultra vires although it is itself law­ful because it is outside the object for which the corporation is cre­ated and, therefore, beyond its powers. The buying and selling of refrigerators would be intra vires.
Ultra vires act distinguished from an illegal act.	When properly used, an ultra vires act means simply an act which is beyond the conferred powers of a corporation or the purposes for which it is created. (Republic vs. Acoje Mining Co., Inc., 7 SCRA 661 [1963].) By itself, an ultra vires act is not necessarily illegal. On the contrary, it may be lawful, moral and even praiseworthy. An illegal corporate act, on the other hand, is an act which is contrary to law, morals, good customs, public order, or public policy (Art. 1306, Civil Code.) and, therefore, per se illicit. (see Pirovano vs. de la Rama, 96 Phil. 335 [1954].) The buying and selling of contraband goods would not only be illegal but also ultra vires.
Ratification of ultra vires acts.	(1) Where the contract is illegal per se, it is wholly void or inexistent. It cannot be ratified or validated. (Art. 1409, Civil Code.) (2) Where the contract is not illegal per se but merely beyond the power of a corporation, the same is merely voidable and may be enforced by performance, ratification, or estoppel, or on equitable ground. (Republic vs. Acoje Mining Co., Inc., supra.) Effects of ultra vires acts which are not illegal. The following rules are recognized: (1) An ultra vires contract, as long as it is executory on both sides, cannot be enforced by either party thereto. It is in the public interest that corporations do not transcend the powers granted to them and their assets be not subjected to risks created by forbidden acts; (2) When an ultra vires contract has been fully performed on both sides, neither party thereto can lawfully set aside the same or to recover what has been given. No public interest is involved here since both parties have already received to their advantage the benefits of the contract voluntarily entered into; and (3) When an ultra vires contract has been performed on one side and the other has received benefits by reason of such per­formance, recovery is permitted in most courts on behalf of the former (7 Fletcher, 620.) on the ground that it would be unjust to allow retention of benefits by a party coupled with his refusal to perform. Other courts hold the contract unenforceable but re­quire the party who has received the benefits of performance to return what he has received or failing to do that, to pay its rea­sonable value. (Ibid., 613.) In any case, when a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. (Coleman vs. Rotel de France Co., 29 Phil. 323 [1915].) In other words, an act is presumed to be within corporate powers unless clearly shown to be otherwise.
Board of Directors/Corporate Officers	(1) Governing body of the corporation. — All corporations, being impersonal, existing only in contemplation of law, can only act and contract through the aid and by means of individuals. Such individuals may be these holding corporate offices or agents properly appointed by such officers. It is well-established in corporation law that the corporation can act only through its board of directors or trustees. Section 23 provides that “unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees.” The board of directors or trustees, therefore, is the governing body of the corporation chosen by the stockholders or members. (2) Binding effect of stockholders’ action. — The stockholders (or members) elect a board of directors (or trustees) to oversee the management and operation of the corporation. They are not the agents of the corporation; they cannot bind it by their acts. With the exception only of some powers reserved by law to stockholders, the directors have sole authority to determine policy and conduct the ordinary business of the corporation within the scope of its charter in all those matters which do not require the consent or approval of the stockholders. (see Sec. 4.) Once elected, the directors are not directly controlled by the stockholders who only have indirect control of the corporation through their votes. (a) The law is settled that contracts between a corporation and third persons must be made by or under the authority of its board of directors and not by its stockholders. Hence, the action of the stockholders in such matter is only advisory and not in any wise binding on the corporation. (Barreto vs. La Previsora Filipina, 57 Phil. 649.) (b) For the same reason that a corporation can act only through the board of directors, a resolution adopted at a meeting of stockholders refusing to recognize a corporate contract effected with the approval of the board of directors or repudiating it, is without effect. (Ramirez vs. Orientalist, 38 Phil. 634.)
Term of office of directors or trustees.	It is now expressly provided that the board of directors or trustees to be elected “shall hold office for one (1) year and until their successors are elected and qualified.” (Sec. 23, par. 1.) Upon failure of a quorum at any meeting of the stockholders or members called for an election, the directorate naturally holds over and continues to function until another directorate is chosen and qualified. (see Sec. 24, last sentence.)
Number of directors or trustees.	(1) Under the Code, the number must be “not be less than five (5) nor more than fifteen (15)” (Sec. 14[6].) except as otherwise provided by the Code or special law. (2) In ordinary non-stock corporations, the board of trustees, unless otherwise provided in the articles of incorporation or the by-laws, “may be more than fifteen (15) in number,” with the term of office of 1/3 of their number expiring every year. (see Sec. 92, par. 1.) (3) In a close corporation, the articles of incorporation may provide that the business of the corporation shall be managed by its stockholders rather than by a board of directors in which case no meeting of stockholders need be held to elect directors. (see Sec. 97, par. 2.) (4) Trustees of non-stock educational corporations “shall not be less than five (5) nor more than fifteen (15),” provided that the number “shall be in multiples of five (5),” with the term of office of 1/5 of their number expiring every year. (see Sec. 108, pars. 1, 2.) (5) In a corporation sole, there is no board of directors or trustees as it consists of one member or corporator only. (see Sec. 110.) (6) The board of trustees of religious societies shall also “be not less than five (5) nor more than fifteen (15).” (see Sec. 116[6].) The limitation as to the number of directors or trustees seeks to give ample representation to stockholders or members of a corporation to its board while at the same avoiding that it will be too unwieldy.
Qualifications of directors or trustees.	(1) Stock corporations. — The qualifications of directors of stock corporations are as follows: (a) Every director must own at least one share of the capital stock; (b) The share of stock held by the director must be registered in his name on the books of the corporation; (c) Every director must continuously own at least a share of stock during his term, otherwise, he shall automatically cease to be a director; and (d) A majority of the directors must be residents of the Philippines. (Sec. 23.) (2) Non-stock corporations. — Trustees of non-stock corporations must be members thereof and like in stock corporations, a majority of them must be residents of the Philippines. In case of domestic banks, the General Banking Act requires that at least two-thirds of the members of the board of directors must be citizens of the Philippines. (R.A. No. 337, Sec. 13.)
b. Election and removal	The following limitations or conditions are imposed in the election of directors or trustees: (1) At any meeting of stockholders or members called for the election of directors or trustees, there must be present in person or by representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote; (2) The election must be by ballot if requested by any voting stockholder or member. Hence, voting by viva voces or roll call (raising of hands) is valid except when there is a request that the election be by ballot; (3) 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; (4) No delinquent stock shall be voted; (5) If a quorum is present, the candidates receiving the highest number of votes shall be declared elected. The law requires only plurality, not majority of the votes cast at the election; (6) In case of failure to hold an election for any reason, the meeting may be adjourned from day to day or from time to time but it cannot be adjourned sine die or indefinitely; and (7) The requisite notice must be given. (see Sec. 50, par. 1.)
Methods of voting.	Every stockholder entitled to vote shall have the right to vote in person or by proxy the numbers of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation or where the by-laws are silent, at the time of the election, and said stockholder may vote his shares in any of the ways mentioned below. (1) Straight voting. — By this voting method, every stockholder “may vote such number of shares for as many persons as there are directors” to be elected. ILLUSTRATION: A owns 100 shares of stock in a corporation. If there are five directors to be chosen, A is entitled to 500 votes obtained by multi­plying 100 by 5. He may give to the five candidates he wants to be elected 100 votes each. Under this method, the votes are distributed equally among the five candidates without preference. (2) Cumulative voting for one candidate. — By this method, a stockholder is allowed to concentrate his votes and “give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.” (a) The privilege of cumulative voting is permitted for the purpose of giving minority stockholders representation in the board of directors. Needless to say, straight voting does not benefit minority stockholders for they would not be able to elect any director over the objection of the stockholder or stockholders who own at least 51% of the capital stock. (b) A director elected because of the vote of minority stockholders who united in cumulative voting cannot be removed without cause. (Sec. 28, last sentence.) ILLUSTRATIONS: (1) If A owns 100 shares of stock and there are five directors to be elected, he is entitled to 500 votes all of which he may cast in favor of any one candidate. (2) Suppose that out of a total of 500 shares, A and B (repre­senting a group of stockholders) own 400 shares while C, D, E and F (representing another group of stockholders) own 100 shares. If there are five directors to be elected, A and B are entitled to 2,000 votes and C, D, E, and F, to 500 votes. The highest number of votes that A and B can give each of their four candidates is 500. Hence, by cumulating their 500 votes in favor of a candidate, C, D, E and F would be able to secure representation in the board of directors. (3) Cumulative voting by distribution. — By this method, a stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. ILLUSTRATIONS: (1) With 100 shares of stock, A is entitled to 500 votes if there are five directors to be elected. A may distribute his votes to can­didates W, X and Y, giving W, 100 votes, X 150 and Y, 250. A may cast his votes in any combination desired by him provided that the total number of votes cast by him does not exceed 500 which is the number of shares owned by him multiplied by the total number of directors to be elected. (2) X, a stockholder, wishes to be elected to a nine-man board. He expects that out of 3,000 outstanding shares, only 2,000 shares will be represented at the meeting. How many of the 2,000 shares does X need to get elected? X will need 200 of the 2,000 shares to be elected. Now, if X seeks control of the company and desires to elect five directors, he will need 1,001 shares to elect the five. (3) Suppose there are 20,000 outstanding shares of a corpora­tion and 11 directors are to be elected. The minority stockholders wish to elect three directors. The formula for determining the votes needed in cumulative voting: D = [A x B] / [C + 1] + 1 E = D x C where: A = Total number of outstanding shares entitled to vote B = Number directors desired to be elected C = Total number of directors to be elected D = Number of shares necessary to elect desired number of directors E = Number of votes required to elect desired number of directors Thus: D = [20,000 x 3] / [11 + 1] + 1 or D = 5001 shares E = 5001 x 11 or E = 55,011 votes which may be distributed equally (18,337 each) to three candidates for directors
Voting in a non-stock corporation.	Members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. This is the manner of voting in non-stock corporations unless otherwise provided in the articles of incorporation or in the by-laws. (see Sec. 89.) ILLUSTRATION: If A is a member of a non-stock corporation and there are five (5) directors to be elected, he is entitled only to five (5) votes. He may give one (1) vote to each of the five candidates he wants to be elected. If he has only one candidate he can cast only one (1) vote for said candidate unless cumulative voting is authorized in the arti­cles of incorporation or in the by-laws. Thus, where cumulative vot­ing exists, and there are nine (9) trustees to be elected, a member is entitled to cast nine (9) votes for one candidate or by distributing the same among as many candidates as he shall see fit.
Requisites for board meeting.	Under Section 25, validity of a corporate act is predicated on the presence of the following requisites: (1) Meeting of the directors or trustees duly assembled as a board, i.e., as a body in a lawful meeting; (2) Presence of a quorum; (3) Decision of the majority of the quorum or, in other cases, a majority of the entire board; and (4) Meeting at the place (see Sec. 51, par. 1.), time, and in the manner provided in the by-laws. (see Secs. 47[12], 53, 101.) Quorum. Quorum is such number of the membership of a collective body as is competent to transact its business or do any other corporate act. (1) Number required for presence of quorum. — Section 25 provides that ‘’unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles shall constitute a quorum for the transaction of corporate business.” The majority would be at least one-half plus one of the number of directors. (2) Number required for approval of corporate acts. — As a general rule, a majority vote of the directors or trustees present at a meeting at which there is a quorum, as distinguished from a majority of the full board, is sufficient to authorize action where the Code requires approval of certain corporate acts such as the declaration of dividends (Sec. 43.) or entering into a management contract (Sec. 44.), without stating that it shall be by majority vote of the board but if the word “majority,’’ is used, the number of votes required to approve such acts shall be at least one-half plus one of the entire membership. (3) Number provided greater than majority. — Unlike the old law which sets the quorum at “a majority of the directors” without giving the corporation the power to provide otherwise, the Code gives the corporation the power to require a number greater than the majority of the board members to constitute the quorum necessary to transact business. So that, given a corporation with nine (9) directors, the presence of five (5) members will be sufficient to hold a board meeting and a vote of three (3) will be enough to pass a board resolution. However, the same corporation can provide in its articles of incorporation or by-laws, that the required quorum shall be seven (7) members. In this case, a vote of at least four (4) members is necessary for the approval of any board resolution. But “the vote of a majority of all the members of the board” or at least five (5) members, shall be required for the election of officers. (see Sec. 97, par. 1[13].) ILLUSTRATION: The by-laws of X Corporation provide for 11 directors. Only 9 directors were elected with 2 seats remaining vacant. During a spe­cial meeting of the board where only 5 directors were present (no quorum), the board passed a resolution. Under the law, the required quorum of the board is a majority of the entire board as it would be constituted if all the vacancies were filled, i.e., 6 directors. Consequently, the resolution is irregular. Suppose the absent director subsequently signed the minutes of the meeting. Will the signature cure the defect of the first meet­ing? No. But if the board subsequently met with 6 directors present and all of them voted unanimously to approve and ratify said resolu­tion, such action would have the effect of curing the defect and giv­ing effect to the resolution. Proxy not allowed. Directors or trustees cannot validly act by proxy. (as to meaning of “proxy” see comments under Sec. 58.) They must attend the meeting of the board of directors or trustees and act in person (Sec. 25, last par.) and as a body. Each director or trustee is required to exercise his personal judgment and he cannot delegate his duties or assign his powers to another.
Disqualification of directors/trustees or officers.	The above provision disqualifies any one convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Code as a director/trustee or officer of any corporation. The offense need not involve moral turpitude. The rule applies regardless of the nature or classification of the offense as long as it is punishable by imprisonment for a period exceeding six (6) years. If the disqualification is based on a violation of the Code (see Sec. 144.), the duration of the imprisonment is immaterial but the commission (not conviction) of the violation must have taken place within five (5) years prior to the date of the election or appointment.
Removal of directors or trustees.	Stockholders cannot tell directors how they are to manage the corporation but they do maintain indirect control since they can remove directors any time if they wish. (1) Generally; limitation. — The law does not specify cases for removal of a director or trustee nor even require that removal should be for sufficient cause or reason. A director or trustee may be removed by the prescribed vote of the stockholders or members without cause subject to the limitation that a director or trustee cannot be removed without cause if the effect of such removal is to deprive minority stockholders or members who united in cumulative voting to elect such director, of right of representation to which they may be entitled under Section 24. (2) Filling of vacancy created. — In case of removal on the vote of stockholders or members, as the case may be, the vacancy so created may be filled by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose after giving the prescribed notice. (Sec. 28.) Thus, the stockholders or members who have removed a director or trustee are also given the power to choose his replacement at the same meeting.
Power of the board to remove a member.	The board of directors (or trustees) has no power to remove one of its members as director (or trustee). The reason is that as officers deriving their title from the stockholders (or members), they can be removed only by the power that appointed them. (Ibid.) Since the law expressly confers the authority to stockholders or members, the board cannot indirectly usurp or disregard the same.
Power of court to remove directors or trustees.	The Corporation Code does not confer expressly upon the courts the power to remove a director or trustee of a corporation. There are abundant authorities, however, which hold that if the court has acquired jurisdiction to appoint a receiver (see Sec. 122.) because of the mismanagement of the directors, these may thereafter be removed and others appointed in their place by the court in the exercise of its equity jurisdiction. But where the properties and assets of the corporation are amply protected by the appointment of a receiver, such removal is unnecessary and unwarranted in view of the provisions of Section 28 prescribing the manner of removal of directors or trustees. (see Angeles vs. Santos, 64 Phil. 697 [1937].)
Requisites for removal of directors or trustees.	Section 28 specifies the following requisites for the removal of directors or trustees: (1) The removal must “take place either at a regular meeting of the corporation or at a special meeting called for the purpose”; (2) There must be “previous notice to the stockholders or members of the corporation of the intention to propose such removal at the meeting”; and (3) The removal must be “by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of two-thirds (2/3) of the members entitled to vote.”
Filling of vacancies in the office of director or trustee.	The person elected to fill a vacancy holds office only for the unexpired term of his predecessor. A vacancy in the office of director or trustee may be filled as follows: (1) By the stockholders or members. — In any of the following cases: (a) If the vacancy results from the removal by the stock­holders or members or the expiration of term; (b) If the vacancy occurs other than by removal or by expiration of term (see Sec. 23, par. 1.), such as death, res­ignation, abandonment, or disqualification, if the remaining directors or trustees do not constitute a quorum for the pur­pose of filling the vacancy; (c) If the vacancy may be filled by the remaining directors or trustees (infra.) but the board refers the matter to the stockholders or members; or (d) If the vacancy is created by reason of an increase in the number of directors or trustees. (2) By the members of the board. — If still constituting a quorum, at least a majority of them are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term. The board has no power to fill any directorship or trusteeship by reason of an increase in the number of directors or trustees. ILLUSTRATION: If four (4) of nine (9) directors died, the remaining five (5) direc­tors still constitute a quorum, and a majority of the five (5) or three (3) may fill the four (4) vacancies.2 But if five (5) of the directors died, the vacancies will have to be filled by the stockholders in a regular or special meeting duly called for the purpose.
Powers and fiduciary duties	The directors of a corporation are its agents. They also occupy a fiduciary relation to the corporation. By numerous authorities they have been called “trustees” (McEwen vs. Kelly, 79 S.E. 777.), with certain powers and subject to certain duties in the management of its property, and each stockholder a cestui que trust according to his interest and shares. (Jackson vs. Ludeling, 21 Wall. [U.S.] 616.) (1) In the performance of their official duties, they are under obligations of trust and confidence to the corporation and its stockholders and must act in good faith and for the interest of the corporation or its stockholders with due care and diligence and within the scope of their authority. (Ibid.) (2) They are personally liable for any wrongful disposition of corporate assets and for any loss or injury to the corporation arising from their gross negligence or unauthorized acts or violation of their duties. (see Steinberg vs. Velasco, 52 Phil. 953 [1929].) (3) Directors are not liable, however, for business losses incurred because of honest bad judgment not amounting to bad faith or gross negligence. (see Ballantine, 160; see also Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].) Liability of directors/trustees for damages. Section 31 enumerates the occasions when a director or trustee may be held liable for damages, as follows: (1) He willfully and knowingly votes or assents to patently unlawful acts of the corporation; (2) He is guilty of gross negligence (not mere “want of ordinary prudence” as held in Steinberg vs. Velosco, supra.) or bad faith in directing the affairs of the corporation; and Sec. 31305 (3) He acquires any personal or pecuniary interest in conflict with his duty as such director or trustee. In the above instances, the erring board members shall be held jointly and severally (or solidarily) liable for all the damages resulting therefrom suffered by the corporation, its stockholders or members, or other persons such as corporate creditors. Liability of directors/trustees or officers for secret profits. Furthermore, in the case mentioned in the second paragraph, the director/trustee or officer guilty of violation of duty shall be held accountable for the profits which otherwise would have accrued to the corporation. Similarly, a director guilty of disloyal act against the corpora­tion, is required by Section 34 to account to the corporation for the profits obtained by him from a business opportunity which should belong to the corporation. Self-dealing directors/trustees or officers. Section 32 renders voidable at the option of the corporation a contract of such corporation with one or more of its directors/trustees or officers. In any of the following cases, the contract shall be valid. (1) All the conditions enumerated in Section 32 are present; (2) Not all the conditions set forth are present but the corporation (through the board) elects not to question the validity of the contract without prejudice to the liability of the directors or trustees for damages under Section 31; or (3) In the case of a contract with a director or trustee, only the third condition is present, i.e., the contract is fair and reasonable under the circumstances, if the contract is ratified by the required vote of the stockholders or members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. Section 32 fails to specify whether the votes of the self-dealing director or trustee shall be counted in the meeting for the ratification of the contract. Contracts between corporations with interlocking directors. Section 33 recognizes as valid a contract between two or more corporations which have interlocking directors (i.e., one, some, or all of the directors in one corporation is/are also director/directors in another corporation) as long as there is no fraud and the contract is fair and reasonable under the circumstances. However, if the interest of the interlocking director in one corporation is substantial, i.e., his stockholdings exceed 20% of the outstanding capital stock and in the other merely nominal, the rules of Section 32 on self-dealing directors shall apply insofar as the latter corporation is concerned. ILLUSTRATION: X Corporation sold a parcel of land worth P500,000.00 to Y Cor­poration for only P300,000.00. Z is a board member of both corpora­tions. Evidently, the contract is not fair and reasonable, and is, there­fore, voidable on that ground. But if the contract is fair and reason­able under the circumstances and Z’s interest in X Corporation is merely nominal and in Y Corporation substantial, the conditions in Section 32 must be present insofar as X Corporation is concerned, on the theory that the contract of X Corporation is with Z. However, if Z’s interest in both corporations is nominal or is substantial, the provisions of Section 32 do not apply but the con­tract shall be valid only if there is no fraud and the contract is fair and reasonable under the circumstances.
The “corporate opportunity’’ doctrine.	Under this doctrine, a director who, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, is guilty of disloyalty and should, therefore, account to the latter for all such profits by refunding the same, notwithstanding that he risked his funds in the venture. Under Section 34, the guilty director will only be exempted from liability to the corporation if his disloyal act is ratified by the vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. Note that there is no similar provision in Section 31. Section 34 is silent on whether the disloyal director shall be allowed to vote his shares in the ratification of his act.
Kinds of meetings	(1) Meetings of stockholders or members. — It may be: (a) Regular or those held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees; or (b) Special or those held at any time deemed necessary or as provided in the by-laws. (Secs. 49, 50.) (2) Meetings of directors or trustees. — It may be: (a) Regular or those held by the board monthly, unless the by-laws provide otherwise; or (b) Special or those held by the board at any time upon the call of the president or as provided in the by-laws. (Secs. 49-53.) The president shall preside at all meetings of directors or trustees and of the stockholders or members, unless otherwise provided in the by-laws (Sec. 54.) and subject to the provisions of Section 50. (last par.) Thus, the by-laws may provide that the chairman instead of the President, shall preside at board meetings.
Necessity of meetings.	The corporate powers are vested in the board of directors or trustees and/or the stockholders or members as a body and not as individuals. (1) Meetings of stockholders or members. — “It is a fundamental rule of corporation law that unless the statute otherwise provides, stockholders [or members] can act only in meetings properly convened and assembled. The written assent of a majority of the shareholders [or members] without a meeting to a matter requiring action by them is not sufficient.” (Fisher, op. cit., Sec. 128.) The reason for the rule lies in the protection to the stockholders (or members) accorded by the giving of notice and the opportunity to attend, discuss, and vote at a meeting. (2) Meetings of directors or trustees. — Similarly, as agents of the corporation managing its affairs, the directors or trustees can only exercise their powers as a board, not individually or separately. The law proceeds upon the theory that directors or trustees shall meet and counsel with each other, and that any determination affecting the corporation shall only be arrived at after a consultation at a meeting of the board upon notice to all, attended by at least a quorum of its members. (SEC Opinion, March 10, 1972, citing Ballantine, p. 123.) Exceptions to the rule. (1) Under Section 16, any corporation may amend its articles of incorporation “by a majority vote of the board of directors or trustees and the vote or written assent of two-thirds of the stockholders representing at least two-thirds of the outstanding capital stock, xxx or xxx of the members xx.” Thus, a meeting of stockholders or members is not necessary. (2) It is evident that the corporation will be bound by the unanimous act or agreement of its stockholders or members although expressed elsewhere than at a meeting. (3) In any of the cases mentioned in Section 101, any action taken by the directors of a close corporation without a meeting shall nevertheless be deemed valid, unless otherwise provided in the by-laws.
Requisites for a valid meeting of stock-holders or members.	The following requisites must be complied with in order that there will be a valid meeting of stockholders or members: (1) It must be held at the proper place (Sec. 51.); (2) It must be held at the stated date and at the appointed time or at a reasonable time thereafter (Ibid.); (3) It must be called by the proper person (Sec. 50, last par.); (4) There must be a previous notice (Secs. 50, 51, 53.); and (5) There must be a quorum. (Sec. 52.)
Matters in which the law requires specific number of votes.	Hereunder are enumerated the corporate acts together with the corresponding minimum votes required for their approval: (1) to amend the articles of incorporation — a majority vote of the board of directors or trustees and vote or written assent of 2/3 of the outstanding capital stock or of the members (Sec. 16.); (2) to elect directors or trustees — a majority of the outstanding capital stock or of the members entitled to vote (Sec. 24.); (3) to remove directors or trustees — 2/3 of the outstanding capital stock or of the members entitled to vote (Sec. 28.); (4) to call a special meeting to remove directors or trustees — a majority of the outstanding capital stock or of the members entitled to vote (Sec. 28.); (5) to ratify a contract of a director/trustee or officer with the corporation — 2/3 of the outstanding capital stock or of the members (Sec. 32.); (6) to extend or shorten corporate term — a majority vote of the board of directors or trustees and 2/3 of the capital stock or of the members (Sec. 37.); (7) to increase or decrease the capital stock — a majority of the board of directors and 2/3 of the outstanding capital stock (Sec. 38.); (8) to incur, create, or increase bonded indebtedness — a majority vote of the board of directors or trustees and 2/3 of the outstanding capital stock or of the members (Ibid.); (9) to sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of the corporate assets — a majority vote of the board of directors or trustees and 2/3 of the outstanding capital stock or of the members (Sec. 40.); (10) to invest corporate funds in another corporation or business or for any purpose other than the primary purpose — a majority vote of the board of directors or trustees and 2/3 of the outstanding capital stock or of the members (Sec. 42.); (11) to issue stock dividends — a majority of the quorum of the board of directors and 2/3 of the outstanding capital stock. (Sec. 43.) Note: The approval of the stockholders is not required with respect to other dividends such as cash and bond dividends; (12) to enter into a management contract — a majority of the quorum of the board of directors or trustees and a majority of the outstanding capital stock or of the members of both the managing and the managed corporations and, in some cases, 2/3 of the total outstanding capital stock entitled to vote or of the members, with respect to the managed corporation (Sec. 44.); (13) to adopt by-laws — a majority of the outstanding capital stock or of the members (Sec. 46.); (14) to amend or repeal the by-laws or adopt new by-laws — a majority vote of the board of directors or trustees and of the outstanding capital stock or of the members (Sec. 48.); (15) to delegate to the board of directors or trustees the power to amend or repeal the by laws or adopt new by-laws — 2/3 of the outstanding capital stock or of the members (Ibid.); and (16) to revoke the preceding power delegated to the board of directors or trustees — a majority of the outstanding capital stock or of the members (Ibid.); (17) to fix the issued price of no par value shares — a majority of the quorum of the board of directors if authorized by the articles of incorporation or in the absence of such authority, by a majority of the outstanding capital stock (Sec. 62, last par.); (18) to effect or amend a plan of merger or consolidation — a majority vote of the board of directors or trustees and 2/3 of the outstanding capital stock or of the members of the constituent corporations (Sec. 77.); (19) to dissolve the corporation — a majority vote of the board of directors or trustees and 2/3 of the outstanding capital stock or of the members (Secs. 118, 119.); and (20) to adopt a plan of distribution of assets of a non-stock corporation — a majority vote of the board of trustees and 2/3 of the members having voting rights. (Sec. 95, par. 2.) A corporation may prescribe a greater voting requirement for the approval of any of the above corporate acts in its articles of incorporation and/or by-laws in order to protect the rights of minority stockholders or members. Note that in Nos. (1), (6), (7), (8), (9), (10), (11), (12), (14), (18), (19), and (20), the acts mentioned must be approved by both the board of directors of trustees and the stockholders or members.
Powers, duties, rights and obligations of stockholders	The theory of a stock corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives or agents called directors. (Ramirez vs. Orientalist, 38 Phil. 634 [1918]; Wolfson vs. Araneta Stock Exchange, 72 Phil. 492 [1941].) The stockholders, however, as part owners of the corporation, have certain rights expressly recognized by the corporation law. These rights may be summarized as follows: (1) Right to attend and vote in person or by proxy at stockholders’ meetings (see comments under Secs. 50, 58.); (2) Right to elect and remove directors (Secs. 24, 28.); (3) Right to approve certain corporate acts (see comments under Secs. 49-54.); (4) Right to adopt and amend or repeal the by-laws or adopt new by-laws (Secs. 46, 48.); (5) Right to compel the calling of meetings of stockholders when for any cause there is no person authorized to call a meeting (Sec. 50, last par.); (6) Right to issuance of certificate of stock or other evidence of stock ownership and be registered as shareholder (see comments under Sec. 63.); (7) Right to receive dividends when declared (see comments under Sec. 43.); (8) Right to participate in the distribution of corporate assets upon dissolution (see comments under Secs. 118-119.); (9) Right to transfer of stock on the corporate books (see comments under Sec. 63.); (10) Right to pre-emption in the issue of shares (see comments under Sec. 39.); (11) Right to inspect corporate books and records and to receive financial report of the corporation’s operations (Secs. 74-75.); (12) Right to be furnished the most recent financial statement upon request and to receive a financial report of the corporation’s operations (Sec. 75.); (13) Right to bring individual and representative or derivative suits (infra.); (14) Right to recover stock unlawfully sold for delinquency (Sec. 69.); (15) Right to enter into a voting trust agreement (Sec. 59.); (16) Right to demand payment of the value of his shares and withdraw from the corporation in certain cases (see comments under Secs. 41 and 81.); and (17) Right to have the corporation voluntarily dissolved. (see comments under Secs. 118-119.) Most of these rights have already been discussed in the preceding chapters while the others (Nos. 8, 11, 12, 16, and 17) are discussed subsequently. Only the right to bring representatives or derivative suits (No. 13) will be discussed here.
Action by stockholders or members.	Corporations represent their stockholders (or members) in all matters within the scope of their corporate powers. This is true respecting litigations as well as in other matters. As a result of the separate identities of the corporation and its stockholders, it follows that any wrong or injury done directly against the corporation gives rise to a cause of action on the part of the corporation through the board of directors (or trustees) and not primarily of an individual stockholder. But, whenever the officials of a corporation refuse to bring suit to redress the wrong, such as when they are the ones to be sued, a stockholder may maintain a derivative suit to enforce the corporate right of action in behalf of himself, the other stockholders, and for the benefit of the corporation. And the fact that no other stockholder has made common cause with the suing stockholder is irrelevant because the smallness of his stockholding is no ground for denying relief. (Republic Bank vs. Cuaderno, 19 SCRA 671.)
Derivative suit explained.	A derivative suit is thus defined as 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. In such action, the suing stockholder is regarded as a nominal party with the corporation as the real party in interest. (Ibid., Gamboa vs. Victoriano, 90 SCRA 40.) In a derivative suit filed by a stockholder, the plaintiff is suing for a wrong done to the corporation and not one done to himself. Hence, the name of the remedy because he derives his right from the corporation. Any recovery belongs to the corporation but the plaintiff is entitled to reimbursement at least of legal expenses. It is important that the corporation should be made a party in order to make the court’s judgment binding upon it. (Republic Bank vs. Cuaderno, supra.) A suit against corporate officers in their official capacity is considered a suit against the corporation. (E. Cano Enterprises, Inc. vs. Court of Industrial Relations, 13 SCRA 290.)
Liabilities of stockholder.	Stock ownership in a corporation results in certain rights. Assuredly, it also places certain liabilities upon the stockholder. These liabilities may be grouped into the following: (1) Liability to the corporation for unpaid subscription (Secs. 67-70.); (2) Liability to the corporation for interest on unpaid subscription (Sec. 66.); (3) Liability to creditors of the corporation on unpaid subscription (Sec. 60.); (4) Liability for watered stock (Sec. 65.); (5) Liability for dividends unlawfully paid (Sec. 43.); and (6) Liability for failure to create corporation. (Sec. 10.) These liabilities are discussed under the corresponding sections indicated.
Corporate reorganization  a. Mergers  b. Consolidations  c. Other business combinations	Common forms of corporate combinations. Below are the common forms of corporate combinations. (1) Sale of assets. — A union of corporations may be effected by one corporation selling all or substantially all of its assets to another. (see Sec. 40.) Such sale is usually, though not necessarily, made in the course of the dissolution of the vendor corporation. (a) In a strict legal sense, the mere sale of all its property by a corporation and the distribution of its assets do not work a dissolution of the corporation inasmuch as possession of property is not essential to corporate existence. (Re: Fulton, 178 N.E. 766.) Generally, therefore, where one corporation sells or otherwise transfers all its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. (Edward J. Neil Co. vs. Pacific Farms, Inc., 15 SCRA 415.) (b) But, if in the agreement, a new corporation expressly acquired the assets and properties, and assumed the obliga­tions and liabilities of an old corporation which it succeeded, the former cannot excuse itself from said obligations and liabilities on the argument that said two corporations are distinct and separate. (Rivera vs. Litam & Co., Inc., 4 SCRA 1072.) (c) The sale of the assets for stock, if followed by dissolution, has the effect of a merger. ILLUSTRATION: X Inc., a shoe manufacturing company, sells all its assets to Y Inc., another shoe manufacturing company. In consideration for the transfer of all its assets, X Inc. receives shares of stocks from Y Inc. Thus, X Inc. becomes a stockholder of Y Inc. By the terms of the sale, the shares of stock of Y Inc. may be issued directly to the stockhold­ers of X Inc. on the basis of their shareholdings. In such case, X Inc. will have no more stockholders as well. It may be dissolved subse­quently. The above transaction is a sale of assets for stock in name but may be found by the courts to be really a de facto merger. Y Inc. is not liable for the liabilities of X Inc. except where Y Inc. expressly or impliedly assumed said liabilities, or Y Inc. is merely a continuation of X Inc. especially where the sale to Y Inc. was ef­fected in furtherance of a fraudulent purpose to evade payment by X Inc. of its outstanding obligations. In the second case, the two corporations are treated as one. (2) Lease of assets. — In this case, a corporation, without being dissolved, leases its property to another corporation for which the lessor merely receives rental paid by the lessee. This is usually practiced by railroad and transportation companies. The lease of assets is similar to the sale of assets except than under a lease nothing passes except the right to use the property leased. (3) Sale of stock. — The purpose of a holding company is to acquire a sufficient amount of the stock of another cor-poration for the purpose of control. The acquiring corporation is called the parent or holding company. The corporation whose stocks are acquired is known as the subsidiary corporation. In all the three foregoing cases of corporate combination, the legal identity of each corporation is retained. (4) Merger. — By this method, two (or more) corporations unite, one corporation which remains in being, absorbing or merging in itself the other which disappears as a separate corporation. ILLUSTRATION: A Inc. and B Inc. are existing corporations. A Inc. transfers all its assets to B Inc. B Inc. absorbs and acquires all the property, rights and liabilities of A Inc. which is dissolved. B Inc. continues its cor­porate existence. A Inc. and B Inc. are the constituent corporations. A Inc. is the merged or absorbed corporation while B Inc. is the merging, absorbing, or surviving corporation that continues the combined business. The stockholders of A Inc. become stockholders of B Inc. (5) Consolidation. — By this method, two (or more) corporation unite, giving rise to a new corporate body and dissolving the constituent corporations as separate corporations. ILLUSTRATION: A Inc. and B Inc. are existing corporations. They unite together to form C Inc. to which they transfer all their assets. A Inc. and B Inc. are dissolved by the consolidation. The title to their property passes to C Inc. and all their rights and liabilities are assumed by C Inc. The dissolved corporations, A Inc. and B Inc., are the constitu­ent corporations. They are also the original corporations. C Inc., the new corporation, is called the consolidated corporation. The stock­holders of A Inc. and B Inc. become stockholders of C Inc. The legal effects of the merger or consolidation accomplished under Title IX are provided in Section 80. Both methods involve a transfer of the assets of the constituent corporations in exchange for securities in the new or surviving corporation but neither involves the winding-up of the affairs of the constituent corporations in the sense that the assets are distributed to the stockholders. Note that there is automatic assumption of liabilities of the absorbed corporation or constituent corporations (Sec. 80[5].) which are dissolved. (Sec. 80[1, 2].)
Meaning of dissolution.	The term dissolution, as applied to a corporation, signifies the extinguishment of its franchise to be a corporation and the termination of its corporate existence. (16 Fletcher 655.)
Power to dissolve corporation.	It is an accepted theory that what the law itself has granted, the law may take away. And so a corporation may come to an end and its life extinguished only by the act or with the consent of the State by which it was established. (16 Fletcher 659.)
Two legal steps in corporate dissolution.	Dissolution of a corporation involves two legal steps: (1) The termination of the corporate existence at least as far as the right to go on doing ordinary business is concerned; and (2) The winding-up of its affairs, the payment of its debts, and the distribution of its assets among the shareholders (16 Fletcher 655.) or members and other persons in interest. After winding-up, the existence of the corporation is terminated for all purposes.
Methods or causes of corporate dissolution.	A corporation can have perpetual existence. The law, how­ever, permits the dissolution of corporations. Under Section 117, a private corporation organized under the law may be dissolved either voluntarily or involuntarily. These two methods of dis­solving corporations may be outlined as follows: (1) Voluntary. — It may be effected: (a) by the vote of the board of directors/trustees and the stockholders/members, where no creditors are affected (Sec. 118.); (b) by judgment of the Securities and Exchange Com­mission after hearing of petition for voluntary dissolution, where creditors are affected (Sec. 119.); or (c) by amending the articles of incorporation to shorten the corporate term (Sec. 120.); and (d) In the case of a corporation sole, by submitting to the Securities and Exchange Commission a verified declaration of dissolution for approval. (Sec. 115.) (2) Involuntary. — It may be effected: (a) by expiration of term provided for in the original articles of incorporation (Sec. 11.); (b) by legislative enactment (infra.); (c) by failure to formally organize and commence the transaction of its business within two (2) years from date of incorporation (Sec. 22.); or (d) by order of the Securities and Exchange Commission. (Sec. 121.) The change of name of a corporation does not result in its dissolution.
Effects of dissolution.	(1) The corporation ceases as a body corporate to continue the business for which it was established (Sec. 122, par. 1.); (2) The corporation continues as a body corporate for three (3) years for purposes of winding-up or liquidation (Ibid.); and (3) Upon the expiration of the winding-up period of three (3) years, the corporation ceases to exist for all purposes and as a general rule, it can no longer sue and be sued as such. (Fisher, op. cit., p. 386.) A dissolved corporation thus continues to exist but only for a limited purpose and for a limited time.
Meaning of liquidation.	Liquidation, as applied to a corporation, means the winding-up of the affairs of the corporation, by reducing its assets into money, settling with creditors and debtors, and apportioning the amount of profit and loss.
Methods of corporate liquidation.	There are three methods by which a dissolved corporation may wind-up its affairs: (1) Liquidation by the corporation itself (Sec. 122, par. 1.); (2) Liquidation by a duly appointed receiver (Sec. 119, last par.); and (3) Liquidation by trustees to whom the board of directors or trustees had conveyed the corporate assets. (see Sec. 122, par. 2.)
Liquidation by the corporation itself.	The normal method or procedure is for the corporation through the directors or trustees and executive officers to have charge of the winding-up operations. (1) As the law (Sec. 122.) grants it a period of three years after the time when it would have been so dissolved within which to wind-up its affairs, the claims by and against it not presented and settled within that period become unenforceable as there exists no longer a corporate entity against which they can be enforced. (2) It is to be noted that there is nothing in Section 122 (par. 1.) which bars an action for the recovery of the debts of the corporation against the liquidator thereof after the lapse of the winding-up period of three (3) years. (Republic of the Philippines vs. Marsman Dev. Co., 44 SCRA 418.)
Liquidation by a receiver.	The liquidation by receivership is authorized by Section 119 by virtue of which upon the dissolution of the corporation, the Securities and Exchange Commission “may appoint a receiver to collect its assets and pay the debts of the corporation.” (last par.) Courts are also empowered to appoint a receiver. (1) The receivership, unless otherwise specifically limited in its duration, shall exist indefinitely until the affairs of the dissolved corporation shall have been completely settled and liquidated. During its continuance, claims can be presented and allowed if they are not barred by the statute of limitations. In other words, the period of three (3) years prescribed by Section 122 is not applicable. (see Summers vs. Valencia, 67 Phil. 721 [1939].) (2) The appointment of a receiver is discretionary with the court and the Securities and Exchange Commission and is not made except upon proper showing that such appointment is necessary. Even without dissolution, the court has the authority to appoint a receiver for a corporation to protect and preserve its properties for the use and benefit of its creditors and others who may have similar interests in the property as where there is already a final and executory judgment against the corporation which is in a precarious financial condition. (Central Sawmills, Inc. vs. Alto Surety and Insurance Co., 27 SCRA 247 [1969].) (3) Where corporate directors are guilty of breach of trust, minority stockholders may ask for receivership. (Chase vs. Court of First Instance, supra.)
Liquidation by a trustee.	The liquidation of the corporation may be placed in the hands of a trustee or assignee to whom the corporate assets are conveyed. (1) By the terms of Section 122 (par. 2.), the effect of the conveyance is to make the trustee the legal owner of the property, subject to the beneficial interest therein of the creditors, stockholders/members, and other persons in interest. The trustee may sue and be sued as such in all matters connected with the liquidation. (2) The same rules governing duration and the time for filing of claim where the liquidation is done by a receiver apply to liquidation effected by a trustee. (see Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)
Priority of application of assets.	The question of the right of a claimant against the assets of a corporation that is being dissolved and liquidated to priority in the payment of his claims becomes of importance only when the assets of the corporation are not sufficient to pay all claims. It is evident that if the corporate assets are sufficient to pay all claims, it cannot matter practically which claim is paid first or is entitled to preferential payment. (13 Am. Jur. 1208-1210.) (1) When the corporation is insolvent, the creditors of the corporation are entitled to have all its assets distributed first among them according to their rights and priorities. This is in accordance with the trust fund doctrine. (2) Stockholders/members, directors/trustees, or officers of the corporation who are also its creditors as a result of a legitimate or proper loan or claim must be paid next. (3) The remaining assets are then to be distributed among the stockholders or members in proportion to their shareholdings or interest in the absence of any provision to the contrary. (see Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, 6 SCRA 373 [1966].) Of course, holders of preferred stock as to assets have a preference over the common stockholders in the distribution of the surplus proceeds of the assets of the dissolved corporation. (4) Upon winding-up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. (Sec. 122, par. 3.) Under the law, such distributive shares of the assets of the corporation upon its dissolution are not available for general distribution among the stockholders. The reason for this rule is that upon the dissolution of a corporation, the assets become a trust fund (see Sec. 41.) with the title of the stockholders becoming an equitable right to a distributive share therein, and that the stockholders, in respect of the liquidating dividend, are not mere creditors, but the money is set apart for them and is, therefore, not available for general distribution. (19 Am. Jur. 2d 1035-1036.)
Foreign corporations	(1) With respect to a particular state, a foreign corporation is a corporation created by or under the laws of another State or country. This is the traditional definition of the term. (2) Under Section 123, it is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own State or country. Under the incorporation test, a corporation organized under the laws of the Philippines is a domestic corpo­ration with respect to the Philippines and a foreign corporation with reference to any other State; if organized under the laws of another country, it is domestic with reference to said country and a foreign corporation under our Corporation Code. (3) During wartime, however, for reasons of national secu­rity, the control test shall determine the nationality of a corpora­tion, that is, a domestic corporation controlled by enemy aliens shall be deemed a foreign corporation with a nationality iden­tical with that of its controlling stockholders. (Filipinas Cia de Seguros vs. Christern Huenefeld & Co., 89 Phil. 54.)
License and certificate of authority required of foreign corporations.	Under Section 123, foreign corporations shall not be permit­ted to transact or do business in the Philippines until they have secured a license for that purpose from the Securities and Ex­change Commission (see Sec. 126.) and a certificate of authority from the appropriate government agency. The fact, however, that a foreign corporation may not transact business in the Philippines unless it has obtained a license for that purpose, nor maintain a suit in Philippine courts for recovery of any debt, claim or demand without such license does not make such corporation any less a juridical person. (General Garments Corp. vs. Director of Patents, 41 SCRA 50.)
Meaning of “transacting business.”	(1) Circumstances of each case. — No general rule can be laid down as to what constitutes “doing” or “engaging” “or transacting” business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. It should appear, however, that the corporation and its officers intended to establish as continuous business and not one of a temporary character. (Marshall Welis Co. vs. Elser & Co., 46 Phil. 71; see Far East Int. Import & Export Corp. vs. Nankai Kogyo Co., Ltd., 6 SCRA 725.) (2) Acts included. — The Code does not define the phrase “doing or transacting business.” The Omnibus Investments Code of 1987. (Exec. Order No. 226, Art. 44.), and the Foreign Investments Act (R.A. No. 7062, Sec. 2[d].), however, give a definition which may be adopted for purposes of the Corporation Code. Under the two laws, “doing business” by a foreign corporation shall include: (a) Soliciting orders, purchases, and service contracts; (b) Opening offices, whether called “liaison” offices or branches; (c) Appointing representatives or distributors who are domiciled in the Philippines or who, in any calendar year, stay in the Philippines for a period or periods totalling 180 days or more; (d) Participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and (e) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or for the purpose and object of the business organization. (Sec. 65 thereof.) (3) Acts not included. — Under the Foreign Investments Act, the phrase “doing business” does not, however, include: (a) mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business; and/or (b) the exercise of rights as such investor; nor (c) having a nominee director or officer to represent its interests in such corporation; nor (d) appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. (Sec. 2[d] thereof.)
Application for and issuance of license.	A foreign corporation applying for a license to transact business in the Philippines must comply with the following requirements and conditions precedent to the issuance of the license by the Securities and Exchange Commission: (1) Submission of required documents. — It shall submit to the Securities and Exchange Commission a certified copy of its articles of incorporation, with a translation to an official language of the Philippines, if necessary, and the application for a license which shall be under oath and shall specifically set forth the matters enumerated by law, unless already stated in its articles of incorporation (Sec. 125, par. 1.); and (2) Accompanying documents to application. — The application shall be accompanied by the following: (a) A duly executed certificate under oath by the author­ized official or officials of the jurisdiction of its incorporation attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do busi­ness therein and the applicant is an existing corporation of good standing, with a translation of the certificate in English under oath of the translator if it is in a foreign language (Ibid., par. 2.); (b) A sworn statement of the president or any authorized officer of the corporation, showing to the satisfaction of the Securities and Exchange Commission and other government agency in proper cases that the applicant is solvent and in sound financial condition and setting forth its assets and li­abilities for the previous year (Ibid., par. 3.); (c) A certificate of authority from the appropriate gov­ernment authority, whenever required by law (Ibid., last par.; Sec. 123.); and (d) A written power of attorney designating a resident agent on whom summons and other legal processes against the corporation may be served and a written agreement or stipulation consenting that such service may be made upon the Securities and Exchange Commission if at any time it shall cease to transact business in the Philippines, or shall be without any resident agent (Secs. 127, 128.); (3) Compliance with special laws. — Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them (Sec. 125, last par.); and (4) Issuance of license to transact business. — If the applicant shows to the satisfaction of the Securities and Exchange Commission that it has complied with the above requirements of the Code and those imposed by other special laws, rules and regulations, the Commission shall issue a license authorizing it to transact business in the Philippines for the purpose or purposes specified therein. (Sec. 126, par. 1.)
Resident agent.	The resident agent is an individual who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines (Sec. 127.), designated in a written power of attorney, by a foreign corporation authorized to transact business in the Philippines, “on whom any summons and other legal processes may be served in all actions or other legal proceeding against such corporation.” The principal duty of a resident agent is to receive in behalf of a foreign corporation notices, summons and other legal processes in connection with actions against such corporation. The service of any such papers on such resident agent has the same force and effect as if made upon the duly authorized officers of the foreign corporation at its home office. (Sec. 128, par. 1.)
Effect of doing business without a license.	Section 133 states the effects as follows: (1) Suit by a foreign corporation. — The foreign corporation transacting business without a license, or its successors or assigns shall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; and (2) Suit against a foreign corporation. — Such corporation may, however, be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. Furthermore, it is implied from the rule established in Section 123 (2nd sentence) that the foreign corporation shall not be permitted to continue transacting business in the Philippines, unless it shall have obtained the license required by law and, until it complies with the law, shall not be permitted to maintain any suit in the local courts. (see Marshall Wells Co. vs. Elser & Co., 46 Phil. 71; Converse Rubber Corp. vs. Jacinto Rubber & Plastics Co., Inc., 97 SCRA 158.)
Suit by and against an unlicensed foreign corporation.	(1) Isolated business transaction in the Philippines. — Con-versely, a foreign corporation not transacting business in the Philippines may maintain an action, even if it has no license. “The implication of the law is that it was never the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the Philippines from receiving redress in Philippine courts and thus, in effect, permit persons to avoid contracts made with such foreign corporation.” (Ibid.; General Garments Corp. vs. Director of Patents, 41 SCRA 50.) In either case, however, compliance with the requirement of license or the fact that the suing corporation is exempt therefrom, as the case may be, must be affirmatively stated in the complaint being an essential part of the plaintiff’s capacity to sue. (Atlantic Mutual Ins. Co. & Continental Ins. Co. vs. Cebu Stevedoring Co., Inc., 17 SCRA 1037.) (2) Protection of its trade name or trademark in the Philippines. — Similarly, an unlicensed foreign corporation which has never transacted business in the Philippines may maintain an action in our local courts for the purpose of protecting its reputation, corporate name and goodwill acquired through the sale by importers and the use within the country of its products bearing its corporate name or trademark. The right to the use of the corporate tradename is a property right, a right in rem, which the foreign corporation may assert and protect in any of the courts in the world, even in countries where it does not transact any business. (Western Equipment & Supply Co. vs. Reyes, 51 Phil. 115; General Garments Corp. vs. Director of Patents, supra.) The matter of trademark or tradename is now governed by statute, Republic Act No. 8293, known as the Intellectual Property Code which repealed R.A. No. 165 (Patent Law), R.A. No. 166 (Trademark Law), and Presidential Decree No. 49 (Decree on the Protection of Intellectual Property). (3) Non-business transaction in the Philippines. — Neither does the prohibition apply to a suit based on an act not arising out of a business transaction in the Philippines. Thus, it has been held that a foreign corporation without a license to engage in business in the Philippines may maintain a suit to recover the value of goods that were part of the shipment which was erroneously discharged in Manila and received by the defendant and not returned. (Swedish East Asia Co. Ltd. vs. Manila Port Service, 25 SCRA 633.) (4) Non-exemption from suit in the Philippines. — If a foreign corporation not engaged in business in the Philippines is not barred from seeking redress from courts in the Philippines, with more reason, that same corporation cannot claim exemption from being sued in the Philippine courts for acts done against a person or persons in the Philippines. (Facilities Management Corp. vs. De La Osa, 89 SCRA 131.)
Withdrawal of a foreign corporation.	Section 136 prescribes the rules for the withdrawal of a foreign corporation from business in the Philippines. (1) A petition for withdrawal of license must be filed with the Securities and Exchange Commission which shall issue a certificate of withdrawal only after compliance with all the requirements mentioned in Section 136. (2) To ascertain that the foreign corporation has no outstanding liabilities to residents in the Philippines, the Commission shall have to make an examination and inspection of its books and records. If the Commission is aware of pending cases against the foreign corporation, it may not declare that such corporation has no outstanding liabilities in the Philippines. (see Scottish Union & National Insurance Co. vs. Macadaeg, 91 Phil. 89.) (3) The courts may review the action of the Commission approving the withdrawal of a foreign corporation for the law should not be interpreted as to permit a foreign corporation to escape the results of pending action against it by withdrawing from the Philippines with all the securities it has deposited, provided it gets the sanction of the Securities and Exchange Commission. (see Ibid.)
Books and records to be kept by corporations.	(1) Under the Corporation Code. — Section 74 requires every private corporation, stock or non-stock, to keep books and records at its principal office as follows: (a) A record of all business transactions; (b) Minutes of all meetings of stockholders or members; (c) Minutes of all meetings of directors or trustees; and (d) Stock and transfer book, in the case of stock corpora­tions. (2) Under other laws. — In addition, corporations must keep other books and records required by special laws like the General Banking Act, National Internal Revenue Code, Labor Code, and others. They may also keep such optional records and subsidiary books as the needs of their business may require.
Right to inspect corporate books.	The right of inspection of corporate books is granted by express provision of our corporation law. Said provision states that “the record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, trustee, or stockholder or member of the corporation at reasonable hours on business days.” (Sec. 74, par. 2.)
Remedies and sanctions for enforcement of right.	(1) Action for mandamus. — In case the officers of the corporation wrongfully denies a stockholder or member of the right to inspect corporate books or papers, the usual remedy to enforce his right is by filing an action for mandamus against the corporation. The secretary should be included as party defendant since such official is customarily charged with the custody of all documents and records of the corporation against whom personal orders of the court would be made. (Ibid., SEC Opinion, April 27, 1970.) (2) Civil and criminal liability. — Under Section 74 (par. 3.), any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of the Code, shall be liable to such director, etc. for damages, and, in addition, shall be guilty of an offense which shall be punishable under Section 144 of the Code. However, if such refusal is pursuant to a resolution or order of the board of directors or trustees, the liability for such action shall be imposed upon the directors or trustees who voted for such refusal.
Basis and purpose of right to inspect corporate books.	(1) Beneficial ownership of corporate assets. — Those in charge of the corporation are merely the stockholders’ or members’ agents concerning whose good faith in discharging their duties the stockholders or members have an interest and right to be informed. (3 Fletcher, Sec. 2213.) (a) The law is based on the principle that the stockholders or members have a right to be fully informed as to the conditions of the corporation, in the manner its affairs are conducted, and how its capital to which they have contributed is employed or managed. (Stone vs. Kellog, 46 NE 22.) (b) The right of stockholders to inspect the books of the corporation rests on the fact of beneficial ownership of the corporate property and assets through ownership of shares. With reference to his right of inspection, the relation of a stockholder to the corporation is analogous to that of partner to the firm. (18 Am. Jur. 2d. 710; Art. 1803, Civil Code.) (c) The right is predicated upon the necessity of self-protection. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336.) (2) Protection of stockholders and general public from mismanage­ment. — The evident purpose of the law in granting stockhold­ers the right to inspect corporate books and records is to protect small and minority stockholders from the power of the majority and from mismanagement by its officers, as well as to ascertain, establish, and maintain their rights and intelligently perform their corporate duties. (SEC Opinion, April 29, 1970, citing Stone vs. Kellog, 46 NE 22.) It has also been stated that the purpose of the law which requires corporations to keep books of account and gives stockholders the right to examine the records of their corporation is not only to protect the interests of stockholders but also to protect the public from monopolies, unlawful combinations, and unreasonable exactions from corporations. (18 Am Jur. 2d 710.)
Right to inspection not absolute.	In spite of the fact that the right of inspection by a stockholder or member would appear to be absolute according to the provision of Section 74, there are limitations on the right. (1) Purpose of inspection. — The right should be denied on the ground that “the person demanding to examine or copy excerpts from the corporation’s records and minutes has improperly used information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand” (Sec. 74, par. 3.), or has an ulterior purpose or improper ends prejudicial to the corporation. (Acuña vs. Parlatone, [C.A.] O.G. Suppl., Oct. 17, 1941, p. 28.) It is presumed, however, that the purpose of the stockholder or member is legitimate or proper (i.e., the purpose is related to his being stockholder). Once the stockholder alleges a proper purpose, the burden of proving otherwise rests on the corporation. (2) Books of foreign corporation. — The right does not apply where the corporation is not organized under the Philippine law as in such a case, the right of the stockholder is governed by the inspection requirements in the jurisdiction in which the corporation was organized. (Philpotts vs. Phil. Manufacturing Co., 40 Phil. 471; see Sec. 129.) (3) Trade secrets. — There are some things which a corpora­tion may undoubtedly keep secret notwithstanding the right of inspection given to stockholders, as where a corporation, en­gaged in the business of manufacture, has acquired a formula or process not generally known, which has proved of utility in the manufacture of its products. The corporation or its board of directors may properly adopt measures for the protection of such process from publicity. (Philpotts vs. Phil. Manufacturing Co., 40 Phil. 471.) (4) Reasonable hours. — Of course, the right may only be exercised at reasonable hours on business days. (Sec. 74, par. 2; Pardo vs. Hercules Lumber Co., 47 Phil. 964.)
Incidents and extent of the right of inspection.	(1) Copies, abstracts and memoranda. — The right to inspect the books and records of the corporation includes, as an incident thereof, the right to make copies, abstracts and memoranda of their contents (Sec. 74, pars. 3, 4.) but a stockholder (or member) cannot, without order of the court, be permitted to take books from the office of the corporation. (Veraguth vs. Isabela Sugar Co., Inc., 52 Phil. 266.) Under Section 75, any stockholder or member has the right to receive the corporation’s most recent financial statements. (2) Agent or representative. — The right of inspection may be exercised either by the director, trustee, stockholder, or member himself or by any proper representative or attorney-in-fact, and either with or without the attendance of the director, etc., otherwise, the right would be unavailing in many instances. (Philpotts vs. Phil. Manufacturing Co., 40 Phil. 471.) (3) All pertinent books, papers, etc. — Section 74 includes “record of all business transactions and minutes of all meetings of stockholders or members or of the board of directors or trustees.” (par. 1.) In general, the right of the stockholder (or member) extends to all books, papers, contracts, minutes, books or other instruments from which he can derive any information that will enable him to better protect his interest. (5 Fletcher 638.)