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BUSINESS LAWS AND REGULATIONSTitle I. General ProvisionCORPORATION 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. should consist of at least 5 to 15 incorporators, ...

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BUSINESS LAWS AND REGULATIONS Title I. General Provision

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. - should consist of at least 5 to 15 incorporators, each of whom must hold at least one share. - minimum paid-up capital of P5,000. - steps in the creation of a corporation: promotion, incorporation and formal organization and commencement of business operations.

ATTRIBUTES OF CORPORATION 1. Artificial being (capacity to contract and transact business, a corporation exists only in the eyes of the law, it exist in the legal fiction only but has its own personality). 2. Created by operation of law (cannot come into existence by mere agreement). 3. Has the right of succession (corporation has continuity, strong juridical personality). 4. Has the powers, attributes and properties expressly authorized by law or incident to its existence (a creature of limited power).

PARTNERSHIP - according to Art. 1767, By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. - created by agreement of partners; minimum paid-up capital of P3,000.

CORPORATION V PARTNERSHIP

PRIMARY FRANCHISE - the primary franchise of a corporation is its right to exist as a corporation – vested in the “individuals who compose the corporation and not in the corporation itself”. - the license to exist as a juridical personality.

SECONDARY FRANCHISE - are certain rights and privileges conferred upon existing corporations. - it refers to any of those franchises of a corporation other than its right or franchise to be a corporation, which is the primary franchise.

DEADLOCKS - it is where business and affairs of the corporation can no longer be conducted to the advantage of the stockholders in general. - any stockholder can petition the SEC, which is empowered to take necessary steps to break the deadlock.

PROVISIONAL DIRECTOR - an impartial person who is neither a stockholder nor a creditor of a corporation. - have all the rights and powers of a duly elected director of the corporation.

CLASSES OF CORPORATION 1. Stock Corporation - corporations which have capital stock divided into shares and are authorized to distribute to the holders of such share dividends or allotments of the surplus profits on the basis of the shares held. - for profit organizations that issues shares of stock to shareholders to raise capital. - the governing body is usually the Board of Directors.

2. Non-stock Corporation - corporation where no part of its income is distributable as dividends to its members, trustees or officers. - corporations which does not issue shares of stock. - can be formed as either for-profit or non-profit corporation. - since this has no shareholders, it is owned by people called “members”. - the governing body is usually the Board of Trustees. - any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose/s for which it has organized.

Power obtained to make profits and engage in business 1. Incidental profits obtained from operations. 2. Profits obtained from investment of accumulated funds. 3. Powers necessary in furtherance of purpose/s.

Rules for distribution of assets upon dissolution

1. All liabilities and obligations of the corporation shall be satisfied. 2. Assets held by corporation under condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned. 3. Assets received and held by the corporation with a limitation permitting their use only for charitable, religious, benevolent, educational or similar purposes but not held upon a condition requiring return, transfer or conveyance by reason of dissolution shall be transferred or conveyed to 1 or more corporations, societies or organizations engaged in activities in the Philippines substantially similar.

3. Public Corporation - formed or organized for the government of a portion of the state (barangay, municipality, city and province) for political purposes connected with the public good in the administration of the civil government. - purpose is the general good and welfare.

4. Private Corporation - formed for some private purposes, benefit or end. - may either be a stock or non-stock corporation.

5. Quasi-public Corporation - private corporations supported by the government in the performance of public duties (public utilities – electricity, water, etc.) - a cross between private corporations and public corporations.

6. Government-owned and Controlled Corporation (GOCC) - created under a special law or charter. Treated as private corporations.

- any agency, stock or non-stock, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government of the Republic of the Philippines.

It is clear that a corporation is a GOCC when the government owns at least a majority or 51% share of the capital stock.

7. Corporation by Prescription - a corporation that has existed longer than the memory of man can remember and is presumed to have acquired its juridical personality from the long time ago (ex. Roman Catholic).

8. Domestic - one formed, organized, or existing under the laws of the Philippines.

9. Foreign - one formed, organized, or existing under any law other than those of the Philippines.

10. De Jure Corporation - organized in accordance with the requirements of law.

11. De Facto Corporation - corporation where there exists a flaw in its incorporation, it falls short of the requirements of law. DE JURE V DE FACTO CORPORATION

12. Corporation by Estoppel - all persons who assume to act as a corporation knowing it to be without authority to do shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.

13. Holding Company - primary purpose is to hold a controlling stock from a corporation. - one that controls another as a subsidiary or affiliate by the power to elect its management. - one which holds in other companies for the purpose of control rather than for mere investment.

14. Affiliate Company - one that is subject to common control to a mother or holding company and operated as part of a system at a minor stake.

15. Parent and Subsidiary Companies - when a corporation has a controlling financial interest in one or more corporations, the one having in control is known as the “parent company” and the others are known as “subsidiary company”.

The difference between parent and holding company is that a parent company has control of other companies BUT has its own operations (day-today ops) while the holding company only has investment in other firms BUT does not have any operations.

16. Municipal 17. Religious 18. Educational 19. Charitable, scientific or vocational 20. Business

21. Aggregate Corporation - a corporation which consists of many persons united to form a body politic and corporate.

22. Corporation Sole - consist of one person only. - may be formed by the chief archbishop, bishop, minister, rabbi, or other presiding elder of any religious denomination, sect or church. - formed for the purpose of administering and managing, as trustee, the affairs, properties, and temporalities of any religious denomination.

23. Close Corporation - not listed in any stock exchange or make any public offering on any of its stocks. - the issued stock shall be held of record by not more than 20 persons. - any corporation may be a close one, except: mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest.

Requisites of a close corporation 1. Number of stockholders not to exceed more than 20. 2. Restriction on the transfer of issued stocks (right of first refusal in favor of stockholder).

3. The stocks cannot be listed in the stock exchange nor should they be publicly offered.

Special rule on stock of ownership - a corporation is not deemed a corporation whenever 2/3 of the voting stocks or voting rights is owned or controlled by another corporation which is a close corporation.

Characteristics - the stockholders themselves can directly manage the corporation and perform the functions of directors without need of election. - when they manage, stockholders are liable as directors; - there is no need to call a meeting to elect directors; - the stockholders are liable for tort.

The restriction in the transfer of shares of the stocks must appear in: 1. AOI; 2. By-laws; and 3. Stock certificates, or they will not be binding on any purchaser in good faith.

Pre-emptive right in close corporation 1. 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 AOI provides otherwise.

Pre-emptive right - is the right of a stockholder to subscribe to the unissued shares of a corporation.

24. Eleemosynary Corporation - one organized for charitable purposes.

VOLUNTARY DISSOLUTION 1. When no creditors are affected, by filing an administrative application for dissolution filed with SEC. 1.1 should be with a majority vote of the Board by resolution; 1.2 affirmative vote of 2/3 of the OCS or 2/3 of the members; 1.3 copy of resolution certified by majority of directors or trustees; 1.4 the SEC must issue a certificate of dissolution. 2. When creditors are affected, by a formal petition for dissolution filed with SEC, with due notice, and hearing to be duly conducted. 2.1 signed by majority of directors or trustees; verified by president or secretary. 2.2 set forth all claims and demand against it; set forth that the dissolution was resolved upon affirmation vote of 2/3 of the OCS or 2/3 of the members. 3. By shortening of corporate term

INVOLUNTARY DISSOLUTION 1. A corporation may be dissolved by the SEC upon filing of a verified complaint, after proper notice and hearing on grounds provided by existing laws, rules and regulations. 2. Expiration of corporate term. 3. Dissolution by the sec on grounds under existing laws.

CASE ABOUT SENATOR GORDON OF PHILIPPINE NATIONAL RED CROSS - It is questioned on why Sen. Gordon is still a member of the Senate if he is now the President of the PNRC for one cannot occupy two positions in the government.

- The SC then, declared that the PNRC is not an instrumentality of the state, meaning it is not a part of the government. - Nor it is a private organization, for it is regulated by the international humanitarian law and is treated as an auxiliary of the state. - The structure of the PNRC is sui generis or “a class of its own”, being neither strictly private nor public in nature.

CHARTER - provides for the basic power, basic elements, the purpose and others.

SHARES / STOCKS - often called shares of stock, represent the equity ownership of a corporation divided up into units. - a piece of a company limited by shares. Represents the ownership of a fraction of a corporation. - represents the interest or right in which the owner has to the corporation.

STOCKHOLDERS / SHAREHOLDERS - is an individual or institution that legally owns one or more shares of the share capital of a public or private corporation.

CLASSIFICATION OF SHARES - the shares of stock of stock corporations may be divided into classes or series of shares. - no shares of stock may be deprived of voting rights except for “preferred or redeemable shares”. - there shall always be a class or series of shares which have complete voting rights. - any or all of the shares or series of shares may have a par value or no par value.

- corporations such as: 1. Banks, 2. Trust, 3. Insurance, 4. Public utilities, 5. Building and loan associations, etc., cannot issue shares with no par value.

COMMON SHARES / SHAREHOLDERS - is a security that represents ownership in a corporation. - this type of ownership typically yield higher rates of return at long term. - common stockholders may not always receive a dividend. - common stockholders have voting rights in corporate governance.

PREFERRED SHARES / SHAREHOLDERS - are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. - preferred shareholders have a higher claim on distributions like dividends than common stockholders, and higher claim to assets in the event of liquidation (pref. sh will only enjoy this benefits if the preferred share is issued with a par value). - usually have “no” or “limited” voting rights in corporate governance unless contrary is stipulated. - preferred shareholders receive a fixed dividend, and is satisfied first.

PAR VALUE SHARES - par value is the value of a single common share as set by a corporation's charter. - par value means “stated value or face value”. - purpose is to fix the minimum issue price of the shares thus assuring creditors that the corporation would receive a minimum amount for its stock.

NON PAR VALUE SHARES

- shares of capital stock without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or its creditors in respect thereto. - when a company has no par value stock, there is effectively no minimum baseline from which to price the stock, so the price is instead determined by the amount that investors are willing to pay, based on their perceived value of the issuing entity.

FOUNDER’S SHARES - given to the incorporators of a corporation. - has certain rights and privileges not enjoyed by owners of other stock like the exclusive right to vote in the election and be voted for in the election of board of directors (enjoyed only for 5 years).

REDEEMABLE SHARES - are shares of stock that can be repurchased by the issuing company on or after a predetermined date or following a specific event. - they may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation.

TREASURY SHARES - are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. - issued, re-acquired but not cancelled. - need to have a suffice balance of unrestricted retained earnings to buy the shares back.

REDEEMABLE V TREASURY SHARES

- the main difference of the two is the existence of retained earnings. Under redeemable shares, it doesn’t matter if the corporation still has an unrestricted retained earnings; but, when it comes to treasury shares, it’s important to have unrestricted retained earnings otherwise, the corporation cannot buy it back. - redeemable shares cannot be reissued or sold by the corporation since it is retired, while the treasury shares may be issued or sold again. - redeemable shares are retired and cannot be re-issued unless stated in the articles of incorporation. While they are considered retired, the same remains in treasury until removed from their treasury status by decreasing the authorized capital stock.

TITLE II. Incorporation Corporations

and

Organization

of

Private

CORPORATORS - are those who compose a corporation, whether as stockholders or as members. - corporators in a stock corporation are called stockholders or shareholders. - corporators in a non-stock corporation are called members.

INCORPORATORS - are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. - part of the original group of stockholders at the time that the articles of incorporation is submitted to the SEC.

Requirements of Law to Incorporators 1. Natural person (because if a juridical person is to be allowed as an incorporator, it will add burden to the corporation being formed because aside from the fact that incorporators will have to discuss among themselves the terms and conditions of the AOI, they will be dealing with a corporation who is governed by its own board of incorporators). 2. Of legal age. (but, a person not of legal age can purchase stocks of a corporation because this requirement only applies to incorporators not to a stockholder/corporators). 3. Must own or subscribe at least one share of stock of the corporation. 4. 5 to 15 incorporators who must sign the articles of incorporation (AOI). 5. Majority of the incorporators must be residents of the Philippines (residency not citizenship).

All incorporators are corporators of a corporation, but not all corporators are incorporators of a corporation.

CORPORATE TERM - not more than 50 years from date of incorporation subject to extension for periods not exceeding 50 years per extension unless: 1. Sooner dissolved, or 2. Extended.

MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS - 25:25 threshold amount. - at the time of incorporation, at least 25% of authorized capital stock as stated in the AOI must be subscribed. - at least 25% of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the BOD.

- stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law. - minimum paid-up capital is not less than P5,000.

Call - term used when the Board formally asks for payment of the balance of the subscription or a part thereof.

CORPORATE LAYERING - using corporations as stockholders of other corporations in different stages of organization.

ARTICLES OF INCORPORATION. a. Nature and function of Articles - the AOI is a basic contract document in Corporation Law that defines the charter of the corporation.

Section 14 of the Corporation Code provides that the AOI do not become binding as the charter of the corporation unless they have been filed with the SEC.

b. Contents 1. Name of corporation 2. Purpose/s, indicating the primary and secondary purposes; 3. Place of principal office 4. Term which shall not be more than 50 years; 5. Names, citizenship and residences of incorporators 6. Number, names, citizenship and residences of directors

7. If stock corporation, amount of authorized capital stock, number of shares; 8. In par value stock corporations, the par value of each share; 9. Number of shares and amounts of subscription of subscribers which shall not be less than 25% of the authorized capital stock; 10. Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000; 11. Name of treasurer elected by subscribers; and 12. If the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum.

AMENDMENT OF ARTICLES OF INCORPORATION a. Voting Requirements 1....