Law on Corporation by Atty. Andrix Domingo PDF

Preview

Summary

Northern CPAR: Business Laws – Law on Corporations1Driven for real excellence! BL by Atty. Andrix Domingo, CPA BL – 6th Batch – HQNORTHERN CPA REVIEW4 th Floor Pelizloy Centrum, Lower Session Road, Baguio City Contact Numbers: SMART : 09294891758; GLOBE : 09272 128204 E-mail: ncpar@yahooATTY. ANDRIX...

Description

Northern CPAR: Business Laws – Law on Corporations

NORTHERN CPA REVIEW 4th Floor Pelizloy Centrum, Lower Session Road, Baguio City Contact Numbers: SMART : 09294891758; GLOBE : 09272128204 E-mail: [email protected]

ATTY. ANDRIX DOMINGO, CPA BUSINESS LAWS THE LAW ON CORPORATION Corporation 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 •Doctrine of piercing the veil of corporate entity or corporate fiction This is the doctrine to the effect that the separate personality of a corporation may be disregarded if such entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime 2. It is created by operation of law. 3. It has the right of succession. 4. It has the powers, attributes and properties expressly authorized by law or incident to its existence. •Doctrine of limited capacity A corporation can exercise only the powers expressly conferred upon it by law and its articles of incorporation, those implied from such powers expressly granted, and those that are incident to its existence. Classification of corporations 1. As to whether shares of stock are issued or not a. Stock corporation b. Non-stock corporation 2. As to the state or country under whose laws it was created a. Domestic corporation b. Foreign corporation 3. As to number of persons composing them a. Corporation aggregate b. Corporation sole 4. As to whether its purpose is public or private a. Public corporation b. Private corporation 5. As to whether its purpose is religious or not a. Ecclesiastical or religious corporation b. Lay Corporation 6. As to whether its purpose is charitable or not a. Eleemosynary corporation b. Civil corporation 7. As to their legal right to corporate existence a. De jure corporation b. De facto corporation 8. As to their relation to another corporation or other corporations a. Parent or holding corporation One which owns the shares of another corporation and having power, directly or indirectly, over the latter including the election of the directors thereof. b. Subsidiary corporation One whose shares of stock are owned by another corporation, called the parent corporation, which has the power to elect its directors. 9. As to whether its shares may be held by the public or not a. Close corporation b. Open corporation 10. Other classifications •Corporation by prescription •Corporation by estoppels Components of a corporation 1. Corporators – stockholders or members. 2. Incorporators – those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories of such document. 3. Stockholders 4. Members Share of stock A share of stock is one of the units into which the capital stock of the corporation is divided.

1

Driven for real excellence!

BL by Atty. Andrix Domingo, CPA

BL – 6th Batch – HQ07

Stock certificate A stock certificate is the written acknowledgment by the corporation of the stockholder’s interest in the corporation and its property. Rules on redeemable shares a. They may be issued by the corporation only if expressly provided in the articles of incorporation. b. They may be deprived of voting rights. c. 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. d. The terms and conditions for their redemption must be stated in the articles of incorporation and the stock certificate representing the said shares. Rules on founders’ shares a. Founders’ shares must be classified as such in the articles of incorporation. b. They may be given rights and privileges not enjoyed by other shares subject to the following limitations: 1) If the exlusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not exceeding 5 years subject to the approval of the SEC. 2) The five – year period begins from the date of the said approval. Rules on treasury shares a. They shall have no voting rights as long as they remain in the Treasury. b. Although they are part of the subscribed stock, they are not considered outstanding shares. c. Being owned by the corporation, they are not entitled to dividends. d. They may again be disposed of for a reasonable price fixed by the board of directors. Watered stock – those issued without consideration or with no adequate consideration. Voting shares – those entitled to vote in the meetings of the corporation. Non-voting shares – those without voting rights, except in certain cases. Non-voting shares may nevertheless vote in 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. Investments of corporate funds in another corporation or in business. 8. Dissolution of the corporation. Contents of the articles of Incorporation ¤The name of the corporation. ¤The purpose or purposes of the corporation. •The purposes must be lawful. •The purposes must be definitely stated. ¤The place of the principal office which must be in the Philippines. ¤The term of existence. ¤Names, nationalities and residencies of the incorporators ¤Number and qualifications of incorporators •They must be natural persons. •Of legal age. •M ajority of whom must be residents of the Philippines. •Numbering not less than 5 or more than 15. •M ust own or be a subscriber to at least one (1) share of stock. ¤Number, names, nationalities and residences of the directors or trustees. •The number of directors shall not be less than 5 or more than 15. •The nationalities of the directors must be indicated to determine if the number of alien directors does not exceed the number allowed based on the ratio of the foreign stock ownership to the total number of shares. •M ajority of the directors must be residents of the Philippines. ¤The amount of authorized capital stock in lawful money of the Philippines, if the number of shares are without par value, the number of authorized shares and the fact that they are without par value must be stated. ¤The names of the subscribers, nationalities, number of shares subscribed, amount subscribed, amount subscribed, and amount paid-in. ¤Other matters not inconsistent with law and which the incorporators may deem necessary or convenient. ¤The name of the temporary treasurer elected (treasurer-in-trust). ¤Notarial acknowledgment. ¤Treasurer’s affidavit. Amendment of the articles of incorporation 1. Purpose It must be for a legitimate purpose or purposes. 2. Vote required a. Majority vote of the Directors, and

b. The vote or written assent of 2/3 of the outstanding capital stock (for stock corporations); 2/3 of the members (for nonstock corporation) 3. Requirements of amendments a. The original and the amended articles shall be indicated by underscoring the change or changes made. 4. Effectivity Upon approval; by the SEC or from the date of filling with the Commission if not it not acted upon within 6 months from the date of filling for a cause not a attributable to the corporation. Effect of non-use of corporate charter for 2 years The corporation shall be deemed dissolved if it does not formally organize, commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation, unless the same is due to causes beyond the control of the corporation as may be determined by the SEC. Effect of continuous non-operation for 5 years If a corporation has commenced the transaction of its business but subsequent becomes continuously inoperative for a period of at least 5 years Board of Directors, Trustees and Officers →is the governing body of a corporation They have the following principal functions: 1. To exercise corporate powers 2. To conduct all corporate business. 3. To control and hold corporate property. Qualifications of a director or trustee 1. He must be the owner of at least 1 share of stock which shall stand in his name on the books of the corporation. •In case a non-stock corporation, a trustee is required to be a member of the corporation. 2. Majority of the directors or trustees must be residents of the Philippines. 3. The number must not be less than 5 nor more than 15. Term of office Directors or trustees shall hold office for 1 year and until their successors are elected and qualified. Election of directors or trustees 1. They are elected at a meeting called for the purpose. 2. There must be present in person or by representative authorized by written proxy: a. The owners of the majority of the outstanding capital stock, if a stock corporation. b. The majority of the members, if a non-stock corporation. 3. The election must be by ballot if requested by any voting stockholder or member. 4. No delinquent stock shall be voted. 5. Methods of voting. a. Stock corporation b. Non-stock corporation A member may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Corporate officers Immediately after their election, the directors must formally organize by the election of the following officers: President – who must be a director Treasurer – may be a director or not. Secretary – must be a resident and citizen of the Philippines. Other officers as may be provided in the bylaws. Meeting of directors or trustees 1. Quorum →is the number of directors or trustees sufficient to transact business. •Quorum in meeting of directors or trustees General rule: Majority of the number of directors or trustees fixed in the articles of incorporation. Exception: If the articles of incorporation or by-laws provide for a for a greater number 2. Vote required to have a valid corporate act Majority of those present provided there is a quorum except in the election of officers which requires a majority vote or all members of the board. 3. Directors or trustees cannot attend or vote by proxy at board meetings. Executive committee →is a small group within a corporation composed of not less than 3 members of the board the creation of which is provided in the by-laws. Its purpose is to take immediate action on important matters without the need of a board meeting particularly when it is difficult to muster a quorum. 2. Functions To act, by a majority vote of all its members, on such specific matters within the competence of the board as may be delegated to it in the by-laws or on a majority vote of the board.

However, the following may not be delegated to the executive committee: Approval of any action for which shareholders approval is also required. The filling of vacancies in the board. The amendment or repeal of by-laws or the adoption of new by-laws. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable. e. The distribution of cash dividends to the shareholders. a. b. c. d.

Removal of directors of trustees 1. Requisites a. The removal must take place in a regular meeting of the corporation or in a special meeting called for the purpose. b. Previous notice of the intention to propose such removal must have been given to the stockholders or members. c. The following vote must been obtained to effect the removal: 1) Stock corporation- by the stockholders representing at least 2/3 of the outstanding at least 2/3 of the outstanding capital stock entitled to vote. 2) Non-stock corporation- 2/3 of the members entitled to vote. Vacancies in the office of director or trustee Removal Expiration of term Increase in the number of directors Resignation Death Abandonment Disqualification 2. Filling of vacancy A vacancy in the office of the board of directors or trustees may be filled as follows: By the stockholders or members 1) If the cause of vacancy is any of the following: a) Removal b) Expiration of term c) Increase in the number of directors. 2) If the cause of vacancy is other than removal, expiration of term or increase in the number of directors or trustees and they do not constitute a quorum for the purpose of filling the vacancy. By the board of directors or trustees 1) If the cause of vacancy is other than removal, expiration of term or increase in the number of directors, and 2) The remaining directors or trustees still constitute a quorum. Disqualification to become directors, trustees or officers a. Person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six years. b. Persons guilty of violating the Corporation Code. Time of commission of the offense The offense must have been committed within 5 years prior to the date of election or appointment. Compensation of directors 1. Rule and Exceptions General rule: Directors are not entitled to compensation as such as directors. Exception: Directors are entitled to compensation in the following cases: When fixed in the by-laws. When the giving of compensation is approved by the stockholders representing at least a majority of the outstanding capital stock. When the compensation refers to reasonable per diems 2. Limitation on compensation The total yearly compensation (excluding per diems) of directors, as such Directors must not exceed 10% of the net income before income tax of the corporation during the preceding year. Rule on self-dealing directors, trustees or officers A contact of the corporation with one or more of its directors, trustees or officers is voidable at the option of the corporation, unless all the following requisites are present: 1. That the presence of such director or trustee in the board meeting in which the →Contract was approved was not necessary to constitute a quorum at such meeting. 2. That the vote of such director or trustee was not necessary for the approval of the contract. 3. That the contract is fair and reasonable under the circumstances. 4. In the case of an officer, the contract with the officer has been previously authorized by the board of directors or trustees. Liability of directors or trustees for damages a. By willingly and knowingly voting for or assenting to patently unlawful acts of the corporation. b. Nature of liability -solidary.

c. To whom liable To the corporation, its stockholder or members Doctrine of corporate opportunity This is the doctrine to the effect that when a director attempts or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, or when by virtue of his office, he acquires for himself a business opportunity which should belong to the corporation, he must account for all such profits derived by him from the said business opportunity by refunding the profits to the corporation. Powers

of

Corporation Kinds of powers 1. Express powers- powers expressly granted to a corporation by its charter. 2. Implied powers- necessary to carry into effect powers which are expressly granted 3. Incidental or inherent powers-by reason of its very existence as a corporation. Power to extend or shorten corporate term Requisites: a. Vote required – the act must be approved by a: 1) Majority vote of the board of directors or trustees, and 2) 2/3 of the outstanding capital stock; or 2/3 of the members in a meeting called for the purpose. b. The articles of incorporation are amended to effect such extension or shortening of corporate term. •Any stockholder who dissents from the act to extend or shorten the corporate term may exercise his appraisal right. •••Appraisal right is the right of a stockholder to demand payment of his shares when he dissents from certain corporate acts. Power to increase or decrease capital stock a. Vote required – the act must be approved by a: 1. Majority vote of the board of directors and 2. 2/3 of the outstanding capital stock in a meeting called for the purpose. b. The increase or decrease of capital stock must be certified to in a certificate duly signed by a majority of the directors and countersigned by the chairman and the secretary of the stockholders’ meeting and setting forth, among other information, the increase or decrease in capital stock, and in case of increase, the names of subscribers, nationalities, residences, etc., the vote obtained. c. Subscription and paid-in capital requirements in case of increase The Treasurer must execute a sworn statement attesting to the fact that at least 25% of the increase in capital stock has been subscribed and that at least 25% of such subscription has been paid. d. In case of decrease, the same should not prejudice the rights of corporate creditors ••Trust Fund Doctrine Under this doctrine, the capital stock and assets of the corporation are held in trust for creditors. Accordingly, there shall be no distribution of assets to shareholders until the claims of creditors have been paid or appropriations of such assets have been made for the payment of such claims. e. The increase or decrease of the capital stock must be approved by the SEC. Power to incur, create or increase bonded indebtedness Vote required – the act must be approved by a: a. Majority vote of the board of directors or trustees, and b. 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose. 2. The incurring, creating or increasing of bonded indebtedness must be certified to in a certificate duly signed by a majority of the directors and countersigned by the chairman and the secretary of the stockholders’ meeting and setting forth, among other information, the bonded indebtedness incurred, created or increased, the actual indebtedness of the corporation on the day of the meeting, the vote obtained, etc. 3. The incurring, creating or increasing bonded indebtedness must be approved by the SEC. 4. The bonds so issued must be registered with the SEC which shall have the authority to determine the sufficiency of the terms thereof. Power to deny pre-emptive right ••Pre-emptive right This refers to the right of existing stockholders to purchase or subscribe to all issuances or disposition of shares of any class, in proportion to their respective stockholdings, before such shares are offered to the public. Power to sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of corporate property including goodwill 1. Vote required – the act must be approved by a: a. Majority vote of the board of directors or trustees, and b. 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose. Power to acquire own shares 1. The acquisition must be for a legitimate purpose or purposes 2. The corporation must have unrestricted retained earnings

Power to invest corporate funds in another corporation or business or for any other purpose 1. Vote required a. Majority vote of the board of directors or trustees, and

b. 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose. 2. Exercise of appraisal right Any stockholder who dissents from the act may exercise his appraisal right. Power to declare dividends 1. Stock dividends – the declaration thereof must be approved by a: a. Majority vote of the directors present provided there is a quorum, and b. 2/3 of the outstanding capital stock entitled to vote in a meeting called for the purpose. 2. Cash dividends – the declaration thereof requires only the majority vote of the directors present provided there is a quorum. Power to enter into management contract Management contract →It is a contract whereby a corporation, delegates the management or operation of its business to another corporation. Voting requirement a. Majority vote of the board of directors or trustees present provided there is a quorum, and b. Majority of the outstanding capital stock or majority of the members entitled to vote in a ...