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UNIVERSITY OF SAN CARLOSSCHOOL OF LAW & GOVERNANCEBusiness Organization 2 Revised Corporation Code ReviewerAtty. Eugenio EspedidoEH403 SY 2019-CORPO COMMITTEE:Gaviola, Keeshia Earl T. Li, Jinnelyn O. Tagaloguin, Elmar M. Torres, Chezka Bianca P.SOURCESDiscussion of Atty. Espedido & Atty. Gav...

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UNIVERSITY OF SAN CARLOS SCHOOL OF LAW & GOVERNANCE

SEC. 14. FORM OF ARTICLES OF INCORPORATION .... 27

Business Organization 2 Revised Corporation Code Reviewer

SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR AMENDMENTS .................................................................. 29

Atty. Eugenio Espedido

SEC. 18. REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATION EXISTENCE ..... 30

EH403 SY 2019-2020 CORPO COMMITTEE: Gaviola, Keeshia Earl T. Li, Jinnelyn O. Tagaloguin, Elmar M. Torres, Chezka Bianca P.

SEC. 19. DE FACTO CORPORATION .............................. 31

SOURCES Discussion of Atty. Espedido & Atty. Gaviola (2018-2019) | Herbosa | Prior Year Notes: Gaviola, Tanya & Beer Notes | UP Law Notes 2019 | San Beda MemAid 2019 Disclaimer: This material is not for sale. The authors do not guarantee the absolute correctness, completeness or accuracy of this reviewer. This is intended to be used as a supplement to your personal readings. Please be vigilant in cross-referring with your own notes. We have arranged Atty. E.’s discussion to align with the codal provisions, and thus this reviewer does not completely follow the flow of his class discussions. 

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Kindly note that the portions of these reviewers marked with double asterisks (**) were not discussed by Atty. E., but for purposes of the mock bar and/or better understanding, the authors thought to include such notes in this material. Tip: To easily reach a specific section or title in this document, simply press CTRL + .

SEC. 15. AMENDMENT OF THE ARTICLES..................... 28

SEC. 17. CORPORATION NAME ...................................... 29

SEC. 20. CORPORATION BY ESTOPPEL ........................ 31 SEC. 21. EFFECT OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION ............... 34 TITLE III. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS ............................................................................. 34 SEC. 22. QUALIFICATIONS OF THE BOD/BOT ............... 35 SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES .... 37 SEC. 24. CORPORATE OFFICERS .................................. 39 SEC. 25. REPORTORIAL REQUIREMENTS ..................... 41 SEC. 26. DISQUALIFICATION OF DIRECTORS, TRUSTEES, OR OFFICERS .............................................. 42 SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES ........... 42 SEC. 28. VACANCIES in the board .................................... 42 SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES ........................................................................................... 44 SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS ......................................................................... 44 SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR OFFICERS ......................................................................... 45 SEC. 32 INTERLOCKING DIRECTORS ............................ 46

TABLE OF CONTENTS

SEC. 33. DISLOYALTY OF A DIRECTOR ......................... 47

TITLE I. GENERAL PROVISIONS, DEFINITIONS AND CLASSIFICATIONS ................................................................. 2

SEC. 34. EXECUTIVE COMMITTEE ................................. 48 TITLE IV. POWERS OF THE CORPORATION ..................... 48

SEC. 1. TITLE OF THE CODE ............................................. 2

SEC. 35. CORPORATE POWERS AND CAPACITY ......... 48

SEC. 2. CORPORATION DEFINED ..................................... 4 SEC. 3. CLASSES OF CORPORATIONS .......................... 11

SEC. 36. POWER TO EXTEND OR SHORTEN CORPORATE TERM .......................................................... 50

SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS OR CHARTERS .................................................................. 14

SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL STOCK ............................................................................... 50

SEC. 5. CORPORATORS AND INCORPORATORS, STOCKHOLDERS AND MEMBERS...................................14

SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS .. 52

SEC. 6. CLASSIFICATION OF SHARES ........................... 15

SEC. 40. POWER TO ACQUIRE OWN SHARES .............. 52

SEC. 7. FOUNDERS’ SHARES .......................................... 16 SEC. 8. REDEEMABLE SHARES ...................................... 16

SEC. 41. POWER TO INVEST CORPORATE FUNDS IN OTHER CORPORATIONS/BUSINESSES ......................... 53

SEC. 9. TREASURY SHARES ........................................... 16

SEC. 42. POWER TO DECLARE DIVIDENDS .................. 54

TITLE II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS .................................................. 22

SEC. 43. POWER TO ENTER INTO MANAGEMENT CONTRACT........................................................................ 59

SEC. 10. NUMBER AND QUALIFICATIONS OF INCORPORATORS ............................................................ 22

SEC. 44. ULTRA VIRES ACTS .......................................... 59

SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT ........ 51

TITLE V. BYLAWS ................................................................ 60

SEC. 11. CORPORATE TERM ........................................... 23

SEC. 45. ADOPTION OF BY LAWS ................................... 60

SEC. 12. CAPITAL STOCKS .............................................. 23

SEC. 46. CONTENTS OF BYLAWS ................................... 61

SEC. 13. CONTENTS OF THE ARTICLES OF INCORPORATION.............................................................. 23

SEC. 47. AMENDMENT TO BYLAWS ............................... 61 TITLE VI. MEETINGS ............................................................ 62 Page 1 of 88 | EH403 2019-2020 Corporation Law

SEC. 48. KINDS OF MEETINGS ........................................ 62 SEC. 49. REGULAR & SPECIAL MEETINGS OF STOCKHOLDERS OR MEMBERS ..................................... 62 SEC. 50. PLACE & TIME OF MEETINGS OF STOCKHOLDERS OR MEMBERS ..................................... 65

R.A. No. 11232 An Act Providing for the Revised Corporation Code of the Philippines TITLE I. GENERAL PROVISIONS, DEFINITIONS AND CLASSIFICATIONS

SEC. 51. QUORUM IN MEETINGS .................................... 65 SEC. 52. REGULAR & SPECIAL MEETINGS OF DIRECTORS/TRUSTEES; QUORUM ................................ 65 SEC. 53. WHO SHALL PRESIDE AT MEETINGS .............66

SEC. 1. TITLE OF THE CODE Section 1. Title of the Code. This Code shall be known as the “Revised Corporation Code of the Philippines”.

SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS & ADMINISTRATORS ............................................................ 66 SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF STOCK ............................................................................... 66 SEC. 56. VOTING RIGHT FOR TREASURY SHARES ...... 67

INTRODUCTION The Revised Corporation Code of the Philippines (RCC) was signed into law by Pres. Rodrigo Duterte on 20 February 2019, and became effective on 23 February 2019, following its publication in 2 newspapers of general circulation.

SEC. 57. MANNER OF VOTING; PROXIES ......................67 SEC. 58. VOTING TRUSTS ...............................................68 TITLE VII. STOCKS AND STOCKHOLDERS .......................70 SEC. 59. SUBSCRIPTION CONTRACT ............................. 70 SEC. 60. PRE-INCORPORATION SUBSCRIPTION .......... 70 SEC. 61. CONSIDERATION FOR STOCKS ......................71 SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF SHARES ............................................................................. 72 SEC. 63. ISSUANCE OF STOCK CERTIFICATES ............ 73 SEC. 64. LIABILITY OF DIRECTORS FOR WATERED STOCKS ............................................................................. 75 SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS ........ 77 SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION .. 77 SEC. 67. DELINQUENCY SALE ........................................78 SEC. 68. WHEN SALE MAY BE QUESTIONED ................ 79 SEC. 69. COURT ACTION TO RECOVER UNPAID SUBSCRIPTION ................................................................. 79 SEC. 70. EFFECT OF DELINQUENCY .............................. 79 SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT ............................................................................................ 79 SEC. 72. LOST OR DESTROYED CERTIFICATES ........... 80 TITLE VIII. CORPORATE BOOKS AND RECORDS ............82 SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT ............................................................................................ 82 SEC. 74. RIGHT TO FINANCIAL STATEMENTS ............... 86 APPENDIX ............................................................................. 87 P.D. 902-A .......................................................................... 87 NATIONALIZED ACTIVITIES (SEC. 8, RA 7042) ............... 87 SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042) ........... 88

In its repealing clause, the Revised Corporation Code expressly repealed the 1980 Corporation Code, which had no amendments for almost 39 years. Notes: From 149 sections, the RCC now has 188 sections. Being a special law, it is a combination of substantive and procedural law. The most important innovation is the introduction of the OPC, or one-person corporation. This is a very new concept. We have abandoned the old concept of at least 5 incorporators being required to make a corporation. o There is a new concept because many investors refrain from investing much into businesses, because when they invest into sole proprietorships, their liability is unlimited. o However, forming a corporation under the old law required 5 incorporators, and businessmen may not be comfortable with doing business with five other persons. So what they did before was they incorporated a corporation together with family members. Sometimes, they did it with their drivers, gardeners and laundrywomen, etc. The SEC realized that we are just fooling ourselves, that incorporators can sometimes be had in circumvention of the law. That is why they now allow the OPC. However, note that 80-90% of the Code remains the same with the Old Code. TYPES OF BUSINESS ORGANIZATIONS (1) Sole Proprietorships A form of business organization with only one proprietary owner. It is when a person personally or a single individual conducts business under his own name or under a business name. (2) Partnerships By a 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. Two or more persons may also form a partnership for the exercise of a profession.

Page 2 of 88 | EH403 2019-2020 Corporation Law

(3) 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.

SOLE PROPRIETOR -SHIP

Starts upon selling Commence -ment

Sole proprietor

PART -NERSHIP

CORPO -RATION

Created by mere agreement of the parties

Created by operation of law

At least 2 persons

New Law: One Person Corporation is allowed

No. of Incorporators

Old Law: At least 5 incorporators No juridical personality

Commence -ment of Juridical Personality

Liable up to the extent of personal properties

Execution of the contract

From the date of issuance of the Certificate of Incorporation by the SEC

Liable personally and subsidiarily for partnershi p debts to 3rd persons

Stockholder s are liable only to the extent of their investments as represented by the shares subscribed by them

Liability

Managed by the sole proprietor Management

Absence of any agreement, every partner is an agent of the partnership

Important: Veil of Corporate Fiction applies only to a Corporation Power to do business is vested in the Board of Directors (BOT) or Board of Trustees

Transferrable through asset sale

Transferability of Interest

Needs consent of all partners (based on delectus personae)

No right of succession Right of Succession

Does not need prior consent of the stockholders

There is right of succession

What is the basic distinction between the three? A: The veil of corporation fiction only exists in a corporation, and not in a sole proprietorship or a partnership. Atty. Espedido.: A Corporation, such as a One Person Corporation (OPC) enjoys the veil of corporate fiction and a limited liability whereas a Sole Proprietorship’s liability may not be limited at all. One of the requirements of an OPC to exist is to declare how much capital he intends so that his liability will be based on that capital. He must prove that he has separated that capital from his personal funds. The amount declared as capital for the Corporation has been separated from the personal funds. Unless he can do that, he might be liable as a Sole Proprietor. ADVANTAGES OF A CORPORATION (1) More capitalization (2) Limited liability – veil of corporate fiction applies (3) Right of succession – upon the death of a stockholder, the heir becomes the new stockholder which provides stability for the business to continue (4) Transferability of interest – does not require the consent of other stockholders (5) Easier management – management is centralized in the Board of Directors DISADVANTAGES OF A CORPORATION (1) Higher Income Tax Liability (May be taxed twice) Corporate Income Tax and Income Tax Stockholders

to

Illustration. When the corporation acquires income, it will be subject to corporate income tax. When it is distributed to the shareholder as cash dividends, it will also be an income of the shareholder and such are taxable income of the shareholder. (2) Less Participation in the Management. Participation of stockholders in a corporation is indirect. Indirect – means the management of the corporation is entrusted to the Board of Directors. The only participation of stockholders in the management is in the election of the Board of Directors. (3) No delectus personae – investing with people you do not know; there is no personal touch; no delectus personae (4) Dissolution – dissolution is granted by the State, unlike in a Partnership which can be dissolved anytime. Dissolution of a Corporation requires consent of the State because it is imbued with public interest. Page 3 of 88 | EH403 2019-2020 Corporation Law

(5) Greater degree of government control and supervision (6) Difficulty in meeting requirements – high cost of formation and operations

TYPES OF CORPORATIONS 1.

Public corporations Created to govern a portion of the State. Its purpose is for the general good and welfare (Sec. 3, Act 1456).

2.

Private corporations Created for some private purpose, benefit, aim or end. It may either be stock nor non-stock, governmentowned or controlled, or quasi-public.

3.

Publicly-listed corporations Private corporations whose stocks are listed in the PSE (Philippine Stock Exchange).

SEC. 2. CORPORATION DEFINED Section 2. 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 incidental to its existence. This course is actually called Business Organizations II. But what will we be studying in this course? A: We will be studying about private corporations, as distinguished from public corporations.

Examples: (1) San Miguel Corporation (2) Philippine Long Distance Telephone Company (3) SM Prime Holdings, Inc.

Private corporations are different from public corporations in that the latter are created and governed by special charters. What is a public corporation? A: It is one created by the State either by general or special act for purposes of administration of local government or rendering services in the public interest. PRIVATE CORPORATION VS. PUBLIC CORPORATION PRIVATE CORPORATION Formed for a private purpose, benefit or end.

PUBLIC CORPORATION Formed or organized to govern a portion of the State. Examples: 1. Municipalities 2. Provinces 3. Autonomous Regions such as the ARMM and the CAR

What about Region 7? A: It is not a public corporation because its purpose is for geographical determination and there is no election of Regional Representatives. Its only purpose is for the clustering of the provinces forming part of that region. How about ARMM and CAR? A: These are autonomous regions that have their own governors and boards. These are public corporations. How do we define private corporations? A: They are corporations that are established for a private purpose or benefit. What do you think about PAGCOR? A: It is an artificial being. Does it have the right of succession? A: It has. The Philippine Airlines before was a private corporation. And it was government-owned. Now, it has been privatized. Meaning, the shares of stock of the government were sold to private persons. PAGCOR is a private corporation.

4.

Quasi-public corporations Private corporations performing public functions. (Example: VECO)

5.

Government-Owned and Controlled Corporations Private corporations created by the Congress through a special charter and the majority of its shareholdings are owned by the government. A GOCC has a personality of its own, separate and distinct from that of the government. Examples: (1) Development Bank of the Philippines (2) Philippine Ports Authority (3) Philippine Amusement and Gaming Corporation (4) Land Bank of the Philippines (5) Manila International Airport Authority

**NOTES: 1. The test to determine whether a GOCC or private corporation: if a corporation is created by its own charter for the exercise of a public function, then GOCC; if by incorporation under the general corporation law, then private corporation (Baluyot vs. Holganza, 2000) What about the Department of Education? A: It is not a public corporation. It is an instrumentality of the government under the Executive Branch. What is a government instrumentality? A: It is not a private or a public corporation, but an instrumentality of the government performing functions of a particular branch of the government. If the employees of a GOCC are illegally dismissed, where do they go? A: It depends on what is written on their special charter. They are not covered under the Revised Corporation Code, and they are also not covered in the Labor Code. Moreover, many of them are covered by the Civil Service Rules even if they are private corporations.

Therefore, we have demonstrated the fact that private corporations may be? A: They can be private or government-controlled. Page 4 of 88 | EH403 2019-2020 Corporation Law

CONSEQUENCES OF BEING A CORPORATION What are the consequences of a corporation existing as an artificial being? A: (1) It has a separate and distinct personality from its members or shareholders, thus incurs separate liability (2) It enjoys rights separate from the stockholders (3) Properties of the corporation are separate from the properties of the stockholders.

XPNs: (1) When the crime is punishable by a special law; Atty. Espedido: The special law must specify that it imposes penalties on the officers of the corporation. To be able to punish the officers, the law should specifically provide that in case the corporation ...