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Questions and Answers
How much must be newly subscribed when a corporation increases its capital stock by P30,000,000?
What is the minimum amount that must be paid in cash or property when subscribing to the additional capital?
What approval is required for a non-stock corporation to incur bonded indebtedness?
What is required for bonds issued by a corporation according to the RCC?
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When are corporate notes typically used over bonds?
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What is required alongside the certificate of increase of capital stock?
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What is the minimum percentage of the increase in capital stock that must be subscribed?
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Who must sign the certificate of increase or decrease in capital stock?
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What must accompany the certification regarding the bonded indebtedness?
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Within how many months must the application to the Commission be submitted after approval?
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What information must be included about the persons subscribing during an increase of capital stock?
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Which entity's approval is required for changes in capital stock or bonded indebtedness?
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What must be provided regarding the capital stock that has been subscribed?
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When does the Bulk Sales Law apply?
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What must a vendor do to comply with the Bulk Sales Law?
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Under what condition are sales in bulk not covered by the Bulk Sales Law?
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What is required of the vendor prior to a sale under the Bulk Sales Law?
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Who must give authority for transactions in a non-stock corporation without voting members?
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Which of these does NOT require compliance with the Bulk Sales Law?
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Can a corporation acquire its own shares?
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What is one of the key requirements that must accompany a sale under the Bulk Sales Law?
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What must a corporation have in its books to acquire its own shares?
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Under which condition can a corporation NOT acquire its own shares?
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Which of the following is NOT a legitimate corporate purpose for purchasing or acquiring its own shares?
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What majority is required for a private corporation to invest funds in another corporation for purposes other than its primary purpose?
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What distinguishes dividends from profits in a corporation?
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Which type of dividend is paid in specific property instead of cash?
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What happens to a corporation's ability to pay creditors if it acquires its own shares and causes insolvency?
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When can dividends be declared by a corporation?
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What is the maximum percentage of surplus profits that stock corporations can retain?
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When can a stock corporation retain surplus profits beyond the established limit?
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What is NOT a requirement for the validity of a management contract?
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In which case is a greater vote of stockholders required to approve a management contract?
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What is the required board approval for a management contract?
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How long can a management contract typically last?
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What qualifies as an ultra vires act?
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Which of the following is a special circumstance allowing profit retention?
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What is one of the specific contents that may be included in a private corporation's bylaws?
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Which of the following options describes the nature of bylaws in relation to third persons?
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What is the required percentage of stockholders or members needed to adopt new bylaws?
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What can be included under the penalties in a corporation's bylaws?
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Under what conditions may the power to amend the bylaws be delegated?
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Which of these is NOT typically included in the bylaws of a private corporation?
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What is one way in which a corporation may notify stockholders or members about meetings?
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What does the term 'quorum' refer to in the context of corporate bylaws?
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Study Notes
Revised Corporation Code ("RCC")
- The RCC is a legal code governing corporations.
- Title IV covers corporate powers.
- Title V covers bylaws.
Title IV - Powers of the Corporation
- Every corporation under the RCC has power and capacity to:
- Sue and be sued in corporate name.
- Have perpetual existence, unless certificate of incorporation states otherwise.
- Adopt and use a corporate seal.
- Amend articles of incorporation according to RCC provisions.
- Adopt bylaws, not against law, morals, or public policy, and amend/repeal them per RCC.
- Issue/sell stocks to subscribers, sell treasury stock, and admit members (if non-stock).
- Deal with real and personal property, including securities.
- Partner, joint venture, merge, consolidate, or enter into other agreements with natural and juridical persons.
- Make reasonable donations for public welfare, health, charitable, cultural, scientific, civic purposes (with restrictions on political donations).
- Set up pension, retirement, and other plans for directors, trustees, officers, and employees.
- Exercise other powers necessary to carry out its purpose as stated in the articles of incorporation.
How the Term of a Private Corporation Can Be Extended or Shortened
- A private corporation can extend or shorten its term if approved by:
- A majority vote of the board of directors or trustees.
- Ratified by the stockholders or members representing at least two-thirds of the outstanding capital stock (or two-thirds of the members in non-stock corporations).
- Written notice of the proposed action and meeting time/place must be sent to shareholders at residence, deposited in mail, or delivered in person; in some cases using electronic means.
- A dissenting stockholder has the right of appraisal under RCC conditions.
Can a Corporation Extend Its Life After Liquidation?
- No. A corporation cannot extend its life after its term has expired and during liquidation. Extension steps must occur before expiration of the original term.
Increasing or Decreasing Capital Stock of Stock Corporations
- A corporation can increase or decrease its capital stock or incur/create bonded indebtedness if:
- Approved by a majority vote of the directors.
- Approved by two-thirds of the outstanding capital stock at a duly called stockholders' meeting.
What Documents Must Be Signed Concerning Capital Stock or Bonded Indebtedness?
- A certificate must be signed by a majority of the directors and countersigned by the chairperson/secretary of the stockholders' meeting. This certificate must include:
- Confirmation of fulfilled requirements of the section.
- Amount of increase/decrease of the capital stock.
- Details of any increase in capital stock: amount of no-par stock subscribed, names/details of subscribers, amounts paid by each subscriber.
- Any bonded indebtedness to be incurred, created, or increased.
- Amount of stock represented at the meeting.
- The vote authorizing the increase/decrease (or incurring, creating, or increasing) of bonded indebtedness.
SEC and PCC Approval for Increasing or Decreasing Capital Stock
- Any increase or decrease in the capital stock or incurring, creating or increasing bonded indebtedness needs prior approval from the SEC and, where appropriate, the Philippine Competition Commission (PCC).
- Application to the Commission must be submitted within six months of the board of directors' and stockholders' approval. This time period could be extended for justifiable reasons.
Certificate Requirements for Increasing Capital Stock
- The certificate of increase of capital stock must be accompanied by a sworn statement by the corporation's treasurer.
- This statement must show at least 25% of the increase in capital stock has been subscribed, with at least 25% paid in actual cash to the corporation, or with property of equivalent value.
Illustrative Examples: Capital Stock Increase
- An example presented illustrates a corporation increasing its authorized capital stock from P20,000,000 to P50,000,000.
- To meet the RCC requirement, at least 25% of the additional P30,000,000 stock must be subscribed, and 25% of that subscribed amount paid in cash or property.
Non-Stock Corporation Bonded Indebtedness
- Non-stock corporations can incur, create, or increase bonded indebtedness with approval from:
- A majority of the board of trustees.
- At least two-thirds of the members in a meeting duly called for the purpose.
Bonds Issued by Corporations
- Bonds issued by a corporation must be registered with the SEC.
- The SEC has the authority to determine the sufficiency of the bond terms.
Corporate Notes, Bonds, and Bonded Indebtedness
- Corporate indebtedness can be in the form of notes or bonds. Notes are usually issued for small amounts or short periods while bonds are for larger amounts or over several years.
Stockholders' Pre-emptive Rights
- Stockholders of a stock corporation have preemptive rights to subscribe to issues or disposition of shares—in proportion to their ownership.
- Exceptions to preemptive rights:
- Denials in articles of incorporation or amendments.
- Issues conforming to laws regarding stock offerings or minimum stock ownership.
- Shares issued in good faith with approval from a majority of outstanding capital stock.
Purpose of Pre-emptive Rights
- These rights maintain proportionate voting strengths of stockholders and prevent their shareholding percentage from being diluted through new share issuances.
Pre-emptive Rights on Treasury Shares
- When corporations reacquire their own shares (treasury shares), stockholders still retain preemptive rights when those treasury shares are later reissued or sold.
Sale of Substantially All Corporation Assets
- If a sale or similar disposition covers significantly all of the corporate property and assets, it's viewed as substantially all assets. The corporation would then be deemed incapable of continuing its purpose.
Requirements for Selling Substantially All Corporation Assets
- Must comply with Republic Act No. 10667 (Philippine Competition Act) and other relevant laws.
- Must be approved by a majority vote of the Board of Directors or Trustees and two-thirds (2/3) of the outstanding capital stock (or two-thirds of members in non-stock corporations) at a meeting duly called for that purpose.
- Follow the Bulk Sales Law if applicable, including detailed requirements such as notices to creditors, inventory, and registration statements.
- Exceptions to the Bulk Sales Law requirements.
When the Bulk Sales Law Applies
- It applies to sales, transfers, mortgages, or assignments of corporation assets that are not part of ordinary trade or business procedures.
- It applies to substantially all of the corporation's business or trade assets, and to all or substantially all of the fixtures and equipment used in that business.
- Exemptions exist when creditors have waived these provisions.
Requirements of the Bulk Sales Law
- The vendor must execute and deliver a statement of creditors' names and addresses, amounts due, and assurances proceeds will be applied to creditor payments.
- The vendor must create an inventory of the goods and transfer a notice to creditors (at least ten days before the sale/mortgage).
- A written, sworn statement from the vendor must be registered with the Bureau of Domestic Trade.
Situations Where Bulk Sales Law Doesn't Apply
- If the vendor and creditors have a written waiver of Bulk Sales Law provisions.
- If the sale is handled by an executor, administrator, receiver, assignee in insolvency, or public officer acting under legal procedures.
- If the sale is part of the company's regular business operations.
Non-Stock Corporation Voting Requirements
- In non-stock corporations without voting members, authorization for transactions in Section 39 of the RCC is sufficient with a majority vote by trustees in office.
Corporation Acquiring Its Own Shares
- A stock corporation has the power to purchase or acquire its own shares if there's a legitimate reason, including eliminating fractional shares from stock dividends, settling corporation debts (from unpaid subscriptions), or paying dissenting or withdrawing shareholders according to the provisions of the Code.
Limitations on Acquiring Own Shares
- The corporation must have unrestricted retained earnings to purchase/acquire its shares.
- The corporation cannot acquire its own shares if these actions violate the trust fund doctrine, potentially impeding the right of creditors for satisfaction-of-claims and resulting insolvency.
Corporate Investment in Other Corporations
- A private corporation may invest its funds in another corporation or business, for reasons other than its primary purpose.
- The investment needs a majority approval by directors/trustees and a two-thirds approval from the shareholders (or members in a non-stock corporation), in a meeting duly called for that purpose.
Dividends
- Dividends are a portion of profits formally set aside by a corporation for distribution to shareholders.
- Profits alone do not qualify as dividends until a decision to distribute them is made and the dividends are formally declared.
- Dividend types include cash dividends (in cash) and property dividends (in specified assets). Stock dividends are payable in corporation shares and come from the unissued/excessively issued stock.
- Divident Declaration: Cash and property dividends follow majority approval of the board of directors. Stock dividends need board-approval + majority shareholder vote.
Who is Entitled to Dividends?
- Dividends are distributed to stockholders who had ownership in the corporation at the time the dividend was declared (not at the time of payment).
Dividend Eligibility for Shareholders Who Haven't Paid Subscriptions
- Stockholders who haven't fully paid subscriptions are still entitled to dividends unless they are in default.
- Cash dividends issued for delinquent stock first go towards unpaid balance, costs, and expenses.
- Stock dividends for delinquent stock are withheld until paid-up subscription.
Amending or Withdrawing Dividend Declarations (Cash, Property, Stock)
- Cash and property dividends once declared cannot be withdrawn or revoked. Stock dividends can be.
Compelling Dividend Declarations
- Generally, corporations are not required to declare dividends.
- Exceptions include when the corporation's excess profits exceed 100% of their paid-in capital, a definite corporate expansion project or program was approved and justified, a loan agreement prohibiting dividend payments was instituted and consent has not been provided, special reserve funds are needed for future crises.
Management Contracts Requirements
- The management contract necessitates majority approval from the members of the managing corporation's board and stockholders (or members in a non-stock corporation).
- A contract is invalid if it exceeds a validity period; normally set to 5 years, unless related to resource exploitation (periods can vary according to relevant laws).
Greater Shareholder Vote for Management Contracts
- Stockholders (or members) needing a larger vote majority (e.g., ⅔ of owners or members, despite a majority, are voting under a clause related to ownership interest. Alternatively if a majority of directors of both corporations are included in votes).
Ultra Vires Acts
- An ultra vires act is an action taken by a corporation that's beyond its stated powers, found in its charter or statutes. It isn't necessarily illegal; however, it's voidable.
- Types of Ultra Vires Acts: contracts that fall outside the scope of a corporation's charter or powers, acts exceeding those limitations even within the objectives (goals) listed in the charter.
- Ultra Vires Acts vs. Illegal Acts: an ultra vires act is not necessarily wrong or illegal but solely beyond the scope of an organization's powers, while an illegal act violates laws.
Ratifying Ultra Vires Acts
- Ultra vires acts can be ratified if they don’t violate laws or policy.
- Ratification can be direct, expressed, or implied through acceptance of benefits.
Bylaws
- Bylaws are internal rules within a corporation.
- Bylaws are adopted after incorporation by a majority vote of the shareholders or members (unless a majority vote of the board and members is included in a clause).
- Bylaws must not contradict legal or public policy nor impede existing rights of contracts.
- Bylaws must be general in application, reasonable, and not arbitrary or oppressive.
Bylaw Adoption Before Incorporation
- A code of bylaws must be approved and signed by all incorporators of a corporation before their filing with the Securities and Exchange Commission (SEC), along with the articles of incorporation.
Bylaw Effectiveness
- Bylaws are only valid following a certification by the SEC that they are consistent with the RCC.
SEC Acceptance of Bylaws
- The SEC will not accept bylaws, or amendments, from certain types of corporations (like banks, trust companies, insurance, etc) for filing, unless accompanied by appropriate certificates ensuring they align with the applicable corporation law.
Contents of Bylaws and Examples
- Typical bylaws include details on meetings, voting, proxy procedures, director/trustee qualifications, and their responsibilities.
- They may detail methods for selecting/appointing other officers. They may include penalties for rule violations, how to handle stock certificates in cases of stock corporations, and any other corporate rules, affairs, and governance/anti-graft measures.
Bylaws and External Parties
- Bylaws only affect parties within the corporation. Third-party individuals are not bound to the company's internal rules unless they are aware of and agree to those rules.
Amending Bylaws or Adopting New Bylaws
- Amend/repeal/adopt new bylaws by majority vote of directors/trustees, a majority of outstanding capital stock, or a majority of members (of non-stock corporations) and at a regular or special meeting called for the specific purpose. Stockholders may delegate this power to the board.
Requirements for Amended Bylaws
- After amending their bylaws, the corporation must file the amended bylaws with the SEC, and in relevant cases, the resolution authorizing the delegation. The document must be attested by the Secretary, approved by the majority of Directors/Trustees, and be officially sworn under oath.
Date of Bylaw Effectiveness
- Amended or new bylaws only become effective after the SEC confirms they are consistent with the RCC and relevant laws.
Aol (Articles of Incorporation) vs. Bylaws
- Articles of incorporation are a fundamental law of the corporation, established before the corporation operates, and essential for its existence. Bylaws, however, concern internal rules, can be altered, and don't impede the corporate existence.
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