2024 Philippine Commercial Law Part 2 Notes PDF

COMMERCIAL LAW (PART I) P U R P L E N O T E S DISCLAIMER The Purple Notes represent the collective efforts of the selfless and heroic Student Volunteers of the Arellano Law Bar Operations Commission. Its primary purpose is to create a material that will help the barrist...

COMMERCIAL P U R P L E N O T E S DISCLAIMER The Purple Notes represent the collective and heroic Student Volunteers of Operations Commission. Its primary material that will help the barristers as well as provide the underbar to supplement learning in their While these materials were discerningly diligence under the guidance and professors, it does not claim any these materials claim an impeccable Should the reader find any error to reach out to our Bar Operations [email protected] so we can earnestly issue an walk this path, we humbly May this be a lighting guide road until such time you life, liberty and property— the to guide lost causes toward property of the Arellano Law Bar unauthorized reprint or use No part of this material may be form or by any means, but not limited to information storage or written consent of both 2024 and the © 2024 stockholders, directors, and officers (Vasquez vs De Borja, G.R. Nos. 48930-48931). As corollary to this rule, obligations of the stockholders, directors, and officers are not the obligations of the corporation. (Aquino and Sundiang Sr., Reviewer on Commercial Law, 2022 edition, p. 245) and Rights belonging to the corporation cannot be invoked by the stockholders including directors and officers, even if the latter owns substantial majority of the shares in that corporation and rights of stockholders, directors, and officers cannot be invoked by the corporation. (Stonehill vs. Diokno, G.R. No. L-19550, June 19, 1967) A corporation may invoke the right against unreasonable search and seizure. (Stonehill vs. Diokno, G.R. No. L-19550, June 19, 1967) However, it cannot invoke the right against self-incrimination. It is elementary that the right against self- incrimination has no application to juridical persons. "While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privileges..." x x x There is a reserve right in the legislature to investigate [a corporation’s] contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. (BASECO vs. PCGG, G.R. No. 75885, May 27, 1987) A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. (LBC Express, Inc. vs. Court of Appeals, G.R. No. 108670, September 21, 1994) However, while a corporation cannot experience wounded DO NOT REPRODUCE 1 the same, though frequent changes may be made of its members. (Black’s Law Dictionary, 6 th edition, p. 1141) its own, “All individual members that have existed from the foundation to the present time, or that shall ever hereafter exist, are but one person in law, a person that never dies; in like manner as the River Thames is still the same river, though parts which compose it are changing every instant.” (1 Blackstone Commentaries, pp. 467-468) (d) It has powers, attributes, and properties expressly authorized by law or incidental to its existence. (Sec. 2, RCC) A corporation can only exercise powers conferred upon it: (1) By law (Sec. 35, Sec. 36-43, RCC); (2) Its articles of incorporation, those implied from the conferred powers (Sec. 35, RCC); or (3) Necessary or Incidental to its existence (Sec. 44, RCC) If the act of the corporation is not one of those express, implied or incidental powers, the act is ultra vires. (Aquino and Sundiang Sr., Reviewer on Commercial Law, 2022 edition, p. 263) s, 2. NATIONALITY OF CORPORATIONS The nationality of a corporation is determined by law and not by the corporation and/or its subsidiaries. It is the test or tests, as provided by law, that should prevail in determining the nationality of a corporation, and not its representations and/or those of its subsidiaries. (SEC-OGC Opinion No. 11-42 dated October 12, 2011) Generally, the corporation is considered as a national of the country where it was incorporated. (Place of Incorporation Test, Sec. 140 RCC) While the incorporation test serves as the primary test under Philippine jurisdiction, other tests such as the control test must be used for purposes of compliance with the provisions of the Constitution and of other DO NOT REPRODUCE 2 corporation is organized under Philippine laws. (Villanueva, Philippine Corporate Law, p. 58 as cited in SEC-OGC Opinion No. 11-42 still the prevailing mode dated October 12, 2011) corporation Note: In times of war, the nationality of a corporation is determined by the nationality of the controlling stockholders. (War-time Control Test) Corporations considered as “Philippine Nationals” under Foreign Investment Act of 1991 (R.A. 7042): Under the Foreign Investment Act of 1991 (RA No. 7042), a corporation shall be considered a “Philippine National” if it is: (1) A corporation organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens; or (2) A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock entitles to vote belong to Filipinos. Where a corporation and its non-Filipino stockholders’ own stocks in an SEC- registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least 60% of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national. (Double 60% rule) (Sec. 3(a), RA No. 7042, as amended by RA No. 8179) primary test b) GRANDFATHER RULE Grandfather Rule - is the method of attributing the shareholdings of a given corporate shareholder to the second or even the subsequent tier of ownership in a corporation. This is consistent with the rule that the “beneficial ownership” of corporations engaged in nationalized activities must reside in the hands of Filipino Citizens. In the case of multi-tiered DO NOT REPRODUCE 3 A private corporation organized under this Code commences its corporate existence and juridical personality from the date the Commission issues the certificate of incorporation under its official seal. (Sec. 18, RCC) Note: A corporation sole, after filing the verified articles of incorporation along with the documents required in Sec. 110 with the SEC, immediately becomes endowed with corporate personality. This serves as an rule." — exception to the rule that a corporation to the acquires juridical personality only upon the issuance of a certificate of incorporation by the said government agency. (Ladia and Reyes, The Revised Corporation Code of the Philippines, Annotated, 2021, p. 114) A corporation has a personality separate and distinct from its members. A corporation has a legal personality separate and distinct from that of people comprising it. (Secosa, et. al. vs. Heirs of Erwin Francisco, G.R. No. 160039, January 29, 2004) Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. (Art. 46, New Civil Code) By virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a corporation does not make one's property the property also of the corporation. (Bustos vs. Millian Shoes Inc., G.R. 185024, April 4, 2017) The president and manager of a corporation, who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of a corporation being separate and distinct from the person composing it. (Rustan Pulp & Paper Mills, Inc. vs. Intermediate Appellate Court, G.R. No. 70789 October 19, 1992) DO NOT REPRODUCE 4 requiring a personal performance of overt acts. In addition, the penalty of imprisonment cannot be imposed. and distinct (f) Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers since it does not have malice. In such case, the responsible officers would be criminally liable. (People vs. Tan Boon Kong, G.R. No. 32652, March 1930) Officers – As a Exceptions: A corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fines and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. (Ching vs. Secretary of Justice, G.R. No. 164317, February 6, 2006) Moreover, if by express provision of law (e.g. Sections 9 and 14 of Anti-Dummy Act Law and Anti-Money Laundering Act), the corporation is held criminally liable. Doctrine of corporate negligence. The hospital’s failure to supervise its resident physicians and nurses and to take an active step in order to remedy their negligence renders it directly liable. The duty of providing quality medical service is no longer the sole prerogative and responsibility of the physician. This is because the modern hospital now tends to organize a highly- professional medical staff whose competence and performance need also to be monitored by the hospital commensurate with its inherent responsibility to provide quality medical care. Such responsibility includes the proper supervision of the members of its medical staff. Accordingly, the hospital has the duty to make a reasonable effort to monitor and oversee the treatment prescribed and administered by the physicians practicing in its premises. (Professional Services, Inc. vs Court of Appeals, G.R. No. 126297, February 2008) Corporations not entitled to moral damages General A corporation is not entitled commit Rule to moral damages because special laws it has no feelings, no DO NOT REPRODUCE 5 and Sundiang Sr., Reviewer on Commercial Law, 2022 edition, p. 255, Cruz vs Dalisay, A.M. No. R-181-P, July 31, 1987) The doctrine of piercing the veil of corporate fiction applies to both stock and non-stock corporation. (International Academy of Managment Economics vs Litton and Company, G.R. No. 191525, December 13, 2017) Southern The doctrine likewise applies with equal force to a One Person Corporation. (Sec. 130, RCC) Areas of Application The doctrine of piercing the corporate veil applies only in three basic instances, namely: a natural or (a) when the separate distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or (c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. (Roquel v. Philippine National Bank, G.R. No. 246270, June 30, 2021) In one case, one corporation was considered THE a mere alter ego or adjunct, or instrumentality of the other because the stockholders were the same, they shared the same manager (and person in control of operations), they shared the same customers, they held office in the same building owned by the majority stockholders, and the business operations of the two corporations were merged. Hence, the adjunct corporation's obligations were considered the obligations of the other corporation and the latter's properties were made to answer for the said obligations. (Estelita Burgos Lipat v. Pacific Banking DO NOT REPRODUCE 6 This test requires that the parent corporation's conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental unfairness." (Ibid.) Test: Harm Test This test requires the plaintiff to show that the defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant's exercise of control and improper use of the corporate form and, thereby, legal right; and suffer damages. (Ibid.) To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil. (Roquel v. Philippine National Bank, G.R. No. 246270, June 30, 2021) its affairs This test requires the plaintiff to show that the defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant's exercise of control and improper use of the corporate form and, thereby, DO NOT REPRODUCE 7 and did not have an identity that was one and the same as its members. (Sulo ng Bayan vs. Araneta, G.R. No. L-31061, Aug. 17, 1976) Non-profit corporations are not immune from the doctrine of piercing the corporate veil. The court’s view piercing of the corporation as an equitable remedy, which justifies said courts to scrutinize any organization however organized and in whatever manner it operates. Moreover, control of ownership does not hinge on stock ownership. (Intl. Academy of Management and Economics vs. Litton and Company, G.R. No. 191525, Dec. 13, 2017) Alter-Ego Doctrine The doctrine of alter ego is based upon the misuse of a corporation by an individual for wrongful or inequitable purposes, and in such case the court merely disregards the corporate entity and holds the individual responsible for acts knowingly and intentionally done in the name of the corporation. (Sulo ng Bayan vs. Araneta, G.R. no. L-31061, Aug. 17, 1976) Kinds of Piercing (1) Traditional veil-piercing – a court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider (Intl. Academy of Management and Economics vs. Litton and Company, G.R. No. 191525, Dec. 13, 2017) (2) Reverse piercing action – flows in the opposite direction (of traditional corporate veil-piercing) and makes the corporation liable for the debt of the shareholders. (Ibid.) fiction, this Two Types of Reverse Piercing (1) Outside Reverse Piercing — occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant. property on (2) Inside Reverse Piercing — in insider reverse piercing, the controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets. (Intl. DO NOT REPRODUCE 8 in a counterclaim against the corporation. The Supreme Court rejected this move ruling that the doctrine cannot be applied to make the corporation liable for the personal obligations of directors, officers, or shareholders. According to the High Court, it is far-fetched to allege that the corporation is protecting and/or perpetrating fraud or promoting injustice. It was also pointed out that the doctrine is normally invoked to make the directors, officers, and shareholders liable for the obligations of the corporation. What the lawyer sought was the reverse. (Francisco Motors Corporation vs. Court of Appeals, G.R. No. 100812, June 25, 1999; Aquino and Sundiang Sr., Reviewer on Commercial Law, 2022 edition, p. 257) Examples of cases when doctrine was applied as single The separate personality of a corporation may be disregarded if such personality is: (1) used to evade obligations to employees or used as a pretext to dismiss employees; (2) used to evade lawful obligations or a money judgment; (3) dominated by officers or stockholders or other person or entity to the extent that the corporation is a mere alter ego, adjunct, or business conduit; (4) used to defeat public convenience (5) used to justify wrong (6) used to protect fraud (7) used to protect crime (8)used to confuse legitimate legal or judicial issues; or (9) used to perpetrate deception or otherwise circumvent the law (Land Bank of the Philippines v. CA, G.R. No. 127181, September 4, 2001; Luisito Padilla v. CA, G.R. No. 123893, November 22, 2001). of corporate To apply the doctrine of piercing the corporate veil against a corporation, it must have been impleaded in the case In A corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction, in that situation, the court has not acquired jurisdiction over the corporation and, hence, DO NOT REPRODUCE 9 (3) When properties are transferred in fraud of creditors. (4) When properties are disposed of or undue preference is given to some creditors even if the corporation is insolvent. (Ibid, p.335) KINDS OF CORPORATIONS on the fact 1. As to the existence of stock STOCK VS NON-STOCK CORPORATION STOCK NON-STOCK DEFINITION Stock corporations A nonstock are those which corporation is one have capital where no part of stock divided into its income is shares and are distributable as authorized to dividends to its distribute to the members, holders of such trustees, or shares, dividends, officers: Provided, or allotments of the that any profit surplus profits on which a nonstock the basis of the corporation may shares held. (Sec. 3, obtain incidental to RCC) its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organize. (Sec. 86, RCC) REQUISITES Requisites of a Requisites of a stock stock corporation: corporation: 1. It has a capital 1. No part of its stock divided income is into shares; and distributable 2. It is as dividends to authorized to its members; distribute and dividends or 2. It may be allotments as formed or surplus profits organized for to its charitable, stockholders on religious, the basis of the educational, professional, DO NOT REPRODUCE 10 civic among the holders (3) years from of stocks registered among the in the corporation's members of the or books (Sec. 22, corporation (Sec. RCC). 22, RCC). trade, Although a corporation has a capital stock divided into shares if it is not authorized to distribute dividends and allotment of surplus and profits to its stockholders, it may not be classified as a stock corporation because it lacks the second requisite. (Republic vs. City of Parañaque, G.R. No. 191109, July 18, 2012) A stock corporation is one that sources its capital through shares of stock and therefore or has a share capital or capital stock, not just for capital, whose capital stock is divided into shares, and who is authorized to distribute dividend to the holders of such share. A non- stock corporation, on the other hand, is one where no part of its income is distributable as dividends to its members, trustees, or officers. A non-stock corporation must have members. (Light Rail Transit Authority vs Quezon City, G.R. No. 221626, October 09, 2019) Three (3) requisites must concur for one to be classified as a stock corporation, viz: (1) it has capital stock, (2) the capital stock is divided into shares, and (3) it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. As for non- stock corporations, they must have members and must not distribute any part of their income to said members(Ibid.) 2. As to whether they are open to public or not CLOSE VS OPEN CORPORATION CLOSE OPEN DEFINITION Is one whose Are those formed to articles of openly accept incorporation outsiders or provides that: stockholders or a. All of the investors; corporation’s (Villanueva-Castro, issued stocks of Commercial Law DO NOT REPRODUCE 11 2020 Even if the transfer of stocks is made in violation of the restrictions enumerated under Section 99, such transfer is still valid if it has been consented to by all the stockholders of the close corporation and the corporation cannot refuse to register the transfer of stock in the name of the transferee. (Florete vs Florete, G.R. No. 223321, April 2, 2018) Deadlock If the directors or stockholders are so divided on the management of the corporation's business and affairs that the votes required for a corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. (Sec. 103, RCC) Remedy in case of Deadlock In the exercise of such power, the SEC shall have authority to make appropriate orders, such as: a. Cancel or alter any provision contained in the articles of incorporation, by-laws, or any stockholder’s agreement; b. Cancel, alter, or enjoin a resolution or act of the corporation or its board of directors, stockholders, or officers; c. Direct or prohibit any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; d. Require the purchase, at fair value, of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings or by the other stockholders; e. Appoint a provisional director; of f. Dissolve the corporation; or g. Grant such other relief as the circumstances may warrant. (Sec. 103, RCC) Provisional Director DO NOT REPRODUCE 12 CORPORATION RELIGIOUS SOLE SOCIETIES DEFINITION A corporation sole Any religious may be formed by society, religious the chief order, diocese, or archbishop, bishop, synod, or district priest, minister, organization of any rabbi, or other religious presiding elder of denomination, sect such religious or church. (Sec. denomination, sect 114, RCC) or church for the of purpose of administering and managing, as as trustee, the affairs, property and temporalities of any religious denomination, sect or church. (Sec. 108, RCC) in multiples 4. As to ownership HOLDING CORPORATION A parent or holding company is a corporation which owns or is organized to own a substantial portion of another company's voting shares of stock enough to control or influence the latter's management, policies or affairs thru election of the latter's board of fill directors or otherwise. (Maricalum Mining Corp vs Florentino, G.R. No. 221813, July 23, the 2018) of a term, SUBSIDIARY CORPORATION A subsidiary corporation is 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. (Villanueva-Castro, Commercial by Law Recap Book Two, 2020 edition, p. 10) Affiliate Corporation It is one related to another by owning or being owned by common management or by a long-term lease of its properties or other control device. It may be the controlled or DO NOT REPRODUCE 13 “Incorporation” is oftentimes used interchangeably with the term “organization.” Hence, domestic corporations are often referred to as corporations organized and existing under Philippine laws. However, “organization” in the sense that it is being used under Section 21 of the RCCP is different from incorporation. Organization under Section 21 of the RCCP presupposes that the corporation is already incorporated. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 181) 1. NUMBER AND QUALIFICATIONS OF INCORPORATORS Incorporators – Incorporators are those stockholders or members mentioned in the Articles of Incorporation as originally forming and composing the corporation and who are signatories thereof. (Sec. 5, RCC) The basic qualifications of incorporators under Section 10 may be enumerated as follows: (1) The incorporator must be a natural or juridical entity; (2) There must not be more than 15 incorporators; (3) If the incorporator is a natural person, he or she must be of legal age; and (4) Each incorporator of a stock corporation must own or be a subscriber to at least one share of the capital stock. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 182) which give the Old Corporation Revised Code Corporation Code Who can be incorporators Natural persons Natural persons The Partnership Philippines, Association Corporation Minimum number of incorporators Five (5) One (1) – in case of a one- person corporation (Sec. (OPC) DO NOT REPRODUCE 14 LAW frauds and evasions and difficulties of for administration and supervision. The policy of the law expressed in our corporate statute is clearly against such a practice. (Red Line Transportation Co. v. Rural Transit Co., G.R. No. 41570, September 6, 1934, 60 Phil. 549) Section 17 now expressly grants the SEC the following powers if it finds that the name of a corporation is not distinguishable from a name already reserved or registered for the use of another corporation or is already protected by law or is contrary to law, rules and regulations: (1) reject the Articles of Incorporation; (2) summarily order the corporation to cease and desist from using such name; (3) summarily order the corporation to register a new name and amend its Articles of Incorporation bearing the new name; (4) cause the removal of all visible signages, marks, advertisements, labels, prints and other effects bearing such corporate name. do acts with Section 17 of the RCC further provides that if the corporation fails to comply with the orders of the SEC (2, 3 and 4 above), the SEC may: (1) hold the corporation or its responsible directors and officers in contempt; and/or (2) hold them (corporation and directors/officers) administratively, civilly and/or criminally liable; and/or (3) revoke the registration/certificate of incorporation of the corporation. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 240-241) Distinguishability Test The RCC adopts the distinguishability test with respect to corporate names. This test was adopted as part of the reform to enhance the ease of doing business. It was observed that: “The present name verification system, with the ‘confusingly similar’ standard imposed, is indeed confusing. Hence, a shift to the “distinguishability” test will no doubt allow the full and seamless automation of name registration. For example, under the DO NOT REPRODUCE 15 used for so long and so exclusively by one producer with reference to an article and the purchasing public has considered the word or phrase as associated to his product. (Lyceum of the Philippines, Inc. v. Court of Appeals, G.R. No. 101897, March 5, 1993) p. 241- Thus, if a corporate name, though descriptive, has been used for so long and exclusively by one corporation and has become associated with that corporation alone in the mind of the public, another corporation cannot register said name as a corporate name. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 245) corporate The rules provide that the name of a corporation or partnership that has been dissolved or whose registration has been revoked shall not be used by another corporation or partnership unless approved by the SEC. However, only expired corporations may apply for reregistration using the same corporate name. If a new corporation is organized using the name of a dissolved corporation, the newly formed corporation cannot be considered as the legal successor of the dissolved corporation. The new corporation has a personality separate and distinct from the dissolved corporation. The new corporation cannot enjoy the rights and privileges of the dissolved corporation although the new corporation has the same or similar name.(SEC Opinion dated June 7, 2002.) name or even Under the present rules, “the name of a corporation or partnership that has been dissolved or whose registration has been revoked shall not be used by another corporation, within five years from the approval of dissolution or five years from the date of revocation. (SEC Memorandum Circular No. 13, Series of 2019.) Change of Name A change in corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation or on its property, rights or liabilities. The corporation, upon such change in its name, is DO NOT REPRODUCE 16 subscription agreements whether fully paid or not. name, and c. Paid Up Capital - the portion of the authorized capital that is subscribed and paid. June 29, d. Paid-In Capital - the amount of outstanding capital stock and additional paid- in capital (APIC) or premium paid over the par value of the shares. APIC is any additional contribution by shareholders over the par value of shares. Courts e. Outstanding Capital Stock - refers to the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement. f. Capital - includes properties and assets of the corporation that are used for its business or operation. g. Stated Capital - the sum of the par value of all issued par value shares, the entire amount received for no-par value shares and any amount transferred by a stock dividend or other corporate action from surplus to stated capital. Even treasury shares are considered part of the Stated Capital under the definition because Stated Capital includes all issued shares.(Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 194-195) h. Treasury shares - shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (Sec. 9, RCC) Old Corporation Revised Code Corporation Code Amount of capital stock to be subscribed and paid for purposes of incorporation At least twenty- None five percent (25%) of the DO NOT REPRODUCE 17 LAW extension having been effected, the corporation is deemed dissolved by such expiration without need of further action on the part of the corporation or the State. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 191) Extension of term If the corporation has a fixed term, the extension of term must be made within the time and in the manner prescribed by the RCC. Otherwise, the term will expire and the corporation’s personality will cease. Old Corporation Revised Code Corporation Code Corporate Term Fifty (50) years, GR: Perpetual Extendible for existence another fifty XPN: Articles of (50) years Incorporation (AOI) provide otherwise Corporations existing prior to effectivity of RCC Fifty (50) years, GR: Shall have perpetual Extendible for existence another fifty (50) years XPN: The corporation elects to retain its specific corporate term pursuant to its AOI* When can extension be made GR: Not earlier GR: Not earlier than five (5) than three (3) years prior to years prior to the original or the original or subsequent subsequent expiry date(s) expiry date(s) XPN: justifiable XPN: justifiable reasons for reasons for earlier earlier extension extension 6, 2053 Extension cannot be sought after the expiration of the term. There is no more term to extend in such a case. The conditions must DO NOT REPRODUCE 18 necessary to The shares comprise what is known as the capital stock. “Capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.” A “specific class of shares may have rights or privileges or restrictions different from the rest of the shares in the corporation.” (Heirs of Wilson P. Gamboa v. Teves, G.R. No. 176579, October 9, 2012.) certificate is Doctrine of Equality of Shares Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock. (Sec. 6, RCC) resolution Kinds of Shares Shares may be classified into: (1) common or preferred shares (2) voting or non-voting shares (3) par value or no par value shares (4) treasury shares (5) redeemable shares (6) founder’s shares Preferred shares may be: (1) cumulative or non-cumulative (2) participating or non-participating (3) preferred as to dividends and/or preferred as to assets upon distribution. privileges Preferred shares may also be convertible shares. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 156) Common Shares Common shares or stocks represent the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary fights or privileges and entitles the shareholder to a pro rata division of profits. (Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576, January 20, 1999, 301 SCRA 152, 187.) Preferred Shares DO NOT REPRODUCE 19 the common in the later year. (Hamilton, supra, p. 301.). Once dividends are declared, the cumulative preferred shareholders are entitled to receive the dividends for the years when no declaration was made. (Dohme v. Pacific Coast Co., 5 N.J. Super. 477 (1949)) 2. Non-Cumulative – if the shares are non- cumulative, there is no need to make up for undeclared dividends. No right survives as to the undeclared dividends and the directors do not even have discretion to declare those past dividends subsequently. (Guttman v. Illinois Central Railroads, Co., 198 F 2d. 927 (1951)) the certificate Par value and No-par value shares 1. Par Value Shares - Par value shares are those with fixed value stated in the Articles of Incorporation and the share certificate. Par value is an arbitrary amount assigned to the share and is expressed in the certificate covering the share. 2. No-par Value Shares - refer to shares without such arbitrary amount. (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 161) share; and The issued value or stated value of the shares may be higher than the par value. The Board of Directors is authorized to fix the amount for which the shares shall be subscribed. This is subject to the condition that the value fixed cannot be below par. With respect to no-par value shares, the stated or issued value cannot be less than five pesos (P5.00). (Aquino, The Revised Corporation Code of the Philippines, 2020 Ed., p. 162) Conditions for the issuance of no-par value shares (1) Shares of capital stock issued without par value shall be deemed fully paid and non- assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto (2) The shares without par value may not be issued for a consideration less than the value of five pesos (P5.00) per share; and (3) The entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not DO NOT REPRODUCE 20 as dividends While redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. (Republic Planters Bank v. Agana, G.R. No. 51765, March 3,1997, 269 SCRA 1.) When the redeemable shares are reacquired, the same shall be considered retired and no longer issuable unless otherwise provided for in the Articles of Incorporation. (471Section 3(2), SEC Rules Governing Redeemable and Treasury Shares (1982)) The redeemed shares shall be considered deduction to equity if there is no provision in the Articles of Incorporation that provides that the same shares are not retired. In a sense, redemption is a repurchase of the shares for cancellation. (SEC SGC Opinion No. 06-35, September 7, 2006.) SEC. The On the other hand, the redeemed shares will not be considered retired and will become treasury shares if the Articles of Incorporation expressly provides that once redeemed, the redeemable shares shall be classified as treasury shares. (SEC SGC Opinion No. 09-21, August 13, 2009.) If the redeemable shares are considered retired, the authorized capital stock of the corporation is in effect reduced by the corresponding number of shares because the redeemed shares can no longer be re-issued. The Articles of Incorporation must be amended accordingly. (SEC Opinion dated June 21, 1989.) in the Treasury Shares Under Section 9 of the Corporation Code (now the RCCP), treasury shares are shares of stock that have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, and donation or through some other lawful means. Treasury shares are issued shares but DO NOT REPRODUCE 21 issued shares or amount of stated capital (SEC Opinion dated June 22, 1995) G.R. No. L- Inasmuch as treasury shares are not considered as outstanding capital stock, the corporation is not entitled to any right or privilege of a shareholder. The reason is that when a corporation re-acquires its own shares, it does not become a s

2024 Philippine Commercial Law Part 2 Notes PDF

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