Business Law - Corporation PDF

C O R P O R AT I O N S THE LAW ON C O R P O R AT I O N S REPUBLIC ACT NO. 11232 Revised Corporation Code of the Philippines 2 DEFINITION A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes,...

C O R P O R AT I O N S THE LAW ON C O R P O R AT I O N S REPUBLIC ACT NO. 11232 Revised Corporation Code of the Philippines 2 DEFINITION 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. 3 DEFINITION The foregoing definition provides for the attributes of a corporation, namely: 1. It is an artificial being 2. It is created by operation of law 3. It has the right of succession 4. It has only the powers, attributes and properties expressly authorized by law or incidental to its existence 4 DOCTRINE OF PIERCING THE VEIL O F C O R P O R AT E E N T I T Y This is the doctrine to the effect that the separate personality of a corporation will be disregarded if such entity is used to: 1. Defeat public convenience, justify a wrong, protect fraud or defend crime; or 2. Where a corporation serves as a mere alter ego or conduit of a person or an instrumentality, agency or adjunct of another corporation; or 3. Where the corporate fiction is used to evade contracts and obligations; or 4. Confuse legitimate legal or judicial issues 5 PA R T N E R S H I P S V S. C O R P O R AT I O N S PARTNERSHIP CORPORATION HAS SEPARATE JURIDICAL CAPACITY HAS SEPARATE JURIDICAL CAPACITY ARTIFICIAL PERSON ARTIFICIAL PERSON COMPOSED OF A GROUP OF PERSONS COMPOSED OF A GROUP OF PERSONS (XPN: ONE PERSON CORP.) CREATED BY MERE AGREEMENT OF THE PARTNERS CREATED BY OPERATION OF LAW FORMED BY TWO OR MORE PERSONS MAY BE FORMED SINGLY OR JOINTLY WITH OTHERS, BUT SHOULD NOT EXCEED 15 HAS NO RIGHT OF SUCCESSION HAS THE RIGHT OF SUCCESSION MAY EXERCISE ANY POWER PROVIDED IT IS AUTHORIZED BY THE PARTNERS AND IS NOT CONTRARY TO LAW, CAN EXERCISE ONLY THE POWERS EXPRESSLY AUTHORIZED BY MORALS, GOOD CUSTOMS, PUBLIC ORDER OR PUBLIC LAW, IMPLIED POWERS, AND INCIDENTAL POWERS POLICY ACTS THROUGH ITS BOARD OF DIRECTORS ACTS THROUGH ALL THE GENERAL PARTNERS STOCKHOLDERS OR MEMBERS ARE NOT LIABLE FOR THE GENERAL PARTNERS ARE LIABLE WITH THEIR SEPARATE OBLIGATIONS OF THE CORPORATION PROPERTY FOR PARTNERSHIP DEBTS COMMENCES TO HAVE JURIDICAL PERSONALITY ON THE DATE OF COMMENCES TO HAVE JURIDICAL PERSONALITY UPON THE THE ISSUANCE OF THE ARTICLES OF INCORPORATION EXECUTION OF PARTNERSHIP CONTRACT CANNOT BE DISSOLVED WITHOUT THE CONSENT OF THE STATE MAY BE DISSOLVED BY THE PARTNERS 6 C L A SS E S O F C O R P O R AT I O N S IN GENERAL 1. Stock Corporation those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. 2. Non-Stock Corporation one where no part of its income is distributable as dividends to its members, trustees, or officers. (Sec. 86, RCC) 8 A S T O T H E S TAT E O F C O U N T RY UNDER WHOSE LAW IT WA S C R E AT E D 1. Domestic Corporation One incorporated under Philippines laws 2. Foreign Corporation One formed, organized or existing under laws other than those of the Philippines' and whose laws allow Filipino citizens and corporations to do business in its own country or State.(Sec. 140, RCC) 9 A S T O T H E S TAT E O F C O U N T RY UNDER WHOSE LAW IT WA S C R E AT E D Tests to determine nationality of corporations 1. Incorporation Test 2. Control Test 3. Business Domiciliary Test 10 AS TO NUMBER OF PERSONS COMPOSING THEM 1. Corporation Aggregate One that is composed of more than one (1) corporator 2. Corporation Sole One composed of only one person, or a “One Person Corporation” 11 AS WHETHER ITS PURPOSE IS P U B L I C O R P R I VAT E 1. Public Corporation One that is organized for the government of a portion of a State, like provinces, cities, municipalities and barangays. 2. Private Corporation One that is formed for a private purpose or end. o Government-owned and controlled corporations o Quasi-public corporations 12 AS WHETHER ITS PURPOSE IS RELIGIOUS OR NOT 1. Religious Corporation One formed for a religious purpose. 2. Lay Corporation One formed for a purpose other than ecclesiastical or religious. 13 AS WHETHER ITS PURPOSE IS C H A R I TA B L E O R N O T 1. Eleemosynary Corporation One organized for public charity. 2. Civil Corporation One organized for business or profit. 14 AS TO THEIR LEGAL RIGHT TO C O R P O R AT E E X I S T E N C E 1. De jure Corporation One that has been created in strict compliance with all the legal requirements and whose right to exist as a corporation cannot be successfully attacked in a direct proceeding for that purpose by the State. 2. De facto Corporation One that is defectively created but there is an actual exercise of corporate rights and franchise resulting from an attempt in good faith to incorporate on the part of the members. 15 A S T O T H E I R R E L AT I O N T O A N O T H E R C O R P O R AT I O N O R O T H E R C O R P O R AT I O N S 1. Parent or Holding Corporation One which owns the shares of another corporation and having the power, directly or indirectly, over the latter. 2. Subsidiary Corporation One whose shares of stock are owned by another corporation, called the parent corporation. 16 A S T O W H E T H E R I T S S H A R E S M AY B E H E L D BY T H E P U B L I C O R N O T 1. Close Corporation One whose articles of incorporation provide that its shares are limited to a few, restricted as to their transfer, and not listed in any stock exchange. 2. Open Corporation One whose shares are open to the public. 17 COMPONENTS OF A C O R P O R AT I O N 18 1. Corporators 2. Stockholders 3. Members 4. Incorporators 19 C A P I TA L S T O C K.. AND OTHER TERMS  C A P I TA L S T O C K The amount specified in the articles of incorporation paid in, or procured to be paid in for the carrying on of the business of the corporation. 21 C A P I TA L S T O C K Authorized Capital Stock  Total amount of shares which a corporation is allowed to issue if the shares have per value. If the shares do not have per value, the corporation does not have an authorized capital stock which is an amount. Once issued, the corporation shall have a capital stock with a corresponding amount, but not an authorized capital stock. 22 C A P I TA L S T O C K Subscribed Capital Stock  That is the part of the capital stock which is subscribed, whether paid or unpaid. 23 C A P I TA L S T O C K Outstanding Capital Stock  This refers to total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares. 24 C A P I TA L S T O C K Paid-up Capital Stock  The part of the subscribed capital stock paid to the corporation. Unissued Capital Stock  The part of the capital stock which is not issued or subscribed. 25 C A P I TA L Refers to the actual property of the corporation in money or other property. 26 L E G A L C A P I TA L Refers to the total par value of all issued par value shares, or the total cash or consideration received for all issued no-par value shares. 27 S TAT E D C A P I TA L The capital with which the corporation issuing shares without par value begins business, increased by any additions thereto, or diminished by any deductions therefrom. 28 SHARE OF STOCK SHARE OF STOCK Is one of the units into which the capital stock is divided. 30 C L A SS E S O F S T O C K 1. Common stock – the ordinary stock of a corporation that entitles the holder to a pro rata division of the dividends, without any preference or advantage over other stockholders. 2. Preferred stock – one that entitles the holder to certain preferences over the stockholders. 3. Per value stock – one the nominal value of which appears on the stock certificate. 31 C L A SS E S O F S T O C K 4. No-Par value stock – one without any nominal or par value appearing on the stock certificate. 5. Redeemable Shares – those that grant the issuing corporation the power to redeem or purchase them after a certain period. 6. Founders’ Shares – are shares issued by a corporation, classified as such in the articles of incorporation and which grant the holders thereof certain rights and privileges not enjoyed by other shares such as the exclusive right to vote and be voted for in the election of directors or preference in the distribution or preference in the distribution of dividends. 32 C L A SS E S O F S T O C K 7. Treasury Shares – those that have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. 8. Watered Stock – those issued without consideration or for an inadequate consideration. 9. Voting Stock – those entitled to vote in meetings of the corporation. 10.Non-voting Stock – those without voting rights, except in certain cases. 33 P O W E R O F A C O R P O R AT I O N T O C L A SS I F Y I T S O W N S H A R E S 1. A corporation may divide its shares into classes or series of shares, or both. 2. The classification of shares, their corresponding rights, privileges, or restriction, and their stated par value, if any, must be included in the articles of incorporation. 3. Except as otherwise provided in the articles of incorporation and stated in the stock certificate, each share shall be equal in all respects to every other shares. (Doctrine of Equality of Shares) 34 P O W E R O F A C O R P O R AT I O N T O C L A SS I F Y I T S O W N S H A R E S 4. Limitations on the issuance of nonvoting shares 5. Limitations on the issuance of no-par shares 6. Limitations on the issuance of preferred shares 35 I N C O R P O R AT I O N AND O R G A N I Z AT I O N O F P R I VAT E C O R P O R AT I O N S 36 S T E P S I N I N C O R P O R AT I O N 1. Verification with the SEC of the name to be used. This may be done online or with the SEC Name Verification Unit. 2. Drafting and execution of the articles of incorporation signed by the incorporators. The articles of incorporation must comply with the requirements provided for in Sections 13 and 14. 3. Filing of the articles of incorporation with the SEC. 37 KINDS OF FRANCHISE 1. Primary Franchise - It is also known as corporate franchise. It refers to the right and privilege granted by the state to exist as a corporation and to do such things as are authorized by the charter of the corporation. 2. Secondary Franchise – This refers to different rights, privileges and powers which are obtained by the corporation, which are not a prerequisite to corporate existence. 38 W H O M AY B E I N C O R P O R A T O R S a. Natural person b. Partnership c. Association d. Corporation 39 N U M B E R O F I N C O R P O R AT O R S 1. For an ordinary corporation, 2 or more persons, but not more than 15, may organize themselves and form a corporation. 2. For One person Corporation (OPC), only one incorporator is required who is also the single stockholder and sole director. 40 Q U A L I F I C AT I O N S O F I N C O R P O R AT O R S 1. For a stock corporation, each incorporator must own, or be a subscriber to at least 1 share of capital stock. For a nonstock corporation, each incorporator must be a member of the corporation. 2. The incorporators may be composed by any combination of natural person/s, SEC-registered partnership/s, SEC-registered domestic corporation/s or association/s, as well as foreign corporation/s. 3. Incorporators who are natural persons must be of legal age, and must sign the articles of incorporation/bylaws. 41 C O R P O R AT E T E R M 1. Perpetual existence as the default corporate term 2. Corporate terms of corporations with certificates of incorporation issued prior to the effectivity of the Revised Corporation Code. 3. Amendment to extend or shorten corporate term 4. Amendment to change specific corporate term to perpetual corporate term 5. Amendment to change perpetual corporate term to specific corporate term 6. Appraisal right of dissenting stockholders 7. Revival of corporate existence when corporate term has expired 42 PA I D - I N C A P I T A L S T O C K 1. Minimum capital stock not required  Stock corporations shall not be required to have a minimum capital stock, except as otherwise provided by law. 2. Minimum paid-up capital as regards certain corporations (Per SEC Website) (Legend: P- Philippine Peso, US $ Dollar) 43 44 45 46 A RT I C L E S O F I N C O R P O R AT I O N 1. Concept  The basic governing document of a private corporation.  The articles, are in effect, the application of the incorporators with the government through the SEC to give them the privilege to exist as a corporation. 2. Contents of the articles of incorporation a. The name of the corporation b. The purpose or purposes of the corporation 47 A RT I C L E S O F I N C O R P O R AT I O N c. The place of principal office which must be in the Philippines. d. The term of existence of the corporation. e. Names, nationalities and residence addresses of the incorporators. f. Number, names, nationalities and residences of directors or trustees. g. The amount of authorized capital stock, the number of shares into which it is divided and the par value of each share. h. The names of the subscribers, nationalities, number of shares subscribed, amount subscribed, and amount paid-in. 48 A RT I C L E S O F I N C O R P O R AT I O N i. Other matters not inconsistent with law and which the incorporators may deem necessary or convenient. j. The name of the temporary treasurer elected (treasurer-in-trust) NOTE: The articles of incorporation can be amended subject to certain requirements. 49 C O R P O R AT E N A M E 1. What corporate name may be used 2. Consequence on the use of corporate name that is not allowed 3. How new name is changed 4. Guidelines and procedures on the Use of Corporate and Partnership Names ( SEC Memorandum Circular No. 13, Series of 2019) 5. Industrial Refractories Corp. of the Philippines vs. Court of Appeals (G.R. No. 122174, October 3, 2002) 50 D E J U R E A N D D E FA C T O C O R P O R AT I O N De Jure Corporation One that has been created in strict compliance with general corporation statute in accordance with the procedures provided by law. Entitled to exist and operate perpetually or for the period stated in its articles of incorporation, if so provided provided therein, and such existence may not be challenged by anyone including the state in a direct proceeding for this purpose. Means “by right of law” It is a corporation that has complied substantially with the mandatory provisions 51 D E J U R E A N D D E FA C T O C O R P O R AT I O N De Facto Corporation One that is defectively created but there is a franchise resulting from an attempt in good faith to incorporate and an exercise of corporate powers on the part of its members. It has all the powers of de jure corporation but its due existence can be attacked directly in a quo warranto proceeding. Means “in fact” 52 D E J U R E A N D D E FA C T O C O R P O R AT I O N De Facto Corporation It exists when it fails in some material respect to comply with all the mandatory provisions of the law for incorporation. It is considered as a corporation against either an attack by third persons or an attempt on its part to deny corporate existence. 53 R E Q U I S I T E S O F A D E FA C T O C O R P O R AT I O N a. There must be a valid law under which it is incorporated. b. There must be a bona fide attempt to comply with that law and to organize a corporation thereunder. c. There must be an actual exercise of corporate powers in the belief that a corporation has been created. d. A certificate of incorporation is issued despite a defect in its incorporation. 54 C O R P O R AT I O N BY E S T O P P E L One which is not in reality a corporation but is considered as one with respect to those who are precluded by their admission or conduct from denying its existence. This holds true with respect to both the persons holding themselves as representing a corporation or believing themselves to be dealing with a corporation. 55 EFFECTS OF NON-USE OF C O R P O R AT E C H A RT E R If a corporation does not organize and commence business within five (5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period. (Sec. 21, first par., RCC) The revocation is automatic, no hearing is required. 56 E F F E C T S O F N O N - O P E R AT I O N F O R AT LEAST FIVE (5) YEARS AFTER THE C O R P O R AT I O N C O M M E N C E D O P E R AT I O N S The SEC may, after due notice and hearing, place the corporation under delinquent status. A delinquent corporation shall have a period of two (2) years to resume operations and comply with all the requirements that the SEC shall prescribe. Upon compliance by the corporation, the SEC shall issue an order lifting the delinquent status. Failure to comply with the requirements and resume operations within the period given by the SEC shall cause the revocation of the corporation’s certificate of incorporation (Sec. 21, second and third paragraphs, RCC) 57 BOARD OF DIRECTORS / TRUSTEES AND OFFICERS 58 BOARD OF DIRECTORS OR TRUSTEES Top governing body of a corporation Although a corporation is a person in contemplation of law, it can only act through human agents or individuals elected by the stockholders or members. These human agents are known as directors or trustees. The directors or trustees may manage the corporation only when they are convened as a body. 59 POWERS OF THE BOARD OF DIRECTORS a. To exercise corporate powers. b. To conduct all business of the corporation. c. To control and hold corporate property. 60 Q UA L I F I C AT I O N S O F T H E B O A R D O F DIRECTORS OR TRUSTEES STOCK CORPORATIONS A director must be the owner of at least 1 share of stock which share shall stand in his name in the books of the corporation while he is a director. The bylaws, however, may validly provide for a larger number of shares, such as 50 shares of stock, that one must own before he can qualify as director. 61 Q UA L I F I C AT I O N S O F T H E B O A R D O F DIRECTORS OR TRUSTEES NONSTOCK CORPORATIONS A trustee must be a member thereof, except with respect to independent trustees of nonstock corporations vested with public interest who may not be members of the corporation. (See Sec. 91, RCC) A trustee must be a member of the corporation during his term. 62 Q UA L I F I C AT I O N S O F T H E B O A R D O F DIRECTORS OR TRUSTEES A director or trustee, within 5 years prior to his election or appointment, must not have been: 1. Convicted by final judgment: a. of an offense punishable by imprisonment for a period exceeding 6 years; or b. for violation of the Revised Corporation Code; or c. for violation of Republic Act No. 8799, otherwise known as “The Securities Regulation Code”; or 63 Q UA L I F I C AT I O N S O F T H E B O A R D O F DIRECTORS OR TRUSTEES 2. Found administratively liable for any offense involving fraudulent acts; or 3. Found liable by foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in two foregoing paragraphs. 4. Other qualifications as may be provided in the by-laws. 64 NUMBER OF DIRECTORS OR TRUSTEES Stock Corporation Nonstock Corporation Should not be more than May or may be more 15 than 15, except with respect to nonstock educational corporations where the number of trustees must not be less than 5 nor more than 15, provided that the number shall be in multiples of 5. 65 PRINCIPLE OF HOLDOVER Directors or trustees continue to hold office until the stockholders or members elect their successors and the latter take office. Accordingly, the incumbent directors do not automatically cease to hold office upon the expiration of their term if they have yet no successors. 66 INDEPENDENT DIRECTOR Is a person who, apart from his or her fees and shareholdings, is independent of management and free from business or other relationship which could, or could reasonably be perceived to, materially interfere with his or her exercise of independent judgment in carrying out his or her responsibilities as a director. (Sec. 22, fourth par., RCC). 67 ELECTION AND RULES APPLICABLE TO INDEPENDENT DIRECTORS Independent directors must be elected by the shareholders present or entitled to vote in absentia during the election of directors. Shall be subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships and other requirement that the Commission will prescribe to strengthen their independence and align with international best practices. (Sec. 22) 68 ELECTION OF DIRECTORS OR TRUSTEES 1. Right of stockholder or member to nominate director or trustee 2. Requisites for the election of directors or trustees a. The election must take place at a meeting duly called for the purpose. b. There must be present, either in person or through a representative authorized to act by written proxy (as quorum): 1) The owners of the majority of the outstanding capital stock entitled to vote, if a stock corporation. However, no delinquent stock shall be voted. 2) The majority of the members entitled to vote, if a nonstock corporation. 69 ELECTION OF DIRECTORS OR TRUSTEES c. The election must be by ballot if requested by a stockholder or member. If there is no such request, the election may be done viva voce or other means. d. Nominees for directors or trustees receiving the highest number of votes shall be declared elected. 70 METHODS OF VOTING a. Stock Corporation 1. Cumulative voting is the method of electing directors in a stock corporation. It permits stockholders to multiply the number of shares standing in their own names in the stock books of the corporation at the time fixed in the bylaws or where the bylaws are silent, at the time of the election, by the number of votes in favor or one or more candidates they wish to elect to the board. 71 METHODS OF VOTING b. Nonstock 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. Cumulative voting may, however, be provided in the articles of incorporation or the bylaws. This is true in the case of nonstock corporations that have capital stock. 72 C O R P O R AT E O F F I C E R S 1. Main Function Conduct the day-to-day operations and execute such policies Shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors. 2. Statutory corporate officers a. President – Must be a director b. Treasurer – Must be a resident. 73 C O R P O R AT E O F F I C E R S c. Corporate secretary – Must be a resident and citizen of the Philippines. d. Compliance officer, if the corporation is vested with public interest. e. Such other officers as may be provided in the bylaws 74 REPORT OF ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS AND OTHER M AT T E R S 1. Reporting requirements on election of directors, trustees and officers a. What must be reported - The names, nationalities, shareholdings, and residence addresses of the directors, trustees and officers elected. b. When and to whom reported - This must be reported to the SEC within 30 days after the election. c. Who submits the report – The corporate secretary, or any other officer of the corporation 75 REPORT OF ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS AND OTHER M AT T E R S 2. Reporting requirements on non-holding election The non-holding of elections and the reasons therefor shall be reported to the SEC within thirty (30) days from the date of the scheduled election. The report shall specify a new date for the election, which shall not be later than sixty (60) days from the scheduled date. If no new date has been designated, or if the rescheduled election is likewise not held, the SEC may, upon the application of a stockholder, member, director or trustee, and after verification of the unjustifiable non-holding of the election, summarily order that an election be held. 76 REPORT OF ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS AND OTHER M AT T E R S The SEC shall have the power to issue such orders as may be appropriate, including other directing the issuance of a notice stating the time and place of the election, designated presiding officer, and the record date or dates for the determination of stockholders or members entitled to vote. Notwithstanding any provision of the articles of incorporation or by laws to the contrary, the shares of stock or membership represented at such meeting and entitled to vote shall constitute a quorum for purposes of conducting an election under this section. 77 REPORT OF ELECTION OF DIRECTORS, TRUSTEES AND OFFICERS AND OTHER M AT T E R S 3. Reporting requirement on death, resignation or cessation in any manner to hold office of director, trustee or officer Should a director, trustee or officer die, resign or in any manner case to hold office, the secretary or the director, trustee or officer of the corporation, shall, within seven (7) days from knowledge thereof, report in writing such fact to the SEC. (Sec. 25, RCC) 78 D I S Q UA L I F I C AT I O N O F D I R E C T O R S , TRUSTEES OR OFFICERS A person shall be disqualified from being a director, trustee or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was: a. Convicted by final judgment: 1. Of an offense punishable by imprisonment for a period exceeding six (6) years; 2. For violating this Code; and 3. For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code"; 79 D I S Q UA L I F I C AT I O N O F D I R E C T O R S , TRUSTEES OR OFFICERS b. Found administratively liable for any offense involving fraudulent acts; and c. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above. The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings. (Sec. 26, RCC) 80 R E M OVA L O F D I R E C T O R O R T R U S T E E S 1. Requisites a. The removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose. b. Previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. 81 R E M OVA L O F D I R E C T O R O R T R U S T E E S c. Any director or trustee of a corporation may be removed from office: 1) Stock corporation - by the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock 2) Nonstock corporation - by a vote of at least two-thirds (2/3) of the members entitled to vote. 82 R E M OVA L O F D I R E C T O R O R T R U S T E E S 2. Cause of Removal General rule: Removal may be with or without cause. Exception: Removal without cause may not be used to deprive minority stockholders or members of the right representation to which they may be entitled under Section 23 of the RCC. (Sec. 27, RCC) 83 VA C A N C I E S I N T H E O F F I C E O F D I R E C T O R OR TRUSTEE 1. Causes a. Removal b. Expiration of term c. Increase in the number of directors d. Resignation e. Death f. Abandonment g. Disqualification 84 VA C A N C I E S I N T H E O F F I C E O F D I R E C T O R OR TRUSTEE 2. Power to fill vacancy a. 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 or trustees 85 VA C A N C I E S I N T H E O F F I C E O F D I R E C T O R OR TRUSTEE 2) If the cause of vacancy is any is other than removal, expiration of term or increase in the number of directors or trustees, but the remaining directors or trustees do not constitute a quorum for the purpose of filling the vacancy. (Sec. 28, RCC) b. By the board of directors or trustees If the cause of vacancy is other than by removal, expiration of term, or increase in the number of directors, and the remaining directors still constitute a quorum. 86 VA C A N C I E S I N T H E O F F I C E O F D I R E C T O R OR TRUSTEE When the vacancy is due to term expiration, the election shall be held no later that the day of such expiration at a meeting called for that purpose. When the vacancy arises as a result of removal by the stockholders or members, the election may be held on the same day of the meeting authorizing the removal and this fact must be so stated in the agenda and notice of said meeting. In all other cases, the election must be held no later than forty-five (45) days from the time the vacancy arose. A director or trustee elected to fill vacancy shall be referred to as replacement director or trustee elected to fill a vacancy shall be referred to as replacement director or trustee and shall serve only for the unexpired term of the predecessor in office. However, when the vacancy prevents the remaining directors from consituting a quorum and emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation, the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees. The action by the designated director or trustee shall be limited to the emergency action necessary, and the term shall cease within a reasonable time form the termination of the emergency or upon election of the replacement director or trustee, whichever comes earlier. The corporation must notify the Commission within three (3) days from the creation of the emergency board, stating therein the reason for its creation. 87 VA C A N C I E S I N T H E O F F I C E O F D I R E C T O R OR TRUSTEE When the vacancy is due to term expiration, the election shall be held no later than the day of such expiration at a meeting called for that purpose. When the vacancy arises as a result of removal by the stockholders or members, the election may be held on the same day of the meeting authorizing the removal and this fact must be so stated in the agenda and notice of said meeting. In all other cases, the election must be held no later than forty-five (45) days from the time the vacancy arose. 88 VA C A N C I E S I N T H E O F F I C E O F D I R E C T O R OR TRUSTEE A director or trustee elected to fill vacancy shall be referred to as replacement director or trustee elected to fill a vacancy shall be referred to as replacement director or trustee and shall serve only for the unexpired term of the predecessor in office. In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of this Code shall apply. (Sec. 28. RCC) 89 C O M P E N S AT I O N O F D I R E C T O R S O R TRUSTEES In the absence of any provision in the bylaws fixing their compensation, the directors or trustees shall not receive any compensation in their capacity as such, except for reasonable per diems: Provided, however, That the stockholders representing at least a majority of the outstanding capital stock or majority of the members may grant directors or trustees with compensation and approve the amount thereof at a regular or special meeting. In no case shall the total yearly compensation of directors exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year. 90 C O M P E N S AT I O N O F D I R E C T O R S O R TRUSTEES Directors or trustees shall not participate in the determination of their own per diems or compensation. Corporations vested with public interest shall submit to their shareholders and the Commission, an annual report of the total compensation of each of their directors or trustees. (Sec. 29, RCC) 91 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS Fiduciary duties of directors a. Duty of Obedience b. Duty of diligence c. Duty of loyalty 92 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS Grounds for liability to pay damages Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. 93 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS A director, trustee or officer shall not attempt to acquire, or any interest adverse to the corporation in respect of any matter which has been reposed in them in confidence, and upon which, equity imposes a disability upon themselves to deal in their own behalf; otherwise, the said director, trustee or officer shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (Sec. 30, RCC) 94 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS Special Facts Doctrine The Special Fact Doctrine holds that a corporate officer with superior knowledge gained by virtue of being an insider owes a fiduciary duty to a shareholder in transactions involving transfer of stocks. 95 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS Insider R.A. 8799 or the Securities Regulations Code defines an insider in the following manner: “Insider” means (a) the issuer; (b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any forgoing insiders. (Chapter I, Section 3.8 of the R.A. 8799) 96 DEALINGS OF DIRECTORS, TRUSTEES OR O F F I C E R S W I T H T H E C O R P O R AT I O N A contract of the corporation with one (1) or more of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of such corporation, unless all the following conditions are present: a. The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; b. The vote of such director or trustee was not necessary for the approval of the contract; c. The contract is fair and reasonable under the circumstances; 97 DEALINGS OF DIRECTORS, TRUSTEES OR O F F I C E R S W I T H T H E C O R P O R AT I O N d. In case of corporations vested with public interest, material contracts are approved by at least a majority of the independent directors voting to approved the material contract; and e. In case of an officer, the contract has been previously authorized by the board of directors. 98 DEALINGS OF DIRECTORS, TRUSTEES OR O F F I C E R S W I T H T H E C O R P O R AT I O N Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting and the contract is fair and reasonable under the circumstances. (Sec. 31, RCC) 99 C O N T R A C T S B E T W E E N C O R P O R AT I O N S WITH INTERLOCKING DIRECTORS Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances a contract between two (2) or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one (1) corporation is substantial and the interest in the other corporation or corporations is merely nominal, the contract shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholding exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. 100 C O N T R A C T S B E T W E E N C O R P O R AT I O N S WITH INTERLOCKING DIRECTORS Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances a contract between two (2) or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one (1) corporation is substantial and the interest in the other corporation or corporations is merely nominal, the contract shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholding exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. (Sec. 32, RCC) 101 D I S L O Y A LT Y O F A D I R E C T O R The Doctrine of Corporate Opportunity limits the ability of those who owe a fiduciary duty to a corporation to take advantage of business opportunities that might otherwise be available to them in the absence of the fiduciary relationship. The Doctrine arises out of the fundamental obligation of a fiduciary not to allow a conflict of their duty with their own interests. (Sec. 33, RCC) 102 D I S L O Y A LT Y O F A D I R E C T O R Guidelines in determining the application of the Doctrine of Corporate Opportunity: 1. The corporation is financially able to exploit the opportunity; 2. The opportunity is within the corporation’s line of business; 3. The corporation has an interest or expectancy in the opportunity; and 4. By taking the opportunity for his own, the corporate director, trustee, or officer will consequently be placed in a position inimical to his duties to the corporation. The Court added that in evaluating if the corporate opportunity is within the corporation’s line of business, the involved corporations must be in competition 103 E X E C U T I V E M A N A G E M E N T, A N D O T H E R SPECIAL COMMITTEES If the bylaws so provide, the board may create an executive committee composed of at least three (3) directors. Said committee may act, by majority of vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the bylaws or by majority vote of the board, except with respect to the: (a) approval of any action for which shareholders' approval is also required; (b) filing of vacancies in the board; (c) amendment or repeal of bylaws or the adoption of new bylaws; (d) amendment or term is not amendable or repealable; and (e) distribution of cash divedends to the shareholders. The board of directors may create special committees of temporary or permanent nature and determine the members' term, composition, 104 POWERS OF CORPORATIONS 105 K I N D S O F P O W E R S O F A C O R P O R AT I O N 1. Express Powers 2. Implied Powers 3. Incidental Powers 106 K I N D S O F P O W E R S O F A C O R P O R AT I O N 1. Express Powers 2. Implied Powers 3. Incidental Powers 107 K I N D S O F P O W E R S O F A C O R P O R AT I O N Express powers of a corporation refer to those that are expressly provided for under the Revised Corporation Code of the Philippines (RCCP), applicable laws, administrative rules and regulations, and the Articles of Incorporation of the corporation. Implied powers of a corporation refer to those powers that are recognized under paragraph (k) of Section 35 of the RCCP, which provides that every corporation incorporated under the RCCP has the power and capacity: (k) To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of 108 K I N D S O F P O W E R S O F A C O R P O R AT I O N Incidental powers of a corporation refer to those that are deemed conferred on the corporation by virtue of its existence. Corporations have incidental powers as a consequence of the fact that they exist as juridical persons. Incidental powers may include the right to succession, the right to have a corporate name, right to make bylaws, and the right to hold properties for the purposes that are allowed by its charter. 109 K I N D S O F P O W E R S O F A C O R P O R AT I O N Incidental powers of a corporation refer to those that are deemed conferred on the corporation by virtue of its existence. Corporations have incidental powers as a consequence of the fact that they exist as juridical persons. Incidental powers may include the right to succession, the right to have a corporate name, right to make bylaws, and the right to hold properties for the purposes that are allowed by its charter. 110 THANK YOU!