Revised Corporation Code.pdf

REVISED CORPORATION CODE OF THE PHILIPPINES (R.A. NO. 11232) CORPORATION 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. REVISED...

REVISED CORPORATION CODE OF THE PHILIPPINES (R.A. NO. 11232) CORPORATION 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. REVISED CORPORATION CODE 2  ATTRIBUTES OF A CORPORATION 1. It is an artificial being; 2. It is created by operation of law; 3. It has the right of succession; and 4. It has only the powers, attributes and properties expressly authorized by law or incidental to its existence. REVISED CORPORATION CODE 3  ATTRIBUTES OF A CORPORATION 1. It is an artificial being; 2. It is created by operation of law; 3. It has the right of succession; and 4. It has only the powers, attributes and properties expressly authorized by law or incidental to its existence. REVISED CORPORATION CODE 4 CORPORATION AS AN ARTIFICIAL BEING A corporation is a juridical entity with a legal personality separate and distinct from the people comprising it and which juridical personality commences upon the issuance of the certificate of incorporation by the Securities and Exchange Commission (SEC). REVISED CORPORATION CODE 5 CORPORATION AS AN ARTIFICIAL BEING Consequences of such separate juridical personality: 1. The debts of the corporation are not the debts of its stockholders, nor are the debts of the stockholders the debts of the corporation; 2. The stockholders are not the owners of the assets of the corporation but have only an indirect interest therein. REVISED CORPORATION CODE 6 CORPORATION AS AN ARTIFICIAL BEING Consequences of such separate juridical personality: 3. In connection with corporate property or affairs, stockholders cannot maintain actions in their own name and they have no right to recover possession of property belonging to the corporation to recover damages for injury thereto. 4. In taxation, the income of the corporation is not the income of stockholders who may still be required to pay taxes on the dividends they may derive from such income. REVISED CORPORATION CODE 7 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. Concept 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 wrong, protect fraud or defend crime; or REVISED CORPORATION CODE 9 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. 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 juridical issues. REVISED CORPORATION CODE 10 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. Consequence To hold the stockholders directly liable for corporate acts or obligations. Where the separate personality of the corporation is disregarded, the corporation will be treated merely as an association of persons and the stockholders or members will be considered as the corporation. REVISED CORPORATION CODE 11 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. Application The doctrine of piercing the corporate veil applies only in three areas: 1. Defeat of Public Convenience as when the corporate fiction is used as a vehicle for the evasion of existing obligation; REVISED CORPORATION CODE 12 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. 2. Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; and 3. Alter Ego cases, where the corporation is merely 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 are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. REVISED CORPORATION CODE 13 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. Some indications that a subsidiary corporation is a mere instrumentality of its parent corporation; a. The parent corporation owns all or most of the capital stock of the subsidiary; b. The parent and subsidiary corporation have common directors or officers; REVISED CORPORATION CODE 14 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. c. The parent corporation finances the subsidiary; d. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation; e. The subsidiary has grossly inadequate capital; f. The parent corporation pays the salaries and other expenses or losses of the subsidiary; REVISED CORPORATION CODE 15 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. g. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation; and h. The parent corporation uses the property of the subsidiary as its own. REVISED CORPORATION CODE 16 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. Test to determine the application of the alter ego: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attached so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own (Control Test); REVISED CORPORATION CODE 17 CORPORATION AS AN ARTIFICIAL BEING Doctrine of Piercing the Veil of Corporate Entity. 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff’s legal right (Fraud Test); and 3. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of (Harm Test). Note: Absence of any of these elements prevents piercing the corporate veil. REVISED CORPORATION CODE 18 CORPORATION AS AN ARTIFICIAL BEING Reverse Piercing the Veil of Corporate Entity. The piercing of the corporate veil may apply to corporations as well as natural persons involved with corporations. “The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation.” The corporate veil may be pierced to reach the assets of a corporation to satisfy claims against a corporate insider. REVISED CORPORATION CODE 21 CORPORATION AS AN ARTIFICIAL BEING Reverse Piercing the Veil of Corporate Entity. Consequence: Reverse-piercing flows in the opposite direction of traditional corporate veil-piercing and makes the corporation liable for the debt of the shareholders. REVISED CORPORATION CODE 22 CORPORATION AS AN ARTIFICIAL BEING Reverse Piercing the Veil of Corporate Entity. Two types: 1. Outsider 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. 2. 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. REVISED CORPORATION CODE 23  CORPORATION IS CREATED BY OPERATION OF LAW Unlike partnerships, corporations do not come into existence by the mere agreement of the parties. They require special authority from the sovereign power How authority given: 1. General Law providing the guidelines for the incorporation of private corporation; and 2. Special Law which by itself confers juridical status upon the corporation, whether public (Local Government) or private (GOCC). REVISED CORPORATION CODE 25  CORPORATION HAS RIGHT OF SUCCESSION A corporation continues to exist perpetually or for the period for which was formed regardless of the changes in the ownership of the shares of stock or in its membership. Its existence is not affected by the death, insolvency, or incapacity of the individual stockholders or members. REVISED CORPORATION CODE 26  CORPORATION HAS THE POWERS, ATTRIBUTES, AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENTAL TO ITS EXISTENCE A corporation, being a mere creation of the law, operates under the doctrine of limited capacity. Hence, it can only perform acts within the powers expressly granted to it by its charter, those implied from such powers expressly conferred, and those that are incidental to its existence. Any act performed beyond the range of such powers is considered ultra vires. REVISED CORPORATION CODE 27  CLASSES OF CORPORATION 1. In General a. Stock Corporation – One that has capital stock divided into shares AND is authorized to distribute dividends or allotments of surplus profits on the basis of the shares held. b. Non-stock Corporation – One which does not issue shares and no part of the income of which is distributable as dividends to its members, trustees, or officers. It is created not for profit but for public good and welfare. REVISED CORPORATION CODE 28  CLASSES OF CORPORATION 2. As to the states or country under whose laws it was created a. Domestic Corporation – One incorporated under Philippine laws (or one operating within the country under whose laws it was incorporated) b. Foreign Corporation – One formed, organized, and existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State. REVISED CORPORATION CODE 29  CLASSES OF CORPORATION 2. As to the states or country under whose laws it was created Tests to determine the nationality of a corporation: i. Incorporation Test – The nationality of a corporation follows that of the country under whose laws it was incorporated. This is the test applied in our jurisdiction. ii. Control Test – The nationality of a corporation follows that of the stockholders owning the controlling interest. This is applied during wartime for the purpose of the security of the State. REVISED CORPORATION CODE 30  CLASSES OF CORPORATION 2. As to the states or country under whose laws it was created Tests to determine the nationality of a corporation: iii. Business Domiciliary Test – The nationality of a corporation is that of the country where its principal business is conducted. Thus, under this test, a corporation organized under the laws of the USA shall be considered a Philippine corporation if its principal business is conducted in the Philippines. REVISED CORPORATION CODE 31  CLASSES OF CORPORATION 3. As to number of persons composing them a. Corporation Aggregate – One that is composed of more than one corporator; b. Corporation Sole – One composed of only one person, like a bishop or rabbi, or a “One Person Corporation”. REVISED CORPORATION CODE 32  CLASSES OF CORPORATION 4. As to whether its purpose is public or private a. Public Corporation – One that is organized for the government of a portion of the State, like provinces, cities, municipalities, and barangays. Note: The true criterion to determine whether a corporation is public or private is found in the totality of the relation of the corporation to the State. If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its government functions, then that corporation is considered public; otherwise, it is private. REVISED CORPORATION CODE 33  CLASSES OF CORPORATION 4. As to whether its purpose is public or private a. Private Corporation – One that is formed for a private purpose or end, like San Miguel Corporation. Private Corporations include the following: i. Government Owned or Controlled Corporation – These refer to corporations created by special law other than those for the government of a portion of the State, such as Land Bank, GSIS, Philippine Postal Corporation, etc. and those formed under the Revised Corporation Code, where the government owns at least a majority of its outstanding voting capital stock. They may be performing governmental or proprietary function. REVISED CORPORATION CODE 34  CLASSES OF CORPORATION 4. As to whether its purpose is public or private a. Private Corporation – One that is formed for a private purpose or end, like San Miguel Corporation. Private Corporations include the following: ii. Quasi-public corporations – Those organized for profit which are granted a franchise by the State to perform public service, such as BENECO, BAWADI, etc. REVISED CORPORATION CODE 35  CLASSES OF CORPORATION 5. As to whether its purpose is religious or not a. Ecclesiastical or religious corporation – One formed for a religious purpose. b. Lay Corporation – One formed for a purpose other than ecclesiastical or religious. 6. As to whether its purpose is charitable or not a. Eleemosynary Corporation – One organized for public charity. b. Civil Corporation – One organized for business or profit. REVISED CORPORATION CODE 36  CLASSES OF CORPORATION 7. As to their legal right to corporate existence a. 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. b. 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. It has all the powers of a de jure corporation but its due existence can be attacked directly in a quo warranto proceeding. REVISED CORPORATION CODE 37  CLASSES OF CORPORATION 7. As to their legal right to corporate existence Requisites of a de facto corporation: i. Organized under a valid law; ii. Colorable compliance – Bona fide attempt in good faith to form a corporation according to the requirements of the law. Note: Issuance of Certificate of Incorporation by SEC is a minimum requirement for the formation of the corporation in good faith. iii. Actual User – Use of corporate powers, the corporation must have performed the acts which are peculiar to a corporation like entering into a subscription agreement, adopting by-laws, and electing directors. REVISED CORPORATION CODE 38  CLASSES OF CORPORATION 8. As to their relation to another corporation or other corporations a. Parent or Holding Corporation – One which owns the shares of another corporation and has the power, directly or indirectly, over the latter including the election of the directors thereof. b. Subsidiary Corporation – One whose shares of stock are owned by another corporation, called the parent corporation, which has the power to elect its directors. REVISED CORPORATION CODE 39  CLASSES OF CORPORATION 9. As to whether its shares may be held by the public or not a. 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. b. Open Corporation – One whose shares are open to the public, such as those whose shares are listed in the stock exchanges. REVISED CORPORATION CODE 40  CLASSES OF CORPORATION 10. Other Classifications a. Corporation by prescription – One which has exercised corporate powers for such length of time without interference from the State and which, by fiction of law, is given the status of a corporation, such as the Roman Catholic Church. b. Corporation by estoppel – 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. REVISED CORPORATION CODE 41  COMPONENTS OF CORPORATION 1. Corporators – Those who compose a corporation, whether as stockholders or members. 2. Stockholders – Corporators of a stock corporation. 3. Members – Corporators of a non-stock corporation. 4. Incorporators – Those stockholders or members mentioned in the article of incorporation as originally forming and composing the corporation and are signatories of such document. REVISED CORPORATION CODE 42  COMPONENTS OF CORPORATION Promoter Concept A promoter is a person, natural or juridical, who usually discovers a prospective business and brings persons interested to invest in it through the formation of a corporation. Promoter facilitates the creation of the corporation by negotiating contracts for its initial operations including subscriptions to its capital stock, incorporating the business, and helping management start operations. REVISED CORPORATION CODE 43  COMPONENTS OF CORPORATION Promoter Promoter’s Liability on Contracts A promoter is personally liable for contracts made for the benefit of the proposed corporation. If the incorporation of the corporation does not materialize, the promoter remains personally liable. If the corporation is formed, he remains liable until the corporation ratifies or adopts such contracts, or releases him from liability. The third person must also agree to absolve him from liability. REVISED CORPORATION CODE 44  COMPONENTS OF CORPORATION Promoter Corporation’s Liability on Contracts Entered into by Promoter A newly formed corporation is not automatically liable for pre-incorporation contracts entered into by a promoter on its behalf. It will become liable only by its adoption, ratification, or novation of such contracts. REVISED CORPORATION CODE 45  CAPITAL STOCK AND OTHER TERMS 1. Capital Stock – The amount specified in the article of incorporation paid in, or procured to be paid in for the carrying on of the business of the corporation. a. Authorized Capital Stock – The total amount of shares that a corporation is allowed to issue if the shares have a par value. If the shares do not have a par value, the corporation does not have an authorized capital stock which is an amount. What it has is the authorized number of no-par shares that it may issue. REVISED CORPORATION CODE 46  CAPITAL STOCK AND OTHER TERMS 1. Capital Stock b. Subscribed Capital Stock – This is the part of the capital stock that is subscribed, whether paid or unpaid. c. Outstanding Capital Stock – This refers to the total shares of stock issued to subscribers or stockholders, whether fully or partially paid, except treasury shares. d. Paid-up Capital Stock – The part of the subscribed capital stock paid to the corporation. e. Unissued Capital Stock – The part of the capital stock which is not issued or subscribed. REVISED CORPORATION CODE 47  CAPITAL STOCK AND OTHER TERMS 2. Legal Capital – 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. 3. Stated Capital – The capital with which the corporation issuing shares without par value begins business, increased by any additions thereto, or diminished by any deductions therefrom. 4. Capital – Refers to the actual property of the corporation in money and other property. REVISED CORPORATION CODE 48  CAPITAL STOCK AND OTHER TERMS Share of Stock Concept A share of stock is one of the units into which the capital stock is divided, It represents the intangible interest or right that an owner has in the management, profits, and assets of the corporation. It is property subject to conversion. REVISED CORPORATION CODE 50  CAPITAL STOCK AND OTHER TERMS Share of Stock Distinguished from stock certificate a. Share of stock represents the rights and interests of a stockholder in a corporation. Stock certificate is the written evidence of such rights and interest; b. Share of stock is intangible personal property, while stock certificate is tangible personal property; c. Share of stock may be issued even if not fully paid, except shares without par value which are deemed fully paid and non- assessable upon issuance. Stock certificate is issued only if the subscription is fully paid. REVISED CORPORATION CODE 51  CAPITAL STOCK AND OTHER TERMS Classes of stock 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 other stockholders. Such preferences may be as follows: a. Preferred stock as to asset – One that entitles the holder to preference in the distribution of assets over common stock upon liquidation of the corporation REVISED CORPORATION CODE 52  CAPITAL STOCK AND OTHER TERMS Classes of stock b. Preferred stock as to dividends – One that entitles the holder to preference in the distribution of dividends over common stock. The following are the kinds of preferred stock as to dividends: i. Cumulative Preferred Stock – Those which entitle the holder or payment not only of current dividend has also those in arrears, when dividends are declared, to the extent stipulated, before holders of common shares are paid. REVISED CORPORATION CODE 53  CAPITAL STOCK AND OTHER TERMS Classes of stock b. Preferred stock as to dividends ii. Non-cumulative preferred stock – Those that entitle the holder to payment of current dividends but not those in arrears, before holders of common shares are paid. iii. Participating preferred stock – Those that entitle the holder to participate with the holders of common shares in the surplus have been paid to the holders of preferred shares. iv. Non-participating preferred stock – Those that entitle the holders only to the stipulated preferred dividend. REVISED CORPORATION CODE 54  CAPITAL STOCK AND OTHER TERMS Classes of stock 3. Par value stock – One the nominal value of which appears on the stock certificate. 4. No-par value stock – One without any nominal or par value appearing on the stock certificate. 5. Redeemable Share – Those that grant the issuing corporation the power to redeem or purchase them after a certain period. REVISED CORPORATION CODE 55  CAPITAL STOCK AND OTHER TERMS Classes of stock 5. Redeemable Share The following are the characteristics of redeemable shares: a. They may be issued by the corporation only when expressly provided in the article of incorporation; b. They may be deprived of the voting right; c. They may be purchased by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation. d. The terms and conditions for their purchase must be stated in the articles of incorporation and in the stock certificate representing the said shares; and e. They shall be considered as treasury shares unless retired or again disposed of by the corporation. REVISED CORPORATION CODE 56  CAPITAL STOCK AND OTHER TERMS Classes of stock 6. Founder’s shares – 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 of dividends. Issued to those who established the corporation. REVISED CORPORATION CODE 58  CAPITAL STOCK AND OTHER TERMS Classes of stock 6. Founder’s shares The following are the limitations on the issuance of the founder’s shares: a. They must be classified as such in the articles of incorporation; b. If the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed (5) years from the date of incorporation. However, such exclusive right shall not be allowed if its exercise will violate “Anti-Dummy Law”, the “Foreign Investments Act of 1991”, and other pertinent laws. REVISED CORPORATION CODE 59  CAPITAL STOCK AND OTHER TERMS Classes of stock 6. Founder’s shares The following are the limitations on the issuance of the founder’s shares: c. The grant of such exclusive right to vote and be voted for in the election of directors to the holders of the founder’s shares will thus deprive the other shares the right to vote in the election of directors during the term provided for its exercise, although such other shares may not be classified as “preferred” or “redeemable”. REVISED CORPORATION CODE 60  CAPITAL STOCK AND OTHER TERMS Classes of stock 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. Treasury shares have the following characteristics: a. They shall have no voting rights as long as they remain in the treasury; b. Although they are part of the subscribed capital stock. They are not considered as outstanding shares; c. Since they are not outstanding for being owned by the corporation, they are not entitled to dividends; d. They may again be disposed of for a reasonable price fixed by the board of directors. Note: The price may be less than the par value or the issued price in case of no-par shares provided it is reasonable. REVISED CORPORATION CODE 61  CAPITAL STOCK AND OTHER TERMS Classes of stock 8. Watered stock – Those issued without consideration or for inadequate consideration. 9. Voting stock – Those entitled to vote in meetings of the corporation. 10. Nonvoting stock – Those without voting rights, except in certain cases. REVISED CORPORATION CODE 62 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 1. A corporation may divide its shares into classes or series of shares or both. Such classification may include the following: a. Voting and nonvoting shares. b. Common and preferred shares. c. Par value and no-par value shares. d. Classification to ensure compliance with constitutional or legal requirements. REVISED CORPORATION CODE 63 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 2. The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be included in the article of incorporation. 3. Except as otherwise provided in the article of incorporation and stated in the stock certificate, each share shall be equal in all respects to every other share. (Doctrine of equality of shares) REVISED CORPORATION CODE 64 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 4. Limitation on the issuance of nonvoting shares a. Only those classified as “preferred” or “redeemable” shares may be deprived of the voting right, unless otherwise provided in the Revised Corporation Code. b. There shall always be a series or class of shares that have complete voting rights. c. Nonvoting shares may nevertheless vote in the following cases: i. Amendment of the Articles of Incorporation; ii. Adoption and amendment of by-laws; iii. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; REVISED CORPORATION CODE 65 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 4. Limitation on the issuance of nonvoting shares c. Nonvoting shares may nevertheless vote in the following cases: iv. Incurring, creating, or increasing bonded indebtedness; v. Increase or decrease of authorized capital stock; vi. Merger or consolidation of the corporation with another corporation or other corporations; vii. Investment of corporate funds in another corporation or business; viii. Dissolution of the corporation. REVISED CORPORATION CODE 66 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 5. Limitations on the issuance of no-par shares a. Subscriptions to no-par shares shall be deemed defined as 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. Thus, there shall be no “subscription receivable” in the corporate books for no-par share subscribed. b. Shares without par value must be issued for a consideration of at least P5.00 per share. c. The entire consideration received for no-par shares shall be treated as capital and shall not be available for distribution as dividends. REVISED CORPORATION CODE 67 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 5. Limitations on the issuance of no-par shares d. Banks, trust, insurance, and preneed companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether publicly listed or not, shall not be permitted to issue no-par value shares of stock. REVISED CORPORATION CODE 68 POWER OF CORPORATION TO CLASSIFY ITS OWN SHARES 6. Limitations on the issuance of preferred shares a. Preferences in the distribution of dividends and in the distribution of corporate assets in case of liquidation, or such other preferences must be indicated in the articles of incorporation. b. Preferred shares may be issued only with a stated par value. Thus, there can be no-par preferred stock. c. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares or any series thereof. d. Such terms and conditions shall be effective upon the filing of a certificate thereof with the SEC. REVISED CORPORATION CODE 69  NATIONALITY OF CORPORATION Tests in determining the nationality of a corporation 1. Place of Incorporation test; 2. Control Test; 3. Grandfather Rule – Nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized areas. This test is an exception to the Control Test and was applied by the SEC in several cases. 4. Domiciliary Test – Determined by the principal place of business of the corporation. REVISED CORPORATION CODE 70  NATIONALITY OF CORPORATION Grandfather Rule To ensure compliance with the constitutional limitation(s) of a corporation engaging in nationalized activities, the nationality of a corporation must be determined by ascertaining if the required ownership was met. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be observed. REVISED CORPORATION CODE 71  NATIONALITY OF CORPORATION Grandfather Rule Reason: One must not stop until the citizenship of the individual or natural stockholders of layer after layer of investing corporations have been established, for this is the very essence of the Grandfather Rule. (Redmount Consolidated Mines Corp. v. McArthur Mining Corp.) REVISED CORPORATION CODE 72  NATIONALITY OF CORPORATION Grandfather Rule Rules governing the application of the Grandfather Rule: 1. The grandfather rule should be used in determining the nationality of a corporation engaged in a partly nationalized activity. This applies in cases where the stocks of a corporation are 60% owned by another corporation with foreign stockholders exceeding 40% of the capital stock of the corporation. REVISED CORPORATION CODE 73  NATIONALITY OF CORPORATION Grandfather Rule Rules governing the application of the Grandfather Rule: 2. The grandfather rule will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource corporation is not in doubt. If the stockholder corporation is 60% or more owned by Filipinos, all the stock held by the stockholder corporation is deemed to be held by Filipinos. REVISED CORPORATION CODE 74  NATIONALITY OF CORPORATION Grandfather Rule Rules governing the application of the Grandfather Rule: 3. When there is doubt as to the actual extent of Filipino equity in the investee corporation, the SEC is not precluded from using the Grandfather Rule. Note: To arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are determined. REVISED CORPORATION CODE 75  NATIONALITY OF CORPORATION Nationalized Activities Reserved for Filipinos under the Constitution and Special Laws: 100 % Filipino Owned 1. Cooperative 5. Utilization of Marine 9. Private Security Agencies Resources 2. Manufacture of Firecrackers 6. Cockpits 10. Retail trade enterprises with and Other Pyrotechnical devices paid-up capital of less than US$ 2.5 M 3. Manufacture, repair, 7. Manufacture, repair, stockpiling, and/or distribution stockpiling and/or distribution of biological weapons and of Nuclear Weapon Anti-personnel mines. 4. Mass Media except recording 8. Small-scale mining REVISED CORPORATION CODE 76  NATIONALITY OF CORPORATION Nationalized Activities Reserved for Filipinos under the Constitution and Special Laws: 80 % Filipino Owned 1. Private Radio Communications Network 75 % Filipino Owned 1. Private Recruitment, whether for local or overseas employment 2. Contracts for the construction of Defense-related structures REVISED CORPORATION CODE 77  NATIONALITY OF CORPORATION Nationalized Activities Reserved for Filipinos under the Constitution and Special Laws: 70 % Filipino Owned 1. Advertising 2. Corporation engaged in pawnshop business REVISED CORPORATION CODE 78  NATIONALITY OF CORPORATION Nationalized Activities Reserved for Filipinos under the Constitution and Special Laws: 60 % Filipino Owned 1. Contracts for the supply of 5. Culture, production, milling, processing, trading, materials, goods and commodities to excepting retailing of rice and corn and acquiring by GOCC, agency or municipal barter, purchase or otherwise, Rice and Corn and corporation the by-products thereof 2. Ownership of private lands 6. Operation and management of public utilities 3. Ownership/establishment and 7. Exploration, development, and utilization of administration of educational Natural Resources institution 4. Adjustment Companies 8. Operation of Deep Sea commercial fishing vessels REVISED CORPORATION CODE 79  NATIONALITY OF CORPORATION Nationalized Activities Reserved for Filipinos under the Constitution and Special Laws: 60 % Filipino Owned 9. Project proponent and facility operator of BOT project requiring a public utilities franchise. 10. Corporation engaged in Coastwise shipping 11. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring PNP clearance REVISED CORPORATION CODE 80  NATIONALITY OF CORPORATION Nationalized Activities Reserved for Filipinos under the Constitution and Special Laws: 40 % Filipino Owned 1. Financing companies regulated by the SEC 2. Investment houses regulated by the SEC REVISED CORPORATION CODE 81  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Steps in incorporation 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 of the Revised Corporation Code. REVISED CORPORATION CODE 85  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Steps in incorporation 3. Filing of the Articles of Incorporation with the SEC, together with the following documents: a. Verification Slip/Certificate authorizing the use of the corporate name; b. Treasurer’s Affidavit to the effect that the paid-up portion of the subscription in cash and/or property for the benefit and credit of the corporation has been duly received; c. Joint Affidavit of two incorporators to change corporate name unless the undertaking to change the corporate name is already stated in the articles of incorporation. REVISED CORPORATION CODE 86  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Steps in incorporation 3. Filing of the Articles of Incorporation with the SEC, together with the following documents: d. Endorsement/clearance from a department of the SEC or other government agencies, if applicable. e. Payment of the filing, legal research, and other fees. REVISED CORPORATION CODE 87  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Steps in incorporation 4. Issuance of the Certificate of Incorporation by the SEC. This is the operative act that will confer juridical personality on the corporation. A corporation commences its existence and juridical personality from the date stated in the certificate, which is actually the date of issue. REVISED CORPORATION CODE 88  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Kinds of Franchise 1. Primary Franchise – It is also known as a 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. The primary franchise of a corporation and not in the corporation itself. - It is conferred through the issuance of the certificate of incorporation. REVISED CORPORATION CODE 89  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Kinds of Franchise 2. Secondary franchise – This refers to different rights, privileges, and powers that are obtained by the corporation, which are not a prerequisite to corporate existence such as the right to occupy and use public places for the operation of a system of water, gas works, electricity lighting plants, railroad, etc. REVISED CORPORATION CODE 90  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Who may be incorporators: 1. Natural Person; 2. Partnership; 3. Association; 4. Corporation. REVISED CORPORATION CODE 91  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Number of Incorporators 1. For an ordinary corporation, one (1) or more persons, but not more than fifteen (15), may organize themselves and form a corporation. 2. For a One Person Corporation (OPC), only one incorporator is required who is also the single stockholder and sole director. REVISED CORPORATION CODE 92  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Qualifications of Incorporators 1. For a stock corporation, each incorporator must own, or be a subscriber to at least (1) share capital stock. For a nonstock corporation, each incorporator must be a member of the corporation. 2. The incorporators may be composed of 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/by-laws. REVISED CORPORATION CODE 93  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Partnership as incorporators If a SEC-recorded partnership is made an incorporator, the application for registration must be accompanied by a Partners’ Affidavit, duly executed by all partners, to the effect that they have authorized the partnership to invest in the corporation about to be formed and that they have designated one of the partners to become a signatory to the incorporation documents. REVISED CORPORATION CODE 94  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Domestic corporations or associations as incorporators If an SEC-registered domestic corporation is made incorporator, its investment in the new corporation must be approved by a majority of the board of directors or trustees and ratified by the stockholders, representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of nonstock corporations, at a meeting duly called for the purpose. A Directors’/Trustees’ Certificate or a Secretary’s Certificate, indicating the necessary approvals, as well as an authorized signatory to the incorporation documents, shall be executed under oath and submitted by the applicant. REVISED CORPORATION CODE 95  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Foreign corporations as incorporators If a foreign corporation is made an incorporator, the application for registration must be accompanied by a copy of the document (Board Resolution, Director’s Certificate, Secretary’s Certificate, or its equivalent), duly authenticated by a Philippine Consulate or which an apostille is affixed thereto, authorizing the foreign corporation to invest in the corporation being formed and specifically naming the designated signatory on behalf of the foreign corporation. REVISED CORPORATION CODE 96  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Designation of Incorporators as Directors An individual who signs the articles of incorporation on behalf of an incorporator, who is not a natural person, may not be named as director or trustee in the same articles of incorporation, unless the said individual is also the owner of at least one (1) share of stock, or is also a member, of the corporation being formed. REVISED CORPORATION CODE 97  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Foreign nationals in the articles of incorporation The inclusion of foreign nationals in the articles of incorporation shall be subject to the applicable constitutional, statutory, and regulatory restrictions, as well as conditions, with respect to foreign participation in certain investment areas or activities. REVISED CORPORATION CODE 98  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Additional requirements for certain corporations No article of incorporation of banks, banking, and quasi- banking institutions, preneed, insurance and trust companies, nonstock savings and loan associations, pawnshops, and other financial intermediaries shall be approved unless accompanied by a favorable recommendation of the appropriate government agency to the effect that articles of incorporation are in accordance with law. REVISED CORPORATION CODE 99  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Corporate Term 1. Perpetual existence as the default in corporate term. A corporation shall have perpetual existence unless its articles of incorporation provide for a specific corporate term. 2. Corporate terms of corporations with certificates of incorporation issued prior to the effectivity of the Revised Corporation Code. REVISED CORPORATION CODE 100  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Corporate Term Rules on Corporate terms of corporations with certificates of incorporation issued prior to the effectivity of the Revised Corporation Code. a. The corporate term of corporations with certificates of incorporation issued prior to the effectivity of the RCC, February 23, 2019, and which continue to exist, shall be deemed perpetual effective such date, without any further action on the part of the corporation. REVISED CORPORATION CODE 101  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Corporate Term Rules on Corporate terms of corporations with certificates of incorporation issued prior to the effectivity of the Revised Corporation Code. b. If any such corporation elects to continue with its present corporate term pursuant to the articles of incorporation, it shall notify the SEC by filing a Notice with the attached Directors’ Certificate, certifying that the decision to retain the specific corporate term as specified in the articles of incorporation was approved in a meeting duly held for the purpose by a majority vote of BOD or BOT and by the vote of the Stockholders representing a majority of the outstanding capital stock, including the nonvoting shares, or a majority of the members, in case of a nonstock corporation. Note: Must be filed within a period of two (2) years from February 23, 2019. REVISED CORPORATION CODE 102  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Amendment to extend or shorten corporate term a. Corporations incorporated under the RCC and existing corporations incorporated before the effectivity of the code that opted to retain their specific corporate term, may file an amendment of the articles of incorporation to extend or shorten the specific corporate term. Must be approved by the vote of Majority of the BOD and the assent of the stockholders representing at least two- third (2/3) of the outstanding capital stock of the corporation. REVISED CORPORATION CODE 104  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Amendment to extend or shorten corporate term b. In no case shall the extension be made earlier than three (3) years prior to the original or subsequent expiration date of the corporate term unless there are justifiable reasons for extension as may be determined by the SEC. c. Extension of the corporate term shall take effect only on the day following the original or subsequent expiry date. REVISED CORPORATION CODE 105  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Amendment to change specific corporate term to perpetual corporate term; Amendment to change perpetual corporate term to specific corporate term; Required vote: Majority vote of the BOD and vote or written assent of the stockholders representing at least two-third (2/3) of the outstanding capital stock of the corporation. REVISED CORPORATION CODE 107  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Appraisal Right of Dissenting Stockholders Any change in the corporate term pursuant to Section 11 of the Code shall be without prejudice to the appraisal right of dissenting stockholders in accordance with the provision. Appraisal Right – is the right of dissenting stockholders to demand payment of the fair value of their shares in case they dissent from specific corporate acts. REVISED CORPORATION CODE 108  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Corporate Name 1. Corporate name should be distinguishable from that already reserved or registered for the use of another corporation. A name is not distinguishable even if it contains one or more of the following: a. The word “corporation”, “company”, “incorporated”, “limited liability”, or an abbreviation of one of such words; and b. Punctuation, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing, or number of the same word or phrase. REVISED CORPORATION CODE 109  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Corporate Name 2. The name should not be one that is already protected by law; and 3. The use of the name should not be contrary to existing laws, rules, and regulations. REVISED CORPORATION CODE 110  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Consequences for the use of a corporate name that is not allowed: 1. SEC may summarily order the corporation to immediately cease and desist from using such name and require the corporation to register one. 2. SEC shall cause the removal of all visible signages, marks, advertisements, labels, prints, and other effects bearing such corporate name. REVISED CORPORATION CODE 111  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Articles of Incorporation Concept The governing document of a private corporation is the Articles of Incorporation. As part of the charter of the corporation, they partake of the nature of a contract between the stockholders/members themselves, between the corporation and the stockholders/members, between the corporation and the State, and between the stockholders/members and the state. REVISED CORPORATION CODE 113  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Contents of the Articles of Incorporation 1. The name of the corporation; 2. The purpose or purposes of the corporation - It must be lawful; - The purpose or purposes must be definitely stated; - If the corporation has more than one purpose, the primary purpose should be stated separately from the secondary purpose or purposes. - The purposes, if there are several, must be capable of being lawfully combined. REVISED CORPORATION CODE 114  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Contents of the Articles of Incorporation 3. The place of principal office which must be in the Philippines; 4. The term of existence of the corporation; 5. Names, nationalities, and residence addresses of the incorporators. 6. Number, names, nationalities, and residences of directors or trustees; 7. The amount of authorized capital stock, the number of shares into which it is divided, and the par value of each share. REVISED CORPORATION CODE 115  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Contents of the Articles of Incorporation 8. The names of the subscribers, nationalities, number of shares subscribed, amount subscribed, and amount paid-in. 9. Other matters not inconsistent with law and which the incorporators may deem necessary or convenient; and 10. The name of the temporary treasurer elected (treasurer-in- trust). REVISED CORPORATION CODE 116  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Amendment of the Articles of Incorporation Requirements: 1. The amendment must be for a legitimate purpose or purposes. 2. The following vote must be obtained: a. Majority vote of the board of directors or trustees; and b. The vote or written assent of 2/3 of the outstanding capital stock in the case of a stock corporation, or 2/3 of the members in the case of a non-stock corporation. REVISED CORPORATION CODE 117  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Amendment of the Articles of Incorporation Requirements: 3. The original and the amended articles shall contain all provisions required by law to be set out in the articles of incorporation; and 4. The amendment shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and majority of the director or trustees, with a statement that the amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the SEC. REVISED CORPORATION CODE 118  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Amendment of the Articles of Incorporation Effectivity of Amendment: 1. Upon approval by the SEC; or 2. From the date of filing with the SEC if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation. REVISED CORPORATION CODE 119  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Grounds for disapproval of the Articles of Incorporation or any amendment thereto: 1. No substantial compliance with the required form; 2. Purpose or purposes are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations. 3. Non-compliance with the required percentage of ownership of the capital stock by Filipinos under existing laws or the Constitution. 4. Absence of favorable recommendation from appropriate government agency. REVISED CORPORATION CODE 120  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 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 quorum, either in person or through a representative authorized to act by written proxy; Note: A stockholder or member who participates through remote communication or in absentia, shall be deemed present for the purpose of quorum. REVISED CORPORATION CODE 121  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Effects of non-use of corporate charter If the corporation does not formally organize and commence its 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. Here the revocation is automatic, no hearing is required. REVISED CORPORATION CODE 122  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Effects of continuous nonoperation for at least 5 years after the corporation has commenced operations If a corporation has commenced its business but subsequently becomes inoperative for a period of at least 5 consecutive years, the SEC may, after due notice and hearing, place the corporation under delinquent status. A delinquent corporation shall have a period of 2 years to resume operations and comply with all requirements that the SEC shall prescribe. Upon compliance by the corporation, the SEC shall issue an order lifting the delinquent status. Failure to comply within the period shall cause the revocation of the corporation’s certificate of incorporation. REVISED CORPORATION CODE 123  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Board of Directors or Trustees for a Corporation Concept The BOD/BOT is the 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. The directors or trustees may manage the corporation only when they are convened as a body. REVISED CORPORATION CODE 124  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Powers of the Board of Directors, Extent The board of directors of a corporation has the following powers: 1. To exercise corporate powers. 2. To conduct all business of the corporation. 3. To control and hold corporate property. The BOD must act in good faith and exercise reasonable care and judgment in the discharge of its functions. REVISED CORPORATION CODE 125  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Qualifications of directors or trustees 1. For stock corporations, a director must be the owner of at least one (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 fifty (50) shares of stock that one must own before he can qualify as a director. Note: For nonstock corporation, a trustee must be a member thereof, expect with respect to independent trustees of nonstock corporation vested with public interest who may not be members of the corporation. REVISED CORPORATION CODE 126  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Qualifications of directors or trustees 2. A director or trustee, within five (5) years prior to his election or appointment, must not have been: a. Convicted by final judgment: i. of an offense punishable by imprisonment for a period exceeding six (6) years; or ii. for violation of the Revised Corporation Code; or iii. For violation of RA No. 8799, otherwise known as “The Securities Regulation Code”; or REVISED CORPORATION CODE 127  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Qualifications of directors or trustees 2. A director or trustee, within five (5) years prior to his election or appointment, must not have been: b. Found administratively liable for any offense involving fraudulent acts; or c. found liable by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct similar to those enumerated in the two foregoing paragraphs. REVISED CORPORATION CODE 128  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Qualifications of directors or trustees 3. Other qualifications as may be provided in the by-laws, such as prohibition of a stockholder whose business competes with the corporation from running for seat in the board. REVISED CORPORATION CODE 129  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Number of Directors or Trustees 1. For stock corporations, the number should not be more than fifteen (15). 2. For nonstock corporations, the number may be more than fifteen, except with respect to nonstock educational corporations where the number of trustees must not be less than five (5) nor more than fifteen (15), provided that the number shall be in multiples of five. REVISED CORPORATION CODE 130  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Term of office of directors or trustees 1. For stock corporation, directors shall be elected for a term of one (1) year. 2. For nonstock corporations, trustees, in general, shall be elected for a term not exceeding three (3) years. For nonstock educational corporations, the trustees shall be elected for five (5) years, with the first trustees so classifying themselves that the term of one-fifth (1/5) of their number shall expire every year (staggered term). REVISED CORPORATION CODE 131  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS 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 expiration of their term if they have yet no successors. REVISED CORPORATION CODE 132  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Independent Director Concept An Independent Director is a person, who, apart from his or her fees and shareholdings, is independent of management and free from business or other relationships 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. REVISED CORPORATION CODE 133  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Corporations required to have Independent Directors The corporation of the following corporations vested with public interest shall have independent directors containing at least twenty percent (20%) of such board: 1. Corporations listed with an exchange or with assets of at least Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares. REVISED CORPORATION CODE 134  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Corporations required to have Independent Directors 2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, preneed, trust, and insurance companies, and other financial intermediaries; and 3. Other corporations engaged in business vested with public interest similar to the above, as may be determined by the SEC, after taking into account relevant factors that are germane to the objective and purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities, issued or offered to investors, etc. REVISED CORPORATION CODE 135  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS 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. Independent 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 requirements that SEC will prescribe to strengthen their independence and align with international best practices. REVISED CORPORATION CODE 136  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 1. Right of Stockholder or member to nominate director or trustee Each stockholder or member shall have the right to nominate any director or trustee who possesses all the qualifications and none of the disqualifications set forth in the RCC, except when the exclusive right is reserved for holders of founder’s share. REVISED CORPORATION CODE 137  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 2. Requisites for the election of directors or trustees c. The election must be by ballot if requested by any voting stockholders or members. If there is no such request, the election may be done by viva voce or other means. d. Nominees for directors or trustees receiving the highest number of votes shall be declared elected. REVISED CORPORATION CODE 138  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (Stock Corporation) a. Cumulative Voting (Mandatory) 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 by-laws or where the by-laws are silent, at the time of election, by the number of directors to be elected and to cast the resulting number of votes in favor of one or more candidate they wish to elect to the board. REVISED CORPORATION CODE 139  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (Stock Corporation) a. Cumulative Voting (Mandatory) Example: If a stockholder owns 500 shares and there are 9 directors to be elected. Number of Votes= Number of shares x number of directors to be voted Number of Votes= 500shares x 9 directors Number of Votes = 4,500 votes REVISED CORPORATION CODE 140  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (Stock Corporation) a. Cumulative Voting (Mandatory) Purpose: Designed to give minority stockholders the opportunity to elect their representative on the board of directors. The minority stockholders may thus combine their forces to elect a director to represent them. REVISED CORPORATION CODE 141  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (Stock Corporation) a. Cumulative Voting (Mandatory) The formula used in determining the number of shares needed to elect the desired number of directors: N = [(AXB)/(C+1)]+1 Where: N = Number of shares needed to elect the desired number of directors A= Number of shares entitled to vote B= Desired number of directors to be elected C= Total Number of directors to be elected REVISED CORPORATION CODE 142  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (Stock Corporation) a. Cumulative Voting (Mandatory) Example: If there are 50,000 outstanding shares entitled to vote and the number of directors to be elected is 9, minority stockholders who wish to elect 2 directors would need the following number of shares: N= [(AxB)/(C+)]+1 N= [(50,000x2)/(9+1)]+1 N= (100,000/10)+1 N= 10,001 shares REVISED CORPORATION CODE 143  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (Stock Corporation) b. How the votes may be cast i. The votes may be cast equally among the total number of directors to be elected. (Straight Voting) ii. All the votes may be cast in favor of one candidate. (Cumulative Voting in Favor of One Candidate) iii. The votes may be cast in favor of two or more candidates that the stockholder wishes to elect. (Cumulative Voting by Distribution) REVISED CORPORATION CODE 144  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 3. Methods of Voting (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 AOI or bylaws in the case of nonstock corporations that have capital stock. Example: If there are 9 trustees to be elected, a member is entitled to 9 votes, but he cannot cast more than 1 vote for one candidate. REVISED CORPORATION CODE 145  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 4. How right to vote is exercised The right to vote of stockholders or members, in the election of directors, trustees, or officers, may be exercised through any of the following manners: a. In person; b. Through a proxy; c. Through remote communication or in absentia, when so authorized by the bylaws, or by resolution of the majority of the BOD or BOT, provided that the resolution shall only be applicable for a particular meeting. REVISED CORPORATION CODE 146  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Election of Directors or Trustees 5. Rule when no election is held If no election is held, or no quorum, such meeting may be adjourned and the corporation shall proceed in accordance with Section 25 of the RCC (Sec. 23 par. 6) which includes submission of a report to the SEC indicating therein that no elections were held and the reason therefor. REVISED CORPORATION CODE 147  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Corporate Officers 1. Concept While directors are responsible for the overall policies of the corporation, they need to elect or appoint officers who will conduct the day-to-day operations and execute such policies. Such officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors. REVISED CORPORATION CODE 148  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Corporate Officers 2. Statutory Corporate Officers Thus, immediately after their election, the directors of a corporation must formally organize by the election of the following officers; a. President- Must be a Director b. Treasurer- Must be a resident c. Corporate Secretary- Must be a resident and citizen of the Philippines d. Compliance Officer, if the corporation is vested with the public interest. e. Such other officers as may be provided in the bylaws. REVISED CORPORATION CODE 149  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Corporate Officers 2. Statutory Corporate Officers Limitations: No one can be the president and secretary or president and treasurer at the same time. Purpose of Limitations: To provide for check and balance, particularly on matters of finances and records. REVISED CORPORATION CODE 150  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Reporting Requirement to SEC 1. On Election of Directors, Trustees, and Officers a. What must be reported The name, nationalities, shareholdings, and residence addresses of the directors, trustees, and officers elected. b. When Within thirty (30) days after the election c. Who submits the report The Corporate Secretary, or any other officer of the corporation. REVISED CORPORATION CODE 151  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Reporting Requirement to SEC 2. Non-holding of election a. What The non-holding of the election and the reason therefor, and with the specification of a new date for the election which should not be later than sixty (60) days from the schedule date. If no new date has been designated, or if the rescheduled election is not likewise held, the SEC will summarily order that an election be held upon the application of a stockholder, member, director, or trustee, and after verification of the unjustified non- holding of the election. REVISED CORPORATION CODE 152  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Reporting Requirement to SEC 2. Non-holding of election b. When This must be reported to the SEC within thirty (30) days from the date of the scheduled election. c. Who submits the report The corporate secretary, or any other officer of the corporation. REVISED CORPORATION CODE 153  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Reporting Requirement to SEC 3. On death, resignation, or cessation in any manner to hold office of director, trustee, or officer. a. What The fact of death, resignation, or cessation to hold office. b. When Within seven (7) days from the knowledge of such fact of death, resignation, or cessation to hold office. REVISED CORPORATION CODE 154  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Reporting Requirement to SEC 3. On death, resignation, or cessation in any manner to hold office of director, trustee, or officer. a. What The fact of death, resignation, or cessation to hold office. b. When Within seven (7) days from the knowledge of such fact of death, resignation, or cessation to hold office. c. Who submits report The Corporate Secretary, or the director, trustee or officer having knowledge of such facts. REVISED CORPORATION CODE 155  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Removal of Directors or Trustees 1. Requisites: a. The removal must take place either at a regular meeting of the corporation or at a special meeting called for the purpose. b. Previous notice of the intention to propose such removal must have been given to the stockholders or members. (must be given by publication or by written notice) c. The following vote must have been obtained to effect removal. i. Stock Corporation – By the stockholders holding or representing at least 2/3 of the outstanding capital stock entitled to vote. ii. Nonstock Corporation – By at least 2/3 of the members entitled to vote. REVISED CORPORATION CODE 156  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Removal of Directors or Trustees 2. Cause of Removal GR: Removal of a director or trustee may be with or without cause. Exception: Removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled. Otherwise, the purpose of cumulative voting in stock corporations which is to allow minority stockholders to unite and elect their representative in the board will be rendered useless. REVISED CORPORATION CODE 157  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Removal of Directors or Trustees 3. Removal on order of the SEC The SEC, shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election. REVISED CORPORATION CODE 158  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 1. Causes of vacancy in the office of director or trustee a. Removal; b. Expiration of term; c. Increase in the number of directors; d. Resignation; e. Death; f. Abandonment; g. Disqualification. REVISED CORPORATION CODE 159  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 2. Power to fill vacancy a. By the stockholders or members i. If the cause of vacancy is any of the following: 1)Removal 2) Expiration of term 3) Increase in the number of directors or trustees REVISED CORPORATION CODE 160  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 2. Power to fill vacancy a. By the stockholders or members ii. If the cause of vacancy 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. REVISED CORPORATION CODE 161  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 2. Power to fill vacancy b. By the board of directors or trustees If the cause of vacancy is other than removal, expiration of term, or increase in the number of directors, and the remaining directors still constitute a quorum for the purpose of filling the vacancy. REVISED CORPORATION CODE 162  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 3. When election is held to fill the vacancy a. When vacancy is due to term expiration -The election shall be held not later than the day of such expiration at a meeting duly called for the purpose. b. When vacancy arose as a result of removal - 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 the said meeting. REVISED CORPORATION CODE 163  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 3. When election is held to fill the vacancy c. In all other cases of vacancy The election must be held no later than forty-five (45) days from the time the vacancy arose. REVISED CORPORATION CODE 164  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 4. Term of office of director or trustee elected to fill vacancy A director or trustee elected to fill a vacancy, known as a replacement director or trustee, shall serve only for the unexpired portion of the term of his predecessor in office. REVISED CORPORATION CODE 165  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 5. Emergency board of directors Requisites: a. There is a vacancy in the board of directors; b. Such vacancy prevents the remaining directors from constituting a quorum. c. Emergency action is required to prevent grave substantial, and, irreparable loss or damage to the corporation. REVISED CORPORATION CODE 166  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Vacancy in the Office of Director or Trustee 5. Emergency board of directors 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 from the termination of the emergency or upon election of the replacement director, or trustee, whichever comes earlier. The corporation must notify the SEC within 3 days from the creation of the emergency board, stating the reason for its creation. REVISED CORPORATION CODE 167  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Compensation of Directors or Trustees GR: Directors are not entitled to compensation. Exception: Directors are entitled to compensation in the following cases 1. When there is a provision in the bylaws fixing the compensation. 2. When the majority of the stockholders/members approved the giving of compensation and the amount. 3. When the compensation refers to reasonable per diems for attending board meetings. REVISED CORPORATION CODE 168  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Compensation of Directors or Trustees Limitations: The total yearly compensation of directors should not exceed 10% of the net income before income tax of the corporation during the preceding year. REVISED CORPORATION CODE 169  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Liability of Directors, Trustees, or Officers 1. Fiduciary duties of directors Directors occupy a position of trust and confidence as regards the corporation and its stockholders. a. Duty of Obedience b. Duty of Diligence c. Duty of Loyalty REVISED CORPORATION CODE 170  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Liability of Directors, Trustees, or Officers Duty of Obedience Directors must restrict their acts within the scope of the powers of the corporation. Any act performed beyond such powers violates their duty of obedience and may subject them to personal liability for any loss that may be sustained by the corporation. REVISED CORPORATION CODE 171  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Liability of Directors, Trustees, or Officers Duty of Diligence Directors are obliged to perform their duties with the degree of diligence or due care that a reasonably prudent man would exercise in the conduct of his personal affairs or in similar circumstances. Note: Business judgment rule – directors who act with due care and good faith are protected from liability as a consequence of a decision made within the powers of the corporation and the authority of management. REVISED CORPORATION CODE 172  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Liability of Directors, Trustees, or Officers Duty of Loyalty The duty, among other things, forbids a director from acquiring business deals that belong to the corporation or obtaining profits therefrom to the prejudice of the corporation because of the undisclosed conflict of interest. REVISED CORPORATION CODE 173  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Liability of Directors, Trustees, or Officers Grounds for Liability to pay damages 1. By willingly and knowingly voting for or assenting to patently unlawful acts of the corporation. 2. By being guilty of gross negligence or bad faith in directing the affairs of the corporation. 3. By acquiring any personal or pecuniary interest in conflict with their duty as such directors or trustees. REVISED CORPORATION CODE 174  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Liability of Directors, Trustees, or Officers Nature of liability Joint and several (solidary) To whom liable To the corporation, its stockholders or members, or other persons who suffer damages resulting from the acts aforementioned. REVISED CORPORATION CODE 175  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Dealings of Directors, Trustees or Officers with the Corporation 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; (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. REVISED CORPORATION CODE 176  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Dealings of Directors, Trustees or Officers with the Corporation 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; (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. REVISED CORPORATION CODE 177  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Dealings of Directors, Trustees or Officers with the Corporation Where any of the first three (3) conditions set forth 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. REVISED CORPORATION CODE 178  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Contracts Between Corporations 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. Note: Stockholding exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for the purposes of interlocking directors. REVISED CORPORATION CODE 179  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Disloyalty of a Director Doctrine of Corporate opportunity - prohibits directors from usurping for, or diverting to, themselves business deals or opportunities that in equity or fairness belong to the corporation. A director who acquires such business deals or opportunities for his personal gain and at the expense of the corporation commits a breach of his fiduciary duty to the corporation. REVISED CORPORATION CODE 180  BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Disloyalty of a Director Consequences A director who commits a breach of his fiduciary duty by acquiring a business opportunity that should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, must account for and refund to the latter all such profits. Note: This obligation, however, does not apply if the director’s act has been ratified by a vote of the stockholders, owning or representing at least 2/3 of the outstanding capital stock. REVISED CORPORATION CODE 181  POWERS OF CORPORATION Kinds of Power of Corporation 1. Express powers – powers expressly granted to a corporation by its charter. 2. Implied powers – powers which are necessary to carry into effect the powers that are expressly granted, and which must therefore be presumed to have been the intention in the grant of the franchise. 3. Incidental powers – powers that a corporation may exercise because of its very existence as a corporation. REVISED CORPORATION CODE 182  POWERS OF CORPORATION EXPRESS POWERS (Sec. 35 of the RCC which emphasizes the “theory of general capacity”) Every corporation incorporated under the RCC has the power and capacity; 1. To sue and be sued; 2. To have perpetual existence unless the certificate of incorporation provides otherwise; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of the code; REVISED CORPORATION CODE 183  POWERS OF CORPORATION EXPRESS POWERS (Sec. 35 of the RCC which emphasizes the “theory of general capacity”) 5. To adopt bylaws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with the code; 6. In the case of a stock corporation, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provision of the Code and to admit members to the corporation if it is a nonstock corporation. 7. To purchase, receive take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution. REVISED CORPORATION CODE 184  POWERS OF CORPORATION EXPRESS POWERS (Sec. 35 of the RCC which emphasizes the “theory of general capacity”) 8. To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give donations in aid of any political party or candidate or for purpose s of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. REVISED CORPORATION CODE 185  POWERS OF CORPORATION EXPRESS POWERS (From different sections of the RCC which emphasizes what is referred to in corporation law as the “theory of specific capacity”) 1. Power to extend or shorten corporate term; 2. Power to increase or decrease capital stock; 3. Power to incur, create, or increase bonded indebtedness; 4. Power to deny preemptive right; 5. Power to sell, lease, exchange, mortgage, pledge or otherwise dispose all or substantially all of its corporate property; 6. Power to acquire its own shares; REVISED CORPORATION CODE 186  POWERS OF CORPORATION EXPRESS POWERS (From different sections of the RCC which emphasizes what is referred to in corporation law as the “theory of specific capacity”) 7. Power to invest corporate funds in another corporation or business or for any other purpose; 8. Power to declare dividends; and 9. Power to enter into a management contract. REVISED CORPORATION CODE 187  POWERS OF CORPORATION IMPLIED POWERS 1. Acts in the usual course of business; 2. Acts to protect debts due to the corporation; 3. Acts which involves embarking on a different line of business; 4. Acts designed to protect and aid employees; and 5. Acts to increase the business of corporation. REVISED CORPORATION CODE 188  POWERS OF CORPORATION INCIDENTAL POWERS Some of the express powers of a corporation under Section 35 of the RCC are incidental powers such as the following: 1. Power of succession; 2. Power to have a corporate name; 3. Power to adopt a corporate seal; 4. Power to acquire, hold, or dispose of or convey property as its business may reasonably require; and 5. Power to adopt and amend its by-laws. REVISED CORPORATION CODE 189  POWERS OF CORPORATION PREEMPTIVE RIGHT Concept: It is the right of existing stockholders to subscribe to all issues or dispositions of shares of any class, in proportion to their respective stockholdings, before such shares are offered to the public. Purpose: This right enables the stockholders to maintain their portion of control, voting power, or financial interest in the corporation. Note: Existing stockholders are given a certain period within which to exercise the right otherwise failure to do so shall be deemed waiver thereof. REVISED CORPORATION CODE 190  POWERS OF CORPORATION PREEMPTIVE RIGHT Shares Covered: 1. Shares issued as a result of an increase in capital stock; 2. Shares issued out of the unsubscribed portion of the authorized capital stock; and 3. Other shares that may be disposed of by the corporation including treasury shares. REVISED CORPORATION CODE 191  POWERS OF CORPORATION PREEMPTIVE RIGHT When right not available: 1. When it is denied by the Article of Incorporation or an amendment thereof; 2. When shares are to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; 3. When shares are to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock; a. In exchange for property needed for corporate purposes; or b. On payment of previously contracted debt. REVISED CORPORATION CODE 192  POWERS OF CORPORATION DIVIDENDS Concept: Dividend is the portion of the accumulated profits of a corporation that is set aside for distribution to stockholders. It represents