ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPA Licensure Examination  Weeks 6-8

REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS J. DOMINGO  N. SORIANO

RFBT-04: LAW ON PRIVATE CORPORATIONS &

THE SECURITIES REGULATION CODE
I. DEFINITION, ATTRIBUTES AND CLASSES
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 incident to its existence.

ATTRIBUTES:
1. ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.

CORPORATE ENTITY THEORY

As a legal entity, the corporation is possessed with a juridical personality separate and distinct from the
individual stockholders or members and is not affected by the personal rights, obligations or transactions of
the latter.

PIERCING THE VEIL OF CORPORATE ENTITY: The applicability of the corporate entity theory is confined
to legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak or cover
for fraud or illegality, or to work injustice.

When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend
crime, the law will regard the corporation as a mere association of persons, or in the case of two corporations,
merge them into one, the one being merely regarded as part or instrumentality of the other. The same is true
where a corporation is a mere dummy and serves no business purpose and is intended only as a blind, or an
alter-ego or business conduit for the sole benefit of the stockholders.

In cases where the doctrine of piercing the veil of corporate fiction, the concept of a separate juridical
personality shall be set aside.

2. CREATED BY OPERATION OF LAW – the formal requirement of the State’s consent through compliance
with the requirements imposed by law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the grant of its independent existence as a
juridical entity.

COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the issuance of the Certificate of

Incorporation or Registration. It is only from this time that it acquires juridical personality and legal existence,
EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Sole Corporation – which is reckoned from the filing of verified articles.

3. RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more
of its stockholder does not result in its dissolution; this is otherwise referred to as the corporation’s “strong”
juridical personality.

4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only
such powers and can hold only such properties as are granted to it by the enabling statutes unlike natural
persons who can do anything as they please.

Powers of a corporation:
a. Express Powers – those expressly authorized by the Corporation Code and other laws, and its Articles of
Incorporation.
b. Implied Powers – Those that can be inferred from or necessary for the exercise of EXPRESS powers;
c. Incidental Powers – those that are incidental to the existence of the corporation.

under the Corporation Code, a Corporation has power and capacity:

a. To sue and be sued in its corporate name;
b. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and
to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
g. 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;

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h. To enter into merger or consolidation with other corporations as provided in this Code (now, a
corporation can also enter into a partnership and joint venture);

i. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, that no corporation, domestic or foreign (now only
foreign), shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;

(1) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
(2) Implied Powers: 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.

ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they are
not within its express, inherent, or implied powers as defined by its charter or AOI. Accordingly, it may be
subject to a collateral attack questioning the authority of the corporation to engage in such particular
endeavor.

CLASSES OF CORPORATIONS:

STOCK CORPORATIONS Corporations 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 are stock corporations.
NON-STOCK Corporations which are not authorized to distribute surplus profits.
CORPORATIONS
DOMESTIC are those organized or created under or by virtue of the Philippine laws, either
CORPORATION by legislative act or under the provisions of the General Corporation Law.
FOREIGN CORPORATION are those formed, organized or existing under any laws other than those of the
Philippines
CLOSE CORPORATIONS are those whose shares of stock are held by a limited number of persons like
the family or other closely-knit group. There are no public investors and the
shareholders are active in the conduct of the corporate affairs.
OPEN CORPORATIONS are those formed to openly accept outsiders as stockholders or investors. They
are authorized and empowered to list in the stock exchange and to offer their
shares to the public such that stock ownership can widely be dispersed. In
which case, they are called PUBLICLY-LISTED CORPORATIONS.
PRIVATE CORPORATIONS those formed for some private purpose, benefit, aim or end. They are created
for the immediate benefit and advantage of the individuals or members
composing it and their franchise may be considered as privileges conferred by
the State to be exercised and enjoyed by them in the form of the corporation.
PUBLIC CORPORATIONS those formed or organized for the government of a portion of the State or any
of its political subdivisions and which have for their purpose the general good
and welfare.
ECCLESIASTICAL are composed exclusively of ecclesiastics organized for spiritual purposes or for
CORPORATIONS administering properties held for religious ones. They are organized to secure
public worship or perpetuating the right of a particular religion.
LAY CORPORATIONS are those organized for purposes other than religion. They may further be
classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such as
those organized for the purpose of maintaining hospitals and houses for the
sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit,
pecuniary or otherwise, of its members.
AGGREGATE are those composed of a number of individuals vested with corporate powers.
CORPORATIONS
CORPORATION SOLE those consist of one person or individual only and who are made as bodies
corporate and politic in order to give them some legal capacity and advantage
which, as natural persons, they cannot have. Under the Code, a corporation
sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or
other presiding elder or religious denominations, sects or churches.

Classes of Corporations according to validity of formation:

Compliance with requirements for Separate and Questioning the personality

valid incorporation distinct personality of the corporation
from stockholders Direct Collateral
Attack* Attack**
De Jure Full compliance Yes No No
Corporation

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De Facto Requisites for existence: Yes Yes, via quo No

Corporation 1. There exists a valid law under warranto
which it may be incorporated;
2. An attempt in good faith to
incorporate (colorable
compliance)
3. Use of corporate powers
Corporation No compliance at all. The persons None, stockholders Yes Yes
by Estoppel who compose it only set themselves are liable as general
out as a corporation. partners

Direct Attack: means the very subject of the case is the legal existence or personality of the corporation. This is
allowed in a de facto corporation via a quo warranto proceeding.

Collateral Attack: means that the main subject of the case is other than attacking the personality of the
corporation, but it is questioned as a side subject.

1. An ultra vires act is an act or a transaction of a corporation which:

A. Is considered illegal
B. Is contrary to morals, public policy, good customs
C. Not within the express, implied or incidental powers of the corporation
D. All of the above

2. Under the Revised Corporation Code, a foreign corporation has power and capacity to do all of the following,
except:
A. Form joint ventures
B. Adopt and use a corporate seal
C. Give aid for political partisan activities
D. Acquire properties in its own name

3. Under the Revised Corporation Code, a foreign corporation has power and capacity to do all of the following,
except:
A. Form joint ventures
B. Adopt and use a corporate seal
C. Give aid for political partisan activities
D. Acquire properties in its own name

4. Mr. X was invited by his friends to invest in XYZ Corp., a newly organized firm where he was appointed
president. He entered into a contract of sale with ABC Corp. to purchase equipment, in accordance with
the primary purpose of the corporation. Later on, however, it was discovered that the Articles of
Incorporation had not been filed by his friends. He hurriedly attended to the matter and when the SEC
issued the Certificate of Registration, the corporation became bankrupt and Mr. X is now being sued by
ABC Corp. in his personal capacity. In this case,
A. Mr. X cannot be made liable since XYZ Corp. is considered a de facto corporation which has a separate
personality.
B. Mr. X cannot be made liable since the de facto status of the corporation has not been attacked by the
State.
C. Mr. X can be made liable upto his personal assets since he is the president of XYZ Corporation which is
a corporation by estoppel.
D. Mr. X can be made liable only upto his investment since he had no knowledge that the corporation was
not validly incorporated.

5. Mr. X invested his property in exchange for shares in ABC Corporation. Later on, the same property
mortgaged as security for the loan of ABC Corporation from M Bank. For failure to pay, the mortgage was
foreclosed and proceeds were less than the amount of the outstanding balance of the loan which M Bank
sought from Mr. X contending that the property was invested by him. Mr. X cannot be made liable under
which principle:
A. Corporate Entity Theory
B. Piercing the Veil of Corporate Entity
C. Limited Liability Principle
D. All of the above

II. ORGANIZATION AND INCORPORATION

1. PROMOTIONAL STAGE: undertaken by the organizers or promoters who bring together persons interested
in the business venture. They enter into contract either in their own names or in the name of the proposed
corporation.

A promoter, although he may assume to act for and on behalf of a projected corporation and not for himself,
will be held personally liable on contracts made by him for the benefit of a corporation he intends to organize.
The personal liability continues even after the formation of the corporation unless there is novation or other
agreement to release him from liability.

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2. PROCESS OF INCORPORATION: includes the drafting of the Articles of Incorporation, preparation and
submission of additional and supporting documents, filing with the SEC, and the subsequent issuance of the
Certificate of Incorporation.

Contents of the Articles of Incorporation:

a. The name of the corporation;

The name of the corporation is essential to its existence since it is through it that it can act and perform
all legal acts. Each corporation should therefore, have a name by which it is to sue and be sued and do
all legal acts.

Thus, the organizers must make sure that the name they intend to use as a corporate name is not similar
or confusingly similar to any other name already registered and protected by law since the SEC would
refuse registration if such be the case.

This requirement is now specifically indicated in the Revised Corporation Code.

b. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which
is the primary purpose and which is/are the secondary purpose or purposes: Provided, that a
non-stock corporation may not include a purpose which would change or contradict its nature
as such;

The statement of the objects or purpose or powers in the charter results practically in defining the scope
of authority of the corporate enterprise or undertaking. This statement both congers and also limits the
actual authority of the corporate representatives.

The reasons for requiring a statement of the purposes or objects:

1. In order that the stockholder who contemplates on an investment in a business enterprise shall know
within what lines of business his money is to be put at risks;
2. So that the board of directors and management may know within what lines of business they are
authorized to act; and
3. So that anyone who deals with the company may ascertain whether a contract or transaction into
which he contemplates entering is one within the general authority of the management.

SECONDARY PURPOSE: Although the Corporation Code does not restrict nor limit the number of purpose
or purposes which a corporation may have, Sec. 14 thereof, requires that if it has more than one purpose,
the primary purpose as well as the secondary ones must be indicated therein.

GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or general terms;
3. If there is more than one purpose, the primary as well as the secondary ones must be specified; and
4. The purposes must be capable of being lawfully combined

c. The place where the principal office of the corporation is to be located, which must be within
the Philippines;

It must be located within the Philippines. The AOI must not only specify the province, but also the City or
Municipality where it is located.

The principal office serves as the residence of the corporation and is thus important in:
i. venue of actions;
ii. registration of chattel mortgage of shares;
iii. validity of meetings of stockholders or members in so far as venue thereof is concerned.

d. The term for which the corporation is to exist, if the corporation has not elected perpetual
existence;

A corporation now generally has perpetual existence since the Revised Corporation Code removed the
limitation of 50 years unless the Articles of Incorporation would provide otherwise.

This equally applies to already existing corporations, except if by majority vote of its stockholders, it
notifies the SEC to retain its specific corporate term.

Definite Term: If the corporation would opt to have a definite term for its existence, any extension
thereof can be made no earlier than 3 years (from 5 years) prior to expiry date, unless there are
justifiable reasons to allow earlier extension.

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Revival: Also under Sec. 11, after the expiration of the corporate term, a corporation may file for
revival of its corporate existence. Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence,
unless its application for revival provides otherwise.

e. The names, nationalities and residence addresses of the incorporators;

CORPORATORS apply to all who compose the corporation at any given time and need not be among
those who executed the AOI at the start of its formation or organization.

INCORPORATORS are those mentioned in the AOI as originally forming the corporation and who are
signatories in the AOI.

An incorporator may be considered as a corporator as long as he continues to be a stockholder or a

member, but not all corporators are incorporators.

Number of Incorporators: not less than 5 but not more than 15 (now, “not more than 15”)

Qualifications:
1. Must be natural persons (now can also include a partnership, association or corporation)
2. Of Legal Age (still a requirement for natural person-incorporators under SEC MC No. 16-2019)
3. Must own or subscribe to at least 1 share.
4. Majority must be residents of the Philippines (already removed)

f. The number of directors which shall not be more than fifteen (15) or the number of trustees
which may be more than fifteen (15);

DIRECTORS compose the governing board in stock corporations which should not exceed 15.

TRUSTEES pertain to non-stock corporations which may exceed 15.

INDEPENDENT DIRECTORS: Section 22 of the RCC, the following corporations vested with public
interest shall have independent directors constituting at least 20% of such board:
1. Corporations covered by the Securities Regulations Code;
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-
need, 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.
An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship which could,
or could reasonably be perceived to materially interfere with the exercise of independent judgment in
carrying out the responsibilities as a director

g. The names, nationalities and residences of persons who shall act as directors or trustees until
the first regular directors or trustees are duly elected and qualified in accordance with this
Code;

h. If it be a stock corporation, the amount of its authorized capital stock, the number of shares
into which it is divided, the par value of each, the names, nationalities and residences of the
original subscribers, and the amount subscribed and paid by each on his subscription, and a
statement that some or all of the shares are without par value, if applicable;

This requirement that at least 25% of the authorized capital stock must be subscribed and that 25% of
the subscription must be paid-up has already been removed under the Revised Corporation Code, but
still applies to increase in authorized capital stock.
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and paid-
in or secured to be paid by the subscribers. It may also refer to the maximum number of shares that a
corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which there are
contracts for their acquisition or subscription. It is in effect, the stockholder’s equity account showing that
part of the authorized capital stock which has been paid or promised to be paid, or that portion of the
authorized capital stock which has been subscribed by the subscribers or stockholders.

PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value which has been actually
contributed or paid to the corporation in consideration of the subscriptions made thereon.

Considerations for stocks:

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient
for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock
issued;

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3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

AMENDMENT: Consideration for stocks under Section 61 (formerly Section 60) now includes:
1. Shares of stock in another corporation; and/or
2. Other generally accepted form of consideration.
Note:
• Stocks cannot be issued for a consideration less than the par or issue price thereof.
• Promissory notes or future service cannot be considered valid consideration for stocks.

OUTSTANDING CAPITAL STOCK: total number of shares issued, including those which are subscribed
and not yet fully paid, but excluding treasury shares.

i. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residence addresses of the contributors and the amount contributed by each; and

j. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

RESTRICTIONS AND PREFERENCES:

If the corporation desires to grant such options, restrictions and/or preferences, the same must be
indicated in the AOI AND in all of the stock certificates. Failure to provide the same in the AOI would not
bind the purchasers in good faith despite the fact that the said restriction and/or preference is indicated
in the by-laws of the corporation.

In a close corporation, however, such restrictions and preferences must not only appear in the articles of
incorporation and in the stock certificates BUT ALSO be embodied in the by-laws of that close corporation
otherwise it may not bind purchasers in good faith.

OTHER MATTERS TO BE INDICATED IN THE ARTICLES OF INCORPORATION:

1. The name of the Treasurer duly elected by the subscribers
2. No Transfer Clause: in case a corporation is required to maintain a required minimum Filipino
ownership, committing that no transfer shall be made which shall reduce the ownership of Filipino
citizens to less than the required percentage.
3. The Execution Clause: which will contain the names and signatures of the incorporators
4. Notarial Acknowledgment

AMENDMENT: The following were specifically included as those who would be needing a favorable
recommendation from the concerned government agency:
1. Non-Stock Savings and Loans Associations; and
2. Pawnshops.
On the other hand, the following were removed from the enumeration of entities requiring favorable
recommendations:
1. Educational Institutions; and
2. Other corporations governed by special laws.

AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD REQUIRE:

a. Majority approval of the members of the Board;
b. Written assent of stockholders representing 2/3 of the outstanding stocks or 2/3 of the members in case
of non-stock corporations.
c. Approval of the SEC. If the SEC did not act on the application within 6 months from the date of filing, the
amended is deemed approved.

6. Under the Revised Corporation Code, a corporation has:

A. A maximum of 50 years of existence
B. A maximum of 50 years of existence but renewable not earlier than 5 years prior to expiration of the
term
C. A maximum of 50 years of existence but renewable not earlier than 3 years prior to expiration of the
term
D. Perpetual existence

7. Which of the following is still a requirement that applies to incorporators under the Revised Corporation
Code:
A. Majority must be residents of the Philippines
B. Must be natural persons
C. Natural persons must be of legal age
D. None of the choices

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8. A, B, C, D and E is organizing a corporation whose Authorized Capital Stock is P64,000. How much is the
minimum paid-up capital requirement under the Revised Corporation Code for the corporation to
incorporate?
A. P0
B. P4,000
C. P5,000
D. P16,000

9. A restriction as to transfer of shares in an ordinary stock corporation must be indicated in:

I. Articles of Incorporation
II. By-Laws
III. Certificate of Stock

A. I, II and III C. I and III

B. I and II D. II and III

10. The existence of a corporation sole begins from:

A. The time the parties came to an agreement to form a corporation and contribute money or property.
B. Filing of the verified articles of incorporation.
C. Issuance of a certificate of registration.
D. First day of the year following the filing of the Articles of Incorporation

III. BOARD OF DIRECTORS

The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme authority in
matter of management of the regular and ordinary business affairs of the corporation.

However, this authority does not extend to the fundamental changes in the corporate charter such as amendments
or substantial changes thereof, which belong to the stockholders as a whole.

Classification of powers of the board members/corporate officers: The general rule is that a
corporation is bound by the acts of its corporate officers who act within the scope of the classifications
of powers of corporate agents, which are:
1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by the
official act of the board of directors;
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and
necessary to carry out the corporate purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually granted, the principal knowingly allows or
permits it to be done; and
5. Powers arising out of customs, usage or emergency

QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws of a corporation may provide for additional
qualifications and disqualifications of its members of the board of directors or trustees. However, it may not do
away with the minimum qualifications and disqualifications.

Qualifications of a Director/Trustee: Must own at least 1 share in their own names or a member (in the case
of trustees).

A director who ceases to own at least 1 share or a trustee who ceases to be a member of the corporation shall
cease to be as such.
Residency: the requirement that majority of the directors must be residents has already been removed by the
Revised Corporation Code.

Disqualifications of a Director/Trustee: A person shall be disqualified from being a director, trustee or

officer of any corporation:
1. If, within 5 years prior to election or appointment as such, the person was Convicted by Final Judgment
a. Of an offense punishable by imprisonment for a period exceeding 6 years;
b. Violation of the Corporation Code;
c. Violation of the Securities Regulations Code
2. Found administratively liable for any offense involving fraud acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to the
disqualifications under the Code.
4. Such other disqualifications that may be provided in the by-laws.

ELECTION OF MEMBERS OF THE BOARD/TRUSTEES

1. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the
election of the directors; or majority of members entitled to vote, in the case of a non-stock corporation. If
the required quorum is not obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot otherwise viva-voce
would suffice.
3. The candidates receiving the highest number of votes shall be elected

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Report Requirement: Section 25 of the RCC requires a report within 30 days to be submitted to the SEC in case
of non-holding of elections, which shall include a new date for the election, which shall not be later than 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, summarily order that an election be held.

Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director,
trustee or officer of the corporation, or in case of death, the officer’s heirs shall, within seven (7) days from
knowledge thereof, report in writing such fact to the SEC.

METHODS OF VOTING:
1. Straight Voting – every stockholder may vote such number of shares for as many persons as there are
directors to be elected
2. Cumulative Voting:
a. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as
the number of directors to be elected multiplied by the number of his shares shall equal (Cumulative
Voting for one candidate) or he may distribute them among the candidates as he may see fit (Cumulative
voting by distribution)
b. This is granted by law to each stockholder with voting rights. However, in non-stock corporations,
cumulative voting is generally not allowed, UNLESS allowed by the AOI or by-laws.
c. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000 votes
which he may cast in favor of one candidate or may apportion to any number of candidate he may wish
d. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
e. Cumulative voting is not available in non-stock corporations.

REMOVAL AND FILLING-UP OF VACANCIES

1. By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for those causes;
3. A director NOT representing the minority may be removed even without a cause.

AMENDMENT: The SEC is now empowered to motu proprio (not just 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.

Requirements for a valid removal:

1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital
stock or the members entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the intention to propose such removal at
the meeting either by publication or on written notice to the stockholders or members.

Vacancy:

CAUSE OF WHO WILL FILL THE VACANCY WHEN ELECTION WILL BE HELD
VACANCY
Removal Stockholders Same day of the meeting authorizing the
removal
Expiration of the Stockholders No later than the day of such expiration at a
term meeting called for that purpose
Other causes Board of Directors – if they still constitute No later than 45 days from the time the
(death, a quorum; vacancy arose
resignation,
abandonment) Stockholders – if the Directors no longer
constitute a quorum
Increase in the Stockholders Same day of the meeting authorizing the
number of removal
Directors

Replacement of Hold-Over Directors: in the event that a director, after the expiration of his term is not replace
since there was no election held, such director can continue to function in a holdover capacity. However, if he
resigns, the stockholders will be the one to replace him even if the remaining directors continue to constitute a
quorum. Note that the power of the Board to fill up the vacancy is only if the director resigns before the expiration
of his term. In this instance, the term of the director already expired, he just continued as such only in a hold-
over capacity.

EMERGENCY BOARD: When the vacancy prevents the remaining directors from constituting 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.

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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 therein the reason for its creation.

Compensation of Directors/Trustees: General Rule: Directors are not entitled to receive any compensation
this is because the office of a director is usually filled up by those chiefly interested in the welfare of the institution
by virtue of their interest in stock or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation. Except:
1. Reasonable per diems;
2. As provided in the by-laws
3. Upon a majority vote of the stockholders; and
4. If they are performing functions other than that of a director.

Limit: In no case shall the total yearly compensation of the directors (except number 4 above), exceed 10% of
the net income before tax of the corporation during the preceding year. (Section 30)

AMENDMENT: Section 29 of the RCC now specifically prohibits the Director/Trustee from participating in
the fixing of their own per diems or compensation.

Likewise, the same section requires corporations vested with public interest to submit to their shareholders
and the Commission, an annual report of the total compensation of each of their directors or trustees.

CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a fiduciary and
prohibits him from seizing a business opportunity and/or developing it at the expense and with the facilities of
the corporation. He cannot appropriate to himself opportunity which in fairness should belong to the corporation.

Ratification:
1. The second paragraph of Sec. 31 which makes a director liable to account for profits if he attempts to acquire
or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as
to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity which should belong to the corporation, he
is bound to account for such profits unless his act is ratified by the stockholders owing or representing at least
2/3 of the outstanding capital stock.

Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value
of P100M for P90M.
a. If it was offered first to A, and A made a profit of P90M, this would fall under Sec. 34 and may be subject to
ratification; A merely acquired a business opportunity owing to the corporation.
b. If it was offered to REALTY CORP., and A, later on offered to buy it for P95 and sold it making a profit of P5M,
it would fall under Sec. 31 and not subject to ratification, A should return the profits to REALTY CORP. It was
a matter reposed in him in confidence.

SELF-DEALING DIRECTORS: is one who deals or transacts business with his own corporation.

Generally, A contract entered into by a director with his own corporation is voidable at the latter’s option,

Except, in the following cases:

1. When the following requisites concur:
1. That 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;
2. That the vote of such director or trustee was nor necessary for the approval of the contract (see
amendment below);

The approval for transactions of self-dealing directors of corporations vested with public interest,
under the Revised Corporation Code, shall require:
a. At least two-thirds (2/3) of the entire membership of the board, with
b. At least a majority of the independent directors

3. That the contract is fair and reasonable under the circumstances.

2. On the other hand, where any of the first two conditions is absent, the contract becomes voidable subject
to the ratification of the stockholders representing 2/3 of the outstanding capital stock – the
requirements of which are:
1. there must be a meeting called for that purpose;
2. full disclosure of the adverse interest of the director; and
3. the contract is fair and reasonable under the circumstances.

3. If the self-dealing director owns all or substantially all of the shares of stock, thereby making ratification
easily possible, the reasonableness of the transaction shall be determined.

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INTERLOCKING DIRECTOR: is a director in one corporation who deals or transacts with another corporation of
which he is also a director. In such case, there may effectively be a dual agency, a divided allegiance where
allegiance in one corporation may be subordinated to the other.

General Rule: The contract between corporations with interlocking director is valid provided it is reasonable
under the circumstances.

Except:
1. If there is fraud;
2. If the interest of the interlocking director in one corporation exceeds 20% (substantial) and in the other
merely nominal, the contract is voidable at the latter corporation’s option.

In effect, the director would be treated as a self-dealing director discussed above.

REMEDIES AGAINST ERRING OFFICERS/DIRECTORS: In case of a wrongful or fraudulent act of a director,

officer or agent, stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such as denial of his right to inspect corporate
books and records or pre-emptive rights;
2. Representative or Class Suit – in which one or more members of a class sue for themselves as a class or for
all to whom the right was denied, either as an individual action or a derivative suit; and a
3. Derivative Suit – an action based on injury to the corporation – to enforce a corporate right – wherein the
corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation. It is a suit
granted to any stockholder to institute a case to remedy a wrong done directly to the corporation and indirectly
to stockholders.

EXECUTIVE COMMITTEE: The by-laws of a corporation may create an executive committee, composed of not
less than three members of the board, to be appointed by the board.

Said committee may act, by majority vote of all its members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
1. Approval of any action for which shareholders’ approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or
repealable; and
5. A distribution of cash dividends to the shareholders.

AMENDMENT: The board of directors may create special committees of temporary or permanent nature and
to determine the members’ term, composition, compensation, powers, and responsibilities.

IV. CORPORATE OFFICERS

ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the corporate officers may be
elected directly by the stockholders, the Code requires the BOD to elect the said officers;

The officers that may be elected are the:

1. President – who must be a director;
2. Treasurer – who may or may not be a director (now, required to be a resident of the Philippines);
3. Secretary – who should be a resident and citizen of the Philippines;
4. Such other officers as may be provided for in the by-laws.

Any two or more positions may be held concurrently by the same person, except:
1. The president and the secretary;
2. The president and the treasurer.

Compliance Officer – is now a required corporate officer in corporations vested with public interest.

AUTHORITY OF CORPORATE OFFICERS TO ACT IN BEHALF OF THE CORPORATION: a corporate officer or

agent may represent and bind the corporation in transactions with third person to the extent that authority has
been conferred upon him, and this includes powers which have been:
1. intentionally conferred, and
2. also, such powers as, in the usual course of business, are incidental thereto, or may be implied therefrom,
3. powers added by custom and usage, as usually pertaining to the particular officer or agent, and
4. such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that
it has conferred

LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law specifically provides a corporate
officer or agent is not civilly or criminally liable for acts done by him as such officer or agent, or when absent bad
faith or malice.

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Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation
may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) gross negligence in
directing its affairs, or (d) conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his corporate action.

ELECTION OF CORPORATE OFFICERS: require the majority of ALL MEMBERS of the Board, not just the usual
majority of those present in the meeting. Meaning, if there are 15 members of the Board, and 9 are present, 8
votes would be necessary to elect a corporate officer.

11. The following are qualifications of a Director, except:

A. They must own at least 1% share.
B. They meet all the qualifications under the by-laws
C. They do not possess any of the disqualifications under the Corporation Code.
D. None of the choices is an exception

12. A, is a stockholder of Silvestre Corporation, who holds 10,000 shares thereof. A stockholders meeting was
called to elect members of a 5-man Board. How many votes can A cast in favor of B if they employ
cumulative voting?
A. 10,000 votes C. 50,000 votes
B. 25,000 votes D. 100,000 votes

13. A, B, C, D and E are members of the Board of Directors. A retired and D died. In this case, who shall fill-
up the vacancy?
A. Stockholders in a meeting called for the purpose, regardless if the directors still have a quorum
B. A, B and C, since they still constitute a quorum
C. A, B and C, regardless if they still constitute a quorum
D. Stockholders in a meeting called for the purpose since the directors no longer have a quorum

14. A, B, C, D, E, F, G, H, I are members of the Board of Directors. In the meeting to appoint corporate officers,
only A, B, C, D and E are present. How many votes are required to elect corporate offices?
A. 2 C. 4
B. 3 D. 5

15. A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value of
P100M for P90M. Z offered the property first to A, who acquired it for P90M and eventually sold the same
for P100M. In this case,
A. A can keep the profits provided the sale is ratified by the stockholders.
B. A can keep the profits because it was offered to him and not to REALTY CORP.
C. The sale is not subject to ratification and A may be required to remit the profits to REALTY CORP
D. None of the above

16. Mr. X is a Director of both XYZ Corporation and ABC Corporation. XYZ and ABC entered into a contract of
sale, the contract between XYZ and ABC, is considered valid absent fraud and provided it is reasonable
under the circumstances. But it is considered voidable if the shareholdings of Mr. X in the two corporations
are:

ABC XYZ
A. 25% 25%
B. 5% 5%
C. 25% 5%
D. 3% 20%

17. Which of the following corporate officer position may be held by the same person?
A. President and Secretary
B. Treasurer and Secretary
C. President and Treasurer
D. None of the above

18. Mr. X, as the president of ABC Corporation, signed the check in his official capacity. Later on, the check
bounced due to insufficiency of funds and he is now being sued for violation of BP Blg. 22. Can Mr. X be
made personally liable?
A. Yes, because he acted in bad faith in allowing the issuance of a worthless check
B. No, because he merely signed in his official capacity
C. Yes, because he is made personally liable by law
D. No, because of the corporate entity theory

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V. CLASSES OF SHARES OF STOCK

Shares of Stock designate the units into which the proprietary interest in a corporation is divided. They represent
the proportionate integers or units, the sum of which constitutes the capital stock of the corporation. It is likewise
the interest or right which the owner, called the stockholders or shareholder, has in the management of the
corporation, and in the surplus profits and in case of distribution, in all of its assets remaining after the payment
of its debts.

Certificate of Stock is a document or instrument evidencing the interest of a stockholder in the corporation.

COMMON STOCKS are those which entitles its owner to an equal or pro-rata division of profits, if there are any,
but without any preference or advantage in that respect over any other stockholder or class of stockholders.

Voting Rights: A common share usually carries with it the right to vote, and frequently, the exclusive right to do
so. The only time a common stock’s right to vote may be limited is where there exists Founders’ Shares.

FOUNDER’S SHARES: are shares issued to the founders of the corporation which are granted certain right
and privileges such as the exclusive right to vote and be voted for in the election of directors, for a period not
to exceed 5 years..

The period of 5 years is non-extendable because it may result in the almost perpetual disqualification of other
stockholders to elect or be elected as members of the BOD resulting to the lack of proper representation
thereat.

PREFERRED STOCKS is a stock that gives the holder preference over the holder of common stocks with respect
to the payment of dividends and/or with respect to distribution of capital upon liquidation.

LIMITATIONS imposed by the Code in the issuance of preferred stocks:

1. They can be issued only with a stated par value; and
2. The preference must be stated in the AOI and in the certificate of stock otherwise each share shall be, in all
respect, equal to every other share.

Preference as to Dividends
They have the privilege of being paid dividends first before any other stockholders are paid theirs. The guaranty
is not absolute so as to create a relation of debtor and creditor between the corporation and the holders of such
stock. The amount of preference is stated in the contract of subscription and is usually a fixed percentage or by
specified amount indicated therein.

Participating and Non-Participating Preferred Shares

If the preferred share is participating, they are entitled to participate in dividends with the common shareholders
beyond their stated preference. Non-participating preferred shares on the other hand are entitled to its fixed
priority or preference only.

Cumulative and Non-cumulative Preference Shares

Cumulative preferred shares are those that entitle the owner thereof to payment not only of current dividends
but also back dividends not previously paid whether or not, during the past years, dividends were declared or
paid. In light of the provision of the Code stating that all shares are equal in all respects unless otherwise stated
in the AOI, a preferred share to be considered cumulative, the same must be provided for and specified in the
certificate.

Non-cumulative preferred shares are those which grant the holders of such shares only to the payment of current
dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same.

Voting Rights of Preferred Shares: same with redeemable shares, preferred shares are usually denied voting
rights – but this right must be clearly withheld. However, even if the right to vote is withheld, they shall have the
right to vote on the following:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

AMENDMENTS: In determining whether the sale involved covers all or substantially all the properties and
assets of the corporation, the old Section 40 only provides “if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was incorporated”.

Section 39, amending the above-mentioned provision now includes “The determination of whether or not
the sale involves all or substantially all of the corporation’s properties and assets must be computed based
on its net asset value, as shown in its latest financial statements.”

Also, the notice requirement can likewise now be sent through electronic means, if allowed by the by-laws
or done with the consent of the stockholders.

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Amendment of by-laws: The submission of the amended by-laws no longer requires that it be filed with the
SEC attached to the original articles of incorporation and original bylaws.

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

Preference upon liquidation: this preference must be stated in the contract to accordingly grant such
preference in the distribution of the assets ahead of the common stockholders, including dividends in arrears in
case the preferred shares are cumulative.

PAR AND NO-PAR VALUE SHARES

Par Value Shares are those whose values are fixed in the Articles and shown on the certificate. The par value is
the minimum subscription or original issue price of the shares. If the shares are issued at less than its par value,
the shares sold is considered as watered stocks, and the stockholders will remain liable for the difference of the
par value and the amount paid therefor.

No Par Value Shares are those whose issued price are not stated in the certificate of stock but may be fixed in
the AOI, or by the BOD when so authorized the articles or the by-laws, or in the absence thereof, the stockholders
themselves. They do not purport to represent any stated proportionate interest in the capital measured by value,
but only an aliquot part of the whole number of shares of the corporation issuing it.

The Code allows the issuance of no par value shares, subject to the following limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loans
associations.

WATERED STOCKS: Watering of stocks happened when the shares are issued at less than its par or issue price.

REDEEMABLE SHARES: are those subject to redemption, as indicated in the contract, usually attached to
preferred shares and other debt securities like bonds. This type of shares grants the corporation the right to
repurchase the shares at its option or at the option of the holder based on the face or issued value plus a specified
premium. The redemption may be optional or mandatory at a fixed future date.

The repurchase is not subject to the availability of unrestricted retained earnings.

TREASURY SHARES: are shares of stock which have been issued and fully paid for, but subsequently reacquired
by the issuing corporation by purchase, redemption, donation or through some other lawful means. Subsequently,
the corporation can re-issue the shares of stock or sell them or declare them as property dividends.

Such shares, though paid for already, do not form part of outstanding shares and accordingly, do not have the
right to vote and receive dividends.

SUBSCRIPTION CONTRACT: Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription, notwithstanding the fact that the parties refer to it
as a purchase or some other contract.

Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a corporation still to be formed
while post-incorporation subscriptions are those made or executed after the formation or organization of the
corporation, and are deemed irrevocable:
1. For a period of at least 6 months from the date of subscription unless (a) all the subscribers consent to the
revocation; or (b) the incorporation fails to materialize within said period or within a longer period as may
stipulated in the contract of subscription; and
2. After submission of the AOI to the SEC

Issuance of certificates of stock; requisites:

1. It must be signed by the president or vice-president and countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any) should have been paid.

Indivisibility: Subscription to shares of stock are deemed indivisible and no certificate of stock can be issued
unless and until the full amount of his subscription including interest and expenses, if any is paid.

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Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a
stockholder and the corresponding liability that attach thereunder, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right.

Delinquent Shares of Stock: a subscription to shares of stock become delinquent if there no payment made on
the balance of all or any portion of the subscription within 30 days on the date or dates fixed in the contract of
subscription without need of call, or on the date specified by the BOD pursuant to a call.

Effect of Delinquency:
General Rule: the stockholder thereof immediately loses the right to vote and be voted upon or represented
in any stockholders meeting as well as all the rights pertaining to a stockholder

Except: the right to receive dividends:

1. Cash dividend - shall first be applied to the unpaid balance on his subscription plus cost and expenses; while
2. Stock dividends - shall be withheld until his unpaid subscription is paid in full.

Delinquent shares; enforcement of payment of subscriptions: Unpaid subscription or any percentage

thereof, together with interest if required by the by-laws or the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a “call” declaring any or all unpaid portion
thereof to be so payable

To enforce payment, the following remedies are available:

1. By board action; and
2. By a collection case in court.

Failure or refusal of the BOD to enforce or collect payment of unpaid subscription will not prevent the creditors or
the receiver of the corporation to institute a court action to collect the unpaid portion thereof.

Delinquency Sale:
1. Amount to be paid includes:
a. The balance due on each subscription
b. All accrued interest
c. Costs of advertisement
d. Expenses of sale

2. Bids: shall all be for the amount due above and shall differ only on the number of shares that the bidders are
willing to accept in exchange of the said amount.
3. Highest Bidder: shall be the bid made for the least number of shares in exchange for the total amount due.
4. Effect of Delinquency Sale: The stock so purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of
stock covering such shares.
5. No bidder: Should there be no bidder at the public auction, the corporation may bid for the same, and the
total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in the corporation as treasury shares.

19. Which of the following is false with regards preferred shares?

A. Preferred share is a stock that gives the holder preference over the holder of common stocks with
respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.
B. A preferred share can be issued without a par value provided it is not issued for less than P5.
C. The preference must be stated in the Articles of Incorporation and the Certificate of Stock.
D. None of the above.

20. As a general rule, preferred shares do not give the holder the right to vote. However, they shall have the
right to vote on the following, except:
A. Amendment of the Articles of Incorporation
B. Adoption and amendment of the by-laws
C. Sale of all or substantially all of the inventories
D. Increase or decrease of capital stock

21. X Co. has P10M Authorized Capital Stock divided into: (1) 5M shares at P1.00 par value; and (2) 1M no
par value shares with issued value at P5.00. If A acquired 100,000 no par value shares at P4.00 and the
same were issued. In this case,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the P1.00 per share difference.
C. Only A is liable for the P1.00 per share difference.
D. Only the directors of X Co. is liable for the P1.00 per share difference

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22. Mr. A subscribed to 10,000 shares of P1 par value for P10 per share. He was able to pay 50% of the
subscription price. In this case, which of the following is not a right granted to Mr. A:
A. He can receive dividends attributable to the whole 10,000 shares
B. He has the right to vote equivalent to the 10,000 shares
C. He can demand the issuance of certificate of stock for the 5,000 shares already paid
D. None of the choices.

VI. RIGHTS OF A STOCKHOLDER

1. Participation in the management of the corporate affairs by exercising their right to vote and be voted
upon either personally or by proxy;

Instances where the concurrence of the stockholders are necessary for the exercise of the powers
of the corporations
a. Requiring majority vote of the BOD and concurrence of the stockholders representing 2/3 of the
outstanding capital stock:
i. Increase/decrease corporate stock
ii. Incur or create bonded indebtedness;
iii. Sell, dispose, lease, encumber all or substantially all of corporate assets;
iv. Invest in another corporation other than the primary purpose;
v. Amend the articles of incorporation.
vi. Merger or consolidation
vii. Voluntary dissolution of the corporation

AMENDMENT: Voluntary dissolution now requires a majority vote only of the stockholders for
instances with NO creditors affected. For voluntary dissolutions where creditors are affected, the
voting requirement remains to be 2/3.

viii. Extend or shorten the corporate term;

ix. Deny pre-emptive right
x. Declare stock dividends
xi. Enter into a management contract – where:
a) a stockholder(s) representing the same interest in the managed and the managing corporation,
owns or controls 1/3 of the capital stock of the managing corporation; or
b) where a majority of the members of the board of the managing corporation also constitute a
majority of the board of the managed corporation;

AMENDMENT: Section 43 of the RCC now limits the term for a management contract to 5 years for
any 1 term.

b. Majority of the BOD + majority of the outstanding capital:

i. Enter into a management contract other than above;
ii. Adopt, amend or repeal the by-laws

c. Without board resolution, 2/3 of the stockholders may:

i. Delegate to the board the power to amend the by-laws
ii. Remove a member of the Board of Directors – vote required
iii. Ratify a business opportunity entered into by a member of the Board (corporate opportunity doctrine)
iv. Ratification of contracts of self-dealing directors, where his presence is required to constitute a quorum
and/or his vote is required for its approval by the BOD.

d. Without board resolution, majority of the stockholders may:

i. Revoke delegated power to amend by-laws
ii. Calling a special meeting to remove directors
iii. To fix compensation of directors
iv. To fix the issue price or stated value of no-par value shares.

2. To enter into a voting trust agreement;

3. To receive DIVIDENDS and to compel their declaration if warranted;

If the dividends to be declared are stock dividends, it requires not only the majority vote of the BOD but also
the approval of stockholders owning at least 2/3 of the outstanding capital stock.

The BOD can be compelled to declare dividends if the retained earnings are in excess of 100% of the paid-up
capital. However, the BOD can still refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved by the Board;
b. The corporation is prohibited under a loan agreement to declare dividends without the creditor’s consent
and such consent has not yet been secured;
c. It can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation.

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If there are no retained earnings, dividends, as a rule, cannot be declared out of capital stock. EXCEPT:
a. Liquidating dividends
b. Investments in wasting assets such as mining, oil, well, etc.

4. To transfer shares of stock subject only to reasonable restrictions such as the options and preferences as
may be allowed by law inclusive of the right of the transferee to compel the registration of the transfer in the
books of the corporation;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise pre-emptive rights;

A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares of any class in
proportion to his present holdings, the purpose being to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the surplus. Except in the following cases:
a. Shares to be issued to comply with the laws requiring stock offering or minimum stock ownership by the
public;
b. Shares issued in good faith in exchange for property needed for corporate purposes;
c. Shares issued in payment for previously contracted debt;
d. In case the right is denied in the Articles of Incorporation;

If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to
purchase the corresponding shares of the shareholder who declined. But if nobody purchased the same and
later on the board re-issued the shares, the pre-emptive right applies.

7. To exercise their appraisal right;

APPRAISAL RIGHT: Right is the method of paying a shareholder for the taking of his property. It is a statutory
means whereby a stockholder can avoid the conversion of this property into another property not of his own
choosing.

When may it be exercised:

a. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights
of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of corporate existence;

Not all amendments: the right may only be exercised in cases of amendment which “has the effect of
changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or shortening the term
of corporate existence”.

Accordingly, if the amendment is to increase or decrease the number of directors, or change the corporate
name, or change of principal office, the appraisal right is not available.
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all
of the corporate property and assets as provided in the Code;
c. In case of merger or consolidation;
d. Investment of funds in another corporation or business or for any other purpose other than its primary
purpose;
e. In a close corporation, a stockholder has the unbridled right to compel the corporation “for any reason” to
purchase his shares at their fair value which shall not be less than the par or issued value, when the
corporation has sufficient assets to cover its debts and liabilities, exclusive of capital stock.

Suspension of rights: the stockholder concerned is regarded as having made an election to withdraw from the
corporate enterprise and take the value of his stock. Such a procedure suspends (for a maximum period of 30
days) certain ownership rights associated with stockholder status, such as the right to receive dividends or
distribution and the right to vote which cannot be restored without compliance with the governing statutory
conditions.
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation;
11. To be furnished by the most recent financial statement of the corporation;

AMENDMENT: Changes introduced by Section 74 (formerly Section 75) concerning the issuance of the
corporation’s financial statements are as follows:
Section 75 (old) Section 74 (RCC)
Certification Independent CPA In accordance with the Code and the rules
the SEC may prescribe

Alternative If paid-up capital is less than P50,000, the If the total assets or total liabilities of the
Certification FS may be certified under oath by the corporation is less than P600,000, or such
Treasurer or any responsible officer of the other amount as may be determined
corporation appropriate by the DoF, the financial
statements may be certified under oath by
the treasurer and the president.

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12. To be issued a new stock certificate in lieu of the lost or destroyed one;
13. To have the corporation dissolved;
14. To participate in the distribution of assets of the corporation upon dissolution;
15. In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock; and
16. Also, in the case of a close corporation, to withdraw therefrom, for any reason, and compel the
corporation to purchase his shares.

23. Which of the following grounds to deny pre-emptive right requires the approval of 2/3 of the outstanding
capital stock?
A. Shares to be issued in order to comply with the laws requiring stock offering or minimum stock
ownership by the public
B. Shares issued in good faith in exchange for property needed for corporate purposes
C. In case the right is denied in the By-Laws
D. None of the choice

24. The appraisal right of a stockholder may be exercised in the following actions of the corporation, except:
A. In case of merger or consolidation.
B. Sale of all or substantially all the assets of the corporation.
C. Investment of funds in another corporation or business or for any other purpose other than the primary
purpose.
D. Amendments to the Articles of Incorporation to change the name of the corporation

25. Under the revised corporation code, which of the following is a valid requirement for the validity of the
annual stockholders’ meeting?
A. If there is no date fixed in the by-laws, it can be held on any date in April
B. There must be notice 2 weeks prior to the meeting
C. It must be held in the city where the principal office is located
D. It must be called by the proper party

VII. BY-LAWS
BY-LAWS are rules made by a corporation for its own government; to regulate the conduct and define the duties
of the stockholders or members towards the corporation and among themselves. They are the rules and
regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholder or members and directors and officers with relation thereto and among themselves
in their relation to it.

Effectivity: After approval by the SEC.

Adoption of by-laws: may be made:
1. Prior to incorporation – it must be signed by all the incorporators without need of the majority vote of
outstanding stocks or members as long as it is submitted together with the AOI;
2. After incorporation – must be submitted within 1 month after receipt of the notice of issuance of certificate of
registration or incorporation and must be approved by majority of the outstanding capital stock or members.
Failure to file within the 1 month period may be a ground for suspension or revocation of the corporate
franchise.
AMENDMENT: Section 45 (amending Section 46) of the RCC removed the one-month (from receipt of
the notice of issuance of the certificate of incorporation) requirement to submit the by-laws.

Amendment of by-laws; two modes:

1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or
members, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning 2/3 of the outstanding capital stock
or 2/3 of the members. This power, however, is considered revoked, when so voted by a majority of the
outstanding capital stock or members in a regular or special meeting.
AMENDMENTS: Section 46(d) of the RCC now includes “The modes by which a stockholder, member, director,
or trustee may attend meetings and cast their vote.”

It likewise includes that an arbitration agreement may be provided in the bylaws.

The submission of the amended by-laws no longer requires that it be filed with the SEC attached to the original
articles of incorporation and original bylaws.

VIII. MEETINGS
DIRECTORS STOCKHOLDERS
Quorum Majority Majority of the Outstanding Capital Stock
Date of Regular Monthly as fixed in the by-laws Annual as fixed in the by-laws. If no such date is
Meeting fixed, any date in April as the BOD/T may
determine.

AMENDMENT: Any date after April 15.

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Date of Special At any time deemed necessary or as provided for

Meeting in the by-laws
Notice Regular/Special Meetings – 1 day prior Regular Meetings – 2 weeks (now 21 days)
to the meeting. Special Meetings – 1 week

AMENDMENT: 2 days prior to the

meeting.
Place Anywhere City or Municipality where the principal office is
located. For this purpose, Metro Manila shall be
considered as one city.

AMENDMENT: the meeting shall not be at the

principal office itself, unless it is not practicable,
in the city or municipality where the principal office
is located.

Moreover, Metro Cebu and Metro Davao, as well as

other Metropolitan Areas are now considered a city
or municipality.
Proxy Voting Not allowed for a director or trustee Generally allowed
Voting General Rule: Majority of those present Refer to voting requirements under Rights of
Requirement shall be valid as a corporate act. Stockholders

Exceptions:
a. Election of corporate officers:
majority of all the members of the
board.
b. When the by-laws provide for
higher voting requirement.

Validity of Stockholders’ Meetings despite defect: If the voting requirement is met, any resolution passed in the
meeting, even if improperly held or called will be valid if ALL the stockholders or members are present or duly
represented thereat, as provided under the last paragraph of Sec. 51: “All proceedings had and any business
transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting.”

AMENDMENT: The meeting is still considered valid even if improperly held as long as ALL the stockholders or
members are present or duly represented, EXCEPT if the purpose of their attendance is only object to the
transaction of any business because the meeting is not lawfully called or convened.

Notice: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

However, under the revised Section 49 of the RCC, general waivers of notice in the articles of incorporation
or the bylaws shall not be allowed.

The attendance at a meeting shall constitute a waiver of notice of such meeting, except when the person attends
a meeting for the express purpose of objecting to the transaction of any business because the meeting is not
lawfully called or convened.

Attending the meeting in absentia: In the stockholders’ meeting for the election of directors/trustees, Section
23 of the RCC now specifically allows the stockholders or members to vote through remote communication or in
absentia, in case the by-laws or majority of the BOD authorizes the same, or even without such authorization in
case of corporations vested with public interest.

Directors/trustees are also now allowed to attend the meeting through remote communication such as
videoconferencing, teleconferencing, or other alternative modes of communication that allow them reasonable
opportunities to participate.

A stockholder or member who participates through remote communication or in absentia, shall be deemed
present for purposes of quorum.

STOCK AND TRANSFER BOOK OR MEMBERSHIP BOOK: The stock and transfer book contains a record of:
1. All stocks in the names of the stockholders alphabetically arranged;
2. The installments paid and unpaid on all stocks for which subscriptions has been made, the date of payment of
any installment;
3. A statement of every alienation, sale or transfer of stock made, the date thereof, by and to whome made;
4. Such other entries as the bylaws may prescribe
Unless the bylaws provide for a longer period, the stock and transfer book or membership book shall be closed
at least 20 days for regular meetings and 7 days for special meetings before the scheduled date of the
meeting

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IX. REORGANIZATION; MERGER AND CONSOLIDATION

REORGANIZATION: is generally entered into to put the company upon a sound financial basis and to enable it
to take care of its obligations thereby avoiding liquidation or bankruptcy. But in some cases, a reorganization is
effected notwithstanding the fact that the corporation is solvent.

MERGER: is a union effected by absorbing one or more existing corporations by another which survives and
continues the combined business. It is the uniting of two or more corporations by the transfer of property to one
of them which continue in existence, the other or the others being dissolved and merged therein.

CONSOLIDATION: is the uniting or amalgamation of two or more existing corporations to form a new
corporation. It signifies a union as necessarily results in the creation of a new corporation and the termination of
existence of old ones. The united concern resulting from such union is called consolidated corporation.

In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing or
surviving corporation is not, only the absorbed.

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION:

1. The BOD/T of each constituent corporations shall approve a plan or merger or consolidation setting for the
matters required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of the member in
non-stock corporations of each of such corporations at separate corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be given to
all stockholders or members in the same manner as in regular/special meetings of stockholders
(AMENDMENT from 2 weeks, either personally or by registered mail stating the purpose thereof);
4. Execution of the articles of merger or consolidation by each constituent corporations to be signed by the
president or vice-president and certified by the corporate secretary or assistant secretary setting forth the
matters required in Sec. 78;
5. Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the requirement
of Sec. 79 that if it involve corporations under direct supervision of any other government agency or governed
by special laws the favorable recommendation of the government agency concerned shall first be secured;
and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation
shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set a hearing to give
the corporations concerned an opportunity to be heard upon notice and thereafter, the Commission shall
proceed as provided in the Code.

EFFECTS OF MERGER OR CONSOLIDATION:

1. There will only be a single corporation. In case of merger, the surviving corporation or the consolidate
corporation in case of consolidation;
2. The termination of corporate existence of the constituent corporations, except that of the surviving
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under the Code;
4. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises of
the constituent corporations, and all property and all receivables due, including subscriptions to shares and
other choses in action, and every other interest of, or belonging to or due to the constituent corporations
shall be deemed transferred to and vested in such surviving or consolidated corporation without further act
or deed; and
5. The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by the
merger or consolidation.
6. There would be no need to liquidate or wind-up the affairs of the corporation because (1) there are no assets
to distribute; (2) no debts and liabilities to pay – since all these are transferred to the surviving or consolidated
corporation.

26. The delegation of the power to amend the by-laws would require __ vote of the stockholders, while its
revocation would require __ vote.
A. Majority; Majority
B. Majority; 2/3
C. 2/3; 2/3
D. 2/3; Majority

27. A Corp. and B Corp. agreed to a business combination. In the agreement, A. Corp. will absorb all the assets
and liabilities of B Corp. and the latter will cease to exist. The business combination entered into is a:
A. Merger C. Reorganization
B. Consolidation D. Quasi-reorganization

28. The merger or consolidation is deemed effective starting:

A. On the date the parties agreed to a consolidation or merger
B. On the date the stockholders ratified the Board resolution for consolidation or merger
C. Upon submission of the articles of merger or consolidation to the SEC
D. Upon issuance of the certificate of merger or consolidation

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29. As a general rule, ____ of the outstanding capital stock is required to constitute a quorum; and majority
of _____________ is the voting requirement.
A. Majority; outstanding capital stock
B. Majority; those present
C. 2/3; outstanding capital stock
D. 2/3; those present

30. The regular meetings of _____ are to be held monthly:

A. Stockholders
B. Members
C. Board of Directors
D. All of the choices

X. NON-STOCK CORPORATIONS

A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees,
or officers, except upon dissolution. Any profit which a non-stock corporation may obtain as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which
the corporation was organized.

The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except
as may be covered by specific provisions pertaining to non-stock corporations.

Differences:

STOCK CORPORATION NON-STOCK CORPORATION

Purpose Generally, for profit Primarily organized for charitable, religious,
educational, professional, cultural, scientific, social,
civic service, or similar purposes, like trade,
industry, agricultural and like chambers or any
combination thereof
Distribution of Authorized Not authorized
dividend
Term of office of the 1 year until their successor is 3 years
directors/trustees elected and qualified

Voting Cumulative Straight voting unless authorized under the by-laws

or AOI
Manner of voting Either in person or by proxy By mail or other similar means as may be authorized
by the by-laws (which may include voting through
remote communication and/or in absentia)

Transferability of Transferable Membership is personal and non-transferable, unless

interest the AOI or by-laws provide otherwise
Ownership of director At least one share Member

Independent trustees are not required to be a

member
Place of meeting of City or municipality where the Any place in the Philippines
stockholders/members principal office is located (now
Principal Office unless not
practicable)

XI. CLOSE CORPORATIONS

DEFINITION: A close corporation is one whose articles of incorporation provide that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding twenty (20);
2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted
by this Title; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds
(2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.

Business with public interest: may not be formed as close corporation. Sec. 140 of the Code lays down a similar
policy authorizing NEDA to recommend to the legislature the setting of maximum limits to family or group
ownership of stock in corporations vested with public interest, and the determination of whether or not it should
be vested with public interest within its domain. The following cannot be a close corporation:

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1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utility;
7. Educational institutions

Differences with an Ordinary Stock Corporation:

CLOSE CORPORATION ORDINARY STOCK CORPORATION

The number of stockholders cannot exceed 20 No limitation as to number of shareholder
Shares of stock are subject to specified restrictions Generally no restriction on transfer of shares
Shares of stock are prohibited from being listed in the stock No prohibition
exchange or offered for sale to the public
Stockholders may take an active part in corporate Management is lodged in the Board of Directors
management by vesting management to them rather than a
Board of Director
To the extent that all stockholders can be deemed directors, Maximum number of directors is 15
the number of directors can effectively be more than 15
To the extent that directors may be classified into one or more Ordinarily, no such classification and no
classes and to be voted solely by a particular class of stock, restrictions on cumulative voting
cumulative voting may, in effect, be restricted
The articles of incorporation may provide that all officers shall Officers are elected by the Board of Directors
be elected or appointed by the stockholders
Restriction on transfer of shares should be indicated in the Valid and binding if indicated in the articles of
articles of incorporation, by-laws and stock certificates incorporation and stock certificates
Pre-emptive right of stockholders is broader as it includes all Pre-emptive rights may be denied on certain
issues without exception grounds
Appraisal right may be exercised for any reason with the Appraisal right may be exercised only on
limitation only that the corporation has sufficient assets to specific grounds
cover its liabilities exclusive of capital stock

XII. ONE PERSON CORPORATION:

A One Person Corporation is one formed by a natural person, a trust or an estate, who is the sole stockholder
thereof. The provision of the new Chapter III of the Revised Corporation Code shall apply to an OPC and other
provisions of the Code shall apply suppletorily (Section 115);

Corporate Name: must contain the words “OPC”.

Not Applicable to OPC:

1. Authorized Capital Stock
2. By-Laws
3. Minutes of the Meetings of the Board of Directors (in lieu of which shall be the resolutions recorded in a
Minutes Book)

Not allowed to incorporate as an OPC:

1. Banks, quasi-banks, pre-need, trust, insurance companies
2. Public and publicly-listed companies
3. Non-chartered GOCCs
4. Natural persons for the purpose of exercising their profession.

Articles of Incorporation: shall be the same as an ordinary corporation with the following additional provisions:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties together
with the proof of such authority to act on behalf of the trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation
of the authority.

Corporate Officers: The sole stockholder shall automatically be the sole director and the President. Within 15 days
from the issuance of its certificate of incorporation, an OPC shall appoint a treasurer, corporate secretary, and
other officers as it may deem necessary, and notify the SEC thereof within 5 days from appointment.

Other positions of the president/sole stockholder:

1. Corporate Secretary: not allowed

Corporate Secretary: In addition to the functions designated by the OPC, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which notice
shall be given no later than 5 days from such occurrence;

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c. Notify the SEC of the death of the single stockholder within 5 days from such occurrence and stating in
such notice the names, residence addresses, and contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal heirs
with regard to, among others, the election of a new director, amendment of the articles of incorporation,
and other ancillary and/or consequential matters.

2. Treasurer: allowed provided he shall give a bond to the SEC in such a sum as may be required and a written
undertaking to faithfully administer the OPC’s funds to be received as treasurer, and to disburse and invest
the same according to the Articles as approved by the SEC.

Nominee and Alternate Nominee: The single stockholder shall designate a nominee and an alternate nominee
who shall, in the event of the single stockholder’s death or incapacity, take the place of the single
stockholder as director and shall manage the corporation’s affairs.

The articles of incorporation shall state the names, residence addresses and contact details of the nominee and
alternate nominee, as well as the extent and limitations of their authority in managing the affairs of the OPC.

The written consent of the nominee and alternate nominee shall be attached to the application for incorporation.
Such consent may be withdrawn in writing any time before the death or incapacity of the single stockholder

Term of the Nominee: When the incapacity of the single stockholder is temporary, the nominee shall sit as
director and manage the affairs of the OPC until the stockholder, by self-determination, regains the capacity to
assume such duties.

In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director and
manage the affairs of the OPC until the legal heirs of the single stockholder have been lawfully determined,
and the heirs have designated one of them or have agreed that the estate shall be the single stockholder of the
OPC.

The alternate nominee shall sit as director and manage the OPC in case of the nominee’s inability, incapacity,
death, or refusal to discharge the functions as director and manager of the corporation, and only for the same
term and under the same conditions applicable to the nominee.

Change of Nominee: The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the SEC the names of the new nominees and their corresponding written consent. For this purpose,
the articles of incorporation need not be amended.

Liability of Single Stockholder: A sole shareholder claiming limited liability has the burden of affirmatively showing
that the corporation was adequately financed.

Where the single stockholder cannot prove that the property of the OPC is independent of the stockholder’s
personal property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the
OPC.

The principles of piercing the corporate veil applies with equal force to OPC as with other corporations.

Conversion from Ordinary Corporation to OPC: When a single stockholder acquires all the stocks of an
ordinary stock corporation, the latter may apply for conversion into n OPC, subject to the submission of such
documents as the SEC may require.

If the application for conversion is approved, the Commission shall issue certificate of filing of amended articles
of incorporation reflecting the conversion. The OPC converted from an ordinary stock corporation shall succeed
the latter and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion.

Conversion from OPC to Ordinary Corporation: An OPC may be converted into an ordinary stock corporation after
due notice to the SEC (within 60 days from occurrence) of such fact and of the circumstances leading to the
conversion, and after compliance with all other requirements for stock corporations under the RCC. If all
requirements have been complied with, the Commission shall issue an amended certificate of incorporation
reflecting the conversion.

In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares to the duly
designated legal heir or estate within 7 days from receipt of either an affidavit of heirship or self-adjudication
executed by a sole heir, or any other legal document declaring the legal heirs of the single stockholder and notify
the SEC of the transfer. Within 60 days from the transfer of the shares, the legal heirs shall notify the SEC of
their decision to either wind up and dissolve the OPC or convert it into an ordinary stock corporation.

The ordinary stock corporation converted from an OPC shall succeed the latter and be legally responsible for all
the latter’s outstanding liabilities as of the date of conversion.

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XIII. FOREIGN CORPORATIONS

A FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the
Philippines.

Incorporation Test: is applied in determining whether a corporation is domestic or foreign. If it is incorporated in

another state, it is a foreign corporation, while if it is registered under Philippine laws, it is deemed a Filipino or
domestic corporation irrespective of the nationality of its stockholders.

Control Test: on the other hand, is used to determine corporate nationality for purposes of applying laws, e.g.,
prohibition to acquire lands applicable to corporations more than 40% of which is owned by non-Filipinos.

Grandfather Rule: a method of determining the nationality of a corporation which in turn is owned by another
corporation by breaking down the entity structure of the shareholders of the corporation. The true Filipino
ownership is traced all the way to the individual stockholders of the corporation (A) owning shares in another
corporation (B), by multiplying the Filipino ownership of the first corporation (A) to the corresponding ownership
of the other corporation (B).

It applies to nationalized activities or those which require whole or partial Filipino ownership.

RESIDENT AGENT: As a condition precedent to the grant of license to do or transact business in the Philippines,
the foreign corporation is required to designate its resident agent on whom summons and other legal processes
may be served in all actions or legal proceedings against such corporation.

AMENDMENT: A resident agent corporation for a foreign corporation is now required that it is of sound financial
standing and must show proof that it is in good standing as certified by the SEC.

LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign corporation must secure the
necessary license before it can transact or do business in the Philippines.

Without a license: a foreign corporation shall NOT be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.

What constitutes “doing business”: Doing business in the Philippines may be determined using the following tests:
1. Continuity test – doing business implies a continuity of commercial dealings and arrangements and
contemplates to some extent the performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of the purpose and object of its organization;
2. Substance test – a foreign corporation is doing business in the country if it is continuing the body or substance
of the enterprise of business for which it was organized
3. Contract test – actual performance of specific commercial acts within the territory of the Philippines

“DOING BUSINESS” under the Foreign Investment Act (Sec. 3, d), “doing business” would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called “liaison offices” or branches;
3. Appointing representatives or distributor domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or more;
4. Participating in the management, supervision or control of any domestic business, firm, entity or corporation
in the Philippines;
5. Any other act that imply a continuity of commercial dealings or arrangements and contemplate to that extent
the performance of acts or works, or the exercise of functions normally incident to and in progressive
prosecution of commercial gain or of the purpose and object of the business organization.

Provided, however, that the phrase “doing business” shall not be deemed to include:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business,
and/or exercise of rights as such investor, nor
2. Having a nominee director or officer to represent its interest in such corporation; nor
3. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name
and for its own account.

31. The following does not apply to an OPC, except:

A. Articles of Incorporation
B. By-Laws
C. Authorized Capital Stock
D. Minutes of the Meetings of BOD

32. What will be the term of the nominee in case of temporary incapacity of the sole stockholder?
A. Until declaration of the court of the sole stockholder’s capacity to take over
B. Upon self-determination of the sole stockholder that he regained capacity
C. Until the legal heirs of the stockholder has been determined
D. Once the heirs have designated one of them to take over management

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33. The place of meetings of members in a non-stock corporation:

A. Anywhere
B. Anywhere in the Philippines
C. The principal office
D. The city or municipality where the principal office is located

34. In order to be considered as a close corporation, the following are required to appear in the Articles of
Incorporation, except:
A. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not exceeding twenty.
B. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title.
C. The corporation shall not list in any stock exchange or make any public offering of any of its stock of
any class.
D. None of the choices is an exception.

35. Which of the following business is allowed to incorporate as a close corporation?

A. Banks and insurance companies
B. Mining companies
C. Educational institutions
D. Hospitals

36. To qualify as a foreign corporation, the consideration is

A. Ownership of the shares of stock
B. Appointment of a resident agent
C. Agreement of the parties
D. Under what country’s law it was incorporated

37. A corporation doing business in the Philippines without the requisite license:
A. Can sue and be sued in Philippine courts
B. Can sue but cannot be sued in Philippine courts
C. Can be sued but cannot sue in Philippine courts
D. Cannot sue and be sued in Philippine courts

XIV. DISSOLUTION AND LIQUIDATION

DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate existence.

When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for which
it was incorporated. It will nevertheless continue as a body corporate for another period of three years from the
time it is dissolved but only for the purpose of winding up its affairs and the liquidation of its assets.

THREE WAYS OF DISSOLUTION:

1. Expiration of its corporate term

Extension: should be made before the expiration of the original term, but not earlier than 5 years prior to
such expiration, otherwise the corporation is dissolved, ipso facto.

Dissolution by shortening the term of corporate existence: A corporation may exist for 50 years, but there is
no law which prevents the shareholders thereof to shorten that period and effect a dissolution of the
corporation. This, however, requires the vote of the stockholders to be cast in a meeting therefor, not only
“written assent” as for general amendments. Moreover, this requires the approval of the SEC and its inaction
is not deemed an approval therefor.

2. Voluntary surrender of its primary franchise (voluntary dissolution); and

Formal and Procedural Requirements when no creditors are affected.

a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholders or member either by registered mail or personal delivery at least
20 days (before 30 days) to the meeting (scheduled by the board for the purpose of submitting the board
action to dissolve the corporation for approval of the stockholder or members.);
c. Publication of the notice of time, place and subject of the meeting once (previously, for three (3)
consecutive weeks) in a newspaper published in the place where the principal office of said corporation is
located or in a newspaper of general circulation in the Philippines;
d. Resolution adopted by the affirmative vote of the stockholders owning at least majority of the
outstanding capital stock or majority of the members (previously, 2/3) at the meeting duly called for the
purpose;
e. A verified request for dissolution shall be filed with the SEC stating: (a) the reason for the dissolution; (b)
the form, manner, and time when the notices were given; (c) names of the stockholders and directors or
members and trustees, who approved the dissolution; (d) the date, place, and time of the meeting in
which the vote was made; and (e) details of publication.

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Withdrawal:
i. A withdrawal of the request for dissolution shall be made in writing, duly verified by any incorporator,
director, trustee, shareholder, or member and signed by the same number of incorporators, directors,
trustees, shareholders, or members necessary to request for dissolution.
ii. The withdrawal shall be submitted no later than fifteen (15) days from receipt by the SEC of the
request for dissolution.
iii. Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action on the request
for dissolution and shall, after investigation: (a) make a pronouncement that the request for
dissolution is deemed withdrawn; (b) direct a joint meeting of the board of directors or trustees and
the stockholders or members for the purpose of ascertaining whether to proceed with dissolution; or
(c) issue such other orders as it may deem appropriate.
f. Issuance of a certificate of dissolution by the SEC.

Where creditors are affected, the voting requirement remains to be 2/3 of the stockholders and what is filed
with the SEC is a petition not a request.

3. The revocation of its corporate franchise (involuntary dissolution)

Grounds:
a. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;
b. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts
which would amount to a grave violation of its franchise;
c. Continuous inoperation for a period of at least five (5) years;

Continuous inoperation: If a corporation has commenced its business but subsequently becomes
inoperative continuously for a period of at least 5 years, the same shall be merely a ground for
suspension or revocation of its corporate franchise or certificate of registration.

AMENDMENTS: In case of continuous non-operation for 5 years, it is no longer considered a ground

for revocation, at least not immediately. In such case, the SEC may, after due hearing and notice,
place the corporation under delinquent status and allow the corporation to resume operations within
2 years upon compliance with the requirements of the SEC; where upon compliance, the SEC shall issue
an order lifting the delinquent status.

In case of non-compliance, with the requirements and to resume operations, only then will the SEC
cause the revocation of the corporation’s certificate of incorporation.

Notably, the Section 21 no longer includes the exception that the provision on failure to commence
and continuous non-operation shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond the
control of the corporation as may be determined by the SEC.

COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been issued, the corporation
MUST formally organize and commence its business.

Non-Use of Corporation Charter: the failure of the corporation to organize within 5 years (previously
2) would result in it automatic dissolution, unless, of course, its failure to do so is due to causes beyond
its control.

Formal Organization: refers to the process of structuring the corporation to enable it to effectively pursue
the purpose for which it was organized.

d. Failure to file by-laws within the required period;

e. Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period.

Other grounds provided under the Corporation Code:

a. Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in section 105;
c. In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal
or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or wasted under section 105.

AMENDMENTS: Aside from empowering the SEC to motu proprio dissolve a corporation, the following
grounds are now specified under Section 138:
1. Non-use of corporate charter
2. Continuous inoperation of a corporation
3. Upon receipt of a lawful court order dissolving the corporation
4. Upon finding by final judgment that the corporation procured its incorporation through fraud
5. Upon finding by final judgment that the corporation:

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a. Was created for the purpose of committing, concealing or aiding the commission of securities
violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
b. Committed or aided in the commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew; and
c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees.

If the corporation is ordered dissolved by final judgment pursuant to the above grounds (a), (b) and
(c) under no. 5, its assets, after payment of its liabilities, shall, upon petition of the SEC with the
appropriate court, be forfeited in favor of the national government. Such forfeiture shall be without
prejudice to the rights of innocent stockholders and employees for services rendered, and to the
application of other penalty or sanction under the RCC or other laws

EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into contracts or to continue the business
as a going concern.

The SC held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it was
organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant
(Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a contract executed prior to its dissolution
for the purpose of continuing the business of its organization (Cebu Ports vs. State Marine).

Debts due to or by a corporation are not extinguished. It has thus been held that the termination of the life of a
juridical entity does not, by itself, imply the diminution or extinction of rights demandable against such juridical
entity (Gonzales vs. Sugar Regulatory Adm.)

Despite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of 3 years for
purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration of the 3-year period to wind up its
affairs, the juridical personality of the corporation ceases for all intent and purposes, and as a general rule, it can
no longer sue and be sued.

LIQUIDATION AND WINDING-UP:

1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.

Liquidation can be taken up in any of the following manner:

1. By the corporation itself through the BOD - This is the usual method or procedure of liquidating a
corporation (China Banking Corp vs. Michelin) and although there is no law authorizing it, neither is there
anything that prohibits the BOD from undertaking the same.
a. If this method is resorted to, the board will only have a period of 3 years to finish its task of liquidation
b. Claims for or against the corporate entity not filed within the period will become unenforceable as there
exist no corporate entity against which they can be enforced.
c. Actions pending for or against the corporation when the 3-year period expires are abated, since after the
period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore)

2. By a trustee appointed by the corporation - The corporation may opt to convey all corporate assets to a
trustee who will take charge of liquidation
a. If this method is used, the three-year period limitation imposed by section 122 will not apply provided the
designation of the trustee is made within that period.
b. Thus, during the period of liquidation, but before the completion thereof, a dissolved corporation is still
liable for all its debts and liabilities in an action filed against it through its trustee even if the case is filed
beyond the 3-year period of liquidation.

3. By appointment of a receiver - A receiver may be appointed by the proper forum on petition or moto proprio
upon the dissolution of the corporation (Sec. 119)
a. If a receiver is appointed, the 3-year period fixed by law within which to complete the task of liquidation
will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be
sued even after that period (Sumera vs. Valencia).
b. Thus, it has been held that when a corporation is dissolved and the liquidation of assets is placed in the
hands of a receiver or assignee, the 3 year period is not applicable and the assignee may institute all actions
leading to the liquidation of the corporation even after the expiration of 3 years.
c. Note however, that a receiver may be appointed by the court even while the corporation is a going concern
and does not always imply dissolution of a corporation.
AMENDMENTS: Section 139 of the RCC introduced the following amendments concerning Corporate
Liquidation:
1. The exclusion of Banks is now specifically provided, given that they are governed by the New Central Bank
Act and the PDIC Law;
2. Upon the winding up of corporate affairs, any asset distributable to any creditor or stockholder or member
who is unknown or cannot be found shall now be escheated in favor of the national government, which used
to be the city or municipality where the property is located under the old Section 122.

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38. The following are effects of dissolution, except:

A. The corporate entity ceases to exist except for liquidation purposes.
B. It can no longer enter into contracts for furthering its purpose
C. It can no longer apply for a secondary franchise
D. Existing contracts are deemed terminated

39. In case the corporation has been continuously inoperative for a period of 5 years, under the Revised
Corporation Code, it:
A. Is automatically dissolved
B. Provides for a ground to dissolve the corporation
C. Will be placed under delinquent status by the SEC
D. Shall no longer be allowed to operate

40. Under the Revised Corporation Code, any asset distributable to any creditor or stockholders or members
who is unknown or cannot be found shall be escheated in favor of:
A. The national government
B. The city or municipality where the asset is located
C. A charitable institution designated by the corporation
D. The other stockholders

XV. SECURITIES REGULATIONS CODE

PURPOSE: The Securities Regulations Code or RA No. 8799 aims to protect the investing public primarily
through a system of disclosure and provide punishment for fraudulent practices.

PROTECTION OF THE PUBLIC: The Securities Regulations Code protects the public as follows:
1. Requiring full disclosure of information to the public regarding the securities that are being offered and
the issuers, including the filing and approval of the registration statement and the approval of the prospectus;
2. The requirement of regularly submitting material information to the SEC;
3. Close monitoring of the securities and other circumstances that may affect the same as well as the persons
involved including brokers, issuers, the exchange itself, etc. in order to ensure compliance with pertinent laws
and regulations;
4. Prohibiting and penalizing different fraudulent practices and transactions; and
5. Providing the SEC the powers and functions.

SECURITIES

Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making

venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. (Section
3.1)

The main feature of a security is that a person purchases or acquires the same in the expectation of obtaining
passive income or asset appreciation, that is income or gain obtained through the effort of another person. This
feature makes them attractive and desirable and necessitates the protection of the investing public.

They include:
1. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit
for a future subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar
instruments
6. Proprietary or nonproprietary membership certificates in corporations; and
7. Other instruments as may in the future be determined by the Commission.

Investment contract is a contract, transaction, or scheme whereby a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts of others.

Requisites:
1. An investment of money;
2. In a common enterprise;
3. With expectation of profits;
4. Primarily from the efforts of others (this modifies the Howey Test which requires profits to be derived “solely”
from the efforts of others)

REGISTRATION AND REPORTORIAL REQUIREMENTS

REGISTRATION: The Securities Regulations Code (SRC) provides that securities shall not be sold or offered for
sale or distribution within the Philippines, without a registration statement duly filed with and approved by the
SEC (Commission). Prior to such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.

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The Commission may audit the financial statements, assets and other information of firm applying for registration
of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the
investors and the public in general.

Procedure:
1. Filing of SWORN REGISTRATION STATEMENT containing the information as the SEC may by rule require.
a. Signatories to registration statement: Executive officer, principal operating officer, principal financial
officer, comptroller, principal accounting officer, corporate secretary.
b. Written consent of the expert named as having certified any part of the registration statement, whenever
necessary.
c. Where the registration statement includes shares to be sold by selling shareholders, a written certification
by such selling shareholders as to the accuracy of any part of the registration statement contributed to
by such selling shareholders shall also be filed.
2. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such securities
are proposed to be offered.
3. PUBLICATION of notice of the filing of the registration statement in two newspapers of general circulation
once for two consecutive weeks.
4. Within 45 days after the date of filing, or by such later date to which the issuer has consented, the SEC shall
give an ORDER declaring the registration statement effective or rejecting it.
5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement and in
such prospectus are correct.

SECURITIES exempt from registration: (GRIB)

1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or
agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said
Government.
2. Any security issued or guaranteed by the government of any country with which the Philippines maintains
diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity:
Provided, That the SEC may require compliance with the form and content for disclosures the SEC may
prescribe.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory
body.
4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of
the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau
of Internal Revenue.
5. Any security issued by a bank except its own shares of stock.

TRANSACTIONS exempt from registration: (BISCEPS SMILE)

1. BROKER’S transaction, executed upon customer’s orders, on any registered Exchange or other trading
market.
2. An ISOLATED transaction in which any security is sold, offered for sale, subscription or delivery by the
owner thereof, or by his representative for the owner’s account, such sale or offer for sale or offer for sale,
subscription or delivery not being made in the course of repeated and successive transaction of a like character
by such owner, or on his account by such representative and such owner or representative not being the
underwriter of such security.
3. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation,
of securities to its stockholders or other security holders as a STOCK dividend or other distribution out of
surplus.
4. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a
right of CONVERSION entitling the holder of the security surrendered in exchange to make such
conversion: Provided, That the security so surrendered has been registered under the SRC or was, when sold,
exempt from the provision of the SRC, and that the security issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion fall within the class of securities entitled to registration
under the SRC. Upon such conversion the par value of the security surrendered in such exchange shall be
deemed the price at which the securities issued and delivered in such exchange are sold.
5. EXCLUSIVE SALE: The sale of capital stock of a corporation to its own stockholders exclusively, where
no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such
capital stock.
6. PRIVATE PLACEMENT: The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
7. SUBSCRIPTIONS for shares of the capitals stocks of a corporation prior to the incorporation thereof or
in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense
is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription
is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which
should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase.

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8. Sale to SOPHISTICATED (Qualified) Buyers: The sale of securities to any number of the following qualified
buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the Philippines or any political
subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in
trust functions;
e. Investment company or
f. Such other person as the SEC may rule by determine as qualified buyers, on the basis of such factors as
financial sophistication, net worth, knowledge, and experience in financial and business matters, or
amount of assets under management
9. MORTGAGE-BACKED SECURITIES: The issuance of bonds or notes secured by mortgage upon real estate
or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby
are sold to a single purchaser at a single sale.
10. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in INSOLVENCY
or bankruptcy.
11. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for
sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of SRC,
to LIQUIDATE a bonafide debt, a security pledged in good faith as security for such debt.
12. The EXCHANGE of securities by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

The SEC may exempt other transactions where not necessary in public interest or for protection of investors such
as small amount or limited character of public offering. However, an exemption fee of 1/10 of 1% of the maximum
aggregate price or issued value of the securities should be paid.

REPORTORIAL REQUIREMENTS:

1. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash Flows
certified by a CPA and a management discussion and analysis of results of operation
2. Other periodical reports for interim fiscal periods and current reports on significant developments of the issuer
as the SEC may prescribe as necessary to keep current information on the operation of the business and
financial condition of the issuer.

These reportorial requirements shall apply to an issuer:

1. Which has sold a class of its securities pursuant to a registration
2. With a class of securities listed for trading in an Exchange
3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall prescribe,
and having two hundred (200) or more holders each holding at least one hundred (100) share of a class of
its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminate
ninety (90) days after notification to the SEC by the issuer that the number of its holders holding at least one
hundred (100) share reduced to less than one hundred (100)

The issuer shall likewise furnish to each holder of such equity security an annual report in such form and containing
such information as the SEC shall prescribe.

TENDER OFFER

A tender offer is an offer by a person or group of persons to the stockholders of a corporation to tender their
shares for purchase.

Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide them with a
fair price for their share whenever a person or group of persons intends to buy a sizable number of shares in the
company.

Mandatory Tender Offer: applies to any person who intends to acquire at least 35% over a period of 12
months (previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity
security of a:
1. Listed corporations; or
2. Corporations with:
a. Assets of at least P50M and
b. Having at least 200 shareholders who each have at least 100 shares

The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership of over 50%
of the total outstanding equity securities of the public company.

The offeror would be required to accept any and all securities thus tendered.

Note that the percentage requirements likewise applies even in indirect acquisitions.

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Transactions EXEMPT from the Mandatory Tender Offer Requirement:

1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a 50%
or more ownership of shares by the purchaser;
2. Any purchase of shares from an increase in authorized capital stock.
3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security
arrangement where the acquisition is made by the debtor or creditor.
4. Purchases in connection with privatization undertaken by the government of the Philippines.
5. Purchases in connection with corporate rehabilitation under court supervision.
6. Purchases through an open market at the prevailing market price
7. Merger or consolidation.

Process:
1. The offeror will make an announcement of his intention in a newspaper of general circulation, prior to the
commencement of the offer;
2. At least 2 business days prior to the date of the commencement of the tender offer:
a. File SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees
b. Hand deliver a copy of such form including all exhibits to the target company at its principal executive
office and to each Exchange where such class of the target company’s securities are listed for trading.
3. Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days
after the termination of the tender offer, copies of the final amendments to the form.

FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS

1. Wash sale – any transaction in a security which involves no change in the beneficial ownership. A series of
buy and sale transaction may be placed by one and the same beneficial owner in the exchange which would
not affect any change of ownership of the shares transacted.

2. Matched Order – refers to an order or orders for the purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such
security has, or wil be entered by or for the same or different parties.

Wash Sale and Matched Orders are not in themselves illegal. But they are considered fraudulent whenever
they are resorted to in order to create a false or misleading appearance of active trading.

3. Marking the close – placing of purchase or sale order, at or near the close of the trading period in order to
affect the closing price likewise affecting the opening price the following day.

4. Painting the tape – akin to marking the close but the activity is made during normal trading hours which
involves buying activity among nominee accounts at increasingly higher or lower prices or causing fictitious
reports to appear on the ticker tape.

5. Squeezing the float – part or portion of the issue/security which is outstanding but intentionally held by
dealers or other person with a view of reselling them later for profit. Thereby affecting supply of the security
or its availability while demand remains the same or increases, driving the prices up.

6. Hype and Dump – involves the following steps:

a. Purchase of outstanding capital stock of a dormant public shell company for a nominal amount;
b. Merger of the shell company with the privately held company of the person or group of persons involved
to gain control of the majority of the stocks of the merged entity;
c. Reverse-split of the shares
d. Reissuance of the shares certificates in the name of the merged entity to relatives and associates;
e. Hiring a broker-dealer who would market the stocks of the newly merged entity;
f. Hiring a promoter to “hype” the virtues of the company;
g. When the market reaches the high price, they would “dump” their shareholdings and bail out.

7. Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by telephone
or through direct mail offerings for securities of either a certain type or from a specific issuer. Investors are
induced to purchase through hard-sell techniques based on unfounded predictions and mailing of misleading
market letters.

All 5 above (3 to 7) become illegal/unlawful if its effected to:

a. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly controlled
company by others;
b. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the
same issuer or of a controlling, controlled company, or commonly controlled company by others; and
c. Creates active trading to induce such purchase or sale through said devices or schemes.

8. Circulating or Disseminating Information On Share Price Movement – involves people providing

information that the price of any security listed in the exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted for the purpose of raising or depressing
the price of the security and thus inducing the purchase or sale of such security.

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9. Making False or Misleading Statements – with respect to any material fact, which he knew or had some
reasonable grounds to believe was so false or misleading for the purpose of inducing the purchase or sale of
any security.

10. Pegging or Fixing or Stabilizing the price of security effected either alone or with others through any
series of transactions for the purchase or sale thereof, if done for such purpose.

11. Short Sale – selling the security which the vendor does not own and borrowed only from another. This is not
illegal per se but only regulated.

INSIDER TRADING

Material Non-Public Information: Information that will affect the price of the security or would influence a
person in deciding whether to buy, sell, or hold a security which is not available to the public.

Insider:
1. The issuer.
2. A director or officer of the issuer or a person controlling the issuer.
3. A person whose relationship or former relationship to the issuer gives or gave him access to material non-
public information.
4. A government employee, or director, or officer of an exchange, clearing agency, and/or self-regulatory
organization who has access to material non-public information.
5. A person who learns such information by a communication from any of the foregoing insiders.

Insider Trading: when an insider in possession of material non-public information buys or sells a security.

Exceptions: a person in possession of material non-public information can buy or sell securities:
1. When he can prove that the information was not gained from an insider;
2. If the other party is identified and that he:
a. Disclosed the information; or
b. Had reason to believe that the other party is also in possession of the information.

Presumption: a purchase or sale of a security of the issuer made by an insider or such insider’s spouse or
relatives by affinity or consanguinity within the 2 nd degree, legitimate or common-law, shall be presumed to have
been effected while in possession of material non-public information if transacted:
1. After such information came into existence;
2. But prior to the dissemination of such information to the public and the lapse of a reasonable time for the
market to absorb such information.

Liability for disclosure: It shall be unlawful for any insider to communicate material nonpublic information about
the issuer or the security to any person who, by virtue of the communication, becomes an insider, where the
insider communicating the information knows or has reason to believe that such person will likely buy or sell a
security of the issuer whole in possession of such information.

This is regardless of whether the one to whom the communication was given actually traded on the securities.

INSIDER TRADING WHERE INFORMATION RELATES TO A TENDER OFFER: if the information is relative to
a tender offer, it is unlawful for any person (other than the tender offeror) who is in possession of material
nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or
to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic
and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any insider of such issuer.

FILING OF GENERAL INFORMATION SHEET (GIS)

All corporations shall file their GIS within 30 calendar days from:
1. Stock Corporations – date of annual stockholders’ meeting
2. Non-Stock Corporations – date of annual members’ meeting
3. Foreign Corporations – anniversary date of the issuance of SEC license

FILING OF ANNUAL FINANCIAL STATEMENTS (AFS)

1. Corporations using the calendar year: depending on the last numerical digit of their SEC registration or
license number in accordance with the schedule set by the SEC.

However, any corporations may file their AFS regardless of the last numerical digit or license number on or
before the first day stated in the coding schedule.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY RFBT-04
Weeks 6-8: LAW ON CORPORATIONS

2. Corporations using the fiscal year:

a. General Rule: 120 calendar days from the end of the fiscal year;
b. Exceptions:
i. Broker dealers – 110 calendar days from the end of the fiscal year;
ii. Listed companies and Public Companies – 105 days from the end of the fiscal year.

The AFS, other than the consolidated financial statements, shall have the stamped “received by the Bureau of
Internal Revenue (BIR)” or its authorized banks, unless the BIR allows an alternative proof of submission for its
authorized banks.

41. The Securities Regulations Code aims to protect the investing public through the following, except:
A. Requiring full disclosure of information to the public regarding the securities being offered.
B. Requiring registration of the securities prior to them being offered to the public.
C. Requiring reportorial requirements from the issuer
D. None of the above

42. The following are securities exempt from the coverage of the Securities Regulations Code, except:
A. Securities issued by the Philippine Government or Government of any country
B. Certificates issued by a trustee or a receiver in bankruptcy
C. Securities or derivatives, the sale or transfer of which is under the supervision or regulation of the
Insurance Commission, the Housing and Land Use Regulatory Board, or the Bureau of Internal
Revenue.
D. Securities issued by a bank, including its own shares of stock.

43. The sale of securities to any number of the following qualified buyers are exempt from the registration
requirement, except:
A. Bank
B. Investment House
C. Insurance Company
D. Pension fund or retirement plan

44. The following are considered insiders, except:

A. The issuer
B. A director, officer or a person controlling the issuer
C. A person whose relationship gives him access to material non-public information even after
resignation.
D. A person who learns of the material non-public information even by mistake or error

45. Which of the following is not covered by the Mandatory Tender Offer Rule as to X Corporation stockholders:
A. A, B and C plans to acquire 40% of the shares of X corporation
B. D, who owns 20% of the shares of X corporation plans to acquire an additional 32%
C. E, who owns 18% of X corporation, plans to acquire 50% of Y corporation which in turn owns 64% of
X corporation
D. None of the above

END

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