CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
FIRST EXAM COVERAGE
November 15, 2017
(Eliza Devilleres)
THE IMPORTANCE OF FORMALITY IN
CORPORATIONS
This is where you have to grasp the
importance of formality. For the acts of a
corporation, reality is not as important as the
formality.
Why is it that formality is more important
than reality?
You will then later on find out that there is
such a thing as table meetings of the
corporation. The board is said to have met
but they actually did not meet. But all the
directors are made to sign beforehand that
they already met.
What is the reality?
There was no meeting. But formally, there
was a meeting because everybody signed
an ostensive minutes of the meeting.
Who will question whether or not there
was a meeting? If you sign that there was
a meeting and you were not there, can
you say that there was no meeting – why
did you sign?
If in that meeting, there was a crucial
resolution that was passed, what is the
status of that resolution? Is it binding on
the corporation or is it not?
It is binding because the formality is there.
Where is the reality?
It is prima facie presumed that that there
was a reality because there was a formality.
Why is it that that is the NATURE OF
CORPORATE ACTS?
Because, going back to the Civil Code, a
JURIDICAL PERSON is an artificial being.
Unlike natural persons (like you and me), we
have a physical existence. The
corporation does not have a physical
existence. The corporation exists in
contemplation of the law. It is a creature.
In fact, it cannot act without the agency of
natural persons like you and me.
How does a corporation enter into
contracts?
It cannot sign because it has no arm. The
Board of Directors pass a resolution
approving the corporation’s entrance into an
agreement, and designates the person who
will sign for and in behalf of the corporation.
Without that natural person who will sign,
there is no contract. In other words, the
corporation is dependent on an AGENT.
That is the only time that you see that a
principal must act through an agent. It cannot
act by itself. It has no arms, no mouth, no
feet. It does not exist, except in
contemplation of the law. Now, that is why
formality is very important.
Formality: Whether or not there was a
meeting. If there was a meeting, whether
or not there was a a quorum in that
meeting – because quorum determines
validity. Whether or not the resolution was
passed by the required majority – whether
it be absolute majority or simple majority or
qualified majority (2/3 of the stockholders
__ because there are different gradations
in the corporation).
Now that it the forest – the details. You have
to pay attention to those details. You have to
know all those details, esp. when you are a
corporate secretary of a corporation because
that is your job. The lawyer in the Board is
the one who thinks of the worst so that he
can defend the corporation. So that is the
reason why details and formality is very
important.
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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
Now, we go back once more to the Civil
Code. We go back to the notion of
PERONALITY. We are taught in Civil law
that a PERSON is a subject of rights and
obligations. Only a person has rights only a
person has obligations. Because a person
has rights and obligations, only a person
can sue and be sued. If you are not a
person, you cannot be sued and neither
can you bring suit. Bisag unsa pa gani nimo
ka bright na iro, duklon cyas ulo, mukiha ba
cya? Does he have the personality to bring
suit? NO! Because he is not a natural
person.
What does it take to be a natural person?
All you have to be is to be born. Neither you,
much less me, decided that we will be
persons. Not even your parents decided that
you will be persons. They were hoping that
they could have children, but they did not
decided anymore than the rooster can meet
the sunrise by crowing at dawn. Somebody
else up there decided that you will be a
person. And so you are – you are the subject
of rights and obligations.
A corporation is a juridical person. That
means, by fiat of law, by consent of the state,
it is a person – it has rights, it has obligations.
Because it has rights and obligations, it can
file suit and it can be sued. And precisely
because it is a person, no stockholder can
say – even if he owns 99% of that
outstanding shares of the corporation – that
he owns that corporation.
How can you own a person?
You cannot own a person.
How is that expressed in Civil Law?
The stockholders’ interest in the corporation
is always inchoate.
What is inchoate?
Dependent upon a condition that should the
corporation dissolve, the corporation has
enough assets to be liquidated to answer for
its legally binding and valid obligations. After
which, there is still something left to be
divided among the stockholders in proportion
to the ownership of the outstanding shares.
That is the ownership of shareholders.
So strict language, you say na tag-iya na
cyas corporation. Do you use that language?
NO! But there is a caveat there. That is
legally deficient in language. When you are
in a formal setting, you cannot use that
language because it betrays your lack of
grasp of basic principles in Corporation Law.
No one can own a corporation. Bisag si
Gokongwei, Henry Sy pa. Bisag ikaw pa
nagimbento anang korporasyona. Have you
heard of Double Dragon? It is a corporation,
the controlling stockholders of which are
Batman ad Robin. Bat man is Caktiong – the
founder and president of Jollibee. Robin is
Mr. Sia – the former owner of Mang Inasal.
Together, they came and form this
corporation (Double Dragon). Double
Dragon Story: (Why is Caktiong suddenly
forming Double Dragon? Because he does
not own Jollibee. He founded Jollibee, it was
his idea, he founded it, he pushed it, but it
was funded by the family of his wife. So it is
the Lim family who controls Jollibee. And
now Caktiong and the wife are estranged. So
he decides to form his own corporation
where he knows he is in control. His partner
is Mr. Edgar Sia is the owner of Mang Inasal.
Cokationg went and offered him a price that
he cannot refuse – P900M for 50% of Mang
Inasal. Those are the magic numbers. Mr.
Sia could not refuse because even if she
sells 50%, he still runs Mang Inasal. He
increased the branches from 300 to 700.
Jollibee was the one financing the
expansion. By the time he reached 700
branches, Jollibee said that it is now time for
us to buy you out – to buy your remaining
48%. This time it was over a billion pesos. He
was paid over P1.4B, because it was already
bigger than the original. Together they
formed Double Dragon. What are they
selling? Katol? (Haha). Unsa man ilang
ginabaligya? Have you not heard of Double
Dragon? The price of its shares of stock has
already doubled in 3 yrs from the time that
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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

there was an initial public offering. Their transferability agreeable

strategy is to capture, retail, upper retail of of shares in to the
business through secondary source. They the articles of partners.
put up City Mall. Wa na dris Davao because incorporation What binds
this is not considered as a secondary city. of the parties. the
But if you go to Tagum, etc. there is City Mall You can only partnership
– a lower cost mall. BCD market. Retail is a put some is utmost
very tricky business. limitations. trust and
confidence.
2.) The
moment
So, you have Uber valued at $70B more than
that a
any taxi company in the world and not
partner
owning a single taxi. You have Air BnB that
dies, the
makes available millions of goods without
partnership
owning a single hotel. That could not have
is
been done post-industrial revolution. It’s only
dissolved.
done because we are now in the 3rd industrial
revolution and that is the digital age. You will
later on find out that the certificate of stock Why do you need to study corporation law?
which in law is a good evidence of ownership Because it is the mistress of taxation. It helps
of shares is actually a barrier for trading. As taxation. The ultimate aim is tax. You want to
long as you keep the roster of your lower taxes, you have to go through
shareholders by the certificate of stock, you importation. You know that there are so
discourage trading. Now, it is de-certified many corporations who have engaged into
shares. It’s now digital shares. tax avoidance, like Shell, etc? there are also
Ivy League schools which have also these
What made the industrial revolution?
endowment funds which are all in banks.
Technology they say, made the industrial Discussion about Mighty Corp. tax
revolution. The invention of the spin engine avoidance – P25B. Attorney’s fees of P250M
and the cotton gin. So that now instead of a will go to Fortun and Narvasa and Narvasa.
family making thread and sowing it into cloth, These gal who who will pocket it will be
now it’s a factory that does it. They say that dancing and smiling all their way to the bank
is what makes the industrial revolution. will get P100M – Talks about the alumni of
Except that, supporting that is the juridical ADDU. I’m not bullshitting you (Haha).
person of limited liability – the corporation.
Without the corporation, there would have
November 16, 2017
been no large-scale projects, because it is
(Jennifer Lim)
very difficult to martial huge amounts if you
do not have limited liability.
We parted yesterday with the nationality of a
CORPORATION v. PARTNERSHIP
corporation. The most important issue on the
CORPORATION PARTNERSHIP nationality of a corporation is with respect to
the control test.
1.) Ownership of 1.) You cannot I give to you a decision of the Supreme Court
shares can transfer its – PCGG vs. Pea in relation to Yuchengco
be easily shares. vs. Sandiganbayan wherein Supreme Court
transferred The says “In PCGG v. Pea, this Court, describing
2.) You cannot transferee the rule of Marcos as a well-entrenched
deny may not be

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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
plundering regime of twenty years, noted the
magnitude of the past regimes organized
pillage and the ingenuity of the plunderers
and pillagers with the assistance of the
experts and best legal minds available in the
market. The evidence presented in this case
reveals one more instance of this grand
scheme. This Court guardian of the high
standards and noble traditions of the legal
profession has thus before it an opportunity
to undo, even if only to a certain extent, the
damage that has been done.”
So, it is official pronounced by the Court. Mao
na inig mitindog kani na si Ferdinand Jr.
basaha ning PCGG vs. Pena. Official na! It’s
in the books. Dapat sagpaon na siya ni-ini.
Organized plunder village, magnitude of
which has never been seen. Basta dili gani
ka mubasa ning kaso ni ug dili ka katubag…
HAGBONG KA sa akoang klase. It’s not just
a simple case of missing the point; you are
supposed to be enlightened kay kahibalo ka
sa balaod.
There’s a case here which the Supreme
Court removed from its Supreme Court
records. Ngano man? Kay naulaw sila.
Ridon vs. AXN Networks Philippines, it is
an En Banc Resolution but Per Curiam. It is
just the Clerk of Court and Vidal who says
this decision is En Banc. It was for 1 week in
the website of the Supreme Court but not in
the SCRA because it was removed. Ngano
man? Nauwaw ang Supreme Court.
Why? Because Gamboa, in the case of
Wilson Gamboa vs. Secretary of Finance,
that is how they questioned the Filipino
composition in the share holders. Gamboa
went straight to the Supreme Court for an
order of prohibition against Secretary Teves,
asking the court to order Teves not to sell
those shares. Because that sale would make
PLDT a foreign corporation. The SC
entertained it and entered an En Banc
decision, by Senior Justice Carpio who wrote
that decision in 2011 and 2012.
In 2014, Ridon et.al. went straight to the
Supreme Court and questioned why AXN,
Fox News and all those foreign corporations
are allowed to function in the Philippines and
even broadcast.
What is the rule with respect to
communications media? The corporation
allowed to stream in the Philippines by the
Constitution is 100% Filipino.
The SC issues an En Banc resolution
dismissing the petition unlike in Wilson
Gamboa. It is premature and it should go
through the right channels.
Why is it that they allowed Gamboa to go
straight to the SC? Even the SEC in Wilson
Gamboa followed and issued a
memorandum this is how we measure a
corporation 60% Filipino, 40% foreign. It was
questioned again directly to the SC in ROI
vs. SEC and PLDT November 22. 2016.
They questioned again the memorandum
and said that it does not follow the ruling in
Gamboa.
Who said it does not follow? The same
people in the SC who wrote the in Gamboa.
Carpio, Sereno, Leonnen, Jardeleza. They
still entertained it. Why? They should have
dismissed it following Ridon. Gitangtang kay
uwaw man kaayo.
Let us move to the first attribute that a
corporation is an artificial being. That is
why you cannot say that a stockholder owns
a corporation because it is a person even if
that person has no being. You cannot own a
person because it is a free- center, subject to
rights and obligations. In other words, it is the
only entity in reality that is given standing by
the court. He can sue and be sued-that is
standing.
What is the difference of standing and the
personality to sue? ‘Pag about sa
personality, cause of action na. You might
have standing but you are not the proper
person to sue. You have not suffered a
wrong. You have no cause of action that is
why you have no personality to sue.
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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
Muingon gani ang POEA that there should
be no deployment to Iraq and Afghanistan,
kinsa man mu-sue? Association of
Recruitment and Manning Agencies. Daghan
mi mag suffer ani, wala na mi mapadala sa
Iraq. The court says you have no personality
to sue. It should be the OFW who should sue
because they are the ones standing to suffer
directly to suffer a wrong.
WHAT ARE THE FULLY OR
PARTIALLY NATIONALIZED
CORPORATIONS?
1. Mass media except recording
studios – Article 15 Section 7 of
the Constitution.
2. Retail trade business with trade-
up capital of less than 2.5 million
dollars under RA 8762.
3. Private security agencies under
RA 5487. Section 4 provides
“Private security agencies must be
Filipinos if they operate within the
country.”
Ngano man nang American
executives nagdala ug foreign
security along with helicopters to
the Davao Coal Plant? We can
only brush aside. We cannot
question that to court. It was said to
be a diplomatic relation.
4. Small scale mining under
Section 3 of RA 7076. One of the
most abused laws. It is not small
scale at all but hiding under this
law. You must be 100% Filipino.
5. Utilization of natural resources
under Article 12 Section 2 of the
Constitution
6. Cockpits under Section 5 PD
449. Should be all Filipino. Pilipino
lagi nang ni dagan dira pero ang
manok foreign man. Puros man
imported.
7. Manufacture, stock-repair
and/or distribution of nuclear
weapons under Article 2 Section
8 of the Constitution.
8. Manufacture of firecrackers and
other pyrotechnic devices under
Section 5 RA 4783. Very unsafe!
This is why I’m so wary about
nationality laws because it protects
abusive Filipinos. They have an
unfair advantage. The Filipinos
suffer!
25% FOREIGN- EQUITY
1. Private recruitment local or
overseas Article 27 PD 447
Labor Code. Must be 75% Filipino.
2. Construction and repair of
locally funded works.
3. Construction of defense related
structures – 25% foreign
maximum.
FILIPINO CORPORATIONS- 40%
FOREIGN, 60% FILIPINO
1. Exploration, development and
utilization (EDU) of natural
resources under Article 12
Section 2 Constitution
2. Realty Corporations that own
private lands under Article 12
Section 7
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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
3. Operation and management of
public utilities under Article 12
Section 11.
4. Culture, milling, processing,
trading except retail of rice and
corn and by products. Section 5
PD 194.
5. Adjustment companies. i.e.
appraisers
They are different from asset
valuators who are employed in
mergers and acquisitions that
come with value of machineries
and buildings and how they are to
be reckoned with. There is a
different body that controls it just
like CPAs, CNAs they are asset
valuators.
In the Philippines, if you are an
appraiser, the maximum capital is
25%.
If you exercise the profession is
100%.
NOTE:
 APPRAISER – LLA. They are not covered by it. Of course,
25% Max. Capital
 EXERCISE OF A
PROFESSION – group – the Maveric group. Datu Puti, Mang
100%
That is why SGV split because they
are beginning to be controlled by
Ernst and Young. Wa sila gisumbong
ilahang founder na si Washington
Sycip who is an American citizen.
Born in the Philippines but never
changed his citizenship after he
stayed in Colombia. It was allowed by
the Laurel-Langley Parity Act –
Americans have the same rights as
Filipinos for 30 years.
In Quasha vs. Republic, Quasha was an
American lawyer who came to the
Philippines and started practicing here
during the Commonwealth period.
When the LLA was passed, he continued
practicing even after the 2nd World War. He
bought properties one of which was in
Forbes Park. Then, the LLA was about to end
in 1965. He went to the Supreme Court with
a petition for declaratory relief. He was
saying “I bought it in good faith. I am the
owner of the land in fee-simple which I call
home. What will happen after Parity ends?
Will I be stricken-off my land? Dili mo maluuy
nako na I am a simple lawyer from
Delaware”.
The one who wrote the decision was JBL
Reyes, that was his valedictory decision, his
last decision. He says when the parity ends,
your right to own ends. So you better
disinvest it. Transfer it. That’s what
Americans did. Except, one person
recognized by the Court, Del Monte
International.
Because Del Monte obtained ownership of
the property in Bukidnon in 1899 before the
they transferred it later on to Campos. Del
Monte now is owned by Mr. Campos and his
Tomas. Where did he get his money? You
read Yuchiengco. Because his father was a
friend of Marcos even before he became
congressman. Mr. Campos was the one who
was first to return hidden wealth entrusted to
him by Marcos. He owned the biggest
pharmaceutical company in the Philippines,
UNILAB. It became really big because at the
time of Marcos, the DOH was directly
transacting with them. They did toll-
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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
manufacturing. Unlike in India, they just copy
the composition of medicines and produce
their own. They say “To hell with copyright!”.
*Talks about the current US
President.*
November 17, 2017 (1st Half)
(Therese Candolita)
We are still in Section 2. The section which
gives us the definition of a Corporation.
Section 2. Corporation defined. 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 OF A CORPORATION:
A. It is an artificial being
B. Its legal personality is
separate and distinct from the
personality of its stockholders.
C. It is created by operation of
law.
D. It has the right of succession.
E. It has only the powers,
attributes, and properties
expressly authorized by law
or incident to its existence.
A. A CORPORATION IS AN
ARTIFICIAL BEING
It has no physical existence. But it
is a being nonetheless. How many
here have taken up metaphysics? To
exist you must be something, either a
stone, an animal, a tree. You have to
be something. But here, we postulate
an existence that is a creature of the
state by mere consent of the law. It
does not occupy space, does not
have weight, you cannot touch it, you
cannot smell it but it is there by legal
postulate. It has no physical
existence.
Now, most of the Bill of Rights apply to the
corporation as a person, but the right against
self-incrimination does not apply to a
corporation. Why? Because the corporation
has no mouth and the freedom against self-
incrimination is freedom against testimonial
evidence. The one who can invoke it is
somebody who can express himself. The
corporation cannot express itself except
through an agent. It needs to go through
the formality of passing a resolution.
Now, suppose you are paralyzed, such as
when di ka katingog, di ka kasulat, pero
gasiga pa ng mata nimo. Di ka kasulti kay
paralyzed ka, makapirma ba na sya ug
contract? Di na sya kapirma ug contract pero
makuha nimo iyang thumbmark. Maka-
communicate sya kay naa sya’y physical
existence, ang corporation, wala man. The
only way to go is through the formality of a
resolution –that’s why resolutions are
important.
A corporation as an artificial being also
means that it cannot accept new agents if
it has no agents anymore. They cannot act.
– SITUATION: Suppose here is a
corporation with 5 incorporators, they are all
classmates and they are the same
stockholders who are also in the Board of
Directors. 5 sila
incorporators/stockholders/sa Board kay sila
ra nag-piliay sa ilang kaugalion. They love
each other, no complications. Unya karon
pagbakasyon nila sabay 5, ni-crash ilang
gisakyan, namatay ang 3. What happens?
The corporation is paralyzed. 2 na lang man
ang nahibilin. You cannot be elected a
Director unless you are the owner of at least
1 share, meaning you are a stockholder of
the corporation, so the Board of Director has
no quorum, it cannot act, it cannot pass a
resolution. This is why the corporation has
to be dissolved. When the formalities can
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 CORPORATION LAW TSN
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no longer be done than it could end up law will disregard

that the corporation will have to be the corporation
dissolved. It’s not like a person, amang na as an association
sya and paralyzed, naa pa man sya. of persons.”
Makalihok gihapon, thumbmark gihapon.
Maski comatose pa, maka-transact pa. That
is when he needs an agent, you go to court 2 WAYS OF PIERCING THE VEIL:
to be appointed as guardian of his properties
and another appointment to be the guardian 1. The corporation is used defeat
of his person. public convenience, justify wrong,
protect fraud or perpetrate crime
B. THE CORPORATION HAS A
SEPARATE PERSONALITY FROM You have the corporation and you
THE PERSONALITY OF ITS have a dominant, overwhelming,
CONSTITUTENTS, WHETHER controlling stockholder and he uses
MEMBERS OR ITS the corporation either to defeat public
STOCKHOLDERS OR ITS OFFICES convenience, justify wrong, protect
fraud or perpetrate crime. That is why
That is the DOCTRINE OF LEGAL the law will disregard the separate
ENTITY. legal entity of the corporation and the
veil is pierced. The dominant
GENERAL RULE: Mainly, stockholder using the corporation as
the corporation has a a conduit and he will be the only
personality separate and person considered by the court.
distinct from the personality
of its stockholders or officers 2. The subsidiary is used by the
or other constituents. mother corporation

EXC: Piercing the veil of You have 2 corporations, the mother

corporate entity and the subsidiary, and it ends up
that the subsidiary is just used by the
PIERCING THE VEIL OF mother corporation. In fact the funds
CORPORATE ENTITY of the subsidiary are not placed in a
separate bank account but co-
Laid down by the US mingled with the mother
Supreme Court in the case corporation. For all practical
of United States vs purposes, the officers of the mother
Milwaukee Refrigerator corporation considers the officers of
Transit Company; 142 the subsidiary corporation as a
Federal Reports 247 (1905) division of the mother corporation
as follows: and in so doing they avoid payment
of tax, they disregard their
“When the notion obligations under contract, or they
of legal entity is perpetrate crime. What does the
used to defeat court do? The court cancels out the
public separate and distinct personality
convenience, of the subsidiary and only the
justify wrong, mother corporation is considered.
protect fraud or
defend crime, the

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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
So those are the 2 ways by
which Piercing the Veil is
exercised. What are the cases
that you have to remember?
1. Mother corporation and
subsidiary corporation -
PNB vs Ritratto; 362 scra
216 (2002)
2. Then a corporation as a
mere conduit of a not deny the corporation of legal
dominant overwhelming
stockholder – Francisco
vs Mejia; 326 scra 738
(2001)
The SC says in the case of a
person dominating a
corporation, what are the
elements that must be present to
justify piercing the corporate
veil on the ground that the
corporation is a mere alter ego:
1. Control, not mere majority
or complete stock control,
but complete domination
not only of finances but of
policy and business practice
in respect to the transaction
attacked so that the
corporate entity as to this
transaction had at the time
no separate mind, will or
existence of its own.
2. Such control must have been
used by the defendant to
commit fraud or wrong, to
perpetuate the violation of a
statutory or other positive
legal breach of duty, or a
dishonest and unjust act in
contravention of plaintiff’s
legal right; and
3. The aforesaid control and
breach of duty must have
approximately caused the
injury or unjust loss
complained of. (Carillo vs
PCMC; GR 224099; June 21,
2017)
Question: Is the corporation that is
disregarded ceases to be a corporation?
Does it mean that the said corp is
cancelled as to its registration?
The application of piercing the veil of
corporate entity in a particular case does
personality for any and all purposes, but
only for the particular transaction or
instance of which the doctrine is invoked.
It is a reference to a particular
transaction.
General Rule: Doctrine of Corporate
Entity (meaning separate legal
personality)
Exception: Piercing the Veil of Corporate
Entity
C. A CORPORATION IS CREATED BY
OPERATION OF LAW
It is not created by law. Historically, a
corporation was created by law, in the
days where the King had all the great
powers, executive, legislative and
judicial. All the King had to do was
issue a decree that the following
group of people are now to be
accepted as a corporation of limited
liability, and shall be called, let’s say
“East India Company Ltd.” So all
those who put their money there, they
are the stakeholders. Now that is
prohibited by the Constitution.
Section 16, Article XII on
National Economy and
Patrimony which stated
that “Congress shall not,
except by general law,
provide for the
formation, organization,
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 CORPORATION LAW TSN
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or regulation of private
corporations.
Government-owned and
controlled corporations
may be created or
established by special
charters in the interest of
common good and
subject to the test of
economic viability.”
CHARTER TEST
By law means there is a charter. Baluyot vs
Holganza; 324 scra 248 (2000) where the
SC said
“The test to determine whether a
corporation is government-owned
and controlled or private in nature is
simple: Is it created by its own
charter for the exercise of a public
function or by incorporation under
the General Corporation Law?
Those with special charters are
government corporations subject
to its provisions, and its employees
are under the jurisdiction of the
Civil Service Commission and
are compulsory members of the
GSIS.”
The charter test is applied prospectively,
it does not apply retrospectively. So it does
not apply to the Philippine Society for the
Prevention of Cruelty to Animals, because
it was issued a charter by law on January 19,
1905.
How does the coporation act?
By passing its own laws equivalently through
a resolution.
In Liban et al vs Gordon; January 18, 2011
en banc resolution by J. de Castro. In
2010 the decision was penned by J. Abad.
The original decision as its stands is that the
Red Cross is neither private nor public, it has
the characteristics of both. Why public?
Because its work is governmental, to
respond to victims of human tragedy, either
natural or man-made calamities. But when
Red Cross responds to victims of man-made
tragedy such as terrorism, kidnapping of
hostages, that is their private aspect. The
court says neither public nor private but it has
aspects of both.
Begin to distinguish by law or by operation of
law. All you have to do is comply with the
requirements of the general enabling law.
Please take note that there is not just 1
general enabling law. Not just the
Corporation Code. The Labor Code is
also a general enabling law. Because a
group of persons can so constitute
themselves and apply to be issued a cert of
registration to be a union. And that union has
a separate and distinct personality from its
members. That is also creation of a juridical
person by operation of law.
In the Cooperative’s Code, when a group of
persons at least 15, constitute themselves
into a cooperative they are issued a
certificate of registration by the Cooperative
Development Authority then you have
another juridical personality. There are many
ways to have a separate juridical personality,
not just one. But for us, that is the
Corporation Code. Whether it be by law or by
operation of law, what is common with the
two is government intervention. The
consent in corporations created by law is
DIRECT. The consent of government in
private corporations is INDIRECT. You
comply with the requirements than you are
granted.
If you are not granted but you think you have
fully complied with the law, what is your
remedy? Mandamus. Because for SEC to
grant a certificate of registration is not
discretionary, it is purely ministerial.
November 17, 2017 (2nd Half)
(Marry Suan)
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 CORPORATION LAW TSN
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So as we said, whether it is a corporation
created by law or created by operation of law,
the common denominator of the two is the
consent of the state. That is the THEORY
OF CONCESSION, to the point of saying that
the corporation is really a corporation of the
state.
GENERAL RULE: Without the consent of
the state, there is no corporation.
EXC:
A. De facto corps.
B. Corp. by estoppel
C. Corp. by prescription
Is that true? Many commentators say that
there are exceptions to the rule. What are
some of the exceptions?
A. DE FACTO CORPORATION
Section 20. De facto corporations. – The
due incorporation of any corporation
claiming in good faith to be a corporation
under this Code, and its right to exercise
corporate powers, shall not be inquired
into collaterally in any private suit to
which such corporation may be a party.
Such inquiry may be made by the
Solicitor General in a quo warranto
proceeding. (n)
4 ELEMENTS OF A DE FACTO
CORPORATION:
1. There is a general enabling act –
the Corporation Code.
2. There is a xxx attempt to
incorporate under such law.
3. There is an assumption of
corporate power.
4. Despite the fatal defect, a serious
defect, it is issued a certificate of
incorporation.
So a DE FACTO CORP. has a certificate of
incorporation but it is fatally defective. It
is really not a corporation.
Now what is the effect? It lacks consent of
the state and yet the law says that nobody
can attack this collaterally. You must attack it
directly. In other words, it stands as a
corporation until it is impugned. You
cannot attack it indirectly.
What is an example of a de facto
corporation? An example is Sawadjaan vs.
CA 459 SCRA 516 (2005). This corporation
is in Loyola Heights Villa. This is
homeowners association versus the
corporation. That the party employee is
Sawadjaan. What was the defect of that
corporation? It functioned for thirty years but
it did not file any by-laws with the SEC. It just
presumed it had all the laws but it did not
have any by-laws. It just followed the
Corporation Code. So there’s a big question
mark as to the validity of all its acts. And yet,
Sawadjaan acknowledge it as a true
corporation and became a member of it when
he bought a piece of land there. He cannot
just say, you have a fatal defect so I will
stop paying my subdivision dues. You
must bring an independent suit to attack
the invalid corporation.
How do you do that? You must bring a quo
warranto petition. Who brings the quo
warranto? It’s the solicitor general. This is
a permissive quo warranto. You must xxx
the solicitor general to bring the action. You
must prove your cause of action and its
merits to the solicitor general. Once you have
convinced him, then you must put up a bond
which is at the disposal of the solicitor
general if he loses the case, that is to protect
him against damages that may be awarded.
And then, he files the quo warranto
proceeding.
There’s another way to attack it. You
convince the SEC and the SEC brings a
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cancellation proceeding under Section 6 of
P.D. 902-8, the expanded powers of the
SEC.
So de facto corporation, in effect, there is
no state consent and yet it is protected.
You cannot attack it indirectly. Because of
that principle in labor, unions cannot also be
attacked indirectly. You have to bring the
action to cancel union registration. That is
now the uniform xxx with respect to juridical
persons.
B. CORPORATION BY ESTOPPEL
Section 21. Corporation by estoppel. – All
persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as
general partners for all debts, liabilities
and damages incurred or arising as a
result thereof: Provided, however, That
when any such ostensible corporation is
sued on any transaction entered by it as
a corporation or on any tort committed by
it as such, it shall not be allowed to use
as a defense its lack of corporate
personality.
One who assumes an obligation to
an ostensible corporation as such,
cannot resist performance thereof on the
ground that there was in fact no
corporation. (n)
This one clearly does not have a consent
of the state. They just pretend to be a
corporation but they are not and they
know they are not.
What happens? They cannot deny that
they are a corporation. They are a
corporation because they are estopped
from denying that they are not, even if in
reality they are not. They have the liabilities
of general partners. That means they
absorb the liability of the corporation –
every single one of these persons that are
involved in the simulated corporate
existence.
One who assumes an obligation to an
ostensible corporation as such cannot resist
performance thereof on the ground that there
was in fact no corporation. So if you deal with
this ostensive corporation and it is not really
a corporation, you cannot later on say that
you are not obligated because you’re not a
corporation. Your obligation is valid.
Again, that is an exception to the
CONCESSION THEORY – that the
corporation exists only by the concession of
the state.
C. CORPORATION BY
PRESCRIPTION
There is only one corporation by prescription
and that is pronounced by the Supreme
Court in Barlin vs. Ramirez 7 Phil. 41. This
is in the 1990s.
Barlin was the archbishop of Manila.
Ramirez was the one who questioned why
the archbishop is allowed to organize and
coordinate the activities of the police in the
city of Manila in order to celebrate the first
international Eucharistic congress. (chika)
So why was public money used to
commemorate a religious event? That is the
whole issue. It’s sectarian and then you put
up a stand. It is a public corporation using
government funds to glorify a religious event.
That is when the SC says, it is no longer
religious. Suwayig saway ang mga tao na dili
ta magcelebrate ug pasko sa gobyerno. It is
religious from the beginning but by long
tradition and practice, it has become
culture. It is part of the culture. And it has
even antedated the republic.
So according to the SC, the Roman Catholic
church is a CORPORATION BY
PRESCRIPTION. It is in reality part and
parcel of the Philippine society. Where a
body of men have been for a long time in the
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exercise of corporate powers, a presumption
arises of an ancient character that a charter
was granted to their predecessors making
the exercise of such powers by them lawful
and right. So this is the Roman Catholic
church.
(chika about the Jesuit’s corporate name)
XXX
Continuation from last meeting kay naputol…
D. POWER OF SUCCESSION
The fourth attribute is that the corporation
has the power of succession. Disabuse
yourself of the notion that succession which
means that which it put out under the xxx.
No, that’s not the succession.
Succession here means continuity. You
have a corporation. You have the persons
that originally formed it. Even after the
persons who originally formed it died and
then replaced, it is still the same corporation.
Let’s say that the first 50 years is expired and
then it renews its term for another 50 years,
that corporation that is in existence in the
next 50 years is still the same corporation.
There is continuity.
But the corporation cannot write a will. Only
a natural person can write a will.
So that is to the advantage of the corporation
– that the corporation can be perpetual by
just renewing its term for an indefinite
number of 50-year terms. It is capable of
perpetual existence by the power of
succession.
And many times that is necessary for
projects that have very long gestation
periods. Let’s say the making of Suez Canal.
That was more than 50 years. (chika about
Suez Canal and Mr. Nobel)
Soon, we will have that reality. Next year they
say they will sign a contract with the
Japanese to build the subway in Manila. The
subway will cost something like P35 billion.
(chika about drilling holes for subway and
issuing 60 year bonds to fund it)
What is the legal reality that you negate?
When you are a corporation, the longest you
exist according to your term is 50 years. And
yet you issue 60 year bonds. The last 10
years, kinsay muservice ana? You review
and amend your Articles for another 50
years. That is the power of succession.
But the Philippine SC says, a corporation
cannot enter into usufruct for more than 50
years because its term is only 50 years
maximum. Pagkakitid sa utak. The
corporation has power of succession!
In the States, they are issuing 100-year
bonds. (chika about Branson and Virgin
Airlines, rocket ships) Giilugan ng iyang
bonds! So it is deemed viable by many
business savants.
So why is our SC xxx? They just xxx service
to power of succession.
E. POWERS, ATTRIBUTES AND
PROPERTIES ARE EXPRESSLY
AUTHORIZED BY LAW OR INCIDENT TO
ITS EXISTENCE
1. Express
2. Implied
3. Inherent
1. Express – Those that you can read
from its Articles, those that are
provided by the Corporation Code,
those that are provided by other
special laws. Those are the express
powers.
2. Implied – are those powers that are
necessary if you have to exercise the
express power. Example, purpose
clause of this corporation is to
organize, xxx, operate, maintain a
cement factory. That is the express
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 CORPORATION LAW TSN
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power. It cannot operate, maintain
and build a cockpit. It’s not there in
the purpose clause. What is there is
the cement factory. Now, how can
you do it? Implied powers! You can
hire people, enter into contract with
people, employer-employee
relationship. Because if you cannot
do that, how can you build your
cement factory? That is the meaning
of implied powers.
3. Incidental powers or inherent
powers – Are the powers that define
a corporation. All corporations
necessarily have this power because
otherwise, it is no corporation. It’s like
police power or power to tax or power
of eminent domain of the state.
Without those powers, it is not a
state. The Constitution does not grant
those powers. It merely recognizes
those powers because those are
what defines a state. It’s not that you
are a state first then you have those
powers. It is the power that makes
you a state.
It is inherent for water to wet. If it does
not wet, it is not water. Labayon kag
ice, di ka mabasa pero mawad-an
kag panimuot kay naigo man ka.
Solid man ng ice. It is not water.
Wetness is inherent in water. The
longer it is no longer wet, it’s ice. It is
no longer water.
So even if there is no more law, it is
still there. Because it is part and
parcel of being a corporation. What
are those powers? The power to sue,
the power to acquire and dispose of
properties (real or personal, tangible
or intangible), the power to enter into
contracts, and so on. These are all
inherent, incidental powers. It cannot
be xxx, it can only be recognized.
Now we go to Section 3, classes of
corporations.
Section 3. Classes of corporations. –
Corporations formed or organized under
this Code may be stock or non-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. All
other corporations are non-stock
corporations. (3a)
CLASSIFICATION OF CORPORATIONS:
1. Stock, or
2. Non-stock
What is the key difference between the two?
The proviso in the Articles of Incorporation
that the corporation is allowed to
distribute dividends.
STOCK CORP. NON-STOCK
CORP.
It is allowed to It is not allowed to
distribute dividends distribute dividends
to its stockholders. to its members.
You are a non-stock corporation. You are
not allowed to distribute dividends. But you
make profits. Your revenues that you derive
from your activity is larger than your
expenses so you have accumulated profits.
Does that make you a stock corporation? No,
it does not make you a stock corporation.
That is why the SC berated the BIR. Just
because you make profits, you already tax
his income. Di man! You are non-stock, non-
profit. Kung masayop ang BIR niini, sa ato pa
murag lisod-lisod ni sya sabton.
Ngano man na si Henares nanggukod na
man na sya? Ang iyang gigukod, ang San
Juan de Dios Hospital. That is non-stock
non-profit. It has paid rooms and it has free
wards for indigents. But their revenues
exceed their expenses. So they have profit.
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 CORPORATION LAW TSN
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The BIR wants to tax them. The lawyers of
this corporation fought the BIR. Does that
make us stock corporation just because we
make profits? No. It is the proviso that you
can distribute dividends.
You are taking up taxation now. First
semester, you took income tax. Now you are
taking up business tax. For income to be
taxable must be realized income. Unrealized
income is not taxable. So if you are given
stock dividends, there is no realization of
income. There is no tax. When are you taxed
on that dividend? Only when you dispose of
that dividend. Then that’s capital gains tax.
Now, stock and non-stock. Later on, we will
come to discussion on non-stock
corporations. There are only the purposes
listed in Section 88 that allow you to be a
non-stock corporation. Because if the
purpose is other than those listed in Section
88, you are a stock corporation.
Section 4. Corporations created by
special laws or charters. –Corporations
created by special laws or charters shall
be governed primarily by the provisions
of the special law or charter creating them
or applicable to them, supplemented by
the provisions of this Code, insofar as
they are applicable. (n)
We have taken this up – created by law,
created by operation by law.
So we are now beginning formation of a
corporation.
Section 5. Corporators and incorporators,
stockholders and members. –
Corporators are those who compose a
corporation, whether as stockholders or
as members. Incorporators are those
stockholders or members mentioned in
the articles of incorporation as originally
forming and composing the corporation
and who are signatories thereof.
Corporators in a stock corporation
are called stockholders or shareholders.
Corporators in a non-stock corporation
are called members. (4a)
TAKE NOTE OF THESE TERMS:
 Corporators - Are those who
compose a corporation, whether
as stockholders or as members.
 Incorporators – Are those
stockholders or members
mentioned in the articles of
incorporation as originally forming
and composing the corporation
and who are signatories thereof.
 Stockholders or Shareholders –
Corporators in a stock corporation.
 Members – Corporators in a non-
stock corporation.
The significance of this terminology must be
understood together with what is said in
Section 15 of the Corporation Code.
Section 15. Forms of Articles of
Incorporation. – Unless otherwise
prescribed by special law, articles of
incorporation of all domestic
corporations shall comply substantially
with the following form:
xxx
So they give you a form here in the Articles.
The standard is not literal compliance. It is
just substantial compliance. More or less,
you comply with the language here. But there
are several terminologies that must be used
and it cannot be changed.
What are those terminologies? The first one
is Section 5.
1. Corporators
2. Incorporators
3. Stockholders
4. Members
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These terminologies cannot be
substituted. A corporation has constituents,
persons who make up the organization.
SEVERAL TERMINOLOGIES YOU
OUGHT TO REMEMBER:
 Sole proprietorship – Has only
one constituent.
 Partnership – Has the partners as
constituents.
In a Corporation:
 Shareholders or Stockholders –
If it is a stock and profit corp.
 Members – If it is a NPSP.
 Corporators – Members ans
stockholders.
 Incorporator – If you are a
corporator that signs the Articles of
Incorporation.
* Not all corporators are stockholders
but all stockholders are corporators. All
the corporators are corporators but not
all corporators sign and so, they are not
all incorporators.
Why is it important? It is important to
determine where the seat is of the primary
franchise. What is primary franchise, as
opposed to secondary franchise?
Secondary franchise is awarded by a
government agency to a corporation, like
public utility, the right to ply the roads
between Davao and Tagum. That is your
franchise.
How about the right and privilege to exist as
a corporation? That is a primary franchise.
What is the difference between primary
franchise and secondary franchise?
Secondary franchise, with the consent of
government, can be sold for a consideration.
But the primary franchise to exist as a
corporation cannot be sold. It is not
commercially viable.
TAKE NOTE:
PRIMARY SECONDARY
FRANCHISE FRANCHISE
Primary franchise to Secondary
exist as a franchise, with the
corporation cannot consent of
be sold. It is not government, can be
commercially sold for a
viable. consideration.
Now, where is the seat of right to exist as a
corporation? where is that located? It is
located among the incorporators. So who
can bring a petition for mandamus to compel
the SEC to issue a certificate of registration?
Even if you have complied with all the
requirements but the SEC has not issued you
a certificate of registration, you file a
mandamus. Who can file that? The one who
has the right to be corporation. The seat
where the right is vested, those are the
incorporators.
Articles of Incorporation of XYZ Corporation.
“Know all men by these presents, we the
undersigned incorporators have this day
constituted and organized ourselves into a
stock and profit corporation under the
following terms and conditions, to wit: (a) the
name of the corporation shall be XYZ
Corporation, (b) the term of the corporation
is 50 years from and after the issuance of the
certificate of incorporation.”
Sugod na. We are here now, formation of a
corporation. That’s from Section 5 up to
Section 15. Ayaw lang mog basa ining
sample ini. Read as many Articles of
Incorporation as you can hold of. Naa na
tanan sa internet. (chika about articles of
incorporation of BDO and all its corporate
name in the articles)
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November 22, 2017
(Ria Lumapas)
1
Commentary: Defining the future of public utilities
By Hannah Viola (philstar.com) | Updated October 6, 2017 - 11:05am
(First published on October 5, 6:08 p.m.)
The United Nations Conference on Trade and Development published
a World Investment Report on June 2017 showing that out of 104
economies, including the Philippines, transportation ranked as the industry
most affected by restrictions on foreign direct investment.
The five most-affected industries are transportation, media, electricity,
telecommunications and mining, oil and gas.
Legal limbo over our economic future
Of these five industries, a majority (transportation, electricity and
telecommunications) are considered “public utilities” in the Philippines.
This is because the term “public utilities” is interpreted with reference
to “public service” as provided in Commonwealth Act No. 146, more
commonly known as the “Public Service Act.”
Under this law, a public service is said to include:
[E]very person that now or hereafter may own, operate, manage, or
control in the Philippines, for hire or compensation, with general or
limited clientele, whether permanent, occasional or accidental, and
done for general business purposes, any common carrier, railroad,
street railway, traction railway, sub-way motor vehicle, either for freight
or passenger, or both with or without fixed route and whether may be
its classification, freight or carrier service of any class, express service,
steamboat or steamship line, pontines, ferries, and water craft,
engaged in the transportation of passengers or freight or both,
shipyard, marine railways, marine repair shop, [warehouse] wharf or
dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas,
electric light, heat and power water supply and power, petroleum,
sewerage system, wire or wireless communications system, wire or
wireless broadcasting stations and other similar public services.
Despite some legal antecedents (e.g. NAPOCOR vs. Court of Appeals
in 1997 and JG Summit Holdings, Inc. vs. Court of Appeals in 2003),
the definition of “public utility” is still wanting in clarity. The definition
itself is a source of confusion in the interpretation and application of
the law—with serious economic consequences.
...the definition of “public utility” is still wanting in clarity. The definition
itself is a source of confusion in the interpretation and application of
the law—with serious economic consequences.
These consequences are the result of our constitutional prohibitions on
foreign participation in “public utilities” (undefined). Under Section 11,
Article XII of the 1987 Constitution, “No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens.”
Aside from the limitations on foreign ownership, public utilities are also
subject to other constitutional restrictions such as:
Before we move on to our topic, I’m gonna
give you a copy of a bill now pending in
Congress. It’s HB 45011 authored by

limitations on foreign management;
 non-exclusivity;
 maximum limit of fifty (50) years;
 amendment, alteration, or repeal by Congress when the common good
so requires;
 temporary take-over and operation of public utilities during times of
national emergency when public interest so requires;
 in the interest of national welfare or defense, establishment and
operation of vital industries and transfer to public ownership utilities
and other private enterprises to be operated by the Government upon
payment of just compensation;
 supervision or regulation of the enjoyment or utilization of franchises
or permits for the operation of public utilities during election period.
New solutions from the House and Senate
On Sept. 8, 2017, the House of Representatives approved on third
reading House Bill 5828 which seeks to provide a clear definition of a
public utility. Meanwhile, five bills have been filed in the Senate which
also seek to amend the Public Service Act.
These bills are of the same view that a public utility should be clearly
defined as a “person that operates, manages, and controls the
distribution and transmission of electricity, and water pipeline
distribution system or sewerage pipeline system for public purpose.”
This list can only be changed by a subsequent law, subject to some
criteria.
Investments and job creation
Data from the Labor Force Survey show that while unemployment and
underemployment are generally improving, it still remains high.
Unemployment in July 2017 inched higher to 5.6 percent, compared to
5.4 percent in the previous year. By sector, services still accounted for
over half of the labor force.
Thus, non-government groups such as CitizenWatch Philippines and
the Foundation for Economic Freedom have expressed their support
for the legislative reform measure. At CitizenWatch, we stress that the
ambiguous interpretation and application of the law have prevented the
utilities sector from seizing its potential to attract investments, create
high-quality jobs, and consequently drive economic growth.
By way of example, several industries, notably the telecommunications
and airline industries, were opened to more competition during the
administration of former President Fidel Ramos. The economic growth
and job creation resulting from the removal of major barriers to
competition and investment demonstrated the economic potential that
the monopolies had long suppressed.
The economic growth and job creation resulting from the removal of
major barriers to competition and investment demonstrated the
economic potential that the monopolies had long suppressed.
Taking the UNCTAD Report and the proposed amendments to the
Public Service Act into account, only the distribution and transmission
in the electricity industry, as opposed to the whole of three industries
(transportation, electricity and telecommunications), will fall under the
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 CORPORATION LAW TSN
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Congressman Arthur C. Yap. Does he ring a
bell? He was the former Agriculture
Department Secretary of Gloria Arroyo. He
replaced this guy. (Fr. can’t seem to
remember the name) Came from the family
of the owners of La Panday. He’s very
famous because he cannot come home from
the US. He was involved in the fertilizer
scam. But somebody up there in the
stratosphere was machinating, and he was
just the signatory of the checks. He’s indicted
but he is a person of interest that’s why he is
not coming back. I’m beginning to forget
names now. The same family that owns
pancake house. And then Arthur Yap took
over. He was the student of Gloria Arroyo. He
ran for governor when GMA ended her term
and now he is congressman.
This house bill proposes to redefine the
meaning of the word public utility. This is
the pertinent provision:
the term public utility shall mean electric
power transmission, so national grid is
covered; electric power distribution so Davao
Light and Meralco; water pipeline
distribution, so Maynilad, Manila Water is
included; and sewerage pipeline system
unless otherwise subsequently provided by
law any existing law to the contrary
notwithstanding, no other business or
service shall be deemed a public utility
unless otherwise subsequently provided by
law upon recommendation by the National
Economic Development Authority.
So what happens? By a stroke of pen,
telecommunications is no longer public
definition of a “public utility” and will thus be subjected to the
constitutional limitations.
The opportunity to accelerate reforms through the amendments to the
Public Service Act will help create more and better jobs for the 2.37
million Filipinos who are currently unemployed. By considering the
operation of public utilities as one of the priorities for investment
liberalization measures, the government clearly defines its plan to cater
to industry players and potential investors, hopefully towards a more
competitive and vibrant public service sector.
___
utility. Bus transportation, rail, no longer
public utility. You have the super majority?
Lusot ni. Digong wants all these people to
invest, unsaon nya pagpa-invest na 40% ra
man ang foreign? Wa na ron! Tungod ani,
ang mga pikot makasulod na.
Telecommunications, they are no longer
covered by the 60-40. Kaingon kag buang2x
na si digong, kaingon kag unggoy na si
digong? Tanawa ni o! Lusot ni sa majority.
Basaha ninyo ug mag-agik-ik mo ug katawa
o diba maghilak mo. As far as I’m concerned
all nationalism laws are stupid!
Tanawa the city of Tokyo. I told you it has
125,000 cell sites. The entire Philippines has
25,000 cell sites that’s why you understand
ngano hina kayo atong telecommunication.
Why don’t they put up more cell sites?
Because the return of investment of adding
more cell sites will not be sufficient to justify
it business-wise. Kay unli man tanan. Now,
there’s another issue, most of us when we
use the internet, when we go surfing, we go
all the way to the States. And you need trunk
lines for that, undersea cable, because the
internet is the most wired system of
communication, only the last line is not wired:
your smartphone to the cell site is not wired.
But everything else is wired, in between cell
sites, even the cloud that they say, there are
huge computer storage machines. Close to a
hundred gud ng Google, Facebook. Hain
man nila gibutang ilang storage? Tua si
kinatugnawang country kay init man kayo na.
So bisag ang atong housemates adto sa
America kung magsurf sa net, FB man. Ang
hapon di man kabalo mag English, di tua
lang sila nagutyok2x sa Japan. Naa pud sila
Lawyer Hannah Viola is a convenor and legal counsel
of CitizenWatch Philippines and a fellow of
the Stratbase ADR Institute, a partner of Philstar.com.
Business ( Article MRec ), pagematch: 1, sectionmatch: 1
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 CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno
kaugalingong FB sa Japan pero dira lang sila
kutob sa Japan. Kita ron, pirti ng grabeha kay
ultimo maid or guard ga-FB.
Kadungog mo anang ARPU, average
revenue per user. US, it’s between 30-50
dollars a month. Diri sa Pilipinas, ang ARPU,
may gani makaabot 100 pesos. Kay register
ka man lang dayun ug unli, 3 days unli
surfing ug muadto pa gyud ka ug laing
number ma extend pa gyud ug one day. Di
na nimo buhaton masuko man nimo ang mga
tao human mangutana dayun, nganung
hinay man?
There will be a 3rd or 4th that will come in, sa
sinugdanan gwapo kayo. Wa pa may sud.
Abtan na ug unom ka buwan o isa ka tuig, wa
na sad. Kabuang na sad.
You know how much 25,000 cell sites cost?
Asset base sa PLDT, which is 15 billion US
dollars, Globe is about 8-9 dollars, i-combine
na nimong duha, 25,000 cell sites. Pila man
diay ng naa sa Tokyo? Pirting mahala diay
ana! More than 100 billion dollars diay na!
Mangutana ko, naa bay foreign investor
muingon na bundakan nako ni ug 100 billion
kay mabawi man nako na. pero diri, mabawi
na nimo ug unli? Ay sus. Maabtan kag
syam2x, tubuan kag side burns do! Di pa
gihapon na. Mao na istoryang mingaw.
Let it not be said that I did not tell you about
this. Sulod na na, mga Intsik, Hapon. I’m all
for building infrastructure, sige buhata na.
You know at the turn of the century, katung
1800-1900, that’s when New York built its
subway. Katung panahon na gipusil si Rizal
sa Luneta, nagkalot sila sa New York
pagbuhat sa subway nila. Kita diri, gipusil si
Rizal. Pila ka kompanya nakadaog sa
bidding? Walay nadaog kay walay bidding.
Kutob sa gusto mukalot, hala kalot mo. Unsa
may imo? Hoboken to Manhattan buhat ko
subway, 32 sila nagkalot, nag away2x na
gud sila sa ilalom. Unsay nahitabo? Nahapay
sila tanan except for 3 unya gobyerno mu-
take over kay most of them were bonds
guaranteed by the government. That is why
New York is the most provided by way of
public transport. That’s why the population of
New York has stabilized for more than 100
years. Wa na nagtubo. It’s just not even 8
million people. Nganu man? Because there’s
so much transport that you can live in the
outskirts. Nya muadto ka, buhata ng riles diri,
bagsak ng presyo sa yuta sa Davao.
Magpuyo ka bisan Tagum ka pa o Digos,
makaabot ka dinhi in less than 30 mins, wa
man trapik. Abot ka diri trabaho ka, pauli ka
sa inyo, maayo pa ang hangin na gihanggab
nimo. Gibuhat pa ng Digong samtang mayor
sya, 30 years gud sya mayor diri, nothing to
show for!  Ug kinsa tung mga advisers sa
kilid, ang Cebu dugay na kayo sige float ug
bonds, si Osmena na naglakaw2x nagkupot
sa iyang tae, nag colonoscopy naman na
sya. Naa naman nay bag. Sya mismo nag
ingon “ako ray mayor gadala-dalag tae maski
asa.” Mao nay tao nag-float ug bonds. O
karon, way approval sa Congress, buhat sila
ug bridge, ikatulong bridge. Ako dili ko
against ana. Akong inahan sultian ta mo,
1960s pa, palit sya ug yuta dira sa Mactan.
Piso ra ang yuta ikaw pa magpatitulo. Nya
wa man nya gibaligya hantud sa ni-70 years
nalang. Tagpila naman ang yuta ron? 6-7k
per square meter, piso, ngadto sa 6-7
thousand, walay investment manager
makalupig ana.
Karon sige ra gihapon ta ug istorya, buhat ta
ug bridge didto sa Samal, sige lang gihapon
ug istorya. Ang importante ana ang kwarta
man. Float kag bonds, baligya kag bonds.
Cebu, baligya man ug bonds, di gani paliton
sa Cebu adto sila sa Hongkong, Singapore.
Toll hantud mabayran. Utility, gwapo ni.
Gawas ani ron, wa nay utility.
Now, naa pa ni giingon diri:
Any existing law to the contrary
notwithstanding the following shall not be
considered public utility operation: electric
power generation, electric power supply in
sec. 29 of RA 9136, crude oil and petroleum
production, transportation in this Act and EO
202, broadcasting, telecommunications and
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 CORPORATION LAW TSN
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value added services in RA 7835, other
public services in this Act.
Not content na gi-change ang definition,
gibutang na gyud, explicit. This is not public
utility. Unsa may epekto ana? Do you think
the price of the shares of stock of PLDT or
Globe will rise? If you think it’s going up you
better buy now. Kay once this becomes a law
it will be too late. Naa nay naghuwat dinha.
SHARES OF STOCK
So first we will go to shares of stock. Humana
man ta sa name of a corporation, articles of
incorporation. (FGN asks Ms. Domingo what
topic the class was in)
FGN: Okay we are still in constituents of a
corporation. We are still in section 5.
Corporators, incorporators, stockholders
and members.
Corporators
Shareholders
Members
(Stock and
(NPSP)
Profit Corp.
You will try to put this in modern math, what
is the set? The subset, and the sub subsets.
The biggest set here, the biggest genus is
corporators, which may be divided into two
subsets: members and shareholders. You
are a shareholder if it is a stock and profit
corporation. You are a member if it is a
nonstock corporation. Kaning incorporator
is also a shareholder or a member. But he is
so at the inception of the corporation’s
existence. In other words before the
corporation is formed he already intervenes,
his name is in the articles and he signs the
articles of incorporation. He has liabilities
with respect to what appears in the articles of
incorporation. If there's something illegal
there then he is legally responsible. He can
be made to account for it. So, if you are an
incorporator, your name appears and then
you sign.
How many incorporators when you form a
corporation? Not less than 5, not more
than 15. But the original subscribers of
shares of stock or the original members in
case of nonstock can appear in the articles
but they are not incorporators if they do not
sign.
*NOTE: It is VERY IMPORTANT that
incorporators sign!
If you are a minor, can you be an
incorporator?
You cannot be because you are not sui juris.
You are limited in your personality, in your
capacity to act. So you cannot be an
incorporator if you are a minor, less than 18.
Is you’re a minor, can you be a
shareholder? A subscriber?
Yes. Ownership does not discriminate with
respect to age. You can be an owner of
shares of stock even before you are born.
Your parent can donate to you while you are
still in the womb provided later on you are
born. So you can be a shareholder but you
cannot be an incorporator.
You are made an incorporator, your name
appears there and there are only 5 of you,
the certificate of incorporation is issued.
What happens if later on you are convicted
of plunder? Niapil ka sa gobyerno human
naapil ka sa fertilizer scam. Convicted ka.
Nya ang imong corporation, ang isa ka
incorporator kani, convicted na sya of
plunder. Kangil-ad sad ani. So i-amend nato
aron mawala ng ngan anang tawhana na
makauulaw. You cannot amend that part
of the articles because it’s historical. Ma-
amend ba nimo ang imong amahan? Ilisddan
ni nako. Wala. Di na nimo, maski adopted pa
ka, natural father nimo magpabilin na. Di na
nimo mailisdan ang historical facts. Mao
nay bahin sa corporation na dili ma-amend.
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 CORPORATION LAW TSN
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Mao na that’s one thing you have to keep in
mind. Ikaw ang abogado gipabuhat sa
dokumento, unya you foresee that this
corporation will live for many years. Huna-
hunaa nimo. Pilia ng mga tiguwang na
hapit na mamatay ba. Mao na ibutang
dinha na founders. After pirma nila, patay
sila, wa na. Kabaw na ka sa record. Di na
madaot ang corporation. Pero batan-on
imong gibutang, naa pa na sya dugang
panahon na magbuhat ug binuang. Nya
ikaw ang pasangilan. Sa kadaghang tao na
atong pilian nganu kato man gyud sya?
(Talks about Charles Manson, the serial killer
as example).
May gani ang dagan way mutan-aw. Naa
gani gamayng ligas tanang tao mahimong
expert sa articles of incorporation. So, you
have to reckon with that.
Now, aside from these corporators,
incorporators, stockholders, members, we
said that we have these two characters that
play a role in the formation of a corporation if
your corporation sells shares to the public.
The SEC has come out with a plan when you
sell shares to the public. If you sell shares to
more than 19 people then it’s like banking. If
you accept deposits of more than 19 people
then you are already engaged in banking.
Wa gani kay lisensya priso ka because there
is a criminal liability for engaging in banking
without a license. So if you sell shares to
more than 19 people it means you are
violating the Securities Regulation Code and
2 3
A promoter is an individual or organization that
helps raise money for some type
of investment activity. Promoters may raise
money for a company by offering investment
vehicles other than traditional stocks and bonds,
such as limited partnerships and direct
investment activities. Often, promoters are paid
in company stock or free entrance into
the investing activity though a more standard fee
for service structure may also be used to dictate
the level of compensation.
there is also a criminal liability if you sell
shares without a license.
Who is the most famous person in the
Philippines who sold shares without a license
and went scot-free? El Shaddai, Brother
Velarde. He sold shares of his broadcasting
corporation because he needed money. But
nobody prosecuted him. All the politicians
are afraid of him because he will only say one
word to his followers that means you do not
vote for him. But he really sold shares.
Now if you sell shares to the public, you will
need a promoter2 and an underwriter3.
What is the function of a promoter? In what
way does he differ from an underwriter?
A promoter brings together those who issue
securities, whether shares of stock, bonds,
derivatives, futures contracts and then there
are those who are investors who buy these
instruments. Who are these? They are
retirement funds, insurance companies,
mutual funds, hedge funds – he brings them
together. He rents a place in Wall Street. He
sends out invitations to the ones he knows
are investors. And he prepares a buffet.
Mangadto na sila and there is a presentation.
So let’s say you are one of these
entrepreneurs, you have a new business that
you are proposing. You are proposing this
new toilet that can be maintained without
water. There was a contest sponsored by Bill
Gates to solve the problem in Africa. Apil
tanan, MIT, Harvard. Kinsay nakadaog? Wa
gyud mo. Toilets are the last thing for you.
An underwriter is a company or other entity that
administers the public issuance and distribution
of securities from a corporation or other issuing
body. An underwriter works closely with the
issuing body to determine the offering price of the
securities, buys them from the issuer, and sells
them to investors via the underwriter's distribution
network. Underwriters generally
receive underwriting fees from their issuing
clients, but they also can earn profits when selling
the underwritten shares to investors.
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 CORPORATION LAW TSN
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Toilets are just something, a matter of fact Corporators in a non-stock corporation

that you’d rather not include in your are called members. (4a)
conversations because they are toilets. Dako
kayo ng problema sa India. Sa Cannes, a TERMS TO REMEMBER:
foreign movie about toilets. A woman
suddenly finds out on the night that she’s  Corporators – Are those who
married that there’s no toilet in the house. compose a corporation, whether
Half of the houses in India have no toilets. as stockholders or as members.
You bring a bottle of water, you walk down  Incorporators – Are those
the railroad and you do it somewhere there. stockholders or members
Tutal ang makakita nimo muagi man lang. mentioned in the articles of
And the untouchables in India are those incorporation as originally forming
tribes exclusively whose jobs are to clean and composing the corporation
toilets. Father whispers: naa bay Indian diri? and who are signatories thereof.
Wa ma nay silay quota sa gobyerno. Mao na  Stockholders or Shareholders –
nanganhi na sila kay nakakwarta na sila pero Corporators in a stock corporation.
di sila kasulod sa mga medical schools didto  Members – Corporators in a non-
kay wa na sila quota. They are discriminated stock corporation.
against by traditional practice. Mga lagum
gyud sila. There is a gradation of darkness
even among the dark! (Fr. talks about mga Corporators are the basic constituents of a
kabaw na) corporation. You are a shareholder or
stockholder of a corporation if it is stock
November 24, 2017 (1st Half) and profit corporation. So you are a
(Florienne Melendrez) corporator. But not all corporator are
shareholder or stockholder because if it is
FORMATION OF A CORPORATION non-stock, the corporator is a member, not a
stockholder.
A corporation whether stock or non-stock Now, if in the by-laws your name appears
has constituents. And it is these constituents and you sign the by-laws, you are a
that make up the corporation. As it is placed corporator but you are also more importantly
in section 5, the constituents are divided into an incorporator.
subsets from corporators.
CORPORATOR v. INCORPORATOR
 Section 5. Corporators and
incorporators, stockholders and CORPORATOR INCORPORATOR
members. – Corporators are
those who compose a -Are those who -Are those
corporation, whether as compose a stockholders or
stockholders or as members. corporation, members
Incorporators are those whether as mentioned in the
stockholders or members stockholders or as articles of
mentioned in the articles of members. incorporation as
incorporation as originally originally forming
forming and composing the and composing the
corporation and who are corporation and who
signatories thereof. are signatories
thereof.
Corporators in a stock corporation are
called stockholders or shareholders.

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-Has certain obligated to maintain a website. Or the

liabilities attached to Philippine Stocks Exchange makes available
the articles of a list of 100 biggest stockholders of a
incorporation which corporation.
is a public document
because it (Father tells about the list of the biggest
eventually ends up stockholders of Ayala Corporation as can be
with the Securities seen in the internet. MerMac Corp has been
and Exchange the biggest stockholder since 2005 with 58%
Commission (SEC). of the total outstanding capital stocks. Shows
It is possible that the obituary of Mercedes Ayala McMicking to
your are telling an class. Story about the Ayala family. Father
untruth there. You asks to look up the biggest 100 stockholders
can say that this of Ayala)
number of shares is
already paid-up Now we discussed 2 persons who are not in
even when it is not. section 5 but are just as important--- the
-You may be an That is falsification promoter and underwriter. If the
ordinary corporator of public document. corporation you are forming tries to sell to the
if you are a minor. That is a notarized public shares of stock, then you cannot help
You can be a document. but employ the services of a promoter and
stockholder. underwriter.
- You cannot be an
incorporator if you Underwriter enters into contract with the
are a minor because corporation as to the sale of shares— how
you must assume much he gets as a commission. If it is a
liability and age is corporation still to be formed, then once you
one of the limitations really enter into contract with the promoter
of the capacity to act and underwriter are the incorporators.
of the person.
NOTE: When is the corporation in existence?

 Stockholders or Shareholders – After the issuance of certificate of

Corporators in a stock corporation.
 Members – Corporators in a non-
stock corporation.
If you are to find out who are the stockholders
of a corporation, where do you go?
Repository of all the stockholders(?) in the
corporation is the stock and transfer book
of the corporation. That is where everything
about the incorporators and shareholders is
recorded. The subscription, the balance,
everything is there.
incorporation by the SEC. It is by consent of
the state and the agent of the state is the
SEC.
So if you are selling shares of the
corporation still to be formed and you
engage an underwriter, with whom is the
underwriter in contract with?
It is in contract with the corporation but it is
negotiated by the incorporators. Upon the
formation of the corporation, the corporation
assumes the obligations, the rights that the
incorporators agreed to.

Is it open to everybody? No. However, if you Is there a violation of contract law?

are listed in the stocks exchange, you are

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The corporation is the successor-in-interest

of the incorporators. The incorporators act in Is an agreement Underwriting is the
and for behalf of this corporation still to be which the process by
formed. underwriter which investment
promises to bankers raise
So this promoter and underwriter are make a full- investment capital from
bound to the corporation. They must fleged attempt to investors on behalf of
answer to the corporation. sell as much of a corporations and
securities governments that are
The underwriter may agree to the so-called offering, such as issuing
English type agreement. an initial public either equity or debt
offering, as it securities. The word
English type agreement- That in the can to the public. "underwriter" originally
event that the public does not take all of came from the practice
the number mentioned in the agreement of of having each risk-
shares of stock, the underwriters will take taker write his name
shares which the public will not take. So under the total amount
there is an assurance that all the shares of risk he was willing to
they will issue will be bought. accept at a specified
premium. This
(Father talks about Wallstreet having a centuries-old practice
mathematical calculations of all the shares continues, in a way,
which may be bought) as new issues are
usually brought to
Best efforts type4 market by an
Vs. underwriting syndicate,
Firm commitment type – paliton na nako in which each firm
tanan. Wala pa nagsugod gipalit na, sya na takes the
bahala retail ana. responsibility, as well
(Father did not explain further huhu) as the risk, of selling its
specific allotment
BEST EFFORT UNDERWRITING

4
Best efforts is an agreement in which
an underwriter promises to make a full-fledged attempt to sell
as much of a securities offering, such as an initial public
offering, as it can to the public. Best-effort agreements are
used mainly for securities with higher risk, such as
unseasoned offerings, or in less-than-ideal market conditions.
Best Efforts vs. Firm Commitment
Underwriters and issuers can handle public offerings in
different ways. In contrast to a best-efforts agreement,
a bought deal, also known as a firm commitment, requires the
underwriter to purchase the entire offering. The underwriter's
profit is based on how many shares or bonds it sells, and on
the spread between the discounted purchase price and the
sale price of the shares to the public.
Commission (SEC) to sell $20 million in an initial public
offering. WR Hambrecht+ Co. was the agent that was going
to sell the shares, using best efforts.
Aperion is a small company that qualified as an emerging-
growth company, defined in the Jumpstart Our Business
Startups Act (JOBS). For the latest fiscal year, which ended
on Sept. 30, 2015, revenue was just $34,000. In light of the
company's small size, WR Hambrecht chose a best-efforts
offering to minimize the risk that it would not be able to sell the
deal in a firm commitment underwriting.
The latest filing, in January 2016, registered 3.1 million
shares, and the proposed price range was $7 to $9. The
company has not yet gone public, as of July 2016. The shares
will be offered on an all-or-none basis.

Example

In September 2015, Aperion Biologics, Inc. filed an offering

statement on Form 1-A with the Securities and Exchange

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 CORPORATION LAW TSN
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The promoter is one that brings the sellers
and buyers together. Sya na muadto kung
nay mga biddings, buhat siyag
presentations, nay pagkaon diha. These are
the rituals of selling shares of stock in the
market. Once you go into a certain amount,
you have to sell it in the big market so you go
abroad.
So you have section 6
Section 6. Classification of shares. –
The shares of stock of stock
corporations may be divided into
classes or series of shares, or both, any
of which classes or series of shares
may have such rights, privileges or
restrictions as may be stated in the
articles of incorporation: Provided,
That no share may be deprived of
voting rights except those classified
and issued as "preferred" or
"redeemable" shares, unless otherwise
provided in this Code: Provided,
further, That there shall always be a
class or series of shares which have
complete voting rights. Any or all of the
shares or series of shares may have a
par value or have no par value as may
be provided for in the articles of
incorporation: Provided, however, That
banks, trust companies, insurance
companies, public utilities, and
building and loan associations shall
not be permitted to issue no-par value
shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in
the distribution of the assets of the
corporation in case of liquidation and in
the distribution of dividends, or such
other preferences as may be stated in
the articles of incorporation which are
not violative of the provisions of this
Code: Provided, That preferred shares
of stock may be issued only with a
stated par value. The board of
directors, where authorized in the
articles of incorporation, may fix the
terms and conditions of preferred
shares of stock or any series thereof:
Provided, That such terms and
conditions shall be effective upon the
filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued without
par value shall be deemed fully paid
and non-assessable and the holder of
such shares shall not be liable to the
corporation or to its creditors in
respect thereto: Provided; That shares
without par value may not be issued for
a consideration less than the value of
five (P5.00) pesos per share: Provided,
further, That the entire consideration
received by the corporation for its no-
par value shares shall be treated as
capital and shall not be available for
distribution as dividends.
A corporation may, furthermore,
classify its shares for the purpose of
insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the
articles of incorporation and stated in
the certificate of stock, each share shall
be equal in all respects to every other
share.
Where the articles of incorporation
provide for non-voting shares in the
cases allowed by this Code, the holders
of such shares shall nevertheless be
entitled to vote on the following
matters:
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;
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;
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 CORPORATION LAW TSN
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7. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote
necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights. (5a)
TYPES OF STOCKS:
After you give the name of the corporation,
you give the place of its office, then you have
the purpose of the corporation, the term of
the corporation, now you have to put the
authorized capital, subscribed capital, paid-
up capital of the corporation.
Capital stock is divided into shares. So you
enter into classification of shares.
CLASSIFICATION OF SHARES
First you have to divide shares whether they
are par-value shares or no par-value
shares.
PAR VALUE NO PAR VALUE
SHARES SHARES
Has a nominal Does not have a
value as to its nominal value. It is
share. just one unit.
Par-value share – has a nominal value as to
its share.
No par-value share – does not have a
nominal value. It is just one unit.
Now the rule says if you have par-value
shares you cannot issue or sell it initially from
the corporation to the subscriber at lower
than par-value. The minimum price of a par-
value share upon issuance is the par-value.
Can you sell it at higher than par-value? Yes
you can. The difference between the issued
price and the par-value is the premium of
stock. You identify that in the balance sheet.
Example:
Authorized capital at 10 million
Divided into 10 million shares at Php1.00
par-value per share
(So 1 peso is 1 share)
And you multiply it by 10 million
= authorized capital
that is the maximum number of shares that
you can issue. But take note that that is not
the maximum amount that you can issue
because you may sell it at higher than par-
value. What determines the issued price? It
is your understanding of the market’s
capacity to buy.
Kung inilog imong share, patas-an nimo.
Kung wa jud kisaw imong share then kutob r
aka sa par-value. Mao nang kelangan jud ug
presentation.
(Talks about Double Dragon corporation
having a good presentation)
But what is really the value of the shares?
The par-value is just the starting value, what
is called the nominal value.
(Talks about inflation. 100 peso 10 years ago
vs now)
You cannot issue shares at lower than par-
value. If there is no par-value, what is the
26
 CORPORATION LAW TSN
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amount that is critical? The issued value. The
law says if you have no par-value shares,
you cannot issue no par-value shares at
lower than 5 pesos.
All consideration received in the issuance of
no par-value shares are considered the full
payment of the shares. No par-value shares
that are issued are issued as non-
assessable until entire consideration is
already given. So you cannot purchase
shares on installment if it is no par-value
share.
Par-value: you can have subscription of
installment. Mubayad kag allowable
downpayment and balance is to be paid on
the date stated in the contract or on the date
on call of the board. Those are the two
possible dates when you can pay the
balance of the subscription.
Now if the articles of the incorporation says:
1. “this is the authorized capital stock”
2. “this is the subscribed capital” then the
subscribed capital is at least 25% of the
authorized capital stock.
Now if you as a subscriber have a
subscription of 100 shares, are you obliged
to pay at least 25% of your subscription?
That is Php25 that is equivalent to 25 shares
of the 100 shares total.
3 kinds of capital:
authorized
subscribed
paid-up
NO. You do not have to pay 25%. The
obligation is in the aggregate. That the entire
subscribed capital is at least 25% of the
authorized and the paid-up capital is at least
25% of subscribed. The whole obligation not
the individual shareholders.
Kung sugtan ka sa treasurer of the
corporation na 20% imong bayran, okay.
Some might pay the entire subscription. As
long as the aggregate paid-up capital is 25%
of the subscribed, and the subscribed is 25%
of the paid-up, that’s enough.
Classification of shares
 Common shares – not found in the
corporation code.
 Preferred
 Redeemable
 Founder’s shares
 Treasury shares – not a classification
in the articles. You have a treasury
share because of what happens to
you. If the corporation repurchases or
reacquires you, you become a
treasury share. You stay in the
treasury of the corporation. It is not by
virtue of presentation but what
happens to you.
November 24, 2017 (2nd Half)
(Althea Astrid Gopo)
PREFERRED AND REDEEMABLE
SHARE–
According to section 6, you cannot
classify preferred or redeemable if there
are no par value shares. They must be par
value shares.
You cannot classify redeemable and
preferred shares if there are no par value
shares. They must be par value shares.
Thereby, section 6 says, “only
redeemable shares and preferred shares
may ble classified as non-voting shares.”
So, only par value shares may be deprived
of voting rights.
Okay, let’s go to PREFERRED.
Q: What do you mean by “preference”?
a. Preference as to distribution of
assets at the time when the
corporation is dissolved. So
liquidating dividend. You can have
preference there. You will be first
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paid if the corporation is dissolved,
ahead of the common shares or other
shares.
b. Or you can have preference in the
distribution of dividends. When the
corporation makes money, before
any other share receives dividends,
you receive. And it’s a percentage.
Let’s say: 8% preferred dividend. So
8% of par, that is what you get as
dividend preferred.
Now, time and again the Supreme Court
has said: dividends can only be taken
from profits, and profits is the result of
the strenous and ordinary course of
business operation of a company.
So if the corporation has no profits, it
cannot issue dividends.
Q: Can a corporation borrow money in
order to pay dividends?
That is a trick question. But because a
corporation may register profits, but because
of cash flow, it cannot pay out dividends if it
does not borrow. So it borrows in order to
have cash, to pay cash dividends.
Now, if the corporation does not have
accumulated retained earnings it cannot
issue dividends. So it cannot borrow if it has
no accumulated retained earnings. It does
not have profits.
Asa may corporation nga nag-ganansya
pero way kwarta nga ikabayad? Cash flow
ba. Cash flow. Kamong mga dili accountant,
pa-explain mo sa inyong mga accounting
nga classmate kung unsa ning cashflow.
That’s a problem of cashflow. Diri sa Pilipinas
o, the government needs money everyday,
every month; it has to pay salaries. But then
they only get collection from taxes, periodic
times: when income tax is paid, at the end of
the year. How do they manage in between?
Ah, that’s why the government floats treasury
bills every Monday, the Bangko Sentral.
Because that is a problem of cash flow. Ang
imong kinahanglan kada adlaw, unya ang
imong kita periodic. So wa kay panggasto so
kinahanglan manghuwam ka.
What does the law prohibit? It prohibits
issuing dividends without profits. You might
have profits but you don’t have the cash flow.
So you have to borrow and be able to pay it.
You might be preferred. Bayran kag una. If
you are preferred cumulative, cumulative
prefered shares. Whats the maning? If in one
year the company cannot make the issuance
of dividends. It has profits but it cannot issue
dividends. What happens? Purdoy ka ana!
Unya preferred man ka? Cumulative man
ka? The following year, you can ask payment
for the dividends paid for that year plus the
year before that was not paid you. That is
called dividends in arrears. Mu-cumulate na.
Kay cumulative preferred man ka.
Please keep this in mind clearly: no
company, no corporation can guarantee
the payment of dividends every year. You
cannot. But a company may be able to
issue guaranteed cumulative preferred
shares.
What’s the meaning of that? NOT that the
same company who issued the shares is
guaranteeing preferred dividends every year,
with or without profits. But that there is
another company that guarantees it. This
company will come to the rescue if this
subsidiary cannot pay the dividends. It may
borrow money, because that is his expense,
because he guaranteed this subsidiary. But
the company itself who owns the shares
cannot guarantee the preferred every year.
PARTICIPATING PREFERRED.
Q: What is the meaning of participating
preferred?
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You get your preferred dividends. There is
profit, you get your preferred dividends. After
you get it, there is still profits remaining. So
now the common shares will get their profits
after you’ve gotten yours. But because you
are participating, you also go with the
common to receive dividends. So kaduha ka
muigo. Preferred ka pa, common ka pa. Sa
ato pa, in earning terms, you are actually two
shares: you are common and you are
preferred. Kay participating man ka.
Kinsa may buang nga corporation nga mu-
issue ana? Mao na nang mga gwapo gani
kaayo nga shares. Buot pasabot ana,
nagkagidlay na nang corporation kay way
mupalit kung ordinary shares ra. So
butangan nila na’g daghan kaayog features
dira para paliton nimo. Kay nanginahanglan
silag capital pero way mupalit ana ug
ordinary lang ang shares, way daghang
buloloy. So butangan nilag daghang features
– cumulative, participating, naa pa gani nay
voting. Kay kasagran sa mga preferred, they
are classified as non-voting. Preferred na
gud ka, unya muboto pa ka. Mura na sad kag
common stock. Wa kanay apil sa boto. Non-
voting ka. Pero wa may mupalit nimo. Hala!
Butangan nalang natog voting aron paliton
gyud.
VOTING, NON-VOTING.
Q: What is the presumption.. if you are
preferred shares and there is common
shares, are you voting or are you non-
voting? What is the assumption?
The assumption is you are VOTING! Why?
Because there is an assumption that all
shares have equal rights, UNLESS
otherwise provided in the articles of
incorporation and when it comes to
limitations to transfer shares also in the
certificate of stock. Feature of a corporation
shares are found in the articles of
incorporation.
You are an original share holder who bought
shares. Nagkahina na ang corporation.
Walay mupalit sa iyang common shares.
Muingon nang corporation: we will create
preferred shares, and they will be voting
shares. So mabotohan na; i-amend na ang
articles. You reclassify shares. There are still
remaining 1M common shares unissued.
Then you will amend it, and you will say 200K
of these shares are now reclassified as
preferred, voting shares.
When that resolution is passed, and you
are a dissenting stockholder, you can
exercise what is called “APPRAISAL
RIGHT”.
Muingon kag “I want out in the corporation
because you are giving more privileges to
somebody other than me. Nauna gud ko
dinhi!” so I can ask the corporation to value
my shares then pay me because I am leaving
this corporation. That is appraisal right. Mag-
usab gani sila..
Preferred shares:
1. Must be voting; cannot be non-
voting. Maski pag valued up (?) It’s
the only share that can be deprived
of vote;
2. Like the redeemable shares,
must be par value; cannot be no
par value shares;
3. Gets preferrence as to being paid
out in dissolution. It’s the senior
proprietary interest - senior to the
common shares. In terms of
dividends, it’s also senior to the
common shares;
4. It may be convertible. Convertible
preferred. What do you mean by
convertible shares? Convertible
shares are preferred shares or
some other share that may be
converted to common shares either
at the option of the
shareholder/owner or at the option
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of the corporation. Convertible
shares.
So, daghan na tag nakit-an: preferred,
ordinary, cumulative, participating,
convertible.
REDEEMABLE SHARES.
Q: What are redeemable shares?
In the articles of incorporation, it says,
“these shares may be put back by the
corporation at a pre-determined price.
Now, it could be at the option of the
stockholder or it could be at the option
of the corporation:
a. At the option of the
corporation, that is
DIRECTORY.
b. At the option of the
stockholder, that is
MANDATORY.
Now, the GENERAL RULE is: no
corporation can pay the stockholder
and get his shares if it does not have
unrestricted retained earnings or
accumulated profits.
That is the rule. Why is that the rule?
Because if it were not the rule, what
would prevent the corporation from
forming? Formed na sya. Nangutang
sya’g daghan kaayo. Unya paghuman
niyag pangutang, niingon sya “paliton
nako’g balik tanan ninyong mga shares.
Hala panagan na mo!” Paliton niya.
Unya, wa na na’y kwarta ang
corporation, kay giuli man niya ang
kwarta didto sa mga nag-increase ang
shares. Wa pa ma’y ginansya. There is
no unrestricted and retained earnings.
And then in your articles you say, “this is
subscribed. Mao ning amount. This is
paid up.” And the public reads that, and
they rely that the corporation has money
to answer for its validly incurred
obligations. Unya diay gisekreto diay’g
uli ngadto sa mga stockholders katong
ilang kwarta nga gibayad sa shares.
That is a violation of what is called
the “TRUST FUND DOCTRINE”.
That is why redemption of shares, the
buy-back of shares by the corporation is
not allowed unless there is unrestricted
retained earnings. However, if the
shares are redeemable shares
classified under the articles as such,
that at certain point will be put back, then
even if the corporation does not have
unrestricted retained earnings, it may be
purchased/re-acquired by the
coporation. So long as the corporation’s
capital is not impaired, or the
corporation’s operation is not fatally
injured by the redemption even if it does
not have unrestricted retained earnings.
Q: What happens when a corporation
redeems the shares even if it has no
unrestricted retained earnings?
In that instance, what is said in the
articles is already no longer true. There
is this amount that is subsribed, there is
25% that is paid-up – no more! Giuli man
nimo! It’s no longer true. So what do you
have to do? You have to amend the
articles of incorporation. You have to
retire the shares that you have
redeemed. So that the articles will
reflect the true state of your capital
stock.
Q: But if you redeem with profits, do
you have to retire the shares that are
now with the treasury?
They are now treasury shares because
you have redeemed/re-acquired them
by paying the stockholder. You do not!
Why? Because what is written in the
articles remains true! You did not give
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back the articles that you paid. You paid
out the profits. So the capital stock still
remains intact. So you do not have to
amedn the articles of incorporation.
– Break –
Section 6 says that at all times there
must be a classification of shares
that must have COMPLETE VOTING
RIGHTS. You cannot split voting by
classifying shares.
Let’s say, these shares can only vote in
the election of directors; these shares
can only vote when it is for questions of
amending the corporation for increase
or decrease of capital stock. You cannot
split voting that way. If you do that, there
must still be a class of shares that has
complete voting rights.
This is important because when we
come to Founder Shares - Section 7, a
corporation may classify shares as
founder shares that have exclusive right
to vote (exclusive voting rights) and be
voted for in the Board of Directors, but
only for a limited period of five (5) years,
non-renewable.
I’ll give you something from other
jurisdictions that it not true in the
Philippines and which makes our
securities here by contrast, different
from others.
For instance, in the US, you incorporate
according to the State. Most
corporations in the US that were big,
were incorporated in the State of
Delaware. And the Stae of Delaware
allowed enhanced voting rights for
certain classes of shares.
So this is what Ford Motor Company did
before it went public: it created founder
shares of Ford. But these founder
shares have 10 times more vote than
the rest of the shaes. Now, these
founder shares were owned by the Ford
family. And because of this feature, it is
the only car company that remains
under the control of its original founder
today while all the rest have already –
the founders have already lost control of
the corporation. Like General Motors,
the original founder had long lost
control. Ford still controls it because
Ford created founder shares. Shares of
stock that have ten times more voting
rights than the others. And that is
allowed. That is owned by the family.
Actually it is owned by the Ford
Foundation.
Now, if you are a member of the Ford
Family, unya naa man gyud kay right.
“Cash out na ko! Ibaligya na nako akong
shares unya kwartahon na nako. Bahala
na mo. I will go forth somewhere.”
What is the solution of Ford
Foundation? Ford Foundation has, in
the meantime, bought ordinary shares.
They bought ordinary shares. So if you
have Ford shares that has 10 votes, you
are equivalent to 10 shares. But Ford
has bought ordinary shares. Kung ikaw
gusto na ka mucash out, they will sell
the equivalent number of shares in
ordinary shares and give you the cash.
But then Ford Founder Shares that have
10 times voting rights, they did not give
you that. So it’s still intact. So kinsa to’y
mulaban nila, lisud kaayo. Ka-napulo
kadaghan na shares imong
kinahanglanon aron mutumpag sa isa
nila ka buok na share. That’s why they
remain under control, the Ford family.
Alright. That is not allowed in the
Philippines. You classify a share with
ten votes more than the ordinary.
That is not allowed because of the
principle of equality.
Europe. They decided in the 70s and
80s that public owned corporations,
government owned corporations, are
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very inefficient because the officers are
appointed by politicians, and they are
answeable to their appointing powers.
So they were not profit-oriented. They
were not efficiency-geared. So they
decided to privatize – privatization,
shrinking of governments.
But they said, there are certain
corporations, public utilities, that are
crucial to national security. We cannot
afford to lose control. Communications.
Petroleum. Water. So what they did
was, they still went private but they
provided in the articles of incorporation
what they called a Golden Share – one
share that can veto in the name of
national security. If it casts its vote
against a particular measure in the
name of national security, pildi ka na.
That golden share is held by the
government. In all other instances of
voting, wa na syay round, usa ra sya ka
vote. But when it exercises its veto vote,
bisag pila pa mo kabuok dira, di mo
makapildi niya. That is the Golden
Share.
German Telecom. Telefunken. Naa nay
Golden Share. The Petroleum company
of France. Naa nay Golden Share.
In certain instances, the government will
just whip out that single share and
announce that this is the exercise of the
veto power of the Golden Share. And
that measure cannot prosper.
Diri sa Pilipinas, is it possible here? Can
be. All we have to do is just legislate.
TREASURY SHARES.
If you are reacquired by a corporation,
shares are reacquired, they go to the
treasury. They have no voting rights,
they have no dividend rights, they just
stay in the treasury. But they can be re-
issued.
“Re-issued” for me is a common
inaccurate term. Because issuance is
only once. That’s actually sold.
And treasury shares can be sold to
the public for a consideration less
than par value.
You can resell those shares for a
consideration less than par value or less
than issued value before. Because it is
presumed that the original capital that
you contribute to the corporation when it
issued is still remaining there. In other
words, you already acquired with the
use of accumulated profits. So there is
no impairment of the capital stock of the
corporation by selling less than par
value.
Q: What is the use of treasury
shares?
The man in the street thinks that the
more money you have in business, the
better for you. Kinahanglan mag-
negosyo ka, kinahanglan 5M capital
padagan sa negosyo. Pero naa kay
10M, ang extra 5M nimo gibutang nimo
sa bangko, for siguro ra ba. Magkuha
kag pedicab, dali ra kaayo ka kahulbot,
di ka kinahanglan manghiram. Safe
kaayo ka. Muingon ang mga tao, “mao
nay negosyo”.
Beh, palista ka sa stock market. Daghan
kaayo kag cash. The market will punish
you! What are you doing with all that
cash? Lost opportunity! Buang-buang
ba ka nga magsugod kag business, diba
mag expand ka? Because the ideal
financial situation is you just have
enough cash, enough capital to run your
business. Not more. Because if you
have more, you lose opportunity! That
money could have made more money
somewhere! If you have less money that
is needed to run, then your cost of
operation increases because you have
to borrow money. And there is a cost to
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borrow money. So the ideal cost picture
for a corporation is just enough money.
Then you are efficient.
Pareho na sa car racing driver Formula
One. Ingon bitaw na sila, mupakusog
kag dagan, ika’y kinakusgan,
kinapaspasan mupadagan. Di man ikaw
mao’y makadaog ana. Ang makadaog
sa Formula One, those who can take on
average, maximum speed all the curbs.
This particular curb is taken at 120, 119,
120, 118. Ang uban lagyo kaayo. But
just enough. Why? Because if you go
more than the maximum, lagpot ka. If
you go less than the maximum,
overtake-an ka. So enough ka lang. So
the trick of the best Formula One driver
is memory. Gwapo kaayo kag memory.
Kada corner, kada curb, naa kay
memory. Sugod ka nag tapak ug brake,
buhian nimo diri. Kakapoy ana. Mga
maayo na sila’g memory. Kanang
makadaog ana, di na sila pinaka-
paspas.
350kph. Mubo pa gyud kaayo. Ang
naga-separate sa imong sampot ug sa
dalan, 4 inches ra. (LOL) Mukibra (?)
lang nag gamay, pangos imong sampot
ana!
That is the ideal finance-wise. Karon kay
daghan mag sigeg takeover. If you
become very profitable, you become the
target. Non-profitable also, kining mga
profitable nga gusto muexpand,
manguha nalang na sila. They will just
acquire by merger.
Kung controlling interest ka, naa kay
daghang treasury shares. Naa na gani’y
gusto mu-takeover, release your
treasury shares at less than par value.
Kinsa ma’y mupalit? Ikaw ra sad! Kinsa
may mupalit, ang board may magbuot!
Ikaw may nag control sa board. Baligya
nimo ang treasury shares. Ang katong
mu-takeover nimo, mupalit man at
market rate. Mag sige syag gukod nimo
ug daghan ka nang shares. It becomes
very expensive for him. After a while,
mugive up na na sya. Kay daghan man
ni syag bala.
See? That’s one of the uses of treasury
shares. That is why people keep
treasury shares.
Corporations have a buy-back policy
once the market price does not reflect
what they think is the real market value.
If the real value from their estimate is
$100 per share. And the market is
trading your shares at $80. Muingon
dayon na sila’g, well, my shares are
trading at a discount of 20%. Why
should we invest on someone else. Let’s
invest on ourselves – let’s buy our
shares!
What is the effect? You reduce the
number of outstanding shares that will
divide the profits. So gamay nalang ang
shares na mudivide sa profits. Mutaas
ang earnings per share. Pag taas sa
earnings per share, kita ang mga
investors, musaka ang price traded. O
diba, edi kaduha ka muginansya. Saka
ang earnings per share, saka ang price
at which it is traded, meaning, ana ka na
mu-unload. Kay kaduha man ka muigo.
But it will take time because you have to
play with the public perception of your
value and what is relative to the price of
your shares.
You know there is a corporation in the
US that has never declared – since its
beginnings in the NY Stock Exchange in
the mid 1960s – it has never declared
profits, either stock or cash. Never
declared. Par value, 5 pesos per share.
Now, it is trading at over $200K per
share. Mupalit kag usa ka share – and
many do that, there are so many
analysts who buy just one share. Why?
So they can attend the annual
stockholders meeting and listen. It is
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$200K per share. Wa may declare-
declare ug profits.
Now, di man na mahimo sa ato. You
have declare dividends – either stock or
cash – the moment your accumulated
unrestricted and retained earnings is as
much as your paid up capital. The
moment it is 100% of your paid up
capital, you are required to declare
profits UNLESS there is a reason for you
to justify. Naay disaster or something
like that – then maybe you will be given
postponement by the SEC.
But that is the rule in the corporation.
You cannot not declare. If you want to
know, go to Youtube. Tyoe there and
search Warren Buffet. Very famous guy.
He’s already in his 80s. He can survive
just on burgers and coke. Unhealthy
food. 80s na siya. He runs Berkshire
Hathaway. It is just a ___ company now.
And there is not right or reason for the
way he buys subsidiaries. But he is the
most successful investor in the stock
market. Warren Buffet. You will see him
lecturing to Harvard Business Students,
Stanford Students. Simple kaayo na’g
mga rules si Warren Buffet, makatawa
ka.
Okay, let’s continue next meeting.
November 29, 2017
(Carra Tito)
So there is a stock in the Philippines’ listed
corporation, not in pesos. So what does this
make Del Monte? Del Monte is a foreign
corporation. It’s listed in Singapore but it is
making its shares available in the
Philippines. The owner of Del Monte in
Bukidnon is Nutri Asia. It’s the holding
company. Del Monte is listed in Singapore
but it is owned by a Philippine corporation,
Nutri Asia, one of the groups of Mr. Campos,
the eldest main son of the original founder of
Unilab. So that’s where they get their money.
Now it says “preferred series A-2. How many
of these series A-2 are issued? 8 million
series. Assuming that it is issued at $10
million, what is the gross amount that they’re
supposed to get? $80 million dollars. But
there is a proviso. It says oversubscription of
up to 8 million series A-2 preferred shares.
So they can issue more if there are more who
are willing to buy. You are off bringing 8
million but h ten there are so many lining up.
How will they know that they are called?
Because their underwriters are swapped with
first to buy.
WHO ARE THE UNDERWRITERS?
BDO, Capital Investment Corporation,
Chinabank. What else? All those listed
there. (refer to handouts) PNB Investment
Corporation, Chinabank, BDO Securities
Corporation.
Now what is the preference exactly? First of
all, what kind of shares are these? It says
preferred shares but did you read the fine
print (in the handout)? The corporation has
an option that upon the 5th anniversary, it can
redeem its shares. So redeemable.
Preferred redeemable.
WHEN IS IT REDEEMABLE?
On the 5th anniversary. So 5 years.
What happens if the corporation is showing
the issuer, Del Monthe, does not redeem?
There is a step-up date. Musaka ka. Unsa
man isaka nimo? Your preferred rate of
return can go up. How? The benchmark rate
is the 10-year US Treasury Bond Rate. It
says here, the dividends shall be adjusted on
the step-up date to the sum of the 10-year
US Treasury Bond Rate as of the step-up
date + initials spread + margin of 2.50% per
annum. So if the 10-year bond rate is
already higher than the rate provided here.
What is the dividend rate? 6.5%. if it is
already higher, dungagan pa jud ug 2.5%.
however, if the dividend rate is higher than
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the applicable step-up rate, then there shall
be no adjustment of the dividend rate. So if
the 10-year US Bond nibagsak, lower than
that 6.5, and 10-year needed the margin of
2.5, it is lower than 6.5, what will happen? So
you can only go higher. You are already
guaranteed 6.5%. but is that really a
guarantee? Of these are shares and the
benchmark is a bond rate.
WHAT IS THE DIFFERENCE BETWEEN A
BOND AND A SHARE?
The return of the share is dependent on the
existence of retainer on its profits. The
returnable bond, regardless of whether you
make profits or not, you have to pay the
interest to the creditors. That is the big
difference between a bond and a share of
stock.
WHAT IS THE DIFFERENCE BETWEEN A
CLASS OF SHARES AND SERIES OF
SHARES?
The class share is preferred redeemable.
The series is preferred redeemable A-2 first
class. Una pa to baligya. Mahalin gani
tanan, naa pa guro gusto ug up to another 8
million release, that is it. Another series.
Because it says here 8,000 series A-2
preferres shares with oversubscription option
of up to 8 million series into preferred shares.
So naa pa gani gusto mupalit, mao na
ginatawag sa Wall Street “GreenShoe.”
Green shoe provision.
Now, the Philippine stock exchange can
approve anyone. Details of the offer can be
found in the supplement uploaded on the
company’s website. The Philippine Stock
Exchange approves the listing of the
abovementioned securities on November 24,
2017. While the Philippine Securities and
Exchange Commission (SEC) issued an
updated permit to sell the securities of Del
Monte’s Series A-2 preferred shares on
November 27, 2017. Bag-o pa lang ni. Init
kayo ni.
How much interest do you get in the bank?
Wa pa 1%. Kini, 6.5%. Why profit? Unsaon
man nila paghatag ug preferred shares..
When shares of stock are entitled to
dividends only when there is profit. You can
only issue dividend profits. And yet they are
compelling it with bonds as if it were a bond.
But the giving of preference of 6.5% and is
not unconditional unlike a bond. It is still
conditioned on the registration of profits. So
you can have preferred shares series A,
series B. if you go to PLDT, you can have
preferred shares series A, B, up to A. And
then they start again, AA, BB, etc. Preferred
shares that are non-voting.
This one, is this voting or non-voting? Since
there is no disclosure as to whether or not
there ___, it must be voting. The
presumption of stocks have the same rights
and properties unless it is so provided in the
articles or by-laws of the corporation.
Diba there was as time was when Del Monte
was ruled by the technical team. Now, all
agricultures are ruled by finance. They have
it passed around at one time. AKR was the
owner of Del Monte but they sold it so that
now it is very huge.
Sec. 6. Classification of
shares. - The shares of stock of stock
corporations may be divided into classes
or series of shares, or both, any of which
classes or series of shares may have
such rights, privileges or restrictions as
may be stated in the articles of
incorporation: Provided, That no share
may be deprived of voting rights except
those classified and issued as "preferred"
or "redeemable" shares, unless
otherwise provided in this Code:
Provided, further, That there shall always
be a class or series of shares which have
complete voting rights. Any or all of the
shares or series of shares may have a
par value or have no par value as may be
provided for in the articles of
incorporation: Provided, however, That
banks, trust companies, insurance
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companies, public utilities, and building
and loan associations shall not be
permitted to issue no-par value shares of
stock.
Preferred shares of stock issued
by any corporation may be given
preference in the distribution of the
assets of the corporation in case of
liquidation and in the distribution of
dividends, or such other preferences as
may be stated in the articles of
incorporation which are not violative of
the provisions of this Code: Provided,
That preferred shares of stock may be
issued only with a stated par value. The
board of directors, where authorized in
the articles of incorporation, may fix the
terms and conditions of preferred shares
of stock or any series thereof: Provided,
That such terms and conditions shall be
effective upon the filing of a certificate
thereof with the Securities and Exchange
Commission.
Shares of capital stock issued
without par value shall be deemed fully
paid and non-assessable and the holder
of such shares shall not be liable to the
corporation or to its creditors in respect
thereto: Provided; That shares without
par value may not be issued for a
consideration less than the value of five
(P5.00) pesos per share: Provided,
further, That the entire consideration
received by the corporation for its no-par
value shares shall be treated as capital
and shall not be available for distribution
as dividends.
A corporation may, furthermore,
classify its shares for the purpose of
insuring compliance with constitutional or
legal requirements.
Except as otherwise provided in
the articles of incorporation and stated in
the certificate of stock, each share shall
be equal in all respects to every other
share.
Where the articles of
incorporation provide for non-voting
shares in the cases allowed by this Code,
the holders of such shares shall
nevertheless be entitled to vote on the
following matters:
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;
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.
Except as provided in the
immediately preceding paragraph, the
vote necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights.
Alright, we have taken up the Articles of
Incorporation (AOI), the name, the principal
office, the purpose, the term, and then the
capital, the classification of shares, under
Section 6.
Now there is Section 6. I keep telling the
class, it is a kind of corporation. You have to
know this Section 6. You cannot understand
it? Outline it. There are rules about voting
rights, what shares are voting rights, in
relation to par on par value, in relation to
preferred redeemables, in relation to
treasury shares. So you must be familiar
with the different ways of classified shares .
Where the articles of incorporation provide
for non-voting shares in the cases allowed by
this Code, the holders of such shares shall
nevertheless be entitled to vote on the
following matters
1) Amendment of the articles of
incorporation;
2) Adoption and amendment of by-laws;
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3) Sale, lease, exchange, mortgage, pledge
or other disposition of all or substantially
all of the corporate property;
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.
1) AMENDMENT OF THE ARTICLES OF
INCORPORATION (AOI)
Now we said in the amendment of the
AOI, the 2/3 vote that is necessary to
approve the amendments of the parties ‘
stockholders can be either in the form of
secret ballots in a meeting duly called for the
purpose or just written assent. You read
about that in \section 16, amending the AOI.
Unless otherwise provided by this
Code or other special law and for
legitimate purposes, any provision or
matter stated in the AOI may be
amended.
I told you, the incorporators cannot be
changed. The directors cannot be changed.
They are historical in nature. Now what if it
is discovered that one of you incorporators is
Jack the Ripper (one of America’s serial
killers)? Di na nimo ma-change. Wa na ka
mahimo ana. Mamatay tao. Dili na nimo
mailisdan sa AOI. So not any provisions but
in the ___ that is changed does not suffice a
a meeting of the stockholders or secret
ballots change it by written consent then
send forms to stockholders and they will mail
back. They will think of the amendment if
they agree or disagree. If they do not agree,
they will say so. If they agree, they give their
written assent.
So what will the corporate secretary do?
Mangolekta lang daan ug proxy. Koletkahon
nimo dayon ang proxy. Naa na gani ka 2/3,
you can already start mailing. Sigurado na b
aka? Ayaw pag-gasto-gasto kung wa pa ka
kaibaw. Di man ni lumba sa kabayo na
mangpusta ka. In fact, you could not call a
meeting the results of which you do not
know. Siguraduha na daog ka. If you are
willing to pass a resolution, they they give
you a proxy. Ikaw corporate secretary amn
ang pangutan-on, “O, do we have the
numbers?” Corp. Sec: “I don’t know.” Patay.
Mao na imong trabaho.
So I give you an example. Before, you only
have common shares in your AOI. 25% of
that are already issued and subscribed which
is the basic requirement. So if 1 billion
authorized capital share at 1 peso par value,
240,000 shares at 1 par value each share
has already been issued by way of
subscription. Of that 24%, 50% is paid up.
12.5% is paid up. Now, you want to raise
more capital. You are thinking of issuing the
remaining 750,000 shares but your
corporation is not making money. In fact, it
lost money. So what is the book value now?
The book value now is lower than the par
value. So naa kay problema. You cannot
issue your shares at a price lower than the
par value. Kinsa kaya mupalit? At even par
value when your book value is lower than par
value, way mupalit sa imong shares.
Langawon ka.
Unsa may solusyon ani?
#1 Solution: You do a road show. Pareha
bas a Dayang Dayang sa imong
kaugalingon. Mag make-up ka, palit ug
gwapo na sanina, etc. Don’t laugh because
these are the terminologies in the finance
world. Do a road show. Once they say an
international roadshow, you cover the most
likely source of capital – New York, London,
Zurich, Singapore, Hong Kong, Tokyo. Kada
lugar, mangita kag promoter kay muhimo
kag imbestigasyon sa investors. Then make
a presentation. Unsa imong role as CEO,
CFO or COO? After the presentation, you sit
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down and they ask clarificatory questions.
You are selling your corporation. That is #1.
#2 Solution: the other solution is send
preferred shares in a preference that is
attracting. Common sharese lang ))) voting.
Unya way siguro. Makakuha b aug dibidendo
basig way gawas na kwarta? Wa may
obligsasyon and corporation to issue cash
dividends even if there are profits. So it’s not
attractive. So unsaon man niya paghatag ug
preferred shares na wa man preferred
shares? Then the consultant says, “amend
your Articles.” Naa man gud ka 750,000
shares, magkuha ka 50,000 or 100,000
shares ba, buhaton nag preferred. Unya,
mao na imong i-issue ug bag-o. now, so you
are now to go through the process of
amending the article.
INSTANCE OF AMENDING THE AOI.
Pangutan-on nimo ang corporate
secretary, “Do we need a stockholder’s
meeting?” If the secretary knows the
Corporation Law, no need. Mere written
assent is enough. Why? Because it is not
one of the cases provided for a meeting duly
called for the purpose. It is a minor change.
So, ingon nimo ang secretary na get the
proceeding going. Kuhaon nimo ang
proxies. Kung daghan na, anha pa ka
magpadala ug forms for written assent.
Assuming of course, that the controlling
interest in the board has already a minimum
of majority vote of all the members of the
board. Because of the cases mentioned in
Section 6, it requires majority votes first of
directors or trustees. It is an absolute
majority. If there are 11, then 6 are needed
for a quorum. If you only have 5 attendees,
all 6 must vote because that is the absolute
majority of 11 people to vote. So that is an
instance where you only need written assent
to amend the AOI.
INSTANCE WHEN VOTING BY SECRET
BALLOT IN THE MEETING DULY CALLED
FOR THE PUROSE IS REQUIRED
What is an instance when you need voting by
secret ballot in the meeting duly called for the
purpose?
Increase or decrease of capital stocks. You
will increase authorized capital. Once you
increase authorized capital, you change that
number. Once you change the number the
subscribed capital must also change. Why?
Because for every increase, 25% of the
increase must be subscribed. And then, of
the subscribed, 55% must be paid up. It is
here in Section 6, number 5.
So that is an instance where you cannot use
written assent. You have to have a meeting
duly called for the purpose.
In any case, the stockholders have a role to
play. It is an indispensable role depending
on whether or not the stockholders are voting
or non-voting shares.
Let us leave that for a while. Let us go
Section 7.
Sec. 7. Founders' shares. -
Founders' shares classified as such in the
articles of incorporation may be given
certain rights and privileges not enjoyed
by the owners of other stocks, provided
that where the exclusive right to vote and
be voted for in the election of directors is
granted, it must be for a limited period not
to exceed five (5) years subject to the
approval of the Securities and Exchange
Commission. The five-year period shall
commence from the date of the aforesaid
approval by the Securities and Exchange
Commission.
This classification of shares is temporary.
You cannot have founders’ shares for the
entire time you have a corporation. The
shares are good up to 5 years because that
is what the Section 7says. Founders’ shares,
classified as such in the AOI, is given certain
rights and priviliges not enjoyed by the
owner’s other stocks or by where their right
to vote and be voted for in the election of
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directors is granted, it must be for a limited
period not exceeding 5 years.
Some object to the approval of the SEC. The
5-year period shall commence on the day of
said approval of the SEC.
FOUNDERS’ SHARES DO NOT APPLY TO
NON-STOCK CORPORATION.
Christian School Inc., nagbutang sila ug
proviso. Ang kadtong founder, is honorary
trustee for life kay siya man nagsugod sa
Christian School. For life siya non-stock,
non-profit corporation. But for 20 years, they
operated that way until somebody
questioned it before the SEC and finally, it
went to the Supreme Court. The Supreme
Court says that is VOID. They cannot make
somebody a director or trustee without
voting.
So founder shares must be provided in the
Articles. Kaning “added to the articles’
amendment,” there is no proviso prohibiting
it. So it can be added. Ako pa, founder ko,
di ko mag founders’ shares dayon. Tig 5
years lang na. Mupalit ka ug shares, amend
ka dayon, muhatag ka dayon sa imong
kaugalingon ug another 5 years. Ikaw na
ang muboto ug botohan as directors.
I told you about Ford Motors Company.
There is a reason why it is still controlled by
the Fords. Because before, Henry Ford, the
founder, listed the share of stock in Wall
Street. He amended the articles. He created
a class called “founders’ shares” and 2
shares had 10 times more voting rights than
the ordinary shares. Then he transferred it
to Ford Foundation, nonstock, nonprofit, ang
tag-iya sa share. And who are these in the
Ford Foundation? Only if you are a Ford. If
you’re not a Ford, you cannot af-Ford!
(HAHAHA!) So naa ka dinha. Now you want
to cash out. Ingon ka ang equivalent sa
akong shares dinha, kwartahon na nako kay
di na ko gusto ani niya. Unsa man buhaton
sa Ford Foundation? Mukuha sila sa
reserves nila kay as they gain profits, they
set aside a sinking fund. Mamalit sila ug
ordinary shares na equivalent sa imong 10
voting shares. Unya, ibaligya nimo ang
imong shares sa market, kwarta na nimo.
Pero intact gihapon ang ilang Ford Shares
na 10 times voting rights. So hantod karon,
5th generation na, sila gihapon ga-control.
Ang GM ug Chrysler, wala na. Thus, the
CEO there is elected by the Ford Company.
Di na sila gabutang ug Ford na CEO. They
are not hungry for that anymore. Di na sila
kinahanglan mutrabaho.
Mahimo man na diri. Muhimo ka ug class of
shares of stocks with 10 times voting rights.
It’s allowed by the SEC. Voting for the ___.
Now I also told you about the so-called
“golden share.” Mao nang golden shares sa
gobyerno. Thy want to have their pie and eat
it too. Ila rang i-publicly sell ang mga shares
of stocks. Pero naa gihapon silay PC
Ownership power because they can veto
actions in the name of public necessity. So
when they exercise that vote, pildi ka na.
In Asia, they say that there is 1 corporation
that has that kind of power. Siam Cement of
Thailand. It is 10 times beigger than San
Miguel.But cement is not even 1/10 of the
sale of Siam. Who is the controlling owner of
Siam Cement? The Royal Family of
Thailand. They have a veto power as to its
direction. So unsa ang number 1 sales nila?
candy resins. So that’s how the Royal Family
finance its life standing. Unlike in the UK, the
Royal Family has approproations. Kanang
mga kabayo nila, gikan na sa taxpayer’s
money.
December 1, 2017
(Miles Buhay)
Let us go to this very exciting process of
creating a corporation.
We have gone through the different
classifications of shares of stock because
that is how the capital stock of the
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corporation is divided. You have authorized
capital and there’s a figure there. Then you
have subscribed capital and you’ll have a
figure there. And you have a paid-up capital,
and you also have a figure there.
Alright, what do you have to remember? The
authorized capital, the figure there, is always
bigger or best equal to the subscribed
capital. You cannot have the subscribed
capital bigger than the authorized capital.
The paid-up capital can only be equal to the
subscribed capital but cannot be bigger than
the subscribed. Sa accounting, ang kinadak-
an, mag-una. Unya musunod ang mas
gamay.
Now, this is what you have to reconcile
because commentaries say, the authorized
capital is the limit that a corporation can
brace by way of capital. So it’s a ceiling no.
Is it true? [No.] The number is not the ceiling.
It is the number of shares derived from the
authorized capital. That is the ceiling. Is it
possible to raise more money that the
authorized capital? The answer is yes. Why?
Because a corporation can issue shares
higher than par value if the market can take
it. The authorized capital is the amount that
is the result of the total no.of shares that a
corporation can issue multiplied by the par
value. That is the authorized value. You
divide that authorized capital with the par
value of shares then you have maximum
no.of shares.
Is that the hard and fast rule? Not exactly
because a corporation can issue different
classes of shares at different par values. You
can have preferred shares with a par value
of 10. You can have common shares at a par
value of 5. But most corps will not do that
because you will just confuse the market. But
there is no prohibition against a corporation
from classifying shares according to different
par values. There is even no prohibition in
issuing par value shares and no par value
shares. You can classify in your articles of
incorporation par value shares and no par
value shares. But you will end up confusing
the public and so, no too many corps. If you
want an example of different par values, and
it’s a successful corporation, you go to
Warren Buffon Berkshire Hathaway. He has
different par value shares that he has issued
after he was successful. People put in there
money in Berkshire Hathaway because of
Warren Buffon and not because they know
where he is going because nobody does.
Story… Warren considers what is profitable.
Classification of Shares
Suppose you sell shares at higher than par
value. Is it possible to sell shares at a
premium that is several times more than par
value? It is. So much so that in the balance
sheet you will have common stock (Let us
say 100M) and premium on stock; that
excess of par value at which you issue
shares. It might be 200M. It’s possible. Rare
but possible. Now when you have that par
value at premium of a stock, the perception
of people will already [be that they will] win
because you are already selling at above par
value and you declare dividends out or
premium on stock that you issued. Sobra-
sobra naman ang inyong kwarta. Premium
on stock is in excess of par value that you
issued your stock for and because people
have such great faith in you, your premium
on stock is double your capital stock. Can
you declare dividends out of premium on
stock?
The general rule is, you declare your
dividends out of profits. What is profit? Profit
according to the SC is the positive result of
recurring business in the ordinary operation
of the corporation; the strenuous operation of
the corporation. Ginansya gani, results from
the day to day operation of the corporation
by which its revenues exceeds its expenses.
Mao nang naay profits and it is from there
that you declare dividends. That is the main
traditional source of dividend.
When you sell capital of the corporation; the
corporation sells assets and realized profit
from the sale of assets, is that part of profit?
What’s an example?
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In the olden days, technology was such that
when you were a telephone company, you
needed huge buildings because the switches
were big and you had to have generating
power; you had to have big transformers
because the telephone machinery needed
bigger machines so you had to have bigger
real properties.
With the advent of new tech the switches
became smaller; switches became smaller.
You did not need real property anymore.
PLDT now is selling its real properties. They
sold one here to a developer. Obviously,
when they bought that 15 years ago, it was
inexpensive. But now, they are selling it
several times higher than their acquisition
price. Is that profit? Is that the result of
strenuous day to day work? Security and
Exchange Commission (SEC) says, that is
part of profit. You can declare dividends out
of capital gains. Cash and stock dividends.
But premium on stock, you need the
permission of SEC if you have to declare
dividends out of premium on stock and you
can only issue out of premium on stock NOT
cash dividend, but stock dividend only.
If in the formation of the corporation you
already make money, you’re not operating
yet the corporation. But because you are
already selling the corporation at so much
higher than par value, your premium is higher
than your realization of consideration of
stock at par value. That is rare. But that
happens.
You will find out later on that if your
unrestricted retained earnings (these are
capital accounts in the balance sheet) is
already in excess 100% of paid-up capital,
you have to issue/give out dividends. You
cannot accumulate profits more than the
paid-up capital unless you have a very good
reason and you have to prove that to the
SEC.
After authorized capital, subscribed capital
and paid-up capital in the articles of
incorporation, you have the provision that
names the treasurer who shall act as such
until his successor is fully elected and
qualified. So he is the interim treasurer. He is
named in the articles of incorporation.
Actually, “treasurer” of the corporation is a
misnomer because there is still no
corporation. It is still a corporation in the
process of coming into being. It begins to
exist the moment the SEC issues a certificate
of incorporation. So he is the treasurer of the
interim corporation.
The period from the signing of the articles up
to the day the SEC issues a certificate. The
moment that there is a certificate of
incorporation issued, the corporation must
organize. Then the corpo elects the directors
and then the directors elect now the
treasurer. The interim treasurer may be
elected so that he will also become the
treasurer of the corporation.
What is the duty of the interim treasurer?
He is the one who collects the paid-up capital
and deposits it in the bank. He tells the bank,
“I am a trustee because this is for the
corporation the papers of which are still with
the SEC and it’s not yet formed. So I am the
trustee of the funds of this corporation still to
be formed because these are all pre-
incorporation (before being a corporation)
payments of the subscription.
Q: If that interim treasurer is suddenly hit by
lightning and dies, what happens to the
money?
If the corporation is formed:
1. The Board will pass a resolution
appointing the treasurer after the
Board is constituted by the
stockholders in the organization.
2. With that resolution and appointment
he [new treasurer] will just go the
bank and say, “Here am I, I am the
successor of the one who passed
away and so I will take charge. I am
the treasurer.”
3. The Board will pass another
resolution that the corporation will
open a bank account in this particular
bank. It could be the bank where the
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deceased interim treasurer put the
money or it could be another bank in
which case the treasurer will transfer
the money to the new bank.
4. With that resolution will be provided
the signatories to the official account
of the corporation. Not just one (1)
signatory, a juridical person cannot
risk just one (1) signatory. Normally,
corporations have several
signatories.
If the corporation is not formed (denied a
certificate of corporation):
Who can act? Without the certificate
of incorporation, all you have is the
contract entered into by the
incorporators.
1. So the incorporators have to go
to the bank and say, “This is the
list of those who had subscription
and who put in money. You have
to help us give this money back to
their lawful owners because the
corporation did not go through.
Pareho ra nag Donation propter
nuptias. When the marriage
ceremony did not go through, unsa
may mahitabo atong mga donation?
What happens to those donations
propter nuptias? The donations are
ineffectual because it is given by
reason of marriage, and there is no
marriage. So you give it back to
where it came from. If the father of the
groom donated a condominium unit,
it must be returned (ouch) to him.
So that is what the incorporators do.
They go to the bank. They give a list
and they contact these people and
they say, “Get back your money from
the bank. Appear in the bank with
proper identification.” That is what will
happen.
How about the theory that if a corporation
does not go through, a de facto partnership
is formed? Is that correct? Is there a de facto
partnership created if a corporation that is
formed fails to acquire a certificate of
incorporation? No.
The SC said that the intent to form a
corporation does not contain within it a
partnership. So there is no implied
partnership formed if the corporation does
not succeed. Implied partnership is not within
the intent to form a corporation.
What will happen is the paid-up capital will be
distributed.
Now if there is somebody who donates to the
corporation, let us say a piece of land which
the corporation needs. Who is the donor?
The parent of one of the incorporators whose
subscription and paid-up portion of his
subscription is the biggest among all the
incorporators and subscribers. What
happens to the donation? The donation is
ineffectual and it will be reconveyed to the
donor. There is reconveyance.
If you need to count it as part of the capital,
the donation must be registered with the
Registry of Deeds then the title is transferred
to the corporation. But the corporation is not
given a certificate of incorporation. So, there
will be reconveyance.
If the interim treasurer runs away with the
money, what is that? Is that theft? Is that
estafa? Does the interim treasurer have the
right to the physical possession of the
money? Yes! Asa pa may lain nilang
butangan ug kwarta? If he puts himself as the
sole signatory as the trustee, does he have
the right to title to the monies? Until the
corporation is formed, he has the right. That
is why he is the signatory. No other
incorporator is the signatory; He alone.
Therefore, that is estafa because he is the
trustee.
The treasurer executes the treasurer’s
affidavit. The treasurer’s affidavit is separate
and distinct from the articles of incorporation
although it is always attached to the articles
of incorporation. Why? Because he takes
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personal responsibility and liability - criminal
and civil - as to the compliance of the
corporation. The treasurer says “under oath
that at least 25% of the authorized is
subscribed.” And then “the 25% of the sub is
paid-up”. Not only paid-up but “received by
me”. Walay lain nidawat, ako ra. In cash or
property, in the amount of not less than 5K in
accordance with the Corporation Code.”
Then he signs it.
Minus gani anang gisulti sa treasurer; less
than 25% of the authorized is paid-up, who is
to blame? It is the treasurer. The assumption
is he pocketed the difference. He is the only
one who received it, he says. That is the
weight of the treasurer’s responsibility.
(5 min break. Chika ni Clemm and friends sa
recording. LOL)
Let us take a look at the grounds for rejecting
or disapproving a corporation under Section
17.
Sec. 17. Grounds when articles of
incorporation or amendment may be
rejected or disapproved. – The Securities
and Exchange Commission may reject
the articles of incorporation or
disapprove any amendment thereto if
the same is not in compliance with the
requirements of this Code: Provided,
That the Commission shall give the
incorporators reasonable time within
which to correct or modify the
objectionable portions of the articles or
amendment. The following are grounds
for such rejection or disapproval:
(1) That the articles of incorporation
or any amendment thereto is not
substantially in accordance with
the form prescribed herein;
(2) That the purpose or purposes of
the corporation are patently
unconstitutional, illegal,
immoral, or contrary to
government rules and
regulations;
(3) That the Treasurer’s Affidavit
concerning the amount of
capital stock subscribed and/or
paid is false;
(4) That the percentage of
ownership of the capital stock to
be owned by citizens of the
Philippines has not been
complied with as required by
existing laws or the
Constitution.
No articles of incorporation or
amendment to articles of incorporation
of banks, banking and quasi-banking
institutions, building and loan
associations, trust companies and
other financial intermediaries,
insurance companies, public utilities,
educational institutions, and other
corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favorable recommendation of the
appropriate government agency to the
effect that such articles or amendment
is in accordance with law. (n)
(1) That the articles of incorporation
or any amendment thereto is not
substantially in accordance with
the form prescribed herein;
Remember that the compliance is not
necessarily literal, but just substantially the
same as to its form.
(2) That the purpose or purposes of
the corporation are patently
unconstitutional, illegal, immoral,
or contrary to government rules
and regulations;
What is your purpose? To develop 100
hectares of Cannabis for medicinal purpose.
Is that recognized here in the Philippines?
No, walay mutuo nimo. 100 hectares for
medicinal purpose? Ay, negosyo.
What is your purpose? To enable desirous
single Filipina to the brides of western and
other foreign gentlemen. Declared by SEC to
be illegal because it is immoral. Mail-order
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brides as a purpose is immoral according to
the SEC. What about those in the internet?
Those are foreign-based corporations. They
are not allowed here to form a corporation for
that purpose.
You cannot put up a corporation whose
purpose is to practice a profession. You can
only have a partnership. That is why law
firms have partners. Accounting firms, they
are partnerships. The relationship between
clients and attorneys is personal. It is based
on trust and confidence. It is personal. You
cannot have a corporation acting as your
counsel. The corporation cannot be
subjected to criminal liability whereas a
lawyer (natural person) can be made to
answer criminally if he violates the canons of
professional ethics.
So those are the grounds for rejecting the
articles of a corporation as to their purpose/s.
Your primary purpose might be lawful and
your secondary purpose is not lawful. Or both
your primary and secondary purposes are
lawful but they are not legally combinable.
Ex. Imong primary purpose: ospital.
Secondary purpose nimo: funeral parlor.
Illegal na.
But you won’t find that illegal in the US.
Department for ICU for babies and
department for abortion in the same building.
(Chika on visiting a former student who is a
neonatal specialist in Toledo.)
(3) That the Treasurer’s Affidavit
concerning the amount of capital
stock subscribed and/or paid is
false;
How can he determine if it is false? The
treasurer has to execute a waiver of his rights
under the Secrecy of Bank Deposits Act. So
he gives his account no. and executes the
waiver. So the SEC can verify and call the
bank.
“This is the SEC and we are on verification.
Please call this number after we put the
phone down.” Tawag ang banko balik. “We
are interested in this corporation still to be
formed. How much money is in the bank
account of the interim treasurer?” Mailhan
kung namakak. Bahala nag masobra, dili
lang makulang sa 25%.
(4) That the percentage of ownership
of the capital stock to be owned by
citizens of the Philippines has not
been complied with as required by
existing laws or the Constitution.
This might be a thing of the past. A law
limiting public utilities is about to be passed.
You will place in your articles that you will be
paid the proportionate ownership of Filipinos
because this particular corporation is
engaged in public utilities or the development
of natural resources or whatever reason.
SEC will check that.
The SEC is usually very patient with articles
of incorporation. They usually don’t reject.
Ipa-usab lang kung niay mga mali. They’re
very patient and yet some corporations still
get past them and there is a fatal defect. So
you still end up with a de facto corporation.
They are especially very meticulous with
respect to banks, banking and quasi-banking
institutions, building and loan associations,
trust companies and other financial
intermediaries, insurance companies, public
utilities, educational institutions, and other
corporations governed by special laws. They
are closely scrutinized.
Suppose you have complied with everything
and the SEC still does not issue a certificate
of incorporation and they did not give a
reason. What is your remedy? This is
different from when you submit an
amendment on your articles. When the SEC
does not act on it for a period of 6 months
and the reason why the SEC has not acted
is not attributable to you who filed the
amendment, then the amendment becomes
effective for inaction by the SEC. That is
Section 16, last paragraph. But if it is articles
of incorporation, unya unom (6) na ka buwan
wala lang giyapon certificate of
incorporation, do you become a corporation
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by the inaction? No. You need to get that
certificate of incorporation. How do you get
it? You need to file a mandamus.
If the SEC has objection to your name, it will
be returned to you. You must not have
confusingly similar or similarly confusing
corporation name. All corporations now
must have “incorporated” or “incorporation”.
You cannot use an already protected name.
You cannot use somebody else’s name.
(Story about Brother Eddy who was expelled
from Iglesia ni Kristo Haligi ng Suhay at
Katotohan and put up his own corporation
with the name Iglesia ni Kristo, H.S.K. This
was considered confusingly similar to an
already protected name)
If your name is objectionable, the certificate
of incorporation shall not be issued.
Now, you already know beforehand that the
name is acceptable because when you go to
the SEC office and you pay a certain amount
and you give your preferred name, they
communicate with the data bank in SEC
Manila and find out if the name is already
taken and word will come back to you on the
same day. You have this name for 30 days
for an amount of 200 Pesos. So you have
that name, dali dali na dayon ka ug buhat ug
Articles ana. If you can file your Articles
within 30 days, that name is yours. If you fail
to submit, you pay another 200 Pesos to
extend to another 30 days to have that name
reserved. You are allowed an extension.
Wala na gani, it’s up for grabs. That is how
you find out whether the name is already
restricted or already owned or is no longer
open to be appropriate.
Sec. 19. Commencement of corporate
existence. A private corporation formed
or organized under this Code
commences to have corporate
existence and juridical personality and
is deemed incorporated from the date
the Securities and Exchange
Commission issues a certificate of
incorporation under its official seal;
and thereupon the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is extended
or the corporation is sooner dissolved
in accordance with law.
From that time that you have been issued
your certificate of incorporation, you have 30
days to organize. You have 2 years to
commence your business. If you have
commenced your business and you have
organized and for some reason you stop the
works of your business, you have 5 years
continuous non-operation. If you do not work
as a corporation for 5 years, what happens?
It is a ground for revocation or cancellation of
your certificate of incorporation. If you do not
begin your work within 2 year after you have
organized, then you are also in danger of
revocation or cancellation of your certificate
of incorporation. You must begin or you ask
the SEC to condone your non-operation or
non-inception of business because your
reason is valid. What is a valid reason why
you cannot begin your business?
Ex. You want the business of rehabilitating
the rubber plantation in Basilan. The
Philippine marine commander however does
not give you the clearance to do so. You
communicate this situation to SEC. Is it a
valid reason? It is up to SEC.
Once a certificate of incorporation is issued it
cannot be cancelled or revoked unless there
is notice and hearing. (Section 6, PD 902-A)
There has to be notice and hearing before
the cancellation or revocation of the
certificate of incorporation.
(Story on Father Gus being the lawyer of
Maryknoll Fathers and Brothers, Inc. which is
non-stock, non-profit. Father suggested to
work towards the dissolution of the
corporation but letting the government do the
job. He suggested non-operation for 5
years). The SEC will put you in the twilight
list. This corporation has not been in
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operation for 5 years or more. They will send
you notice that you are in the list and you will
be directed to show cause why your
certificate of incorporation should not be
cancelled. And when we receive that, we will
not act upon it.
You can have a corporation dissolved this
way if you have no debts. Otherwise, mag-
una2x ug file ang imong creditors ug
involuntary insolvency.
The last paragraph of Section 22 says:
This provision shall not apply if the failure
to organize, commence the transaction of
its business 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
Securities and Exchange Commission.
The SEC can still make you continue in
existence if the cause is not within your
control.
Wala na moy bag-ong member, is that within
your control? No. Can the SEC consider that
as a valid or reasonable excuse? I doubt it
because it goes to the very essence. You
need at least 5 to function as a corporation.
When you erase a corporation; when you
cease as a corporation, it is just as, if not
more than, complicated with its formation.
December 6,2017
(April Pareno)
We will begin with board of directors.
Sec. 23. The board of directors or
trustees. - Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code shall
be exercised, all business conducted and
all property of such corporations controlled
and held by the board of directors or
trustees to be elected from among the
holders of stocks, or where there is no
stock, from among the members of the
corporation, who shall hold office for one
(1) year until their successors are elected
and qualified.
Every director must own at least one (1)
share of the capital stock of the
corporation of which he is a director, which
share shall stand in his name on the books
of the corporation. Any director who
ceases to be the owner of at least one (1)
share of the capital stock of the
corporation of which he is a director shall
thereby cease to be a director. Trustees of
non-stock corporations must be members
thereof. a majority of the directors or
trustees of all corporations organized
under this Code must be residents of the
Philippines.
What is the term of Board Of Directors?
It is not right to say 1 year. It is 1 year until
their successors are elected and qualified.
What is the meaning of elected?
It means that the stockholders or members
of the corporation cast a vote to elect you.
What is the meaning of qualified?
It means you accept it and sit down as BOD.
You are elected and qualified.
You called for a director/stockholder’s
meeting; and then there is no quorum
because less than 50% of the share holders
+1 is represented in the meeting. What
happens? Can you go on to elect the BOD?
(Because Every annual meeting you elect
the BOD.)
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Usually if it is a stock and profit corporation,
you do not have a stock holder’s meeting that
failed to have a quorum.
But if you have a non-stock non-profit
corporation, like the corporation that is made
up of the homeowners of Bell-Air Subdivision
I, that is more than 1k houses. And they do
not bother to send a proxy; proxy is allowed
by the specific provisions of Bell-Air
Homeowners Corporation.
What happens if they do not have a quorum?
They have given notice so let’s go ahead with
the election. Is that valid?
No it is not valid. What happens is the entire
Board becomes a hold-over board. That is
when the second part of the last sentence of
1st paragraph of section 23 takes effect.
They continue to hold office because there is
no successor that has been elected and
qualified.
The problem is, if a hold over director dies,
does he have an unexpired term?
No, he does not have unexpired term
because he is just a hold-over. The Board of
Directors cannot elect another to replace him
to serve the unexpired term. It has to be the
stockholders to elect him or the homeowners
who will elect the replacement.
But they can’t get a quorum, what happens?
I-abort. Next meeting, wala gyapon quorum
so hold-over gyapon. Hantod maghinay
hinay na silang kamatay, wala na gyuy
quorum na mabilin. But I am telling you it is a
problem of 90% of Home Owners
Association that are high end. The problem
of condominiums. They are so busy with
some other businesses that their
Homeowners Corporation is given second
priority or no priority at all.
The Only corporation meeting of
homeowners which is non-stock non-profit
but has always with quorum is Forbes Park.
Why? Because the owners are not
individuals but corporations. The owners of
lots and homes in Forbes Park are all
corporations.
Ingon ka, why? Why in heaven’s name is it a
corporation?
Because nobody sells land in Forbes Park. If
you want to sell your land, you sell the
corporation who owns the land.
Why? So that your capital gains tax will not
be punitive in size.
Ever since Pacquiao bought property in
Forbes Park, the price of property in Forbes
Park is 400,000/sq.m.
The size of the property is 2,500 sq.m
minimum; how much is that at 400,000/sq.?
1 billion. Why is it that expensive? Because
BGC is already 450,000/sq.m. Ayala, the
other side, is also 450,000/sq.m. That’s
Forbes Park in between.
In Forbes Park, there is an annotation: you
cannot build more than two stories. It is
limited, but the first 25 years is over. And it’s
already 10 years into the next 25 years when
they reviewed the annotations in the titles by
the subdivision owners. They elected to
renew it. Pagkahuman 15 years to go na lng,
there is a potential it becomes an extension
of BGC or extension of Ayala. That’s why
corporations are the ones positioned in them
Do you know that UP has three lots there?
You may ask why? If you have studied your
Property laws then you would have come
across the case of Quasha vs Republic of
the Philippines.
They have land in Forbes Park. Two years
before the end of parity, they filed a case
straight to the SC. What was the case?
Petition for Declaratory relief.
I am an American under Parity; I own a
residential land in Forbes Park. What is the
scope and extent of my right post-parity?
Can I continue to own? Am I still the owner?
That is the question he brought up. And it
was JBL Reyes who wrote the decision.
JBL Reyes said you had parity while the
amendment lasted. After the amendment
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expired, that is the end. You have to
disinvest. What the SC pronounce becomes
law of the land. So all the Americans in
Forbes Park that had property had to think
what are we going to do. What did they do?
They conveniently donated the property to
the Universty of the Philippines; but not
before the UP signed a deed of assignment
so that executives will continue to live there
for a sum of money, 25 years renewable for
another 25 years. That is why the UP is an
owner of property next to the property of
Senator Boxer Manny Pacquiao.
The rule in Forbes Park is that you can only
build of 60% of the lot; the rest is easement
and that includes for another development
like swimming pool. *Fr talks abt prop of
Napoles*
If the sale of 2,500 is according to market
value, it will be 1 billion. How much is capital
gains plus doc stamps? What is 7.5% of
that? 75 million. Maghilak ka. Whereas if it is
owned by a corporation and you sell the
corporation, you sell the shares of stocks of
all the stockholders there who are under your
control at par value, that is the extent of your
capital gains.
Let us say you are 95% owner of an
outstanding capital stock of a corporation.
The moment you are 95% owner, the
business parlance term is that corporation is
wholly-owned by you. That is business
parlance ha, that is not legal.
The moment you own 50% + 1 of the
outstanding capital stock of a corporation,
that corporation is called a subsidiary of
the owning corporation.
Wholly-owned, subsidiary, the next term is
an affiliate.
If the corporation outstanding capital stock is
owned less than 50% by another
corporation, this corporation is said to be an
affiliate of the owning corporation.
Why is it wholly-owned when it is only 95%?
It’s not 100%. Because you cannot own
100%.
Why?
Because you need a Board of directors. And
a Board Of Directors constitutes, the
smallest number is 5. You cannot be elected
as a member of Board of Directors unless
you own 1 share in the books of the
corporation.
You own 95%, you have to allow co-
ownership by at least other 4 people, so that
you will be at least be followed.
The business language is accommodating.
95% is wholly-owned already.
Let us say you are 95% owner of outstanding
capital stock, and then, all of a sudden, you
die. And in your will you already bequeath
the shares of stocks of the corporation to
your only daughter. You have other business
and you disposed according to your will. Let
us say you die in February, just a week after
the annual meeting of the corporation and all
5 directors are already elected and you
chose not to be one of the directors. You
have a nominate, all, in fact, are your
nominates. You die, your daughter becomes
the stockholder that owns 95%.
Can she say, I demand to attend the BOD
meeting? Can she demand attendance to a
meeting of the BOD legally?
Unless she is elected to the Board, she
cannot demand.
Why?
Because the powers are directly given by
Section 23. It is not a derivative power. It is a
power granted by law, directly by law.
“xx the corporate powers of all corporations
formed under this Code shall be exercised,
all business conducted and all property of
such corporations controlled and held by the
board of directors xx”. Make no mistake bout
that.
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Can the majority stockholder, 95% owner of
the outstanding capital stock, can he remove
all the directors?
We go to section 28.
Sec. 28. Removal of directors or
trustees. - Any director or trustee of a
corporation may be removed from office by
a vote of the stockholders holding or
representing at least two-thirds (2/3) of the
outstanding capital stock, or if the
corporation be a non-stock corporation, by
a vote of at least two-thirds (2/3) of the
members entitled to vote:
From that first sentence, there is possibility
that you can remove because you have 95%
of the shares and not only 2/3. But let us
continue.
Provided, That such removal shall take
place either at a regular meeting of the
corporation or at a special meeting called
for the purpose, and in either case, after
previous notice to stockholders or
members of the corporation of the
intention to propose such removal at the
meeting. A special meeting of the
stockholders or members of a corporation
for the purpose of removal of directors or
trustees, or any of them, must be called by
the secretary on order of the president or
on the written demand of the stockholders
representing or holding at least a majority
of the outstanding capital stock, or, if it be
a non-stock corporation, on the written
demand of a majority of the members
entitled to vote.
So the 95% owner can demand a special
meeting.
Should the secretary fail or refuse to call
the special meeting upon such demand or
fail or refuse to give the notice, or if there
is no secretary, the call for the meeting
may be addressed directly to the
stockholders or members by any
stockholder or member of the corporation
signing the demand. Notice of the time and
place of such meeting, as well as of the
intention to propose such removal, must
be given by publication or by written notice
prescribed in this Code.
What is qualified notice?
It contains not only the time, ate place of the
meeting but also of that item in the agenda
for which the meeting is called. If it is for
removal, then you must state in the notice
that this is a meeting for the removal of the
directors, so and so. Notice must be
qualified.
Must be given by publication and by written
notice as prescribed in this code. The
vacancy resulting pursuant to this section
may be filled by election at the same meeting
without further notice or at any regular or
special meeting called for that purpose.
Removal may be with or without cause:
Provided, That removal without cause may
not be used to deprive minority
stockholders or members of the right of
representation to which they may be
entitled under Section 24 of this Code.
95% ka stockholder, ang tulo ana
matangtang nimo without cause because
they are deemed to be your representative, if
you call a meeting.
But the two, you cannot remove without
cause, because they deem to be the minority
representation. It has to be for cause that
they must be removed.
How do you guard against it? In most
corporations, if you are the controlling
investor, when you invite somebody to
become a director, make him sign a letter of
resignation that is undated. Ready na ka,
aron dili ka mamoroblema aning section 28.
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This is not asked in the Bar exam but please
memorize the formula for the number of
votes that is required to elect directors.
What is the formula?
(AB/C + 1) +1 = number of votes that can
be shares or proxies that is required to
elect directors.
What does A stand for? AB over C.
A = total outstanding shares that are voting
shares
B = desired number of directors
C = total number of directors you want
elected or voted
You have to memorize this formula if you are
the secretary.
PLDT has more than 2 million stockholders.
Ngano kadaghan? Kay Marcos passed a law
favoring the Coangcos. If you wanted a
telephone connection, part of the fee you
paid PLDT for that telephone connection is
for the purchase of preferred non-voting
shares.
½ of the 2M stockholders of the PLDT has no
votes; only 1 million has voting powers.
So you count; but how can you count when
everyday it is being bought and sold in the
stock market? How can you identify the value
of A?
PLDT has this thing called a “cut-off date”.
1 month before the annual meeting, the
stock transfer book is closed. If you buy or
sell, it is not recorded. Because that day
freezes the number of voters for the annual
meeting.
Is that valid?
The SC already said it is valid.
What is the reason for holding the validity of
the cut-off date 1 month before the annual
meeting?
Because it will be chaotic if you do not have
that cut-off date. Suppose all 1 million decide
to transfer their sales the day before election,
how can you process that? And you must
grant because theoretically they have the
right.
It is a way of solving the orderly transfer
ownership and the keeping of the stock and
transfer book.
Corporation law, especially, stock and profit
corporation is all about control. Who controls
the corporation?
Muingon ka, magbuhat kog corpo na walay
ga control. 33% diri, 33% sad diri, 33% diri.
Walay ga control.
Do you know what you’re doing? You are
inviting chaos. Your proposal is that the
purpose of the corporation is not fulfilled kay
magsigeg away. Equal force man sila.
In the formation of the corporation, drawing
up of the articles, you make sure that there is
control and control is not necessarily
padaghanay shares. You can have control
even if you have the smallest number of
shares.
If you are swing interest, 40% and 40%
magka- away gyud na sila gikan sauna.
Musulod ka naa kay 20%, ikaw naay control.
Kay kung kinsa imo dapigan, mao man ng
madaog.
If you are the swing vote and you do it very
well in the articles of the corporation, even if
you are the minority, you will control.
Classification of shares is very important
because in the end what determines is
control.
Section 24
Sec. 24. Election of directors or
trustees. - At all elections of directors or
trustees, there must be present, either in
person or by representative authorized to
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act by written proxy, the owners of a
majority of the outstanding capital stock, or
if there be no capital stock, a majority of
the members entitled to vote.
Can you provide for a higher requirement for
quorum than simple majority?
The Securities and Exchange Commission’s
opinion is: Yes, you can provide for a higher
requirement for quorum but you cannot
reduce the quorum to less than majority.
The election must be by ballot if requested
by any voting stockholder or member.
Is the election to be by ballot?
No. Only if requested.
I will tell you how most elections are carried
out.
W corporation, they require cut-off of the
stock and transfer vote one month before the
annual meeting of the stockholders. The by-
laws also require that those who want to put
themselves up as candidates to be directors
must be nominated by at least 10% of the
outstanding capital stock and the names
must be submitted before the cut-off.
Ang mga minority they have to organize
themselves so they can submit somebody in
voting.
The Corporation Code requires that you
must allow for cumulative voting. You cannot
deny cumulative voting in a stock and profit
corporation.
What is “cumulative voting”?
If you’re a stock holder, your maximum
number of votes is your number of shares
multiplied by number of director to be
elected. That is your total number of votes
Pila man imong shares? 10
Pila ka directors ang pillion? 11
11 x 10 = 110
that is your maximum number.
How do you cast it?
You can cast it all on one candidate; you can
divide it equally; or divide it according to the
proportion that you want.
Why is it allowed to cumulate all its votes and
put it in one candidate?
To allow or give chance to minority to have
representation. That is why cumulative
voting cannot be denied in the by-laws in a
profit and stock corporation.
In a non-stock, non-profit corporation, if the
by-laws is silent, there’s only one vote per
person, you cannot have cumulative voting.
December 7, 2017
(Janice Molina)
Board of Directors or Trustees
If the corporation were a ship, the BOD is the
captain of the ship. Remember that analogy.
The captain of the ship, mao nay tinood nga
manager, gusto ka makakitag tinood nga
manager, kapitan sa dakong bapor nga
overseas. Wa kay tabang ana ikaw ra, naay
magbuang buang ana nimo nga tripulante
unsa man imong buhaton ana makiglayog
nimo? desiplinahon nimo kay kon d na nimo
desiplinahon manunod nang uban.
So the BOD is the captain of the Corporation.
Who elects the Board?
As a general rule, it is the stockholders or the
members of the corporation. But there are
times when it is the BOD that elect the
members of the Board. In case a member
dies, is incapacitated, resigned, or is
disqualified, the one who elect is the board
itself. I will summarize it to you; there are five
(5) instances when the stockholders elect the
board:
First Instance. Annual Meeting - usually
Fiscal year. The annual meeting is dictated
by the by laws, you cannot just change the
date of the annual meeting. It is provided in
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the by-laws and normally it coincides with the
cycle of the fiscal year. Fiscal Year meaning
the twelve month period not necessarily
coinciding with the calendar but it is the
accounting period to recon the financial story
of the corporation. Usually 2 to 3 months at
the end of the fiscal year, that is the annual
meeting in the by laws
Why 2 to 3 months?
Because you have to give time to the
independent external accountants to review
the Financial Statements of the Corporation
Because one of the items in the agenda of
the annual meeting after you elect the
directors is to present the financial
statements. The President together with the
treasurer, they make a report. Why did we
register laws? They explain. Why did we
make less money? They also explain. Why
did we make a lot of money? that's when they
also explain. And then the stockholders vote
to accept the financial statement. After they
have voted, then that is the Financial
Statement of the Corporation. But that is
already audited.
What is the significance of audited
Financial Statements?
The significance of the audited FS is that a
third party that is respected in his field
certifies that the number in the FS, Balance
Sheet, and Profit and Loss Statement
reflects accurately the financial story of the
Corporation in accordance with Generally
Accepted Accounting Principles (GAAP).
Then you are not afraid to present it to
anybody. If there are investors, dia ra ang FS
namo! naay magsukit sukit diha nga
Government Agency? Dia ra sagpaon nimo
ana :) kay audited naman. Mao nay purpose
ana nga di ka mag tago-tago.
You have an election then, annual meeting.
One year man ang term or until the
successor is elected and qualified, one year
ang term. Unya mapatay sya in the middle of
the term? patawag kag stockholder's
meeting para mupili sa mupuli nya? dili! Only
the directors choose the replacement. If
incapacitated? If napiang sya? Incapacitated
ba na? dili! He can still attend meeting by
teleconferencing, by video conferencing,
mahimo man. So he is not incapacitated.
Kani adto, incapacitated ka ana, marayuma
ka, ma gout ka, d naka kalakaw,
incapacitated ka na. Karon dili na! dili ka
incapacitated ug buhi lang imong utok.
Second Instance. When the numbers of
BOD is increased - by an amendment to the
Articles. Even if it's in the middle of the term,
it is the stockholders who elect the additional
BODs
When can they do that?
When the amendment is approved
How is it approved?
When the SEC issues a Certificate of Filing
Third. When the Director is removed - First
of all, to remove a director you need a
meeting duly called for a purpose. Di na
mahimo ang written assent ha. And 2/3 must
vote to remove you. If you are the
representative of the majority, you can be
removed by two-thirds vote of the
Stockholders with or without cause. Cause?
nangawat ka, tangtang ka. Without cause?
wa ka, gisumhan ra sila sa imong hitsura!
When do you elect the replacement?
You can elect the replacement at the same
meeting of his removal.
Fourth. When a director resigns, dies or is
incapacitated, and the remaining directors no
longer constitute a quorum. The example is
Texas Instruments Philippines Inc., five
directors in their corporation, nag inaugurate
sila ug ika-duhang factory sa Baguio. Ngano
sa Baguio man? Bacause higher altitude and
ostensibly the air in Baguio is contains less
pollutants, they manufacture, not ordinary
chips but they manufacture intelligent
controlling chips. In fact the likelihood of the
Texas Instruments controlling chips in your
smartphone is 70% because Texas
Instrument manufactures 90% of all
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controlling chips. Mao nay technology nga
gitaguan sa Amercano. Japan and China?
puro na memory pero pag abot na sa
controlling chips, wa pa na nila buhi-i.
How about the 5 Directors of the Texas
Instruments?
The law requires that the majority in the BOD
must be a resident of the Philippines. There
is no citizenship requirement, majority is
residents. That is what is required by the law.
Now they were inaugurating a factory, the 3
Americans choose to fly, the 2 Filipinos
decided to go by tag. but ang gisakyan sa
Americano na-crash man, patay ang 3.When
a director dies, it’s only the BOD who elects
the replacement but the replacement is to be
elected by at least the majority of the Board.
Absolute majority or at least 3. Duha naman
lang nahibilin? So they have to call a
stockholder's meeting. So that is the work.
Fifth. Recently decided case (2 years ago) -
The case of Bel-Air vs. SEC. Bel-Air is one of
the subdivisions created by the Ayalas. Pila
mana ka subdivision diha sa Makati? Forbs,
Dasmarinas, Bel-Air 1, Bel-Air 2,San
Lorenzo. Residential Subdivisions created
out of the Ayala estate. In the middle is the
Ayala Central Business District. This is one
of the most expensive Real Estate. Aron
makabawi ka naa kay dapat at least 30
stories nga building, naay 600 to 650T per
square meter.
Ang Bel-Air mao na ila problema, walay
quorum kada magmeeting sila homeowners.
Bel-Air Homeowners Associations, Inc. Unsa
may meetingan ana? Gasto sa garbage,
repair, security, discipline (husay) sa
subdivision. What happens? 3 na ka-tuig
walay quorum, so all the directors were so
called "hold-over directors" because a
director is supposed to have a term of 1 year
or until the successor is elected and
qualified. Toa na sya sa "until elected and
qualified". Ni-resign man sya, ang director ni
resign, pag resign niingon ang nahibilin nga
sige magpili ta ug replacement. Unya naa
may bag-o abogado, gi-challenge nya,
niingon nga dili namo makapili kay hold-over
man mo. Wa man xay term nga nahibilin,
naghulat nalang sa puli. Wa man paminawa
abogado, nagkaso sila hangtod naabot sa
SC. SC said correct, the Board cannot elect
the replacement if there is no unserved
portion of the term that is left behind because
he is a holdover director. So, that is what
happens. When the director resigns, dies,
disqualified, incapacitated or in any way
cannot continue to serve a remaining portion
of his term and the remaining director also
are hold-over directors, they cannot elect the
replacement. It must be the stockholders.
Those are the 5 instances that a director
must be elected by the stockholders or the
members of the Corporation.
Remember if the director dies, you have
30days to report. If he disqualified himself?,
here is a question. There is a disqualification
provision, Section 27.
Section 27. No person convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding six (6)
years, or a violation of this code, committed
within five (5) years prior to the date of his
election or appointment, shall qualify as a
director, trustee, or officer of any corporation
This is a disqualification. So if na-priso na
gani ka ug 6 years, di naka ma director or if
you violated any provision of the Corporation
Code or directive of the SEC within 5 years
from your election, you cannot serve as a
director or trustee.
Can the Articles or the By Laws add
qualification or disqualification to a
Directorship in that Corporation?
The Leading case is Gokongwei vs. SEC 89
SCRA 336. I remember this case because
that was 1977, I was still in Ateneo de Manila
Law school and the lawyer of Gokongwei
was teaching us and the lawyer of San
Miguel was also teaching us. This is their
issue, Gokongwei slowly accumulated
shares of San Miguel. All you need to be
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elected to San Miguel, you need only one-
fifteenth of Outstanding Capital Stock. The
story here is Gokongwei, after he has
accumulated about one-twelfth of the
Outstanding Capital Stock, he started getting
proxies and one month before the annual
elections, they already submitted his name
and nominations to be a director. So he is
registered 1 month before, so San Miguel
started floating articles in the newspaper that
Gokongwei has antagonistic business
against San Miguel, that Gokongwei is in
San Miguel precisely to spy on the product
developments of San Miguel so that he could
have advance knowledge of where San
Miguel is now. Now, even before that, San
Miguel already passed an amendment to
their Article. The amendment was this, if you
have an interest, personally or in another
Corporation, financially or indirectly of a
business that is in competition with San
Miguel or of any of its product lines, then you
are disqualified from becoming a member of
a BOD. So they said, you Gokongwei, you
have antagonistic business.
What is SMC's antagonistic business?
Nakahinumdom mo atong Presto Ice cream?
Gokongwei had Presto IceCream, SMC had
Magnolia. Gokongwei had Robina Feeds,
SMC had BMeg Feeds. So in competition. So
they said, Gokongwei, you cannot run for
Board of Director of SMC. But d man nila
mapugngan naa naman siyay one-fifteenth,
you just cumulate that, dba cumulative
voting? You cumulate that lingkod jud ka di
ka ma prevent. So Gokonwei did not accept
the warning of the secretary. He filed a case
with the SEC, the SEC ruled in favor of SMC.
The decision of the SEC is appealable to the
CA but the lawyer decided to go to the SC for
the question of law.
Can a stockholder be disqualified from
becoming a member of the BOD when he
has enough shares to be voted as
director?
First, the SC divided the issue, can there
be a disqualification added in the by-laws
preventing a stockholder to become a
director? SC says yes. A corporation is free
to add disqualification or additional
qualification.
Second, is there a valid disqualification
here when his disqualification was voted
upon by the stockholder when the
Outstanding Capital stock was only one-
third of the present number of shares that
is in__? gamay pa tong corporation niadto
when this disqualification was set. The SC
says yes, the disqualification still operates
later
Is Gokongwei disqualified from running?
SC answered, the presumption is
Gokongwei can run. If as the controlling
share says that he is disqualified then he
must be given his day in __. He must be
investigated, he must be heard, and there
must be an investigation as to whether he
really fits the disqualification. So it is not
automatic. If there is a disqualification in the
by-laws, that still has to go to an
investigation. The order is to remand to the
SEC but itw as settled amicably. Gokongwei
was first made a director of San Miguel
International in Hong Kong and afterwards
they offered him price he could not refuse
and so he made a lot of money. The money
he got, he bought PCI bank together with the
Lopez’s. Later on, they sold PCI bank to
Equitable Bank.
Say, there were people in the board who are
also disqualified but they did not raise the
objection later. One of them is Jaime Zobel
de Ayala, used to sit on the board of SMC
and yet the Ayala's at that time owned Pure
foods because SMC bought them up and
SMC had Monterey. Ngano gi-allow man nila
si Ayala na mulingkod diha? Naa sila BMeg,
Ayala also had a Joint Venture with
Harvel(?), high breed corn. They allow Ayala
because Ayala and Soriano are first cousins.
Director’s Compensation has a limit in the
Corporation. What is the limit? It cannot be
collectively more than 10% of the Net Income
of the Corporation before tax. When you are
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given a problem about this, make sure that is
a pure director because there are directors
who are also officers of the Corporation. Let's
see you are President and CEO of the
Corporation and you are also a director, your
compensation as an officer does not have a
limit, but your compensation as a director has
a limit. The limit is not more than 10% of the
net profit before tax. That ceiling does not
include per diem. Per Diem is the expenses
that you must incur in order for you to
perform the Director's duties.
Probably you remember that PNB was still a
GOCC, it was the President who appointed
the directors and during the time of Ramos,
he was very grateful with this Dabawenyo,
because he helps during the elections, he
appointed him as the director of PNB. PNB
has a meeting once a month. Director’s fee?
100k per meeting excluding per Diem. The
per diem is not included in the ceiling of
1/10th of the net income before tax.
What is the Director's fee in PLDT? 250K,
one board meeting. If you are called in a
committee meeting, it is 150K. So once a
month you have a meeting 250k, tawgon sad
ka ug committee meeting 150K.
December 8, 2017 (1st Half)
(Lizette Estillore)
Sec. 32. Dealings of directors, trustees
or officers with the corporation. - A
contract of the corporation with one or
more of its directors or trustees or officers
is voidable, at the option of such
corporation, unless all the following
conditions are present:
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;
3. That the contract is fair and
reasonable under the
circumstances; and
4. That in case of an officer, the
contract has been previously
authorized by the board of
directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent,
in the case of a contract with a director or
trustee, such contract may be ratified by
the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3)
of the members in a meeting called for the
purpose: Provided, That full disclosure of
the adverse interest of the directors or
trustees involved is made at such meeting:
Provided, however, That the contract is fair
and reasonable under the circumstances.
SELF-DEALING DIRECTOR are those who
enter contract with the corporation of which
they are directors. Technically speaking, it is
an anomalous dealing. A director is an agent
of the corporation who acts for the
corporation. Yet, a self-dealing director also
acts for himself.
REQUISITES:
1. His presence in the meeting, which
approved the transaction, must not
be counted for purposes of quorum.
2. He cannot vote on said issue.
3. The contract is fair and reasonable
under the circumstances
4. In case of an officer, the contract has
been previously authorized by the
board of directors (SELF-DEALING
OFFICER e.g. president of the
corporation, general manager who is
not a director)
If the 1st and 2nd requisites are not met, for as
long as the contract is fair and reasonable (In
NIRC, it is termed as arms length
transaction), there is no fair advantage that
is given to the director.
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Illustration: You are a director of Bachelor
Bus. You are also one of the biggest dealers
in second hand tires and brand-new tires in
Davao. As a director, you offer it to Bachelor
Bus. This transaction must go through
Section 32 of the Code. There’s a meeting.
The presence of the director is not counted.
Tangtang na siya sa minutes for this
particular discussion on the transaction
because in the end the BOD will pass a
resolution approving the transaction. That’s
how a corporation acts!
Put it in record that he did not vote. The
others who voted shall still constitute as the
majority of the BOD.
Have a comparative pricing of others.
“These are the pricing of others. This is the
price that he gives. Therefore, it is fair and
reasonable.”
It’s another story when this self-dealing
director owns 2/3 of the outstanding capital
stocks because even with the absence of the
1st and 2nd requisites, these transactions can
be ratified by the stockholders.
What is the assumption behind this rule? If
the self-dealing director is a stockholder with
2/3 of the outstanding capital stock, he is less
likely to take advantage of the corporation.
Mura ka ug nag-dunggab sa imong
kaugalingon – imo na gud na ang 2/3 unya
imo pang lawgawon ang corporation!
Maluoy ka man sa imong kaugalingon.
Charity begins at home!
I’d like to point this out to you because there
is another applicable assumption applicable
to directors. Now, the Securities Regulation
Code requires of certain corporations to have
independent directors at least 20% or at least
2, whichever is lower, in the Board. These
are Listed
1. Listed Corporations
2. Corporations with at least P50M
assets and at least 200 stock holders,
100 of the stockholders owning at
least 100 shares
3. Banks, financial institutions, and
quasi-banks
Who is an INDEPENDENT DIRECTOR?
1. He cannot own more than 10% of the
outstanding capital stock of the
corporation. The PSE raised the
requirement. The law says not 10%.
The PSE says not more than 5%.
2. He cannot be related to any of the
controlling owners
3. He cannot be an employee of the
corporation or the external auditor, or
consultant of the corporation, its
mother or subsidiary
The whole thinking is you can think better for
the good of the corporation if you are not
related to the corporation – you are thinking
of the general welfare of the investing public.
In Section 32, if you have 2/3, you are
thinking about the good of the corporation
that is why you can ratify the transaction.
Asa ma’y tinuod ana? If you ask me, none of
those two. It’s the actual running of the
corporation. It’s the oversight! In the end,
good governance is good governance in any
language provided that it exists.
Q: Are the directors prohibited from entering
into contracts with the corporation?
A: No, they are not. But there is a formality
that has to be done.
Sec. 33. Contracts between
corporations with
interlocking directors. - Except in cases
of fraud, and provided the contract is fair
and reasonable under the circumstances,
a contract between two or more
corporations having interlocking directors
shall not be invalidated on that ground
alone: Provided, That if the interest of the
interlocking director in one corporation is
substantial and his interest in the other
corporation or corporations is merely
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nominal, he shall be subject to the
provisions of the preceding section insofar
as the latter corporation or corporations
are concerned.
Stockholdings exceeding twenty (20%)
percent of the outstanding capital stock
shall be considered substantial for
purposes of interlocking directors.
Normally, it is the corporation who enters into
a contract of which the director is also a
director because he is also a stockholder,
and he is entering into contract with the
corporation of which he is also a director.
This is what we call INTERLOCKING
DIRECTOR.
There is an INTERLOCKING DIRECTOR in
a croprations where one or some, or all of the
directors of one corporation is/are a director
in another corporation.
If the interest of the interlocking director of a
corporation are both substantial where
stockholdings exceed 20% of the
outstanding capital stock, you become a
substantial interest in the corporation, as far
as interlocking directors is concerned, then a
contract between two or more corporations
having interlocking directors shall not be
invalidated on that ground alone, except if
the contract is fraudulent or not fair or
reasonable.
The contract, as a general rule, is voidable if
the interest of the interlocking director in one
of the corporations is nominal, while
substantial in the other stockholdings in
another corporation. It will only be valid if the
following conditions are present:
1. The presence of such director/trustee
in the board meeting in which the
contract is approved was not
necessary
2. The vote of such director/trustee is
not necessary or not counted in the
approval of the contracts
3. The contract must be fair and
reasonable
The corporation where that interlocking
director has only nominal interest needs to
be ratified by 2/3 of the outstanding capital
stock or 2/3 of the members of the
corporation. There has to be full disclosure
of the adverse interest of the directors and
the contract must be fair and reasonable.
Kanusa man naa’y ratification kinahanglan
2/3? If your interest is less than substantial
or if it is nominal, the assumption is that you
may favour the corporation where your
interest is substantial.
A director might act as an agent for another
corporation and that other corporation has
nothing to do with that, but he brings in to the
director. That is not covered. (Huh?)
Illustration: For example a corporation is
putting up a building. They are opening it for
bidders. One of the directors is related to a
well-known construction company because
his brothers are architects and engineers.
So dad-on niya ang corporation sa iyang
brothers. Is he a stockholder there? No, he
is not! How do you handle that? Then you
enter into *** because *** requires full
disclosure if a director brings a business
opportunity to the corporation through the
board, then he must make full disclosure.
Muiingon siya – “Kini akong giduso, I am
related to them. My brothers are officers of
the corporation and a major stockholder.”
For delikadeza, muingon siya – “I better
refuse myself so you can freely discuss the
merits and demerits of this transaction.”
Sibat siya! Ang iyang proposal debatehon sa
BOD and wala siya diha kay related man
siya. Mao na ang full-disclosure, honest, and
transparent. Kinsa man muingon ana? Ang
corporate secretary.
*Father talks about SMC and derivative suit*
DERIVATIVE SUIT is filed by a stockholder
in the name of the corporation.
Who files the suit for the corporation? It’s not
the corporation because it has no hands to
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sign the complaint. It has to be the BOD who
files the suit. It files the suit by passing a
resolution where a natural person, normally
the President, is named who will act for and
in behalf of the corporation. This is approved
by the majority of the BOD.
If the corporation acts against the very
agents who are supposed to act for him, the
suit shall be filed through a derivative suit. A
stockholder can file the suit in the name of
the corporation. The stockholder is the
representative party to the corporation
because the mortal representatives of the
corporation are themselves the respondents.
Only one share is needed for a stockholder
to validly file a derivative suit. At the time the
controversy arose, you must be a
stockholder. At the time you file the suit, you
must still be a stockholder.
*Fathers talks about the whereabouts of
Danding Conjuanco and SMC*
Sec. 31. Liability of directors, trustees
or officers. - Directors or trustees who
willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or
who are guilty of gross negligence or bad
faith in directing the affairs of the
corporation or acquire any personal or
pecuniary interest in conflict with their duty
as such directors or trustees shall be liable
jointly and severally for all damages
resulting therefrom suffered by the
corporation, its stockholders or members
and other persons.
When a director, trustee or officer attempts
to acquire or acquires, in violation of his
duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
to which equity imposes a disability upon
him to deal in his own behalf, he shall be
liable as a trustee for the corporation and
must account for the profits which
otherwise would have accrued to the
corporation.
December 8, 2017 (2nd Half)
(Zarah Domingo)
Section 31 lists down the 3 ways in which a
Director is liable.
1.) When he votes for or consents to a
patently illegal act;
2.) Willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation;
It was reported a week ago that the Mayor of
the IGACOS (Samal) said he has money for
microfinance and he appointed the multi-
purpose cooperative of Samal that it will
process the applicants, after which they will
release the microloans. The cooperative
passed a resolution which provided that in
gratefulness to the Mayor, it is giving the
mayor a gift of P100,000. The following year,
they passed another resolution giving
P100,000. This is in violation of the Anti-Graft
and Corrupt Practices Act-“gifts by reason of
office.” The Mayor received the check and
subsequently encashed it and deposited it in
his account. The check was recorded in the
cooperative. There is no way he can deny
that he has not received the money.
Give a law that makes the director and the
office liable, criminally. An example is the
violation of the Trust Receipts Law. If the
corporation is the trustee, the officers are the
ones who serve the prison term, not the
corporation because it cannot be put in jail.
Section 13. Penalty clause. The failure of
an entrustee to turn over the proceeds of
the sale of the goods, documents or
instruments covered by a trust receipt to
the extent of the amount owing to the
entruster or as appears in the trust receipt
or to return the said goods, documents or
instruments if they were not sold or
disposed of in accordance with the terms
of the trust receipt shall constitute the
crime of estafa, punishable under the
provisions of Article Thirteen hundred and
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fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred
and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation
or offense is committed by a corporation,
partnership, association or other juridical
entities, the penalty provided for in this
Decree shall be imposed upon the
directors, officers, employees or other
officials or persons therein responsible for
the offense, without prejudice to the civil
liabilities arising from the criminal offense.
For instance, you import a machine (8-color
printing machine from Italy). You obtain a
loan from a corporation. You open a letter of
credit in the name of the corporation (bank),
assigned to you. You will be made to sign a
trust receipt which provides that the
proceeds of that, if you are a printing press,
go directly to the corporation to service the
debt. If you cannot pay, that will amount to
estafa. The proceeds belong to the bank
because it is the owner of that machine.
That is the same case with Avon. You will be
asked to open an account and issue
postdated checks so that you will work hard
to sell them, and at the same time, you will
be made to sign trust receipts because Avon
is the owner of the beauty products (pa-pula)
and you are merely an agent. If you cannot
pay and you cannot return the beauty
products, you are deemed to have
appropriated these products for your benefit.
You have committed estafa.
The provision of law states that if it is the
corporation who is the trustee in a trust
receipts contract, the officers, the members
of the board, they are criminally responsible.
They will answer for the fine or imprisonment
that is meted out to the corporation, jointly
and severally liable.
What is the “Doctrine of Corporate
Opportunity”?
Section 34. Disloyalty of a director. –
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. This provision
shall be applicable, notwithstanding the
fact that the director risked his own funds
in the venture.
‘Nangilog ko ug business sa corporation.’
You are all directors, you went to Australia.
Cattle-fattening is your business. As long as
the cattle is still increasing its weight, you do
not yet kill it. When it stops growing, that is
the time you slaughter it. While you were
choosing a cow, somebody came near you
and told you they were looking for leather. It
made an offer that the former will make
leather from their cattle and they will buy it.
You as director, you say this is my chance, I
will not give this to the corporation. When you
went back to the Philippines, you put up a
leather-tanning business. You get the skin of
the cow that will be slaughtered. Is that a
violation of the Doctrine of Corporate
Opportunity? No.
The requisites of the Doctrine of Corporate
Opportunity: The Doctrine says that if there
is presented to a corporate director a
business opportunity which:
1.) The corporation is financially able to
undertake;
2.) From its nature is in line with the
corporation’s business and is of
practical advantage to it;
3.) One in which the corporation has an
interest or a reasonable expectancy.
And then, wala nimu gihatag, imuhang gi-
solo. Then you must account for the profits,
even if you spent you money in that
business.
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The Supreme Court said that it is not a case
of violation of the Doctrine of Corporate
Opportunity. Cattle-fattening and Leather-
Hide/Cattle-Hide Tanning, Curing and
Selling, are 2 different businesses.
What is an example of a violation of the
Doctrine of Corporate Opportunity? Bitong vs
CA (1998)
Bitong was the President of Jaka
Corporation (the holding company of Juan
Ponce Enrile).The corporation was named
after Enrile’s two children. It was the 2nd
biggest owner of real property along Ayala
Avenue, the main avenue of the Central
Business District in Makati. Jaka was in the
development of high-rise condominium and a
law was passed than when you are a high-
rise developer, 10% of your project must also
be in low-cost housing. They looked for lot
where they will be putting up the low-cost
housing project. They found 3 prospects: the
first one was flat, already with electricity and
NAWASA connection; the second one was
also flat but without water and electricity; and
the third one will require high cost of
development because it is not in a flat area,
which although having access to electricity,
had no access to water. Bitong said that Jaka
will get the third option. He got the first one
for his own corporation which was also
involved in real property development. The
SC said that it was a violation of the Doctrine
of Corporate Opportunity because it was no
longer speculative, the corporation needs
that, it was in-line with the business. There
are no ifs and buts.
If you compare this case with the previous
example, layo pa, daghan pa itranslate,
agian. There is a way of slaughtering to
produce leather—there is curing and
stretching. In other words, the process of
producing leather is not part of the business
of cattle-fattening. Hence, there was no
violation of the Doctrine of Corporate
Opportunity.
There is a corporation that has a debt with
another corporation. The latter calls the
directors for a meeting. It was found out that
although all the former’s properties in the
Philippines were already attached, a special
information was received that the debtor
corporation owned a plane in Burbank,
California. The directors agreed that they will
hire a lawyer to attach the property. Now, one
of the directors stands up and goes outside
and makes a phone call. He called his lawyer
in LA and told him that since the debtor
corporation also had debts to him, he
instructed the said lawyer to go to Burbank
and attach the same property which the
creditor corporation has agreed to attach. He
is a director of a corporation. He used his
knowledge for his own benefit/ That I
disloyalty.
If you are a director of a corporation, it is like
partnership, if the debtor has a debt to a
partnership and a debt to you personally, not
as a partner, but in your other business, and
both obligations have ripened. Naa siya
gihatag na payment pero dili paigo sa duha,
sa usa ra. Asa man na i-apply kung ikaw ang
mukulekta? To his debt to you or to the
corporation? (But, charity begins at home.)
You have, first and foremost, a fiduciary duty,
which is higher than your personal duty. It is
higher.
In the same way, when a friend requests that
he parks his car in your parking space while
he is away for a conference and your house
got burned and you chose to save your own
car before your friend’s car, are you liable.
Yes, you are liable for it. That is a contract of
deposit. You have an obligation as the
depositary to attend to what is deposited
ahead of your own. That is the obligation that
you accepted when he deposited it to you.
When you deposit in the bank, it is fungible
so it is not a true deposit. It is a mutuum.
Contract of Deposit, Contract of Partnership,
Fiduciary nature of a corporation, mau ra na.
It’s a common thread.
If you are not careful, you will end up
betraying the corporation because you
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obtain an interest to your benefit, at the
expense of the corporation.
EXECUTIVE COMMITTEE
Section 35. 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 filling of vacancies in the
board; (3) the amendment or repeal of by-
laws 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 dividend to the
shareholders.
Those are the exceptions which the
Executive Committee cannot act.
There are so many corporations who do not
want to call it Execom. They call it Mancom
(Management Committee). The problem with
that is that it is the terminology that is found
in FRIA (Financial Rehabilitation and
Insolvency Act of 2010). It is a technical
group which may be appointed by the SEC in
a distressed corporation. So, the correct term
is Executive Committee, not Mancom.
It says here that the by-laws of the
corporation may create. Suppose there is no
provision in the by-laws, can the board create
an Execom? The Supreme Court said YES.
Why? Because the powers of the Board is
plenary. It is supposed to exercise such
powers and create such committees to
enable it to govern and administer the affairs
of the corporation. So even if there is no
provision in the by-laws, the board can create
an Execom.
I will tell you the story of the Execom of the
old PCI Bank. PCI Bank was bought by the
Lopez Group and the Gokongwei Group.
They teamed up together, equal shares sila
and they bought it right after EDSA
Revolution. The way it was bought is, the
Romualdez shares, most of it, were
sequestered by government and the
government said, since the Romualdez’s did
not contest, we are selling it. The way they
sell it is by obtaining dollar credits. At that
time, the Philippines had so much foreign
debt. If you pay the foreign debt, you obtain
credits equivalent to the debt that you paid.
And that is how they gained control over
these different corporations that were for
sale. So since Lopez did not have enough
money to pay for everything, he teamed up
with Gokongwei who had money, but did not
have enough to buy everything. So pareho
sila, they teamed up. 35%-35%, so 70% sila.
Karun, gipalit nila, pagkahuman palit nila,
ingun dayun si Gokongwei kay Eugenio
Lopez “ since you are more used to the
public, you be the Chairman and President,
tapos ako, Execom ra ko.” Lipay kayo si
Eugenio kay siya man ang starring, siya man
ang chairman. Si Gokongwei, Execom ra
siya. Sa ngadtu-ngadtu na, nakamatikud na
si Lopez na ang mga corporation ni
Gokongwei ang sige kahuwam sa kwarta
because it is the Execom that processes the
loans, they meet every week. Ka-isa ra man
magmeeting every month ang board.
Nothing reaches the board unless it is
approved by the execom. So nawala na sa
passing si Eugenio Lopez Jr. Mauna niingun
siya na ibaligya na natu. Who wants to buy
35% when you do not control. So, niduol siya
kang Gokongwei ingun siya “let’s sell
together” so it’s 60%, they have to pay a
premium for control, not only the buying of
the shares, but you add a price to being in
control of the corporation, that is the
premium, because you get 70%. Ingun si
Gokongwei “no I am not interested in selling.”
So what did Eugenio Lopez Jr do? He did the
unthinkable, he went to Romualdez (mau nit
u siyang gipriso ni Marcos unya gipa-eskapo
sila) who was a minority stockholder with
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20%. Giingnan niya si Romualdez “I am just ratified in passing, paspas ra na kaayo.

approaching you, I am asking for your help The Board begins to look at the loans once it
(hinay na tu sila, wala na man tu sila sa is above P5 Million. So for a big bank like
Board), let us organize and let us sell Unibank or PCI Bank, higher tingali ang
togather because the Equitable Bank is threshold, P10 Million or P20 Million. So that
interested in buying.” was how Gokongwei made PCI Bank the
financing company of his corporations kay
This is the time of Estrada. Gipahuwam ni siya man ang sa Execom, siya man gakupot.
Estada sa SSS and GSIS ang Equitable Is it not covered by the Interlocking
Bank, so naa siya kwarta ikapalit. So Directors? It is covered supposed to be if it
Romualdez said “Go atu ni ibaligya arun was the Board that approved it, but it is not
maka-kwarta ko kay I will have a premium. If the Board that approved it, it was the
I sell by myself, there will be no premium Executive Committee.
because there will be no control, but if I sell
together with Lopez, there will be control, it Alright, we are finished with the Board of
will be 55%.” Lopez told Romualdez wait for Directors. We are now with Powers of a
my signal. Corporation (Father hands in a handout to
the class).
Lopez went to Gokongwei and he told him
“you don’t have to attend the meeting
because if you do, you will just be
embarrassed. You will no longer be in the
Executive Committee, and I am and
Romualdez will sell to Equitable Bank-Mr.
Go, and that will be the end of you, you are
just 35%, no premium, you will only be 2nd
beadle to Mr. Go of Equitable Bank.” What
did Gokongwei say “Okay I am selling with
you.”

Lopez said “Okay, we were in this together

when we came in, we will exit together.” And
than was te ultimate stabwound to
Romualdez because Romualdez grabbed
Meralco from the Lopez’s so Lopez did not
have any qualms at all to betray Romualdez.

That is the story of how it became Equitable

Bank, then afterwards, it got into trouble
because of bankrun (remember that vice-
president who testified that it was Velarde
himself who signed it but that was Estrada,
edi, bankrun).

Who got Equitable Bank? BDO. Equitable

Bank is lost in BDO who bought it.

Sometimes, it is the Executive Committee

who runs the corporation. Naa man na
resolution ang Board of Directors, let us say
for loans, P5 Million and below, approval of
the Executive Committee is enough and it is

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