BUSINESS ORG. 2 COURSE OUTLINE (2010)

I. INTRODUCTION --- History/Origin – Roman times/Medieval period/ England/ USA Philippine setting - Spanish regime/ US regime/Present

II. DEFINITIONS/ ATTRIBUTES OF A CORPORATION

A. Artificial Being - Sec. 2, Corp. Code; Art. 44 (3), Civil Code a) Commencement of juridical personality for:

1. corporations2. partnerships – registered / unregistered3. associations –regd./ unregd. (Art. III, Sec 8, Constitution)

4. sole proprietorship – Mangila v. CA (GR 125027; 8/12/ 2002

b) Rights of a juridical person – Art. 46, Civil Code Art. III, Sec. 1 and 2, Constitution

c) Criminal Liability -- Ching v. CA (Feb. 6, 2006) d) Moral damages -- Herman Crystal, et. al v. BPI (GR 172428, Nov. 2008) Filipinas Broadcasting Network v. AMEC-BCCM (GR 141994, Jan. 17, 2005) ABS-CBN Corp. V. CA 361 Phil. 499 (1999) Jardine Davies/Purefoods v. CA (GR 128066; 6/19/2000) Mambulao Lumber v. PNB 130 Phil. 366 (1968) Pp. v. Manero, Jr. (GR 86883-85, Jan. 29, 1993) B. Created by Operation of Law – Art. XII, Sec. 16, Constitution

1. private corporations (distinguish from public corporations)2. GOCCs

3. Corp. by prescription

C. Right of Succession – Rationale; Compare with partnership (delectus personae) & sole proprietorship

D. Express/Implied/Incidental Powers - Corp. Code, Sec. 45, 36-44 III. COMPARISONS & DISTINCTIONS --- Corporations/Partnerships Sole proprietorships

IV. DOCTRINE OF CORPORATE ENTITY

A. Doctrine/ Effects:

Gallagher v. Germania Brewing Co. 54 N.W. 115 (1893)Magsaysay-Labrador v. CA. (1989) 180 SCRA 266Stockholders of Guanzon v. Reg. of Deeds (1962) 6 SCRA 373Caram v. CA (1987) 151 SCRA 373Palay, Inc. v. Clave (1983) 124 SCRA 640Dulay Enterprises v. CA (1993) 225 SCRA 678San Juan Structural v. CA (1998) 296 SCRA 631Tramat Mercantile v. CA (1994) 238 SCRA 14Jacinto v. CA (1991) 198 SCRA 211JG Summit Holdings v. CA (2007) 450 SCRA 169

B. Piercing the Corporate Veil:

Villa Rey Transit v. Ferrer (1968) 25 SCRA 845Marvel Bldg. v. David (1954) 94 Phil. 376 Cease v. CA (1979) 93 SCRA 483Secosa v. Heirs of Francisco (2004) 433 SCRA 273Concept Builders v. NLRC (1996) 257 SCRA 149Claparols v. CIR (1965) 65 SCRA 613La Campana Coffee Factory v. Kaisahan (1953) 93 Phil 160Pamplona Plantation v. Tinghil (2005) 450 SCRA 421Yu v. NLRC (1995) 245 SCRA 134Indo-Phil Textile Mills v. Calica (1992) 205 SCRA 698Umali v. CA (1990) 189 SCRA 529

C. Parent-Subsidiary Relationship:

Yutivo v. CTA (1961) 1 SCRA 160Koppel v. Yatco (1946) 77 Phil 496Liddell & Co. v. CIR (1961) 2 SCRA 632Jardine Davis Inc. v. JRB Realty (2005) 463 SCRA 555PNB v. Ritratto Group (2001) 362 SCRA 216Pantranco v. NLRC. (G.R. No. 170689) March 17, 2009

V. CLASSES OF CORPORATIONS UNDER THE CORP. CODE

1. Sec. 3, 87, 88 --- stock and non-stock corporation Case: Coll. of Int. Rev. v. Club Filipino (1962) 5 SCRA 3212. Other classes of corporations under the Corporation Code: Close corporation – Sec. 96 Special corporations – Educational, religious (Title XIII) Foreign corporations --- Sec. 123

Others: subsidiary (wholly-owned v. majority owned), affiliate, parent/holding company, joint venture corporation, open vs. close, lay vs. religious, eleemosynary vs. civil corp., etc.

VI. CREATION OF CORPORATION

1. Promotion (relate to Securities Regulation Code)2. Incorporation 3. Formal organization and commencement of business operations

VII. INCORPORATION

1) Steps in incorporation2) Sections 10 –19, 88, 96, 973) Articles of Incorporation– a) Sec. 14, 15, b) Amendment of A/I – Sec. 16, Relate to: Sec. 38.4 – power to amend Sec. 6 – voting rights of non-voting shares Sec. 81[1]--- appraisal right Secs. 37, 38, 103 – mere written assent c) Binding effect of amendment

Cases: Rivera case and RH Macy case 4) Citizenship requirements --- Sec. 140 ; --- pertinent provisions of the

Constitution; --- Foreign Investments Act (FIA) of 1991

(R.A. 7042, as amended); --- other laws imposing maximum foreign

equity participation in corporations;

--- “Philippine national” under the FIA --- Phil. corporation under the Corp. Code --- foreign corporation under the Corp. Code 5) Residence of corporation - Case: Young Auto Supply Co. v. CA (1993) 223 SCRA 670

6) Name of corporation – (SEC Memo Circ. 14, Series of 2000) Cases: Philips Export B.V. v. CA (1992) 206 SCRA 457 Lyceum of the Phils. v. CA (1993) 219 SCRA 610 Armco Steel Corp. v. SEC (L-54580 Dec. 29, 1987) P.C. Javier & Sons, Inc. v. CA (2005) 462 SCRA 36

7) De jure corporations 8) De facto corporations – Sec. 20 (requisites, basis, powers, rights, liabilities, validity ) Cases: Pioneer Insurance v. CA (G.R. 84157) (1989) 175 SCRA 668 Municipality of Malabang v. Benito (1969) 27 SCRA 533 Hall v. Piccio (1950) 86 Phil. 603 Cagayan Fishing Devt. v. Sandiko G.R. L-43350 (12/23/1937) Harill v. Davis (1909) 168 F. 187

9) Corporation by Estoppel – Sec. 21 (rationale, liabilities, validity) Cases: Asia Banking Corp. v. Standard Products Co. (1924) 46 Phil. 145 Cranson v. Int’l Business Machines Corp. (1964) 234 Md. 477; 200 A. 2d 33 Salvatierra v. Garlitos et al. (1958) 103 Phil. 757 Albert v. University Publishing Co., Inc. (1965) 13 SCRA 84 Chiang Kai Shek School v. CA (1989) 172 SCRA 389 Lim Tong Lim v. Phil. Fishing Gear Industries (1999) 317 SCRA 728 Int’l Express Travel v. CA (2000) 343 SCRA 674

10) Corps. that are neither de jure, de facto, nor by estoppel

VIII. INTERNAL ORGANIZATION OF CORPORATIONS

1) By-laws – Sec. 36 (5); Secs. 46 and 47

a) Concept of by-laws b) By-laws vs. Articles of Incorporation c) Contents of by-laws

d) Procedure for adoption – (b.1) before incorporation (b.2) after incorporation e) Effect of non-adoption f) Requisites for validity g) Binding effect of by-laws h) Amendment of by-laws and effectivity date Cases: Loyola Grand Villas Homeowners v. CA (1997)

276 SCRA 681 Fleischer v. Botica Nolasco (1925) 47 Phil. 583 Govt. of P. I. v. El Hogar Filipino (50 Phil. 399; 1927) Gokongwei Jr. v. SEC, et al. (1979) 89 SCRA 336 Grace Christian High School v. CA ( GR 108905; Oct. 23, 1997) Thomson v. CA (298 SCRA 280) Salafranca v. Philamlife (Pamplona) Homeowners

Asso. (300 SCRA 469) China Banking Corp. v. CA ( 270 SCRA 503)

2) Commencement of Business ---- Sec. 22 3) Election of Directors & Officers --- Sec. 25

IX. CAPITAL STRUCTURE OF CORPORATIONS

A. Concepts:1) Capital vis-à-vis Capital Stock2) Shares of Stock vis-à-vis Stock Certificate3) Authorized Capital Stock4) Subscribed Capital Stock5) Paid-in Capital6) Outstanding Capital Stock – Sec. 1377) Watered stock - Sec. 65

B. Trust Fund Doctrine - vis-à-vis corporate assets - vis-à-vis subscribed capital stock

C. Doctrine of Equality of Shares

D. Classification of Shares – Rationale - Sec. 6, 7, 8, 9 a) Par value shares b) No par value shares - issued price - “deemed fully paid and non-assessable” c) Common shares d) Preferred shares – different types e) Redeemable shares f) Founders’ shares g) Treasury shares e) Voting shares f) Non-voting shares

E. CASES --- Republic Planters Bank v. Agana ( GR 51765; Mar. 3, 1997)

COCOFED v. RP ( GR Nos. 177857-58; 178193; 180705 promulgated Sept. 17, 2009) re conversion of shares

F. STOCKS & STOCKHOLDERS

Sec. 60 -73, 137, 90 1) Consideration for shares -----

Garcia v. Lim Chu Sing 59 Phil. 562 (1934)Apodaca v. NLRC (172 SCRA 442)National Exchange vs Dexter (51 Phil. 601; 1928)

2) Unpaid subscriptions -----

Velasco vs Poizat 37 Phil. 802 (1918)Lingayen Gulf Electric vs Baltazar (93 Phil. 404; 1953)Da Silva vs Aboitiz (44 Phil. 755; 1923)Lumanlan vs Cura (59 Phil. 746; 1934)

China Banking Corp. v. CA GR 117604 (Mar. 26, 1997)

3) Rights of Unpaid Shares ---- Fua Cun v. Summers, et al. (1923) 44 Phil. 704Baltazar v. Lingayen Gulf (1965) 14 SCRA 522Nava v. Peers Mktg. Corp. (1976) 76 SCRA 65

4) Nature/Function of Stock Certificates ---- Tan v. SEC (206 SCRA 740)

5) Proof of Ownership of Shares ----

Nautica Canning Corp. Yumul GR 164588 (Oct. 19, 2005)Lao v. Lao GR 170585 (Oct 6, 2008)

6) Restrictions on Transfer of Shares ---

Fleischer v. Botica Nolasco (1925) 47 Phil. 583Thomson v. CA (298 SCRA 280)Rural Bank of Salinas, Inc. v. CA (210 SCRA 510)

7) Validity of Transfers / Registration of Shares

Razon v. IAC GR 74306 (March 16, 1992)Torres v. CA (278 SCRA 793)Rivera v. Florendo (144 SCRA 647; 1986)

Lim Tay v. CA GR 126891 (Aug. 5, 1998) Ponce v. Alsons Cement GR 139802 ( Dec. 10, 2002)

Rural Bank of Salinas, Inc. v. CA (210 SCRA 510) Hager v. Bryan 19 PHIL 138 (1911)

Bitong v. CA 292 SCRA 503 Abejo v. De la Cruz 149 SCRA 654 (1987)

8) Unauthorized Transfers ----

Santamaria vs. Hongkong 89 Phil. 780 (1951)De los Santos vs. McGrath 96 Phil. 577(1955)

9) Collateral Transfers ---

Uson v. Diosomito (61 Phil. 535; 1935)Chua Guan vs. Samahang Magsasaka 62 Phil. 473 (1935)Chemphil Export & Import v. CA (Dec. 12, 1995)

X. PRE-EMPTIVE RIGHT – Sec. 39 and 102

XI. CORPORATE POWERS

1) Express, Implied, Inherent - Sections 36 to 45 2) Ultra Vires Doctrine --- Sec. 45; Legal Consequences Cases: RP v. Acoje Mining (1963) 7 SCRA 631 National Power Corp. v. Vera (1989) 170 SCRA 721 Govt. of the P.I. v. El Hogar Filipino 50 Phil. 399 Pirovano, et al v. De la Rama (1954) 96 Phil. 335 Harden, et al v. Benguet (1933) 58 Phil. 141 Bissel v. Michigan Southern 22 NY 258; 1860 XII. CONTROL & MANAGEMENT

1) Board of Directors/Trustees – a) Sections 23, 27

Ramirez v. Orientalist Co. & Fernandez 38 Phil 634 Expert Travel & Tours, Inc v. CA 459 SCRA 147

Citibank NA v. Chua 220 SCRA 75 Boyer-Roxas v. CA 211 SCRA 470

b) Non-stock corp. – Sec. 92

c) Close corp. - Secs. 97 (par.1, no.2), 97 (par.2), Sec.104 --provisional director

d) Special corporations – Educational --- Sec. 108

Religious – Sec. 110-113, Sec. 116 (6)

e) Meetings – Sec. 49, 53, 54 Close corp. – Sec. 97(3), 101

f) Elections - Sec. 24, 26, 27

Removal – Sec. 28 Vacancy – Sec. 29 Valle Verde CC v. Africa GR 151969 (Sept. 4, 2009) 2) Officers – Sec. 25, 92 (par. 3), 97 (last par.), 26, 27, 31, 32

Yu Chuck v. Kong Li Po 46 Phil 608 Woodchild Holdings v. Roxas Electric 436 SCRA 235 Bd. Of Liquidators v. Heirs of Kalaw 20 SCRA 987

3) Board Committees - Sec. 35

Hayes v. Canada Atlantic & Plant S.S. Co., Ltd. (1910) US Circuit CA, First Circuit 181 F. 2894) Stockholders –

(a) Sec. 23 and other provisions of the Corp. Code requiring stockholders’ action

(b) Meetings – Sec. 49, 50, 51, 52, 54, 55, 56, 57

c) Deadlocks in close corps – Sec. 104

XIII. DUTIES OF DIRECTORS & CONTROLLING STOCKHOLDERS

1) Compensation of directors – Sec. 30 2) Duty of diligence/business judgment rule – Sec. 31

Benguet Electric Coop. v. NLRC 209 SCRA 55 3) Self-dealing directors- Sec. 32

Prime White Cement v. IAC 220 SCRA 103

4) Interlocking directors – Sec. 33 Gokongwei v. SEC et al. 89 SCRA 336

5) Doctrine of Corporate Opportunity – Sec. 34

6) Duty to stockholders - Special Facts Doctrine

Strong v. Repide 41 Phil. 947

7) Duty to creditors – Steinberg v. Velasco 52 Phil. 953

8) Watered Stocks - Sec. 65

XIV. DEVICES AFFECTING CONTROL

1) Proxy device – Sec. 582) Voting trusts – Sec. 593) Pooling & voting agreements – Sec. 1004) Cumulative voting – Sec. 245) Classification of shares – Sec. 66) Restriction on transfer of shares – Sec. 98 7) Prescribing qualifications for directors – Sec. 47 (5)8) Management contracts – Sec. 449) “Super” votes; unusual voting/quorum requirements – Sec. 97

XV. RIGHT OF INSPECTION ---- Secs 74 - 75 Cases: Pardo v. Hercules Lumber 47 Phil. 965 Gonzales v. PNB 122 SCRA 490 Veraguth v. Isabela Sugar Co. 57 Phil. 266 Gokongwei v. SEC L- 45911, April 11, 1979

XVI. DERIVATIVE SUIT Cases: Evangelista v. Santos 86 Phil. 387 Republic Bank v. Cuaderno 19 SCRA 671 SMC v. Khan L- 85339 (Aug. 11, 1989) Yu v. Yukayguan GR 177549 (June 18, 2009)

XVII. MERGERS & CONSOLIDATION

XVIII: DISSOLUTION:

A. Modes of Dissolution:

1) Expiration of term – whether original, shortened, or extended

2) Sec. 22 3) Voluntary – Sec. 118 (no creditors affected)

Sec. 119 (creditors affected)4) Involuntary - Sec. 121

- Quo warranto proceedings – jurisdiction with RTC under Securities Regulation Code

5) Shortening corporate term – Sec. 1206) Close Corporation – Sec. 105

B. Effects of Dissolution –

1) Juridical personality ceases – not even de facto corporation; subject to collateral attack

2) Business discontinued except for winding up3) 3-year pd after dissolution – for winding up and

liquidation only4) Section 145 5) Cases: National Abaca v. Pore (2 SCRA 989)

Clemente v. CA (242 SCRA 717)

XIX. LIQUIDATION: A. Sec. 122 B. Modes of Liquidation – 1) by Board of Directors 2) by trustees– 3- yr limit does not apply, provided

appointment of trustees is made within said 3-year period

3) by receiver appointed by RTC- same rule as above REVIEW: National Abaca case and Clemente case

GR: Prohibition against distribution of assets except upon dissolution and liquidation (Sec 122)

Exception: Sec. 8, 9, 38, 41, 43, 104, 105

OTHER CASES: 1) China Banking v. Michelin 58 Phil. 261 2) RP v. Marsman Dev. Corp 44 SCRA 418 3) Tan Tiong Bio v. CIR (GR No. L-15778,

April 23, 1962)

C. Non-stock Corporations - Sec. 94 to 95

XX. FOREIGN CORPORATIONS --- Sec. 123 – 136, 144

1. Definition and Right of Foreign Corporation – Sec. 123

2. Principle of Reciprocity – Sec. 123 and 125(10)

3. Application for a License– Sec. 125

4. Issuance of License by SEC /when to commence transacting business in the Philippines/ duration for transacting business – Sec. 126

5. What constitutes “doing business” - continuity of transactions w/c are in pursuance of the

normal business of the corporation (Mentholatum v. Mangaliman) 72 Phil. 525 (1941) - Implementing rules of RA 7042 (Foreign Investments

Act of 1991, as amended) 6. What constitutes “not doing business”

- Test is if a company has no intention to repeat the business activity and there is no element of continuity of conduct of business

- Sec. 1 of implementing rules of RA 7042, as amended

2. Who may be resident agent – Sec. 127

3. Service of summons/ other legal processes: a) Sec. 128 - foreign corp. w/c has a license to do

business in the Philippines b) Sec. 14, Rule 14 of New Rules of Court – foreign

corp. doing business in the Phil. w/out a license

9. Applicable Law: General Rule/ Exceptions - Sec.129 10. Amendments - Sec. 130 and 131

11. Merger or consolidation – Sec. 132 (applicable only to foreign corps. authorized to do business in RP)

a) If with local corp. – no law authorizing the sameb)If with another foreign corp – Sec. 132 Absorbed corp – must file petition for w/drawal Surviving corp – if it desires to continue in RP the business of absorbed corp., must file own application in acc. w/ Sec. 123. 125. 126. 128

12. Doing business without a license – Sec. 133

a) Foreign corp. CANNOT sue (Granger Asso. v. Microwave Systems, Inc.) 189 SCRA 63 (1990) Exception --- estoppel on part of party dealing w/ foreign

corp. (Merrill Lynch Futures v. CA) 211 SCRA 824 (1992)

b) May be SUED under the doctrine of quasi-estoppel by acceptance of benefits (Marubeni Nederland BV v. Tensuan) 190 SCRA 105 (1990)

13. Not doing business in RP (not required to get a license)

a) CAN sue on the following: - on an isolated transaction (Marshall Wells v. Elser)

46 Phil 71 (1924) - to protect its reputation, name, and goodwill

(Gen. Garments Corp. v. Dir. Of Patents) 41 SCRA 50 (1971)

- infringement of trademark and unfair competition (Le Chemise Lacoste v. Fernandez) 129 SCRA 377 (1984) - Sec. 160 of R.A. 8293 (Intellectual Property Code) - to enforce its right not arising out of a business

transaction b) CAN BE SUED for actionable acts or omissions - acts done vs. a person(s) in the Phil.

- obligations incurred by its representative and fully subsidized extension office in the Phil.

(Mavest Inc. v. Sampaguita Garment) 470 SCRA 440 [2005])

14. In relation to Nos. 5, 6, 12, and 13 above: Agilent Technologies Singapore (PTE) Ltd. vs. Integrated

Silicon Technology Philippines Corp. , et al. (G.R. No. 154618)       April 14, 2004

15. Enforceability of contracts of unlicensed foreign corporations --- Lack of capacity at execution of contract cured by subsequent registration of unlicensed foreign corp.

(Home Insurance Co. v. Eastern Shipping Lines) 123 SCRA 424

16. Revocation of License – Sec. 134 and 13517. Withdrawal of foreign corp. – Sec. 136

XXI. JURISDICTION – Interim Rules of Procedure for Intra- corporate Matters --- w/ the RTC

--- Securities Regulation Code XXII. SECURITIES REGULATION CODE --- Exempt Transactions,

Tender Offer, etc. Case: CEMCO v. Nat. Life Insurance G.R 171815 (Aug. 7, 2007)