CORPORATION LAW part II

CORPORATION BY ESTOPPEL

• The doctrine of corporation by estoppel is based on equitable consideration and resorted to in fairness to all concerned. It applies against a third party dealing with the ostensible corporation "only when tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation.
• The rule that a third party cannot deny the corporate existence of the association because it had contracted and dealt with it in such a manner as to recognize and in effect admit its existence does not apply if the third party "is not trying to escape liability from the contract but rather is the one claiming from the contract" ( INTERNATIONAL EXPRESS TRAVEL AND TOURS VS. CA)

SEC. 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.

QUALIFICATION OF DIRECTORS

1. Must own at least 1 shares of capital stocks of the corporation of which he is a director
2. Standing in his name in the books of corporation

Sec. 25

Every director must own at least 1 share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation. Any director who ceases to be the owner of at least 1 share of the capital stock of the corporation of which he is a director xxx

• Apparent from the provision is that a director who ceases to be an owner of a share of stock becomes automatically disqualified to be and act as a director. Thus, if he assigns his shares and the same is recorded in the books of the corporation, he can not act for and in behalf of the corporation despite the fact that he may remain the beneficial owner of the shares assigned or transferred. Whoever is the registered owner as "appearing in the books" of the corporation has the right to vote or be voted for.

Q: Can a transferor in the VTA still be qualified to be a director?

A: No. The immediate effect of VTA is that the transferor becomes a beneficial owner, thus, he becomes disqualified or ineligible to be a director. Under the NCC, which ommitted the phrase "in his own right", what is material is the legal title to, not the beneficial ownership of the stocks as appearing in the books of the corporation. That is whoever owns the shares as appearing in the books of corporation, becomes eligible to be elected and act as a director. (LEE VS. CA)

Q: What is the purpose of VTA?

A: The purpose of VTA is to confer upon the trustee the right to vote and other rights pertaining to shares, for a period not exceeding 5 years.

Q: What is the effect of VTA?

A: The certificate of stock is cancelled and a new one will be issued to the transferee. Thereafter, it shall be noted in the books of corporation. Once entered into VTA, the transferor ceases to be owner of at least 1 share of stocks standing in his name in the books of corporation. He becomes a mere beneficial owner. He ceases to have anything to do with the management of the enterprise. He ceases to become a director or becomes ineligible to as such.

Q: When does VTA expires?

A: Upon full payment of the loan.

Q: What are the conditions or requirements of VTA?

A: It must be in writting and notarized, specifying theterms and conditions. The certificate of agreement must be filed with the corporation and the SEC.

Q: What is the effect if the certificate is not filed?

A: It becomes ineffective and unenforceable.

SERVICE OF SUMMONS

Q: To whom summons may be served if the defendant is a corporation, partnership or association, organized under the laws of the Philippines with a juridical personality?

A: Service of summons may be made upon;

1. President
2. Managing Partner
3. General Manager
4. Corporate Secretary
5. Treasurer
6. In-house Counsel

Q: Can liberal construction be invoked or utilized as to the service of summons?

A: No. Strict compliance is necessary to confer jurisdiction. Service must be made to the one who is named in the statute. (E.B VILLAROSA & PARTNERS CO.LTD VS. BENITO)

COMPENSATION OF DIRECTORS

• In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such director, except for reasonable per diems xxx

" AS SUCH DIRECTORS"

• Western Institute of Technology vs. Salas, explains the phrase "as such director" when SC held valid the questioned resolution, which was passed by the Board of directors, who are themselves the Chairman, Vice Chairman, Secretary and Treasurer, granting compensation for their services. The compensation was for the services rendered by them as officers of the corporation and not as such directors.

LIABILITY OF DIRECTORS/ TRUSTEES AND OFFICERS

• As a General Rule, Corporate Directors, Officers and Agents are not liable for obligations incurred by corporation through their acts if they did so within the scope of their authority in good faith.

Q: When can they be held liable?

A: Personal liability of corporate directors, trustees or officers with the corporation may validly attach, as a rule only when;

1. He ASSENTS to a patently unlawful act of the corporation; for bad faith or gross negligence in directing its affairs; or for conflict of interest resulting in damages to the corporation, its stockholders or other persons.
2. He CONSENTS to the issuance of watered stocks, or who having knowledge, thereof, does not file his written objection thereto.
3. He AGREES to hold himself personally and secondarily liable to the corporation.
4. He IS MADE BY SPECIFIC PROVISION OF LAW to personally answer for the corporate action.

Llamado vs. Ca

• In this case, the Corporate Secretary and the Treasurer issued and signed checks with ISF. The court held them personally liable. This is because corporate officers are made so liable as such under Sec. 1 of BP. 22, which provides that;
• " Where a check is drawn by a corporation, company or entity, the person or persons who actually signed the checks in behalf of such drawer shall be liable under this act."

Uichico vs. CA

• In this case, the court held corporate directors and officers liable for the termination of its employees for the feigned ground of serious business losses.
• In Labor cases, corporate directors and officers are solidarily liable with the corporation for termination of employees done with malice or bad faith.

DOCTRINE OF SECONDARY MEANING

• A word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because of geographically or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to his acrticle that, in that trade and to that branch of purchasing public, the word or phrase has become to mean that the article was his product.

DOCTRINE OF CORPORATE OPPORTUNITY

• Rest fundamentally on unfairness, in particular circumstances of an officer/director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.

CORPORATE ENTITY THEORY

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

PIERCING THE VEIL OF CORPORATE FICTION

• Notion of corporate legal entity is not at all times respected. Corporate entity theory is confined to legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak or cover for fraud or illegality, or to work an injustice.
• It is a fundamental principle in corporation law that a corporation is an entity seperate and distinct from its stockholders or members and from other corporation to which it may be connected. But when the notion of legal entity is being used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as a mere association of persons, or in the case of two corporations, merge them into one, the one being merely regarded as part or instrumentality of the other. Same is true when a corporation is a mere dummy and serves no business purpose and is intended only as a blind, or an alter-ego or business conduit for the sole benefit of the stockholders.

INSTRUMENTALITY RULE

• States that when one corporation is so organized and controlled and its affairs are conducted so that in fact a mere instrumentality or adjunct of the other, the fiction of corporate entity of the instrumentality may be disregarded. The control necessary is to invoked the rule is not majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no seperate mind, will or existence of its own and is but a conduit for its principal. The control and the breach of duty must proximate cause the the injury or loss for which the complaint is made.

TEST IN DETERMINING THE APPLICABILITY OF THE RULE:

1. Control, not merely majority but complete control and domination not only of finances but of policies and practices so that the corporate entity so controlled has no seperate mind, will or existence of its own.
2. Such control was used to commit fraud or wrong to perpetuate the violation of a statutory or positive duty, or dishonest or unjust act in contravention to plaintiff's legal rights; and
3. Said control and breach of duty must proximately cause the injury or loss complained of.

***Absent any one, piercing the veil of corporate fiction will not be justified.

"IN HIS OWN RIGHT" vs. "STAND IN HIS NAME ON THE BOOKS OF CORP"- with regard to qualification of director/trustee

• The phrase "in his own right" was already deleted under Sec. 23 with regard to the qualification of a director or trustee. Hence, there is a clear indication that in order to be eligible as director, what is material is the LEGAL TITLE, not the BENEFICIAL OWNERSHIP, of stock as appearing on the books.

ULTRA-VIRES ACTS- Doctrine of Limited Capacity

• Those that can not be executed or performed by a corporation because they are not within its express, inherent or implied powers as defined by its charter or articles of incorporation. It allows collateral attack upon the authority of corporation to engage in such particular endeavor. May not be necessarily illegal but merely beyond the power of the corporation to perform.

Q: May ultra-vires acts which are not illegal per se become binding and enforceable?

A: Yes. Mere ultra-vires acts or those which are not illegal per se and void ab initio, but are not merely within the scope of AOI are voidable and may become binding and enforceable when ratified by the stockholders. Unless, thepublic or third parties are therby prejudiced. ( PRIVANO, ET AL VS. DE LA RAMA STEAMSHIP CO.)

Q: May ultra-vires acts which are illegal be subject to ratification?

A: No.

Q: Does the liability of an accomodation party apply in a corporation?

A: No. An accomodation party liable on the instrument to a holder for value although such holder at the time of taking the instrument knew him to be only an a accomodation party, does not include nor apply to corporation which is an accomdation party. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accomodation of another is ultra-vires. Hence, one who has taken the instrument with knowledge of the accomodation nature thereof can not recover against a corporation. Except, when an officer or agent of a corporation execute or indorse it with authority.

Q: Do President and Vice President have the power to execute for mere accomodation a negotiable instrument of corporation for ther individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern?

A: None. In fact, it can not be enforced against corporation, escpecially since it is not involved in any aspect of the corporate business or operations. Signatories thereof shall be primarily liable therefor, as well as the consequences arising from their acts in connection therewith. (CRISOLOGO-JOSE VS. CA)

CONSEQUENCES OF ULTRA VIRES ACT:

1. ON CORPORATION ITSELF

• May suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of general public.

2. ON THE RIGHTS OF STOCKHOLDERS

• Stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or contract.
• If act or contract has already been performed, a derivative suit for damages against the directors may be filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contract.

3. ON THE IMMEDIATE PARTIES

• If the contract is fully executed on both sides, the contract is effective and the courts will not interfere to deprive either party of what has been under it;
• If the contract is executory on both sides, as a rule, neither party can maintain an action for its non-performance; and,
• Where the contract is executory on one side only and has been fully performed on the other, the courts differ as to whether an action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts, however, hold that the party who has received benefits from the performance is "estopped" to set up that the contract is ultra vires to defeat an action on the contract. This is more in conformity with the doctrine that no person shall be allowed to enrich himself at the expense of the other.

BY-LAWS

• Rules and ordinance made by a corporation for its own government to regulate the conduct and define the duties of the stockholders or members towards the corporations and among themselves.
• Express power granted to all corporations registered under the corporation code.

Q: Is the adoption of By-Laws mandatory?

A: Yes.

Q: When should the by-laws be adopted?

A:

1. PRIOR TO THE INCORPORATION - The same must be signed by all incorporators without the need of affirmative vote of the majority of the outstanding capital stock or the majority of the members in case of a non-stock corporation
2. AFTER INCORPORATION - Stockholder's or member's consent or approval would be required. In such case, it must be signed by the stockholders or members voting for them. The corporation must adopt with in a period of one month after receipt of notice of its due incorporation.

Q: What will happen if adopted/filed not in accordance with the provisions of Sec. 14?

A: Failure to comply may result to suspension or revocation of its corporate franchise after proper notice and hearing.

Q: Will it result to automatic dissolution?

A: No outright demise of corporate existence. The incorporators must be given a chance to explain their neglect or omission. (LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOC., INC. VS. CA)

Q: When do by-laws become effective?

A: Upon approval of the SEC.

Q: What if the SEC failed to act within the period of 6 months, does its inaction result to effectivity?

A: No. Last paragraph of Sec. 16 with regard to the inaction of SEC within 6 months applies only to Articles of Incorporation. Still, approval of SEC is necessary for the effectivity of by-laws.

TWO MODES OF AMENDING OR REPEALING BY-LAWS/ADOPTING A NEW ONE:

1. MAJORITY VOTE of the directors or trustees and majority vote of outstanding capital stock or members in a non-stock corporation at a regular or special meeting duly called for the purpose.
2. DELEGATION to the board of directors or trustees the power to amend or repeal any by-laws or adopt a new one.

Q: Who may delegate to the board of directors or trustees such powers?

A: The owners of 2/3 of outstanding capital stock or 2/3 of members in a non-stock corporation.

Q: Can the BOD/BOT by itself amend the by-laws?

A: Yes.

Q: Are stockholders presumed to know the provisions of by-laws?

A: Yes. Conclusively presumed. ( FLEISCHER VS. BOTICA NOLASCO, INC.)

Q: What about third parties?

A: They are not presumed to know the by-laws.

ELEMENTS OF A VALID BY-LAWS - CIGIR

1. Must not contrary to lae, public policy or morals.
2. Must not be inconsistent with the Articles of Incorporation.
3. Must be general and uniform in its effect or applicable to all alike or those similarly situated.
4. Must not impair obligations and contracts or vested rights.
5. Must be reasonable.

Q: May the provision of by-laws provides meeting be held anywhere in the Philippines?

A: No. Contrary to the Law (Sec. 51). Meeting which may be held anywhere in the Philippines applies only to a non-stock corporation.

Q: May by-laws provide non-member be a President?

A: No. Contrary to law. ( GOKONGWEI VS. SEC )

Q: May the provision of by-laws provide for continuing compensation even after their service?

A: No. Contrary to law. ( BARETTO VS. LA PREVISORA FILIPINO )

Q: In case of discrepancy between AOI and by-laws, what should govern?

A: Articles of Incorporation.

MEETINGS

• Applies to every duly convened assembly either of stockholders, members, directors or trustees, managers, etc. for any legal purposes, or the transaction of business of common interest.

STOCKHOLDER'S REGULAR MEETING

• Those held ANNUALLY on a date fixed in by laws, or if not so fixed, on any date of April of every year as the BOD/BOT may determine.

STOCKHOLDER'S SPECIAL MEETING

• Shall be held any time deemed necessary or as provided in the by-laws.

Q: May the notice of any meeting be waived?

A: Yes. It may be waived expressly or impliedly by the stockholder or member.

Q: What is the notice requirement in meeting?

A: 2 weeks prior if Regular Meeting/ 1 week prior if Special Meeting.

Q: May sending of notices be shortened or extended?

A: Yes. By-laws may extend or shorten notice whether for Regular or Special Meetings.

REQUIREMENTS FOR VALID STOCKHOLDER'S MEETING:

1. Held on the date fixed in the by-laws or in accordance with law.
2. Prior notice must be given
3. Must be held at the proper place
4. Must be called by proper party
5. Quorom and voting requirements must be met.

Q: Where should stockholder's meetings shall be held?

A: Must at all times, be held in the city or municpality where the principal office of the corporation is located. However, Non-stock members are given privelege to hold their meetings anywhere in the Philippines, provided proper notice is sent to all membersindicating the date, time and place of meeting which shall be within the Philippines.

Q: Who presides at the meeting of directors?

A: President

PERSON OR PERSONS WHO MAY CALL THE MEETING:

1. Person or persons authorized under a by-law provision;
2. Absent of any provision in the by-laws, it may be called by the president;
3. By the secretary on order of the President or on written demand of the stockholders representing or holding at least a majority of the outstanding capital stock or majority of the members entitled to vote in a non-stock corporation, or the stockholder or member making the demand if there is or secretary if he refuses to do so, under Sec.28; and
4. On order of the SEC pursuant to Sec. 50 of the code.

Q: Who may call a meeting if there is no person authorized to do so?

A: For any cause, the SEC, upon petition of a stockholder or member, and on showing of "good cause" therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this code or by the by-laws.

Q: In such case, who shall preside?

A: The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer.