MODULE 1: FUNDAMENTALS OF SECURITIES

Question 1

What are the 5 Types of Corporation?

Answer 1

1) Stock Corp
2) Limited Liab Corp
3) Close Corp
4) Public Company
5) De Jure Corp

Question 2

As, a general rule, in a corporate form of business organization, the stockholders are not personally liable for corporate obligations and and cannot be held liable to third persons who have claims against the corporation beyond their agreed subscriptions/contributions to the corporate capital. However, this privilege may be disregarded under the ”Doctrine of Piercing the Corporate Veil.”

Answer 2

Limited Liability Company

Question 3

A “______________” within the meaning of the Corporation Code is one whose articles of incorporation provide that: (1) All the corporation’s issued stocks of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20);

(2) All of the issued stocks of all classes shall be subject to one or more specified restrictions on transfer permitted by the Corporation Code; and

(3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. A corporation shall be deemed not a close corporation when at least two- thirds (2/3) of its voting stocks or voting rights is owned or controlled by another corporation which is not a close corporation as defined above.

Answer 3

Close Corporation

Question 4

Means any corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities.

Answer 4

Public Company/Listed Company

Question 5

4 Components of the Formation of A Corporation

Answer 5

1) Articles of Incorporation (AOI)
2) By-Laws
3) Certificate of Incorporation / Juridical Personality Commences
4) Powers of a Corporation

Question 6

By-Laws are different from the Articles of Incorporation. T or F?

Answer 6

TRUE

Question 7

1. The rules of action adopted by a corporation for its internal government.
2. Adopted before or after incorporation.
3. Approved by the stockholders if adopted after incorporation.
4. A condition subsequent in the acquisition by a corporation of a juridical personality.

Answer 7

by-laws

Question 8

When to adopt by-laws?

Answer 8

The Corporation Code requires that every corporation formed under the Corporation Code, must, within one (1) month after receipt of the official notice of the issuance of the certificate of incorporation by the SEC, adopt by-laws for its government not inconsistent with the provisions of the Code.

The by-laws, however, may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the SEC, together with the articles of incorporation.

Question 9

Specific Express Powers of a corporation under the Corporation Code

Answer 9

*Power to extend or shorten corporate term.
* Power to increase or decrease capital stock.
*Power to incur,create or increase bonded indebtedness
* Power to deny pre-emptive right.
* Power to sell, lease, exchange, mortgage, pledge or otherwise dispose all or substantially all of its property
* Power to acquire its own shares
* Power to invest corporate funds in another corporation or business or for any other purposes.
* Power to declare dividends
*Power to enter into management contracts

Question 10

Their names are mentioned in the articles of incorporation as originally forming the corporation and are signatories thereof.

Answer 10

1. Corporators
2. Stockholders
3. Members
4. Incorporators

Question 11

no proper form but holds themselves as such

Corporation by estoppel

Answer 11

De facto

Question 12

corporation within the proper confines of the law

Corporation by law

Answer 12

De Jure

Question 13

Disregarded when the law is used to defeat public convenience, justify wrong or cover fraud

Answer 13

Doctrine of corporate veil; piercing the veil of corporate fiction

Question 14

What are the 5 Corporate Doctrines?

Answer 14

1) DOCTRINE OF CORPORATE OPPORTUNITY

2) DOCTRINE OF CORPORATE ENTITY

3) PIECING VEIL OF CORPORATE FICTION

4) RIGHT OF SUCCESSION

5) ULTRA VIRES DOCTRINE

Question 15

Under the “___________________________________” of corporate entity, the principle on separate identity of a corporation from its stockholders may be disregarded when it is used to defeat public convenience, justify wrong, protect or cover fraud or defend crime or work an injustice. If used in those situations, the corporation and the stockholders composing it should be treated as one and the same. Consequently, the stockholders can be held personally liable to corporate debts. However, application of said doctrine is for the proper court to decide. The proper court will not hesitate to pierce the corporate veil or corporate fiction when it would defeat the ends envisaged by law, as the theory of corporate entity was not meant to promote unfair objectives.

Answer 15

Doctrine of piercing the veil of corporate fiction

Question 16

Another attribute of a corporation is that it has a “_________________.” The “_____________________” granted by law to a registered corporation means that a corporation has a continuity of corporate life during its term of existence stated in the articles of incorporation, independent from that of its stockholders or members.

Thus, its continued existence cannot be effected by any change in the stockholders, whether the change be the consequence of death of a stockholder/member or transfer of shares by a stockholder to third person.

Answer 16

Right of Succession

Question 17

No corporation under the Corporation Code shall possess or exercise any corporate powers except those conferred by the the Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers as conferred.

Answer 17

Ultra vires acts of a corporation

Question 18

This is the doctrine to the effect that when a director 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, or when by virtue of his office, he acquires for himself a business opportunity which should belong to the corporation, he must account for all such profits derived by him from the said business opportunity by refunding the profits to the corporation.

Answer 18

Doctrine of Corporate Opportunity

Question 19

What are the 7 Types of Capital Structure

Answer 19

1) AUTHORIZED CAPITAL STOCK

2) PRE-INCORPORA TION SUBSCRIPTION

3) PAID-UP CAPITAL

4) SUBSCRIBED CAPITAL STOCK

5) ADDITIONAL PAID-IN CAPITAL

6) UNISSUED/UNSUBSCRIBED CAPITAL STOCK

7) OUTSTANDING CAPITAL STOCK

Question 20

This refers to the total amount of shares which a corporation is allowed to issue if the shares have a par value. If the shares do not have par value, the corporation does not have an authorized capital stock but it has authorized number of shares which it may issue. Once issued, the corporation shall have a capital stock but not an authorized capital stock.

Answer 20

Authorized Capital Stock

Question 21

This is the part of capital stock which is subscribed, whether paid or
unpaid.

Answer 21

Subscribed capital stock

Question 22

the part of the subscribed capital stock paid to the corporation.

Answer 22

Paid-up capital stock

Question 23

That part of the capital stock which is not issued or subscribed.

Answer 23

Unissued capital stock

Question 24

This refers to the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is a binding subscription agreement) , except treasury shares.

Answer 24

Outstanding Capital Stock

Question 25

the term “surplus” is generally defined as the excess of the net assets of a corporation over its capital or stated capital. Paid-in surplus includes premium on par value stock. Thus where the par value shares are issued and a premium paid over par, a paid-in surplus results.

Answer 25

Paid-in surplus

Question 26

Under this doctrine, the capital stock and assets of the corporation are held in trust for the creditors. Accordingly, there shall be no distribution of assets to shareholders until the claims of creditors have been paid or an appropriation of such assets has been made for the payment of such claims.

Answer 26

Trust Fund Doctrine

Question 27

In Philippine Long Distance Telephone Co. vs. National Telecommunications Commission, G.R. No. 152685, December 4, 2007, the Supreme Court, citing National Telecommunications Commission vs. Court of Appeals, G. R. No. 127937, held that the ___________________________ considers the subscribed capital as trust fund for the payment of Debts of the corporation, to which the creditors may look for satisfaction, until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholders (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital, subscription commitments cannot be condoned or remitted, nor can the corporation buy its its own shares using the subscribed capital as the consideration thereof.

Answer 27

Trust Fund Doctrine

Question 28

A ______________________ is one of the units into which the capital stock of the corporation is divided. It represents the intangible interest or right which an owner has in the management, profits and assets of the corporation. It is property, subject to conversion.

Answer 28

Shares of stock

Question 29

A __________________ is the written acknowledgement by the corporation of the stockholder’s interest in the corporation and its property.

Answer 29

Stock certificate

Question 30

_________________ represents the rights and interest of a stockholder in the corporation. Stock Certificate is the written evidence of such right.

Answer 30

Share of stock

Question 31

___________________ is intangible personal property, while stock certificate is tangible personal property.

Answer 31

Share of stock

Question 31

The ordinary stock of a corporation which entitles the holder to a pro rata division of the dividends, without any preference or advantage over any other stockholders

Answer 31

Common Stock

Question 32

___________________ may be issued even if not fully paid, except shares without par value which are deemed fully paid and non-assessable upon issuance. Stock certificate, as a rule, is issued only if the subscription is fully paid.

Answer 32

Share of stock

Question 33

_________________one which entitles the holder to certain preferences over other shareholders. Such preferences may be as follows:

(a) _______________ as to asset – One which entitles the holder to preference in the distribution of dividends over common stock upon the liquidation of the corporation.

(b) ________________ as to dividends – One that entitles the holder to preference in the distribution of dividends over common stock

Answer 33

Preferred stock

Question 34

One which entitles the holder to preference in the distribution of dividends over common stock upon the liquidation of the corporation.

Answer 34

Preferred stock as to asset

Question 35

One that entitles the holder to preference in the distribution of dividends over common stock

Answer 35

Preferred as to dividends

Question 36

One the nominal value of which appears on the articles of incorporation and on the stock certificate.

Answer 36

Par value stock

Question 37

One without any nominal or par value appearing in the articles of incorporation or on the stock
certificate.

Answer 37

No Par value stock

Question 38

Those which grant the issuing corporation the power to redeem or purchase after a certain period.

Answer 38

Redeemable shares

Question 39

Those entitled to vote in the meetings of the corporation

Answer 39

Voting shares

Question 40

Those without voting rights, except in certain cases.

Answer 40

Non-voting shares –

Question 41

Those that grant to the founders certain rights and privileges not enjoyed by other shares.

Answer 41

Founders’ Shares

Question 42

What are the Rules On Founders Shares

Answer 42

a. Founders shares must be classified as such in the articles of incorporation.

b.They may be given rights and privileges not enjoyed by other shares subject to the following limitations:

1. If the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not exceeding 5 years subject to the approval of the SEC.
2. The five-year period begins from the approval of SEC.

Question 43

Those which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means.

Answer 43

Treasury Shares

Question 44

What are the Rules of Treasury Shares?

Answer 44

a. They shall have no voting rights as long as they remain in the treasury.

b. Although they are part of the subscribed stock, they are not considered outstanding
shares.

c. Being owned by the corporation, they are not entitled to dividends.

d. They may again be disposed of for a reasonable price fixed by the board of directors

Question 45

The following statements are correct except:

1. Where the corporation had previously issued the entire authorized capital stock, it cannot issue additional stock in excess thereof. Where there is an over-issuance, the increase and the certificates issued are void because of the fact that it is beyond the power of the corporation to create and issue the additional stock, and therefore, holders of the certificates, whether they be the original holders or their bona fide transferees, do not become stockholders.
2. Shares of stock cannot be issued by a corporation gratuitously under an agreement that nothing at all shall be paid to the corporation for this would result in the watering of shares.
3. A corporation may issue shares of stock at any price, provided it is not less than par.
4. An agreement between the corporation and subscribers to pay the shares of stock above “par
   value” but below the “book value” is not valid and is in violation of trust fund doctrine.

Question 46

What are the considerations for the issuance of shares?

Answer 46

1) Cash
2) Property
3) Previously incurred indebtedness
4) Deposit for future subscription
5) Outstanding shares of stock
6) Unrestricted retained earning to stated capital
7) Actual services rendered

Question 47

The following statements are correct, except:

Answer 47

1. The subscribers may in their own personal capacity and acting in good faith, borrow money for payment of their subscriptions. The loan agreement between the borrower and the creditor is a private contract between them of which the corporation is not a party. The moment the borrowed money is contributed and accepted as payment to subscription, the borrower- stockholder cannot, as a matter of right, demand for the return of the borrowed funds invested to answer his liability to the creditor nor can he demand the corporation to pay his debts.
2. Corporations are not restricted from receiving only money/cash in payment of subscription of capital stock. The Corporation Code allows payment in exchange for shares of stock in the form of “property.”
3. Shares of stock may be accepted as capital contributions payment in exchange of shares of stock of a corporation, provided that the same is necessary or convenient in carrying out the corporate business for which the corporation is organized,
4. Shares of stocks can be issued in exchange for future services.

Question 48

What are the 10 Rights of a stockholder?

Answer 48

RIGHT TO VOTE IN THE ELECTION OF THE BOARD

RIGHT TO BE VOTED

RIGHT TO VOTE IN CORPORATE ACTS

PRE-EMPTIVE
RIGHT/STOCK RIGHTS OFFERINGS

RIGHT OF FIRST REFUSAL

RIGHT TO RECEIVE DIVIDENDS

RIGHT TO INSPECT CORPORATE BOOKS

APPRAISAL RIGHT

RIGHT TO
DISPOSE, DESIGNATE PROXY, VOTING TRUST AGREEMENT

DERIVATIVE SUIT

Question 49

• For stock corporations, no share may be deprived of voting rights, except those classified and issued as “preferred” or ‘redeemable” shares, provided that there shall always be a class of shares or series of shares which have complete voting rights.
• Each share of stock is entitled to vote, unless denied in the articles of incorporation or declared delinquent under Section 67 of the Corporation Code.
• Only stockholders of record as of date fixed in the by-laws shall enjoy the right to vote at stockholders’ meeting.
• The stock and transfer book is the best evidence to establish the stockholders who are entitled to vote at stockholders’ meeting
• The right to vote is a stockholder’s most basic and fundamental right inherent in and incidental to the ownership of corporate shares of stock. This right should not be denied on tenuous and shallow grounds.

Answer 49

General Rule In Voting

Question 50

• Section 71 of the Corporation Code is explicit that the moment a stock becomes delinquent, the holder thereof loses his right to vote. Therefore, no delinquent stock for unpaid subscription shall be voted or entitled to vote or represented at any stockholders’ meeting. Neither can he be voted for as director of the corporation, nor continue seating in the board if he has been previously elected as member thereof.
• Since the whole subscription shall be declared delinquent upon failure of the stockholder to pay the balance due and payable within the period stated in Section 67 of the Corporation Code, the delinquent stockholder cannot vote the shares covering the entire subscription.

Answer 50

Delinquent shares

Question 51

In case of pledged or mortgaged shares in stock corporations, the __________________________ shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded in the appropriate corporate books.

Answer 51

Pledgors, mortgagors, and administrators

Question 52

In case of __________________________ in stock corporations, the __________________________ shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded in the appropriate corporate books.

Answer 52

pledged or mortgaged shares ; Pledgors, mortgagors, and administrators

Question 53

On the death of a shareholder, his __________________________ becomes vested with the legal title to his stocks and entitled to vote the same at all meetings and that until a settlement and division of the estate is done, the legal title to the stocks of the deceased belongs to said administrator or executor as his personal representative.

This finds support under Section 55 of the Corporation Code which provides that the administrator of the estate of the deceased duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.

Answer 53

executor or administrator

Question 54

• Shares standing in the name of another corporation may be voted by such officer, agent, or proxy as the by-laws may prescribe, or in the absence of a by-law provision, as its board of directors may determine. In the absence of a provision in the by-laws, the board of directors may authorize the stockholders to vote for said shares.

Answer 54

Corporate Stockholders

Question 55

It is the sole prerogative and discretion of the board of directors of the parent or holding corporation to choose its nominees in the board of directors of its subsidiaries and other corporations of which it is a stockholder; whose acts shall be under the ultimate direction of the board of directors of the appointing corporation, and the stockholders cannot demand, as a matter of right, for proportionate representation.

Answer 55

Corporate Stockholders

Question 56

appointment of a proxy in the corporation’s behalf, through its board of directors/trustees. Thus, in the case of corporation held stocks, it would be in order to adopt a resolution authorizing the proxy, and to exercise it in a formal corporate manner.

Answer 56

Corporate Stockholders

Question 57

In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the _______________shall be necessary, unless there is a written proxy, signed by all the ___________________ authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an “and/or” capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor

Answer 57

co-owners

Question 58

The right to vote a co-owned share covered by a conjunctive “and/or” in the stock certificate may be exercised by both or all or any of the co-owners

Answer 58

Co-owners

Question 59

One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time:

Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.

Answer 59

Trustee of voting trust agreements

Question 60

_______________________ refers to the right granted to the stockholders to have the first option to subscribe to any issuance or disposition of shares from the capital stock in proportion to their respective shareholdings in the corporation.

Answer 60

Pre-emptive right

Question 61

Subscription deposits are not included in determining the proportionate right of the stockholders in the exercise of ___________________.

Answer 61

Pre-emptive right

Question 62

A board resolution limiting the subscription of existing stockholders to a certain number of shares in additional issuances of shares is not enforceable. Unless denied in the articles of incorporation, the existing stockholders of record are entitled to exercise their pre-emptive right to subscribe to all issuances of shares of stock of the corporation in proportion to their present stockholdings.

Answer 62

Pre-emptive right

Question 63

All stockholders whose name appear in the stock and transfer book of the corporation on the date of the meeting authorizing the issuance of shares are entitled to the pre-emptive right under Section 39 of the Corporation Code.

Answer 63

Pre-emptive right

Question 64

• In order to be valid and enforceable, any restriction on the transfer of shares requiring the transferor to first offer the same to the existing stockholders before selling it to third parties, must be explicitly provided for in the articles of incorporation and stock certificate.
• Restrictions on transfer cannot be more oppressive than granting the existing stockholders or the corporation the option to purchase the shares of the selling stockholders under reasonable terms and conditions or period stated therein.
• In the absence of an express provision in the articles of incorporation and stock certificate stating that the transfer of issued shares should be offered to the existing stockholders, the transferor may legally dispose of or sell his shares to anybody without the need of a waiver from the remaining stockholders.
• A provision in the articles of incorporation giving the stockholders the right of first refusal in case of sale of stock does not apply to transfer by donation.

Answer 64

Right of First Refusal

Question 65

______________________ is not an inherent right of a stockholder, or a matter of absolute right, otherwise, a stockholder can easily withdraw from the corporation at anytime he desires by returning his shares and getting back his capital. Such would constitute a violation of the trust fund doctrine. _____________________is allowed only under the instances provided in the Corporation Code, particularly in Section 37, 42, 81, and 105, the exercise of which is subject to the conditions prescribed therein. However, as a remedy in case an appraisal right is not allowed, a stockholder may avail of Section 63 of the Corporation Code which allows transfer of ownership of shares.

Answer 65

Appraisal Right

Question 66

How appraisal right is exercised?

Answer 66

The conditions for the valid exercise of stockholders’ appraisal right may be summed-up as follows:
a. Any of the instances set forth by the law for the exercise of appraisal right by a dissenting stockholder must be present.
b. The dissenting stockholder must have voted against the proposed corporate action.
c. The demand for payment must be made by the dissenting stockholder within thirty (30) days from the date a vote is
taken thereon. Failure to make such demand within such period shall be deemed a waiver of the appraisal right.
d. The price of the shares must be based on the fair value as of the day prior to the date on which the vote was taken; and the fair value must be determined in accordance with the procedure set forth in Section 82.
e. Submission of the withdrawing stockholder of his shares to the corporation for notation of being a dissenting stockholder within ten (10) days from written demand
f. Payment of shares must be made only when the corporation has unrestricted retained earnings in its books to cover such payment
g. Upon such payment by the corporation, the stockholder must transfer his shares to the corporation.

Question 67

__________________ refers to corporate profits allocated, lawfully declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time.

Answer 67

Dividend

Question 68

When a corporation earns profit over and above the amount of its capital, the stockholders are entitled to have a share in such profit in proportion to their shareholdings, and the fund set apart for this purpose is called ____________________.

Answer 68

Dividends

Question 69

The term “______________________” as defined under the generally accepted accounting principles is understood to mean “ the accumulated profits realized out of normal and continuous operations of the business. It refers to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt.

Answer 69

retained earnings

Question 70

Dividends must be declared and paid out of the “___________________” of the corporation

Answer 70

unrestricted retained earnings

Question 71

Retained earnings which are not appropriated for designated purposes (such as expansion, possible future loss and other contingencies or when prohibited under a loan agreement) are what are referred to as “________________________” from which dividends can be legally paid.

Answer 71

unrestricted retained earnings

Question 72

The right to receive dividends is inherent in the ownership of shares, hence, only stockholders of record are entitled thereto. A person who is not a stockholder of record cannot be a recipient of a dividend. TRUE OR FALSE

Answer 72

TRUE

Question 73

A record date, for purposes of determining who are entitled to dividends, is the future date specified in the resolution declaring dividends, that the dividend shall be payable to the stockholders of record on a specified future date or as of the date of meeting declaring said dividend. TRUE OR FALSE

Answer 73

TRUE

Question 74

The general rule for determining the person to whom a dividend is payable in the absence of a record date is that it belongs to the person who is recorded in the corporate books as stockholder at the time of the declaration. TRUE OR FALSE

Answer 74

TRUE

Question 75

What are the 6 features of dividends?

Answer 75

1) Guaranteed
2) Cumulative
3) Non-cumulative
4) Participating
5) Non-participating
6) Cumulative-participating

Question 76

payment of dividends is guaranteed.

Answer 76

Guaranteed

Question 77

entitle the holder thereof to payment of current dividends as well as dividends in
arrears

Answer 77

Cumulative

Question 78

entitle the holder thereof only to the payment of current and not past dividends.

Answer 78

Non-cumulative

Question 79

entitle the holder thereof to participate with the holders of common shares after their preferred right has been satisfied

Answer 79

Participating

Question 80

entitle the holder thereof to payment of the stipulated preferred dividends and no more .

Answer 80

Non-participating

Question 81

• MAJORITY OF THE BOARD AND
• STOCKHOLDERS REPRESENTING 2/3 OF THE OUTSTANDING CAPITAL STOCK

Answer 81

VOTES REQUIRED FOR THE COMPENSATION OF THE BOARD

Question 82

entitle the holder thereof to payment of dividends in arrears and also, after receiving his preferred share of dividends, to participate with the holders of common stock in the remaining profits

Answer 82

Cumulative-participating

Question 83

• MAJORITY VOTE OF THE BOARD AND
• STOCKHOLDERS REPRESENTING 2/3 OF THE OUTSTANDING CAPITAL STOCK

Answer 83

VOTES REQUIRED FOR AMENDED ARTICLES OF INCORPORATION

Question 84

• MAJORITY VOTE OF THE BOARD AND
• STOCKHOLDERS REPRESENTING MAJORITY OF THE OUTSTANDING CAPITAL STOCK

Answer 84

VOTES REQUIRED FOR AMENDED BY-LAWS

Question 85

• STOCKHOLDERS REPRESENTING 2/3 OF THE OUTSTANDING CAPITAL STOCK.

Answer 85

VOTES REQUIRED TO REMOVE A MEMBER OF THE BOARD