Revised Corporation Code (Divina on Commercial Law Volume I)

Question 1

1. What is a corporation?

Answer 1

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 incidental to its existence.

Question 2

2. What are the attributes of a corporation?

Answer 2

The attributes of a corporation are drawn from its statutory definition.

(1) It is an artificial being.
(2) It is created by operation of law.
(3) It has the right of succession.
(4) It has the powers, attributes, and properties expressly authorized by law or incidental to its existence.

Question 3

21. What are the various tests to determine the nationality of a corporation?

Answer 3

The various tests to determine the nationality of a corporation are:
(1) Place of incorporation test;
(2) Control test; and
(3) Grandfather rule.

Question 4

21.1. What is the place of incorporation test?

Answer 4

The place of incorporation test means that the nationality of the corporation is determined by the state of incorporation. Under this test then, a corporation is a Philippine national if it is organized and existing under Philippine laws, regardless of the nationality of the shareholders. It is applied if the corporation is not engaged in areas of activities reserved, in whole or in part, for Filipinos.

This test presents a simple method of determining the nationality of a corporation, the main criterion being the state of the incorporation, regardless of the nationality of the stockholders.

Question 5

21.2. What is the control test?

Answer 5

The control test is a mode of determining the nationality of a corporation engaged in nationalized areas of activities, provided for under the Constitution and other applicable laws, where corporate shareholders with foreign shareholdings are present, by ascertaining the nationality of the controlling stockholder of the corporation. If the capital of the investing corporation is at least 60% owned by Filipinos, then the entire shareholdings of the investing Corporation shall be recorded as Filipino-owned thus making both the investing and the investee - corporations Philippine national.

Question 6

21.3. What is the grandfather rule?

Answer 6

The grandfather rule is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other applicable laws, is accurately computed, in cases where corporate shareholders with foreign shareholdings are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are determined. In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders.

The purpose of this rule is to trace the nationality of the stockholder of investor corporations to ascertain the nationality of the corporation where the investment is made.

Question 7

25. What is the doctrine of piercing the veil of corporate fiction?

Answer 7

It is the doctrine that allows the State to disregard, for certain justifiable reasons, the notion or fiction that the corporation has a separate legal personality from those composing it. The doctrine of separate juridical personality (doctrine of separate legal entity) is only a fiction to promote public convenience. If this fiction is misused or abused, then the State shall pierce the corporate veil and treat the corporation and the persons composing it as one and the same entity.

Question 8

26. In what areas does the doctrine of piercing the veil of corporate fiction apply?

Answer 8

The doctrine of piercing the corporate veil applies in three (3) basic areas, namely:
(1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
(2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
(3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation.

The doctrine likewise applies in the following cases:
(1) Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.
(2) When the complaint alleges that the directors and/or officers committed bad faith or gross negligence in conducting the affairs of the corporation.

Question 9

36. What are the results of piercing the corporate veil? Does it result in the dissolution of the corporation?

Answer 9

The piercing of the corporate veil does not dissolve the corporation. It simply means that the stockholder and/or director and/or officer, whose action/s became the basis for the application of the doctrine, and the corporation shall be treated as one and the same entity. In traditional piercing the corporate veil, the concerned stockholders, directors/trustees, and officers become liable for the obligation of the corporation. In reverse piercing the corporate veil, the corporation becomes liable for the debts of the concerned stockholders/members, directors/trustees, and officers of the corporation.

In case the corporation is just the an alter ego of another corporation, both corporations become one and the same entity.

Question 10

55. What are shares of stocks?

Answer 10

Shares of stocks are forms of securities representing equity ownership in a corporation, divided up into units. They are the measure of the stockholder’s proportionate interest in the corporation in terms of the right to vote and to receive dividends, as well as the right to share in the assets of the corporation when distributed in accordance with law and equity.

Question 11

57. What are preferred shares of stock?

Answer 11

These are shares of stock that are given certain preferences as may be provided in the articles of incorporation but may be denied the right to vote.

Question 12

58. What are common shares of stock?

Answer 12

Common shares are the basic class of stock ordinarily and usually issued without privileges or advantages, except that they cannot be denied the right to vote. Owners are entitled to a pro-rata share in the profits of the corporation and in its assets upon dissolution and liquidation and in the management of its affairs.

Question 13

73. Who composes a corporation?

Answer 13

A. Corporators are those who compose a corporation, whether as stockholder or shareholders in a stock corporation, or members in a nonstock corporation.

B. Incorporators are those stockholders or members mentioned in the article of incorporation as originally forming and composing the corporation and who are signatories thereof.

C. Board of Directors are generally elected by the stockholders to conduct the business, control the property, and exercise corporate powers. Directors may also be elected by their fellow directors in the cases and under the conditions specified in Section 28 of the RCC. They are called the Board of Trustees in a nonstock corporation.

D. Officers are those appointed to assist the Board to manage the affairs of the corporation.

Question 14

76. What are the distinctions between corporators and incorporators?

Answer 14

A. Incorporators are mentioned in the articles of incorporation as those who originally form part of the corporation and are signatories thereof, whereas corporators are otherwise.

B. Incorporators are corporators while corporators are not necessarily incorporators.

C. Incorporators in a stock corporation should not exceed 15 whereas the number of corporators may exceed 15 taking into account the number of authorized shares of the corporation.

D. Under the RCC, the majority of the incorporators should be residents of the Philippines, while no such requirement is imposed on corporators under the RCC.

E. Except for corporation sole, the number of incorporators should not be less than five (5). These distinctions no longer hold under the RCC because the requirement of residency for incorporators was removed and a one (1)-person corporation is now allowed.

Question 15

83. What are the allowable forms of consideration for the issuance of shares of stock?

Answer 15

Consideration for the issuance of stock may be:
A. Actual cash paid to the corporation;

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

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

D. Previously incurred indebtedness of the corporation;

E. Amounts transferred from unrestricted earnings to stated capital;

F. Outstanding shares exchanged for stocks in the event of reclassification or conversion;

G. Shares of stock in another corporation; and/or

H. Other generally accepted form of consideration.

Question 16

84. Under what conditions may a corporation accept property as consideration for the issuance of its shares of stock?

Answer 16

A corporation may accept property as consideration for the issuance of its shares of stock under the following conditions:

A. It must be necessary or convenient for its use and lawful purposes.

B. It must be fairly valued, at least equal to the par or issued value of the stock issued.

C. The valuation thereof shall initially be determined by the stockholders or the board of directors.

D. The valuation is subject to the approval of the SEC.

Question 17

85. Under what conditions may a corporation issue its shares of stock in consideration for the payment of debt?

Answer 17

The conditions are:

A. The debt must be previously existing, thus shares cannot be used in payment but only as security for future debts.

B. If the shares will be issued not to existing stockholders, the issuance must be approved by the board of directors, as well as by the stockholders representing at least 2/3 of the outstanding capital stock, otherwise, it will amount to a violation of the pre-emptive right of the stockholders.

C. If its own shares will be acquired by a bank in payment of a debt, the acquisition has to be approved by the BSP and the shares have to be disposed of within six months from acquisition.

Question 18

171. Stikki Cement Corporation (“STIKKI”) was organized primarily for cement manufacturing. Anticipating substantial profits, its President proposed that STIKKI invest in:
     (a) a power plant project,
     (b) a concrete road project, and
     (c) quarry operations for limestone used in the manufacture of cement.

What corporate approvals or votes are needed for the proposed investments? Explain.

Answer 18

Unless the power plant and the concrete road project are reasonably necessary to the manufacture of cement by STIKKI (and they do not appear to be so), then the approval of the said project by a majority of the board of directors and the ratification of such approval by the stockholders representing at least 2/3 of the outstanding capital stock would be necessary.

As for the quarry operations for limestone, the same is an indispensable ingredient in the manufacture of cement and may, therefore, be considered reasonably necessary to accomplish the primary purpose of STIKKI. In such a case, only the approval of the board of directors would be necessary.

Question 19

172. What are dividends?

Answer 19

Dividends are corporate profits allocated, lawfully declared and ordered by the directors to be paid proportionately to the stockholders in the form of cash, property, or stocks.

Question 20

173. Are profits the same as dividends?

Answer 20

Profits are the sources of dividends. Profits are dividends only when they have been set aside for distribution to stockholders under the conditions specified by law.

Profits belong to the corporation while dividends once declared, belong to the stockholder.

Question 21

177. Is it ministerial duty of the corporation to declare dividends if surplus profit is available?

Answer 21

The declaration of dividends is discretionary, covered by the business judgment rule. However, stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock, except:
A. when justified by definite corporate expansion projects or programs approved by the board of directors; or

B. when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign, from declaring dividends without their consent, and such consent has not yet been secured; or

C. when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

Thus, the board of directors may be compelled to declare dividends if the surplus profit is in excess of 100% of its paid-in capital and no justifiable reasons exist to withhold dividend declaration.

Under Section 49 of the RCC, however, the board of directors must endeavor to present to the stockholders an explanation on dividend policy and the fact of payment of dividends or the reasons for the nonpayment thereof.

Question 22

A. Palmavera Corporation has an authorized capital stock of Php 500,000,000.00 all subscribed and outstanding as of December 31, 2019. The corporation also has unrestricted retained earnings in its book amounting to Php 375,000,000.00. Since the corporation needed the cash surplus to carry out its expansion projects, the board of directors, in its meeting held on January 5, 2020, approved a resolution declaring and ordering the issuance of 50% stock dividends in lieu of cash dividends.

Was the resolution declaring the issuance of stock dividends valid? Explain your answer.

Answer 22

Yes, the resolution of the Board of Directors declaring the issuance of stock dividends was valid, but still insufficient for purposes of stock dividend.

Question 23

B. Palmavera Corporation has an authorized capital stock of Php 500,000,000.00 all subscribed and outstanding as of December 31, 2019. The corporation also has unrestricted retained earnings in its book amounting to Php 375,000,000.00. Since the corporation needed the cash surplus to carry out its expansion projects, the board of directors, in its meeting held on January 5, 2020, approved a resolution declaring and ordering the issuance of 50% stock dividends in lieu of cash dividends.

What is/are the step/s needed to be taken so that the decision of the board could be implemented? State the required vote.

Answer 23

The aforesaid approval of the Board of Directors for the declaration of stock dividends should still be concurred in by the stockholders representing not less than 2/3 of the outstanding capital stock, at a regular or special meeting called for the purpose. In addition, the authorized capital stock must be increased to accommodate the stock dividends since the authorized capital stock of Palmavera Corporation is fully subscribed. The increase in capital stock is subject to SEC approval.

Question 24

186. ABC Management, Inc. presented to DEF Mining Corp. the draft of its proposed Management Contract. As an incentive, ABC included in the terms of compensation that ABC would be entitled to 10% of any stock dividend which DEF may declare during the lifetime of the Management Contract. Would you approve of such provision? If not, what would you suggest as an alternative?

Answer 24

I would not approve of a proposed stipulation in the management contract that the managing corporation, as additional compensation to it, should be entitled 10% of any stock dividend that may be declared. Stockholders are the only ones entitled to receive stock dividends. I would add that the unsubscribed capital stock of a corporation may only be issued for cash or property or for services already rendered constituting a demandable debt. As an alternative, I would suggest that the managing corporation should instead be given net profit participation and, if later so desires, to then convert the amount that may be due thereby to equity or shares of stock at no less than the par value thereof.

Question 25

255. What is a derivative suit?

Answer 25

A derivative suit is an action filed by a stockholder in the name and on behalf of the corporation to enforce a corporate right or cause of action to set aside the wrongful acts of the corporation’s directors and officers.

It concerns a wrong to the corporation itself. The real party in interest is the corporation, not the stockholders filing the suit. The stockholders are technically nominal parties but are nonetheless the active persons who pursued the action for and on behalf of the corporation.

Question 26

484. What are the different forms of corporate combinations and acquisitions?

Answer 26

The different forms of corporate combinations and acquisitions are:
(1) Sale of all or substantially all of the assets (asset sale);
(2) Sale of controlling block of stock to new stockholder/s (stock sale); and
(3) Merger or consolidation.

Question 27

485. What is a merger?

Answer 27

A merger is a reorganization of two (2) or more corporations that results in their consolidating into a single corporation, which is one of the constituent corporations, one disappearing or dissolving and the other surviving.

To put it another way, merger is the absorption of one (1) or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities, and obligations of the absorbed corporation(s). The surviving corporation continues its existence while the life or lives of the other corporation(s) is or are terminated.

Question 28

486. What is consolidation?

Answer 28

Consolidation is the union of two (2) or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two (2) or more corporations by which their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations.