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March 2, 2019

Topics discussed: Amendments and BOD

AMENDMENTS TO THE CORPORATION CODE

Most of the changes in the Revised Corporation Code are being practiced or found in
other laws theyve just been adopted to the amended corporation code.

What are the most significant changes?


1. The new law removes the minimum number of incorporators. You have one person
corporation.

2. Incorporators are now not limited to natural persons. Partnerships, corporations, and
other juridical entities are now allowed to be incorporators.

3. No more minimum subscribed and paid up.

4. Perpetual corporate term and its automatic for existing corporations unless you elect
otherwise.

5. Corporations are allowed e-filing.

6. Remote communication, attendance in meeting by remote communication now allowed


for stockholders. BOD were allowed to do that but not stockholders but under this new
amendment, stockholders can now attend meetings in person by proxy or by remote or
in absentia.

7. Mutual strengthening of corporate governance with the specific requirement for


independent directors but that is really not new because those required under the
amended corporation to have independent director are already required under other laws
to have 20% of their board as independent directors.

8. Adoption of the alternative dispute resolution in the by laws.

SPECIFIC CHANGES ON THE PROVISIONS THAT WE HAVE DISCUSSED BEFORE

Section 7 - Founder's share: It is now expressly provided that the exclusive right to
vote and be voted on for founders share on the election of directors should not violate
the anti dummy law and the FRIA.
Anti-dummy law is persons who are not allowed to have an interest in nationalized
corporations will just nominate Filipino citizens to be the legal stockholder but in reality
theyre the ones controlling so that is the violation of the anti dummy law, that is a criminal
offense.
Foreign Investment Act, apil diha ang foreign investment negative list, katong mga
restrictions.
Founders shares should not violate, as between founders shares and anti dummy law or
the FRIA. The fria and the antidummy law will prevail. This is new but technically this is
not new because this has always been followed.

The qualifications of incorporators as I mentioned theyre now allowed to have


juridical entities as incorporators no more minimum number.

Corporate term: Now perpetual even for existing corporations automatically perpetual
unless you elect to have a limited term. For those corporations whose terms have expired,
for example you elect to have a definite term and then ni expire, under this new law, the
expiration of the corporate term does not result in the automatic dissolution of the
corporation because the corporation can still be revived you can just apply for the revival
of the corporate existence and then the personality of the corporation it is as if it never
expired, so same rights, obligations, properties, assets, liabilities.

Sec 12: No more minimum capital stocks. Before this used to be NO MINIMUM
AUTHORIZED CAPITAL STOCK. They took out authorized so it is now no minimum capital
stock so it is now whether authorized,subscribed or paid up.

They took out the old section 13 katong the requirement on the 25-25.

Contents of the articles of incorporation: More or less the same except that the
number of directors is not subject to minimum anymore.
There is a provision that if the stockholders want there can be can be an arbitration
agreement in the articles of incorporation.

They took out the treasurers affidavit. It is supposed to be an affidavit of the 25-25. So
now they just incorporated in the body that the total paid up is this much.

Now, it is not just the incorporators signing the articles, the treasurer is also required to
sign.

Corporate name: This one has been lengthened so the corporate name is not allowed
if it is not distinguishable from that already reserved, registered for another corporation
or if protected by law or when the use is contrary to existing laws rules and regulations.
A name is not distinguishable just because you add the terms corporation, company,
incorporated, punctuations, conjunctions, articles. For example, you copy the name of an
existing or a protected name and you just put corporation to distinguish it. That is still
not considered as distinguishable that is still not allowed to be registered.
Then it adds that the SEC has the power to hold a corporation and its directors in
contempt for failure to comply with an order not to use the name. That is not in the old
law, this is a new power of the SEC.

SEC 18: They just basically outlined the process of incorporation, this was not in the old
law but its already been practice.

Then it still the same corporate existence will commence from the moment they will issue
the certificate of incorporation.

Non use of a corporate charter and continuous inoperation: This one there is a
slight revision. So failure to organize and commence business it is now 5yrs. In this case,
the certificate of incorporation shall be deemed revoked as of the day following the end
of the 5yr period. At the end of the 5yr period if you still have not organized or
commenced your business then 5yrs plus 1 day, youre corporation is considered as
revoked. But if the corporation has already started operations and then it stopped for a
period of at least 5 yrs , it is not a ground for revocation anymore. Now, it is just a ground
for placing the corporation under delinquent status and such delinquent corporation has
a period of 2yrs to resume operations, then if it fails to resume within 2yrs then this
allows the sec to revoke the corporation certificate of incorporation. That's new, there is
no delinquent status before.

BY-LAWS: They took out the one month period to adopt the by-laws. This is now
consistent with the cases that by laws is not necessary for the existence of the
corporation.

That is basically it for the items that we've already discussed. Let's proceed to

BOARD OF DIRECTORS

How are directors elected?

In the presence of the majority of the outstanding stockholders or in a written proxy


provided that it be present in the bylaws of the corporation or by a majority vote of the
BOD voting maybe allowed thru remote communication or in absentia provided that in
those cases the owners of stock that will participate in the election thru remote
communication and in absentia shall be part in the computation for the quorom.

But before they actually are voted or elected, the directors have to do what?
Nominate.
Who nominates? Any stockholder may nominate any person who is an owner of a stock
as long as he possesses the qualifications(owner of one share of the corporation) and
non of the disqualifications.

What are the disqualifications?

a. A person shall be disquali􏰀fied from being a director, trustee or offi􏰀cer of any


corporation if, within five (5) years prior to the election or appointment as such, the
person was:
Convicted by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years;
For violating this Code; and
For violating Republic Act No. 8799, otherwise known as "The Securities Regulation
Code";
b. Found administratively liable for any offense involving fraudulent acts; and
c. By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.

The violation that was added under the amended corp code is the violation of the SEC
Code.
A stockholder, any stockholder under the new corp code, it is now expressly provided
that the stockholders have the right to nominate stockholders or persons holding at least
one share of stock to be elected as a member of the board provided that the person
nominated has the qualification which is the stock ownership and none of the
disqualifications.

So there are three disqualifications:


1. Conviction by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, violation of the corp code, violation fo the SEC Code.
2. administratively liable for any offense involving fraudulent acts
3. Similar offenses gultied(?) by a foreign court or regulatory body.

How is the voting done, the actual casting, how many votes or how many shares
can a stockholder cast? Number of shares multiplied by the number of seats to be
elected.

How do you distribute your votes?


STUDENT: Three ways:
1. Cumulatively - giving all of the votes he is entitled to to one nominee
2. Proportionately divide his votes to the number of vacant seats
3. Give his vote to 2 or more directors depending on his choice.

ATTY: So he can allocate to as many persons as he sees fit but of course it is not
logical to allocate it to more than the number of the vacancies or seats to be filled you
cannot get a director elected that way.
So what happens after the election?
The corporate secretary is required to submit a General Information Sheet (GIS) to the
SEC.
The corporate secretary will have to file a report to the SEC on the election of the
directors. It has to be filed within 30days from the time of conduct of the election.

What will be contained in the GIS?


The nationalities, residence, the address of the elected BOD.

What happens if no election is held?

STUDENT: You have to report to the SEC the reason behind the failure of that election.
And the SEC within 30days and are required to state that the schedule of the next
election, it should not be more than 60days from the date of election that failed.

ATTY: (this is new this is not in the old code) So youre now required to submit a report
on non holding of election.

What happens if the corporation continues to not hold the election?


STUDENT: A stockholder, director may petition after due hearing to the SEC and upon
resolution of that hearing the SEC can motu proprio order the corporation to hold the
election and is able to exercise all the powers of *** time and date and who presides on
such election.

What is the Business Judgment Rule again?


GENERAL RULE:
So whatever is the decision of the BOD who has been granted the power to exercise all
the corporate powers of the corporation, to conduct all the business and the control and
hold the corporate properties no person not even the stockholders or not even the
courts can question and substitute their judgment for that of the BOD. And the BOD are
insulated from any liability or damages that may arise out of their decision.

EXCEPTION: (When are they liable?)


1. Voting or assenting to patently unlawful acts.
2. Acting in bad faith or gross negligence
3. If they acquire personal or pecuniary interest in conflict with their duty as such
director or trustee
In those instances what is the liability of the director? To whom?
In those three instances, directors or trustees can be held solidarily liable for any
damages that has been caused to the corporation, to the stockholders, or any other
person.

BUSINESS JUDGMENT RULE


GENERAL RULE: Directors shall not be liable for any losses or damages that their
decisions may cause the corporation or any corporation.
EXCEPTIONS: Under sec 30, if they vote for or assent patently unlawful acts, they are
guilty of bad faith or gross negligence in managing the operations of the corporation and
if they acquire personal or pecuniary interest in conflict with their duty as such director
or trustee.

MAGALING v ONG CASE


He was made solidarily liable for the loan made by Ong to the corporation on the ground
of negligence in directing the affairs of the corporation. So, one of the ground under
section 30 where a director may be held solidarily liable.

So how was the negligence manifested? The SC said his answers appeared to be I
dont know or i dont remember, so it shows an attitude of nonchalance or indifference so
he simply did not care about the operations of the corporation, that is considered as
grossly negligent he was held solidarily liable.

IENS v PREBON CASE


The issue in this case was that the aggrieved corporation was not satisfied with the civil
penalty, it wanted a criminal penalty, imprisonment. The SC ruled that sec 144 which is a
catch-all provision it says that if there are no penalty any other penalty of the corporation
code provided that there are no penalties classified therefore are liable for a fine and
imprisonment. So it was a criminal penalty. This case basically says that violation of sec
31 and sec 34 are already penalized under those sections so you do not apply sec 144
in other words violation of fiduciary duty is not a criminal offense it is merely civil. Solidary
liability for damages but if you take a look at section 170 which is the new catch all
provision it is no longer also criminal, that has been taken out it is now merely a fine
although the amount has been increased. But still, section 31 and 34 because they are
penalized under their own sections you dont apply sec 170. You only apply section 170 if
the violation is not penalized anywhere else in the code.

Can directors delegate their powers? They can delegate.

FILIPINAS PORT SERVICES CASE

What committee?

It was an executive committee.

So the new board also created an executive committee. What was the issue that
was brought up by Cruz with respect to the executive committee?
That supposedly it was not allowed because it was not provided in the by-laws.

Is it required to be provided in the by-laws?


For executive committee it is required to be stated in the by-laws.
What's the basis? What section in the code?
Sec. 34. If the by-laws so provide, the board may create an executive committee
composed of at least 3 directors.

So the creation of an executive committee will only be allowed if it is provided in


the by-laws. In the case of Filport, as what SC said that the executive committee
created was? What did the SC say?
In the ruling of SC, it was held that the by-laws of Filport was silent with regard to the
creation of an executive committee.

Was the creation of the executive committee valid or not?


It was held that they cannot rule if it is illegal or unlawful.

What was the ruling? Was the creation of the executive committee valid? As stated,
under the corporation code, in order to have a valid executive committee, the
authority to establish the committee must be stated in the by-laws. We said that the
by-laws of Filport did not create such executive committee so was the executive
committee valid or not?
*guys di jud madungog layo ang student*

It's valid even though it's not in the by-laws? Why?


*inaudible*

Which one is required under the by-laws and which one is within the power of the
board to create?
Since the board of directors--

You're talking about management prerogative.

How do you reconcile the requirement in the law that says that the executive
committee has to be established through the by-laws and the ruling of the SC in
the Filport case which says that here's a company, the by-laws will not provide for
the executive committee, the executive committee is still valid. How do you
reconcile? How did the SC reconcile it?
-

If you're going to tell me that it's because of management prerogative does that
mean that the requirement under Sec 34 is useless?
It was not considered as powerful--

What do you mean powerful?


-
How do you reconcile with the requirement in Sec 34?
-
What's the difference between the law and the case? Where do you reconcile?
-
When is it required to be in the by-laws and when is it allowed to be created by the
board even without authority from the by-laws?
It depends on the function of the committee created.

Why is the function important?


If the executive committee have the same function as the directors then in that case the
executive committee is required to be provided in the by-laws of the corporation

Again to recap when is the executive committee required to be established by the


by-laws?
The executive committee is required to be established in the by-laws if the functions or
its nature will be similar to that of the board of directors.

Atty's discussion: In other words, under Sec 34 the executive committee contemplated
is one which exercises the powers of the board of directors. So it's not the name, it's the
function. However in the case of Filport, while they named their committee executive
committee there was no showing that that executive committee exercised the power of
the board or that the board delegated certain authorities to that executive committee. So
according to the SC, as a general rule which is now under the 2nd paragraph of Sec 34,
the board has the power to create special committees temporary or permanent in nature.
So as long as that committee does not exercise the power of the board, the board has
the right to establish those committees even if not provided in the by-laws. Are we clear?

In the case of Filport there was no showing that the committee that was created
exercised the power of the board. In which case, the requirement under the 1st paragraph
of Sec 34 does not apply because what is required under 1st par Sec 34 is if the executive
committee will exercise all the competencies of the board, that's the time it needs to be
established through the by-laws. That's the explanation why the executive committee in
Filport was upheld because the function is not that contemplated under the 1st par of Sec
34 and now Sec 34 2nd par expressly provides that the board has the power to create
special committees as long as that committee does not exercise the power of the board
under the 1st par. Although wala na siya before but that was the implication of the case,
now it's expressly provided under Sec 34.

TOPIC: Self-dealing directors


What's the rule on self-dealing directors?
Under the revised corporation code, there is self-dealing contract when the corporation
enters into a contract with its director, trustee, or officer including their spouses and
relatives within the 4th civil degree by consanguinity or affinity.

Atty's discussion: Take note ha there's no requirement for self-dealing with


stockholders. The requirement only applies to directors, trustees, or officers meaning
those who manage the corporation. Because the assumption is that unless the
stockholder is also a director, the stockholder has nothing to do with the management of
the corporation.
Basically what this law is trying to prevent is a conflict of interest where the director who
manages the corporation will give preference to his own interest in dealing with the
corporation of which he is tasked to manage. This rule applies to directors, trustees,
officers. That's the old law. Under the new law, it now includes their spouse or relatives
within the 4th degree of consanguinity or affinity. That's the new addition there.

What's the rule with respect to self-dealing directors, trustees, officers?


As a general rule it is voidable except when the requisites under the revised corporation
code are met.

Atty: The contract is voidable meaning it is valid until voided and it can be ratified. That is
the nature of a voidable contract. Exception is that the contract is valid if it complies with
the requirements under Sec 31.

What are those?


1. The presence of the director or trustee is not necessary in order to achieve quorom
2. The vote of the director/trustee is not necessary in order to make such act valid

Can you give us an illustration of these 2 requirements?


For example, the quorom for directors is based on the number of directors as stated in
the AOI. So if for example there are 5 directors, the quorom is 3 only. So if there are
already 4 of them even if there is 1 absent so the presence of such director is no longer
needed. For the 2nd req, for the validity of a transaction, it shall also be majority of those
who are present at such meeting constituting a quorum. In this case there were 4 so the
majority there is 3. So if those 3 persons already gave their assent, so the vote of the
director in question is not necessary so the 2nd req under the law would be achieved or
attained.

What happens if the requirements are not met? For example out of 5 only 3 were
present including the self-dealing director then out of the 3 only 2 voted to approve
including the self-dealing director. What happens to the contract?
It is voidable but then it can be ratified.

Atty: Okay, it's not void. As long as you have the quorum, as long as you have the correct
number of approval, the contract is not void, it is voidable because you did not need the
requirements under Sec 31. But if you met the requirements under Sec 31 then that would
make your contract valid.

What's the third requirement?


3. That the contract must be fair and reasonable under the circumstances.

Atty: So these 3 requirements, if they are met will now make the contract valid.

What happens if the contract is voidable because one of the requirements was not
met? Is there any other remedy?
It can be ratified by a vote of 2/3 of the stockholders representing 2/3 of the outstanding
capital stock or the 2/3 of the members of non-stock corporation. And there must be a
meeting wherein the director/trustee shall fully disclose the adverse interests that he has
and again the contract must be fair and reasonable under the circumstances.

What happens if the corporation is vested with public interest?


When the corporation is vested public interest material contracts are approved by at least
2/3 of the entire membership of the board with at least a majority of the independent
directors voting to approve the material contract. So what is needed is 2/3 of the entire
membership of the board and majority of the independent directors.

What happens if this is not achieved?


Then the contract is voidable.

TOPIC: Independent directors


By the way, what are independent directors?
Independent directors are those persons who are free from any relation which could
reasonably interfere with their independent exercise of their judgment.

When are they required?


Under the law, there are entities that require independent directors.
(1) When the corporation falls under Sec 17.2 of the Securities Regulation Code.

How many types of corporation are mentioned under 17.2?


I think there are three. The first one those whose securities are registered with the
commission.

Atty: Okay so those corporation whose securities are registered with the commission.

What else?
(2) Corporations listed with an exchange such as--

What is an exchange? Can you give an example?


Philippine Stock Exchange.

Atty: An exchange is basically a market place for securities. We only have one in the
Philippines and that's the PSE Philippine Stock Exchange. If you list your shares with the
PSE you fall under 17.2 of the Securities Regulation Code.

The the third is?


(3) Those with assets of at least 50 million and must have at least 200 or more
shareholders and each shareholder must have at least 100 shares.

So how many types of corporations under 17.2?


There are 3.
Atty:
1. If the corporation with securities registered in the SEC
2. If the corporation has securities listed in the exchange
3. If the corporation has assets exceeding 50 million pesos with 200 or more shareholders
each owning more than 100 shares.

So three types of corporation under 17.2. The last two listed in an exchange and the 50
million they are known as the public corporations. Basically you have corporations with
registered securities and public corporations--those are required to have independent
directors. That is not new. The requirement is also in the Securities Regulation Code that
this types of corporations should have independent directors.

What other corporations are required to have independent directors aside from
those under the SRC?
- Banks, quasi-banks, other entities which are engaged in money service businesses,
pawnshops, pre-need, trust, and insurance companies
- Corporations vested with public interest

Atty's discussion: So regulated entities. Again, this is not a new requirement for these
entities because these entities are required under their own laws to have independent
directors. And next, corporations vested with public interest. As I said earlier, this is not
new, they just incorporated the provisions in the corporation code but the laws creating
these corporations actually require independent directors already. So this is not a new
requirement for them. They just reconciled it.

Summary: Corporations that require Independent Directors


1. Corporations mentioned in Sec 17.2 of the Securities Regulation Code
a. If the corporation with securities registered in the SEC
b. If the corporation has securities listed in the exchange
c. If the corporation has assets exceeding 50 million pesos with 200 or
more shareholders each owning more than 100 shares
2. Banks, quasi-banks, other entities which are engaged in money service businesses,
pawnshops, pre-need, trust, and insurance companies
3. Corporations vested with public interest

How many must be independent directors?


It must be at least 20% of the membership of the board.

TOPIC: Interlocking directors


What's the rule on interlocking directors?
Interlocking director is when he is a director of two corporations and those 2 corporations
are in contract with each other. The general rule is the contract is valid.

Atty's discussion: Interlocking director is not a ground to invalidate the contract but if
there are other grounds then the contract can be invalidated on those grounds such as
fraud. Fraud has always been a ground to invalidate a contract di ba. Interlocking directors
is not a ground to invalidate a contract. Meaning if there are no other faults in the contract,
that is valid contract. Are we clear?

Exception to this rule is?


If in one corporation he has substantial interest, and in the other merely nominal interest.

How do we determine whether it is substantial or nominal?


Nominal if he has less than 20% shareholding of the total outstanding capital stock

If substantial?
If it exceeds 20%.

What if its 20%?


Nominal.

What is substantial?
If it exceeds 20%.

Atty: Substantial is if your shareholding exceeds 20% of the total outstanding capital stock

So what's the rule?


The rule is with regards to where the interlocking director has nominal interest, the
requirements under Sec 31 must be applied so his presence must not be needed to
constitute quorum, his vote must not needed to constitute approval, and that the contract
is fair and reasonable under the circumstances.

TOPIC: Removal of director


How may directors be removed?
They may be removed by a vote of 2/3 of the shareholders representing the outstanding
capital stock or 2/3 of members for non-stock. The revised corp code also allows for the
commission to remove motu propio or upon verified complaint, after due notice and
hearing.

How do you remove the directors by stockholders voting?


By stockholder, this may be with or without just cause and it must be held in a special
meeting called for that purpose either by the corporate secretary or president--

Just in a special meeting?


I think it can be in a regular or special meeting.

Atty: The meeting where the stockholders can vote to remove directors can be a regular
meeting or a special meeting called for the purpose.

If it's a special meeting, how do you call it?


It must be called by the corporate secretary on order of the president
So it may be called by the corporate secretary upon order of the president? Is that
the only way?
But if the secretary refuses to do so, it can be done by any stockholder upon written
demand---

No is the president the only person who can order the secretary to call the meeting?
It can be upon written demand by the stockholders representing at least majority of the
outstanding capital stock.

Again, how are directors removed by vote of stockholders? What's the process?
They are removed from office by a vote of at least 2/3 of the outstanding---

Before you vote, what do you need to do first? Chronological order.


It must be done in a regular or special meeting called for that purpose. If it's a special
meeting, it must be called by the corporate secretary on order of the president, or upon
written demand of the stockholders representing at least majority of the outstanding
capital stock.

What if the corporate secretary refuses to call?


If the corporate secretary refuses to call, the stockholder or member of the corporation
signing the demand may call for the meeting by directly addressing the stockholders or
meeting (codal ni nako gikuha ha)

How do you remove directors by vote of stockholder?


The removal of the directors by vote of stockholder, there must be a regular or special
meeting called for that purpose. It may be called by the corporate secretary on order of
the president, or upon written demand by the stockholders representing at least majority
of the outstanding capital stock.

If the corporate secretary refused to call?


The stockholders may address the members of the stockholders for that purpose of
calling that meeting for the removal of the director

Summary: Removal of director by vote of stockholder


1. There must be a meeting called for that purpose, can either be regular or special
meeting
2. If it's a special meeting, it must be called by the corporate secretary on order of the
president, or upon written demand by the stockholders representing at least majority of
the outstanding capital stock.
3. If the corporate secretary refuses to call such meeting, the stockholder or member of
the corporation signing the demand may call for the meeting by directly addressing the
stockholders or meeting

What happens during that meeting?


During the meeting..

The meeting has been called, and there is

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