Once you received the certificate of incorporation, what should be done?

The Corporation should operate and formally organize as early as possible, because
if a corporation does not formally organize and commence the transaction of its
business or the construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed
dissolved. However, if a corporation has commenced the transaction of its business
but subsequently becomes continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or revocation of its corporate
franchise or certificate of incorporation.
Can you be a director?
Ans: Yes provided that I hold at least one share of the Companys stocks, legally
capacitated and a natural person.
So why are you required to be a holder of at least of least one share? This applies
only insofar as stock corporations are concerned because non-stock corporations do
not have shares of stocks. It is required only that one be a member of the non-stock
corporation.
Ans: It is important that a director of a corporation be a holder of at least of least
one share because it would encourage him to perform better his task as a director
since has a vested interest in the corporation.
How does one become a director?
Ans: Upon election by the stockholders in the annual stockholders meeting.
Members of the BOD are elected by SH themselves.
Management is vested in the BOD. From whom did the Board get its power?
Ans: Power of the BOD is granted by law. Law is the source of the power.
Can the BOD delegate its power?
General rule: The BOD cannot delegate its power.
Exceptions: Those powers that involves
1. Exercise of purely ministerial functions
2. Matters relating to day to day activities and does not need any discretion
So that, if you are part of the BOD and you got sick. The by-laws requires you to
submit a medical certificate, can you send someone else to participate in the Board
meeting, bringing with him the medical certificate.
Ans: No sir, proxy is not allowed.
Is there any instance wherein a director can delegate his power?
Ans: No sir. There is an absolute prohibition. A director cannot delegate because his
function and duty is purely personal. One is elected precisely because of his skills,
values, integrity, credibility and even ones relationships.

BOD can delegate in instances where the delegated power is merely ministerial or
matters relating to day to day activities and does not need discretion . So
when the BOD appoints Ms. Yap to decide whether the corporation should sell 50%
of the corporation properties, it is not allowed since it is not ministerial, it requires
discretion. But if the BOD delegates to Ms. Yap the act of signing the Deed of Sale of
50% of the property of the corporation, it is a valid delegation because the act of
signing is merely ministerial. The BOD has already deliberated and decided to sell
the property and whats left for Ms. Yap to do is to sign the Deed- purely ministerial.
Situation: So if the corporation intends to have telephone lines for its office with
PLDT, and PLDT requires the corporation to submit a Board Resolution containing
that the corporation in fact is subscribing with PLDT, and the BOD appoints in the
Board Resolution that the BOD designates Mr. Tejano, the corporations janitor, to
sign in behalf of the corporation, is that allowed?
Ans: YES. The law only requires the nature of the delegated power and not the
person to whom it is delegated. As long as the power is ministerial it does not
matter that the person delegated is not an officer of the corporation, as long as the
BOD appoints him/ her as such.
Situation: Authorizing to engage services of a janitorial company
Ans: The board need not meet for matters that pertain to day to day activities,
otherwise, they will not be able to discuss on the more important matters. The Vice
President for Sanitation and Environmental Activity is in a proper position to be
delegated as such. This can be delegated because these are simple matters; these
are day to day activities like janitorial services.
However, authorizing a Vice President for Financial Concern to borrow 10 Million
from the Land Bank of the Philippines, it cannot be delegated because it involves a
huge amount of money and involves a contract that a corporation would enter into.
-----------------Again the law says management is vested in the board, where there are 50
stockholders and the board is composed of 5, does it now protect the interest
of the corporation if the management of the corporation composed of 50
stockholders is vested in the board composed of 5 members?
Ans: For proper management of the corporation, it needs to be given to a certain
number of people; it might create chaos in creating decisions if they are too many.
The main purpose of this is efficiency.
What do we consider as the power of the board, as part of the management?
Ans: 1. Administer the properties and assets of the corporation
2. Determine the conduct of the corporation
3. Represent the corporation. (Exercise the powers of the corporation itself;
only the board can act
for the corporation)
-----------------

To be a member of the board, you must own at least one stock in that corporation.
The purpose of the requirement is the member may have a desire to make the
corporation profitable. And if you are part-owner, you will be serving better. The
moment you cease to be a stockholder?
Ans: You cease to be a director
Situation: You are a holder of one share. You went to the bank to loan money. The
bank is asking you to assign your share. If you did?
Ans: If you assign your only share, you are no longer a shareholder and can be
ousted as a director.
Situation: You bargain with the bank and ask that youll just pledge your share.
Ans: In pledge, you remain to be the owner of the thing. However, possession of the
certificate is transferred to the bank. The pledgee cannot cast his vote during the
elections. In other words, in case of pledge, the pledgor still votes.
In case of trust, who becomes the legal owner?
The legal trustee, because in a trust, legal ownership is transferred to the trustee
although beneficial ownership is retained by the trustor. He may now be nominated
in the board and legal ownership is transferred to trustee but beneficial ownership
like payment of dividends retains in the trustor.
Situation: There are occasions where you have to execute a deed of trust over
your shares. For example, a stockholder cannot occupy a government position, just
to illustrate. Because he cannot occupy a government position, being a stockholder
of a particular corporation, what he has to do is to transfer his shares of stock to
another person. So for all intents and purposes, for the record, the owner is already
the third person. However, to protect the interest of the real stockholder, they will
execute a deed of trust. This document is treated as confidential. The trustee signs,
and acknowledges the fact that hes not the true owner that and hes only holding
the certificate in behalf of the true owner. And when the time comes that the true
owner will demand the return of the shares, the trustee is willing to immediately
and voluntarily return the share.
Q: Who is now the legal owner in the story?
A: The third person. Therefore during elections in the corporation, it is the trustee
who is entitled to vote because in this case he is the legal owner of the share.
Situation: If the corporation needs additional capital, what can they do?
1. Obtain a loan from the bank
2. Ask investors to subscribe to more shares
3. Issue redeemable shares

One option is to borrow money, and this might involve several millions of loan but
the bank is willing. The bank extends P200M loan however the bank wants to be
sure that the P200M will be devoted to the projects the corporation has presented.
The bank is not interested to recover your property or to foreclose the collateral, the
bank is interested to let the money grow and earn interest so that whenever the
bank extends or grants a multi-billion loan, it wants to be sure that the amount
granted by the bank is used for the purpose for which the loan was granted. To be
sure that the corporation will prudently use that money for the purpose it was
granted, the bank will have to require the corporation to provide a seat in the board
for the bank to represent. That is a bank requirement whenever a huge loan is
granted and to be sure that the bank could monitor the application of the money,
the bank says that the corporation will have to provide one seat in the board for its
representative so that every board meeting, the bank will send its representative.
How do you think does that bank representative sit in the board?
Ans: By getting at least one qualifying share in his name.
The corporation necessarily will have to issue one share for that bank
representative with the agreement that during election, that bank representative
should represent the bank. So he now sits in the board, every board meeting, he
receives the report, he has access to the financial status of the corporation, he
has access to the application of the borrowed money where it went, access to
records on the development and progress of the corporation. So the bank will be
able to know whether or not the money was used for the purpose for which it
was granted. To be sure that the project is carried out so that if it is carried out
the expected profits of that project will be realized. And if realized, the bank can
be assured of being able to collect the amount that was loaned.
The bank representative can vote in board meetings, he is a real member of the
board. Hence, he will be there so long as the loan remains outstanding. Once, the
borrowed amount is fully paid however, the bank has no more interest in the
corporation so the bank will now return the share that was lent to it and the bank
representative may now resign from the board. So that when there is now vacancy
in the board, a special election will be held for the purpose.
Q: How long shall the director sit in the board?
A: 1 year, thats why there is an annual election so that the board will be subjected
again to the decision of the stockholders. And during the annual election, this is the
time that the stockholder may replace a member of the board who misbehaves.
Thats the only way that the stockholders may control the management of the
corporation because they cannot intervene with the decision of the board.
Q: So we have the powers of the board. What are the limitations of such powers?
A: Those that may be found in the laws, articles of incorporations, by-laws, and the
corporation code. Beside these limitations, the board has the absolute right to
manage the corporation.
Q: The trust agreement is different from a voting trust agreement. What is a voting
trust agreement?

A: It is an agreement among some or all of the stockholders on how they will vote
on a particular issue.
The stockholder remains the holder of the stocks but he has surrendered his right to
vote.
Q: Since he remains to be the owner, who can exercise the right to vote.
A: The legal owner, not the one who is entrusted with the voting rights.
------RED ALERT------ This is the answer agreed by sir. But check De Leon, coz
according to him, a voting trustee may now be considered as the legal owner of the
shares transferred to him by virtue of a voting trust agreement and, therefore,
eligible to office of director.
Besides, Sir, himself, said that the stockholder remains to be the holder of
the stocks but the right to vote is surrendered. So logically, it is the one upon
whom the right to vote was surrendered who should be allowed to exercise the right
to vote.
Klaroha lang ninyo. Kayo ang humusga, I might be wrong coz Im just a dirty
impotent rapist, but beastly when it comes to performance.
Q: The law requires that the stockholder must hold at least one share of stock. Can
the by-laws require that a stockholder may be elected as a director only if he owns
15 shares of stock?
A: Yes. Such provision does not violate the Code because the Code only requires
that the director must hold at least 1 share, so the by-laws may require for more.
Q: He tried to organize another corporation also to manufacture the best beer. After
operating for quite a time, the best beer that he promoted was actually not the best
because the old one remained the best. So he asked himself, what he should do to
defeat the old one. His consultants told him that the best thing to do is to buy
shares of stocks of that old beer company and make sure that hell be elected to be
a member of the board. So he did. The other members of the current board noticed
that hes buying a lot of shares of stock which would give him a sure seat in the
board. So before he could even start campaigning for the board, the members of
the board in the old beer company wanted to amend the by-laws. Can the board
amend?
A: Yes, provided it is ratified by the stockholders by a vote of 2/3.
Q: So the amendment was passed. The amendment said that no stockholder, who is
at the same time, a stockholder of up to 10 percent of any beer company in
competition to our company, can qualify as a director of our company. So the
director of the new beer company questioned this. He went to court, and said that
he has a lot of shares of stock in the new company but they amended the by-laws in
such a way that he could no longer use his shares of stock to protect his right to
vote and be voted upon in that board of the new corporation. It is unfair, according
to him, and thus violates his right as a stockholder. So he went to the SC contending
that the amendment was for him alone because theres no other person who holds
10 percent of a company that competes with their company. He said hes singled
out, thus theres no equality. If you were the SC, would you allow the amendment or
would you agree with the director of the company so that the amendment would be
considered illegal?

A: The amendment should be allowed. Otherwise, to sustain the contention of the

director of the new beer company will endanger the old beer company. Thus, it
would be for the best interest of everyone if the amendment of by-laws will be
retained.
Imagine if the new director of the new corporation would be a director of the old
corporation. During one board meeting, he can summon the brew master, an expert
insofar as the mixture of the beer is concern, and asked for the formula of the beer
or asked for the list of the top customers of the old corporation. Thus, the Supreme
Court says that is a valid amendment of the by-laws. It just happened that such
person was affected by the provision but it was not intended for him alone. It could
apply to anyone who is in the same situation. Amendment to the by-laws can be
done and approved by the board with the ratification and confirmation of the
stockholder.
Election of the Board of Directors
[Inaudible answer]
Section 24. Election of directors or trustees. At all elections of directors or
trustees, there must be present, either in person or by representative authorized
to act by written proxy, the owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members entitled to
vote. The election must be by ballot if requested by any voting stockholder or
member. In stock corporations, every stockholder entitled to vote shall have the
right to vote in person or by proxy the number of shares of stock standing, at the
time fixed in the by-laws, in his own name on the stock books of the corporation, or
where the by-laws are silent, at the time of the election; and said stockholder may
vote such number of shares for as many persons as there are directors to be elected
or he may cumulate said shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall
equal, or he may distribute them on the same principle among as many candidates
as he shall see fit: Provided, That the total number of votes cast by him shall not
exceed the number of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided in the
articles of incorporation or in the by-laws, members of corporations which have no
capital stock may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from time to time
but not sine die or indefinitely if, for any reason, no election is held, or if there are
not present or represented by proxy, at the meeting, the owners of a majority of the
outstandingcapital stock, or if there be no capital stock, a majority of the member
entitled to vote.
First, there will be a meeting, the time the elections will be held.
Requirement of a valid meeting:
Quorum required number of persons to hold a valid meeting.

If there are 10, quorum is 6.

(50+1: stock, majority of the outstanding capital stock; non-stock, majority of the
members)
Question: Can 5 hold a valid meeting in a group of 10?
A: Yes, if it is provided in the by-laws that such will constitute the quorum.
Simple majority- the minimum majority, one-half plus one
Qualified majority that majority reflected in the articles of incorporation or the
by-laws (based on de Leon) that is higher than simple majority. It is not only what
the parties agreed upon but even the code sometimes refers to it as 2/3, 3/4 (5/6).