CHAPTER 6 Stockholders and Members

WEEK 1

 How to Become a Stockholder.

o 1. By subscription during incorporation
o 2. By purchasing directly from the corporation
o 3. By purchasing directly from individual stockholders
o 4. Other mode of acquiring properties (donation, exchange)
 Fundamental Rights of a Stockholder
o The following are important rights of stockholders, which continue
to exist even when the shares have been sequestered:
a. Right to attend meetings and to vote
b. Right to receive dividends
c. Right to receive distributions upon liquidation of the
corporation
d. Right to inspect the books of the corporation
e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas, G.R. No. 91925,
1991)
 Corporate Powers of the Stockholders
o 1. To extend or shorten the corporate term
o 2. To decrease or increase the capital stock
o 3. To incur, create or decrease bonded indebtedness
o 4. To deny pre-emptive right through an amendment of the articles
of incorporation
o 5. To sell or dispose of all substantially all of corporate assets or
properties
o 6. To invest corporate funds in another corporation or business
o 7. To declare dividends
 Stockholders' Participation in Management.
o i. Proxy – Section 57 of the Corporation Code provides that
stockholders and members may vote in person or by proxy in all
meetings of stockholders or members.
o ii. Voting Trust Agreements – A stockholder confers upon a trustee
the right to vote and other rights pertaining to the shares for a
period not exceeding 5 years at any one time. (Sec. 58).
 Proxy
o Section 57 of the Corporation Code provides that stockholders and
members may vote in person or by proxy in all meetings of
stockholders or members.
Requisites of by Proxy.
o 1. The proxy shall be in writing;
o 2. Signed by the stockholder or member; and
o 3. Filed before the scheduled meeting with the corporate secretary
(Sec. 57
 Voting Trust.
 o – A stockholder confers upon a trustee the right to vote and other
rights pertaining to the shares for a period not exceeding 5 years at
any one time.
 Purpose of Voting Trust.
o The primary purpose is to gain control of the corporation to assure
the continuity of the management and stability of the corporation
 Corporate Acts Requiring Stockholders' Action.
o 1. Stockholders’ action in general
o 2. Stockholder’s action requiring 2/3 votes
o 3. Stockholder’s action requiring majority votes
o 4. Stockholder’s action requiring all votes
 Stockholders' Action Requiring Two-thirds (2/3) Votes
o a. Extend or shorten corporate term;
o b. Increase/Decrease Corporate Stock;
o c. Incur, Create Bonded Indebtedness;
o d. Deny pre-emptive right;
o e. Sell, dispose, lease, encumber all or substantially all of corporate
assets;
o f. Investing another corporation, business other than the primary
purpose;
o g. Declare stock dividends
o h. Enter into management contract if (1) a stockholder or
stockholders representing the same interest of both the managing
and the managed corporations own or control more than 1/3 of the
total outstanding capital entitled to vote of the managing
corporation; or (2) a majority of the members of the board of
directors of the managing corporation also constitute a majority of
the members of the board of the managed corporation;
o i. Amend the Articles of Incorporation
o j. removal of directors and trustees
o k. delegation to the board of the power to amend, repeal or adopt
new by-laws
o l. ratification of merger or consolidation
o m. voluntary dissolution where creditors are affected
 Stockholders' Action Requiring Majority Votes.
o a. To enter into management contract if any of the two instances
stated above are absent;
o b. To adopt, amend or repeal the by-laws.
o c. Revocation of the delegated powers
o d. election of directors
o e. grant of compensation to directors
o f. approval of management contracts with another corporation
o g. filling vacancies in the board of directors or trustees
o h. voluntary dissolution where no creditors are affected
 Stockholders' Action Requiring All Votes
o Ultra vires acts
o Improperly held meeting under section 31 of the Code
 Right to Vote
o Right to vote in non-stock corporations
 The voting rights attach to membership.
o Right to vote in stock corporations
 Is inherent in and incidental to the ownership of corporate
stocks. Only stock actually issued and outstanding may be
voted.
 Right to Vote of Secured Creditors and Administrator.
o The stockholder-grantor shall have the right to attend and vote at
meetings of stockholders, unless the secured creditor is expressly
given by the stockholder-grantor such right in writing which
recorded in the appropriate corporate books.
 Voting in Case of Joint Ownership of Stock
In case of shares of stock owned jointly by two or more persons, in
order
1. the consent of all the co-owners shall be necessary in
voting shares of stock owned jointly by two or more persons
2. unless there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any other person to
vote such share or shares
3. 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.
 Stockholders' Right to Vote Directors or Trustees.
o 1. By straight voting
o 2. By cumulative voting for one candidate
o 3. By cumulative voting by distribution
 Straight Voting
o The said stockholder may vote such number of shares for as many
persons as there are directors to be elected
 Cumulative Voting for One Candidate.
o 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.
 Cumulative Voting by Distribution.
o He may distribute them on the same principle among as many
candidates as he shall see fit.
 Reason for Cumulative Voting.
o The Corporation Code requires that unless otherwise provided in
the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.
 Non-stock Corporation Voting
 o The right of the members of any class or classes to vote may be
limited, broadened or denied to the extent specified in the articles
of incorporation or the by-laws.
 Proprietary Rights
o 1. Rights to dividends
o 2. Right of appraisal
o 3. Right to inspect corporate books
o 4. Right of financial statements
o 5. Pre-emptive right
 Rights of Unpaid Shares which are Nondelinquent.
o Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder
 Right to Dividends.
o The right to dividends vests at the time of its declaration by the
Board of Directors.
Although stock certificates grant the stockholder the right to
receive quarterly dividends of 1%, cumulative and participating,
the stockholders do not become entitled to the payment thereof
without necessity of a prior declaration of dividends. (Republic
Planters Bank v. Hon. Agana, Sr., G.R. No. 51765, 1997)
 Appraisal Right.
o The right to withdraw from the corporation and demand payment
of the fair value of his shares after dissenting from certain
corporate acts involving fundamental changes in corporate
structure.
 Instances of Appraisal Right
o a. Extension or shortening of corporate term; (Sec. 36)
o b. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholders or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class; (Sec. 80)
o c. Investing of corporate funds for any purpose other than the
primary purpose; (Sec. 80)
o d. Sell or dispose all or substantially all assets of corporation;(Sec.
80)
o e. Merger or consolidation.(Sec. 80)
 How Appraisal Right is Exercised.
o A written demand on the corporation within 30 days after the vote
was taken (failure to do so means waiver);(Sec. 81)
o From the time of demand, all rights accruing to such shares
including voting and dividend rights shall be suspended except the
right of such stockholder to receive payment of the fair value of
stockholder’s shares. (Sec. 82)
 o Ten (10) days from demand, the dissenting stockholder must
submit his certificates of stocks for notation that such certificates
represent dissenting shares. (Sec. 85) ●
o The price to be paid is the fair value of the shares on the date the
vote was taken; (Sec. 81) ●
o The fair value shall be agreed upon by the corporation and the
dissenting stockholders within 60 days from the date the vote was
taken. In case there is no agreement, the fair value shall be
determined by a majority of the 3 distinguished persons one of
whom shall be named by the stockholder another by the
corporation and the third by the two who were chosen; (Sec. 81)
o The right of appraisal is extinguished when: (Sec. 83)
a. He withdraws the demand with the corporation’s
consent;
b. The proposed action is abandoned;
c. The SEC disapproves of such action where approval is
necessary
d. The SEC determines that such dissenting stockholder is
not entitled to the appraisal right.
If the dissenting stockholder is not paid within 30 days from the award, he
shall automatically be restored to all his rights as stockholder. (Sec. 82)
 Effect of Demand and Termination of Right.
o 1. All rights accruing to such shares shall be suspended from the
time of demand for payment of the fair value of the shares until
either the abandonment of the corporate action of the purchase of
the corporation
o 2. The dissenting stockholder shall be entitled to receive payment
of the fair value of his shares as agreed upon between him and the
corporation or as determined by the appraisers chosen by them
o 3. If not paid within 30 days after the award, his voting and
dividend rights shall be immediately restored
o 4. Upon such payment all his rights as stockholder are terminated,
not merely suspended. But if before he is paid the proposed
corporate action is abandoned, his rights and status as a
stockholder shall thereupon be permanently restored
o 5. Payment may be made only if the corporation has unrestricted
retained earnings in its books to cover the same.
 When Right to Payment Ceases.
o General rule: no demand for payment of the fair value of the shares
may be withdrawn
o Exceptions:
1. the corporation consents to the withdrawal
2. the proposed corporate action is disapproved by the SEC
where its approval is necessary
3. the proposed corporate action is abandoned
 4. the commission determines that such stockholder is not
entitled to appraisal right
5. the transfer of the shares by the dissenting corporation
6. the dissenting stockholder fails to make a written
demand within the 30-day period provided in section 81
7. the dissenting stockholder fails to submit the stock
certificates within 10 days from the demand of payment,
termination of the appraisal right shall be at the option of
the corporation
 Who Bears Costs of Appraisal.
o General rule: the corporation shall bear cost of appraisal
o Exception: the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may
have offered to pay the stockholder. In such case the stockholder
shall bear the costs.
 Right of the Transferee
o 1. All the rights of a regular stockholder
o 2. All dividend distributions which would have accrued on such
shares shall be paid to the transferee
 Corporate Books and Records.
o The books and records consist of the record of all business
transactions, minutes of the meetings of stockholders or members
and minutes of all meetings of the board of directors or trustees.
 Board Resolution
o A formal action by a corporate board of directors or other
corporate body authorizing a particular act, transaction or
appointment.
 Right to Inspect
o Corporate records, regardless of the form in which they are stored,
shall be open to inspection by any director, trustee, stockholder or
member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may
be made by such director, trustee or stockholder at their expense,
for copies of such records or excerpts from said records. (Sec. 73).
Also, a corporation shall furnish a stockholder or member, within
10 days from receipt of their written request, its most recent
financial statement (Sec. 74).
 Limitation on the Right to Inspect Corporate Books.
o a. If the person demanding to examine the records has improperly
used any information secured for prior examination,
o b. He is not acting in good faith,
o c. A requesting party who is not a stockholder or member of
record, or is a competitor shall have no right to inspect or demand
reproduction of corporate records. (Sec. 73)
 Books to be Kept.
 o 1. Articles of incorporation and by-laws of the corporation and
their amendments
o 2. The current ownership structure and voting rights of the
corporation
o 3. Names and addresses of all the members of the board of
directors or trustees and the executive officers
o 4. Record of all business transactions
o 5. Record of the resolutions of the board of directors or trustees
and of the stockholders or members
o 6. Copies of the latest reportorial requirements submitted to the
SEC
o 7. The minutes of all meeting of stockholders or members
o 8. Books of accounts, original and duplicate originals of invoices
and receipts for goods and services purchased
o 9. Records as may be required under other applicable laws.
 Stock and Transfer Book
o Record of:
 1. All stocks in the names of the stockholders
alphabetically arranged;
 2. The installment paid and unpaid on all stock for which
subscription has been made, and the date of payment of any
installment;
 3. A statement of every alienation, sale or transfer of stock
made; and
 4. Such other entries as the by-laws may prescribe.
 Stock Transfer Agent
o One engaged principally in the business of registering transfer of
stocks in behalf of a stock corporation shall be allowed to operate
in the Philippines upon securing a license from the SEC and the
payment of a fee to be fixed by the SEC, which shall be renewable
annually.
 Right to Financial Statements.
o Within 10 days from receipt of a written request of any stockholder
or member:
1. the corporation shall furnish to him its most recent
financial statement
2. the regular meeting of stockholders or members, the
board of directors or trustees shall present to stockholders a
financial report of the operations of the corporation
3. if the total assets or total liabilities of the corporation are
less than 600,000 or such other amount as may be
determined appropriate by the Department of Finance.
 Financial Statements (FS).
1. The FS of the following domestic corporations shall be audited
by an independent CPA
 a. stock corporations with paid-up capital of P500,000 or
more
b. non-stock corporations with annual gross receipts of
P100,000 or more or total assets of P50,000,000 or more.
2. The FS of the following domestic corporations shall at the
minimum be certified under oath by the treasurer of the
corporation;
a. stock corporations with paid-up capital of less than
P50,000
b. non-stock corporations with annual gross receipts of less
than P100,000 or a total assets of less than P500,000.
3. The FS of the following foreign corporations shall be audited by
an independent CFA registered with the BOA;
a. branch office of a stock foreign corporation with total
assets of P500,000 or more
b. branch office of non-stock foreign corporation with total
assets of P500,000 or more
c. Representative office of a foreign corporation with total
assets of P500,000 or more
d. Regional operating headquarters of multinational
companies with assigned capital of P500,000 or more
e. regional headquarters of multinational companies with
total assets of P50,000 or more
4. The FS of the following foreign corporations shall, at the
minimum be certified under oath by the treasurer of the
corporation
a. Branch office of a stock foreign corporation with
assigned capital of less than P50,000
b. Branch office of a non-stock foreign corporation with
total assets of less than P500,000
c. Representative office of a foreign corporation with total
assets of less than P500,000
d. Regional operating headquarters of a multinational
companies with assigned capital of less than P500,000.

 Annual Report of Corporations.

o shall submit to the SEC an annual report to its operations, together
with a financial statement of its assets and liabilities, certified by
any independent CPA covering the fiscal year and such other
requirements as the SEC may require.
 General Information Sheet (GIS)
o Should be certified and sworn to by the corporate secretary. The
submission of GIS, the 30 calendar day period shall be counted
from the date the annual stockholders’ meeting was actually held.
 Electronic Copy/Diskette of GIS and AFS.
 o Corporations with gross sales/revenues of at least 10 Million to
submit a diskette containing the electronic file/soft copy of the GIS
or FS template.
 Pre-emptive Right.
o Refers to the right of a stockholder of a stock corporation to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings.