36.1 Corporations: Stockholders, Meetings, and One Person Corporations

Corporations: Stockholders, Meetings, and One Person Corporations

Stockholders own the corporation and exercise their rights through meetings, votes, and suits. This section covers stockholders' proprietary and remedial rights (including appraisal, inspection, pre-emptive rights, and derivative suits), meetings, quorum, proxies, and voting trusts, and the One Person Corporation.

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1. Stockholders' Rights and Protective Remedies

Stockholders possess inherent proprietary and protective rights recognized by law:

Voting Rights and Non-Voting Stock (Section 6)

While corporations may classify shares into voting and non-voting stock, holders of non-voting shares nonetheless retain the statutory right to vote on eight fundamental corporate acts:

1. Amendment of Articles of Incorporation;
2. Adoption and amendment of Corporate Bylaws;
3. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all corporate property;
4. Incurring, creating, or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation;
7. Investment of corporate funds in another business or purpose outside the primary purpose; and
8. Dissolution of the corporation.

Pre-Emptive Right (Section 38)

The pre-emptive right is the preferential right of existing stockholders to subscribe to all issues or other disposition of shares of any class in proportion to their respective stockholdings, safeguarding their relative voting strength and equity value from dilution.

• Statutory Exceptions (No Pre-emptive Right Exists):
  1. Shares issued in compliance with laws requiring minimum stock offerings to the public;
  2. Shares issued in good faith in exchange for property needed for corporate purposes, or in payment of previously contracted debt, approved by stockholders representing two-thirds (2/3) of the outstanding capital stock; and
  3. Shares where the pre-emptive right is expressly denied or restricted in the Articles of Incorporation.

Appraisal Right (Sections 80 to 85)

The appraisal right is the statutory right of a dissenting stockholder to withdraw from the corporation and demand payment of the fair value of their shares.

                               Statutory Grounds for Appraisal Right (Section 80)
                                                       │
         ┌─────────────────────────┬───────────────────┴───────────────────┬─────────────────────────┐
         ▼                         ▼                                       ▼                         ▼
Amendment of Articles       Sale, Lease, or Disposal                Merger or                 Investment of Corporate
(Altering rights,           of All or Substantially All             Consolidation with        Funds in Another Business
 preferences, or            Corporate Property                      Another Corporation       or Non-Primary Purpose
 shortening/extending term) (Section 39)                            (Section 76)              (Section 41)

Procedural Requisites for Exercising Appraisal Right

1. The stockholder must have voted against the proposed corporate action at the stockholders' meeting;
2. Written demand for payment must be served on the corporation within thirty (30) days after the date the vote was taken;
3. The stockholder must surrender their share certificates to the corporation for notation within ten (10) days of demand;
4. Payment is strictly conditioned upon the corporation having UNRESTRICTED RETAINED EARNINGS in its books. If no unrestricted retained earnings exist, payment cannot be made, and the stockholder's rights as a stockholder are restored.

Right of Inspection (Section 73)

Stockholders have a statutory right to inspect corporate records, minutes of meetings, financial statements, and the stock and transfer book at reasonable hours on business days, and to demand copies at their expense. Under Section 161, any officer who wrongfully refuses inspection is subject to criminal prosecution and administrative fines, unless the requesting party previously improperly used corporate information or is not acting in good faith.

Stockholder Suits: Individual, Representative, and Derivative

Indispensable Requisites of a Derivative Suit

To file a valid derivative suit under the Interim Rules of Procedure for Intra-Corporate Controversies:

1. The plaintiff must be a stockholder or member of record at the time the acts complained of occurred and at the time of filing;
2. The plaintiff must have exerted all reasonable efforts to exhaust intra-corporate remedies (formal demand on the board and stockholders);
3. The cause of action belongs to the corporation;
4. Sued in the name and on behalf of the corporation;
5. No appraisal right is available or has been exercised; and
6. The suit is not a nuisance or harassment suit.

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2. Meetings, Quorum, Proxies, and Voting Trusts

Proxies (Section 57): must be in writing, signed, and filed with the corporate secretary within a reasonable time before the meeting. A proxy is valid only for the meeting it is intended for unless the proxy form provides otherwise, and no proxy may be valid for more than five years at any one time.

Voting trusts (Section 58): stockholders may transfer the right to vote their shares to a trustee for not more than five years at any one time; a voting trust required as a condition of a loan may exceed five years but expires upon full payment of the loan. The agreement must be in writing and notarized, and a certified copy must be filed with the corporation and the SEC, or it is ineffective. The trustee receives the shares and issues voting trust certificates to the transferors, who keep their right to dividends.

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3. One Person Corporation (Title XIII, Sections 115 to 132)

The One Person Corporation (OPC) is one of the most significant institutional innovations introduced by RA 11232, enabling a single entrepreneur to operate with limited liability.

                                  Key Statutory Architecture of an OPC
                                                    │
         ┌──────────────────────────────┬───────────┴───────────┬──────────────────────────────┐
         ▼                              ▼                       ▼                              ▼
Permissible Founders           Capitalization & Term          Corporate Officers              Nominee & Alternate
• Natural person               • NO minimum capital           • Single stockholder is sole    • Designated in AOI
• Trust, or                     requirement                    director and President         • Assume management
• Estate                       • Default perpetual term       • CANNOT be Secretary          upon death or
(Banks, insurers prohibited)                                  • If Treasurer, SURETY BOND     incapacity

Key Statutory Rules Governing OPCs

• Eligibility (Section 116): An OPC can be formed only by a natural person, a trust, or an estate. Banks, non-bank financial institutions, quasi-banks, trust companies, public and publicly-listed companies, insurance companies, and non-chartered government-owned corporations are prohibited from incorporating as OPCs.
• Officers (Section 121): The single stockholder is the sole director and President. The single stockholder cannot be appointed as the Corporate Secretary. The single stockholder may be appointed as the Corporate Treasurer, but must post a surety bond with the SEC in an amount based on the authorized capital stock, renewable every two years.
• Nominee and Alternate Nominee (Sections 124 to 126): The single stockholder must designate a nominee and an alternate nominee in the Articles of Incorporation. In the event of the single stockholder's temporary incapacity, the nominee assumes management until the stockholder regains capacity; in case of death or permanent incapacity, the nominee manages the OPC until legal heirs are determined.
• Piercing the Corporate Veil in an OPC (Section 130): The single stockholder enjoys limited liability. However, the single stockholder has the affirmative burden to prove that the OPC's property is independent of the single stockholder's personal property. If the single stockholder cannot prove complete segregation of personal and corporate assets, the single stockholder is jointly and severally (solidarily) liable for the debts and liabilities of the One Person Corporation.