CORPORATION LAW and severally liable for all obligations of

the partnership.
 Corporation is one of the types of business
organizations. It is also the most important in Definition and Attributes
economic development.
 4 Attributes of a Corporation

1. Artificial being
INTRODUCTION
2. Created by operation of law
 Sole Proprietorship
3. Right of succession
- One man form of business entity, personally
answers all liabilities, but enjoys all the profits 4. Powers, attributes and properties expressly
with the exclusion of others authorized by law or incident to its
existence.
- Limited shareholders responsibility
 Doctrine of limited capacity
- Paid subscription in full, you are no longer
liable - Only such powers as are expressly granted
to it by law and by its articles of
 Partnership
incorporation including others which are
- Based on mutual trust and confidence incidental to such conferred powers, those
reasonably necessary to accomplish its
 Joint venture purpose and those which may be incidental
to its existence
- one time grouping of persons whether they be
natural or juridical
- Can do things as the law asks or allows it to
- does not entail continuity because after the do
undertaking is completed it is already the end
- If it does anything beyond, it shall be
- particular partnership and joint venture would considered as ULTRA VIRES
be similar, but there is already a decision of
the Supreme Court declaring them as different  General rule: Moral damages cannot be
granted to corporations
- when they do not register, it does not exist
 Exception: Filipinas Broadcasting Network
- Foreign corporations enters into an agreement
Inc. vs. Ago Med
with a domestic corporation, it must be
registered. Generally they do not need to be
registered. - In cases of slander, libel and other forms of
defamation (should not qualify because the
 Corporations code does not qualify whether natural or
juridical) Art. 2219 of the civil code:
- They may enter into joint venture, but
generally they cannot enter into a partnership,
but there are exceptions allowed by the SEC: Art. 2219. Moral damages may be
the 3 exceptions must go hand in hand recovered in the following and analogous
cases:
1. The articles of incorporation expressly
authorized the corporation to enter into (1) A criminal offense resulting in physical
contracts of partnership; injuries;

2. The agreement or articles of partnership (2) Quasi-delicts causing physical injuries;

must provide that all the partners will
manage the partnership; and
(3) Seduction, abduction, rape, or other
3. The articles of partnership must stipulate lascivious acts;
that all the partners are and shall be jointly

1
 (4) Adultery or concubinage; theoretical because of disinterested in
management, wide-scale ownership
(5) Illegal or arbitrary detention or arrest; and inaccessible place of meeting;
7. "Double taxation" may be imposed on
(6) Illegal search; corporate income;
8. Corporation are subject to many
(7) Libel, slander or any other form of legal controls and restrictions.
defamation;
 A corporation is a person, therefore
(8) Malicious prosecution;
protected by the due process clause and
equal protection clause of the Constitution
(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21,

26, 27, 28, 29, 30, 32, 34, and 35. CLASSIFICATION OF CORPORATIONS

The parents of the female seduced, abducted, Section 3 Stock and non-stock
raped, or abused, referred to in No. 3 of this
article, may also recover moral damages. - Importance of knowing, determining what
provisions of the code or the law may be
The spouse, descendants, ascendants, and applicable
brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order
Section 3. Classes of corporations. -
named.
Corporations formed or organized under
this Code may be stock or non-stock
 Advantages: corporations. Corporations which have
capital stock divided into shares and are
1. Capacity to act as a single unit authorized to distribute to the holders of
2. Limited shareholder's liability such shares dividends or allotments of
3. Continuity of existence the surplus profits on the basis of the
4. Feasibility of greater undertaking shares held are stock corporations. All
5. Transferability of shares other corporations are non-stock
corporations. (3a)
6. Centralized Management
7.Standardized method of organization,
 Non-stock- (title 10)
management, and finance.
Non-stock corporation - of those where no part of
- No. 2 may also be a disadvantage their income is distributable as dividends to its
members, trustees or officers subject to provisions
- No. 5 may also be a disadvantage
on dissolution.
Disadvantages:
- primarily exist for purposes other than for profit, it
1. Formal proceeding (such as board of does not follow that they cannot make profits as an
meetings) are required; incident to their operations.
2. Business transactions limited to the
- profits obtained cannot be distributed as dividends
State unless authorized by foreign State;
but are used merely for the furtherance of their
3. Credit is limited in view of shareholder's
purpose or purposes.
limited liability;
4. Unity of incompatible and conflicting  Stock (Section 51)
elements in view of transferability of shares;
5. Minority shareholders have practically no Two (2) requisites must be complied with,
say in the conduct of corporate affairs;
6. In large scale enterprises, stockholders' 1. a capital stock divided into shares,
voting rights may become merely fictitious and and

2
 2. authorized to distribute dividends or - Immediate benefit, aim or advantage of
allotments as surplus profits to its stockholders private individuals
on the basis of the shares held by each
of them. - Those formed for some private purpose,
benefit, aim or end
 Stockholders must generally cast their votes in
the meeting; section 4 governed primarily by - Distinction: public for governmental purpose
the law creating them
 Corporation Sole
Section 4. Corporations created by special
- Exemption to the rule because it is
laws or charters. - Corporations created by
special laws or charters shall be governed composed only of one person
primarily by the provisions of the special law or
charter creating them or applicable to them, - An incorporator may also be a juridical
supplemented by the provisions of this Code, person
insofar as they are applicable. (n)
 Close corporation
 Section 3
- There is exclusivity of shares of stock
- The two (2) requisites must always concur
- Section 96-105
1. That they have a capital stock divided into
shares; and, - Restrictions to transfer shares

2. That they are authorized to distribute - Only those indicated can own shares
dividends or allotments as surplus profits to its
- Article must provide that there will be no
stockholders on the basis of the shares held
public offering
by each of them.
 Open corporation
 Section 4
- openly admit investors
- Created by a special law, they have their own
character - example: stock exchange
- They are not immune from suit unless
 Domestic/ Foreign
provided by the law of their creation
 Test
- Primarily governed by the law creating them
- Incorporation test
- Their subsidiaries are entirely different or
independent from that of the other - If incorporated under the laws of the
Philippines it is a domestic corporation
 Close corporation
 ME Gray vs. CA
- There is no exemption it is absolute
- Parent or Holding/ subsidiaries and affiliates
 Public corporation
- Affiliates- no majority vote
- Political or governmental purposes
SMC 12%
- Those formed or organized for the government
or a portion of the State or any of its political
subdivision and which have for their purpose
HERSHEY CBP CBPl 12%
the general good and welfare
12%
 Private Corporation

3
Affiliate is subject to common control by the 12 % and cannot transact business. Promoters
owners cannot act for a projected corporation

 De jure - Metro Manila - paid up capital requirement

is 10 M
- cannot be attached by the state even in a quo
warranto proceeding - Non- stock- mere mention of the operating
capital
 De facto
- Mention the authorized capital
- exists by virtue of colorable compliance
- Restrictions
- Attached directly only by the state in a quo
warranto proceeding - Mandatory in close

 Corporation by estoppel - Not mandatory in ordinary

- So defectively formed, but still considered - Non-stock

corporation, but only in relation to those who
cannot deny their existence section 20 and 21 - If value is not more than 100,000

 A corporation cannot use any other name

unless it has been amended
FORMATION AND ORGANIZATION
 Section 19
 3 stages
- If confusingly similar it will not be allowed to
1. Creation be registered

2. Re-organization or quasi-reorganization - Verification slip from the records officer

3. Dissolution/winding-up Section 19. Commencement of

corporate existence. - A private corporation
 Purpose clause formed or organized under this Code
commences to have corporate existence
- Defining the scope of authority of the and juridical personality and is deemed
corporate enterprise or undertaking. Both incorporated from the date the Securities
confirmed and limited and Exchange Commission issues a
certificate of incorporation under its official
 4 limitations of purpose clause seal; and thereupon the incorporators,
stockholders/members and their successors
1. Lawful shall constitute a body politic and corporate
under the name stated in the articles of
2. Specific or stated concisely incorporation for the period of time
mentioned therein, unless said period is
3. More than one, the primary and secondary extended or the corporation is sooner
must be specified dissolved in accordance with law. (n)

4. Lawfully combined - Words corporation or inc. either in full or

abbreviated form must be included
- Provision that states, cannot be issued less
than par, exception is treasury shares because Section 18. Corporate name. - No
it can be issued less than par corporate name may be allowed by the
Securities and Exchange Commission if the
- A corporation commences only upon issuance proposed name is identical or deceptively or
of the certificate, prior thereto it has no being confusingly similar to that of any existing
corporation or to any other name already

4
 protected by law or is patently deceptive, - section 51 meetings may only be within the
confusing or contrary to existing laws. When a boundaries of the city where the principal
change in the corporate name is approved, the office
Commission shall issue an amended
certificate of incorporation under the amended - non-stock may be held anywhere in the
name. (n)
Philippines, if provided in its by-laws
 Doctrine of secondary meaning - where summons may be served
- A word or phrase originally incapable of
- registration of chattel mortgage must be
exclusive appropriation [usually generic] with
registered in the register of deeds where the
reference to an article in the market, because
principal office is located
of geographically or otherwise descriptive,
might nevertheless have been used so long  Clavecilla Radio System vs. Antillon
and so exclusively by one producer with
reference to his article that, in that trade and to - action not upon a written contract
that branch of the purchasing public, the word
or phrase has become to mean that the article - city where the defendant resides
was his product.
 Term of existence
 Section 18
- corporate term required
- Lyceum of the Philippines case, the additional
- determining what point in time the juridical
geographical name does not make it
personality will cease to exist
confusingly similar
- enter into contract only when it has juridical
- actual confusion is not necessary- Philips
personality
case “it is enough that there is probable
confusion”
- once it ceases to exist, it no longer has
 2 requisites must be proven personality

- that the complainant corporation acquired a - exist for another 3 years only for purposes
prior right over the use of such corporate of liquidation
name
- Dissolution - it is automatic
- identical, deceptively or confusingly, patently
 When should extension be made?
deceptive
- General rule: Not earlier than 5 years
 Principal Office
- Exception: unless there are justifiable
- statement of principal office is required
reasons
- city and municipality not only province must be
 May it be extended after expiration?
specified
- Alhambra cigar vs. SEC once it ceases to
- principal office NOT operations office
exist it has no vested politic, exist only for a
- necessary because it will establish the period of 3 years only for liquidation and for
that purpose only
residence of corporations
 How many incorporators should there be?
- venue of actions for or against the
corporations - 5-15
- venue of meetings  May a corporation be an incorporator?

5
- General rule: only natural persons - YES. There is nothing to prevent a
corporation from being a stockholder
- Exception: cooperatives and corporation
primarily organized to hold equities in rural - Incorporator must subscribe to 1 share
banks
- There are those that are exclusively
 How about minors? reserved to Filipinos

- NO, because they must be of legal age - An incorporator maybe a corporator as long
as he is a stockholder
- May a corporation organized by incorporators
consisting solely of foreigners  section 6

- Yes, there is no nationality requirement only Section 6. Classification of shares.

residence, as long as majority are residents of - The shares of stock of stock corporations
the Phil may be divided into classes or series of
shares, or both, any of which classes or
 Define incorporators <sec.5> series of shares may have such rights,
privileges or restrictions as may be stated in
- Those person mentioned in the articles as the articles of incorporation: Provided, That
originally forming the corporation and who are no share may be deprived of voting rights
signatories of the articles of incorporation. except those classified and issued as
"preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided,
- Must be signatories to be incorporators
further, That there shall always be a class
or series of shares which have complete
Section 5. Corporators and voting rights. Any or all of the shares or
incorporators, stockholders and members. - series of shares may have a par value or
Corporators are those who compose a have no par value as may be provided for in
corporation, whether as stockholders or as the articles of incorporation: Provided,
members. Incorporators are those however, That banks, trust companies,
stockholders or members mentioned in the insurance companies, public utilities, and
articles of incorporation as originally forming building and loan associations shall not be
and composing the corporation and who are permitted to issue no-par value shares of
signatories thereof. stock.

Corporators in a stock corporation are Preferred shares of stock issued by

called stockholders or shareholders. any corporation may be given preference in
Corporators in a non-stock corporation are the distribution of the assets of the
called members. (4a) corporation in case of liquidation and in the
distribution of dividends, or such other
 Define corporators <sec.5> preferences as may be stated in the articles
of incorporation which are not violative of
- All persons who compose the corporation at the provisions of this Code: Provided, That
any given time and need not be among those preferred shares of stock may be issued
only with a stated par value. The board of
who execute the articles of incorporation at the
directors, where authorized in the articles of
start of its formation and organization. incorporation, may fix the terms and
conditions of preferred shares of stock or
- Originally or subsequently any series thereof: Provided, That such
terms and conditions shall be effective upon
- Section 5 provides: the filing of a certificate thereof with the
Securities and Exchange Commission.
Corporators in a stock corporation are
called stockholders or shareholders. Shares of capital stock issued
Corporators in a non-stock corporation are without par value shall be deemed fully paid
called members. (4a) and non-assessable and the holder of such
shares shall not be liable to the corporation
 May a corporation be a corporator? or to its creditors in respect thereto:
6
 Provided; That shares without par value may 1. Educational corporations registered as non
not be issued for a consideration less than the stock corporation whose number of
value of five (P5.00) pesos per share: trustees, though not less than five and not
Provided, further, That the entire consideration
more than [15] should be divisible by five
received by the corporation for its no-par value
shares shall be treated as capital and shall not [5], meaning they must have either five, ten,
be available for distribution as dividends. or fifteen trustees and no other;

2. In close corporations where all the

A corporation may, furthermore,
classify its shares for the purpose of insuring stockholders are considered as members of
compliance with constitutional or legal the board of directors thereby effectively
requirements. allowing twenty members in the board.

Except as otherwise provided in the 3. The by-laws of a corporation may provide

articles of incorporation and stated in the for additional qualifications and
certificate of stock, each share shall be equal disqualifications of its members of the board
in all respects to every other share. of directors or trustees. However it may not
do away with the minimum disqualifications
Where the articles of incorporation lay down by the Code.
provide for non-voting shares in the cases
allowed by this Code, the holders of such  Qualifications of the governing board
shares shall nevertheless be entitled to vote
on the following matters: - Requires mere residency <sec. 23>

1. Amendment of the articles of incorporation;

Section 23. The board of directors
or trustees. - Unless otherwise provided in
2. Adoption and amendment of by-laws; this Code, the corporate powers of all
corporations formed under this Code shall
3. Sale, lease, exchange, mortgage, pledge or be exercised, all business conducted and all
other disposition of all or substantially all of the property of such corporations controlled and
corporate property; held by the board of directors or trustees to
be elected from among the holders of
4. Incurring, creating or increasing bonded stocks, or where there is no stock, from
indebtedness; among the members of the corporation,
who shall hold office for one (1) year until
5. Increase or decrease of capital stock; their successors are elected and qualified.
(28a)
6. Merger or consolidation of the corporation
with another corporation or other corporations; Every director must own at least
one (1) share of the capital stock of the
corporation of which he is a director, which
7. Investment of corporate funds in another
share shall stand in his name on the books
corporation or business in accordance with
of the corporation. Any director who ceases
this Code; and
to be the owner of at least one (1) share of
the capital stock of the corporation of which
8. Dissolution of the corporation. he is a director shall thereby cease to be a
director. Trustees of non-stock corporations
Except as provided in the immediately must be members thereof. A majority of the
preceding paragraph, the vote necessary to directors or trustees of all corporations
approve a particular corporate act as provided organized under this Code must be
in this Code shall be deemed to refer only to residents of the Philippines.
stocks with voting rights. (5a)
 May a domestic corporation have a
 How many directors should there be? governing board consisting solely of
foreigners?
- General rule: Not less than 5 not more than 15

- Exceptions:

7
 - YES, section 23 majority of them must be E
residents of the Philippines, no nationality
requirement PAID UP =62,500

 Anti-dummy act <sec.2-A> Corporation cannot exceed more than 1 M it is the

maximum amount it cannot issue more unless
- If the business undertaking or activity is only amended
partially nationalized, aliens can be elected as
such directors, [unless the law provides Maximum shares it can issue is 1M shares unless
otherwise] but their number shall only be in amended
proportion to their equity or participation in the
 How much shares should be subscribed?
capital stock of the corporation.
- Must be at least 25% of the authorized
 Disqualifications <sec.27>
capital stock
- The disqualifications provided for is absolute
 Paid- up must be at least 25%-minimum
and may not be done away with. Corporate by-
laws may, however, provide for additional  Section 13
qualifications and disqualifications.
- Total subscription compliance with minimum
Section 27. Disqualification of 25% total
directors, trustees or officers. - No person
convicted by final judgment of an offense - Any combination would comply with the
punishable by imprisonment for a period minimum required by section 30
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to
Section 30. Compensation of
the date of his election or appointment, shall
directors. - In the absence of any provision
qualify as a director, trustee or officer of any
in the by-laws fixing their compensation, the
corporation. (n)
directors shall not receive any
compensation, as such directors, except for
 Section 27 and 23 minimum disqualifications reasonable per diems: Provided, however,
and qualifications That any such compensation other than per
diems may be granted to directors by the
 Lee vs. CA vote of the stockholders representing at
least a majority of the outstanding capital
- By laws may provide for additional stock at a regular or special stockholders'
meeting. In no case shall the total yearly
 Gov’t vs. El hogar Filipino, Gokongwei vs. compensation of directors, as such
SMC directors, exceed ten (10%) percent of the
net income before income tax of the
Capital structure corporation during the preceding year. (n)

Foundation- minimum paid-up capital 3M  Minimum for a domestic corporation?

Authorized capital 1 M No. of shares 1M shares par - In no case shall the paid- up capital be less
value 1.00 than 5k

Amount of shares subscribed  Is there a minimum authorized capital

imposed by the code?
50 K A
- If there is minimum paid-up logically there
50 K B
should also be a minimum capital =5000
C 250K
 Minimum paid-up capital for a financing
D company metro manila 10 M if located in
MM

8
 Shares of stock shares of stock issued under binding
subscription agreements to subscribers or
 Purpose of classification stockholders, whether or not fully or partially
paid, except treasury shares. (n)
- To specify and define the rights and privileges
of the stockholders; - Voting and dividend rights, it refers to the
outstanding capital stocks
- For regulation and control of the issuance of
sale of corporate securities for the protection - Only outstanding stocks are allowed to vote
of purchasers and stockholders. and receive dividends

- As a management control device. - Actually the same

- To comply with statutory requirements  Treasury shares

particularly those which provide for certain
limitations on foreign ownership and shares - are also subscribed shares
like overseas employment agencies requiring
- while they remain in the treasury, no voting
to own at least 75% of the shares of stock
and dividend rights
thereof.
- may be reissued by the corporation
- To better insure return on investment which
can be affected through the issuance of
- once reissued they become outstanding
redeemable shares or preferred shares, i.e.,
stocks again
granting the holders thereof, preference as to
dividends and/or distribution of assets in case  Common shares
of liquidation; and,
- carry the right to vote
- For flexibility in price, particularly, no par
shares may be issued or sold from time to time  Preferred shares
at different price depending on the net worth of
the company since they do not purport to - grants the holder preference
represent an actual of fixed value.
- preference as to dividends
 Section 6
- preference as to distribution of the
- Each shall be equal in all respects to every remaining assets upon dissolution or
other share
- both
 Preferred shares
- YOU MUST STATE THE PREFERENCE
- Specific preference BECAUSE IF NOT THEY ARE PRESUMED
TO BE EQUAL
- Dividends or during liquidation
- It may include such other preferences not
 No par inconsistent with the Code. This is so
because Section 6 of the said law allows a
- Can sell it with the network of the corporation stock corporation to issue preferred shares
subject only to the limitations imposed
 Distinction between the subscribed and
therein which are:
outstanding stocks?
a. They can be issued only with sated par
- Section 137
value; and,

Section 137. Outstanding capital b. The preferences must be stated in the

stock defined. - The term "outstanding capital articles of incorporation and in the certificate
stock", as used in this Code, means the total
9
 of stock, otherwise, each share shall be, in all retention is necessary under special
respect, equal to every other share. circumstances obtaining in the corporation,
such as when there is need for special
 Participating reserve for probable contingencies. (n)

- Must be stated because the presumption is - It depends because there are three types of
that it is participating non-cumulative preferred shares

 Cumulative - Discretionary dividend type

- Irrespective of whether or not they where - Mandatory if earned

earned
- Earned cumulative or dividend credit type
 Preferred
 Compare cumulative share from non-
- May be denied cumulative, earned cumulative or dividend
credit type
- Unless denied they are still entitled
- Cumulative share –whether or not earned
 What if hindi i-declare kahit na may dividends
rights for the previous years? May they be - Non-cumulative earned cumulative or
denied dividend rights because they are non dividend credit type- only if earned
holders of non-cumulative? NOTE: YOU
CANNOT COMPEL THE CORPORATION TO  Par
DECLARE DIVIDENDS UNLESS IT
EXCEEDS 100 % PAID UP CAPITAL SEC. 43 - stated par value; shall not be issued less
than par
Section 43. Power to declare
 No par
dividends. - The board of directors of a stock
corporation may declare dividends out of the
- without stated par value
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock - once fully paid no longer liable
held by them: Provided, That any cash
dividends due on delinquent stock shall first be  Corporations cannot use its capitals in
applied to the unpaid balance on the declaring dividends; not all can issue no par
subscription plus costs and expenses, while value section 6
stock dividends shall be withheld from the
delinquent stockholder until his unpaid  Voting
subscription is fully paid: Provided, further,
That no stock dividend shall be issued without - entitled to vote at any motion brought up in
the approval of stockholders representing not writing
less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting  Non-voting
duly called for the purpose. (16a)
- not entitled to vote
Stock corporations are prohibited from
retaining surplus profits in excess of one  What types of shares may be denied of the
hundred (100%) percent of their paid-in capital right to vote?
stock, except: (1) when justified by definite
corporate expansion projects or programs - Preferred and redeemable shares
approved by the board of directors; or (2)
when the corporation is prohibited under any  Is it correct to state that common shares
loan agreement with any financial institution or
can never be denied the right to vote?
creditor, whether local or foreign, from
declaring dividends without its/his consent,
- Only preferred and redeemable shares are
and such consent has not yet been secured;
or (3) when it can be clearly shown that such denied unless provided in this code

10
- PWEDENG MA-DENY YUNG COMMON - Once reissued they shall become
SHARES, KASI YUNG FOUNDER’S SHARES outstanding stocks again and purchasers
MERON SILANG EXCLUSIVE RIGHTS NA shall be entitled to all the rights and
SILA LANG ANG MERON, SO PWEDE privileges as the other holders have
SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG  Section 57 treasury shares have no voting
COMMON SHARE RIGHTS and dividend rights. Why not?

- Example: founders shares- may be given Section 57. Voting right for
certain rights and privileges treasury shares. - Treasury shares shall
have no voting right as long as such shares
- Even common shares may be denied the right remain in the Treasury. (n)
to vote of founders’ shares issued <sec.7>
- Answer: commissioner vs. manning page
Section 7. Founders' shares. - 62 first par.
Founders' shares classified as such in the
articles of incorporation may be given certain “Although authorities may differ on
rights and privileges not enjoyed by the the exact legal and accounting status of so-
owners of other stocks, provided that where called treasury shares, they are more or
the exclusive right to vote and be voted for in less in agreement that treasury shares are
the election of directors is granted, it must be stocks issued and fully paid for and
for a limited period not to exceed five (5) years
reacquired by the corporation either by
subject to the approval of the Securities and
Exchange Commission. The five-year period purchase, donation, forfeiture or other
shall commence from the date of the aforesaid means. Treasury shares are therefore
approval by the Securities and Exchange issued shares but being in the treasury they
Commission. (n) do not have the status of outstanding
shares. Consequently, although a treasury
 Do you include non-voting shares in passing a share, not having been retired by the
valid corporate act? corporation re-acquiring it, may be re-issued
or sold again, such shares, as long as it is
- Even non-voting shares are entitled to vote held by the corporation as a treasury share,
under section 6 participates neither in dividends, because
dividends cannot be declared by the
 Redeemable shares
corporation to itself, nor in meetings of the
- Discretionary/optional corporation as voting stock, for otherwise
equal distribution of voting powers among
- Obligatory or mandatory stockholders will be effectively lost and the
directors will be able to perpetrate their
 Generally a corporation can reacquire its own control of the corporation, though it still
shares if it has unrestricted retained earnings represents a paid for interest in the property
of the corporation. The foregoing essential
 Exception: redeemable shares may be
features of a treasury stocks are lacking in
reacquired irrespective of retained earnings
the questioned shares.
 Treasury shares
In this case, and under the terms of
the trust agreement, the shares of stock of
- They are treasury while in the treasury
Reese participated in dividends which
account of the corporation
the trustee received and the said shares
 May they be reissued by the corporation? were voted upon by the trustee in all
corporation meetings. They were not,
- YES therefore, treasury shares.”

 If they are reissued will they be denied the  When the law speaks of outstanding rights it
right to vote? does not include treasury shares
11
 Treasury shares may be reissued Section 17. Grounds when articles
of incorporation or amendment may be
- They are actually assets of the corporation rejected or disapproved. - The Securities
and Exchange Commission may reject the
- Once re-issued they become outstanding articles of incorporation or disapprove any
stocks again amendment thereto if the same is not in
compliance with the requirements of this
- The corporation may cancel them; in effect Code: Provided, That the Commission shall
give the incorporators a reasonable time
there will be a reduction in the outstanding
within which to correct or modify the
capital stocks objectionable portions of the articles or
amendment. The following are grounds for
- The code does not require ordinary such rejection or disapproval:
corporations to provide for restrictions, but it
does not likewise prohibit restrictions 1. That the articles of incorporation or any
amendment thereto is not substantially in
- Example: right of first refusal accordance with the form prescribed herein;

- The restriction must be contained in the 2. That the purpose or purposes of the
articles of incorporation corporation are patently unconstitutional,
illegal, immoral, or contrary to government
- If provided in by-laws but not in the articles of rules and regulations;
incorporation then it will not be binding
3. That the Treasurer's Affidavit concerning
- Restrictions and preferences are mandatorily the amount of capital stock subscribed
required in close corporations and/or paid is false;

- If it does not provide restrictions it is not a 4. That the percentage of ownership of the
close corporation capital stock to be owned by citizens of the
Philippines has not been complied with as
- Specified persons- close corporations required by existing laws or the
Constitution.
- If not one of those specified you are not
included because there is exclusivity in close No articles of incorporation or
corporations amendment to articles of incorporation of
banks, banking and quasi-banking
institutions, building and loan associations,
- Should also be in the by-laws not only in the
trust companies and other financial
articles of incorporation intermediaries, insurance companies, public
utilities, educational institutions, and other
 No transfer clause corporations governed by special laws shall
be accepted or approved by the
 Execution clause Commission unless accompanied by a
favorable recommendation of the
 Acknowledgment appropriate government agency to the
effect that such articles or amendment is in
 Treasurer affidavit part of the articles of accordance with law. (n)
incorporation
- But the grounds in section 17 are not
 Section 23-27 minimum qualifications, but
exclusive
there may be additional
 When will the corporation commence to
 Grounds for disapproval
exist?
- Only substantial and not strict is required
- Section 19
 May the SEC refuse or reject registration?
Section 19. Commencement of
- <Section 17> corporate existence. - A private corporation
12
 formed or organized under this Code - CORPORATION SOLE- upon filing of the
commences to have corporate existence and verified articles of incorporation, once filed it
juridical personality and is deemed is vested with a judicial capacity
incorporated from the date the Securities and
Exchange Commission issues a certificate of  General rule section 19
incorporation under its official seal; and
thereupon the incorporators, - Vested with judicial capacity upon issuance
stockholders/members and their successors
shall constitute a body politic and corporate of the certificate by the SEC
under the name stated in the articles of
incorporation for the period of time mentioned o However it is not accurate
therein, unless said period is extended or the according to atty. Ladia because
corporation is sooner dissolved in accordance there are those that can issue for
with law. (n) example cooperatives- BUREAU
OF COOPERATIVES which
 A corporation de jure can come into existence register, home insurance guaranty
only upon the issuance of the certificate of corporation- HOME OWNERS
registration by the SEC? TRUE OR FALSE?
 Cagayan Fishing vs. Sandika
- TRUE
- Corporations are created by law
- EXCEPTION: CORPORATION SOLE <sec.
112> - Commence to exist upon issuance by the
CONCERNED government corporation or
Section 112. Submission of the agency
articles of incorporation. - The articles of
incorporation must be verified, before filing, by - Prior there to it has no being
affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi or presiding - The transfer of the property was not valid, it
elder, as the case may be, and accompanied likewise did not have the right to transfer
by a copy of the commission, certificate of
election or letter of appointment of such chief  De jure
archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by - Strict or substantial compliance
any notary public.
 De facto
From and after the filing with the
Securities and Exchange Commission of the - 4 requisites must go hand in hand take out
said articles of incorporation, verified by anyone of them there can be no de facto
affidavit or affirmation, and accompanied by
corporation
the documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
1. There is a valid statute under which the
priest, minister, rabbi or presiding elder shall
become a corporation sole and all corporation could have been created as a
temporalities, estate and properties of the de jure corporation.
religious denomination, sect or church
theretofore administered or managed by him 2. An attempt, in good faith, to form a
as such chief archbishop, bishop, priest, corporation according to the requirements
minister, rabbi or presiding elder shall be held of law, which goes far enough to amount to
in trust by him as a corporation sole, for the a “colorable compliance” with the law;
use, purpose, behalf and sole benefit of his
religious denomination, sect or church, 3. A user of corporate powers, the transaction
including hospitals, schools, colleges, orphan of business in some way as if it were a
asylums, parsonages and cemeteries thereof.
corporation; and,
(n)
4. Good faith in claiming to be and doing
business as a corporation.

13
 Are the rights and obligations between officers - General partners- liable even beyond his
and directors of a de jure and de facto the promise even his personal properties are
same? prone to attachment

- YES. Governed by the same law, rules and  Lozano vs. Delos Santos
regulations
- Founded on principle of equity
 Only important in determining, is for the
purpose of applying the rules with regards to - Exercise corporate powers
the direct and collateral attack
- Enters with business with 3rd parties
 The existence of a de jure cannot be
questioned even by the State, either directly or - When there is no 3rd persons involved and
indirectly the problem arises between there members,
therefore they themselves know that there
 Existence of a de facto can be questioned only is no corporation by estoppel
by the State directly in a quo warranto
proceeding only  Albert vs. University

 Municipality of Malabang vs. Benito - 1965 case, no section 21 yet

- What is the missing link so as to consider it a - Applied where the rules governing agency
de facto? A law, because the executive order
- A person purporting in behalf of a non
is unconditional
existing corporation
- An unconditional act affords no rights, creates
- Section 21, you arrive at the same decision
no office
 Chiang Kai Siek vs. CA
- Legal contemplation it was never passed at all
- SC based its decision from the provision of
- It can therefore be questioned by any person
the education act
 If the certificate of registration has not been
- It cannot immune itself by virtue of its non
issued, may a corporation de facto exist?
compliance with the law
- NO!
 Assuming there was no law?
- Number 4 requirement, good faith in claiming
- YES, it may still be sued as a school for the
to be and doing business as a corporation
past 32 years the school represented itself
 Hall vs. Piccio as possessed of juridical personality

- Missing link is good faith  General rule: a 3rd party transacting with a
non existent corporation shall be estopped
- The certificate was not yet issued by the SEC, to deny
the members knew and therefore they were
not acting in good faith, therefore anybody can  Asia banking vs. standard products
question its existence
- General rule: absence of fraud a person
 Corporation by estoppel who has dealt with a non incorporated
corporation shall be stopped to deny from
- So defectively formed so that they are not to actions in which it had benefited
be considered a de jure or de facto
- Exemptions: when there is fraud the general
rule shall not apply

 Salvatierra vs. Garlitos

14
- As a general rule a person who has contracted - Cannot escape when benefited
it a corporation lacking personality
- General rule: you deal with a corporation,
- Doctrine is not applicable where fraud takes as to estop it
part in the transaction
- Exceptions: 1. fraudulently misrepresents
 Another exemption the third person may file an action directly to
those members, 2. 3rd party will not be
 International express travel and tours vs. CA estopped if he is not trying to escape liability
- No fraud in this case  2 possible remedies

- How come Kahn was made liable? - Chiang kai siek case

- Doctrine of incorporation - Albert case

- Applies only if that person is trying to escape  What would be the effect if the corporation
from a contract where he is benefited failed to commence transaction?

- In this case petitioner is not trying to escape - Automatic

liability, but rather the one claiming from the
contract  Operated but becomes subsequently
inoperative for 5 years only a ground for
 Would this apply to foreign corporation? suspension, proper notice and hearing

- YES, it may apply  Commencement

- Georg Grotjahn vs. Isnami - Example realty company

 A foreign corporation cannot gain access to CORPORATE CHARTER AND ITS

our courts unless they attain a license to AMENDMENTS
engage in business in the Philippines but
applying corporation by estoppels, the court  What do you understand by the word
allowed charter? Is it the same as articles of
incorporation?
 Municipality of Malabang case
- Corporate charter is broader
- No law, hence may be questioned by any
person  Franchise

- An unconstitutional act is not a law, t confers - Primary power granted by the state to be
no rights, it imposes no duties, it affords no and act as a corporation
protections, it crates o office, it is in legal
contemplation, as inoperative as though it had - Secondary franchise is the right or privilege
never been passes that the corporation may exercise

 Hall vs. Piccio  You cannot issue investment contracts

without a secondary franchise, kailangan
- No good faith primary muna hindi pwede mauna
secondary kasi sa section 19 it does not
 Corporation by estoppel exist until issued with a certificate of
registration or incorporation
- Admission, conduct or agreement
 Corporate entity
- Will not apply among members themselves
there must be a 3rd party

15
- Corporation exist separately and  Two or more corporations, one of them will
independently from the stockholders be treated as a mere alter-ego

- Stockholders cannot bring an action, to bring  You cannot pierce the veil of corporate
back the properties of a corporation fiction when there are no facts attendant in
the case
- Corporation has no interest in the individual
properties of its members  Corporate Entity Theory

- The corporation is possessed with a

personality separate and distinct from the
 Sulo ng Bayan vs. Araneta individual stockholders or members and is
not affected by the personal rights,
- Corporation cannot bring an action for the obligations or transactions of the latter
recovery of the properties of its members
 Instrumentality rule
 Caram vs. CA
- Where one corporation is so organized and
- Stockholders cannot be held liable for the controlled and its affairs are conducted so
legitimate obligations of the corporation, they that it is, in fact, a mere instrumentality or
exist separately and independently from one adjunct of the other, the fiction of the
another corporate entity of the “instrumentality” may
be disregarded
 Cruz vs. Dalisay
- Courts are concerned with reality and not
- Final judgment against a corporation cannot
form
be enforced against stockholders
- Mere ownership of all or substantially all of
 Rustan Pulp vs. CA
the shares of stock of a corporation is not,
- Corporation exist separately and in itself, insufficient ground for disregarding
independently the separate corporate personality. And for
the separate personality of the corporation
- Corporation are juridical entities, they exist to be disregarded, the wrong doing must be
only in legal contemplation, can act only clearly and convincingly established
through its authorized representatives
- Fraud must be proven by clear and
 Soriano vs. CA convincingly evidence amounting to more
than preponderance. It cannot be justified
- They are not personally liable by speculation and can never be presumed.
And only if it sought to hold the stockholders
- They where signed for and in behalf of the
liable directly for corporate debt
corporation
 Palacio vs. Fely
 Palay inc. vs. Clave
- Piercing the veil of corporate fiction
- Liabilities incurred by the corporation cannot
be enforced against stockholders, etc., even if - Fely trans and the other corporation is one
stockholders, etc. happens to own a and the same
substantial interest in the corporation, mere
ownership does not disregard the corporate  Marvel bldg. vs. David
entity theory
- There must be facts before the court will be
 Corporate entity for legal or legitimate justified in piercing the veil of corporate
purposes only fiction

16
- Corporation was a mere extension of the respect to the transaction attacked so that
personality of the person the corporate entity as to this transaction
had at the time no separate mind, will or
 Yutivo and sons vs. Court of Tax Appeals existence of its own.

- What where the facts or circumstances arrived 2. Such control must have been used by the
by the court here? defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
- Subscribed capital where all advanced by other positive legal duty or dishonest and
Yutivo, the board where the same as Yutivo unjust act in contravention of plaintiff’s legal
rights; and,
 Commissioner of Internal Revenue vs. Norton
and Harrison 3. The aforesaid control and breach of duty
must proximately cause the injury or unjust
- Court applied the general rule
loss complained of.
- Mere substantial ownership does not
- The absence of one of the elements
mean that it has a same corporate entity
prevents “piercing the corporate veil.” In
 La Campana Coffee Factory, Inc. vs. KKM applying the “instrumentality” or “alter ego”
doctrine, the courts are concerned with
- Two corporations managed by the same reality and not form, with how the
family, workers were made interchangeably corporation operated and the individual
defendant’s relationship to that operation.
 Emilio Cano vs. CIR
 There must facts and circumstances before
- Sued in there official capacity warrant piercing the veil of corporate fiction

- Reverse of Soriano vs. CA (signed in their  The control necessary does not mean stock
official capacity) ownership

 Tesco vs. WCC  MCConnel vs. CA

- The two corporations where located in the - were located in the same floor
same office
- “while the mere ownership of all or nearly all
 Claparols vs. CIR of the capital stock of a corporation does
not necessary mean that it is a mere
- Same as NAFLU and A.C. Ransom business conduit of the stockholder, that
conclusion is amply justified where it is
 Concept builders vs. NLRC
shown, as in the case before us, that the
- Instrumentality rule. What is the instrumentality operations of the corporation were so
rule? “where one corporation is so organized merged with the stockholders as to be
and controlled and its affairs are conducted so practically indistinguishable from them. To
that it is, in fact, a mere instrumentality or hold the latter liable for the corporation’s
adjunct of the other, the fiction of the corporate obligations is not to ignore the corporation’s
entity of the “instrumentality” may be separate entity, but merely to apple the
disregarded.” established principle that such entity cannot
be invoked or used for purposes that could
- Has no separate mind of its own. What is the not have been intended by the law that
degree of control? created that separate personality.”

1. Control, not mere majority or complete stock  Tan boon bee vs. Jarencio
control, but complete domination, not only of
finances but of policy and business practice in - Why would a drug company need a printing
machine
17
- The property must be in pursuance of a - Express power granted to a corporation
company business
 Section 16
 Cease vs. CA
- Appraisal right
- Alter-ego or the extension of the person of
forest ware does the court pierced the veil of - Section 81 to object on certain acts and
corporate fiction transactions

- As to not deprive the holders of their Section 81. Instances of appraisal

successional rights right. - Any stockholder of a corporation
shall have the right to dissent and demand
- Mere ownership of all or substantially all is not payment of the fair value of his shares in
a justification of piercing the veil of corporate the following instances:
fiction
1. In case any amendment to the articles of
 Fraud must be proven by clear and convincing incorporation has the effect of changing or
evidence cannot presume or speculate, there restricting the rights of any stockholder or
class of shares, or of authorizing
must be facts and circumstances
preferences in any respect superior to those
of outstanding shares of any class, or of
 Fraud must be clear and convincing evidence
extending or shortening the term of
more than preponderance corporate existence;
 Remo Jr. vs. IAC
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
- The resolution was not entered to defraud
disposition of all or substantially all of the
anyone corporate property and assets as provided
in the Code; and
 Del Rosario vs. National Labor Commission
3. In case of merger or consolidation. (n)
- The wrongdoing must be clearly established

- There must be facts to support - Right granted only in specified instances

Are non-voting shares included in amending the

- Payment of claims cannot thus be presumed
articles of incorporation
 Indophil Textile Mill vs. CALICA
1 100/s
- How do you distinguish this ruling to La XYZ-----ABC
Campana, having the same issues:
2 100/s
- La campana, one payroll, employees were
To
made interchangeable. Acrylic had its own
standards 10 100/s

 PNB vs. Ritratto Group =1M/S what would

be the 2/3?
- Control test
Section 6 last paragraph
- Not mere majority but rather complete
Voting shares are excluded except the
- Twin ace was only a subsequent interested foregoing instances
party
1 1
- Assets and machineries
2 2
 Amendment of the articles of incorporation
18
 3 3 increase or diminution of the capital stock or
of the incurring, creating, or increasing of
any bonded indebtedness and of the time
4 4 and place of the stockholder's meeting at
which the proposed increase or diminution
of the capital stock or the incurring or
5 5 increasing of any bonded indebtedness is to
be considered, must be addressed to each
6 6 stockholder at his place of residence as
shown on the books of the corporation and
1 & 2=absent deposited to the addressee in the post
1&2=absent but gave their written assent office with postage prepaid, or served
personally.
3 & 4= objected
3&4=objected A certificate in duplicate must be
signed by a majority of the directors of the
5 & 6= approved the amendment corporation and countersigned by the
5&6=approved chairman and the secretary of the
stockholders' meeting, setting forth:
Would there be a valid amendment
(1) That the requirements of this section
 Special amendments 37 & 38 shortening that have been complied with;
would result to dissolution require prior
approval by the SEC (2) The amount of the increase or
diminution of the capital stock;
Section 37. Power to extend or
shorten corporate term. - A private corporation (3) If an increase of the capital stock, the
may extend or shorten its term as stated in the amount of capital stock or number of shares
articles of incorporation when approved by a of no-par stock thereof actually subscribed,
majority vote of the board of directors or the names, nationalities and residences of
trustees and ratified at a meeting by the the persons subscribing, the amount of
stockholders representing at least two-thirds capital stock or number of no-par stock
(2/3) of the outstanding capital stock or by at subscribed by each, and the amount paid
least two-thirds (2/3) of the members in case by each on his subscription in cash or
of non-stock corporations. Written notice of the property, or the amount of capital stock or
proposed action and of the time and place of number of shares of no-par stock allotted to
the meeting shall be addressed to each each stock-holder if such increase is for the
stockholder or member at his place of purpose of making effective stock dividend
residence as shown on the books of the therefor authorized;
corporation and deposited to the addressee in
the post office with postage prepaid, or served (4) Any bonded indebtedness to be
personally: Provided, That in case of extension incurred, created or increased;
of corporate term, any dissenting stockholder
may exercise his appraisal right under the (5) The actual indebtedness of the
conditions provided in this code. (n) corporation on the day of the meeting;

Section 38. Power to increase or (6) The amount of stock represented at the
decrease capital stock; incur, create or meeting; and
increase bonded indebtedness. - No
corporation shall increase or decrease its (7) The vote authorizing the increase or
capital stock or incur, create or increase any diminution of the capital stock, or the
bonded indebtedness unless approved by a incurring, creating or increasing of any
majority vote of the board of directors and, at a bonded indebtedness.
stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding
Any increase or decrease in the
capital stock shall favor the increase or
capital stock or the incurring, creating or
diminution of the capital stock, or the incurring,
increasing of any bonded indebtedness
creating or increasing of any bonded
indebtedness. Written notice of the proposed
19
 shall require prior approval of the Securities - FALSE because it can be valid upon the
and Exchange Commission. date of filing if not acted upon within 6
months without fault attributable to the
One of the duplicate certificates shall corporation
be kept on file in the office of the corporation
and the other shall be filed with the Securities  Why is it retroactive?
and Exchange Commission and attached to
the original articles of incorporation. From and  What provision may be amended, altered or
after approval by the Securities and Exchange
repealed
Commission and the issuance by the
Commission of its certificate of filing, the
 Can you change name, address for
capital stock shall stand increased or
decreased and the incurring, creating or example she married or changed address?
increasing of any bonded indebtedness
authorized, as the certificate of filing may - NO. you cannot change that
declare: Provided, That the Securities and
Exchange Commission shall not accept for  Fait accompli, are beyond the powers or
filing any certificate of increase of capital stock authority of the corporation to change, alter
unless accompanied by the sworn statement or modify. These would include the
of the treasurer of the corporation lawfully following:
holding office at the time of the filing of the
certificate, showing that at least twenty-five - Names of the incorporators and
(25%) percent of such increased capital stock
has been subscribed and that at least twenty- - The incorporating directors or trustees,
five (25%) percent of the amount subscribed
has been paid either in actual cash to the - The name of the treasurer originally or first
corporation or that there has been transferred
to the corporation property the valuation of elected by the subscribers or members to
which is equal to twenty-five (25%) percent of act as such until his successor has been
the subscription: Provided, further, That no duly elected and qualified,
decrease of the capital stock shall be
approved by the Commission if its effect shall - The number of shares and amount originally
prejudice the rights of corporate creditors. subscribed and paid out of the original
authorized capital stock of the corporation,
Non-stock corporations may incur or
create bonded indebtedness, or increase the - The date and place of execution of the
same, with the approval by a majority vote of articles of incorporation,
the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called - The signatories and acknowledgment
for the purpose.
thereof.
Bonds issued by a corporation shall - All other provisions or matters stated or
be registered with the Securities and
contained in the articles are subject to
Exchange Commission, which shall have the
authority to determine the sufficiency of the amendment.
terms thereof. (17a)
 Founder’s or signatories hindi pwede palitan
 The vote must be cast at the meeting called
 Names, nationalities- you cannot
for that purpose
 Capital- right granted by law to all
 Written assent would not suffice
corporation
 When do amendments become valid and
 Paid up capital- NO
effective?
 Restriction and transfer of shares in
- Only upon the approval of the SEC TRUE OR ordinary stock corporations
FALSE?
- You can, but close corporation cannot

20
- Section 96, otherwise it will not be a close - FALSE. It can be if there are justifiable
corporation reasons for earlier extension as may be
determined by the SEC
Section 96. Definition and
applicability of Title. - A close corporation,  Can you extend the corporate term if it has
within the meaning of this Code, is one whose already expired?
articles of incorporation provide that: (1) All the
corporation's issued stock of all classes, - Once the term expires without an
exclusive of treasury shares, shall be held of amendment having happen it ceases to
record by not more than a specified number of exist as a body politic. It is dissolved
persons, not exceeding twenty (20); (2) all the
automatically on the day it expires.
issued stock of all classes shall be subject to
one or more specified restrictions on transfer
 Alhambra cigar and PNB case
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make
 Instances when the SEC allowed extension
any public offering of any of its stock of any
class. Notwithstanding the foregoing, a whose term has already expired
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its - All of them involved are institutions of
voting stock or voting rights is owned or learning, it was the case in order to avoid
controlled by another corporation which is not confusion that would arise later on.
a close corporation within the meaning of this
Code. BOARD OF DIRECTORS/TRUSTEES

Any corporation may be incorporated  Section 23

as a close corporation, except mining or oil
companies, stock exchanges, banks, Section 23. The board of directors
insurance companies, public utilities, or trustees. - Unless otherwise provided in
educational institutions and corporations this Code, the corporate powers of all
declared to be vested with public interest in corporations formed under this Code shall
accordance with the provisions of this Code. be exercised, all business conducted and all
property of such corporations controlled and
The provisions of this Title shall held by the board of directors or trustees to
primarily govern close corporations: Provided, be elected from among the holders of
That the provisions of other Titles of this Code stocks, or where there is no stock, from
shall apply suppletorily except insofar as this among the members of the corporation,
Title otherwise provides. who shall hold office for one (1) year until
their successors are elected and qualified.
 Transfer clause, executor clause, (28a)
acknowledgment, treasury affidavit-NO
Every director must own at least
 Philippine First Insurance case one (1) share of the capital stock of the
corporation of which he is a director, which
- Mere change in the name of a corporation or share shall stand in his name on the books
by merely complying with the law is general of the corporation. Any director who ceases
to be the owner of at least one (1) share of
amendment
the capital stock of the corporation of which
he is a director shall thereby cease to be a
- It does not change its personality. It is the director. Trustees of non-stock corporations
same person in a different name. the charter is must be members thereof. A majority of the
the same directors or trustees of all corporations
organized under this Code must be
 Amendment of a corporate term residents of the Philippines.

- Extending the same can never be made 7 - Controlled by the board of directors
years prior? TRUE or FALSE
- Authority are however restricted to the day
to day

21
- Stockholders may have all the profit but will - No citizenship requirement, at least majority
turn over the management to the governing must be residents
board
- Can have a governing board consisting
- But unless the law provides the power may be solely of foreigners
delegated
- But we have to take into consideration
 General rule partly nationalized industries and other laws
which prohibits or limits foreign ownership
- Corporations must sit and act as a body
- Anti-dummy act
- Will be bound by corporate officers if they
acted within the 5 classification page 150 - Utilization development of natural resources
60% must be owned by Filipino citizens,
 Ramirez vs. Orientalist co. therefore they only own 40%---10 members
they can only have 4 seats, but not entirely
- What was the position of Fernandez in this
correct because the law may provide
case? TREASURER
otherwise; educational institutions restricted
- Why did the court rule that actions of to Filipinos, but there are exceptions when
Fernandez bound the corporation when he is created by religious and charitable
not even a board of director? institutions.

“if a man is found acting for a - By-laws may provide additional

corporation with the external indicia of qualifications and disqualifications
authority, any person not having notice of want
- To qualify as a director he must own at least
of authority, may usually rely upon those
1 share
appearances; and if it be found that the
directors had permitted the agent to exercise  Should the stockholder be the equitable or
that authority and thereby held him out as a beneficial owner in order to qualify as a
person competent to bind the corporation, or director?
had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, - NO, it is not necessary, as long as you are
the corporation will be bound, notwithstanding listed in the books as owner of one share
the actual authority may never have been
granted.”  Lee vs. CA

- Contracts must be made by the director and - As long as you are listed in the books as
not the stockholders owner of one share

- Actions of the stockholders in such matters is - Under the old law he must be the beneficial
only advisory and not in any way binding in the owner and legal owner thereof but in the
corporation new law it is not required as long as it
stands in his name he is qualifies
 Barreto vs. La previsora Filipina
1 A-100t/S B (own in the trust of X) is B
- Everything emanates from the board of qualified to be a director?
directors
2
- Stockholders action is merely advisory except
their approval or vote is necessary to prove a 3-10
valid corporate act
2– transferring there voting rights in favor of VT
 Qualifications:
Other rights will accrue in favor of them, but not the
voting rights
22
voting rights must be recorder in the books of the 3-200k
corporation that it is transferred
4-100k
PNB-IFL- wholly owned subsidiary of PNB
5-100k
PNB will assign to PNB-IFL nominal shares and PNB-
IFL now will be able to be nominated 6-100k

 Gen. Rule: 7-50k

- Term of one year who will serve as such until 8-40k

there successors are elected and qualified
9-5k
 Exception:
10-5k
- Non-stock corporation can serve for a term of
=1MS
3 years
1&2 is absent, 3&4 ayaw tumakbo and hindi
- Educational non-stock- term of the governing
nagvote 6-10, tumakbo and ninominate nila yung
board can be 5 years sarili nila and cast all their shares on themselves
 May this term exceed one year?  Who wins? Or who gets elected?
- Yes, they may serve in a hold over capacity - No vote requirement, the one who gets the
until their successors have been duly elected most number of votes gets elected,
and qualified section24.
 Detective and protective bureau vs.  What is cumulative voting?
Cloribel
- Process of multiplying the number of shares
- In the by-laws, managing director must be
to the number of director to be elected
elected from among themselves
- Matter of right granted to stockholders in a
- Must be duly elected and qualified
stock corporation
How are the directors elected? 1 to 5 has 200k/s and members of the same family-
majority 800k they have 4M votes they are
1-100T/S
guaranteed 4 seats
2-100T/S
6 to 10 are not related- 1 seat 1M votes
3-100T/S
 Cumulative to allow the minority to have a
to 10=1M/S rightful representation in the board

 Do you include the vote of 1 & 2 to have a  Is it allowed in a non-stock corporation?

quorum to have a valid meeting?
- Not generally available
- NO, quorum requirements is 401,000
- Section 89 unless the articles or by-laws
Quorum requirement is 501k allow cumulative voting

Holders of non-voting shares are only entitled to vote Section 89. Right to vote. - The
in last par. Of section 6 right of the members of any class or classes
to vote may be limited, broadened or denied
1-200k to the extent specified in the articles of
incorporation or the by-laws. Unless so
2-200k limited, broadened or denied, each
23
 member, regardless of class, shall be entitled  Prohibited is president to be secretary or
to one vote. treasurer at the same time

Unless otherwise provided in the  Board of director must sit and act as a body
articles of incorporation or the by-laws, a to arrive at a corporate act
member may vote by proxy in accordance with
the provisions of this Code. (n)  What would constitute a quorum if 5 then 3
must be present
Voting by mail or other similar means
by members of non-stock corporations may be  May the vote of 2 members past a 5 man
authorized by the by-laws of non-stock governing board pass a valid corporate act?
corporations with the approval of, and under
such conditions which may be prescribed by, - YES. Voting requirement is majority of
the Securities and Exchange Commission. directors present at which there where a
quorum
 Other corporate officers other than the
governing board section 25 1 1 and 2 present=valid voting requirement

Section 25. Corporate officers, 2 1 and 2 voted yes

quorum. - Immediately after their election, the
directors of a corporation must formally 3 3 voted no
organize by the election of a president, who
shall be a director, a treasurer who may or 4
may not be a director, a secretary who shall be
a resident and citizen of the Philippines, and 5
such other officers as may be provided for in
the by-laws. Any two (2) or more positions  Is it absolute?
may be held concurrently by the same person,
except that no one shall act as president and - NO, except in the election because it
secretary or as president and treasurer at the requires the majority of all the members of
same time. the board

The directors or trustees and officers - If by-laws or articles provide a higher voting
to be elected shall perform the duties enjoined requirement
on them by law and the by-laws of the
corporation. Unless the articles of  Artificial beings must act through its
incorporation or the by-laws provide for a
members and act as a body to have a valid
greater majority, a majority of the number of
directors or trustees as fixed in the articles of corporate act
incorporation shall constitute a quorum for the
transaction of corporate business, and every  Exception:
decision of at least a majority of the directors
or trustees present at a meeting at which there - Delegation
is a quorum shall be valid as a corporate act,
except for the election of officers which shall - Expressly conferred
require the vote of a majority of all the
members of the board. - Where the officer or agent is clothed with
actual or apparent authority
Directors or trustees cannot attend or
vote by proxy at board meetings. (33a) - Otherwise it will not bind the corporation

 Is the president required to be a stockholder?  Yao Ka Sin Trading case “already asked in
YES the bar”

 The chairman may be another person - Only bind the corporation to the extent of
authority confined to him or virtue of
 The president may also be another person customs, usage and policy

24
- Must pass first the controller and counsel directors as a matter of general practice,
custom and policy, the general manager
 What if the notice requirement is not complied may bind the company without formal
with? authorization of the board of directors. In
varying language, existence of such
 Lopez Realty vs. Fotencha
authority is established, by proof of the
- Notice requirement must be complied with course of business, the usages and
practices of the company and by the
hence it should have been with force and
knowledge which the board of directors has,
effect, but according to the SC, it may be
or must be presumed to have, of acts and
ratified expressly if there is a subsequent
doings of its subordinates in and about the
meeting called for that purpose
affairs of the corporation. So also, “xx
- Impliedly through acts authority to act for and bind a corporation
may be presumed from acts of recognition
- Asuncion was aware of the corporations in other instances where the power was in
obligation fact exercised.” “xx Thus, when, in the usual
course of business of a corporation, an
- There was implied ratification or she was officer has been allowed in his official
estopped capacity to manage its affairs, his authority
to represent the corporation may be implied
 Pua Casim & Co. vs. W. Neumark and Co.
from the manner in which he has been
- Considered 3 circumstanced permitted by the directors to manage its
business.”
- Check which was the proceed of the loan
In the case at bar, the practice of
which was endorsed and deposit in the
the corporation has been to allow its
corporate account
general manager to negotiate and execute
- W. Neumark as president and also stockholder contracts in its copra trading activities for
and in NACOCO’s behalf without prior
 Yu Chuck vs. Kong Li Po board approval. If the by-laws were to be
literally followed, the board should give its
- General manager usually has the power to stamp of prior approval on all corporate
hire but the SC said the contract must be contracts. But that Board itself, by its acts
reasonable and through acquiescence, practically laid
aside the by-law requirement of prior
- The contract here is so onerous that it would approval.
throw the corporation into insolvency
- Kalaw signed alone and said contracts were
 Francisco vs. GSIS
submitted to the board of directors after its
consummation and not before
- GSIS cannot evade the binding effect of the
telegram  Buenaseda vs. Bowen
- Only 15 months later that the corporation said - Express ratification is made through a
there was a mistake formal board action
- The silence coupled with the unconditional - Implied ratification is through: silence or
acceptance of the other subsequent acquiescence, acceptance benefits and
remittances is binding to the corporation lastly recognition or adoption
 Board of Liquidators vs. Kalaw - An unauthorized act may nevertheless be
“Settled jurisprudence has it that binding either by express or implied by
where similar acts have been approved by the estoppels

25
 - By virtue of silence the board had impliedly  Who will fill up the vacancy created due to
accepted the act the ouster of a member of the board of
directors <section 29>
- By recognition or adoption
Section 29. Vacancies in the
- By virtue of payment of obligations arising office of director or trustee. - Any
therefore- Lopez realty vacancy occurring in the board of directors
or trustees other than by removal by the
May directors or trustees be disqualified to act as stockholders or members or by expiration of
such? term, may be filled by the vote of at least a
majority of the remaining directors or
- YES, crime, etc. disqualifications in book trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by
- Possess or dispossess any of the the stockholders in a regular or special
qualifications or disqualifications , cease to meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall
hold at least one share
be elected only or the unexpired term of his
predecessor in office.
May directors be ousted from office?

- At least 2/3 of members representing Any directorship or trusteeship to

be filled by reason of an increase in the
outstanding capital stock. Again notice
number of directors or trustees shall be
requirement must be complied with filled only by an election at a regular or at a
special meeting of stockholders or members
1-200 1-5 same family duly called for the purpose, or in the same
meeting authorizing the increase of
2-200 directors or trustees if so stated in the
notice of the meeting. (n)
3-200
 Other than by removal or expiration of term
4-100
they do not have the power
5-100 electing
 When will the vacancies be filled up?
6-100 6 to 10 not related
 Is notice required, to fill up vacancies due to
7-50 removal?

8-40  What if the vacancy is due to an increase,

can it be filled up in the same meeting
9-5 where in the number is increased?

10-5 outstanding director  Election due to removal-in the same

meeting notice is not required
Meetings called by the president or the
secretary ordered by the president  Election due to increase in number- it must
be so stated in the meeting
 It depends if the removal is without cause they
cannot do so because removal without cause  Section 30
shall not deprive the minority stockholders or
members of the right of representative Section 30.Compensation of
directors. - In the absence of any provision
 If with cause they can even if it will prejudice in the by-laws fixing their compensation, the
the rights of the minority, provided of course directors shall not receive any
additional requirements by-laws and articles of compensation, as such directors, except for
incorporation reasonable per diems: Provided, however,
That any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
26
 least a majority of the outstanding capital stock - NO. the phrase “as such director” was used
at a regular or special stockholders' meeting. twice <Section 30>
In no case shall the total yearly compensation
of directors, as such directors, exceed ten - The SC ruled that the 10% ceiling will not
(10%) percent of the net income before likewise apply if they acted in a capacity
income tax of the corporation during the
preceding year. (n) other than “as such directors”

 Government vs. El Hogar

- Generally not entitled to receive compensation
because they render it gratuitously - Judicial intervention is not proper

- Unless the by-laws allows - The appropriates remedy is to those who

can make or unmake the by-laws
- Stockholders may also grant pursuant to a
majority vote  Liability of corporate officers

- Must not exceed net income of 10% tax of the - Obligations incurred by those acting for and
preceding year in behalf of the corporations are not there’s
BUT there are exceptions even if they are
- Acting in special capacity
acting for and in behalf of the corporation
- In, sum directors may receive compensation  Tramat vs. CA
when
- General rule was applied in the case
1. there is a provision in the by-laws to that
effect - Ong acted as officers and acted within the
scope of his authority
2. When the stockholders, by a majority vote of
the outstanding capital stock grant the same; - Court laid down 4 instances when even if
and, acting within the scope of his authority he is
held solidarily liable
3. If the director renders extra-ordinary or unsual
service 1. He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith, or gross
 Central Cooperative Exchange vs. Tibe
negligence in directing its affairs, or (c) for
- By-laws may allow, stockholders may also conflict of interest, resulting in damages to
allow such the corporation, its stockholders or other
persons;
 What do you understand by the phrase “as
such directors” 2. He consents to the issuance of watered
stocks or who, having knowledge thereof,
 Western Institute vs. Salas does not forthwith file with the corporate
secretary his written objection thereto;
- Compensation was granted without by-laws
authority 3. He agrees to hold himself personally and
solidarily liable with the corporation;
- Prohibition is not a sweeping rule
4. He is made, by a specific provision of law,
- Members of the board may receive when they to personally answer for his corporate
receive in a special capacity action.

- Mere act of the board will suffice - Watered stocks- issued, fully paid up when
in fact they have not been fully paid or
 Is the 10% ceiling applicable to other officers? promised as such

 Llamado vs. CA
27
- The corporate entity theory cannot be used as - 31,32,33- specific instances when corporate
a defense to escape liability in violation of B.P. officers may violate loyalty
22
- 32,33 self-dealing and interlocking director
- Where the check is drawn by a corporation the
persons who signed the check shall be liable.  Corporate opportunity doctrine

 Uichico vs. NLRC - It places a director of a corporation in the

position of a fiduciary and prohibits him form
- Labor case corporate directors and officers are seizing a business opportunity and/or
solidarily liable with the corporation for the developing it at the expense and with the
termination of employment of corporate facilities of the corporation. He cannot
employee done with malice and bad faith appropriate to himself a business
opportunity which in fairness should belong
 3 fold duty of directors to the corporation.

- obedient  Last paragraph of section 31 and the

provision of section 34 make reference to
- diligent
recovery of “forbidden profits”
- loyal  Distinction between section 31 and 34
relative to the ratification by the
 Business judgment rule
stockholders
- Questions of policy and management are left
- The second paragraph of section 31 which
solely to the honest decision of the board of
makes a director liable to account for profits
directors and the courts are without authority
if he attempts to acquire or acquires any
to substitute its judgment as against the
interest adverse to the corporation in
former. The directors are the business
respect to any matter reposed in him in
managers of the corporation and as long as
confidence as to which equity imposes a
they act in good faith, its actuations are not
disability upon him to deal in his own behalf
subject to judicial review. Montelibano vs.
is not subject to ratification by the
Bacolod Murcia Milling
stockholders. Whereas, in section 34 if a
- questions of policy and management are left director acquires for himself a business
solely to the board of directors opportunity which should belong to the
corporation, he is bound to account for such
- BOD, business manager of the corporation profits unless his act is ratified by the
and as long as they act in good faith, its stockholders owning ore representing at
actuations are not subject to judicial review least 2/3 of the outstanding capital stock.

- They are not insurer of the property of the - If reposed in him in confidence, not subject
company, they were guarantors that the to ratification
enterprise undertaken by the corporation shall
be successful - If the acquisition is merely that of a
business opportunity which has not been
 Montelibano vs. Bacolod Murcia Milling Co. reposed in him in confidence, the same may
be subject to ratification by the
- Directors are not liable due to imprudence or stockholders.
honest error of judgment
Director x co.
- Duty of loyalty of corporate directors
A-REALTY
- 31,32,33,34
B

28
C Z owns property and is going 1. That the presence of such director or
abroad never to Return, he trustee in the board meeting in which the
wants to sell for 25M the fair contract was approved was not necessary
market value is 30M to constitute a quorum for such meeting;

D 2. That the vote of such director or trustee was

not necessary for the approval of the
E contract;

E goes to Z and offers to pay the property for 26 M and 3. That the contract is fair and reasonable
later he sells it for 30M making 4M profit, one of the under the circumstances; and
stockholders learned and complains that he should
submit the profits. E said that he will move for 4. That in case of an officer, the contract has
ratification of his actuation. Can it be ratified? been previously authorized by the board of
directors.
- It can be ratified he merely acquired a
business owning to the corporation When do they become voidable?

- It would be different if it was entrusted in his - When any of the two requisites are absent it
confidence is voidable, but subject to ratification by 2/3
of the outstanding capital stock or 2/3 of the
Another scenario: member

Had A not attended the meeting he would not have  Requisites for ratification (subject to
known of the sale it is then a matter reposed in him in ratification by the stockholders holding or
confidence representing at least 2/3 of the outstanding
capital stock or 2/3 of the members.)
 A corporation cannot reaquire its share if it has
no restricted unretained earnings - it must be at a meeting called for the
purpose
 Strong vs. Rapide
- full disclosure of the adverse interest of the
- What duty did he violate?
director concerned must be made
- He violated his duty of loyalty
- the contract is fair and reasonable under the
- The law would be impotent if the sale were not circumstances
invalidated
 Problem if self-dealing director involved
- Self-dealing director and interlocking director owns all or substantially all of the shares of
stock of the corporation thereby making it
What is a self-dealing director? easily possible to have the contract ratified

- Director of a corporation dealing or transacting - last sentence of section 32 should be made

business with his corporation to apply by determining the reasonableness
and fairness of the contract
Are the contracts and dealing of a self-dealing director
valid? Section 32. Dealings of directors,
trustees or officers with the corporation. - A
 General rule: voidable contract of the corporation with one or more
of its directors or trustees or officers is
May the contracts of a self-dealing director be valid per voidable, at the option of such corporation,
se. unless all the following conditions are
present:
- YES. If all the 4 conditions are present they
will be valid per se 1. That the presence of such director or
trustee in the board meeting in which the
29
 contract was approved was not necessary to C-
constitute a quorum for such meeting;
D-
2. That the vote of such director or trustee was
not necessary for the approval of the contract; E-

3. That the contract is fair and reasonable  Both companies enter into a contract and A
under the circumstances; and sits, is the contract valid?

4. That in case of an officer, the contract has - Yes on the ground of fraud or if it is unfair
been previously authorized by the board of
directors. - May be subject to the provision of section
32
Where any of the first two conditions
set forth in the preceding paragraph is absent, - Section 32 contract may become voidable,
in the case of a contract with a director or hence it may also be ratified
trustee, such contract may be ratified by the
vote of the stockholders representing at least X Co. Y Co.
two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in A owe 20% A owe 20%
a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of Is it generally valid or voidable? VALID
the directors or trustees involved is made at
such meeting: Provided, however, That the 25% 25% VALID
contract is fair and reasonable under the
circumstances. (n) 15% 25% VOIDABLE SUBJECT TO
section 32
 Prime White Cement vs. IAC
More than 20 substantial
- a director of a corporation owes a position in
trust  BOD mismanages corporate officers. Who
may file a suit?
- in case of conflict between himself and that of
the corporation, he cannot sacrifice the - General rule: BOD which can institute a
interest of the corporation to his own case because it has all the powers. To allow
advantage stockholders to file would violate the
doctrine of corporate entity and may result
- as a director he should have acted in a to multiplicity of suits
manner as not to unduly prejudice the
corporation - Stockholders cannot therefore generally file
a case EXCEPT of course in a
- he cannot be allowed to enrich himself DERIVATIVE SUIT

 May corporate directors purchase the  Derivative suit

corporate property?
- An action based on injury to the
 Mead vs. Mccullogh corporation-to enforce a corporate right-
wherein the corporation itself is joined as a
- interlocking director- a director of one necessary party, and recovery is in favor of
corporation who deals and transacts business and for the corporation.
with another corporation who is himself a
director - Remedy granted by law to stockholders to
institute a case to remedy a wrong done
A- director of X company also a director of Y directly to the corporation and indirectly to
corporation the stockholders, if the board refuses to do
so. Otherwise if not they would be left
B-
without any recourse
30
  Available suits - The right of action is personal in nature. He
became a stockholder only in 1902
Individual or Personal
 Derivative suit
- Wrong done against his person as a
stockholder - By a stockholder to address a wrong done
against the corporation and the stockholder
 Class suit indirectly
- Filed by a stockholder in representation of - Essential requisite must have been a
other stockholders stockholder from the time the act
complained of took place
- A wrong or redress done, a derivative suit in
nature - Cannot institute an action from the years he
was still not a stockholder
 Intra-corporate remedies
 Everett vs. Asia Banking
- Demand to the BOD to institute such action
- Stockholders cannot ordinarily commence
- Negated by the BOD
suit in equity and such is in the hands of its
- The one who instituted must be a stockholder BOD however there are exceptions when
at the date when the act was done, must have the BOD will not sue since they are
been a stockholder by that time themselves principals to the fraud.

 Demand will not be required if the majority of  Republic vs. Cuaderno

the BOD are the one’s guilty of the wrong
- The facts constitute sufficient cause of
charged
action
 The corporation must be made a party in the
- It is not the corporate interest to shield one
case whatever side will not matter because
from criminal prosecution which is personal
under Philippine law misjoinder is not a ground
interest
for dismissal
- Perez is not suing in his behalf, but in behalf
 Non-joinder is a ground for dismissal
of the corporation
 Any benefit should inure to the corporation
 Western Institute vs. Salas
 Stockholder bringing the action is entitled to
- Assuming it was filed in the proper forum
reimbursement such as attorney’s fee ONLY
IF the case is SUCCESSFUL to avoid would there argument that it is a derivative
harassment suit to their management suit prosper? NO. it is people of the
Philippines vs. individual director, it must be
 Pascual vs. Orozco stated in the complaint that it is being
instituted as a derivative suit and for and in
- By virtue of the fact that he is a stockholder, behalf of the corporation
may maintain a derivative suit
- Granting arguendo, that this is a derivative
- Depend on how, when and what reason suit, the same is still outrightly dismissible
for having been wrongfully filed in the
- Seeking for the years 1898 all the way 1907 regular court devoid of any jurisdiction to
entertain the complaint. The case should
- Only became a stockholder in 1903
have been filed with the SEC which
- He can sue only in 1903 forward because he exercises original and exclusive jurisdiction
over derivative suits, they being intra-
must be a stockholder

31
 corporate disputes, per Section 5 (b) of P.D. whose shares have evolved upon him since
902-A by operation of law. This rule, however,
does not apply if such act or transaction
 San Miguel vs. Khan continues and is injurious to the stockholder
or affect him specifically in some other way.
- Was a demand made? NO
The number of his hares is immaterial since
- It is not necessary because he objected in the
he is not suing in his own behalf or for the
board meeting, but still it was adopted protection or vindication of his own right, or
therefore it was useless the redress of a wrong done against him,
individually, but in behalf and for the benefit
 Chase vs. Buencamino
of the corporation.
- Argument that he should be in estoppels since
2. He has tried to exhaust intra-corporate
he filed in the U.S.
remedies, he has made a demand on the
- Assuming the case prospered in the U.S. board of directors for the appropriate relief
would not estoppels apply as against him? NO but the latter had failed or refused to heed
for estoppels to step in it must be a case by his plea. Demand, however, is not required
the corporation if the company is under the complete
control of the directors who are the very
 Reyes vs. Tan ones to be sued (or where it becomes
obvious that a demand upon them would
- Corporate director are guilty of breach of trust have been futile and useless) since the law
does not require a litigant to perform
- A stockholder may institute an action to
useless acts;
remedy a wrong done
3. The stockholder bringing the suit must
- Fraud in the conduct of corporate affairs allege in his complaint that he is suing on a
derivative cause of action on behalf of the
 Gamboa vs. Victoriano
corporation and all other stockholders
- Is derivative suit appropriate in this case similarly situated, otherwise, the case is
dismissible. This is because the cause of
- They are not vindicatory damage done to the action actually devolves on the corporation
corporation, but rather they where vindicating and not to a particular stockholder.
damage against him
4. The corporation should be made a party,
- Violation of their rights as individuals, hence either as party-plaintiff or defendant, in
derivative suit is not the remedy order to make the court’s judgment binding
upon it, and thus, bar future litigation of the
 Evangelista vs. Santos same issues. On what side the corporation
appears loses importance when it is
- Derivative suit is not proper considered that it lay within the power of the
court to direct the making of amendment of
- Claim is not for the benefit of the corporation,
the pleading, by adding or dropping parties,
but rather his individual benefit
as may be required in the interest of justice.
 From the cases above cited, these are the Misjoinder of parties is not a ground to
requirements and the procedures that must be dismiss action; and,
followed in order that a derivative suit may
5. Any benefit or damages recovered shall
prosper
pertain to the corporation. This is so
1. That the party bringing the suit should be a because in all instances, derivative suit is
stockholder as of the time the act or instituted for and in behalf of the corporation
transaction complained of took place, or and not for the protection or vindication of a
right or rights of a particular stockholder,
32
 otherwise, the aggrieved stockholder should  May the board alone create an executive
institute, instead, an individual or personal suit committee without any authority provided
to vindicate his personal or individual right. Or, for the by-laws?
for that matter, representative or class suit for
all other stockholders whose rights are - NO board of directors must sit and act as a
similarly situated, injured or violated, body to have a valid transaction
personally or individually.
 May a non-member of the board of directors
 Executive committee be a member of the executive committee?

- Not allowed under the OLD law - NO, all of them must be members of the
board of directors
 How may executive committee created and
constituted? - BOD cannot act by proxy it would be
abdication of powers
- Section 35
 Purpose clauses necessary because it
Section 35. Executive committee. - confers and also limits the actual authority
The by-laws of a corporation may create an of the corporation
executive committee, composed of not less
than three members of the board, to be CORPORATE POWERS AND AUTHORITY
appointed by the board. Said committee may
act, by majority vote of all its members, on  Corporate authority may be classified into
such specific matters within the competence of three classes namely:
the board, as may be delegated to it in the by-
laws or on a majority vote of the board, except 1. Those expressly granted or authorized by
with respect to: (1) approval of any action for law inclusive of the corporate charter or
which shareholders' approval is also required; articles of incorporation;
(2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the 2. Those impliedly granted as are essential or
adoption of new by-laws; (4) the amendment
reasonably necessary to the carrying out of
or repeal of any resolution of the board which
by its express terms is not so amendable or the express powers;
repealable; and (5) a distribution of cash
dividends to the shareholders. 3. Those that are incidental to its existence.

 Section 36 to 45- POWER GRANTED BY

- Said committee may act and bind the
LAW
corporation by the majority vote of all its
members except with respect to those matters
Section 36. Corporate powers and capacity. -
provided for in sec. 35 these are:
Every corporation incorporated under this Code has
the power and capacity:
1. Approval of any action for which shareholders’
approval is also required
1. To sue and be sued in its corporate
name;
2. The filing of vacancies in the board;

3. Amendment or repeal of by-laws or the 2. Of succession by its corporate name for

the period of time stated in the articles of
adoption of new by-laws;
incorporation and the certificate of
incorporation;
4. Amendment or repeal of any resolution of the
board which by its express terms is not so
3. To adopt and use a corporate seal;
amenable or repealable; and,

5. Distribution of cash dividends to the 4. To amend its articles of incorporation in

accordance with the provisions of this Code;
shareholders.

33
 5. To adopt by-laws, not contrary to law, Section 38. Power to increase or decrease
morals, or public policy, and to amend or capital stock; incur, create or increase bonded
repeal the same in accordance with this Code; indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or
6. In case of stock corporations, to issue or increase any bonded indebtedness unless approved
sell stocks to subscribers and to sell stocks to by a majority vote of the board of directors and, at a
subscribers and to sell treasury stocks in stockholder's meeting duly called for the purpose,
accordance with the provisions of this Code; two-thirds (2/3) of the outstanding capital stock shall
and to admit members to the corporation if it favor the increase or diminution of the capital stock,
be a non-stock corporation; or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock
7. To purchase, receive, take or grant, hold,
or of the incurring, creating, or increasing of any
convey, sell, lease, pledge, mortgage and
bonded indebtedness and of the time and place of
otherwise deal with such real and personal
the stockholder's meeting at which the proposed
property, including securities and bonds of
increase or diminution of the capital stock or the
other corporations, as the transaction of the
incurring or increasing of any bonded indebtedness
lawful business of the corporation may
is to be considered, must be addressed to each
reasonably and necessarily require, subject to
stockholder at his place of residence as shown on
the limitations prescribed by law and the
the books of the corporation and deposited to the
Constitution;
addressee in the post office with postage prepaid, or
served personally.
8. To enter into merger or consolidation with
other corporations as provided in this Code;
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
9. To make reasonable donations, including countersigned by the chairman and the secretary of
those for the public welfare or for hospital, the stockholders' meeting, setting forth:
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
(1) That the requirements of this section
domestic or foreign, shall give donations in aid
have been complied with;
of any political party or candidate or for
purposes of partisan political activity;
(2) The amount of the increase or
diminution of the capital stock;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and (3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
11. To exercise such other powers as may be
the names, nationalities and residences of
essential or necessary to carry out its purpose
the persons subscribing, the amount of
or purposes as stated in the articles of
capital stock or number of no-par stock
incorporation. (13a)
subscribed by each, and the amount paid
by each on his subscription in cash or
Section 37. Power to extend or shorten property, or the amount of capital stock or
corporate term. - A private corporation may extend or number of shares of no-par stock allotted to
shorten its term as stated in the articles of each stock-holder if such increase is for the
incorporation when approved by a majority vote of the purpose of making effective stock dividend
board of directors or trustees and ratified at a meeting therefor authorized;
by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-
(4) Any bonded indebtedness to be
thirds (2/3) of the members in case of non-stock
incurred, created or increased;
corporations. Written notice of the proposed action and
of the time and place of the meeting shall be
addressed to each stockholder or member at his place (5) The actual indebtedness of the
of residence as shown on the books of the corporation corporation on the day of the meeting;
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That (6) The amount of stock represented at the
in case of extension of corporate term, any dissenting meeting; and
stockholder may exercise his appraisal right under the
conditions provided in this code. (n)

34
 (7) The vote authorizing the increase or exchange for property needed for corporate
diminution of the capital stock, or the incurring, purposes or in payment of a previously contracted
creating or increasing of any bonded debt.
indebtedness.
Section 40. Sale or other disposition of
Any increase or decrease in the capital stock or the assets. - Subject to the provisions of existing laws
incurring, creating or increasing of any bonded on illegal combinations and monopolies, a
indebtedness shall require prior approval of the corporation may, by a majority vote of its board of
Securities and Exchange Commission. directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
One of the duplicate certificates shall be kept on file in substantially all of its property and assets, including
the office of the corporation and the other shall be filed its goodwill, upon such terms and conditions and for
with the Securities and Exchange Commission and such consideration, which may be money, stocks,
attached to the original articles of incorporation. From bonds or other instruments for the payment of
and after approval by the Securities and Exchange money or other property or consideration, as its
Commission and the issuance by the Commission of board of directors or trustees may deem expedient,
its certificate of filing, the capital stock shall stand when authorized by the vote of the stockholders
increased or decreased and the incurring, creating or representing at least two-thirds (2/3) of the
increasing of any bonded indebtedness authorized, as outstanding capital stock, or in case of non-stock
the certificate of filing may declare: Provided, That the corporation, by the vote of at least to two-thirds (2/3)
Securities and Exchange Commission shall not accept of the members, in a stockholder's or member's
for filing any certificate of increase of capital stock meeting duly called for the purpose. Written notice
unless accompanied by the sworn statement of the of the proposed action and of the time and place of
treasurer of the corporation lawfully holding office at the meeting shall be addressed to each stockholder
the time of the filing of the certificate, showing that at or member at his place of residence as shown on
least twenty-five (25%) percent of such increased the books of the corporation and deposited to the
capital stock has been subscribed and that at least addressee in the post office with postage prepaid, or
twenty-five (25%) percent of the amount subscribed served personally: Provided, That any dissenting
has been paid either in actual cash to the corporation stockholder may exercise his appraisal right under
or that there has been transferred to the corporation the conditions provided in this Code.
property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, A sale or other disposition shall be deemed to cover
That no decrease of the capital stock shall be substantially all the corporate property and assets if
approved by the Commission if its effect shall thereby the corporation would be rendered
prejudice the rights of corporate creditors. incapable of continuing the business or
accomplishing the purpose for which it was
Non-stock corporations may incur or create bonded incorporated.
indebtedness, or increase the same, with the approval
by a majority vote of the board of trustees and of at After such authorization or approval by the
least two-thirds (2/3) of the members in a meeting duly stockholders or members, the board of directors or
called for the purpose. trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage,
Bonds issued by a corporation shall be registered with pledge or other disposition of property and assets,
the Securities and Exchange Commission, which shall subject to the rights of third parties under any
have the authority to determine the sufficiency of the contract relating thereto, without further action or
terms thereof. (17a) approval by the stockholders or members.

Section 39. Power to deny pre-emptive right. - Nothing in this section is intended to restrict the
All stockholders of a stock corporation shall enjoy pre- power of any corporation, without the authorization
emptive right to subscribe to all issues or disposition of by the stockholders or members, to sell, lease,
shares of any class, in proportion to their respective exchange, mortgage, pledge or otherwise dispose
shareholdings, unless such right is denied by the of any of its property and assets if the same is
articles of incorporation or an amendment thereto: necessary in the usual and regular course of
Provided, That such pre-emptive right shall not extend business of said corporation or if the proceeds of
to shares to be issued in compliance with laws the sale or other disposition of such property and
requiring stock offerings or minimum stock ownership assets be appropriated for the conduct of its
by the public; or to shares to be issued in good faith remaining business.
with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in
35
In non-stock corporations where there are no members balance on the subscription plus costs and
with voting rights, the vote of at least a majority of the expenses, while stock dividends shall be withheld
trustees in office will be sufficient authorization for the from the delinquent stockholder until his unpaid
corporation to enter into any transaction authorized by subscription is fully paid: Provided, further, That no
this section. stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds
Section 41. Power to acquire own shares. - A (2/3) of the outstanding capital stock at a regular or
stock corporation shall have the power to purchase or special meeting duly called for the purpose. (16a)
acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the Stock corporations are prohibited from retaining
following cases: Provided, That the corporation has surplus profits in excess of one hundred (100%)
unrestricted retained earnings in its books to cover the percent of their paid-in capital stock, except: (1)
shares to be purchased or acquired: when justified by definite corporate expansion
projects or programs approved by the board of
1. To eliminate fractional shares arising out of stock directors; or (2) when the corporation is prohibited
dividends; under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and
2. To collect or compromise an indebtedness to the
such consent has not yet been secured; or (3) when
corporation, arising out of unpaid subscription, in a
it can be clearly shown that such retention is
delinquency sale, and to purchase delinquent shares
necessary under special circumstances obtaining in
sold during said sale; and
the corporation, such as when there is need for
special reserve for probable contingencies. (n)
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
Section 44. Power to enter into
provisions of this Code. (a)
management contract. - No corporation shall
conclude a management contract with another
Section 42. Power to invest corporate funds corporation unless such contract shall have been
in another corporation or business or for any other approved by the board of directors and by
purpose. - Subject to the provisions of this Code, a stockholders owning at least the majority of the
private corporation may invest its funds in any other outstanding capital stock, or by at least a majority of
corporation or business or for any purpose other than the members in the case of a non-stock corporation,
the primary purpose for which it was organized when of both the managing and the managed corporation,
approved by a majority of the board of directors or at a meeting duly called for the purpose: Provided,
trustees and ratified by the stockholders representing That (1) where a stockholder or stockholders
at least two-thirds (2/3) of the outstanding capital representing the same interest of both the managing
stock, or by at least two thirds (2/3) of the members in and the managed corporations own or control more
the case of non-stock corporations, at a stockholder's than one-third (1/3) of the total outstanding capital
or member's meeting duly called for the purpose. stock entitled to vote of the managing corporation;
Written notice of the proposed investment and the time or (2) where a majority of the members of the board
and place of the meeting shall be addressed to each of directors of the managing corporation also
stockholder or member at his place of residence as constitute a majority of the members of the board of
shown on the books of the corporation and deposited directors of the managed corporation, then the
to the addressee in the post office with postage management contract must be approved by the
prepaid, or served personally: Provided, That any stockholders of the managed corporation owning at
dissenting stockholder shall have appraisal right as least two-thirds (2/3) of the total outstanding capital
provided in this Code: Provided, however, That where stock entitled to vote, or by at least two-thirds (2/3)
the investment by the corporation is reasonably of the members in the case of a non-stock
necessary to accomplish its primary purpose as stated corporation. No management contract shall be
in the articles of incorporation, the approval of the entered into for a period longer than five years for
stockholders or members shall not be necessary. (17 any one term.
1/2a)
The provisions of the next preceding paragraph
Section 43. Power to declare dividends. - The shall apply to any contract whereby a corporation
board of directors of a stock corporation may declare undertakes to manage or operate all or substantially
dividends out of the unrestricted retained earnings all of the business of another corporation, whether
which shall be payable in cash, in property, or in stock such contracts are called service contracts,
to all stockholders on the basis of outstanding stock operating agreements or otherwise: Provided,
held by them: Provided, That any cash dividends due however, That such service contracts or operating
on delinquent stock shall first be applied to the unpaid agreements which relate to the exploration,
36
development, exploitation or utilization of natural - section 13 Rule 14 was repealed
resources may be entered into for such periods as
may be provided by the pertinent laws or regulations. - the old rules was ambiguous and broad and
(n) at all time illogical

Section 45. Ultra vires acts of corporations. -  the particular revision under Section 11 of
No corporation under this Code shall possess or Rule 14 was explained by retired Supreme
exercise any corporate powers except those conferred Court Justice Florenz Regalado, thus:
by this Code or by its articles of incorporation and
except such as are necessary or incidental to the “xxx the then section 13 of this Rule
exercise of the powers so conferred. (n)
allowed service upon a defendant
corporation to “be made on the
Section 36
president, manager, secretary,
 Where should the corporation be sued? cashier, agent or any of its
directors.” The aforesaid terms
- principal office is important because it were obviously ambiguous and
establishes the residence of the corporation susceptible of broad and
and determining service of summons, venue of sometimes illogical interpretations,
action especially the word “agent” of the
corporation. The Filoil case,
- it can be sued in the city or municipality where involving the litigation lawyer of the
its principal office is found corporation who precisely appeared
to challenge the validity of service
 Principal office is also important for venue of
of summons but whose very
meetings
appearance for that purpose was
 Non-stock corporation may provide in its by- seized upon to validate the
laws that the venue of meeting be anywhere in defective service, is an illustration
the Philippines of the need for this revised section
with limited scope and specific
 Upon whom service of summons be made? terminology. Thus the absurd result
in the Filoil case necessitated the
- Section 11. Service upon domestic private amendment permitting service only
juridical entity- when the defendant is a on the in-house counsel of the
corporation, partnership or association corporation who is in effect an
organized under the laws of the Philippines employee of the corporation, as
with a juridical personality, service may be distinguished from an independent
made upon the president, managing partner, practitioner.”
general manager, corporate secretary,
treasurer, or in house counsel. o notes: additional knowledge

 Delta motor vs. Mangosing - special appearance enter for that particular
appearance you are not the counsel in the
- strict compliance is necessary case

- should be served to those named in the - would apply only if it does not involve an
statute intra-corporate controversy (controversy
between and among the stockholders)
- secretary of a dep’t are not those included in
the statute - upon any of the statutory officers or officers
fixed in the by-laws any secretary, any of
 E.B. Villarosa vs. Benito
the directors; any managers in the by-laws
- decision En Banc repeals all other
 Seal
pronouncement

37
 - merely ministerial or permissive - Converts the property to a private land
automatically once converted it can now be
 Power to amend registered

- section 16  Power to make donation

- special 37,38,120 - Limitation Section 36 par.9

 Power to adopt by-laws Provided, That no corporation, domestic or foreign

shall give donations in aid of any political party or
- section 46-48
candidate or for purposes of partisan political
activity.
 Power to issue or sell stocks and to admit
members - These are circumstances, however, under
- stock of stockholders and provision governing which a donation by a corporation may be
to its benefit as a means of increasing its
non-stock
business or promoting patronage. Thus,
 Power to acquire or alienate real or personal paragraph 9 of section 36 expressly
property authorizes a corporation to make
donations. The only limitations imposed are
- is there any limitation? YES the following:

- Two specific limitation 1. The donation must be “reasonable”;

1. Section 36, as lawful transactions of business 2. It must be for public welfare, or for hospital,
of the corporation may reasonably and charitable, scientific, cultural or similar
necessarily require purpose; and,

2. Constitution and law 3. It shall not be in aid of political party or

candidate, or for purposes of partisan
 Luneta vs. A.D. Santos political activity.

- Importance of the purpose clause  Power to establish pension

It confers and determine the limits the actual authority - Include any act to promote and improve the
of the corporation. convenience, welfare and benefit of the
employees or offices
- Cannot have the power to acquire
 Republic vs. Acoje
- Cannot engage in land transportation
- While as a rule an ultra-vires act is one
- Doctrine of limited capacity committed outside the object for which a
corporation is created as defined by law,
 Gov’t vs. El Hogar
there are however certain corporate acts
- As the lawful transaction of its business may that may be performed outside of the scope
reasonably represent of the powers expressly conferred if they
are necessary to promote the interest or
 Director of Lands vs. CA welfare of the corporation. Thus, it has
been held that “although not expressly
- Exception to the rule in the constitution authorized to do so a corporation may
become a surety where the particular
- Alienable public land
transaction is reasonably necessary or
proper to the conduct of its business,”
and here it is undisputed that the
establishment local post office is a
38
 reasonable and proper adjunct to the conduct  What are the modes of increasing capital
of the business of appellant company. Indeed, stock?
such post office is a vital improvement in the
living condition of its employees and laborers 1. Increasing the par value of the existing
who came to settle in its mining camp which is number of shares without increasing the
far removed from the postal facilities or means number of shares;
of communication accorded to people living in
2. Increasing the number of existing shares
a city or municipality.
without increasing the par value thereof;
 Power to exercise such other powers and,
essential or necessary to carry out its
3. Increasing the number of existing shares
purpose (implied power)
and at the same time increasing the par
1. Acts in the usual course of business; value of the shares.

2. Acts to protect debts owing to the corporation;  Why a corporation increases it capital
stock?
3. Embarking in a different business;
- Generate funds, business expansion, or
4. Acts in part or wholly to protect or aid payment of liabilities, purposes of acquiring
employees; and, other business. (example: to buy cars for
the officers, purpose of acquiring other
5. Acts to increase business business, expansion, other valid reasons)
 Teresa Electric and Power Co. vs. P.S.C.  How do you decrease capital stock and
why a corporation decreases?
- Examined the articles of incorporation to
arrive at its decision - Reduce or wipeout existing deficit where no
creditors would thereby be effected
 National Power vs. Vera
- When capital is more than necessary to
- For purpose of prohibiting the NAPOCOR
procreate the business or reduction of
- The court must decide whether or not a logical capital surplus
and necessary relation exists between the act
- To write down the value of its fixed assets
questioned and the corporate purpose
to reflect those present and actual
expressed in the NPC charter
o NOTE: any increase or decrease of capital
 Importance of PLACE of registration
stock requires approval of government
- Residence agency like SEC it can never take place
unless SEC approves the same
- Venue
 Relevance of decrease of capital?
- Place of meetings
1. To reduce or wipe out existing deficit where
- Place or registration of chattel mortgage no creditors would thereby be affected;

 Powers vs. Marshall 2. When the capital is more than what is

necessary to procreate the business or
 Power to extend its terms reduction of capital surplus; or,

- Once its term expires, already dissolved 3. To write down the value of its fixed assets
automatically, thus can no longer ask for to reflect there present actual value in case
extension where there is a decline in the value of the
fixed assets of the corporation.
- After dissolution, it has 3 years to windup
39
- Examples: Php 10M capital for grocery corporation, the same must be registered
business, mayor didn’t want to issue and approved by the SEC subject to the
license/permit because mayor has 3 other rules and regulations that may be adopted
grocery stores, only allowed sari-sari store by that agency. The procedure and
permit, reduce capital for sari-sari so that the requirements set forth in section 38 is the
money will not sleep in bank same as in increasing or decreasing the
capital stock except that the certificate does
- Example: car rental agencies-Php 10M capital not have to state the matters required in
for 20 taxi’s, after some time each taxi is only sub-section 2 & 3 thereof.
250K, nagmura ang taxi, to reduce capital is to
show actual assets  Pre-emptive rights

 Limitation imposed by law - A right granted by law to all existing

stockholders of a stock corporation to
- Decrease shall not in any way affect the rights subscribe to all issues or disposition of
of the creditors shares of any class, in proportion to their
respective stockholdings, subject only to the
 Philippine Trust Company vs. Rivera limitations imposed under section 39 of the
Code.
- Without the appraisal of SEC, a decrease in
capital stocks has no effect - Internationally granted
 TRUST FUND DOCTRINE:
 Pre-emptive rights, why it is granted?
- Subscription to capital stock of a corporation
- In order that the existing stockholders may
constitute a fund to which the creditors have a
maintain their proportionate right as not to
right to look upon for satisfaction of their
dilute their right
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock  Power to deny pre-emptive rights
subscription in order to realize assets for the
payment of its debts. Section 39. Power to deny pre-
emptive right. - All stockholders of a stock
 Madrigal vs. Zamora corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of
- Decrease in capital has a subterfuge to evade shares of any class, in proportion to their
payment respective shareholdings, unless such right
is denied by the articles of incorporation or
- Thus not valid and effective an amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
- Must not prejudice creditors which includes the to be issued in compliance with laws
employees requiring stock offerings or minimum stock
ownership by the public; or to shares to be
 Bond issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
- Commonly understood as an obligation of a the outstanding capital stock, in exchange
for property needed for corporate purposes
state, its subdivision or a private corporation, or in payment of a previously contracted
represented by a certificate or an instrument debt.
for the principal and by detachable coupons
for the payment of interests. In its simplest  May it be denied? How?
term, it is one where an obligor obliges himself
to pay a certain sum of money to another at a - Yes, if provided by articles of incorporation
day named. or by an amendment

- There are different kinds of bond but before - However, pre-emptive rights is unavailable
they may be issued or floated by the to shares in trading in stock exchange

40
 otherwise stockholders must waive first their The right of pre-emptive rights is absolute in close
right before they may sell such. corporations

 Exceptions “All issues or depositing shares of any class” form

part of ACS
1. When the shares to be issued is in
compliance with laws requiring stock  Certain instances when a stockholder
offerings or minimum stock ownership by may nevertheless be unable to exercise
the public this right:

2. Shares to be issued in good faith with the - Issued for public ownership
approval of the stockholders representing
2/3 of the outstanding capital stock either - Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in
a. In exchange for property needed for exchange for property needed or b) for
corporate purpose or, payment of a previously contracted debt

b. In payment of a previously contracted  Pre- emptive rights of stockholders in

debt ordinary stock corporations may be
denied
- The exceptions, however will not apply to
stockholders of a close corporation by virtue of - if the shares are to be issued in compliance
a subsequent and specific provision of the with laws requiring stock offering or
Code which provides that the “pre-emptive minimum stock ownership by the pubic
right of a stockholder in a close corporation
shall extend to all stock to be issued, including - In exchange for property needed for
reissuance of treasury shares, whether for corporate purposes
money, property or personal services or in
payment of a corporate debt, unless the - In payment of previously contracted debts
articles of incorporation provide otherwise, if
 This rule, however, does not apply in a
not entirely absolute, in that it extends to all
close corporation as the pre-emptive
issuance and disposition of shares
rights of the stockholders thereof is
- Such right of pre-emption may be lost by broadened to include all issues without
waiver of the stockholder, expressly or exceptions unless, of course, denied or
impliedly by his inability or failure to exercise it limited by the articles of incorporations.
after having been notified of the proposed Section 102 provides:
issuance or disposition of shares
Section 102. Pre-emptive right in
 When is it unavailable? close corporations. - The pre-emptive
right of stockholders in close corporations
- In shares traded openly in stock shall extend to all stock to be issued,
exchange/market including reissuance of treasury shares,
whether for money, property or personal
 Is it applicable to close corporations? services, or in payment of corporate debts,
unless the articles of incorporation
provide otherwise.
- See section 96, close corporations must
provide it first on its articles of incorporation,
 Denial will not apply to a close
that its articles does not really deny such pre-
corporation, ABSOLUTE
emptive rights.
- section 96 - Definition and Applicability of
 Section 102, will not apply to close
Close Corporation.
corporations

41
 May a stock holder in a close corporation EXAMPLE:
insist in the exercise of his pre-emptive
rights? ACS 2M

- Yes, section 102 SUBSCRIBED 1M

 What type or shares are covered by pre- PAID UP 1M

emptive rights?
1 100K
 Does it include those originally
2 100K
unsubscribed?
TO
- NO. Benito vs. SEC
10 100K
 Will the stockholders be able to exercise
their pre-emptive right with respect to the  If 1-5 became 200K each, may 6-10
old unissued shares? No. demand the exercise their pre-emptive
right?
- Pre-emptive rights is applicable only to new
issued shares and not to the old unissued - YES
shares because it is presumed that the original
subscribers is deemed to have taken his  May 1-5 subscribe to the unsubscribed
shares knowing that they form a definite capital stock to the exclusion of 6-10?
proportionate part of the whole number of
authorized shares - If a corporation makes 2M unrestricted
retained earnings, it is the shares and not
- When the shares, left unsubscribed are re- the number of persons that matters
offered, he cannot therefore claim. DILUTION
OF INTEREST  May 6-10 complain for a dilution of their
interest?
 Will the acquiring purchaser be liable for
debts of the former corporation? - YES, it’s an internationally recognized right
because it includes “all issues and
- Generally no, corporate entity theory because disposition of shares of any class” and all
there may be instances when purchasing kinds of shares new or old
corporation may be held liable
- If the remaining unsubscribed shares are
 May a corporation acquire its own shares? issued, it’s an issuance of any class

- Yes  May a corporation sell/dispose all or

substantially all of its corporate assets
 Is there any restriction provided for by law and liabilities?
in reacquiring its own shares?
- YES
- Yes, it must have been unrestricted retained
earnings appearing in the books of corporation - 1) RESOLUTION 2) AUTHORIZATION 3)
RATIFICATION 4) PRIOR WRITTEN
 A corporation can never acquire its own NOTICE 5) SALE SUBJECT TO
shares if it has no unrestricted retained PROVISIONS OF EXITING LAWS 6)
earnings DISSENTING STOCKHOLDERS HAVE
THE RIGHT TO EXERCISE THEIR
- False, exception close corporation and
APPRAISAL RIGHT
redeemable shares
 If a corporation sells substantially all of
it assets and properties, will the buyer
assume liability?
42
 - NO, EXCEPT  Will it need the approval of the
stockholders?
1) Express or implied agreement to the purchase
- NO, if the same is necessary in the usual
2) Where the transaction amounts to and regular course of business of said
consolidation or merger of the corporations corporation or if the proceeds of the sale or
other disposition of such property and
3) When purchasing corporation is merely a
assets be appropriated for the conduct of its
continuation of the selling corporation
remaining business
4) Where the transaction is entered into
- If X is a manufacturing company, then it can
fraudulently in order to escape liability for such
sell its only property upon approval of the
debt
stockholders because it will render itself
 Legitimate purpose: for a corporation to capable of continuing its business, BUT if
reacquire its own shares the proceeds will be used to purchase a
better one for the continuance of its
- Limitation: it must have surplus/unrestricted business, then it does not need the
retained earnings approval of the stockholders

- Exception: may redeem irrespective of  Conditions for the valid exercise of this
unrestricted retained earnings power are the following

1) Exercise of stockholders’ right to compel 1. Resolution by the majority vote of the board
“close corporation” to purchase his shares of directors/trustees

2) Where corporation has sufficient assets in its 2. Authorization from the stockholders
books to cover its debts and liabilities representing at least 2/3 of the outstanding
exclusive of capital stock capital stock or 2/3 of the members;

ACS 1M 3. The ratification of the stockholders or

members must be made at a meeting duly
SUBSRIBED 1M called for that purpose

PAID-UP 1M 4. Prior written notice of the proposed action

and of the time and place of meeting must
ASSETS 500K be made addressed to all stockholders of
record, either by mail or personal service;
1M PROFITS
5. The sale of the assets shall be subject to
- 500K LIABILITIES
the provisions of existing laws on illegal
____________________ combinations and monopolies

500K RESERVES IN A CLOSE 6. Any dissenting stockholder shall have the

CORPORATION IT CAN USE THIS TO REACQUIRE option to exercise his appraisal right
ISSUED STOCKS
 IDP vs. CA
X – REALTY CORPORATION
- Consent of the members was not secured
 THE ONLY PROPERTY OF THE
 Edward Nell Co. vs. Pacific Farms
CORPORATION
- Generally where one corporation sells or
 BOARD OF DIRECTORS DECIDED TO SELL
otherwise transfers all of its assets to
IT
another corporation, the latter is not liable

43
 for the debts and liabilities of the transferor, purchase its own stock, and that it will not
except: declare dividends to stockholders when the
corporation is insolvent.
1. Where the purchaser expressly or
impliedly agrees to assume such debts;  Power to invest funds <sec.42>

2. Where the transaction amounts to a Section 42. Power to invest

consolidation or merger of the corporate funds in another corporation
corporations; or business or for any other purpose. -
Subject to the provisions of this Code, a
3. Where the purchasing corporation is private corporation may invest its funds in
merely a continuation of the selling any other corporation or business or for any
corporation; purpose other than the primary purpose for
which it was organized when approved by a
4. Where the transaction is entered into majority of the board of directors or trustees
fraudulently in order to escape liability for and ratified by the stockholders
representing at least two-thirds (2/3) of the
such debts. outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of
 Power to acquire own shares non-stock corporations, at a stockholder's or
member's meeting duly called for the
Section 41. Power to acquire own purpose. Written notice of the proposed
shares. - A stock corporation shall have the investment and the time and place of the
power to purchase or acquire its own shares meeting shall be addressed to each
for a legitimate corporate purpose or stockholder or member at his place of
purposes, including but not limited to the residence as shown on the books of the
following cases: Provided, That the corporation and deposited to the addressee
corporation has unrestricted retained earnings in the post office with postage prepaid, or
in its books to cover the shares to be served personally: Provided, That any
purchased or acquired: dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
1. To eliminate fractional shares arising out of however, That where the investment by the
stock dividends; corporation is reasonably necessary to
accomplish its primary purpose as stated in
2. To collect or compromise an indebtedness the articles of incorporation, the approval of
to the corporation, arising out of unpaid the stockholders or members shall not be
subscription, in a delinquency sale, and to necessary. (17 1/2a)
purchase delinquent shares sold during said
sale; and - For any other purpose other than the
primary purpose, stockholder’s consent or
3. To pay dissenting or withdrawing approval is necessary
stockholders entitled to payment for their
shares under the provisions of this Code. (a) - Thus, if it’s for the secondary purpose, it is
necessary
 The corporation must at all times have
“unrestricted retained earnings” to - If it’s in connection with the primary
exercise this corporate power purpose, only board resolution is necessary

 Steinberg vs. Velasco  Requirements and steps to be followed

- For as long as there are debts and liabilities, a for a valid investment of corporate funds
corporation may not reacquire its shares are:
(subject to exceptions)
1. Resolution by the majority of the board of
- Creditors of a corporation have the right to directors or trustees;
assume that so long as there are outstanding
debts and liabilities, the board of directors will 2. Ratification by the stockholders
not use the assets of the corporation to representing at least 2/3 of the outstanding

44
 capital stock or 2/3 of the members in case of Section 105. Withdrawal of
non-stock corporations; stockholder or dissolution of
corporation. - In addition and without
3. The ratification must be made at a meeting prejudice to other rights and remedies
duly called for that purpose; available to a stockholder under this Title,
any stockholder of a close corporation may,
4. Prior written notice of the proposed investment for any reason, compel the said corporation
to purchase his shares at their fair value,
and the time and place of the meeting shall be
which shall not be less than their par or
made, addressed to each stockholder or issued value, when the corporation has
member by mail or by personal service, and; sufficient assets in its books to cover its
debts and liabilities exclusive of capital
5. Any dissenting stockholder shall have the stock: Provided, That any stockholder of a
option to exercise his appraisal right close corporation may, by written petition to
the Securities and Exchange Commission,
 Dela rama vs. Ma-ao Sugar compel the dissolution of such corporation
whenever any of acts of the directors,
- There is a substantial and not remote officers or those in control of the corporation
connection between the sugar bags and the is illegal, or fraudulent, or dishonest, or
sugar manufacture, thus stockholder’s oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever
approval is not necessary for validity
corporate assets are being misapplied or
wasted.
- A private corporation, in order to accomplish
its purpose as stated in its articles of
 If shares are reacquired, what happens?
incorporation, and imposed by the Corporation
Law, has the power to acquire, hold, - It becomes treasury shares
mortgage, pledge, or dispose of shares bonds,
securities and other evidences of - Stockholder’s consent/ approval is not
indebtedness of any domestic or foreign necessary and mere board action is
corporation. Such an act, if done in pursuance sufficient if in accordance with primary
of the corporate purpose, does not need the purpose
approval of the stockholders; but when the
purchase of shares of another corporation is - The logical relation of act done and primary
done solely for investment and not to purpose of corporation and between the
accomplish the purpose of its incorporation, board of directors to undertake submission
the vote of approval of the stockholders is of acts is a sound corporate practice
necessary.
 Dividends
 Gokongwei vs. SEC
Section 43. Power to declare
- Investments made by SMC is necessarily dividends. - The board of directors of a
connected with its primary purpose and this stock corporation may declare dividends out
was ratified in a meeting of the unrestricted retained earnings which
shall be payable in cash, in property, or in
- Submission of previous action is a sound stock to all stockholders on the basis of
outstanding stock held by them: Provided,
corporate practice
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
 Redeemable shares
balance on the subscription plus costs and
expenses, while stock dividends shall be
 Closed corporation (see section 105)
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
- For any reason, compel the value of shares Provided, further, That no stock dividend
“withdrawal shares” provided corporation has shall be issued without the approval of
sufficient funds to cover its debts and liabilities stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock

45
 at a regular or special meeting duly called for  Board decides to declare 1M, how much
the purpose. (16a) will each receive? May the board declare
stock dividend
Stock corporations are prohibited from
retaining surplus profits in excess of one - NO. that would be over issuance of shares,
hundred (100%) percent of their paid-in capital violation of securities regulation code
stock, except: (1) when justified by definite
corporate expansion projects or programs - It must have a free portion
approved by the board of directors; or (2)
when the corporation is prohibited under any - The corporation may increase its capital
loan agreement with any financial institution or
creditor, whether local or foreign, from
 Z co. 1M to X Co. is 2/3 of X Co.
declaring dividends without its/his consent,
and such consent has not yet been secured; Stockholders reacquired?
or (3) when it can be clearly shown that such
retention is necessary under special - No, because in property 2/3 is not required
circumstances obtaining in the corporation,
such as when there is need for special reserve  What is the effect of declaration of
for probable contingencies. (n) dividends with regards to the assets of a
company?
 What are dividends?
- As compared to stock dividends, the
- Corporate profits set aside, declared and declaration of cash or property dividends
ordered by the Board of Directors to be paid to have the effect of reducing corporate assets
the stockholders. to the extent of dividends declared.

 What are property dividends? - Neither would stock dividends increase the
proportionate interest of the stockholders of
- Those paid in property surplus the corporation although it will have the
effect of increasing the subscribed and
 Like tables and chairs? Can tables and
paid-up capital of the corporation. It gives
chairs make surplus profits?
the stockholders nothing in the way of
- No, they do not make surplus, bonds, etc. distribution of assets but merely divides his
existing shares into smaller units.
 Where should dividends come from?
- Earnings belong to the corporation until
- Stock dividends are declared as stocks declared or given
coming from corporation
 Revocation
 Who declares dividends to be declared? Do
stockholders have any say? - No revocation of dividend may be has
unless it has not been officially
- Board of Directors, if stock approval of 2/3 communicated to the stockholders or is in
outstanding capital stock the form of stock dividends which is
revocable at any time prior to distribution.
ACS-1M SUB-1M P.U.-1M 1M-
U.R.E. (surplus profits of the corporation)  Stock dividends- no reduction, you
capitalize your restricted retained
1-100k earnings, what is issued is a piece of
paper. The restricted earnings remain in
2-100k the corporation
To  Cash and property- reduces corporate
assets
10-100k

1M

46
  Stock dividends increase corporate SUB 1M
assets? No, it will only have the effect of
increasing the subscribed and paid-up capital PU 800K
of the corporation
1-100K 50K PU
 Will there be a corresponding increase in
2-100K 50K
their proportionate interest?
TO
- REMAINS THE SAME
10-100K
Exception: when stock dividends will result in a
fractional share 1M

ACS-2M 1-100K 200 (10%)  Will 1 and 2 receive full amount of

*VOTING AND DIVIDEND RIGHTS STILL dividends?
THE SAME
- YES. They are entitled however if they are
SUB-1M TO 10% declared delinquent, the amount due them
shall first be applied to his delinquency plus
PU-1M 10-100K
expenses.
ACS 2M
 Delinquency occurs, you are called to
SUB 1M pay, but you failed to pay. In case of
stock dividend, the delinquent stock
PU 1M holder will not be entitled thereto until he
has paid his subscription in full.
1M RE
 Are non-stockholders entitled to receive
1 100K dividends?

2 100K - No, tock dividends are civil fruits of the

original investment, and to the owners of
TO
the shares belong the civil fruits.
10 100K
 How did the court decide dividends in
1M the case of Neilsen

 May they be compelled? - Stock dividends cannot be issued to a

person who is not a stockholder in payment
- NO. You cannot declare if it does not come of services rendered.
from unrestricted retained earnings.
- Whether cash, property or stock, only
1. 1M-U.R.E. (is it true there is no way to stockholders may receive dividends.
compel?) Dividends are fruits of investments. They
come from the U.R.E. or surplus profits of
2. 2M-U.R.E. the corporation.
 May they be compelled to declare dividends ACS 2M 1M U.R.E.
- Mandatory if earned, the board may be SUB 1M JULY 24 DECLARATION
compelled to declare dividends JULY 31

- if exceeds 100% of the paid-up capital the PU 1M

boards may be compelled

ACS 2M 1M U.R.E.
47
 1 100K 100T JULY 26-Y conclude a management contract with
(NEW ONE WAS DECLARED TO Y) another corporation unless such contract
JULY 30- 100K shall have been approved by the board of
directors and by stockholders owning at
2 least the majority of the outstanding capital
stock, or by at least a majority of the
TO HAVE THE TRANSFER RECORDED members in the case of a non-stock
corporation, of both the managing and the
10 100K managed corporation, at a meeting duly
called for the purpose: Provided, That (1)
1M where a stockholder or stockholders
representing the same interest of both the
 Insofar as 1 and Y who has a better right? managing and the managed corporations
own or control more than one-third (1/3) of
Already declared, but not yet paid?
the total outstanding capital stock entitled to
vote of the managing corporation; or (2)
- Right to receive vest upon declaration. Who where a majority of the members of the
ever owns at the time of declaration owns the board of directors of the managing
dividends corporation also constitute a majority of the
members of the board of directors of the
- Unless there is a stipulation to the contrary managed corporation, then the
management contract must be approved by
 TRUST FUND DOCTRINE the stockholders of the managed
corporation owning at least two-thirds (2/3)
- The power to declare it if paid-up capital is not of the total outstanding capital stock entitled
maintained or is impaired to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock
- Trust fund must be kept intact for the corporation. No management contract shall
be entered into for a period longer than five
protection of creditors who have the right to
years for any one term.
rely on such subscription and the paid-up
capital for the satisfaction of their claims
The provisions of the next
preceding paragraph shall apply to any
- Cannot accumulate surplus unreasonably contract whereby a corporation undertakes
to manage or operate all or substantially all
- Basis is the paid-up capital of the business of another corporation,
whether such contracts are called service
- Entitled to dividends contracts, operating agreements or
otherwise: Provided, however, That such
- Irrespective of whether the subscription is full service contracts or operating agreements
which relate to the exploration,
- Illegally declared development, exploitation or utilization of
natural resources may be entered into for
- Declare dividend with the belief that it formed such periods as may be provided by the
part of the U.R.E., but yun pala sa capital pertinent laws or regulations. (n)

 Directors are not liable, unless sec31 acted in  The requirement for a valid management
bad faith or gross negligence in the conduct of contract are as follows:
corporate affairs
1. Resolution of the board of directors
 Directors even if acting in behalf of the 2. Approval by the stockholders holding or
corporation, may still be held solidarily liable representing a majority of the outstanding
capital stock or majority of the members in
 Power to enter into management contract case of non-stock corporation of both the
managing and the managed corporation
- New provision 3. The approval of the stockholders or
members must be made at the meeting
called for that purpose
Section 44. Power to enter into 4. The contract shall not be for a period longer
management contract. - No corporation shall than 5 years for any one term, except those
48
 which relate to exploration, development or - If not illegal per se merely voidable. Can be
utilization of natural resources which may be ratified expressly or impliedly or even
entered into for such periods as may be stopped as equitable grounds
provided by pertinent laws and regulations
- Ultra-vires acts which are not illegal per se
 Every corporate act emanates from the
may become binding and enforceable either
BOARD
by satisfaction, estoppels or equitable
 Is the voting requirements of a majority grounds
stockholder ABSOLUTE?
 Consequences of ultra-vires acts?
- Not only a majority but 2/3 of the outstanding
1. On the corporation itself
capital stock or 2/3 of the members in a non-
stock corporation would be required for the - The proper forum, in accordance with the
approval of a management contract in the provisions of PD 902-A, as amended and
following instances: R.A. No. 8799 may suspend or revoke, after
proper notice and hearing, the franchise or
1. Where the stockholders representing the same
certificate of registration of the corporation
interest of both the managing and managed
for serious misrepresentation as to what the
corporation own or control more than 1/3 of
corporation can do or is doing to the great
the total outstanding capital stock of the
damage or prejudice of the general public
managing corporation; and
2. On the rights of the stockholders
2. Where a majority of the members of the board
of directors of the managing corporation also - A stockholder may bring either an individual
constitute a majority of the directors of the or derivative suit to enjoin a threatened
managed corporation ultra-vires act or contract. If the act or
contract has already been performed, a
3. Where the contract would constitute the
derivative suit for damages against the
management or operation of all or
directors may be filed, but their liability will
substantially all of the business of another
depend on whether they acted in good faith
corporation, whether such contracts are called
and with reasonable diligence in entering
service contracts. If it will not constitute the
into the contract.
management of all or substantially all of the
business of another corporation the first 3. On the immediate parties
paragraph of section 44 will apply and not that
of the second, that is, only the vote of the - The courts have not agreed as to the legal
stockholders holding or representing at least a effect of a corporate contract outside of its
majority of the outstanding capital stock or authorized business but Ballatine gives the
majority of the members in the case of non- following summary of the doctrines evolved:
stock corporation will be required.
a. If the contract is fully executed on both
 How long? sides, the contract is effective and the
courts will no interfere to deprive either
- Not longer than 5 years for any one term party of what has been acquired under
it
- Exception: exploration, development or
utilization of natural resources b. If the contract is executory on both
sides, as a rule, neither party can
 What is an ultra-vires act or contract?
maintain an action for its non-
- Doctrine of limited capacity. Corporation can performance
do such acts and things as it is allowed to do
c. Where the contract is executor on one
- Acts beyond it will be ultra vires, allowing a side only, and has been fully performed
collateral attack on the other, the courts differ as to
49
 whether an action will lie on the contract issue or indorsement of negotiable paper by
against the party who has received a corporation without consideration and for
benefits of performance under it. Majority the accommodation of another is ultra-vires
of the courts, however, hold that the party
who has received benefits from the - Corporate officers may guarantee or
performance is estopped to set up that the endorse an accommodation only if
contract is ultra-vires to defeat an action specifically authorized
on the contract. This is more in conformity
Section 36 paragraph 11
with the doctrine that no person shall be
allowed to enrich himself at the expense of Section 10
another
Section 14 and 15
 Privano vs. Dela Rama
 Corporate powers depend on the
- Court looked into the purpose clause agreement of the stockholders rather
than any director
- The purpose clause empowers and limits
- It may sell and it may guarantee, contract
- Articles likewise provide that it may deal with
not necessarily illegal, it will in the absence
any of its money
of proof to the contrary presumed within its
- “deal” broad enough to cover the donation it is power. Corporations are presumed to
not then ultra-vires contract with in its powers- CARLOS CASE

- Not illegal per se hence (law of agency) - Purpose clause may be stretched to cover
excess powers are subject to ratification PLDT internet. It may be within its business.

- Ratified by passing the resolution in question - May it sell computers? NO! other line of
business. Its trading!
 Carlos vs. Mindoro sugar Co.
BY-LAWS
- PTC- trust company as such, it also has
 By-Laws
implied powers as to make them more
attractable - Rule adopted by the corporation for its
internal governance
- Not ultra-vires in pursuance of its legitimate
business  Is the adoption of by-laws mandatory?
 Japanese war notes vs. SEC  When should the by-laws be adopted or
filed? Can it not be adopted earlier?
- Non-stock corporations cannot make profits
and distribute profits to its shareholders - After incorporation- within 1 month
(emanates from the BOARD)
- Ultra-vires because Japanese war notes is a
non-stock corporation - Prior-more convenient (signed by the
incorporators)
 Crisologo-Jose vs. CA (ALWAYS ASKED
BY DEAN SUNDIANG)  Who will sign the adoption clause?
- The negotiable instruments law which holds an - Majority of the stockholders or members
accommodation party liable on the instrument attested to by the corporate secretary
to a holder for value, although such holder at
the time of taking the instrument knew him to  What happens if the corporation fails to
be only an accommodation party, does not adopt the by-laws from the tie provided
include nor apply to corporations which are
accommodation parties. This is because the
50
 by the law? Would there be an automatic - None filing would not affect the status of the
revocation or suspension? corporation, Loyola grand villas case

- Proper notice and hearing, must first be - The word “must” is not always imperative
complied with
- Stockholders are conlusively presumed to
 Loyola grand villas vs. CA know the provisions of the by-laws

- Not the SEC, but the HIGC  How about 3rd persons?

- Must – not always imperative - NO. unless there is actual knowledge of the
same they are not presumed to know of the
- Filing of by-laws mandatory provisions of the by-laws

- Empowered by SEC  Fleischer vs. Botika Nolasco

- Merely a ground, there must be proper notice - Shares of stock are personal properties
and hearing
- Shares of stock may transfer to whom ever
- Not affect the status of the corporation as a he wishes
juridical person
- The by-laws is contrary to law
- Subject the corporation to a fine, as may be
issued by the SEC  Articles of incorporation

 When do by-laws become effective? - May provide reasonable restriction

- Until and unless the SEC gives it stamped of - By-laws merely internal laws
approval
- Articles is the contract between and among
- Suspension of any government agency. The the parties and corporation
permission must first be secured- section 46
 Gov’t vs. El Hogar
 Elements of a valid by-law
- Did the court categorically ruled here that
1. It must not be contrary to law, public policy or the provision in the 5th cause of action is
morals; valid?

2. It must not be inconsistent with the articles of - Rules governing equity, considering the fact
incorporation; that there was always lack of quorum

3. It must be general and uniform in its effect or - Section 29 BOD if still constituting a quorum
applicable to all alike or those similarly may fill up a vacancy other than by removal,
situated; etc.

4. It must not impair obligations and contracts or  Gokongwei vs. SEC

vested rights; and’
- Section 48 allows a corporation to amend it
5. It must be reasonable. by-laws

- Must not be inconsistent with existing laws. - Section 47 of the code, the by-laws may
Not be inconsistent with articles of provide for the qualification and
incorporation disqualification

 By-laws - It cannot be said Gokongwei has a vested

rights

51
- Prevent directors from taking advantage of a majority of the outstanding capital stock or
position to promote his individual interest to a majority of the members in non-stock
the damage of others corporations, shall so vote at a regular or
special meeting.
- The validity or reasonableness of a by-laws is
a question of law Whenever any amendment or new
by-laws are adopted, such amendment or
- Subject to the limitations that reasonableness new by-laws shall be attached to the
original by-laws in the office of the
of a by-law is a mere matter of judgment corporation, and a copy thereof, duly
certified under oath by the corporate
- Rule of the majority and not the tyranny of the secretary and a majority of the directors or
minority trustees, shall be filed with the Securities
and Exchange Commission the same to be
 May the by-laws be amended altered or attached to the original articles of
appealed? incorporation and original by-laws.

- YES. HOW? Two modes The amended or new by-laws shall

only be effective upon the issuance by the
1. By a majority vote of the directors or trustees Securities and Exchange Commission of a
and the majority vote of the outstanding capital certification that the same are not
stock or members in a non-stock corporation, inconsistent with this Code. (22a and 23a)
at a regular or special meeting called for that
purpose;  Baretto vs. La Previsora

2. By the board of directors alone when - Any corporate act emanates from the board
delegated by 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock - Directors themselves cannot amend the by-
corporation. laws if they were not granted the same

- This delegated power, however, is considered  Section 48

revoked whenever a majority of the  The power granted is not subject to
outstanding capital stock or members shall so revocation T or F?
vote at a regular or special meeting.
- FALSE
 If it is to be amended what is the
proceeding?  If the by-laws are amended when will
they become valid?
- Section 48 2nd paragraph provides:
- Upon issuance of the SEC that they are not
Section 48. Amendments to by- inconsistent
laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at  What if the SEC failed to act within 10
least a majority of the outstanding capital months without fault attributable to the
stock, or at least a majority of the members of
corporation?
a non-stock corporation, at a regular or special
meeting duly called for the purpose, may
 T or F any amendment of the by-laws will
amend or repeal any by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the never become valid until it gives its
outstanding capital stock or two-thirds (2/3) of stamp of approval even after 1 year
the members in a non-stock corporation may
delegate to the board of directors or trustees - TRUE. Articles of incorporation and by-laws
the power to amend or repeal any by-laws or are different
adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees MEETINGS
to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked  Meetings
whenever stockholders owning or representing
52
- Meetings of stockholders 1. - Improperly served, any action will be
Date fixed in the by-laws or by-law invalidated at the objection of any
stockholder or member
- Meetings of director or trustees
 Must be held in the proper place
- Meetings are regular and special
 Where should it be held?
- Meetings of stockholders
- Apparent from the foregoing provision is
 What is regular and what is special? that meetings of stockholders must, at all
times, be held in the city or municipality
 When are regular meetings of the where the principal office of the corporation
stockholders held? is located and, as far as practicable, in the
principal office of the corporation.
- Fixed date provided by the by-laws
 May the by-laws of a corporation provide
 What if there is no date?
that meetings be held anywhere in the
- April Philippines?

 Why april? - While there is no provision authorizing a

stock corporation to hold stockholders’
- Point in time the audited financial statement meetings outside of the City of Municipality
have been prepared where the principal office is located, the law
allows a non-stock corporation to provide in
 What if in the date specified in the by-laws its by-laws any place of members’ meeting
or by the law itself the meeting was not provided that proper notice is sent to all
convened, for instance lack of quorum or members indicating the date, time and
force majeure? place of the meeting which shall be within
the Philippines.
- It may be postponed on a reasonable date
 T or F the by-laws of a stock corporation
 Notice requirement?
may validly provide that meetings shall
be held anywhere in the Philippines?
- Regular- 2 weeks prior notice
- FALSE. Non-stock corporations lang
- Special- 1 week
pwede provided nakalagay sa by-laws and
 May the notice requirement be lessened? provided proper notice is given

- By-laws may provide a longer or a shorter  Corporation can do only such things as
duration the law allows it to do, DOCTRINE OF
LIMITED CAPACITY
 What if the notice requirement is not
complied with?  San Miguel office located in Ortigas
Center. May stockholders meeting be
 What happened to any act passed in a held in PICC center?
meeting when notice requirement was not
required with? - YES. Metro Manila, one single city

- Voidable, subject to ratification  Must be called by the proper party

 Board of directors vs. Tan  Who calls?

- Notice requirement is the by-laws is a - President until and unless there is a

mandatory requirement provision , secretary on order of the
president

53
 What if there is nobody who can call? without cause may not be used to deprive
minority stockholders or members of the
- The petitioner, stockholder may petition the right of representation to which they may be
court entitled under Section 24 of this Code. (n)

 What if there is a person who can call, but  Cases of removal or ouster of a director
he fails or neglects to call the meeting?
May a stockholder petition to authorize a  Mandamus would be appropriate remedy if
meeting? there is a person authorized but refuses

- Ponce case only applies when there is NO  Quorum and voting requirement
person authorized to call the meeting. If there
- Majority stockholders or members constitute
is a person, but neglects his duty. Ponce will
a quorum
not apply.
 Is the presence of the majority owners of
 Writ of injunction may never be issued ex
the outstanding capital stock
parte
ABSOLUTE to have a quorum?
 Is there any exception?
- NO. when the code requires a higher
- Section 28 only instance quorum it must also be equivalent to the
vote required
Section 28. Removal of directors or
 Do you include non-voting shares in
trustees. - Any director or trustee of a
corporation may be removed from office by a arriving at the voting requirement to
vote of the stockholders holding or have a valid corporate act?
representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation - It depends.
be a non-stock corporation, by a vote of at
least two-thirds (2/3) of the members entitled - Section 6 last par. If it falls within the
to vote: Provided, That such removal shall penultimate par. Of section 6
take place either at a regular meeting of the
corporation or at a special meeting called for  Five requisites of a valid meeting
the purpose, and in either case, after previous
notice to stockholders or members of the 1. It must be held on the date fixed in the by-
corporation of the intention to propose such laws or in accordance with law
removal at the meeting. A special meeting of
the stockholders or members of a corporation 2. Prior notice must be given
for the purpose of removal of directors or
trustees, or any of them, must be called by the 3. It must be held at he proper place
secretary on order of the president or on the
written demand of the stockholders 4. It must be called by the proper party
representing or holding at least a majority of
the outstanding capital stock, or, if it be a non- 5. Quorum and voting requirements must be
stock corporation, on the written demand of a
met
majority of the members entitled to vote.
Should the secretary fail or refuse to call the
 Date not complied with, notice, place,
special meeting upon such demand or fail or
refuse to give the notice, or if there is no not complied with and the person who
secretary, the call for the meeting may be called not authorized, what happens to
addressed directly to the stockholders or any resolution called?
members by any stockholder or member of the
corporation signing the demand. Notice of the - Section 51, any meeting shall be valid
time and place of such meeting, as well as of provided all the stockholders are present or
the intention to propose such removal, must duly represented and provided it is within
be given by publication or by written notice
the power of the corporation. 3RD paragraph
prescribed in this Code. Removal may be with
or without cause: Provided, That removal of 324

54
- If the voting requirement is met, any resolution Meetings of directors or trustees of
passed in the meeting, even if improperly held corporations may be held anywhere in or
or called will be valid if all the stockholders or outside of the Philippines, unless the by-
laws provide otherwise. Notice of regular or
members are present or duly represented
special meetings stating the date, time and
thereat. The last paragraph of section 51 is place of the meeting must be sent to every
clear on the matter when it provides: director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise
“all proceedings had and any business provided by the by-laws. A director or
transacted at any meeting of the trustee may waive this requirement, either
stockholders or members, if within the expressly or impliedly. (n)
powers or authority of the corporation,
shall be valid even if the meeting be - YES. Expressly and impliedly
improperly held or called, provided all
the stockholders or members of the - SEC ruling
corporation are present or duly
A special meeting is valid without
represented at the meeting.”
notice where the directors are all
 Directors/trustees meeting present or where they consent to
the meeting. Presence at the
 Regular (monthly) and special (anytime) meeting waives the want of notice.
Moreover, it has been ruled that the
 May that be restricted (within or outside the meeting of the directors without a
Phil) formal call first being had, and
notice thereof given to the
- YES. unless the by-laws provide otherwise.
members, did not operate to
invalidate it or to render the
 Is there any notice requirement?
proceedings which were taken at it
- YES. 1 day unless otherwise provided by the void, for every member of the board
by-laws were present, and their joint action
had completely bound the
 What happens if notice is not complied corporation as if the meeting has
with? been called with due formality, and
everyone of the directors had
- If the notice requirement is not complied with received proper notice.
the meeting is illegal and will not bind the
corporation except when subsequently ratified  What is the quorum and voting
or in the case of a close corporation where the requirement in the directors meeting?
act of any one director may bind the
corporation even without a meeting under the - Majority of the members of the board of
special provision of Section 101 of the Code. directors (entire membership)

 Can notice be waived? <sec.53>  Vote required to pass a valid corporate

act?
Section 53. Regular and special
meetings of directors or trustees. - Regular - Majority of those present at which there is a
meetings of the board of directors or trustees quorum (3 present, vote of 2 sufficient)
of every corporation shall be held monthly,
unless the by-laws provide otherwise. - Exception, majority of all the members of
the board in case of election of corporate
Special meetings of the board of officers, unless the articles provide for a
directors or trustees may be held at any time greater quorum or voting requirement
upon the call of the president or as provided in
the by-laws.  Should the director or trustees be
physically present?

55
 - General rule, must sit and act as a body to  Proxy voting is a matter of right granted
have a valid corporate act by law

 Five man member board, a meeting was  Requirements of a valid proxy?

called today, should the physical presence
or warm bodies requires to constitute a - Section 58
quorum?
Section 58. Proxies. -
- NO. it is not required. Teleconference or video Stockholders and members may vote in
conference is allowed, E- commerce law person or by proxy in all meetings of
stockholders or members. Proxies shall in
Membership subject to laws writing, signed by the stockholder or
member and filed before the scheduled
Stockholder not yet meeting with the corporate secretary.
Unless otherwise provided in the proxy, it
 May director vote by proxy?
shall be valid only for the meeting for which
- NO it is intended. No proxy shall be valid and
effective for a period longer than five (5)
 If A is a director and a meeting is called for years at any one time. (n)
the purpose of electing a new set of BOD
 How long may a proxy exist?
can A vote by proxy?
- Maximum of 5 years
- YES. Because it is a stockholders meeting

 If directors meeting, cannot vote by proxy - Valid for the meeting in which it is intended

 Stockholder’s right to vote  Is proxy revocable?

- Inherent in stock ownership - Generally revocable, unless coupled with

interest
- However this right is not always inherent,
 Revocation
because it may be denied:
- A proxy, like agency in general is revocable
1. Redeemable and preferred shares,
however if founders shares are issued unless coupled with an interest and
others may be denied the right to vote. revocation need not be made by formal
notice in writing. Revocation may be
2. May be denied by the articles of expressed to the proxy holder, to the
incorporation or contracts election committee, by a subsequent proxy
to another or by sale of the shares. Thus it
- When not denied they may do so in person or may be revoke orally by conduct such that
by proxy appearing and asserting the right to vote at
a meeting by the registered owner of the
 May the right to vote by proxy be denied? shares revokes a proxy previously given.
 May the articles of incorporation deny?  Must be submitted to a validation
committee
 May the by-laws validly provide that proxy
voting is not allowed?  By-laws of non-stock corporations may
deny proxy voting
- NO
 What is voting trust agreement?
 Only non-stock may be denied proxy
voting (may be broaden, limited or denied) - One created by an agreement between a
group of stockholders of a corporation and a
trustee, or a group of identical agreements
56
 between individual stockholders and a with the corporation and with the Securities
common trustee, whereby it is provided that and Exchange Commission; otherwise, said
for a term o years or for a period contingent agreement is ineffective and unenforceable.
The certificate or certificates of stock
upon a certain event, or until the agreement is
covered by the voting trust agreement shall
terminated, control over the stock owned by be cancelled and new ones shall be issued
such stockholders, shall be lodged in the in the name of the trustee or trustees stating
trustee, either with or without reservation to that they are issued pursuant to said
the owners or persons designated by them the agreement. In the books of the corporation,
power to direct how such control shall be it shall be noted that the transfer in the
issued. name of the trustee or trustees is made
pursuant to said voting trust agreement.
- It is a devise of binding stockholders to vote as
a unit and thus assuring a desirable stability The trustee or trustees shall
execute and deliver to the transferors voting
and continuity in management in situations
trust certificates, which shall be transferable
where it is needed. in the same manner and with the same
effect as certificates of stock.
 What is the effect of a voting trust
agreement relative to the rights? The voting trust agreement filed
with the corporation shall be subject to
- Lee vs. CA must pass these criteria examination by any stockholder of the
corporation in the same manner as any
1. That the voting rights of the stock are other corporate book or record: Provided,
separated from the other attributes of That both the transferor and the trustee or
ownership; trustees may exercise the right of inspection
of all corporate books and records in
2. That the voting rights granted are intended to accordance with the provisions of this Code.
be irrevocable for a definite period of time;
and, Any other stockholder may transfer
his shares to the same trustee or trustees
3. That the principal purpose of the grant of upon the terms and conditions stated in the
voting rights is to acquire voting control of the voting trust agreement, and thereupon shall
corporation. be bound by all the provisions of said
agreement.
 During the duration of the trust they are
irrevocable unless there is a violation No voting trust agreement shall be
entered into for the purpose of
either by fraud
circumventing the law against monopolies
and illegal combinations in restraint of trade
 Requisites
or used for purposes of fraud.
- Section 59
Unless expressly renewed, all rights
granted in a voting trust agreement shall
Section 59. Voting trusts. - One or automatically expire at the end of the
more stockholders of a stock corporation may agreed period, and the voting trust
create a voting trust for the purpose of certificates as well as the certificates of
conferring upon a trustee or trustees the right stock in the name of the trustee or trustees
to vote and other rights pertaining to the shall thereby be deemed cancelled and new
shares for a period not exceeding five (5) certificates of stock shall be reissued in the
years at any time: Provided, That in the case name of the transferors.
of a voting trust specifically required as a
condition in a loan agreement, said voting trust
The voting trustee or trustees may
may be for a period exceeding five (5) years
vote by proxy unless the agreement
but shall automatically expire upon full
provides otherwise. (36a)
payment of the loan. A voting trust agreement
must be in writing and notarized, and shall
specify the terms and conditions thereof. A  Does it need to be notarized?
certified copy of such agreement shall be filed

57
- Yes, otherwise it is ineffective and  May the corporation enforce the voting
unenforceable trust agreements executed by its
stockholders?
 Only legal ownership is transferred
- NO. NIDC vs. AQUINO
 Being still the beneficial owner they may
transfer these rights - Not a privy to the contract

 Is the right granted to a voting trust - Rights liabilities of a stockholder are there in
agreement absolute? (to inspect) their individual capacity- corporate entity
theory
- NO.
 Voting trust agreements
- The voting trust agreement filed with the
corporation shall be subject to examination by - Normally executed in favor of banking and
any stockholder of the corporation in the same financial institutions
manner as any other corporate book or record.
Provided, that both the transfer and the trustee - So that they can vote a certain set of
or trustees may exercise the right of inspection directors
of all corporate books and records in
accordance with the provisions of this Code. - They will be more secured

 Legal title is transferred to the voting  Voting pull agreement

trustee
- Enters into an agreement
 May the voting trustee vote by proxy?
- Pull all their shares to cast one vote
- Yes, legal owner may vote by proxy
- Covered by rules governing contracts
 May the proxy holder vote by proxy?
- By pulling their votes they can decline the
- NO, (AGENT) an agent can have no other resolution passed by the board
agent unless specifically allowed by the
 END OF MIDTERMS
principal

 Stockholder executing as a proxy, is he

qualified to be voted as a director? STOCKS AND STOCKHOLDERS
 Why is he qualified to act as a director if  3 modes
the stockholder executes as a director?
1. By a contract of subscription with the
- The beneficial owner of the shares in a voting corporation;
trust is disqualified to be a director in a voting
trust whereas in a proxy, the owner of the 2. By purchase of treasury shares from the
shares may be elected as such since legal title corporation; and,
thereof remains with him
3. By purchase or acquisition of shares from
- YES he remains to be the owner existing stockholders.

 Is the stockholder executing in a voting  Section 60 subscription

trust agreement, is he qualified to act as a
director? - Any contract

- NO. ceases to be stockholder of record, no - Whether existing or still to be formed

longer the legal owner of shares

58
 Section 60. Subscription contract. - Any  Corporation paid 100T/S therefore the
contract for the acquisition of unissued stock in an corporation reacquired the shares again,
existing corporation or a corporation still to be what are they called?
formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that - Treasury shares
the parties refer to it as a purchase or some other
contract. (n) Y- 80T/S DECEMBER 08

 Under the old law the 4th mode is PURCHASE 40 % (AUGUST) WAS DESTROYED BY FIRE, IS
HE STILL LIABLE TO PAY THE UNPAID
 Purchase
PORTION?
- Reciprocal in nature
 IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A
- Purchaser can neither require the issuance
STOCKHOLDER ONLY IF PAID IN FULL
X Co. Inc. IS HE LIABLE?

- NO, because that was a purchase

P - First example galing sa unissued stock

Authorized capital 1M - 2nd example galling sa treasury shares hindi

sa unissued share
500 SUBSCRIBED
 NO such thing as purchase of unissued
500 UNISSUED STOCKS (AS LONG AS GALING stocks
DITO)
 A subscription contract can be conditional
Z wants to acquire 100K provided there is nothing in the charter or
statute prohibiting it and not against public
Entered in June 50% shall be down payment
order, law, etc.
remainder December 08
 Must it be in writing?
o he will not be considered a stockholder unless
he has paid in full - NO, it may be oral

August 08 property is ravaged by fire all are turned into  5M should it be in writing to be valid and
shares binding as a subscription?

 Is Z liable to pay the balance of his - NO, statutes of frauds only applies to
acquisitions? SALES

- YES, no matter how the party refer to it, it is  Trillana vs. Quezon College
considered subscription
- Counter proposal, therefore there was a
- Once you subscribe, you become a need for an acceptance
stockholder which is entitled to all the liabilities
of a stockholder - Facultative because it is in his own free will,
it is void
Z- subscribed to 100T/S of XCo.
 What may be used as a consideration and
Amount he paid 50k how much should be the consideration?

Z did not pay on the date called and was declared a - Section 62 provides:
delinquent share

59
 Section 62. Consideration for stocks. - Stock dividends will in effect capitalize the
- Stocks shall not be issued for a consideration unrestricted retained earnings
less than the par or issued price thereof.
Consideration for the issuance of stock may  After 5 years the founders shares may be
be any or a combination of any two or more of converted into common shares or other
the following:
kinds of shares
1. Actual cash paid to the corporation;  May shares of stocks be issued without
consideration? Why?
2. Property, tangible or intangible, actually
received by the corporation and necessary or - NO, two reasons by the SC, discriminatory
convenient for its use and lawful purposes at a
against other stockholders and second
fair valuation equal to the par or issued value
of the stock issued; unlawful, it prejudices the right of the
creditors “Trust Fund Doctrine”
3. Labor performed for or services actually
rendered to the corporation;  If issued without a consideration

- Section 65, they will be considered as

4. Previously incurred indebtedness of the
corporation; watered stocks

5. Amounts transferred from unrestricted Section 65. Liability of directors for

retained earnings to stated capital; and watered stocks. - Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par
6. Outstanding shares exchanged for stocks in
or issued value or for a consideration in any
the event of reclassification or conversion.
form other than cash, valued in excess of its
fair value, or who, having knowledge
Where the consideration is other than thereof, does not forthwith express his
actual cash, or consists of intangible property objection in writing and file the same with
such as patents of copyrights, the valuation the corporate secretary, shall be solidarily,
thereof shall initially be determined by the liable with the stockholder concerned to the
incorporators or the board of directors, subject corporation and its creditors for the
to approval by the Securities and Exchange difference between the fair value received
Commission. at the time of issuance of the stock and the
par or issued value of the same. (n)
Shares of stock shall not be issued in
exchange for promissory notes or future - Subscribers may be compelled to pay the
service.
value
The same considerations provided for  Issuance of a certificate of stock is another
in this section, insofar as they may be
thing
applicable, may be used for the issuance of
bonds by the corporation.
 What are the requisites for the issuance of a
valid certificate of stock?
The issued price of no-par value
shares may be fixed in the articles of 1. It must be signed by the president or vice-
incorporation or by the board of directors
president and countersigned by the
pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or in secretary or assistant secretary;
the absence thereof, by the stockholders
representing at least a majority of the 2. It must be sealed with the corporate seal;
outstanding capital stock at a meeting duly and the entire value thereof (together with
called for the purpose. (5 and 16) interest or expenses, if any) should have
been paid.
 “Amounts transferred from unrestricted
retained earnings to stated capital” what does While it appears, that a subscriber to shares
it mean? of stock cannot be entitled to the issuance
of a certificate of stock until the full amount
60
 of his subscription together with interest and
expenses (in case of delinquent shares) if any
is due, has been paid, a subscriber to shares Endorsement from
of stock, even if not yet fully paid, is entitled to When issued by owner
Endorsed by owner- strict compliance
exercise all the rights of a stockholder and the
corresponding liability that attach thereunder.
Thus, the Code provides: ANSWER: a certificate of stock is not regarded as
negotiable in the same sense that a bill or note is
Section 72. Rights of unpaid shares. - negotiable, even if it is endorsed in blank. Thus,
Holders of subscribed shares not fully paid while it may be transferred by endorsement coupled
which are not delinquent shall have all the with delivery thereof, and therefore merely quasi-
rights of a stockholder. (n) negotiable, it is nonetheless non-negotiable in that
the transferees takes it without prejudice to all the
 Is the issuance of a certificate of stock
rights and defenses which the true and lawful owner
necessary to consider the subscriber a
may have except in so far as the principles
stockholder?
governing estoppels may apply.
- NO, shall be considered a stockholder even
He acquired it by virtue of a forged instrument; no
without a certificate of stock
matter how innocent the purchaser is because it is
 Instances when he may not be able to subject to all the rights and defenses
exercise his rights as such stockholder
 What if A endorsed it?
- Declared delinquent
- He is estopped, unless there are other
- When he exercises his appraisal right available defenses

 Are certificate of stocks transferrable?  Transfer is required to be recorded in the

books of the corporation, however even if
- YES not recorded, it will be valid between the
parties. Non-registration will not however,
 Are certificate of stocks considered affect the validity thereof at least in so far as
negotiable? the contracting parties are concerned.

- Quasi-negotiable
Section 63. Certificate of stock and
transfer of shares. - The capital stock of
 Why are they considered quasi-negotiable
stock corporations shall be divided into
when it may be transferred through shares for which certificates signed by the
endorsement and delivery? president or vice president, countersigned
by the secretary or assistant secretary, and
sealed with the seal of the corporation shall
100t/s 001 10/s be issued in accordance with the by-laws.
Shares of stock so issued are personal
Abc co. property and may be transferred by delivery
of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other
B stole and forged the signature person legally authorized to make the
C is purchaser in good faith and for value will C transfer. No transfer, however, shall be
acquire title valid, except as between the parties, until
the transfer is recorded in the books of the
corporation showing the names of the
parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred.

61
 No shares of stock against which the record the transfer, but he cannot be
corporation holds any unpaid claim shall be compelled when the transferee’s title to the
transferable in the books of the corporation. said shares has no prima facie validity or
(35)
uncertain

 “Until registration is accomplished, the  Transfer- absolute and unconditional

transfer, though valid between the parties, transfer to warrant registration in the books
cannot be effective as against the corporation. of the corporation in order to bind the latter
Thus the, unrecorded transfer cannot enjoy and other third persons.
the status of a stockholder; he cannot vote nor
be voted for, and he will not be entitled to  Other restrictions on the right to transfer
dividends. The corporation will be protected shares would include:
when it pays dividend to the registered owner
despite a previous transfer of which it had no 1. It is not valid, except as between the
knowledge. The purpose of registration parties, until recorded in the books of the
therefore is twofold: to enable the transferee to corporation;
exercise all the rights of a stockholder and to
2. Shares of stock against which the
inform the corporation of any change in shares
corporation holds any unpaid claim shall not
ownership so that it can ascertain the persons
be transferable in the books of the
entitled to the rights and subject to the
corporation; unpaid claims, refer to claims
liabilities of a stockholder.”
arising from unpaid subscription and not to
Thus, it was also ruled by the High any indebtedness which a stockholder may
Court in Nautica Canning Corp. vs. owe the corporation such as monthly dues;
Yumul that “A transfer of shares not
3. Restrictions required to be indicated in the
recorded in the stock and transfer
articles of incorporation, by-laws and stock
book of the corporation is non-existent
certificates of a close corporation;
in so far as the corporation is
concerned.” This is so because “the 4. Restrictions imposed by special law, such
corporation looks only through its as the Public Service Act requiring the
books for the purpose of determining approval of the government agency
who its stockholders are.” concerned if it will vest unto the transferee
40% of the capital of the public service
 Registration is necessary for the following:
company;
1. To enable the corporation to know who its
5. Sale to aliens in violation of maximum
stockholders are;
ownership of shares under the
2. To enable the transferee to exercise his rights Nationalization Laws;
a s stockholders;
6. Those covered by reasonable agreement of
3. To afford the corporation an opportunity to the parties.
object or refuse registration of the transfer in
 Monserat vs. Ceron
case allowed by law;
- Does it include mortgage?
4. To avoid fictitious and fraudulent transfers;
and, - NO, it is not an absolute transfer
5. To protect creditors who have the right to look
- Will not affect the transfer through mortgage
upon stockholders, in case of no-payment or
watered shares, for the satisfaction of their - Absolute and unconditional transfer
claims.
- Only the transfer or absolute conveyance of
 Duty of the secretary is ministerial, hence the ownership of the title to a share need be
mandamus will lie if the secretary refuses to entered and noted upon the books of the
62
 corporation in order that such transfer may be transfer by the corporation or its officers or
valid, therefore, inasmuch as a chattel by other stockholders, even though the sale
mortgage of the aforesaid title is not a is to a competitor of the company, or to an
complete and absolute alienation of the insolvent person, or even though a
dominion and ownership thereof, its entry and controlling interest is sold to one purchaser.
notation upon the books of the corporation is
not necessary requisite to its validity  Certificate of stocks are transferrable

 Chua guan vs. Magsasaka - By endorsement and delivery of the stock

certificate to the transferee
- Was the mortgage valid and effective as
against subsequent third parties  In order to be valid, must be registered in
the books. If not, will only be binding among
- Register of deeds where the corporation parties
resides and if different in the register of deeds
of owner’s domicile  How may shares of stock be transferred?

 Unson vs. Dinamito - Endorsement of stock certificate by owner

or attorney-in-fact with delivery
- All transferred not register will not have a valid
force and effect  Embassy farms vs. CA

 Right to transfer may be regulated - Must be endorsed by owner or attorney-in-

fact coupled with delivery
 May not be unreasonably restricted
- Endorsed not delivered
 Violation of nationalization law- Central Bank
- Proper mode and manner must be complied
 Lambert vs. Fox with

- Valid , may be reasonably regulated, restricted  Razon vs. IAC

by agreement of parties
- Delivered not endorsed
- Reasonable agreement by the parties
- Reverse of Embassy Farms
- Reasonable as to length of time
- Endorsement alone is not sufficient nor
 Padgett vs. Babcock delivery without endorsement is not allowed

- Any attempt to restrain transfer - Endorsement plus delivery is mandatory

- SC, in the absence of a valid lien upon its  Is there any other mode of transferring
shares stock?

- Valid restrictions shares are applicable - Notarized deed

- Any restriction on a stockholder’s right to - Deed of assignment

dispose of his shares must be construed
strictly; and any attempt to restrain a transfer  Rural bank of Salinas vs. CA
of shares is regarded as being in restraint of
- If denied or refused without good cause,
trade, in the absence of a valid lien upon its
shares, and except to the extent that valid mandamus will lie
restrictive regulations and agreements exist
 Tay vs. CA
and are applicable. Subject only to such
restrictions, a stockholder cannot be controlled - Mandamus may issue if petition has a clear
in or restrained from exercising his right to legal right
63
- Never issued in doubtful cases - Persons sought to be stockholder is officer
and has custody of the book (estopped)
- Petitioner failed to establish a clear legal right
and alleged ownership is without merit  General Rule for valid transfer

- Did not acquire ownership by virtue of the - Certificate of stock must be endorsed by
contract of pledge owner or attorney-in-fact coupled with
delivery
- In a contract of pledge there must be
foreclosure  Exceptions

- In the case there was no attempt to foreclose - Section 63 uses the word “may”

- Petitioner must have a prima facie right - Showing that there may be other modes of
transferring shares
 Nava vs. Peers Marketing
 Is there a time frame or fixed period as
- A stock subscription is a subsisting liability when transfer can be made?
from the time the subscription is made
- NO, (WON vs. WACK WACK)
- The subscriber is as much bound to pay his
subscription as he would be to pay any other  Won vs. Wack Wack
debt
- Valid between contracting parties even if
- No stock certificate was issued. Without stock not recorded in corporation books
certificate, which is the evidence of ownership
- Right accrues only if refused
of corporate stock, the assignment of
corporate shares is effective only between the
- Statute of limitations does not apply in
parties to the transaction
registration of shares of stock
 Exception to the general rule
- Must determined from the time of refusal
 Rural Bank of Lipa vs. CA
 Why are they non-negotiable when they
- By notarized deed may be transferred?

- Certificate of stocks already issued must be - Transferees pays it without prejudice to all
coupled with delivery, exception (TAN vs. the rights and defenses as the true and
SEC) lawful owner may have under the law
except insofar as such rights and defenses
 Stock certificate has already been issued it are subject to the limitations imposed by the
must be coupled with the delivery principles governing estoppels

 After certificate of stock is issued, may it be  Delos Santos vs. Republic

effectively transferred even without
endorsement or delivery of the stock - Why is he, not considered as the owner of
certificate? shares? When it has been said that when
endorsed by the owner it is considered as
- Person sought to be a stockholder is an officer strict certificate? Because certificate of
and has custody stocks are non-negotiable

 Endorsement and delivery is not necessary - Although a stock-certificate is sometimes

(TAN vs. SEC) regarded as quasi-negotiable, in the sense
that it may be transferred by endorsement,
 Tan vs. SEC (FULL KNOWLEDGE, HE IS coupled with delivery, it is well settled that
ESTOPPED) the instrument is non-negotiable, because
64
 the holder thereof takes it without prejudice to - D will acquire title took the shares not by
such rights or defenses as the registered virtue of a forged or unauthorized transfer,
owner or creditor may have under the law, but on the reliance that the stock certificate
except insofar as such rights or defenses are is valid and owned by C
subject to the limitations imposes by the
principles governing estoppels.  Stock certificate now in possession of D. A
knew of what happened and went to the
 Unauthorized issuance of stock certificates corporation and complains. Who will have a
better title?
100/s 100
- the corporation may be compelled to
XYZCo recognize both, A as stockholder (non-
negotiable) D, reliance that the stock
100 pesos per share certificate is valid and existing and owned
Stolen by B and forged the signature of A by C
B sells to C will C acquire title? NO
 Forged transfers

- If the corporation should issue a new

certificate in pursuance of a forged transfer,
the corporation incurs no liability to the
person in whose favor it is issued and it
may demand its return for cancellation. The
ENDORSEMENT FORM corporation in such case has been guilty of
no misrepresentation. On the other hand, it
 C armed with the endorsement form certificate, is the duty of the purchaser to determine
sold to D (innocent purchaser for value), will D that the indorsement of the owner is
acquire title? genuine. However, if the new certificate
issued to the purchaser comes into the
- NO, subject to such rights and defenses as the hands of a bona fide purchaser for value,
true and lawful owner may have the corporation will be stopped from
denying validity thereof, since by issuing
 What if C now goes to the corporation and such new certificate it represents that the
presents the form? person named therein is a stockholder of
the corporation. The corporation is thus
- Then the corporation shall cancel the old
forced to recognize both the original
certificate and issues a new one, now in the
certificate and new certificate-the original,
name of C, now registered in the name of C,
because the true owner could not be
will C acquire title?
deprived of his title by a forged transfer, and
 A found out what happened and goes to the the new, because of its representation that
corporation who has a better title C or A? the person named therein is the owner of
shares in the corporation. But if the
- A, A cannot be deprived of his right by virtue of recognition of both stockholders would
an unauthorized transfer result in an over issue of shares, then only
the original and true owner can be
 Corporation can compel C to deliver the new recognized as a stockholder. The bona fide
stock certificate because he made a purchaser of the new certificate will
representation that the certificate where good. however have a right of damages against
the corporation. The corporation, in turn,
 Armed with the new certificate issued to C, C
would have a right of action against the
delivers to D a purchaser in good faith and for
person who made false representations and
value will D acquire title?
in whose favor it issued a new certificate.
The true owner of the shares which were

65
 wrongfully transferred would of course have a  A certificate of stock cannot be issued
right to compel the corporation to issue him a unless he fully paid the amount subscribed
certificate in lieu of the original one which was
wrongfully cancelled.  Subscription to the capital stocks of the
corporation are indivisible
 Authorized capital stock 1M shares
 Clear mandate of section 148 of the code is
 All are subscribed who will the corporation that the ruling of the court in Baltazar vs.
recognize as rightful owner A or D? if both will Lingayen Gulf, no longer holds true
be recognized there will be over issuance
Section 148. Applicability to
- only A citing citizens national bank vs. state (but existing corporations. - All corporations
if recognition of both stockholders would result lawfully existing and doing business in the
in an over issue of shares, then only the Philippines on the date of the effectivity of
original and true owner can be recognized as this Code and heretofore authorized,
licensed or registered by the Securities and
a stockholder)
Exchange Commission, shall be deemed to
have been authorized, licensed or
- by virtue of the doctrine of non-negotiability of
registered under the provisions of this
certificate of stocks Code, subject to the terms and conditions of
its license, and shall be governed by the
 The true and lawful owner will never be provisions hereof: Provided, That if any
deprived of his rights such corporation is affected by the new
requirements of this Code, said corporation
 What happens to D? shall, unless otherwise herein provided, be
given a period of not more than two (2)
- D will have a cause of action against the years from the effectivity of this Code within
corporation for the value of his acquisition cost which to comply with the same. (n)
inclusive of damages, attorney’s fees and cost
of suit  Subscription to shares of stocks are
indivisible
 D sues the corporation for the value of his
acquisition cost, inclusive of damages,  Also apparent is that once a subscriber has
attorney’s fees and cost of suit. What may the paid his subscription in full, he becomes
corporation do? entitled to be issued a stock certificate and
in the event that the corporation refuses to
- NO defense, no valid defense, because it was do so, the stockholder my institute a case
represented to other parties that the certificate for mandamus with damages. Thus, it has
of stocks is valid, subsisting, etc. been said that the duty of the corporate
officers to issue stock certificates to those
 2nd situation, what cause of action may the entitled thereto is a ministerial duty
corporation have? Remedy? enforceable by mandamus.
- Third party complaint against C, but what if he is  Fua Cun vs. Summers and China Banking
a purchaser for value? 4th party claim against Corp.
B
- The court erred in holding the plaintiff as the
 When may certificate of stocks be issued? owner of 250 shares of stock; “the plaintiff’s
rights consist in equity in 500 shares and
- Section 64 provides:
upon payment of the unpaid portion of the
subscription price he becomes entitled to
Section 64. Issuance of stock
certificates. - No certificate of stock shall be the issuance of certificate for said 500
issued to a subscriber until the full amount of shares in his favor.”
his subscription together with interest and
expenses (in case of delinquent shares), if any - No certificate of stock until the full amount
is due, has been paid. (37) has been paid.

66
 Watered stock  What is the effect of issuance of watered
stocks
- One which is issued by the corporation as fully
paid-up shares, when in fact the whole amount 1. As to the corporation - when a corporation
of the value thereof has not been paid. is guilty of ultra-vires or illegal acts which
constitute an injury to or fraud upon the
- Basis is par value and not the fair market public, or which will tend to injure or defraud
value the public, the State may institute a quo-
warranto proceeding to forfeit its charter for
 Section 62 states that stocks shall not be the misuse or abuse of its franchise.
issued for a consideration less than par or
issued price thereof, while section 13 states 2. As between the corporation and the
that in no case shall be paid-up capital be less subscriber- The subscription is void. Such
than five thousand [P5000] pesos. being the case, the subscriber is liable to
pay the full par or issued value thereof, to
 If issued below par, issued value considered render it valid and effective.
as water
3. As to the consenting stockholders - They
 How may watered stocks be issued? are stopped from raising any objection
thereto;
1. For a monetary consideration less than its par
or issued value; 4. As to dissenting stockholders - In view of
the dilution of their proportionate interest in
2. For a consideration in property, tangible or
the corporation, they may compel the
intangible, valued in excess of its fair market
payment of the “water” in the stock solidarily
value;
against the responsible and consenting
3. Gratuitously or under an agreement that directors and officers inclusive of the holder
nothing shall be paid at all; or of the watered stocks;

4. In the guise of stock dividends when there are 5. As to creditors - They may enforce payment
no surplus profits of the corporation. of the difference in the price, or the water in
the stock, solidarily against the responsible
 Why is stock watering illegal? directors/officers and the stockholders
concerned; and’
1. The corporation is deprived of its capital
thereby hurting its business prospects, 6. As against transferees of the watered stock
financial capability and responsibility; – His right is the same as that of his
transferor. If, however, a certificate of stock
2. Stockholders who paid their subscriptions in has been issued and duly indorsed to a
full, or promised to pay the same, are injured bona fide purchaser, without knowledge,
and prejudiced by the reduction of their actual or constructive, the latter cannot be
proportionate interest in the corporation; and, held liable, at least as against the
corporation, since he took the shares on
3. Present and future creditors are deprived of
reliance of the misrepresentation made by
the corporate assets for the protection of their
the corporation that the stock certificate is
interest.
valid and subsisting. This is because a
- Corporation is prejudiced corporation is prohibited from issuing
certificates of stock until the full value of the
- Stockholders, dilution of interest subscriptions have been paid and could not,
therefore, deny the validity of the stock
- Creditors are prejudiced, virtue of right to look certificate it issued as against a purchaser
upon corporations properties for the in good faith. Thus, Ballentine states that
satisfaction of their claims whether there is any liability on the part of
the transferee of watered stock is made to
67
 depend upon whether he acquired the same E
without notice, either as purchaser or donee. If
he had knowledge thereof, he is subject to the There is a denial of pre-emptive rights and
same liability as his transferor. directors A,B,C,D,E decided to issue the
remaining 50M and subscribed for 10M each at
 What is the nature of the liability of the 2 per share.
corporate directors consenting to the issuance
of watered stocks and the extent of their  Is there stock watering if the fair market
liabilities? value is 12.00?

- Solidarily liable with the holder of the watered - No stock watering

stocks to the extent of the water from said
- The basis is the par value
shares of stocks
- The shares where in fact paid more than the
 Will all the directors be liable? What if you
objected will you also be liable? par value indicated in the articles of
incorporation
- If you do not issue a written objection, you are
3 days later they sold their 10M share for
still liable
P11.00 each, therefore making a profit.
- Even passive directors may be liable
 Can you question there actuations? What
- Those having knowledge thereof, but did not would be the cause of action?
interpose their objection shall be liable
- It may be questioned.
- Section 65 provides:
- Duty of loyalty or fiduciary duty as such
directors
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of - They cannot advance their own motives to
stocks for a consideration less than its par or the damage prejudice of the corporation
issued value or for a consideration in any form which they represents and stockholders as
other than cash, valued in excess of its fair a whole instead of it being sold outside
value, or who, having knowledge thereof, does
not forthwith express his objection in writing - 500M would have gone to the coffers of the
and file the same with the corporate secretary, corporation, 500M should be there for the
shall be solidarily, liable with the stockholder protection of creditors
concerned to the corporation and its creditors
for the difference between the fair value
- They are placed in a fiduciary relationship
received at the time of issuance of the stock
and the par or issued value of the same. (n)
- Sila lang ba ang kikita, pano naman yung
corporation, opportunity na yun para kumita
 ACS-100M 100M/S PAR VALUE-
1.00  When are unpaid subscriptions due and
payable?
SUBSCRIBED-50M FAIR
MARKET VALUE-12.00/S - Section 67. Payment of balance of
UNSUBSCRIBED-50M subscription. - Subject to the provisions of
the contract of subscription, the board of
A directors of any stock corporation may at
any time declare due and payable to the
B corporation unpaid subscriptions to the
capital stock and may collect the same or
C such percentage thereof, in either case with
accrued interest, if any, as it may deem
D
necessary.
68
 Payment of any unpaid subscription or any  Procedures in case of sale of delinquent
percentage thereof, together with the interest stocks
accrued, if any, shall be made on the date
specified in the contract of subscription or on Section 68. Delinquency sale. - The board of
the date stated in the call made by the board. directors may, by resolution, order the sale of
Failure to pay on such date shall render the delinquent stock and shall specifically state the
entire balance due and payable and shall amount due on each subscription plus all accrued
make the stockholder liable for interest at the interest, and the date, time and place of the sale
legal rate on such balance, unless a different which shall not be less than thirty (30) days nor
rate of interest is provided in the by-laws, more than sixty (60) days from the date the stocks
computed from such date until full payment. If become delinquent.
within thirty (30) days from the said date no
payment is made, all stocks covered by said Notice of said sale, with a copy of
subscription shall thereupon become the resolution, shall be sent to every
delinquent and shall be subject to sale as delinquent stockholder either personally or
hereinafter provided, unless the board of by registered mail. The same shall
directors orders otherwise. (38) furthermore be published once a week for
two (2) consecutive weeks in a newspaper
 Remedies of the corporation to enforce of general circulation in the province or city
payment of unpaid subscription where the principal office of the corporation
is located.
1. By board action in accordance with the
procedure laid down in sections 67 to 69 of the Unless the delinquent stockholder
code pays to the corporation, on or before the
2. By a collection case in court as provided for in date specified for the sale of the delinquent
section 70 stock, the balance due on his subscription,
plus accrued interest, costs of
 Are subscribers of shares of stocks not fully advertisement and expenses of sale, or
paid, liable to pay interest? unless the board of directors otherwise
orders, said delinquent stock shall be sold
- General rule is they are not liable to pay at public auction to such bidder who shall
interest because the code says unless offer to pay the full amount of the balance
requires in the by-laws on the subscription together with accrued
- Aside from the mandate of the law that interest, costs of advertisement and
subscribers to shares of stock must pay the expenses of sale, for the smallest number
full value of their subscription, they may of shares or fraction of a share. The stock
likewise be required to pay interest on all so purchased shall be transferred to such
unpaid subscriptions if so imposed in the purchaser in the books of the corporation
contract or in the corporate by-laws at such and a certificate for such stock shall be
rate as may be indicated thereat or the legal issued in his favor. The remaining shares, if
rate if not so fixed. Unless so required or any, shall be credited in favor of the
provided, however, subscribers to shares of delinquent stockholder who shall likewise
stock, not fully paid, are not liable to pay be entitled to the issuance of a certificate of
interest on their unpaid subscriptions. The stock covering such shares.
code thus provides:
Should there be no bidder at the
Section 66. Interest on unpaid public auction who offers to pay the full
subscriptions. - Subscribers for stock shall pay amount of the balance on the subscription
to the corporation interest on all unpaid together with accrued interest, costs of
subscriptions from the date of subscription, if advertisement and expenses of sale, for the
so required by, and at the rate of interest fixed smallest number of shares or fraction of a
in the by-laws. If no rate of interest is fixed in share, the corporation may, subject to the
the by-laws, such rate shall be deemed to be provisions of this Code, bid for the same,
the legal rate. (37) and the total amount due shall be credited
as paid in full in the books of the
corporation. Title to all the shares of stock
 Until a call is made, they are not due and
covered by the subscription shall be vested
payable, but still subject to the provisions of
in the corporation as treasury shares and
the contracts
may be disposed of by said corporation in

69
 accordance with the provisions of this Code. subscription shall be vested in the
(39a-46a) corporation as treasury shares and may be
disposed of by said corporation in
 Who is the winning bidder in a delinquency accordance with the provisions of this Code.
sale? (39a-46a)

- Bidder who shall “offer to pay the full amount - There was no unrestricted retained earnings
of the balance on the subscription together in the example given therefore the
with accrued interest, cost of advertisement corporation cannot bid , section 41, it states
and expenses of sale, for the smallest number that:
of shares or fraction of a share.”
Section 41. Power to acquire own
X Co. has 1M authorized capital stock shares. - A stock corporation shall have the
power to purchase or acquire its own
shares for a legitimate corporate purpose or
500 thousand is already subscribed
purposes, including but not limited to the
following cases: Provided, That the
A subscribed to 100 thousand shares, 50 corporation has unrestricted retained
thousand is already paid leaving 50 thousand earnings in its books to cover the shares to
unpaid be purchased or acquired:

The corporation is at a loss of 250 thousand, 1. To eliminate fractional shares arising out
the board decides to make a call for the of stock dividends;
payment of the unpaid subscriptions, however
A could not paid, hence declared delinquent
2. To collect or compromise an
and decides to sell his share at a public
indebtedness to the corporation, arising out
auction
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
55 thousand is to be paid, remaining balance sold during said sale; and
plus cost and expenses
3. To pay dissenting or withdrawing
BIDDERS: stockholders entitled to payment for their
shares under the provisions of this Code.
X-55K FOR 99,900 shares (a)

Y-55K FOR 99,500 shares  What if the shares of A were sold without
compliance of the requirements? May A
Z-55K FOR 99,000 shares (winning bidder) question the sale?

 Assume there is no bidder, may the - The law prescribes two conditions before an
corporation bid? action to recover delinquent stocks
irregularly sold may be allowed. These are:
- NO. It cannot bid because the law says,
subject to the provisions of this CODE. Section 1. The party seeking to maintain such action
68 and 41 should be reconciled. Section 68 first pays or tenders to the party holding the
states that: stock the sum for which the same was sold,
with interest from the date of the sale at the
Should there be no bidder at the legal rate; and,
public auction who offers to pay the full 2. The action shall be commenced by the filing
amount of the balance on the subscription of a complaint within six months from the
together with accrued interest, costs of date of the sale.
advertisement and expenses of sale, for the
smallest number of shares or fraction of a - The reason for such is the stability of
share, the corporation may, subject to the transactions of the shares of stock
provisions of this Code, bid for the same,
and the total amount due shall be credited as  Suppose in the example, since there are no
paid in full in the books of the corporation. Title unrestricted retained earnings, hence the
to all the shares of stock covered by the
70
 corporation cannot bid, is the corporation left - Trust Fund Doctrine- subscription to the
without any recourse? capital of a corporation constitute a fund to
which the creditors have a right to look for
Section 70. Court action to recover unpaid satisfaction of their claims and that the
subscription. - Nothing in this Code shall prevent the assignee in insolvency can maintain an
corporation from collecting by action in a court of action upon any unpaid stock subscription
proper jurisdiction the amount due on any unpaid in order to realize assets for the payment of
subscription, with accrued interest, costs and its debts.
expenses. (49a)
 PNB vs. Bitulak
 Velasco vs. Poizat
- Where it not for the promise, the defendants
- The subscriber is as much bound to pay the would have not subscribed
amount of the share subscribed by him as he
would be to pay any other debt, and the right - Trust Fund Doctrine, it is established
of the company to demand payment is no less doctrine that subscriptions to the capital of a
incontestable. corporation constitute a fund to which
- Two available remedies: the first and most creditors have a right to look for satisfaction
special remedy given by the statute consist in of their claims and that the assignee in
permitting the corporation to put up the unpaid insolvency can maintain an action upon any
stock and dispose of it for the account of the unpaid stock subscription in order to realize
delinquent subscriber. The other remedy is by assets for the payment of its debts.
action in court.
- A corporation has no power to release an
 De Silva vs. Aboitiz and Co. original subscriber to its capital stock from
the obligation of paying for his shares,
without a valuable consideration for such
- Discretionary on the part of the board of
release; and as against creditors a
directors to do whatever is provided in the said reduction of the capital stock can take place
article relative to the application of the part of only in the manner and under the conditions
the 70 percent of the profit distributable in prescribed by the statute or the charter or
equal parts on the payment of the shares the articles of incorporation.
subscribed to and fully paid
 Edward Keller and Co. vs. COB
 Lingayen Gulf vs. Baltazar
- May the stockholder be held liable for the
- Exception: pursuant to a bona fide
debts of the corporation? YES. To the
compromise or to set off a debt due from the extent of their unpaid subscription
corporation, a release supported by
consideration, will be effectual as against - As to the liability of the stockholders, it is
dissenting stockholders and subsequent and settled that a stockholder is personally liable
existing creditors. A release which might for the financial obligations of a corporation
originally have been held invalid may be to the extent of his unpaid subscriptions
sustained after a considerable lapse of time
 Is there a prescriptive period wherein a
 Apocada vs. NLRC demand for unpaid subscription should be
made?
- Set-off is without any legal basis
- It was premature - NO. Garcia vs. Suarez case
- Unpaid subscriptions will become due and
payable only upon certain instance  Garcia vs. Suarez
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it - Never became due and payable until there
will not be demandable or payable at all is a call made
- Prescription will not run until and unless
 Lumanlan vs. Cura there is demand

71
 - Prescription should be determined from the Section 43. Power to declare
time demand has been made and not from the dividends. - The board of directors of a
time of subscription stock corporation may declare dividends out
of the unrestricted retained earnings which
 If declared delinquent, what would be the shall be payable in cash, in property, or in
effect as to the owner of said shares? stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
Section 71. Effect of delinquency. - No delinquent
stock shall first be applied to the unpaid
stock shall be voted for or be entitled to vote or to
balance on the subscription plus costs and
representation at any stockholder's meeting, nor shall
expenses, while stock dividends shall be
the holder thereof be entitled to any of the rights of a
withheld from the delinquent stockholder
stockholder except the right to dividends in accordance
until his unpaid subscription is fully paid:
with the provisions of this Code, until and unless he
Provided, further, That no stock dividend
pays the amount due on his subscription with accrued
shall be issued without the approval of
interest, and the costs and expenses of advertisement,
stockholders representing not less than two-
if any. (50a)
thirds (2/3) of the outstanding capital stock
- However if the shares are not delinquent, at a regular or special meeting duly called
subscribers to the capital of a corporation, for the purpose. (16a)
though not fully paid, are entitled to all the
rights of a stockholder, according to section 72 Stock corporations are prohibited
from retaining surplus profits in excess of
Section 72. Rights of unpaid shares. - one hundred (100%) percent of their paid-in
Holders of subscribed shares not fully paid capital stock, except: (1) when justified by
which are not delinquent shall have all the definite corporate expansion projects or
rights of a stockholder. (n) programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
 May the rules governing delinquency sale
any financial institution or creditor, whether
apply to a non-stock corporation? Are there
local or foreign, from declaring dividends
unpaid shares in a non-stock corporation?
without its/his consent, and such consent
has not yet been secured; or (3) when it can
- Rules governing stock corporations, when be clearly shown that such retention is
applicable, also applies to a non-stock necessary under special circumstances
corporation obtaining in the corporation, such as when
- There are delinquent shareholders also in a there is need for special reserve for
non-stock corporation. Example is probable contingencies. (n)
membership dues
 When a certificate of stock is loss or
 A corporation paid 50% of subscription and destroyed, what must be done by the owner
was later on declared delinquent when he thereof?
could not pay upon call; A is also a director of
the corporation. Will A, upon declaration of Section 73. Lost or destroyed certificates. - The
delinquency , still be able to exercise his right following procedure shall be followed for the
as a director? issuance by a corporation of new certificates of
stock in lieu of those which have been lost, stolen or
- Yes, he loses all his right as a stockholder destroyed:
except his right to receive dividends
- He remains to be a director, only qualification 1. The registered owner of a
to be a director is he must own at least 1 share certificate of stock in a corporation or his
and since it still stands in his name pending legal representative shall file with the
the sale, he remains to be and act as a corporation an affidavit in triplicate setting
director forth, if possible, the circumstances as to
- Even if there is sale, he may still be director how the certificate was lost, stolen or
because the winning bidder may not bid or pay destroyed, the number of shares
for all the shares or there might be remaining represented by such certificate, the serial
shares, which would be credited in favor of the number of the certificate and the name of
delinquent stockholder the corporation which issued the same. He
- Section 43 provides:

72
 shall also submit such other information and - The code provides that:
evidence which he may deem necessary;
after the expiration of one (1) year
2. After verifying the affidavit and other from the date of the last publication, if no
information and evidence with the books of the contest has been presented to said
corporation, said corporation shall publish a corporation regarding said certificate of
notice in a newspaper of general circulation stock, the right to make such contest shall
published in the place where the corporation be barred and said corporation shall cancel
has its principal office, once a week for three in its books the certificate of stock which
(3) consecutive weeks at the expense of the has been lost, stolen or destroyed and issue
registered owner of the certificate of stock in lieu thereof new certificate of stock,
which has been lost, stolen or destroyed. The
notice shall state the name of said corporation,  Could it be issued earlier than 1 year?
the name of the registered owner and the
serial number of said certificate, and the
- Yes it can be, the code states that:
number of shares represented by such
certificate, and that after the expiration of one
(1) year from the date of the last publication, if unless the registered owner files a
no contest has been presented to said bond or other security in lieu thereof as may
corporation regarding said certificate of stock, be required, effective for a period of one (1)
the right to make such contest shall be barred year, for such amount and in such form and
and said corporation shall cancel in its books with such sureties as may be satisfactory to
the certificate of stock which has been lost, the board of directors, in which case a new
stolen or destroyed and issue in lieu thereof certificate may be issued even before the
new certificate of stock, unless the registered expiration of the one (1) year period
owner files a bond or other security in lieu provided herein: Provided, That if a
thereof as may be required, effective for a contest has been presented to said
period of one (1) year, for such amount and in corporation or if an action is pending in
such form and with such sureties as may be court regarding the ownership of said
satisfactory to the board of directors, in which certificate of stock which has been lost,
case a new certificate may be issued even stolen or destroyed, the issuance of the new
before the expiration of the one (1) year period certificate of stock in lieu thereof shall be
provided herein: Provided, That if a contest suspended until the final decision by the
has been presented to said corporation or if an court regarding the ownership of said
action is pending in court regarding the certificate of stock which has been lost,
ownership of said certificate of stock which stolen or destroyed.
has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu  May corporate officers be held liable for the
thereof shall be suspended until the final unauthorized issuance?
decision by the court regarding the ownership
of said certificate of stock which has been lost, - YES, the code provides that:
stolen or destroyed.
Except in case of fraud, bad faith,
Except in case of fraud, bad faith, or or negligence on the part of the corporation
negligence on the part of the corporation and and its officers, no action may be brought
its officers, no action may be brought against against any corporation which shall have
any corporation which shall have issued issued certificate of stock in lieu of those
certificate of stock in lieu of those lost, stolen lost, stolen or destroyed pursuant to the
or destroyed pursuant to the procedure above- procedure above-described. (R.A. 201a)
described. (R.A. 201a)
 Assuming the last paragraph is not there;
- The rationale of the above-quoted law is to would it be not the same, that they should
avoid duplication of certificates of stock and be held liable due to fraud, bad faith or
the avoidance of fictitious and fraudulent negligence?
transfers.
- YES. Section 31 provides that:
 When will the replacement certificate be
issued?
Section 31. Liability of directors,
trustees or officers. - Directors or trustees
73
 who willfully and knowingly vote for or assent 7. To exercise their appraisal right in
to patently unlawful acts of the corporation or accordance with the provision of section 81
who are guilty of gross negligence or bad faith and in those instance allowed by law such
in directing the affairs of the corporation or as section 42 and 105;
acquire any personal or pecuniary interest in 8. To institute and file a derivative suit;
conflict with their duty as such directors or 9. To recover shares of stock unlawfully sold
trustees shall be liable jointly and severally for for delinquency as may be allowed under
all damages resulting there from suffered by section 69;
the corporation, its stockholders or members 10. To inspect the books of the corporation
and other persons. subject only to the limitations imposed by
section 73;
When a director, trustee or officer 11. To be furnished by the most recent financial
attempts to acquire or acquires, in violation of statement of the corporation as by section
his duty, any interest adverse to the 75;
corporation in respect of any matter which has 12. To be issued a new stock certificate in lieu
been reposed in him in confidence, as to of the lost or destroyed one subject to the
which equity imposes a disability upon him to procedure laid down in section 73;
deal in his own behalf, he shall be liable as a 13. To have the corporation dissolved under
trustee for the corporation and must account section 118 to 121, and section 105 in a
for the profits which otherwise would have close corporation;
accrued to the corporation. (n) 14. To participate in the distribution of the
assets of the corporation upon dissolution
under section 122;
 Certificate of stock was lost, the owner
15. In the case of a close corporation, to
transfers his shares by way of a notarized
petition the SEC to arbitrate in the event of
deed will it be valid?
a deadlock as allowed under section 104;
and,
- He cannot do so, if a certificate of stock is 16. Also in the case of a close corporation, to
issued by a corporation, a mere notarized withdraw therefrom, for my reason, and
deed will not suffice compel the corporation to purchase his
- Deed of assignment was not sufficient since shares as provided for under section 105.
there was no endorsement (Rural Bank of
Lipa vs. CA)

 Rights and liabilities of stockholders

- RIGHTS

1. Participation in the management of the

corporate affairs by exercising their right to
vote and be voted upon either personally or by
proxy as provided for under sections 50 and
58 of the code;
2. To enter into a voting trust agreement subject
to the procedure, requirements and limitations
imposed under section 50;
3. To receive dividends and to compel their
declaration if warranted under section 43;
4. To transfer shares of stock subject only to
reasonable restrictions such as options and
preferences as may be allowed by law
inclusive of the right of the transferee to
compel the registration of the transfer in the
books of the corporation as provided for in
section 63;
5. To be issued a certificate of stock for fully
paid-up shares in accordance with 64;
6. To exercise pre-emptive rights as provided for
in section 39;

74
LIABILITIES Any officer or agent of the
corporation who shall refuse to allow any
1. To pay to the corporation the balance of his director, trustees, stockholder or member of
unpaid subscriptions subject to the provision of the corporation to examine and copy
section 67 to 70; excerpts from its records or minutes, in
2. To pay interest on his unpaid subscription if accordance with the provisions of this Code,
required by the by-laws or by the contract of shall be liable to such director, trustee,
subscription in accordance with section 66; stockholder or member for damages, and in
3. To answer to the creditors for the unpaid addition, shall be guilty of an offense which
portion of his subscription under the TRUST shall be punishable under Section 144 of
FUND DOCTRINE; this Code: Provided, That if such refusal is
4. To answer the “water” in his stocks as made pursuant to a resolution or order of
provided for in section 65; the board of directors or trustees, the
5. To be liable, as general partners, for all debts, liability under this section for such action
liabilities and damages of a determinable shall be imposed upon the directors or
corporation as envisioned under section 21 trustees who voted for such refusal: and
(corporation by estoppel); and, Provided, further, That it shall be a defense
6. To be personally liable for torts, in the event to any action under this section that the
that a stockholder in a close corporation person demanding to examine and copy
actively participates in the management of the excerpts from the corporation's records and
corporate affairs. minutes has improperly used any
information secured through any prior
examination of the records or minutes of
CORPORATE BOOKS AND RECORDS
such corporation or of any other
corporation, or was not acting in good faith
 What are these books and records that are or for a legitimate purpose in making his
required to be kept? demand.

Section 74. Books to be kept; stock transfer agent. - Stock corporations must also keep
Every corporation shall keep and carefully a book to be known as the "stock and
preserve at its principal office a record of all transfer book", in which must be kept a
business transactions and minutes of all meetings record of all stocks in the names of the
of stockholders or members, or of the board of stockholders alphabetically arranged; the
directors or trustees, in which shall be set forth in installments paid and unpaid on all stock for
detail the time and place of holding the meeting, which subscription has been made, and the
how authorized, the notice given, whether the date of payment of any installment; a
meeting was regular or special, if special its statement of every alienation, sale or
object, those present and absent, and every act transfer of stock made, the date thereof,
done or ordered done at the meeting. Upon the and by and to whom made; and such other
demand of any director, trustee, stockholder or entries as the by-laws may prescribe. The
member, the time when any director, trustee, stock and transfer book shall be kept in the
stockholder or member entered or left the meeting principal office of the corporation or in the
must be noted in the minutes; and on a similar office of its stock transfer agent and shall be
demand, the yeas and nays must be taken on any open for inspection by any director or
motion or proposition, and a record thereof stockholder of the corporation at reasonable
carefully made. The protest of any director, hours on business days.
trustee, stockholder or member on any action or
proposed action must be recorded in full on his
No stock transfer agent or one
demand.
engaged principally in the business of
registering transfers of stocks in behalf of a
The records of all business stock corporation shall be allowed to
transactions of the corporation and the operate in the Philippines unless he secures
minutes of any meetings shall be open to a license from the Securities and Exchange
inspection by any director, trustee, stockholder Commission and pays a fee as may be
or member of the corporation at reasonable fixed by the Commission, which shall be
hours on business days and he may demand, renewable annually: Provided, That a stock
in writing, for a copy of excerpts from said corporation is not precluded from
records or minutes, at his expense. performing or making transfer of its own
stocks, in which case all the rules and
regulations imposed on stock transfer
75
 agents, except the payment of a license fee include financial statements, duly signed
herein provided, shall be applicable. (51a and and certified by an independent certified
32a; P.B. No. 268.) public accountant.

 To summarize: However, if the paid-up capital of the

corporation is less than P50,000.00, the
1. Records of all business transactions which financial statements may be certified under
include, among others, journals, ledger, oath by the treasurer or any responsible
contracts, vouchers and receipts, financial officer of the corporation. (n)
statements and other books of accounts,
income tax returns, and voting trust  May books and records be examined? Who
agreements which must be kept and carefully may examine? Can they copy them? In
preserved at its principal office; whose expense?
2. Minutes of all meetings of stockholders or
members and of the directors or trustees - Yes, according to the code:
setting forth in detail the date, time, and place
of meeting, how authorized, the notice given
“The records of all business
whether the same be regular or special, and if
transactions of the corporation and the
special, the purpose thereof shall be specified,
minutes of any meetings shall be open
those present and absent, and every act done
to inspection by any director, trustee,
or ordered done there at which ,must likewise
stockholder or member of the
be kept at the principal office of the
corporation at reasonable hours on
corporation; and,
business days and he may demand, in
3. Stock and transfer book showing the names of
writing, for a copy of excerpts from said
the stockholders, the amount paid or unpaid
records or minutes, at his expense. “
on all stocks for which subscription has been
made, a statement of every alienation, sale or
transfer of stock made, if any the date thereof,  Is there any defense available that could be
and by whom and to whom made which must raised? By the corporate officers to justify
also be kept at the principal office of the the refusal?
corporation or in the office of its stock transfer
agent. - Yes, the code provides that:

These corporate books and records, inclusive “and Provided, further, That it shall
of all business transactions and minutes of be a defense to any action under this
meetings, are subject to inspection by any of section that the person demanding to
the directors, trustees, stockholders or examine and copy excerpts from the
members of the corporation at reasonable corporation's records and minutes has
hours on business days and a copy of improperly used any information
excerpts of said records may be demanded. In secured through any prior examination
fact, in so far as financial statement is of the records or minutes of such
concerned, the Code clearly provides: corporation or of any other corporation,
or was not acting in good faith or for a
Section 75. Right to financial legitimate purpose in making his
statements. - Within ten (10) days from receipt demand.”
of a written request of any stockholder or
member, the corporation shall furnish to him  What is the stock and transfer? Where
its most recent financial statement, which shall should stock and transfer be kept? Can it be
include a balance sheet as of the end of the kept elsewhere?
last taxable year and a profit or loss statement
for said taxable year, showing in reasonable “Stock corporations must also keep
detail its assets and liabilities and the result of a book to be known as the "stock and
its operations. transfer book", in which must be kept a
record of all stocks in the names of the
At the regular meeting of stockholders or stockholders alphabetically arranged;
members, the board of directors or trustees the installments paid and unpaid on all
shall present to such stockholders or members stock for which subscription has been
a financial report of the operations of the made, and the date of payment of any
corporation for the preceding year, which shall installment; a statement of every

76
 alienation, sale or transfer of stock made, - Disclosure of any matter that have to do
the date thereof, and by and to whom with increasing and decreasing
made; and such other entries as the by- - If not “kulong” violation of securities and
laws may prescribe. The stock and transfer regulation act
book shall be kept in the principal office of
the corporation or in the office of its stock  Why is this right of inspection granted to a
transfer agent and shall be open for stockholder?
inspection by any director or stockholder of the
corporation at reasonable hours on
business days. “ - The basis of the right of the stockholder to
inspect the books and records of the
corporation for a proper purpose is to
 Stock and transfer agent protect his interest as a stockholder. Thus, it
has been said that:
- Records every movement
- Person who monitors movement by the “The right of the shareholders to
minutes or by the hours ascertain how the affairs of his
- Non-stock corporation- stock and transfer company are being conducted by
books its directors and officers is founded
- Club share- membership by his beneficial interest through
ownership of shares and the
 Are stockholders entitled to financial necessity of self-protection.
statements? Managers of some corporations
deliberately keep the shareholders
- Yes, they are entitled to a copy, the code in ignorance or under
provides that: misapprehension as to the true
condition of its affairs. Business
prudence demands that the investor
Section 75. Right to financial
keep a watchful eye on the
statements. - Within ten (10) days from receipt
management and the condition of
of a written request of any stockholder or
the business. Those in charge of
member, the corporation shall furnish to him
the company may be guilty of gross
its most recent financial statement, which shall
incompetence or dishonesty for
include a balance sheet as of the end of the
years and escape liability if the
last taxable year and a profit or loss statement
shareholders cannot inspect the
for said taxable year, showing in reasonable
records and obtain information.”
detail its assets and liabilities and the result of
its operations.
 Is there any distinction of the right of
inspection of a stockholder and that of a
At the regular meeting of stockholders
director?
or members, the board of directors or trustees
shall present to such stockholders or members
a financial report of the operations of the - Yes, as compared to a stockholder or
corporation for the preceding year, which shall member, the right of a director or trustee to
include financial statements, duly signed and inspect and examine corporate books and
certified by an independent certified public records is considered absolute and
accountant. unqualified and without regard to motive.
This is because a director supervises,
directs and manages corporate business
However, if the paid-up capital of the
and it is necessary that he be equipped with
corporation is less than P50,000.00, the
all the information and data with regard to
financial statements may be certified under
the affairs of the company in order that he
oath by the treasurer or any responsible officer
may manage and direct its operations
of the corporation. (n)
intelligently and according to his best
judgment in the interest of all the
- Audited financial statement filed in the SEC, stockholders he represents. Thus, while
120 days from the end of the final year, or stockholders and members are entitled to
must be filed on or before April of each year inspect and examine the books and records
- Must be stamp received by the BIR as provided in sections 74 and 75 they may
not gain access to highly sensitive and
 Those in the stock exchange confidential information. In the case of
77
 directors. “it is not denied” that they have such  W.G. Philpotts vs. Philippine Manufacturing
access. This would include, among others, Co.

a. Marketing strategies and pricing structure; - The right of inspection given to a

b. Budget for expansion and diversification; stockholder can be exercised either by
c. Research and development; himself or by any proper representative or
d. Sources of funding, availability of attorney-in-fact, and either with or without
personnel, proposals of mergers or tie-ups the attendance of the stockholder
with other firms - The right may be regarded as personal, in
the sense that only a stockholder may enjoy
 May this right be exercised, other than by the it; but the inspection and examination may
stockholders themselves? be made by another. Otherwise it would be
unavailing in many instances.
- Yes, while the right is founded on stock
ownership thus personal in nature it may be o Note: Usually hires an auditor or
made by the stockholder’s agent or accountant to safeguard his interest
representative since it may be unavailing in
many instances  Pardo vs. Hercules Lumber Co.

 What if the right of the stockholder to inspect is - The law is clear, it may be exercised during
denied? What is his remedy? reasonable hours on any business days, the
by-laws cannot deny this right all together
1. Mandamus - The general right given by the statute may
2. Damages either against the corporation or not be lawfully abridged to the extent
responsible officer who refused the inspection attempted in this resolution. It may be
3. Criminal complaint for violation of his right to admitted that the officials in charge of a
inspect and copy excerpts of all business corporation may deny inspection when
transactions and minutes of meeting. Section sought at unusual hours or under other
74 provides that Any officer or agent of the improper conditions; but neither the
corporation who shall refuse to allow any executive officers nor the board of directors
director, trustees, stockholder or member of have the power to deprive a stockholder of
the corporation to examine and copy excerpts the right altogether.
from its records or minutes, in accordance with - The corporation, or its responsible directors
the provisions of this Code, shall be liable to and officers cannot unduly restrict this right
such director, trustee, stockholder or member of inspection and may not arbitrarily set a
for damages, and in addition, shall be guilty of few days of the year within which the
an offense which shall be punishable under stockholder may make the inspection.
Section 144 of this Code. The latter provision - A by-law unduly restricting the right of
imposes a penalty of a fine of not less than inspection is undoubtedly invalid
P1,000 but not more than P10,000 or an
imprisonment for not less than 30 days but not  Vegaruth vs. Isabela Sugar Co.
more than 5 years, or both, at the discretion of
the court. If the refusal is pursuant to a
resolution or order of the board, the liability - Directors of a corporation have the
shall be imposed upon the directors or unqualified right to inspect the books and
trustees who voted for such refusal. records of the corporation at all reasonable
hours.
- We do not conceive, however, that a
 Defense of the responsible corporate officer
director or stockholder has any absolute
right to secure certified copies of the
1. That the person demanding has improperly minutes of the corporation until these
used any information secured through any minutes have been written up and approved
prior examination of the records or minutes of by the directors.
such corporation or of any other corporation;
2. That he was not acting in good faith or for a
 May a stockholder of a holding company
legitimate purpose in making his demand;
inspect the books and records of a
3. The right is limited or restricted by special law
subsidiary?
or the law of it creation.

- It depends
78
- The right of the stockholders to examine - Admittedly, he sought to be a stockholder in
corporate books extends to wholly-owned order to pry into transactions entered into by
subsidiary which is completely under the the respondent bank even before he
control and management of the parent became a stockholder. His obvious purpose
company where he is such a stockholder. But was to arm himself with materials he can
if the two entities (subsidiary and parent) are use against the respondent bank for acts
legally being operated as separate and distinct done by the latter when the petitioner was a
entities, there is no such right of inspection on total stranger to the same.
the part of the stockholder of the parent - Bank was created by a special law, it has its
company. own charter and primarily governed by the
law creating them
AYALA- HOLDING COMPANY/PARENT - The bank is only subject to the inspection of
COMPANY the Central Bank and any information
pertaining to the bank is confidential and
SUBSIDIARIES: BPI/GLOBE/AYALA LAND shall not be revealed to any person other
(not wholly-owned subsidiary) than the President of the Philippines, the
Secretary of Finance and the Board of
Directors, nor shall any information relative
o HOLD ATLEAST 50 +1 shares in order to
to the funds in its custody, its current
be a PARENT COMPANY accounts or deposits belonging to private
individuals, corporations or other entities
 A, is a stockholder of Ayala, does he have a except by order of a Court of Competent
right to inspect the records of its subsidiaries? Jurisdiction, hence inspection sought to by
the petitioner is violative of the provisions of
- If wholly owned pwede, but its subsidiaries are its charter and is even subject to penal
not wholly owned kaya hindi pwede sanctions

 Gokongwei vs. SEC  Assuming you are a stockholder of PNB,

and then it was privatized, may you already
- San Miguel corporation owns all of the shares have the right to inspect?
of stock of San Miguel International
- It is wholly-owned - No, unless its charter has been altered or
- It would be in accord with equity, good faith repealed it is still subject to the same law
and fair dealing to construe the statutory right
of petitioner as stockholder to inspect the  3 stages in the life of a corporation
books and records of such wholly-owned
subsidiary which are in respondent - Formation or birth
corporation’s possession and control - We now discuss the union of the
corporation
 If being operated as separate and distinct - The last would be its death or dissolution
corporations, there is no such right
 Telecommunications- special franchise, it is a MERGER AND CONSOLIDATION
legislative grant
 Merger and consolidation
 Gonzales vs. PNB
- In corporate parlance it is called spin-off
- Provisions of the old law was unqualified,
- Almost a year ago San Miguel separated its
when it granted stockholders the right to
brewery business
inspect
- San Miguel Corporation is now a full time
- However, whole seemingly enlarging the right
holding company; it can later on absorb the
of inspection, the new code has prescribed
company
limitations to the same. It is now expressly
- Corporations are granted by the code to
required as a condition for such examination
merge or consolidate
that the one requesting it must not have been
- most common type of corporate recognition
guilty of using improperly any information
secured through a prior examination and that - not the same in every case
the person asking for such examination must - but most common in the weal financial or
be acting in good faith and for a legitimate insolvent condition, aim is to bring it back to
purpose in making his demand its financial capability
79
 - also a method of recapitalization B issues shares of stocks in exchange of
the transfer
o purchase and sale of corporate assets is
another form of corporate reorganization A is then dissolved and B SURVIVES

 How do you value the assets of the merging o Parties to a merger are called
corporation, do you consider goodwill? constituent corporation
 First secure favorably recommendation of
government agency  Consolidation

Section 79. Effectivity of merger or - The uniting or amalgamation of two or more

consolidation. - The articles of merger or of existing corporations to form a new
consolidation, signed and certified as herein above corporation
required, shall be submitted to the Securities and - In merger there is a surviving corporation,
Exchange Commission in quadruplicate for its the others are dissolved, while in
approval: Provided, That in the case of merger or consolidation, all constituent are dissolved
consolidation of banks or banking institutions, and a new one organized
building and loan associations, trust companies,
insurance companies, public utilities, educational
A B
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the C
corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall issue  Like all other corporate acts, it emanates
a certificate of merger or of consolidation, at which from the board
time the merger or consolidation shall be effective.
1. The board of directors or trustees of each
If, upon investigation, the Securities constituent corporations shall approve a
and Exchange Commission has reason to plan of merger or consolidation setting forth
believe that the proposed merger or the matters required in section 76;
consolidation is contrary to or inconsistent with 2. Approval of the plan by the stockholders
the provisions of this Code or existing laws, it representing 2/3 of the outstanding
shall set a hearing to give the corporations capital stock or 2/3 of the member in
concerned the opportunity to be heard. Written non-stock corporations of each of such
notice of the date, time and place of hearing corporations at separate corporate
shall be given to each constituent corporation meetings called for the purpose;
at least two (2) weeks before said hearing. 3. Prior notice of such meeting, with a copy
The Commission shall thereafter proceed as or summary of the plan of merger or
provided in this Code. (n) consolidation shall be given to all
stockholders or members at least two (2)
 Merger weeks prior to the scheduled meeting,
either personally or registered mail
- A union effected by absorbing one or more stating the purpose thereof;
existing corporations by another which 4. Execution of the articles of merger or
survives and continues the combined business consolidation by each constituent
- It is the uniting of two or more corporations by corporations to be signed by the president
the transfer of property to one of them which or vice-president and certified by the
continue in existence, the other or the others corporate secretary or assistant
being dissolved and merged therein. secretary setting forth the matters
required in section 78;
5. Submission of the articles of merger or
A B consolidation in quadruplicate to the
SEC subject to the requirement of section
A transfers all assets, properties, rights, 79 that if it involve corporations under the
obligations, liabilities to B direct supervision of any other government
agency or governed by special laws the
favorable recommendation of the
80
 government agency concerned shall first be the note shall be construed, under the very
secured and; provision of the merger agreement, as a
6. Issuance of the certificate of merger or reference to petitioner bank, “as if such
consolidation by the SEC at which time the reference (was a) direct reference to the
merger or consolidation shall be effective. If latter for all intents and purposes
the plan, however, is believed to be contrary to - Section 80 par. 4 states:
law, the SEC shall set a hearing to give the
corporations concerned an opportunity to be The surviving or the consolidated
heard upon proper notice and thereafter, the corporation shall thereupon and thereafter
Commission shall proceed as provided in the possess all the rights, privileges, immunities
Code. and franchises of each of the constituent
corporations; and all property, real or
 Although merger and consolidation is an personal, and all receivables due on
express power granted to corporation, it is whatever account, including subscriptions to
subject to limitations, as maybe proscribed by shares and other choses in action, and all
law and every other interest of, or belonging to,
or due to each constituent corporation, shall
 What would be the effect of merger or be deemed transferred to and vested in
consolidation? <sec. 80> such surviving or consolidated corporation
without further act or deed; and
1. There will only be a single corporation. In case
of merger, the surviving corporation or the - Without further acts, meaning it is automatic
consolidated corporation in case of
consolidation;  When do merger and consolidation become
2. The termination of the corporate existence of effective? What if the SEC fails to act on it
the constituent corporations, except that of the without fault attributable to the corporation
surviving corporation or the consolidated involved?
corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, - It will never become valid until and unless
privileges, immunities and powers and shall be the SEC gives its stamp of approval
subject to all the duties and liabilities of a - It will be up to the constituent corporation to
corporation organized under the Code; follow it up
4. The surviving or consolidated corporation shall - It will never take effect until the SEC gives
possess all the rights, privileges, immunities its approval and issues the articles of
and franchises of the constituent corporations, merger
and all property and all receivables due,
including subscriptions to shares and other o Granted 3 years to wing up unless there
choses in action, and every other interest of, is a trustee to wing up its affairs
or belonging to or due to the constituent
corporations shall be deemed transferred to  Could there be liquidators and winding up
and vested in such surviving or consolidated with respect to the corporation in
corporation without further act and deed; and, consolidation and merger?
5. The rights of creditors or any lien on the
property of the constituent corporations shall
- No, there is none
not be impaired by the merger or
- No assets properties or rights to collect,
consolidation.
they are transferred
- No debts and liabilities to pay because they
 Is there a liquidation process in case of merger become the liabilities of the surviving
or consolidation? corporations
- No properties transferred because they will
- None, there is nothing to distribute be the properties of the surviving
corporations
 Associated Bank vs. CA
o Hardest part is the financial act,
- By virtue of a specific provision in the merger regarding how many shares would be
agreement issued, probability of collection and the
- Although the subject promissory note names like
CBTC as the payee, the reference to CBTC in
81
 o In merger and consolidation, there is due  What if the principal office is changed from
diligence and an economist is usually QC to TAWI-TAWI, will it change or affect
hired the rights of A?

APPRAISAL RIGHT - To some it may change or restrict the rights

to others it may not
 Define appraisal
 How is the right exercised?
- Right to withdraw from the corporation and
demand payment of the fair value of his - According to section 82 of the code:
shares after dissenting from certain corporate
acts involving fundamental changes in Section 82. How right is exercised.
corporate structure <sec. 81> - The appraisal right may be exercised by
any stockholder who shall have voted
 What property? When may this right be against the proposed corporate action, by
exercises? making a written demand on the corporation
within thirty (30) days after the date on
- Section 81 provides: which the vote was taken for payment of the
fair value of his shares: Provided, That
failure to make the demand within such
Section 81. Instances of appraisal
period shall be deemed a waiver of the
right. - Any stockholder of a corporation shall
appraisal right. If the proposed corporate
have the right to dissent and demand payment
action is implemented or affected, the
of the fair value of his shares in the following
corporation shall pay to such stockholder,
instances:
upon surrender of the certificate or
certificates of stock representing his shares,
1. In case any amendment to the articles of the fair value thereof as of the day prior to
incorporation has the effect of changing or the date on which the vote was taken,
restricting the rights of any stockholder or excluding any appreciation or depreciation
class of shares, or of authorizing preferences in anticipation of such corporate action.
in any respect superior to those of outstanding
shares of any class, or of extending or
If within a period of sixty (60) days
shortening the term of corporate existence;
from the date the corporate action was
approved by the stockholders, the
2. In case of sale, lease, exchange, transfer, withdrawing stockholder and the corporation
mortgage, pledge or other disposition of all or cannot agree on the fair value of the shares,
substantially all of the corporate property and it shall be determined and appraised by
assets as provided in the Code; and three (3) disinterested persons, one of
whom shall be named by the stockholder,
3. In case of merger or consolidation. (n) another by the corporation, and the third by
the two thus chosen. The findings of the
 May it be exercised by a stockholder who majority of the appraisers shall be final, and
dissents to the act of a business other than a their award shall be paid by the corporation
primary purpose? within thirty (30) days after such award is
made: Provided, That no payment shall be
X Co. inc made to any dissenting stockholder unless
the corporation has unrestricted retained
earnings in its books to cover such
Principal office is in Quezon city, it was payment: and Provided, further, That upon
changed to Paranaque payment by the corporation of the agreed or
awarded price, the stockholder shall
A objects and makes a written demand. May forthwith transfer his shares to the
he exercise his right of appraisal? corporation. (n)

- It is not available in all amendments of the X Co.

corporation
- It must be changing or restricting the rights of Principal Office- QC, it was changed to
any stockholder Manila

82
 A objects and makes a written demand for named by the stockholder, another by the
payment of fair value of shares. Can he make corporation, and the third by the two thus
a demand of payment of shares? chosen. The findings of the majority of the
appraisers shall be final, and their award
 True or False, no stockholder in a stock shall be paid by the corporation within thirty
corporation can ever demand if the principal (30) days after such award is made:
office is amended, changing it from QC to Provided, That no payment shall be made
Manila to any dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover such
- False, a stockholder in a close corporation
payment: and Provided, further, That upon
may for any reason compel the close
payment by the corporation of the agreed or
corporation that he be paid the fair value of his
awarded price, the stockholder shall
shares
forthwith transfer his shares to the
corporation. (n)
Can he exercise his appraisal rights in the first
place? He hasn’t even paid his subscription in
Section 86. Notation on
full.
certificates; rights of transferee. - Within ten
(10) days after demanding payment for his
 May a stockholder who hasn’t paid his shares, a dissenting stockholder shall
subscription in full exercise his appraisal submit the certificates of stock representing
rights? his shares to the corporation for notation
thereon that such shares are dissenting
- Yes, he can exercise his appraisal rights, by shares. His failure to do so shall, at the
reconciling the provisions of section 72, option of the corporation, terminate his
section 82 and section 86 rights under this Title. If shares represented
by the certificates bearing such notation are
Section 72. Rights of unpaid shares. - transferred, and the certificates
Holders of subscribed shares not fully paid consequently cancelled, the rights of the
which are not delinquent shall have all the transferor as a dissenting stockholder under
rights of a stockholder. (n) this Title shall cease and the transferee
shall have all the rights of a regular
Section 82. How right is exercised. - stockholder; and all dividend distributions
The appraisal right may be exercised by any which would have accrued on such shares
stockholder who shall have voted against the shall be paid to the transferee. (n)
proposed corporate action, by making a
written demand on the corporation within thirty - Notation is not mandatory, it is even
(30) days after the date on which the vote was discretionary because the code provides “at
taken for payment of the fair value of his the option of the corporation” because it
shares: Provided, That failure to make the never issued one for that matter since the
demand within such period shall be deemed a subscriptions are not yet fully paid
waiver of the appraisal right. If the proposed
corporate action is implemented or affected,  May the corporation be compelled to pay
the corporation shall pay to such the interest of A
stockholder, upon surrender of the
certificate or certificates of stock 300 T, 150T, 150T and 0 unrestricted
representing his shares, the fair value retained earnings
thereof as of the day prior to the date on which
the vote was taken, excluding any appreciation
 No stockholder may be able to compel the
or depreciation in anticipation of such
corporation to pay the value of his shares if
corporate action.
the corporation has no unrestricted retained
earnings
If within a period of sixty (60) days
from the date the corporate action was
- False, a stockholder of a close corporation
approved by the stockholders, the withdrawing
may for any reason, provided only that the
stockholder and the corporation cannot agree
corporation has sufficient assets to cover its
on the fair value of the shares, it shall be
debts and liabilities
determined and appraised by three (3)
disinterested persons, one of whom shall be

83
 o General rule: there should be unrestricted Code, except the right of such
retained earnings stockholder to receive payment of the
o Exception: section 105 “close corporation” fair value thereof: Provided, That if the
dissenting stockholder is not paid the
 The procedure and requirements for the valid value of his shares within 30 days after
exercise of this rights are: the award, his voting and dividend rights
shall immediately be restored. (n)
1. The stockholder must have voted against the
proposed corporate action in any of the  How do you compare the rights of a
instances allowed by law for the exercise of stockholder, declared delinquent compared
the right of appraisal; to a dissenting stockholder exercising his
2. The written demand for payment must be appraisal rights
made by the dissenting stockholder within
thirty (30) days after the date on which the
vote was taken thereon. Failure to make the  What if a stockholder exercising his
demand within the said period shall be appraisal rights is also a director, will he
deemed a waiver on the part of the also lose his rights as a stockholder?
stockholder concerned to exercise his
appraisal right; - The shares remain to stand in his name
3. Surrender of the certificate of stock by the until he is paid, unless there is a stipulation
dissenting stockholder for notation in the in the by-laws
corporate books and the payment by the
corporation of the fair market value of the said  When may the right to be paid the value of
shares as of the day prior to the date on which his shares cease? Can he withdraw his right
the vote was taken. If the stockholder and the of appraisal?
corporation cannot agree on the fair market
value thereof, the same shall be determined in
accordance with the provision of paragraph 2 - Yes, he may withdraw, but there must be
of section 82; consent by the corporation as provided for
4. The fair value of the shares of the dissenting by section 83 of the code:
stockholder must be paid by the corporation
only if it has “unrestricted retained earnings” in Section 84. When right to payment
its books to cover such payment. If the ceases. - No demand for payment under
corporation has no unrestricted retained this Title may be withdrawn unless the
earnings, the dissenting stockholder may not, corporation consents thereto. If, however,
therefore, be able to effectively exercise his such demand for payment is withdrawn with
appraisal rights; the consent of the corporation, or if the
5. Upon payment of the shares by the proposed corporate action is abandoned or
corporation, the dissenting stockholder shall rescinded by the corporation or disapproved
transfer his shares to the corporation. by the Securities and Exchange
Commission where such approval is
 What would be the effect if the stockholder necessary, or if the Securities and
exercises his appraisal rights? What happens Exchange Commission determines that
to his voting and dividend rights if he exercises such stockholder is not entitled to the
his appraisal rights? appraisal right, then the right of said
stockholder to be paid the fair value of his
shares shall cease, his status as a
- It will be suspended, with a limitation of 30 stockholder shall thereupon be restored,
days, as provided for by section 83 of the and all dividend distributions which would
code: have accrued on his shares shall be paid to
him. (n)
Section 83. Effect of demand and
termination of right. - From the time of demand  Instances when the right of a dissenting
for payment of the fair value of a stockholder's stockholder to be paid the fair value of his
shares until either the abandonment of the shares ceases.
corporate action involved or the purchase of
the said shares by the corporation, all rights
1. When he withdraws his demand for
accruing to such shares, including voting
payment and the corporation consents
and dividend rights, shall be suspended in
thereto;
accordance with the provisions of this
84
2. When the proposed action is abandoned or such shares shall be paid to the
rescinded by the corporation; transferee. (n)
3. When the proposed action is disapproved by
the SEC where such approval is necessary; NON-STOCK CORPORATIONS
4. When the SEC determines that he is not
entitled to exercise his appraisal right;  What is a non-stock corporation?
5. When he fails to submit the stock certificate
within ten (10) days from demand to the
corporation for notation that such shares are - A non-stock corporation is one where no
dissenting shares; and, part of its income is distributable as
6. If the shares are transferred and the certificate dividends to its members, trustees, or
subsequently cancelled. officers, subject to the provisions of this
code on dissolution
 Who bears the cost of appraisal?
 What provision of the code will govern non-
stock corporations? Would the provision
- It depends
governing stock corporations also apply to
- The corporation bears the cost if non-stock corporations?

a. The price offered by the corporation is - Yes, 2nd par. Of section 87 provides:
lower than the fair value of the shares of
the dissenting stockholder as determined
by the appraisers; The provisions governing stock
b. Where an action is filed by the dissenting corporation, when pertinent, shall be
stockholder to recover such fair value and applicable to non-stock corporations, except
the refusal of the stockholder to receive as may be covered by specific provisions of
payment is found by the court to be this Title. (n)
justified.
 How is the right to vote exercised in a non-
- Dissenting stockholder will be liable for the stock corporation compared to a stock
cost and expenses of appraisal when corporation

a. When the price offered by the corporation

is approximately the same as the fair value  May a member in a non-stock corporation
ascertained by the appraisers; vote cumulatively?
b. Where the action filed by the dissenting
stockholder and his refusal to accept - General rule is NO
payment is found by the court to be
unjustified.  May it be granted or allowed by the by-
laws?
 The dissenting stockholder may also sell,
transfer or assign his shares - Yes

Section 86. Notation on certificates;  May the right to cumulative voting be denied
rights of transferee. - Within ten (10) days after in a stock corporation?
demanding payment for his shares, a
dissenting stockholder shall submit the - No, Doctrine of Limited Capacity
certificates of stock representing his shares to
the corporation for notation thereon that such
shares are dissenting shares. His failure to do  May members in a non-stock corporation
so shall, at the option of the corporation, vote by proxy?
terminate his rights under this Title. If shares
represented by the certificates bearing - Yes, section 89 provides that:
such notation are transferred, and the
certificates consequently cancelled, the “Unless otherwise provided in the
rights of the transferor as a dissenting articles of incorporation or the by-laws, a
stockholder under this Title shall cease member may vote by proxy in accordance
and the transferee shall have all the rights with the provisions of this Code. (n) “
of a regular stockholder; and all dividend
distributions which would have accrued on
85
 May the right to vote by proxy be validly Unless otherwise provided in the
denied in a stock corporation? articles of incorporation or the by-laws,
officers of a non-stock corporation may be
- No, it is a matter of right in a stock corporation directly elected by the members. (n)

 May member of a non-stock corporation cast  Qualifications?

their vote by text?
1. He is a member of the association;
- Yes, subject to the approval and terms and 2. Majority thereof must be residents of the
conditions of the SEC <sec. 89> Philippines; and,
3. Other qualifications as may be provided for
in the by-laws.
“Voting by mail or other similar means
by members of non-stock corporations may be
authorized by the by-laws of non-stock  Governing board in a non-stock
corporations with the approval of, and under
such conditions which may be prescribed by, - Board of Trustees, however section 138
the Securities and Exchange Commission. “ provides that:

 How about in stock? Section 138. Designation of

governing boards. - The provisions of
- Voting by mail or other similar means may also specific provisions of this Code to the
be authorized and allowed by the by-laws of contrary notwithstanding, non-stock or
non-stock corporations. Generally, in stock special corporations may, through their
corporations, the vote must be cast at a duly articles of incorporation or their by-laws,
constituted meeting. The only exception, in designate their governing boards by any
case of the latter, is in the matter of general name other than as board of trustees. (n)
amendment of the articles of incorporation
where the written assent of the stockholder  Disqualifications
may be sufficient.
- Section 27 also applies to a non-stock
 How is the governing board constituted in a corporation, same holds true to the manner
non-stock corporation? How many members? of removal <sec. 29 ad 30>

- It may exceed 15 in a non-stock corporation Section 27. Disqualification of

unless the AOI or by-laws provide otherwise, directors, trustees or officers. - No person
as provided for by section 92 of the code: convicted by final judgment of an offense
punishable by imprisonment for a period
Section 92. Election and term of exceeding six (6) years, or a violation of this
trustees. - Unless otherwise provided in the Code committed within five (5) years prior to
articles of incorporation or the by-laws, the the date of his election or appointment, shall
board of trustees of non-stock corporations, qualify as a director, trustee or officer of any
which may be more than fifteen (15) in number corporation. (n)
as may be fixed in their articles of
incorporation or by-laws, shall, as soon as Section 29. Vacancies in the office
organized, so classify themselves that the of director or trustee. - Any vacancy
term of office of one-third (1/3) of their number occurring in the board of directors or
shall expire every year; and subsequent trustees other than by removal by the
elections of trustees comprising one-third (1/3) stockholders or members or by expiration of
of the board of trustees shall be held annually term, may be filled by the vote of at least a
and trustees so elected shall have a term of majority of the remaining directors or
three (3) years. Trustees thereafter elected to trustees, if still constituting a quorum;
fill vacancies occurring before the expiration of otherwise, said vacancies must be filled by
a particular term shall hold office only for the the stockholders in a regular or special
unexpired period. meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall
No person shall be elected as trustee be elected only or the unexpired term of his
unless he is a member of the corporation. predecessor in office.

86
 Any directorship or trusteeship to be shall be deemed to be directors for the
filled by reason of an increase in the number purpose of applying the provisions of this
of directors or trustees shall be filled only by Code; and
an election at a regular or at a special meeting
of stockholders or members duly called for the 3. The stockholders of the corporation shall
purpose, or in the same meeting authorizing be subject to all liabilities of directors.
the increase of directors or trustees if so
stated in the notice of the meeting. (n) The articles of incorporation may
likewise provide that all officers or
Section 30. Compensation of employees or that specified officers or
directors. - In the absence of any provision in employees shall be elected or appointed
the by-laws fixing their compensation, the by the stockholders, instead of by the
directors shall not receive any compensation, board of directors.
as such directors, except for reasonable per
diems: Provided, however, That any such  Nature of membership is non-transferrable
compensation other than per diems may be and personal in nature unless the articles of
granted to directors by the vote of the incorporation or by-laws provide otherwise
stockholders representing at least a majority of
the outstanding capital stock at a regular or
special stockholders' meeting. In no case shall Section 90. Non-transferability of
the total yearly compensation of directors, as membership. - Membership in a non-stock
such directors, exceed ten (10%) percent of corporation and all rights arising there from
the net income before income tax of the are personal and non-transferable, unless
corporation during the preceding year. (n) the articles of incorporation or the by-laws
otherwise provide. (n)
 Who elects the other officers?
 How is a membership requirement in a non-
stock corporation
- Directly by the general members unless the
by-laws or articles provide otherwise.
<sec.92> A holds a membership certificate

“Unless otherwise provided in the B goes to the corporation and compels the
articles of incorporation or the by-laws, officers corporation to record the transfer in his
of a non-stock corporation may be directly name
elected by the members. (n) “
- Membership in non-stock corporations may
 In stock corporations who elect officers? be acquired by complying with the
provisions of its rules prescribed in the by-
laws. This is in consonance with the
- Directors express power granted by law under section
36, paragraph 6 of the code, authorizing
 The provision that stock corporations cannot them to admit members thereof and that
validly provide that members cannot be voted authority carries with it the power to
by stockholders is only a general rule because prescribe rules on membership. It has thus
there is an exception section 97 of the code been stated that in the absence of charter
states that: or statutory restrictions, non-stock
corporations may determine who shall be
The articles of incorporation of a admitted to membership and how they shall
close corporation may provide that the be admitted.
business of the corporation shall be managed
by the stockholders of the corporation Section 36. Corporate powers and
rather than by a board of directors. So long capacity. - Every corporation incorporated
as this provision continues in effect: under this Code has the power and
capacity:
1. No meeting of stockholders need be called
to elect directors; 6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell stocks
2. Unless the context clearly requires to subscribers and to sell treasury stocks in
otherwise, the stockholders of the corporation accordance with the provisions of this Code;
87
 and to admit members to the corporation if it contest unless the acts complained of are
be a non-stock corporation; arbitrary, oppressive, fraudulent, violative of
civil rights and the like
- They can provide the manner in which to admit
depending on their own rules - General rule is that the courts will not
interfere with the internal affairs of an
unincorporated association so as to settle
 The power or authority to terminate members
disputes between the members, or
in non-stock corporations is said to be inherent
questions of policy, discipline, or internal
but strict compliance with the manner and
government, so long as the government of
procedure laid down in the by-laws must be
the society is fairly and honestly
observed, otherwise it may render the
administered in conformity with its by-laws
expulsion ineffective and invalid.
and the law of the land, and no property or
civil rights are involved.
Section 91. Termination of
membership. - Membership shall be - Exceptions are the following:
terminated in the manner and for the causes
provided in the articles of incorporation or the
by-laws. Termination of membership shall a. Where law and justice so require, and
have the effect of extinguishing all rights of a the proceedings of the association are
member in the corporation or in its property, subject to judicial review where there is
unless otherwise provided in the articles of fraud, oppression, or bad faith, or where
incorporation or the by-laws. (n) the action complained of is capricious,
arbitrary, or unjustly discriminatory
b. To grant relief in case property or civil
 Power is inherent and may be exercised in rights are invaded, although it has also
certain situations: been held that the involvement of
property rights does not necessarily
1. When an offense is committed which, authorize judicial intervention, in the
although it has no immediate relation to a absence of arbitrariness, fraud or
member’s duty as such, it is so infamous collusion.
as to render him unfit for society of honest c. Are violative of the laws of the society,
men, which is indictable at common law; or the law of the land, as by depriving
2. When the offense is a violation of his duty the person of due process of law
as member of the corporation; and, d. There is lack of jurisdiction on the part
3. When the offense is of a mixed nature, of the tribunal conducting the
being both against his duty as a member proceedings, where the organization
of the corporation, and also indictable at exceeds its powers, or where the
common law. proceedings are otherwise illegal

If the conduct of the member comes within any  Corporations, stock and non-stock, may be
of this cases, it is a ground for valid expulsion dissolved in accordance and pursuant to the
although it may not be expressly made so by provisions of Sections 118 to 121 of the
the by-laws Corporation Code and the pertinent
provisions of P.D. 902-A, as amended. If
 Chinese YMCA vs. Ching such be the case, the assets of the
corporation are to be distributed in
- Right of the corporation to choose who the accordance with law and established
members are, cannot be inquired or jurisprudence.
intervened by the court
- The appealed decision thus contravened the  If a non-stock corporation is dissolved how
establish principle that the courts cannot strip will its properties be distributed?
a member of a non-stock corporation of his
membership therein without cause. Section 94. Rules of distribution. -
In case dissolution of a non-stock
 Lions Club International vs. CA corporation in accordance with the
provisions of this Code, its assets shall
be applied and distributed as follows:
- Courts will not generally interfere on matters
involving the internal affairs of an
unincorporated association such as election
88
 1. All liabilities and obligations of the Philippines substantially similar to those of
corporation shall be paid, satisfied and the dissolving corporation according to a
discharged, or adequate provision shall be plan of distribution adopted pursuant to this
made therefore; Chapter;

2. Assets held by the corporation upon a - If there is no distributive agreement then

condition requiring return, transfer or they may do so through a plan of
conveyance, and which condition occurs distribution under section 95
by reason of the dissolution, shall be
returned, transferred or conveyed in Section 95. Plan of distribution of
accordance with such requirements; assets. - A plan providing for the distribution
of assets, not inconsistent with the
3. Assets received and held by the provisions of this Title, may be adopted by a
corporation subject to limitations permitting non-stock corporation in the process of
their use only for charitable, religious, dissolution in the following manner:
benevolent, educational or similar
purposes, but not held upon a condition The board of trustees shall, by
requiring return, transfer or conveyance by majority vote, adopt a resolution
reason of the dissolution, shall be recommending a plan of distribution and
transferred or conveyed to one or more directing the submission thereof to a vote at
corporations, societies or organizations a regular or special meeting of members
engaged in activities in the Philippines having voting rights. Written notice setting
substantially similar to those of the forth the proposed plan of distribution or a
dissolving corporation according to a plan summary thereof and the date, time and
of distribution adopted pursuant to this place of such meeting shall be given to
Chapter; each member entitled to vote, within the
time and in the manner provided in this
4. Assets other than those mentioned in Code for the giving of notice of meetings to
the preceding paragraphs, if any, shall be members. Such plan of distribution shall be
distributed in accordance with the adopted upon approval of at least two-thirds
provisions of the articles of incorporation (2/3) of the members having voting rights
or the by-laws, to the extent that the present or represented by proxy at such
articles of incorporation or the by-laws, meeting. (n)
determine the distributive rights of
members, or any class or classes of CLOSE CORPORATIONS
members, or provide for distribution; and
 Section 96. Definition and applicability of
5. In any other case, assets may be Title. - A close corporation, within the
distributed to such persons, societies, meaning of this Code, is one whose articles
organizations or corporations, whether or of incorporation provide that: (1) All the
not organized for profit, as may be corporation's issued stock of all classes,
specified in a plan of distribution adopted exclusive of treasury shares, shall be
pursuant to this Chapter. (n) held of record by not more than a
specified number of persons, not
 Non-stock corporations with 4Billion funds, exceeding twenty (20); (2) all the issued
may it be distributed for and among its stock of all classes shall be subject to
members? one or more specified restrictions on
transfer permitted by this Title; and (3)
Section 94 number 3 provides: The corporation shall not list in any
stock exchange or make any public
3. Assets received and held by the offering of any of its stock of any class.
corporation subject to limitations permitting Notwithstanding the foregoing, a
their use only for charitable, religious, corporation shall not be deemed a close
benevolent, educational or similar purposes, corporation when at least two-thirds (2/3) of
but not held upon a condition requiring return, its voting stock or voting rights is owned or
transfer or conveyance by reason of the controlled by another corporation which is
dissolution, shall be transferred or conveyed to not a close corporation within the meaning
one or more corporations, societies or of this Code.
organizations engaged in activities in the
89
- Between and among themselves, they feel 2. Stock exchange
and act alike 3. Banks and insurance companies,
- Not more than 20 stockholders 4. Public utilities
- Specified persons, if you are not specified, you 5. Educational institutions
cannot be a stockholder 6. Corporations vested with public interest
- All the issued stocks of all classes is subject to
restrictions  Classification of directors
- Shall not be listed in the stock exchange not
publicly offered - Ordinary stock- no such right
- 3 qualifying conditions must be contained in - Close corporation-yes there is such a right
the articles of incorporation, to be considered
as a close corporation, if not, it will not be  Section 97 is a permissive provision
considered as such and will be governed by
the general provisions of the code
- Even if 100 % is owned by one person it will Section 97. Articles of
incorporation. - The articles of incorporation
not be considered a close corporation without
of a close corporation may provide:
the 3 qualifying provisions
- Identity of stockholders, specified persons
- Active management either as directors or 1. For a classification of shares or rights
partners in management and the qualifications for owning or holding
- Combination of the corporation and the same and restrictions on their transfers
partnership type of business as may be stated therein, subject to the
provisions of the following section;
 May any type of corporation, be organized as
such close corporation? 2. For a classification of directors into one
or more classes, each of whom may be
voted for and elected solely by a particular
- No, the 3 qualifying conditions must be class of stock; and
present
3. For a greater quorum or voting
 What if 2/3 of the outstanding capital stock is requirements in meetings of stockholders or
owned by another corporation which is also a directors than those provided in this Code.
close corporation, will it be a close
corporation?
 After classification what then?
- No, it will only be a closed corporation if 2/3 of
- After classification, qualification and then
the voting stocks of a close corporation is also
restriction as provided for under the 3
owned by a close corporation. It must be
qualifying conditions in section 96
“voting” stocks
- Even if another corporation owns or controls  Cumulative voting is restricted in close
2/3 of the voting stocks of a close corporation, corporations if will be elected solely by a
the latter may still be considered as such close particular class
corporation if the corporation owning or
controlling the shares is also a close  In a close corporation, the articles of
corporation. incorporation may provide for a greater
quorum and voting requirement in meetings
“Notwithstanding the foregoing, a of both stockholders or directors to increase
corporation shall not be deemed a close the veto power of minority stockholders,
corporation when at least two-thirds (2/3) of its unlike in a stock corporation wherein only
voting stock or voting rights is owned or directors meetings may provide for greater
controlled by another corporation which is not quorum requirement and in stockholders
a close corporation within the meaning of this meeting which may not be altered or
Code.” increased, as provide for in section 25,
following the doctrine of limited capacity
 What kind of corporations cannot be a close  The articles of a close corporation may
corporation? likewise provide that the business of the
corporation shall be managed by the
1. Mining or oil companies, stockholders rather than by the board of

90
 directors. However the same must contain the o ordinary stock corporations are
continuing provisions required in paragraph 2 liable only if acted in Bad faith,
of section 97, that is: fraud or negligence in performance
of duty
1. No meeting of stockholders need be called
to elect directors;  What if there are already 20 stockholders
2. Unless the context clearly requires and they want to add 2 more, may it
otherwise, the stockholders of the compel?
corporation shall be deemed to be
directors; and; - In ordinary stock corporations, they may
3. The stockholders of the corporation shall compel by mandamus
be subject to all liabilities of directors. - In close corporations, may not be compelled
to admit because it breaches the qualifying
 Liability of stockholders acting as directors in a conditions
close corporation are more extensive since
they are personally liable for corporate torts  Since they cannot be compelled, may they
unless the corporation has obtained a admit?
reasonable adequate liability insurance, unlike
a ordinary stock corporation, wherein directors
thereof are only liable for corporate torts only if - Yes, provided all the stockholders
they have been negligent or acted fraudulently consented or instead of consenting they
in the performance of their functions. decide to amend their articles of
incorporation
 Restrictions - Will have to amend the articles of
incorporation to accommodate other
purchasers of share
- In ordinary stock corporations, the restrictions
- Will cease to be a close corporation if it
must appear in the articles of incorporation as
amends and becomes in excess of 20
well as the certificate of stocks
- In a close corporation, the restrictions must
appear in the articles of incorporation, the by- o Unless all the stockholders consent
laws and the certificate of stocks. Otherwise, they “may”
the same shall not be binding on any
purchaser thereof in good faith  What if the other stockholders object to
register? What will be the remedy of the
 What if the stockholders do not want to transferee?
exercise their right or option to purchase may
it be sold to any person? - His remedy is rescission. The effect of
rescission is mutual restitution
- Yes, any third person, section 98 provides:
 How about the stockholder, what is his
Section 98. Validity of restrictions on recourse?
transfer of shares. - Restrictions on the right to
transfer shares must appear in the articles of - He may compel the close corporation to
incorporation and in the by-laws as well as in purchase his shares at their fair value for
the certificate of stock; otherwise, the same any reason, provided the corporation has
shall not be binding on any purchaser thereof sufficient assets in its books to cover the
in good faith. Said restrictions shall not be debts and liabilities exclusive of capital
more onerous than granting the existing - In a close corporation, there is a
stockholders or the corporation the option to withdrawing stockholder, unlike in an
purchase the shares of the transferring ordinary stockholder where there is none,
stockholder with such reasonable terms, they may only do so in the exercise of
conditions or period stated therein. If upon the appraisal rights
expiration of said period, the existing
stockholders or the corporation fails to Section 105. Withdrawal of
exercise the option to purchase, the stockholder or dissolution of corporation. -
transferring stockholder may sell his In addition and without prejudice to other
shares to any third person. rights and remedies available to a
stockholder under this Title, any

91
 stockholder of a close corporation may, for 4. All the directors have express or implied
any reason, compel the said corporation to knowledge of the action in question and
purchase his shares at their fair value, none of them makes prompt objection
which shall not be less than their par or thereto in writing.
issued value, when the corporation has
sufficient assets in its books to cover its  Pre-emptive rights in a close corporation is
debts and liabilities exclusive of capital absolute
stock: Provided, That any stockholder of a
close corporation may, by written petition to Section 102. Pre-emptive right in
the Securities and Exchange Commission, close corporations. - The pre-emptive right
compel the dissolution of such corporation of stockholders in close corporations shall
whenever any of acts of the directors, officers extend to all stock to be issued, including
or those in control of the corporation is illegal, reissuance of treasury shares, whether for
or fraudulent, or dishonest, or oppressive or money, property or personal services, or in
unfairly prejudicial to the corporation or any payment of corporate debts, unless the
stockholder, or whenever corporate assets are articles of incorporation provide otherwise.
being misapplied or wasted.
 Why is it said to be absolute?
 Agreements may also be entered in a close
corporation <sec.100>
- Because there is no public offering in a
close corporation, otherwise it will not be
- They can even agree to be partners in
considered as close
management
- Pre-incorporation
 In a close corporation the pre-emptive rights
- Manner in which the business of the
is broadened to include all issues without
corporation shall be managed
exception unless denied or limited by the
articles of incorporation
 Board resolution
 Section 39 is the governing provision
- Ordinary stock corporations- sit and act as a concerning rights of the stockholder in an
body at a duly constituted meeting, they may ordinary stock corporation and it may be
do so by virtue of the E-Commerce Act denied. If it is not denied a stockholder can
through teleconference or video conference exercise his pre-emptive rights for all issues
of shares whether money, property or
 Exception to the rule: other officers may be previously incurred indebtedness.
directly appointed and hired by the
stockholders Section 39. Power to deny pre-
 Close corporations may validly act even emptive right. - All stockholders of a stock
without a meeting provided the conditions are corporation shall enjoy pre-emptive right to
obtained subscribe to all issues or disposition of
shares of any class, in proportion to their
Section 101. When board meeting is respective shareholdings, unless such right
unnecessary or improperly held. - Unless the is denied by the articles of incorporation or
by-laws provide otherwise, any action by the an amendment thereto: Provided, That such
directors of a close corporation without a pre-emptive right shall not extend to shares
meeting shall nevertheless be deemed valid if: to be issued in compliance with laws
requiring stock offerings or minimum stock
1. Before or after such action is taken, written ownership by the public; or to shares to be
consent thereto is signed by all the directors; issued in good faith with the approval of the
or stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange
for property needed for corporate purposes
2. All the stockholders have actual or implied or in payment of a previously contracted
knowledge of the action and make no prompt debt.
objection thereto in writing; or
 Are treasury shares covered in the exercise
3. The directors are accustomed to take of pre-emptive rights in ordinary stock
informal action with the express or implied corporations?
acquiescence of all the stockholders; or
92
 A provisional director shall be an
 As regards amendments impartial person who is neither a
stockholder nor a creditor of the corporation
Section 103. Amendment of articles or of any subsidiary or affiliate of the
of incorporation. - Any amendment to the corporation, and whose further
articles of incorporation which seeks to delete qualifications, if any, may be determined by
or remove any provision required by this Title the Commission. A provisional director is
to be contained in the articles of incorporation not a receiver of the corporation and does
or to reduce a quorum or voting requirement not have the title and powers of a custodian
stated in said articles of incorporation shall not or receiver. A provisional director shall have
be valid or effective unless approved by the all the rights and powers of a duly elected
affirmative vote of at least two-thirds (2/3) of director of the corporation, including the
the outstanding capital stock, whether with or right to notice of and to vote at meetings of
without voting rights, or of such greater directors, until such time as he shall be
proportion of shares as may be specifically removed by order of the Commission or by
provided in the articles of incorporation for all the stockholders. His compensation shall
amending, deleting or removing any of the be determined by agreement between him
aforesaid provisions, at a meeting duly called and the corporation subject to approval of
for the purpose. the Commission, which may fix his
compensation in the absence of agreement
or in the event of disagreement between the
 What happens if there is a deadlock?
provisional director and the corporation.
- Section 104 provides for a remedy
- Powers of the SEC in intra-corporate
concerns has been transferred to the proper
Section 104. Deadlocks. - commercial courts
Notwithstanding any contrary provision in the - Prohibit, even if acting in good faith
articles of incorporation or by-laws or - Provisional director appointed by the court
agreement of stockholders of a close
- Requiring the purchase, irrespective of
corporation, if the directors or stockholders are
unrestricted retained earnings
so divided respecting the management of the
- The provision of the law above-quoted gives
corporation's business and affairs that the
votes required for any corporate action cannot the SEC a very wide discretion in respect to
be obtained, with the consequence that the management of a close corporation in the
business and affairs of the corporation can no event of a deadlock. It may:
longer be conducted to the advantage of the
stockholders generally, the Securities and 1. Cancel or alter any provision in the
Exchange Commission, upon written petition articles of incorporation, by-laws or any
by any stockholder, shall have the power to stockholders agreement
arbitrate the dispute. In the exercise of such 2. Cancel, alter or enjoin any resolution or
power, the Commission shall have authority to other act of the corporation or its board
make such order as it deems appropriate, of directors, stockholders or officers
including an order: (1) canceling or altering 3. Prohibit any act of the corporation or its
any provision contained in the articles of board of directors, stockholders or
incorporation, by-laws, or any stockholder's officers or other persons party to the
agreement; (2) canceling, altering or enjoining action;
any resolution or act of the corporation or its 4. Requiring the purchase of the par value
board of directors, stockholders, or officers; (3) of the shares of any stockholders, either
directing or prohibiting any act of the by the corporation regardless of
corporation or its board of directors, availability of unrestricted earnings, or
stockholders, officers, or other persons party by the other shareholders,
to the action; (4) requiring the purchase at 5. Appointment of a provisional director
their fair value of shares of any stockholder, 6. Dissolving the corporation; or
either by the corporation regardless of the 7. Other relief as the circumstances may
availability of unrestricted retained earnings in warrant.
its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving  Section 105
the corporation; or (7) granting such other
relief as the circumstances may warrant. - Dishonesty is a ground for dissolution of a
close corporation
93
 - Even one stockholder may petition for regarding the the discretion of the
dissolution operations of the Board to manage
business can corporate affairs
o when there is a relief available, validly be made
dissolution would not be available in 9.To the extent Ordinarily, no such
an ordinary corporation that directors classification and no
may be restrictions on
classified into cumulative voting
CLOSE ORDINARY STOCK
one or more
CORPORATION CORPORATION
classes and to
1.The number of No limitation as to be voted solely
stockholders number of shareholder by a particular
cannot exceed class of stock,
20 cumulative
2.To the extent Maximum number of voting may, in
that all directors is 15 effect, be
stockholders can restricted
be deemed 10. The Officers are elected by
directors, the articles of the Board of Directors
number of incorporation
directors can may provide that
effectively be all officers shall
more than 15 be elected or
3.Shares of stock Generally no restriction appointed by the
are subject to on transfer of shares stockholders
specified 11. It may Although the articles of
restrictions provide for incorporation or by-
4.Shares of stock No prohibition greater quorum laws may provide for
are prohibited and voting greater quorum and
from being listed requirements in voting requirements in
in the stock meetings of directors’ meeting
exchange or stockholders and under section 25,
offered for sale directors those for stockholders’
to the public meeting cannot
5.Stockholders Management is lodged generally be altered
may take an in the Board of 12. Restriction Valid and binding if
active part in Directors on transfer of indicated in the articles
corporate shares should of incorporation and
management by be indicated in stock certificates
vesting the articles of
management to incorporation,
them rather than by-laws and
a Board of stock certificates
Director 13. Pre- Pre-emptive rights may
6.Those active in Directors are liable for emptive rights of be denied as provided
management are torts only if they have stockholders is for in section 39
personally liable acted negligently or broader as it
for corporate fraudulently include all issues
torts unless the without
corporation has exception
obtained an 14. A Unless he sells his
adequate liability stockholder may shares, a stockholder
insurance withdraw and cannot get back his
7.Directors can Directors must, as a compel the investment nor compel
validly act even rule, act as a body at a corporation to the corporation to buy
without a duly constituted purchase his his shares except in
meeting meeting shares for any the exercise of his
8.Agreements Not valid and binding reason with the appraisal right
between since stockholders’ limitation only
stockholders agreement cannot limit that the
94
 corporation has - Section 100 par. 5. To the extent that the
sufficient assets stockholders are actively engaged in the
to cover its management or operation of the business
liabilities and affairs of a close corporation, the
exclusive of stockholders shall be held to strict fiduciary
capital stock duties to each other and among
15. The proper Courts cannot interfere themselves. Said stockholders shall be
forum may I the business personally liable for corporate torts unless
interfere in the judgment of the the corporation has obtained reasonably
management of directors/stockholders adequate liability insurance.
a close “BUSINESS
corporation in JUDGMENT RULE”  Family corporations is not automatically a
case of close corporation the 3 qualifying conditions
deadlocks under must be present.
Section 104,
even of the SPECIAL CORPORATIONS
directors/stockho
lders are acting
in good faith  2 types of special corporations
16. Any Dissolution may be
stockholder may had only on the 1. Educational corporations
petition the SEC grounds provided by 2. Religious corporations
for corporate the provisions of the 2.1 Corporation Sole
dissolution on Code on dissolution 2.2 Religious Societies
grounds among and P.D. 902-A, as
others, provides amended  What provision governs educational
for in section corporations?
105
Section 106. Incorporation. -
Educational corporations shall be governed
 Manuel Dulay Enterprises vs. CA by special laws and by the general
provisions of this Code. (n)
- What was the position of Manuel Dulay here?
President, General Manager and Treasurer - Special laws like they Education Act of the
Philippines
- Cannot act both as president and treasurer at - These institutions of learning, once
the same time recognized by the government as such are
- Since it is a close corporation owned by the mandated by law to be incorporated within
family of Manuel Dulay, save and except the ninety (90) days under the provisions of the
secretary, it should be governed by Title XII Corporation Code and must, perforce,
- Petitioner is classified as a close corporation comply with the requirements and
and consequently a board resolution procedure laid down there under. Their
authorizing the sale or mortgage of the subject failure to so will not immune the educational
property is not necessary to bind the institution from suit as a corporation.
corporation for the action of its president. At (Chiang Kai Siek Case)
any rate, a corporate action taken at a board - Favorable recommendation of government
meeting without proper call or notice in a close agency involved
corporation is deemed ratified by the absent
director unless the latter promptly files his  Two types of educational corporations
written objection with the secretary of the
corporation after having knowledge of the
meeting which, in this case, petitioner Virgilio - Certificate of completion in the academic
Dulay failed to do. field
- Virgilio Dulay is a signatory witness, he knows - Vocational and technical one’s
very well about the deed of absolute sale, he
is estopped o Recommendation of DECS if
certificate of completion in the
 Naguiat vs. NLRC academic field

95
 How is the governing board of an educational is a quorum shall be valid as a corporate
institution instituted? act, except for the election of officers which
shall require the vote of a majority of all the
- Non-stock- multiples of 5 only (example: members of the board.
5,10,15)
- Stock- can be anywhere between 5 to 15 Directors or trustees cannot attend or vote
by proxy at board meetings. (33a)
 Can they consist of 7 or 9 members?
Section 27. Disqualification of directors,
- Yes, if stock trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
 Can they be incorporated also as non-stock? this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as
- Yes a director, trustee or officer of any corporation. (n)
- B.P. 232 allows the organization of an
educational institution that is stock corporation,  Article 14 section 4 par. 2 of the
only if they do not issue a certificate of Constitutions
completion in the academic field
Educational institutions, other than
 Qualifications and disqualifications of the those established by religious groups and
membership in the board of an educational mission boards, shall be owned solely by
corporation citizens of the Philippines or corporations or
associations at least sixty per centum of the
- Educational corporations are governed by capital of which is owned by such citizens.
special laws and general provisions, hence if The Congress may, however, require
there is no provision in the special law, you go increased Filipino equity participation in all
back to section 25 and 27 of the general educational institutions. The control and
provisions administration of educational institutions
- Stock- must be a stockholder shall be vested in citizens of the Philippines.
- Non-stock- must be a member
- By-laws may provide for additional
qualifications and disqualifications No educational institution shall be
established exclusively for aliens and no
Section 25. Corporate officers, group of aliens shall comprise more than
quorum. - Immediately after their election, the one-third of the enrollment in any school.
directors of a corporation must formally The provisions of this sub section shall not
organize by the election of a president, who apply to schools established for foreign
shall be a director, a treasurer who may or diplomatic personnel and their dependents
may not be a director, a secretary who shall be and, unless otherwise provided by law, for
a resident and citizen of the Philippines, and other foreign temporary residents.
such other officers as may be provided for in
the by-laws. Any two (2) or more positions - Management is left solely to citizens of the
may be held concurrently by the same person, Philippines
except that no one shall act as president and - Board of Directors manages the corporate
secretary or as president and treasurer at the affairs, foreigners cannot therefore be
same time. elected in the board
- Exceptions are, mission boards and
The directors or trustees and officers religious orders, which may have a
to be elected shall perform the duties enjoined governing board consisting of foreigners
on them by law and the by-laws of the
corporation. Unless the articles of  Term of office of governing board in an
incorporation or the by-laws provide for a educational institutions
greater majority, a majority of the number of
directors or trustees as fixed in the articles of - Can serve a term of 5 years. If that be the
incorporation shall constitute a quorum for the case, 1/5 of their number shall expire every
transaction of corporate business, and every year
decision of at least a majority of the directors
or trustees present at a meeting at which there
96
 Non-stock or stock, can they serve for a 1 year Section 111. Articles of
term only? incorporation. - In order to become a
corporation sole, the chief archbishop,
- Yes, the articles of incorporation may provide bishop, priest, minister, rabbi or presiding
that it be 1 year only elder of any religious denomination, sect or
church must file with the Securities and
Exchange Commission articles of
 What are these religious corporations spoken
incorporation setting forth the following:
off?
1. That he is the chief archbishop, bishop,
- Corporation sole and religious societies
priest, minister, rabbi or presiding elder of
his religious denomination, sect or church
 What is a corporation sole? and that he desires to become a corporation
sole;
- Consists of one person only and his successor
in some particular station, who are 2. That the rules, regulations and discipline
incorporated by law in order to give them of his religious denomination, sect or church
some legal capacities and advantages, are not inconsistent with his becoming a
particularly that of perpetuity, which in their corporation sole and do not forbid it;
natural persons they could not have had
3. That as such chief archbishop, bishop,
 May a corporation be organized by less than 5 priest, minister, rabbi or presiding elder, he
natural persons? is charged with the administration of the
temporalities and the management of the
- General rule, 5 to 15 natural persons(except affairs, estate and properties of his religious
cooperatives and corporations primarily denomination, sect or church within his
organized to hold equities in rural banks and territorial jurisdiction, describing such
may rightfully become incorporators thereof) territorial jurisdiction;
- Exception, corporation sole, consist of only
one person 4. The manner in which any vacancy
occurring in the office of chief archbishop,
 May any person form or organize a bishop, priest, minister, rabbi of presiding
corporation sole? elder is required to be filled, according to
the rules, regulations or discipline of the
- No, not any person can form a corporation religious denomination, sect or church to
which he belongs; and
sole, section 110 provides:

5. The place where the principal office of

Section 110. Corporation sole. - For
the corporation sole is to be established and
the purpose of administering and managing,
located, which place must be within the
as trustee, the affairs, property and
Philippines.
temporalities of any religious denomination,
sect or church, a corporation sole may be
formed by the chief archbishop, bishop, priest, The articles of incorporation may
minister, rabbi or other presiding elder of such include any other provision not contrary to
religious denomination, sect or church. (154a) law for the regulation of the affairs of the
corporation. (n)
 Is it required to file the articles of incorporation
in the SEC? Section 112. Submission of the
articles of incorporation. - The articles of
incorporation must be verified, before filing,
- Yes
by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or
 What should be contained in the articles of presiding elder, as the case may be, and
incorporation? accompanied by a copy of the commission,
certificate of election or letter of
- Section 111 and section 112 provides for the appointment of such chief archbishop,
contents and procedures bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any
notary public.
97
 From and after the filing with the Section 113. Acquisition and
Securities and Exchange Commission of the alienation of property. - Any corporation
said articles of incorporation, verified by sole may purchase and hold real estate and
affidavit or affirmation, and accompanied by personal property for its church, charitable,
the documents mentioned in the preceding benevolent or educational purposes, and
paragraph, such chief archbishop, bishop, may receive bequests or gifts for such
priest, minister, rabbi or presiding elder shall purposes. Such corporation may sell or
become a corporation sole and all mortgage real property held by it by
temporalities, estate and properties of the obtaining an order for that purpose from the
religious denomination, sect or church Court of First Instance of the province
theretofore administered or managed by him where the property is situated upon proof
as such chief archbishop, bishop, priest, made to the satisfaction of the court that
minister, rabbi or presiding elder shall be held notice of the application for leave to sell or
in trust by him as a corporation sole, for the mortgage has been given by publication or
use, purpose, behalf and sole benefit of his otherwise in such manner and for such time
religious denomination, sect or church, as said court may have directed, and that it
including hospitals, schools, colleges, orphan is to the interest of the corporation that
asylums, parsonages and cemeteries thereof. leave to sell or mortgage should be granted.
(n) The application for leave to sell or mortgage
must be made by petition, duly verified, by
 Is it required to indicate its terms of execution? the chief archbishop, bishop, priest,
Why not? minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by
any member of the religious denomination,
- Not required because they are supposed to
sect or church represented by the
exist in perpetuity
corporation sole: Provided, That in cases
- However, it does not mean that it shall
where the rules, regulations and discipline
continue to exist forever, it merely means that
of the religious denomination, sect or
it has the capacity of continuous existence
church, religious society or order concerned
during a particular period until dissolved in
represented by such corporation sole
accordance with law
regulate the method of acquiring, holding,
selling and mortgaging real estate and
 When will it acquire judicial personality? How personal property, such rules, regulations
do you compare this to other types of and discipline shall control, and the
corporation? intervention of the courts shall not be
necessary. (159a)
- After the filing the verified articles of
incorporation along with the documents  Since a corporation sole is consists only of
required in Section 112 with the SEC, one person, will the registration of the
immediately becomes endowed with corporate property in the name of the corporation sole
personality, this serves as an exception to the vest unto the head thereof the ownership of
rule that a corporation acquires juridical the property?
personality only upon the issuance of a
certificate of incorporation by the said - No, it will not vest unto the head, the head
government agency.
is acting merely as a guardian
- Upon filing of verified articles of incorporation
with the SEC, will not require the approval of
SEC  Roman Catholic Apostolic Adm. Of Davao,
inc. vs. Land Reg. Comm, et al.
 A corporation sole is possessed with the same
power, rights and privileges, to own, acquire - Act only as a guardian
and hold or convey properties like any other - Ownership devolves upon the congregation
corporation? True or False or religious denomination
- A corporation consists of one person only
and his successors (who will always be one
- False, they have the same power rights and
at a time, in some particular station), who
privileges, but when it comes to alienation and
are incorporated by law in order to give
acquisition, it must possess a court order,
them some legal capacities and
however when there is a regulated method, a
advantages, particularly that of perpetuity,
court order may be dispensed with <sec. 113>

98
 which in their natural persons they could not  If a corporation exists in equity may it not be
have had dissolved?
- Roman Catholic Church has no nationality and
that the framers of the Constitution, as will be Section 115. Dissolution. - A
hereunder explained, did not have in mind the corporation sole may be dissolved and its
religious corporations sole when they provided affairs settled voluntarily by submitting to
that 60 percent of the capital thereof be owned the Securities and Exchange Commission a
by Filipino citizens. verified declaration of dissolution.

 Director of Lands vs. CA The declaration of dissolution shall set forth:

- Alienable public land is converted into private 1. The name of the corporation;
land when the same has been openly,
continuously and exclusively in possession of 2. The reason for dissolution and winding
the property as concept of an owner for 30 up;
years, automatically that is
3. The authorization for the dissolution of
 Republic of the Philippines vs. IAC the corporation by the particular religious
denomination, sect or church;
- Determination of the character of the land
should be in mind 4. The names and addresses of the persons
- If they still form part of public domain they who are to supervise the winding up of the
cannot be owned, but if they are converted affairs of the corporation.
into private land, the constitutional prohibition
will not apply Upon approval of such declaration
of dissolution by the Securities and
 If there is vacancy who will fill up the same? Exchange Commission, the corporation
What if there is none, what must the successor shall cease to carry on its operations except
do? for the purpose of winding up its affairs. (n)

- According to section 114: - While section 115 of the code provides for
the process and procedure for the
Section 114. Filling of vacancies. - dissolution of a corporate sole, there is
The successors in office of any chief nothing in the law itself which would prohibit
archbishop, bishop, priest, minister, rabbi or it from amending its articles of incorporation
presiding elder in a corporation sole shall - It is believed that authorization for the
become the corporation sole on their dissolution by the particular religious
accession to office and shall be permitted to denomination, sect or church, as required in
transact business as such on the filing with the sub-paragraph 3 of section 115 would still
Securities and Exchange Commission of a be necessary in the case of amending the
copy of their commission, certificate of articles of incorporation to affect dissolution.
election, or letters of appointment, duly
certified by any notary public. o Expiration of a corporate term will
not apply to a religious corporation
During any vacancy in the office of
chief archbishop, bishop, priest, minister, rabbi  May a corporation sole be dissolved by
or presiding elder of any religious judicial decree?
denomination, sect or church incorporated as
a corporation sole, the person or persons
authorized and empowered by the rules, - General rule: No, because a corporation
regulations or discipline of the religious sole, is by its very nature ecclesiastical and
denomination, sect or church represented by religious (doctrine of separation of church
the corporation sole to administer the and state)
temporalities and manage the affairs, estate - Exception: police power of the state, if its
and properties of the corporation sole during purpose is being carried out and is instead
the vacancy shall exercise all the powers and being used for illegal purpose, it may be so
authority of the corporation sole during such dissolved
vacancy. (158a)

99
 What are religious societies? desires to incorporate for the administration
of its affairs, properties and estate;
- Under common law, a religious society is a
body of persons associated together for the 5. The place where the principal office of
purpose of maintaining religious worship. the corporation is to be established and
located, which place must be within the
 Is it also required to file its articles of Philippines; and
incorporation to the SEC?
6. The names, nationalities, and residences
- No <sec. 116> “may” of the trustees elected by the religious
society or religious order, or the diocese,
synod, or district organization to serve for
 What should be contained in the articles of
the first year or such other period as may be
incorporation?
prescribed by the laws of the religious
society or religious order, or of the diocese,
- Section 116 provides: synod, or district organization, the board of
trustees to be not less than five (5) nor
Section 116. Religious societies. - more than fifteen (15). (160a)
Any religious society or religious order, or any
diocese, synod, or district organization of any  Is it required to indicate its term of
religious denomination, sect or church, unless existence?
forbidden by the constitution, rules,
regulations, or discipline of the religious - Likewise to exist in perpetuity, the law does
denomination, sect or church of which it is a
not require to indicate its term of existence
part, or by competent authority, may, upon
written consent and/or by an affirmative vote at
a meeting called for the purpose of at least  When will it acquire juridical personality?
two-thirds (2/3) of its membership, incorporate - Only a corporation sole may come into
for the administration of its temporalities or for existence without SEC approval, section 19
the management of its affairs, properties and will thus govern, Vested with judicial
estate by filing with the Securities and capacity upon issuance of the certificate by
Exchange Commission, articles of the SEC
incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other o However it is not accurate
member of such religious society or religious
according to atty. Ladia because
order, or diocese, synod, or district
organization of the religious denomination, there are those that can issue for
sect or church, setting forth the following: example cooperatives- BUREAU
OF COOPERATIVES which
1. That the religious society or religious order, register, home insurance guaranty
or diocese, synod, or district organization is a corporation- HOME OWNERS
religious organization of a religious
denomination, sect or church;  How may religious societies be dissolved?

2. That at least two-thirds (2/3) of its - Go to the general rules governing

membership have given their written consent dissolution, because the rules under special
or have voted to incorporate, at a duly corporations do not provide for such rule
convened meeting of the body;
DISSOLUTION
3. That the incorporation of the religious
society or religious order, or diocese, synod, or  What is dissolution?
district organization desiring to incorporate is
not forbidden by competent authority or by the
constitution, rules, regulations or discipline of - Extinguishment of the corporate franchise
the religious denomination, sect, or church of and the termination of corporate existence
which it forms a part;
 3 modes of dissolution
4. That the religious society or religious order,
or diocese, synod, or district organization 1. By expiration of its term;
100
2. By voluntary surrender of its primary franchise 1. Voluntary dissolution where no creditors are
(voluntary dissolution); affected; <sec.118>
3. By revocation of its corporate franchise 2. Voluntary dissolution where creditors are
(involuntary dissolution) affected; <sec. 119>
3. Shortening of corporate term. <sec. 120>
 Philippine National Bank vs. CFI
 Voluntary dissolution where no creditors are
- When the period of corporate life expires, the affected <sec.118>
corporation ceases to be a body corporate for
purposes of continuing the business for which - The formal and procedural requirements
it is organized. But it shall nevertheless be necessary are the following:
continued as a body corporate for three years
after the time when it would have be dissolved, 1. Majority vote of the board of directors or
for the purpose of prosecuting and defending trustees;
suits by or against it and for enabling it 2. Sending of notice of each stockholders or
gradually to settle and close its affairs to member either by registered mail or
dispose of and convey its property and to personal delivery at least thirty (30) days
divide its assets. There is no need for the prior to the meeting (scheduled by the
institution of a proceeding for quo warranto to board for the purpose of submitting the
determine the time and date of the dissolution board action to dissolve the corporation for
of a corporation because the period of approval of the stockholder or members.);
corporate existence is provided in the articles 3. Publication of the notice of time, place and
of incorporation. When such period expires subject of the meeting for three (3)
and without any extension having been made consecutive weeks in a newspaper
pursuant to law, the corporation is dissolved published in the place where the principal
automatically insofar as the continuation of its office of said corporation is located or in a
business is concerned. newspaper of general circulation in the
- The rights of the lessor and the lessee over Philippines;
the improvements which the latter constructed 4. Resolution adopted by the affirmative vote
on the leased premises are governed by of the stockholders owning at least 2/3 of
Article 1678 of the Civil Code. The provision the outstanding capital stock or 2/3 of the
gives the lessee the right to remove the members at the meeting duly called for the
improvements if the lessor chooses not to pay purpose;
one half of the value thereof. However, in the 5. A copy of the resolution authorizing the
case at bar the law will not apply because the dissolution must be certified by a majority of
parties herein have stipulated in the contract the board of directors or trustees and
their own terms and conditions concerning the countersigned by the corporate secretary;
improvements before the termination of the 6. Issuance of a certificate of dissolution by
lease. Petitioner PNB as assignee of PBM the SEC.
succeeded to the obligation of the latter under
the contract of lease. It could not possess  Should this be strictly complied with?
rights more than what PBM had as lessee
under the contract. Hence, petitioner was duly
bound to remove the improvements before the - Yes, compliance with the requirements and
expiration of the period of lease. Its failure to formalities prescribed above is mandatory
do so when the lease was terminated was such that failure to comply therewith will
tantamount to a waiver of its rights and interest have no effect on the legal existence of the
over the improvements on the leased premise. corporation.

o 3 modes of dissolution, 3 modes of  Will dissolution be effective and valid by a

voluntary dissolution and 3 modes of mere resolution of the BOD and
liquidation and winding up- stockholders?
FREQUENTLY ASKED IN THE
FINALS - No, a mere resolution by the stockholders
or the BOD of a corporation to dissolve the
 What are the 3 modes of voluntary same does not affect the dissolution but that
dissolution? some other steps, administrative or judicial
is necessary. (Daguhoy Enterprises vs.
Ponce)

101
- Since it is the State which grants its right to corporation upon dissolution and winding
exist, it is only through the State which can up.
allow the termination of its existence; without - The directors may also undertake
consent of the State, it will not be dissolved. liquidation and winding up of its corporate
affairs, and sound business judgment, on
 Voluntary dissolution where creditors are how they will wind up
affected <sec.119>
 Dissolution by shortening of corporate term
- By virtue of a petition, when there are creditors <sec.120>
affected
- The following formalities would thus be - Will be valid upon approval of the SEC,
required: unlike general amendments, which will be
deemed approved if not acted upon by the
1. Affirmative vote of the stockholders SEC within 6 months from the date of filing
representing at least 2/3 of the outstanding for a cause not attributable to the
capital stock or at least 2/3 of the members at corporation.
a meeting duly called for that purpose; - Shortening of the corporate term partakes
2. Petition for dissolution shall be filed with the the nature of an amendment of the articles
SEC signed by a majority of its board of of incorporation. Section 16 under general
directors or trustees or other officers having amendments allows “written assent” section
the management of its affairs, verified by the 37 mandates that the vote must be cast at a
president or secretary or one of its directors or duly constituted meeting.
trustees, setting forth all claims and demands
against it. Section 120. Dissolution by
3. Issuance of an order by the SEC reciting the shortening corporate term. - A voluntary
purpose of the petition and fixing the date on dissolution may be effected by amending
or before which objections thereto may be filed the articles of incorporation to shorten the
by any person, which date shall not be less corporate term pursuant to the provisions of
than thirty days nor more than sixty days after this Code. A copy of the amended articles
entry of the order. of incorporation shall be submitted to the
4. Before such date, a copy of the order must be Securities and Exchange Commission in
published once a week for three (3) accordance with this Code. Upon approval
consecutive weeks in a newspaper of general of the amended articles of incorporation of
circulation published in the city or municipality the expiration of the shortened term, as the
where the principal office is situated or in a case may be, the corporation shall be
newspaper of general circulation in the deemed dissolved without any further
Philippines. proceedings, subject to the provisions of
5. Posting of the same order for three (3) this Code on liquidation. (n)
consecutive weeks in three (3) public places in
such city or municipality. o Intra-corporate- special commercial
6. Upon five (5) days’ notice, given after the date courts
on which the right to file objections has
expired, the SEC shall hear the petition and try
 Another way of dissolving a corporation is
any issue made by the objections filed.
through involuntary dissolution
7. Judgment dissolving the corporation and
directing of its assets as justice requires and
the appointment of a receiver (if necessary in Section 121. Involuntary
its discretion) to collect such assets and pay dissolution. - A corporation may be
the debts of the corporation. dissolved by the Securities and Exchange
Commission upon filing of a verified
complaint and after proper notice and
o The foregoing are also mandatory
hearing on the grounds provided by existing
requirements laws, rules and regulations. (n)

 Is the appointment of a receiver mandatory?

- Dissolution is tantamount to the imposition
of death penalty
- No, it is merely permissive or discretionary on - Instead of dissolving the corporation, courts
the part of the court. The code uses the word normally enjoin the further commission of
“may”; the law intended to let the shareholders the questioned act
have the control of the assets of the
102
- The relief of dissolution will be awarded only mis-user of its franchise justifying such a
where no other remedy is available and it will forfeiture
not be allowed where the rights of the - Object is to protect the public, and not to
stockholders can be, or are, protected in some redress private grievances, the mis-user
other way (Republic vs. Bisaya Land Trans. must be such as to work or threaten a
Co. Inc.) substantial injury to the public, or such as to
amount to a violation of the fundamental
 What are the grounds for involuntary condition of the contract by which the
dissolution? franchise was granted and thus defeat the
purpose of the grant
- Courts proceed with extreme caution which
- It is commenced through a verified complaint
has for their object the forfeiture of
or motu proprio by the proper courts
corporate franchise, and forfeiture will not
- Section 6 of PD 902-A provides for the
be allowed, except under express limitation,
grounds for involuntary dissolution as follows:
or for plain abuse of power by which the
corporation fails to fulfill the design and
1. Fraud in procuring its certificate of registration; purpose of its organization. But when the
2. Serious misrepresentation as to what the abuse or violation constitutes or threatens a
corporation can do or is doing to the great substantial injury to the public or such as to
prejudice of or damage to the general public; amount to a violation of the fundamental
3. Refusal to comply or defiance of any lawful conditions of its charter, or its conduct is
order of the Commission restraining characterized by obduracy or pertinacity in
commission of acts which would amount to a contempt of law, dissolution will be granted
grave violation of its franchise; - Did the court dissolve the corporation? No,
4. Continuous inoperation for a period of at least it did not, it granted the corporation 6
five (5) years; months to cease and desist the
5. Failure to file by-laws within the required performance of the questioned act
period; otherwise it will be dissolved
6. Failure to file required reports in appropriate
forms as determined by the Commission within
 Government vs. El Hogar
the prescribed period.

- 3 causes of action, the first is that the

- Other grounds are provided for in the
corporation violated the law by holding on
corporation code itself: among them are:
the property beyond that provide for by law,
the second is that the corporation undertook
1. Violation of any provision of the Code under the management f petitioners belonging to
section 144; delinquent shareholders of the association,
2. In case of deadlock in a close corporation as and lastly that the by-law provision, which
provided for in section 105; empowers the BD to cancel shares and to
3. In a close corporation, any acts of directors, return to the owners thereof the balance
officers or those in control of the corporation returning from the liquidation
which is illegal or fraudulent or dishonest or
oppressive or unfairly prejudicial to the
 Compare to Philippine Sugar Estate,
corporation or any stockholder or whenever
wherein the court ruled conditional
corporate assets are being misapplied or
dissolution. Why decree conditional
wasted under section 105.
dissolution in one and not in the other case?
- Mere dishonesty is also a ground in a close
- Because in El Hogar the government was at
corporation
fault, the government wasn’t able to issue
- Other grounds can be found in other special
the certificate of title on time
laws like the Securities Regulation Code and
- When the case was instituted, El Hogar was
the General Banking Act as well as the
already able to dispose the properties in
Insurance Code.
question, in Philippine Sugar Estate it was
still the holding the properties in order to
 Government vs. Philippine Sugar Estate enrich itself at the expense of the taxpayers

- It is necessary in order to secure judicial  Republic vs. Security Credit and

foreclosure of respondent’s charter to show a Acceptance Corp. et al.

103
- The corporation here is a lending institution stockholders are unable to obtain redress
and not a banking institution and protection of their rights within the
- Defendant corporation violated the law corporation itself. Stockholders should not
because before a corporation may engage into be left without recourse
a banking activity it must first obtain a
secondary franchise from the Central Bank  Present set up
- Defendant corporation threatens substantial
injury to the general public, dissolution is - Any stockholder or member of a corporation
warrant can institute a dissolution proceeding
- If there is a bank run kawawa naman yung against his own corporation before the
depositors proper forum
- Special Commercial Courts, shall hear and
 Republic vs. Bisaya Land Transportation Co. decide intra-corporate disputes
Inc
 May a corporation ask for dissolution of the
- The relief of dissolution will be awarded only corporation when there is no prejudice to
where no other remedy is available and it will the general public?
not be allowed where the rights of the
stockholders can be, or are, protected in some - Yes, in a close corporation, a petition for the
other way dissolution of the corporation may be
- Misuse and misapplication of the funds and instituted by any one individual shareholder
assets of the respondent were committed on the ground, even by mere dishonesty
particularly by the corporate officers, where
they can instead be held personally liable
 Effects of dissolution
- Since there is another remedy available
dissolution is not warranted
- The dissolution of a corporation not only
terminates its primary franchise to be a
 Assuming the above stated corporation is a
corporation, but generally prevents it from
close corporation, would the court decree
further exercising other or secondary
otherwise?
franchises which have been conferred to its.
It terminates its power to enter into
- Yes, because in a close corporation, mere contracts or t o continue the business as a
dishonesty is a ground for the dissolution going concern.
- Can even be dissolved by petition of only one - Based on this general rule, the Supreme
stockholder on the grounds stated in the code Court held that a corporation, whose
< sec. 105> corporate life expired, cannot lawfully
pursue the business for which it was
 Financing Corporation of the Philippines vs. organized. It cannot apply for a new
Teodoro certificate or a secondary franchise for it is
incapable of receiving a grant. Neither can it
- Minority stockholders may not ask for the enforce a contract executed prior its
dissolution of a corporation in private suits and dissolution for the purpose of continuing the
that such actions should be brought by the business of its organization.
Government through its legal officers, except - In general the rights and liabilities of the
in cases where the intervention of the corporation are not extinguished by its
State, for one reason or another, cannot be dissolution.
obtained, as when the State is not
interested because the complaint is strictly Section 145. Amendment or
a matter between the stockholders and repeal. - No right or remedy in favor of or
does not involve, in the opinion of the legal against any corporation, its stockholders,
officer of the Government, any of the acts members, directors, trustees, or officers,
or omissions warranting quo warranto nor any liability incurred by any such
proceeding , in which minority corporation, stockholders, members,
stockholders are entitled to have such directors, trustees, or officers, shall be
dissolution. It should be exercised if removed or impaired either by the
necessary in order not to entirely ignore and subsequent dissolution of said corporation
disregard the rights of said minority or by any subsequent amendment or repeal
stockholders, especially when said minority of this Code or of any part thereof. (n)

104
 Buenaflor vs. Camarines Sur Industry Corp. stockholders in accordance with their
proportionate stockholdings in the
- From that time on Camarines Sur was plying corporation or in accordance with their
in an activity that was illegal respective contracts of subscription.
- A corporation where the corporate life has
expired it cannot lawfully pursue the business  Preference upon liquidation
for which it was organized.
- the Supreme Court held that a corporation, - If there are preferred shares, the preference
whose corporate life expired, cannot lawfully granted to such should be complied with
pursue the business for which it was - Preferred shares may give the holder
organized. It cannot apply for a new certificate thereof, preference only in the dividends but
or a secondary franchise for it is incapable of also in the distribution of corporate assets
receiving a grant. upon liquidation or termination of the
- Awarding it to Camarines Sur is tantamount to corporate existence. If such is the intent, the
a medal for its illegal acts contract of subscription must so indicate
- It cannot apply for a new certificate or a lest they are placed on equal footing with
secondary franchise for it is incapable of common shareholders
receiving a grant. It was not even a - Preference may be participating or non-
corporation de facto. And then, there is no participating
application subscribed by the new corporation
- And yet as stated, the new corporation has not  Dissolved corporations are granted a period
filed any application for certificate of public of 3 years to liquidate
convenience in Sabang, and has not published
such application.
Section 122. Corporate liquidation.
- Every corporation whose charter expires
 Cebu Port Labor Union vs. State Marine Co by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate
- Even a cursory reading of the provision would existence for other purposes is terminated
convey the idea clearly manifested in the in any other manner, shall nevertheless be
limitation “but not for the purpose of continuing continued as a body corporate for three (3)
the business for which it was established,” that years after the time when it would have
the 3-year period allowed by the law is only for been so dissolved, for the purpose of
the purpose of winding up its affairs. prosecuting and defending suits by or
against it and enabling it to settle and close
 Gonzales vs. Sugar Regulatory Administration its affairs, to dispose of and convey its
property and to distribute its assets, but not
for the purpose of continuing the business
- Instead of applying the corporation code, the
for which it was established.
court applied the constitutional provision
- Cannot be read as permitting to destroy the
substantive rights At any time during said three (3)
- Such would collide with the non-impairment of years, the corporation is authorized and
contracts clause of the constitution empowered to convey all of its property to
trustees for the benefit of stockholders,
- Complainants will have the right to follow the
members, creditors, and other persons in
assets of the corporation in the hands of SRA
interest. From and after any such
or any other agency for that matter
conveyance by the corporation of its
property in trust for the benefit of its
 After dissolution what next? stockholders, members, creditors and
others in interest, all interest which the
- Liquidation and winding up should follow corporation had in the property terminates,
the legal interest vests in the trustees, and
 What is the definition of liquidation and the beneficial interest in the stockholders,
winding up? members, creditors or other persons in
interest.
- Collection of all corporate assets, the
payments of all its debts and settlement of its Upon the winding up of the
obligations and the ultimate distribution of the corporate affairs, any asset distributable to
corporate assets, if any of it remains, to all any creditor or stockholder or member who
is unknown or cannot be found shall be
105
 escheated to the city or municipality where receiver who may sue or be sued even after
such assets are located. that period

Except by decrease of capital stock o Mere appointment of a receiver

and as otherwise allowed by this Code, no without anything more does imply in
corporation shall distribute any of its assets or the dissolution of a corporation
property except upon lawful dissolution and
after payment of all its debts and liabilities.  National Abaca other Fibers Co. vs. Pore
(77a, 89a, 16a)
- Actions pending for or against the
 However the 3 year period is not absolute corporation when the 3 year period expires,
 Liquidation may be undertaken in either of the are abated since after that period, the
3 ways corporation ceases for all intents and
purposes and is no longer capable of suing
1. By the corporation itself through the BOD or being sued
- May be continued by the trustee provided
- Usual method or procedure of liquidating a done within the 3 year period
corporation and although there is no law - Should the corporation, therefore, finds it
authorizing it, neither is there anything that difficult to finish its liquidation, it may, at any
prohibits the BOD from undertaking the same time during the three year period, convey all
- If this method is resorted to, the board will only its assets and receivables to a trustee to
have a period of 3 years to finish its task of prosecute and defend suits by or against
liquidation the corporation begun before the expiration
- Claims for or against the corporate entity not of said period
filed within the period will become - The effect of the conveyance is to make the
unenforceable as there exist no corporate trustees the legal owners of the property
entity against which they can be enforced conveyed, subject to the beneficial interest
- Actions pending for or against the corporation therein of creditors and stockholders
when the 3 year period expires, are abated
since after the period, the corporation ceases  Sumera vs. Valencia
for all intents and purposes and is no longer
capable of suing or being sued - Thus it was held that when a corporation is
dissolved and the liquidation of the assets is
2. By a trustee appointed by the corporation placed in the hands of receiver or assignee,
the period of 3 years prescribed by law is
- The corporation may opt to convey all not applicable and the assignee may
corporate assets to a trustees who will take institute all actions leading to the liquidation
charge of liquidation of the corporation even after the expiration
- If this method is used, the three year period of 3 years.
limitation imposed by section 122 will not apply - If the corporation carries out the liquidation
provided the designation of the trustee is of its assets through its own officers and
made within that period continues and defends the actions brought
by or against it, its existence shall terminate
3. By appointment of a receiver at the end of three years from the time of
dissolution; but if a receiver or assignee is
appointed, with or without a transfer of its
- A receiver may be appointed by the proper properties within 3 years, the legal interest
forum on petition or motu proprio upon the passes to the assignee, the beneficial
dissolution of the corporation interest remaining in the members,
- The appointment of a receiver is, however, stockholders, creditors and other interested
permissive rather than mandatory and the law persons and said assignee may bring an
tends to recognize that in cases of voluntary action, prosecute that which has already
dissolution there is no occasion for the been commenced for the benefit of the
appointment of a receiver except under special corporation, or defend the latter against any
circumstances and upon proper showing other action already instituted or which may
- If a receiver is appointed, the 3 year period be instituted even outside of the period of
fixed by law within which to complete the task three years fixed for the offices of the
of liquidation will not likewise apply because corporation.
the dissolved corporation is substituted by the
106
 Board of Liquidators vs. Kalaw intended to be created as long as the
stockholders have given their consent
- If there is a trustee, assignee or liquidator, it (Republic vs. Marsman Development
can continue prosecuting suit even beyond the Company)
3 year period fixed by law because he - Winding up is the sole activity of a dissolved
becomes the legal owner of the rights, assets corporation that does not intend to
and properties conveyed to him incorporate anew. If it does, however, it is
not unlawful for the old board of directors to
negotiate and transfer the assets of the
 Gelano vs. CA
dissolved corporation to the new
corporation intended to be created as long
- “Trustee” as used in the corporation statute as the stockholders have given their
must be understood in its general concept consent (Chung Ka Bio vs. IAC)
which could include the counsel to whom was
entrusted in the instant case, the prosecution
 What happens to the remaining assets and
of the suit filed by the corporation. The
properties of the dissolved corporation if
purpose in the transfer of the assets of the
liquidation and winding up as provided in
corporation to a trustee upon its dissolution is
section 122 is not complied with, as a result
more for the protection of its creditors and
of which the 3 year period has elapsed
stockholders. Debtors like the petitioners
herein may not take advantage of the failure of
the corporation to transfer its assets to a - If the three year extended life has expired
trustee, assuming it has any to transfer which without a trustee or receiver having been
petitioner has failed to show, in the first place. expressly designated by the corporation
To sustain petitioners’ contention would be to within that period, the board of directors o
allow them to enrich themselves at the trustees itself, following the rationale of the
expense of another, which all enlightened Supreme Court’s decision in Gelano vs. CA
legal systems condemn. may be permitted to do so continue as”
- The counsel who prosecuted and defended trustees” by legal implication to complete
the interest of the corporation may be the liquidation. Still in the absence of a BOD
considered as a “trustee” at least with respect or BOT, those having any pecuniary interest
to the matter in litigation only in the assets, including not only the
shareholders but likewise the creditors of
the corporation, acting for and in its behalf,
 May a corporation that is already dissolved,
might make proper representations with the
transfer and assign its assets and properties to
SEC, which has primary and sufficiently
a new corporation which will continue the
broad jurisdiction in matters of this nature,
business of the dissolved one?
for working out a final settlement of the
corporate concerns (Clemente vs. CA)
- Yes, provided all the stockholders gave their
consent (Chung Ka Bio vs. IAC)
o According to atty. Ladia the ruling of
the Supreme Court in the case of
 Republic vs. Marsman Development Company Clemente vs. CA is wrong, opinion
& Chung Ka Bio vs. IAC is further discussed after the
Clemente Case
- During the three year period granted to a
corporation to liquidate or wind up its affairs,  Clemente vs. CA
the BOD is not normally permitted to
undertake any activity outside the usual
- Who owns the properties? SOCIEDAD
liquidation of the corporation. There is,
ANONIMA
however, nothing to prevent the stockholders
- The termination of the life of a juridical entity
from conveying their respective shareholdings
toward the creation of a new corporation to does not by itself cause the extinction or
continue the business of the old. This is diminution of the rights and liabilities of such
because winding up is the sole activity of the entity or those of its owners and creditors. If
dissolved corporation that does not intend to the three year extended life has expired
incorporate a new. If it does, however, it is not without a trustee or receiver having been
unlawful for the old board of directors to expressly designated by the corporation
negotiate and transfer the assets of the within that period, the board of directors o
dissolved corporation to the new corporation trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA
107
 may be permitted to do so continue as” Upon the winding up of the
trustees” by legal implication to complete the corporate affairs, any asset distributable
liquidation. Still in the absence of a BOD or to any creditor or stockholder or
BOT, those having any pecuniary interest in member who is unknown or cannot be
the assets, including not only the shareholders found shall be escheated to the city or
but likewise the creditors of the corporation, municipality where such assets are
acting for and in its behalf, might make proper located.
representations with the SEC, which has
primary and sufficiently broad jurisdiction in Except by decrease of capital stock
matters of this nature, for working out a final and as otherwise allowed by this Code, no
settlement of the corporate concerns corporation shall distribute any of its assets
or property except upon lawful dissolution
o the ruling is wrong according to and after payment of all its debts and
atty. Ladia liabilities. (77a, 89a, 16a)

 According to atty Ladia: What happens to a FOREIGN CORPORATIONS

corporation that is already dissolved, that has
not been able to appoint a trustee with in the 3  Definition
year period?
- Section 123. Definition and rights of foreign
- a corporation dissolved which failed to corporations. - For the purposes of this
exercise its rights granted in section 122 after Code, a foreign corporation is one formed,
the 3 year period has elapsed, ceases to exist organized or existing under any laws other
for all intents and purposes, it can no longer than those of the Philippines and whose
sue or be sued laws allow Filipino citizens and corporations
- according to 122 of the code, the property to do business in its own country or state. It
should be escheated, accordingly: shall have the right to transact business in
the Philippines after it shall have obtained a
Section 122. Corporate liquidation. - license to transact business in this country
Every corporation whose charter expires by its in accordance with this Code and a
own limitation or is annulled by forfeiture or certificate of authority from the appropriate
otherwise, or whose corporate existence for government agency. (n)
other purposes is terminated in any other
manner, shall nevertheless be continued as a  What if the law of the state of the foreign
body corporate for three (3) years after the corporation does not allow Filipino citizens
time when it would have been so dissolved, for to do business in their country?
the purpose of prosecuting and defending
suits by or against it and enabling it to settle - The phrase “and whose laws allow Filipino
and close its affairs, to dispose of and convey citizens and corporations to do business in
its property and to distribute its assets, but not its own country or state” is not, however, an
for the purpose of continuing the business for accurate inclusion in the definition as ay
which it was established. corporation registered or organized under
the laws of another state is necessarily a
At any time during said three (3) foreign corporation whether or not the state
years, the corporation is authorized and of its incorporation allow Filipino citizens or
empowered to convey all of its property to corporations to do business in that forum.
trustees for the benefit of stockholders, - The said phrase was inserted by the
members, creditors, and other persons in framers of the law only as a condition
interest. From and after any such conveyance precedent to the grant of a license of a
by the corporation of its property in trust for the foreign corporation to do business in the
benefit of its stockholders, members, creditors Philippines.
and others in interest, all interest which the
corporation had in the property terminates, the  Composed of 100% Americans; organized
legal interest vests in the trustees, and the under the laws other than the Philippines
beneficial interest in the stockholders,
members, creditors or other persons in
interest. - The test is the “incorporation test”
- General rule: the place of its incorporation
irrespective of the nationality

108
- Exception: control test would apply in classes, par value of shares, shares without
determining the corporate nationality, i.e., the par value, and series, if any;
citizenship of the controlling stockholders
determines the nationality of the corporation 8. A statement of its outstanding capital
stock and the aggregate number of shares
 If a foreign corporation wants to transact which the corporation has issued, itemized
business in the Philippines, what must it do? by classes, par value of shares, shares
without par value, and series, if any;
- Obtain a license
9. A statement of the amount actually paid
 How may it do so? in; and

- According to sec. 125: 10. Such additional information as may be

necessary or appropriate in order to enable
the Securities and Exchange Commission
Section 125. Application for a license. to determine whether such corporation is
- A foreign corporation applying for a license to entitled to a license to transact business in
transact business in the Philippines shall the Philippines, and to determine and
submit to the Securities and Exchange assess the fees payable.
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their translation to Attached to the application for
an official language of the Philippines, if license shall be a duly executed certificate
necessary. The application shall be under oath under oath by the authorized official or
and, unless already stated in its articles of officials of the jurisdiction of its
incorporation, shall specifically set forth the incorporation, attesting to the fact that the
following: laws of the country or state of the applicant
allow Filipino citizens and corporations to do
business therein, and that the applicant is
1. The date and term of incorporation; an existing corporation in good standing. If
such certificate is in a foreign language, a
2. The address, including the street number, of translation thereof in English under oath of
the principal office of the corporation in the the translator shall be attached thereto.
country or state of incorporation;
The application for a license to
3. The name and address of its resident agent transact business in the Philippines shall
authorized to accept summons and process in likewise be accompanied by a statement
all legal proceedings and, pending the under oath of the president or any other
establishment of a local office, all notices person authorized by the corporation,
affecting the corporation; showing to the satisfaction of the Securities
and Exchange Commission and other
4. The place in the Philippines where the governmental agency in the proper cases
corporation intends to operate; that the applicant is solvent and in sound
financial condition, and setting forth the
5. The specific purpose or purposes which the assets and liabilities of the corporation as of
corporation intends to pursue in the the date not exceeding one (1) year
transaction of its business in the Philippines: immediately prior to the filing of the
Provided, That said purpose or purposes are application.
those specifically stated in the certificate of
authority issued by the appropriate Foreign banking, financial and
government agency; insurance corporations shall, in addition to
the above requirements, comply with the
6. The names and addresses of the present provisions of existing laws applicable to
directors and officers of the corporation; them. In the case of all other foreign
corporations, no application for license to
transact business in the Philippines shall be
7. A statement of its authorized capital stock
accepted by the Securities and Exchange
and the aggregate number of shares which the
Commission without previous authority from
corporation has authority to issue, itemized by
the appropriate government agency,
whenever required by law. (68a)
109
 Is there any deposit or security requirement? with an actual market value of at least one
hundred thousand (P100,000.) pesos;
- Yes, within 60 days after the issuance of the Provided, however, That within six (6)
license, a foreign corporation, except those months after each fiscal year of the
engaged in foreign banking or insurance, shall licensee, the Securities and Exchange
deposit with the SEC, for the benefit of Commission shall require the licensee to
creditors, securities consisting of bonds or deposit additional securities equivalent in
other evidence of indebtedness of the actual market value to two (2%) percent of
Philippine government or its political the amount by which the licensee's gross
subdivision, or of government owned or income for that fiscal year exceeds five
controlled corporation, shares of stock in million (P5,000,000.00) pesos. The
“registered enterprises” as this term is defined Securities and Exchange Commission shall
in R.A. 5186, shares of stock in domestic also require deposit of additional securities
insurance companies and banks or any if the actual market value of the securities
combination thereof with an actual market on deposit has decreased by at least ten
value of 100,000 (10%) percent of their actual market value
- Additional securities may be required by the at the time they were deposited. The
SEC if the actual market value of the securities Securities and Exchange Commission may
on deposit has decreased by at least 10%. at its discretion release part of the additional
Section 126 of the code provides: securities deposited with it if the gross
income of the licensee has decreased, or if
the actual market value of the total
Section 126. Issuance of a license. -
securities on deposit has increased, by
If the Securities and Exchange Commission is
more than ten (10%) percent of the actual
satisfied that the applicant has complied with
market value of the securities at the time
all the requirements of this Code and other
they were deposited. The Securities and
special laws, rules and regulations, the
Exchange Commission may, from time to
Commission shall issue a license to the
time, allow the licensee to substitute other
applicant to transact business in the
securities for those already on deposit as
Philippines for the purpose or purposes
long as the licensee is solvent. Such
specified in such license. Upon issuance of the
licensee shall be entitled to collect the
license, such foreign corporation may
interest or dividends on the securities
commence to transact business in the
deposited. In the event the licensee ceases
Philippines and continue to do so for as long
to do business in the Philippines, the
as it retains its authority to act as a corporation
securities deposited as aforesaid shall be
under the laws of the country or state of its
returned, upon the licensee's application
incorporation, unless such license is sooner
therefor and upon proof to the satisfaction
surrendered, revoked, suspended or annulled
of the Securities and Exchange
in accordance with this Code or other special
Commission that the licensee has no
laws.
liability to Philippine residents, including the
Government of the Republic of the
Within sixty (60) days after the Philippines. (n)
issuance of the license to transact business in
the Philippines, the license, except foreign
 Other than section 125 and 126. What other
banking or insurance corporation, shall deposit
requirements are set under Philippine Law
with the Securities and Exchange Commission
before a foreign corporation may transact
for the benefit of present and future creditors
business in the Philippines
of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange
Commission, consisting of bonds or other - Yes. A Resident agent is required. As a
evidence of indebtedness of the Government condition precedent to the grant of a license
of the Philippines, its political subdivisions and to do or transact business in the Philippines,
instrumentalities, or of government-owned or the foreign corporation is required to
controlled corporations and entities, shares of designate its resident agent on whom
stock in "registered enterprises" as this term is summons and other legal processes may
defined in Republic Act No. 5186, shares of be served in all actions or legal proceedings
stock in domestic corporations registered in against such corporation
the stock exchange, or shares of stock in - Section 128 provides:
domestic insurance companies and banks, or
any combination of these kinds of securities,

110
 Section 128. Resident agent; service Exchange Commission of the new address.
of process. - The Securities and Exchange (72a; and n)
Commission shall require as a condition
precedent to the issuance of the license to - The necessity of the appointment of a
transact business in the Philippines by any resident agent is only for the purpose of
foreign corporation that such corporation file receiving summons and other legal
with the Securities and Exchange Commission processes in any legal action or proceeding
a written power of attorney designating some against the foreign corporation
person who must be a resident of the
Philippines, on whom any summons and other
 Who may be appointed as a resident
legal processes may be served in all actions or
agent?
other legal proceedings against such
corporation, and consenting that service upon
such resident agent shall be admitted and held - Section 127 provides that:
as valid as if served upon the duly authorized
officers of the foreign corporation at its home Section 127. Who may be a
office. Any such foreign corporation shall resident agent. - A resident agent may be
likewise execute and file with the Securities either an individual residing in the
and Exchange Commission an agreement or Philippines or a domestic corporation
stipulation, executed by the proper authorities lawfully transacting business in the
of said corporation, in form and substance as Philippines: Provided, That in the case of an
follows: individual, he must be of good moral
character and of sound financial standing.
"The (name of foreign corporation) (n)
does hereby stipulate and agree, in
consideration of its being granted by the  May a partnership be appointed as a
Securities and Exchange Commission a resident agent?
license to transact business in the Philippines,
that if at any time said corporation shall cease - Yes, domestic corporation taken in its
to transact business in the Philippines, or shall general sense not legal sense
be without any resident agent in the
Philippines on whom any summons or other
 If there is a resident agent appointed. May
legal processes may be served, then in any
summons be served to any officers of the
action or proceeding arising out of any
corporation?
business or transaction which occurred in the
Philippines, service of any summons or other
legal process may be made upon the - No, if there is a resident agent, the
Securities and Exchange Commission and that designation is exclusive and service must
such service shall have the same force and be made only to the resident agent or else
effect as if made upon the duly-authorized the service is without force and effect
officers of the corporation at its home office." unless made to him
- Thus, while the law allows service upon the
Whenever such service of summons SEC or any of its officers or agents within
or other process shall be made upon the the Philippines
Securities and Exchange Commission, the - The two modes may become effective only
Commission shall, within ten (10) days if the foreign corporation failed or neglected
thereafter, transmit by mail a copy of such to designate such a person or an agent
summons or other legal process to the - Summons must be made only to resident
corporation at its home or principal office. The agent except when there is no resident
sending of such copy by the Commission shall agent appointed
be necessary part of and shall complete such - Where such foreign corporation actually
service. All expenses incurred by the doing business here has not applied for a
Commission for such service shall be paid in license to do and has not designated an
advance by the party at whose instance the agent to receive summons, then service of
service is made. summons on it will be made pursuant to the
provisions of the rules of court. If such
In case of a change of address of the foreign corporation has a license to do
resident agent, it shall be his or its duty to business, then summons to it will be served
immediately notify in writing the Securities and on the agent designated by it for the
purpose, or otherwise in accordance with
111
 the Corporation Law (General Corporation of 5. Or where a party is stopped to
the Philippines vs. Union Insurance Soc. Of challenge the personality of the
Canton Ltd.) corporation by entering into a contract
with it.
 If the foreign corporation conducts business in
the Philippines without the license  Rules laid down by the SC
requirement. What is the effect?
A. As to B. As to
- Section 133 provides: whether or whether or
not it can not it can be
Section 133. Doing business without sue sued
a license. - No foreign corporation transacting A foreign A foreign
business in the Philippines without a license, corporation corporation
or its successors or assigns, shall be permitted transacting or transacting business
to maintain or intervene in any action, suit or doing business in in the Philippines
proceeding in any court or administrative the Philippines with the requisite
agency of the Philippines; but such corporation with a license can license can be sued
may be sued or proceeded against before sue before in the Philippine
Philippine courts or administrative tribunals on Philippine Courts Courts
any valid cause of action recognized under Subject to certain A foreign
Philippine laws. (69a) exceptions, a corporation
foreign corporation transacting business
- if they do so, the responsible officers may be doing business in in the Philippines
subjected to the penal sanctions provided for the country without without a license
in section 144 of the code, which may either a license cannot can be sued in
be fine or imprisonment sue in Philippine Philippine Courts
Courts
If it is not if it is not doing
 What if it is not doing business without a transacting business in the
license? business in the Philippines, it cannot
Philippines, even be sued in
- If it is not transacting business in the without a license, it Philippine Courts for
Philippines, even without a license, it can sue can sue before the lack of jurisdiction
before the Philippine Courts Philippine Courts
 A foreign corporation not doing business in
 The general rule is that “it is not the lack of the Philippines, may it be sued?
required license but doing business without a
license which bars a foreign corporation form - If it is not transacting business in the
access to our courts.” country it cannot be sued for lack of
jurisdiction
 Exception:
 Is there any sanction that can be enforced
1. Foreign corporations can sue before the to foreign corporations which are doing
Philippine Courts if the act or transaction business without the required license?
involved is an “isolated transaction” or the
corporation is not seeking to enforce any
- Penal sanctions under section 144
legal or contractual rights arising from, or
- Any violation of the code is subject to such
growing out of, any business which it has
penal sanctions
transacted in the Philippines
2. Neither is a license required before a
foreign corporation may sue before the  What would constitute doing business?
forum if the purpose of the suit is to protect
its trademark, trade name, corporate - The true test, however, seems to be
name, reputation or goodwill; whether the foreign corporation is
3. Or where it is based on a violation of the continuing the body or substance of the
Revised Penal Code; business or enterprise for which it was
4. Or merely defending a suit filed against it organized or whether it has substantially
retired from it and turned it over to another.
The term implies a continuity of commercial

112
 dealings and arrangements, and corporation from performing single acts, but
contemplates, to that extent, the performance to prevent it from acquiring a domicile for
of acts or works or the exercise of some of the the purpose of business without taking the
functions normally incident to, and in steps necessary to render it amenable to
progressive prosecution of, the purpose and suit in the local courts. It was never the
object of its organization (Mentholatum Co. purpose of the Legislature to exclude a
Inc. vs. Mangaliman) foreign corporation which happens to obtain
an isolated order for business from the
 Mentholatum vs. Mangaliman Philippines, from securing redress in the
Philippine courts
- The true test, however, seems to be whether
the foreign corporation is continuing the body  The Swedish East Asia Co., Ltd. Vs. Manila
or substance of the business or enterprise for Port Service
which it was organized or whether it has
substantially retired from it and turned it over - It must stated that the section is not
to another. The term implies a continuity of applicable to a foreign corporation
commercial dealings and arrangements, and performing single acts or “isolated
contemplates, to that extent, the performance transactions.” There is nothing to show that
of acts or works or the exercise of some of the the petitioner has been in the Philippines
functions normally incident to, and in engaged in continuing business or
progressive prosecution of, the purpose and enterprise for which it was organized, when
object of its organization the sixteen bundles were erroneously
- Whatever transaction the Philippine-American discharged in manila, for it to be considered
Drug Co. had executed in view of the law, the as transacting business in the Philippines.
Mentholatum Co. did it itself. And the The fact is that the bundles, the value of
Mentholatum Co. being a foreign corporation which is sought to be recovered, were
doing business in the Philippines without the landed not as a result of a business
license required by section 68 of the transaction, isolated or otherwise, but due
Corporation Law, it may not prosecute this to a mistaken belief that they were part of
action for violation of trade mark and unfair the shipment of forty similar bundles
competition consigned to persons or entities in the
Philippines, there is no justification
 Why is foreign corporations barred access therefore, for invoking the section
from our courts if they do business without a
license?  There were 3 contracts entered into, how
come they were still not considered as
- Marshall-Wells Co. vs. Henry W. Elser and Co. doing business? (Antam Consolidted, Inc.
vs. CA)
 Marshall-Wells Co. vs. Henry W. Elser and Co.
- Every case shall be judged in the light of its
peculiar circumstances, where a single act
- The object of the statute was to subject the
or transaction however, is not merely
foreign corporation doing business in the
incidental or casual but indicates the foreign
Philippines to the jurisdiction of its courts. The
corporation’s intention to do other business
object of the statute was not to prevent the
in the Philippines, said single act or
foreign corporation from performing single
transaction constitutes “doing” or “engaging
acts, but to prevent it from acquiring a domicile
in” or “transacting” business in the
for the purpose of business without taking the
Philippines
steps necessary to render it amenable to suit
- In the case at bar, the transaction entered
in local courts.
into by the respondent with the petitioners
are not a series of commercial dealings
 Bulakhidas vs. Navarro which signify an intent on the part of the
respondent to do business in the Philippines
- It is settled that if a foreign corporation is not but constitute an isolated one which does
engaged in business in the Philippines, it may not fall under the category of “doing
not be denied the right to file an action in business.”
Philippine courts for isolated transactions - The records show that the only reason why
- The object of section 68 and 69 of the the respondent entered into the second and
Corporation law was not to prevent the foreign third transactions with the petitioner was
113
 because it wanted to recover the loss it business in its own name and for its
sustained from the failure of the petitioners to account and not of the foreign corporation)
deliver the crude coconut oil under the first - if that be the case the mere appointment of
transaction and in order to give the latter a a distributor will not constitute doing
chance to make good on their obligation. From business
these facts alone, it can be deducted that in
reality there was only one agreement between  How do you know if it has an independent
the petitioners and the respondent. status?
- The three seemingly different transactions
were entered into by the parties only in an
- Communications Materials and Design vs.
effort to fulfill the basic agreement and in no
CA
way indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which will  Communications Materials and Design vs.
categorize it as a foreign corporation doing CA
business in the Philippines
- 3 contracts, but according to the court was not - A perusal of the agreements between
doing business in the Philippines petitioner ASPAC and the respondents
show that there are provisions which are
 Far East Int’l import vs. Nankai Kogyo Co. Ltd. highly restrictive in nature, such as to
reduce petitioner ASPAC to a mere
extension or instrument of the private
- Only one contract , but according to the
respondents
Supreme Court was doing business in the
- ITEC was doing business without a license,
Philippines
however ASPAC is estopped
- Every case shall be judged in the light of its
- by entering into the Representative
peculiar circumstances, where a single act or
Agreement” with ITEC, petitioner is charge
transaction however, is not merely incidental
with knowledge that ITEC was not licensed
or casual but indicates the foreign
to engage in business activities in the
corporation’s intention to do other business in
country, and is thus stopped from raising in
the Philippines, said single act or transaction
defense such incapacity of ITEC, having
constitutes “doing” or “engaging in” or
chosen to ignore or even presumptively
“transacting” business in the Philippines
take advantage of the same
- In the instant case, the testimony of Atty.
- In top-weld we ruled that a foreign
Pablo Ocampo, that appellant was doing
corporation may be exempted from the
business in the Philippines corroborated by no
license requirements in order to institute an
less than Nabuo Toshida, one of appellant’s
action in our courts if its representative in
officers, that he was sent to the Philippines to
the country maintained an independent
look into the operation of mines, thereby
status during the existence of the disputed
revealing the defendant’s desire to continue
contract. Petitioner is deemed to have
engaging in business here, after receiving the
acceded to such independent character
shipment of the scrap iron under
when it entered into the Representative
consideration, making the Philippines a base
Agreement with ITEC
thereof.
- In such a case, the single act of transaction is
not merely incidental or casual, but is of such  Western Equipment and Supply Co. vs.
character as distinctly to indicate a purpose on Reyes
the part of the operations for the conduct of a
part of corporation’s ordinary business - The company is not here seeking to enforce
any legal or contract rights arising from, or
 If a corporation appoints a distributor or a growing out of any business which it has
representative, will it necessarily imply doing transacted in the Philippine Islands. The
business in the country? sole purpose of the action is to protect its
reputation, its corporate name, its goodwill,
whenever that reputation, corporate name
- If the foreign corporation maintained an
or goodwill have through the natural
independent status during the existence of the development of its trade, established
disputed contract. themselves
- Appointment of a distributor or representative - And it contends that its rights to the use of
in the Philippines, unless it has an its corporate and trade name, is a property
independent status (transacts and does
114
 right, a right in rem, which may assert and to which the Philippines became a party.
protect against all the world, in any of the Article 8 thereof provides that a trade name
courts of the world even in jurisdictions where shall be protected in all the countries of the
it does not transact business just the same as Union without the obligation of filing or
it may protect its tangible property, real or registration, whether or not it forms part of
personal, against trespass, or conversion the trademark
- Since it is the trade and not the mark that is to
be protected a trademark acknowledges no  Le Chemiste Lacoste vs. Fernandez
territorial boundaries or municipalities or states
or nations, but extends to every market where - The French company may gain access to
the trader’s goods have become known and our courts, in the first place it was not doing
identified by the use of the mark business in the Philippines
- The marketing of its products in the
 General Garments Corporation vs. Director of Philippines is done through an exclusive
Patents distributor, Rustan Commercial Corporation.
The latter is an independent entity which
- A foreign corporation which has never done buys and then markets not only products of
business in the Philippine Islands and which is the petitioner but also many other products
unlicensed and unregistered to do business bearing equally well-known and established
here, but is widely and favorably known in the trademarks and trade-names
Islands through the use therein of its products
bearing its corporate and trade name has a  Assuming Rustans had no independent
legal right to maintain an action in the Islands status would the SC grant Lacoste access
- Mentholatum case was subsequently to our courts?
derogated when Congress, purposely to
“counteract the effects” of said case, enacted - Even if Lacoste did business in the
R.A. 638, inserting Section 21-A in the Philippines it can bring action because the
Trademark Law, which allows a foreign case involves a violation of our penal code
corporation or juristic person to bring an action
- Such was a violation of article 189 of the
in Philippine Courts for infringement of a mark
RPC, if prosecution follows after the
or trade-name, for unfair competition, or false
completion of the preliminary investigation
designation of origin and false description,
being conducted by the Special Prosecutor
“whether or not it has been licensed to do
the information shall be in the name of the
business in the Philippines under Act
People of the Philippines and no longer the
Numbered Fourteen hundred and fifty-nine, as
petitioner which is only an aggrieved party
amended, otherwise known as Corporation
since a criminal offense is essentially an act
Law, at the time it brings complaint.
against the State. It is the latter which is
principally the injured party although there is
 Puma Sporschufabriken Rudolf Dassler, K.G. a private right violated
vs. IAC and MIL-ORO MFG. Corp. - The records show that the goodwill and
reputation of the petitioner’s products
- Treaties for part of the law of the land bearing the trademark Lacoste date back
- Quoting the Paris Convention and the case of even before 1964 when Lacoste clothing
Vanity Fair Mills Inc. vs. T. Eaton Co. this court apparels were forst marketed in the
further said: Philippines. To allow Hemandas to continue
using the trademark Lacoste for the simple
“By the same token, the petitioner reason that he was the first registrant in the
should be given the same treatment in Supplemental Register of a trademark used
the Philippines as we make available in international commerce and not
to our own citizens. We are obliged to belonging to him is to render nugatory the
assure to nationals of countries of the very essence of the law on trademarks and
Union an effective protection against trade names
unfair competition on the same way
that they are obligated to similarly  Atlantic Mutual Insurance Co. vs. Cebu
protect Filipino Citizen and firms Stevedoring Co.

- The ruling in the aforecited case is in - The law denies to a foreign corporation the
consonance with the Convention of the Union right to maintain suit unless it has previously
of Paris for the protection of Industrial Property complied with a certain requirement, then
115
 such compliance, or the fact that the suing responsibilities, or duties of stockholders,
corporation is exempt there from, becomes a members, or officers of corporations to each
necessary averment in the complaint other or to the corporation. (73a)
- These are matters peculiarly within the
knowledge of appellants alone, and it would be  Will the pre-emptive rights of a foreign
unfair to impose upon appellee the burden of corporation be governed by the same
asserting and proving the contrary. It is section of the code? Is the pre-emptive
enough that foreign corporations are allowed rights of a stockholder in a domestic
by law to seek redress in our courts under corporation same as the pre-emptive of a
certain conditions: the interpretation of the law stockholder of a foreign corporation.
should not go so far as to include, in effect, an
inference than those conditions have been met - No
from the mere fact that the party suing is a
foreign corporation
 M.E. Grey vs. Insular Lumber Company
 Olympia Business Machines Co. vs. E. Razon
- PNB vs. Gonzales, will this apply to a
foreign corporation? How do you distinguish
- How do you distinguish this case with Atlantic?
this case from a Philippine law?
- In Atlantic it dismissed the case, while in - Since it concerns the rights of stockholders
Olympia it did not it is the law of New York that should govern

 Time Inc. vs. Reyes  Is the license to do business of a foreign

corporation subject to suspension or
- We fail to see how these doctrines can be a revocation? What are the grounds?
propos in the case at bar, since the petitioner
is not “maintaining any suit” but is merely - Section 134 provides:
defending one against itself; it did not file any
complaint but only a corollary defensive
petition to prohibit the lower court from further Section 134. Revocation of license.
proceeding with a suit that it had no jurisdiction - Without prejudice to other grounds
to entertain provided by special laws, the license of a
foreign corporation to transact business in
the Philippines may be revoked or
 What law govern foreign corporation doing and suspended by the Securities and Exchange
transacting business in the Philippines with a Commission upon any of the following
license grounds:

- Laws of the Republic of the Philippines save 1. Failure to file its annual report or pay any
and except that would normally be those fees as required by this Code;
matters which concern its formation,
organization or dissolution, or those fixing the
relationship, liabilities, responsibilities, or 2. Failure to appoint and maintain a resident
duties of the stockholders, members or officers agent in the Philippines as required by this
of the foreign corporation or their relations to Title;
each other.
- In effect, intra-corporate or internal matters not 3. Failure, after change of its resident agent
affecting creditors or the public in general are or of his address, to submit to the Securities
governed not by Philippine laws but the law and Exchange Commission a statement of
under which the foreign corporation was such change as required by this Title;
formed or organized
4. Failure to submit to the Securities and
Section 129. Law applicable. - Any Exchange Commission an authenticated
foreign corporation lawfully doing business in copy of any amendment to its articles of
the Philippines shall be bound by all laws, incorporation or by-laws or of any articles of
rules and regulations applicable to domestic merger or consolidation within the time
corporations of the same class, except such prescribed by this Title;
only as provide for the creation, formation,
organization or dissolution of corporations or 5. A misrepresentation of any material
those which fix the relations, liabilities, matter in any application, report, affidavit or

116
 other document submitted by such corporation Securities and Exchange Commission
pursuant to this Title; unless all the following requirements are
met;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due 1. All claims which have accrued in the
to the Philippine Government or any of its Philippines have been paid, compromised
agencies or political subdivisions; or settled;

7. Transacting business in the Philippines 2. All taxes, imposts, assessments, and

outside of the purpose or purposes for which penalties, if any, lawfully due to the
such corporation is authorized under its Philippine Government or any of its
license; agencies or political subdivisions have been
paid; and
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any 3. The petition for withdrawal of license has
foreign corporation or entity not duly licensed been published once a week for three (3)
to do business in the Philippines; or consecutive weeks in a newspaper of
general circulation in the Philippines.
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)

 SEC does not have the sole authority to P.D. 902-A

suspend or revoke the license of a foreign
corporation doing business in the Philippines,  P.D. 902-A was amended by R.A. 8799 or
other government agencies like the Central the SECURITIES REGULATION CODE in
Bank , the Insurance Commission may also do the year 2000
so within their respective dominion, despite the
provision of section 134  The jurisdiction of SEC for cases falling
 If the SEC believes that revocation is under section 5 thereof was transferred to
warranted, section 135 provides that: the courts of general jurisdiction designated
by the SC, they were called special
commercial courts, the only exceptions
Section 135. Issuance of certificate of
were revocation of corporate franchise and
revocation. - Upon the revocation of any such
calling of elections
license to transact business in the Philippines,
the Securities and Exchange Commission  However the SEC retained receivership or
shall issue a corresponding certificate of suspension payments within June 20,2000
revocation, furnishing a copy thereof to the
appropriate government agency in the proper  Jurisdiction of special commercial courts
cases. are exclusive and original, jurisdiction is
conferred by law; 1 Special Commercial
The Securities and Exchange Court per region except MAKATI and
Commission shall also mail to the corporation QUEZON CITY which has two
at its registered office in the Philippines a
notice of such revocation accompanied by a  Devices or Schemes
copy of the certificate of revocation. (n)
- Pyramid scheme (misrepresentation)-
 Voluntary withdrawal of license Special Commercial Courts

- Syndicated estafa- not bailable

- All 3 conditions must be complied with
 Alleje case
Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and - Falls squarely under sec. 5 (a) Special
regulations, a foreign corporation licensed to Commercial Courts
transact business in the Philippines may be
allowed to withdraw from the Philippines by - Allegation corporate officers employing
filing a petition for withdrawal of license. No schemes in diverting
certificate of withdrawal shall be issued by the

117
- Not only detrimental to corporation, but  In Andaya the court said that a corporate
general membership officer elected or appointed by the BOD is
always a corporate act
- Fraud must be stated with particularity
- The fact that petitioner sought payment of
 Abad vs. CFI of Pangasinan his back wages, other benefits as well as
moral and exemplary damages and
- Fraud must be stated with particularity attorney’s fees in his complaint will not
otherwise it may be filed to any court operate to prevent the SEC from exercising
its jurisdiction under P.D. 902-A. The
 Intra-corporate jurisdiction will not wrest on the NLRC just
because of that
- Exclusive and original jurisdiction of special
commercial courts  Tabang vs. NLRC
- Sole criteria is there must be an intra- - Jurisdiction lies originally and exclusively to
corporate relationship special commercial courts and not in the
NLRC
- Pertaining to a controversy (speaks also of
intra-partnership controversy, that partnership - SEC has jurisdiction over cases of removal
must be registered with the SEC) from employment of corporate officers
 Rule now - The relationship of a person to a
corporation, whether as officer or as agent
1. Necessarily be an intra-corporate relationship; or employee or not determined by the
and, nature of the servides performed, but by the
incidents of the relationship on they actually
2. The controversy must arise out of said
exist
relationship
- Corporate officers dismissal is always a
 Intra-corporate relationship alone will not
suffice to put it in the ambit of special corporate act or intra-corporate controversy
commercial courts and courts of general
 Midland construction vs. Movilla
jurisdiction may take cognizance
- NLRC will be possessed of jurisdiction
 Case of a transferee of shares of stock to
compel the corporation to recognize him as a exception will not apply to mere recovery
stockholder
 Main consideration
 How can it be intra-corporate when he is not
- Asserts his right to the office or questions
yet fully paid
the propriety or validity of his ouster or
- When the transferee has done all he can be removal, it will be the special commercial
required to do to render the transfer effectual courts and not the NLRC
and the corporation refuses to register the
 Securities Regulation Code
transfer, the requirement of the registration is
waived and the transferee is considered - Transferred jurisdiction of the SEC to
technically a stockholder who may sue to Special Commercial Courts
enforce the right to have the transfer
registered - Suspension of payment, appointment of
management receivership
 Florendo vs. rivera, Embassy Farms
 What is the reason for suspension of all
- The transferor withheld the delivery, they are claims?
not yet prima facie; it will not be considered
intra-corporate - The reason for suspending actions for
claims against the corporation is not really
 Controversies in the appointment (asked in the
to enable the management committee or
bar)
the rehabilitation receiver to substitute the
defendant in any pending action against it
- Cases involving election, appointment and
before any court, tribunal or body. The real
removal
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 justification is to enable the management - Their liability was almost wiped out they
committee or rehabilitation receiver to became stockholders instead of creditors
effectively exercise his powers free from any
Judicial or extra-judicial interference that might - After 5 years those who converted sold it
unduly hinder or prevent the “rescue” of the back to the corporation, thereby making
debtor company. To allow such other actions profits
to continue would only add to the burden of
the management committee pr rehabilitation  Amendment is for the economic
receiver, whose time, effort and resources development of the country
would be wasted in defending claims against
the corporation instead of being directed  What if walang amendment, e mas
towards restructuring and rehabilitation.(PAL maraming liabilities kesa assets
vs. Spouses Sadic and Kurangking)
 Suspension order- all actions for claims
- To enable the receiver to effectively exercise against the corporation are accordingly
his or her power free form any judicial or extra- suspended at whatever stage the
judicial that may disturb proceedings maybe

 3 types of suspension of payments  Effect of suspension- you cannot foreclose

1. Simple suspension of payments  What are claims?

- where deferment of payment of claims against - Debts or demands of pecuniary nature.

a distress company; ask the court to be given Assertion of a right to have money paid
time to the payment of liability by postponing
- Claims against the corporation shall be
the payment
suspended, assertion of a right to have
- When it has sufficient assets and liabilities but money paid; it must present a monetary
forces the impossibility of meeting them when claim, liquidated or unliquidated
they respectively fall due
 Nullification of corporations does not
2. Suspension of receiver with a management present a monetary claim of pecuniary
committee with a rehabilitation play or nature
suspension of payments accompanied by a
proposal for rehabilitation (with or without  Union vs. CA
rehabilitation)
- It does not allow a mere individual to file the
- corporation has sufficient assets to cover its petition which is limited to corporations
liabilities, but sees the possibility; is or without partnership or associations.
rehabilitation plans; normally would attach the
- Where no authority is granted to hear
rehabilitation plan
petitions of individuals for suspension of
- For purpose of economic development payments, such petition are beyond the
competence of the SEC
3. Suspension of payments when the corporation
has no sufficient assets to its liabilities  What happens if there is a suspension
order?
 May it still be revived?
 Explain the key phrase “quality is equity”
- Yes, it may still be revived
- All creditors stand on equal footing, secure
 How can a corporation with more liabilities or unsecure, holding or lien or without a
than assets continue its operations profitably? lien, no creditor may enforce his lien while
rehabilitation is going (Alemar case)
- Even if the distressed company has no
sufficient assets and liabilities it can go for - No preference shall be given
suspension
 RCBC vs. IAC
- It asked for a management committee without
a receiver plan (Victorius Milling case) - Decided on motion for reconsideration

 Convert their claims into equity - It court 7 years to decide authentication

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 Rule of the thumb - In the absence of a strong showing of an
imminent danger of dissipation, loss
- Automatic suspension even if not decreed in wastage or destruction of assets or other
the decision itself properties of a corporation and paralysis of
its business operations, the mere
- Once lifted the preferred creditors will regain apprehension of future misconduct based
their preference upon prior mismanagement will not
authorize the appointment of a
 Appointment of a management committee management committee
- Take over the management committee of the  Section 5 and 6(D) governed by separate
distressed corporation rules; interim rules and intra-corporate
controversy
- Extraordinary and drastic remedy
 Venue of actions
- Without any remedy
- Rules of court- where the parties are
 What is an intra-corporate controversy? residing
- Section 5(B) - Intra-corporate- no matter where the parties
are residing it will be in the city or
- Sole criteria is whether there exists an intra-
municipality where the principal office is
corporate dispute is that if there is an intra- located
corporate relationship
 Rehabilitation proceedings venue
 Why is there suspension of all actions against
claims when a receiver is appointed? - In rem
- To enable the management committee to - Acquired upon publication without furnishing
exercise its powers the creditors a copy of the petition and
attachments thereof
 Sy Chim vs. Sy Siy Ho (before a management
committee may be opt by a court) - A creditor may now file the suspension
proceedings; provides that creditors owns at
- 2 requisites for a valid appointment of least 25%
management committee
 Intra-corporate- rule 1 section 6
1. Imminent danger of dissipation, loss, wastage
or destruction of assets or other corporate  Service of summons- rule 2 section 5
properties
- Summons may be made to anyone
2. Paralysis of business operations, the mere
apprehension of future misconduct based  In case of intra-corporate dispute, elections,
upon prior management fraud, etc; if they are governed by interim
rules of procedure on intra-corporate
- Save and except in the case of a close controversies
corporation in case of deadlock management
committee is allowed to take over right away  Venue

 Jacinto case - Special commercial courts where principal

office is located/established (section 5 rule
- 2nd par of page 676 1)
- 2 requisites where present - Matters of payment/suspension must be
filed in the city/ municipality where
- Wala ng mapautang, there was a paralyzation corporation is located
 Sy Chim  Under old rule, creditors have no right to
institute an action for receivership; now
- Did not appoint a management committee creditors, if they sold 20% they can institute
an action for receivership

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 Section 5 THE SECURITIES REGULATION CODE (RA8799)

- Service of summons may be made by fax/e- - Also known as the Blue Sky Law since it was
mail enacted to protect the public from unscrupulous
promoters who stake business which have no basis
 E.B. Villarosa vs. Benito and sell shares and interest therein to investors,
who are then left holding certificates representing
- Will apply only if it is not an intra-corporate nothing more than a claim to a square of the blue
controversy sky.
 If the controversy arose out of an intra- -SEC. 2. Declaration of State Policy. – The State
corporate dispute rules on interim rules of shall establish a socially conscious, free market that
procedure of intra-corporate controversies regulates itself, encourage the widest participation
shall govern of ownership in enterprises, enhance the
democratization of wealth, promote the
 Rule 4 section 17- immunity from suit
development of the capital market, protect investors,
 Rehabilitation receiver shall not subject to any ensure full and fair disclosure about securities,
action, claim or demand in connection with any minimize if not totally eliminate insider trading and
act done omitted by him in good faith in the other fraudulent or manipulative devices and
exercise of his functions and powers herein practices which create distortions in the free market.
conferred
BROKER - person who buys and sells securities for
 Claim the account of others.

- Right to payment, whether or not it is reduced DEALER - person who buys and sells securities for
to judgment, liquidated or unliquidated, fixed or his/her own account in the ordinary course of
contingent, matured or unmatured, disputed or business.
undisputed, legal or equitable and secured or
unsecured NOTE: No person shall engage in
the business of buying or selling
 Investment contracts securities in the Philippines as a broker
or dealer, or act as a salesman, or an
- A contract, transaction or scheme whereby a associated person of any broker or
person invests his money in a common dealer unless registered as such with
enterprise and is led to expect profits primarily the Commission. (Sec 28)
from the effects of others
SECURITES - shares, participation or interests in a
 The management committee and rehabilitation corporation or in a commercial enterprise or profit-
receiver are empowered to: making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in
1. Take custody and control of all assets of the character. It includes:
corporation CODE: COFDIPS
a) Certificates of assignments, certificates of
2. Evaluate assets and liabilities, earnings participation, trust certificates, voting trust
operations of the corporation certificates or similar instruments;
b) Other instruments as may in the future be
3. Determine the best way to protect the
determined by the Commission;
investors and creditors
c) Fractional undivided interests in oil, gas or
4. Study, review evaluate the feasibility of other mineral rights;
continuing operation and structures d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest
5. Submit recommendations to the RTC or participation in a profit sharing
regarding rehabilitation plan agreement, certificates of deposit for a
future subscription;
6. Rehabilitate the corporation if determined to f) Proprietary or non proprietary membership
be feasible by the RTC certificates incorporations; and
g) Shares of stock, bonds, debentures, notes,
7. Report to the RTC until the corporation is evidences of indebtedness, asset-backed
dissolved securities;

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GR: Securities shall not be sold or offered for sale or e) Sale of capital stock of a
distribution within the PH, without a registration corporation to its own stockholders
statement filed with and approved by SEC. Prior to exclusively, where no commission or other
such sale, information on the securities, in such form remuneration is paid or given directly or
and with such substance as the Commission may indirectly in connection with the sale of such
prescribe, shall be made available to each prospective capital stock.
purchaser. (Sec 8) f) Issuance of bonds or notes secured
by mortgage upon real estate or tangible
EXCEPT: Exempt Securities under Sec 9 personal property, where the entire
a) Any security issued or guaranteed by mortgage together with all the bonds or
the Government of the PH, or by any political notes secured thereby are sold to a single
subdivision or agency thereof, or by any purchaser at a single sale.
person controlled or supervised by, and acting g) Issue and delivery of any security in
as an instrumentality of said Government. exchange for any other security of the same
b) Any security issued or guaranteed by issuer pursuant to a right of conversion
the government of any country with diplomatic entitling the holder of the security
relations with the PH, or by any state, province surrendered in exchange to make such
or political subdivision thereof on the basis of conversion: Provided, That the security so
reciprocity: Provided, that the SEC may require surrendered has been registered under this
compliance with the form and content of Code or was, when sold, exempt from the
disclosures the Commission may prescribe. provisions of this Code, and that the security
c) Certificates issued by a receiver or by issued and delivered in exchange, if sold at
a trustee in bankruptcy duly approved by the the conversion price, would at the time of
proper adjudicatory body. such conversion fall within the class of
d) Any security or its derivatives the sale securities entitled to registration under this
or transfer of which, by law, is under the Code. Upon such conversion the par value
supervision and regulation of the Office of the of the security surrendered in such
Insurance Commission, Housing and Land exchange shall be deemed the price at
Use Regulatory Board, or the Bureau of which the securities issued and delivered in
Internal Revenue. such exchange are sold.
e) Any security issued by a bank except h) Broker’s transactions, executed
its own shares of stock. upon customer’s orders, on any registered
Exchange or other trading market.
AND Exempt Transactions under Sec 10 i) Subscriptions for shares of the
a) A judicial sale, or sale by an executor, capital stock of a corporation prior to the
administrator, guardian or receiver or trustee in incorporation thereof or in pursuance of an
insolvency or bankruptcy. increase in its authorized capital stock under
b) By or for the account of a pledge the Corporation Code, when no expense is
holder, or mortgagee or any other similar lien incurred, or no commission, compensation
holder selling or offering for sale or delivery in or remuneration is paid or given in
the ordinary course of business and not for the connection with the sale or disposition of
purpose of avoiding the provisions of this such securities, and only when the purpose
Code, to liquidate a bona fide debt, a security for soliciting, giving or taking of such
pledged in good faith as security for such debt. subscriptions is to comply with the
c) An isolated transaction in which any requirements of such law as to the
security is sold, offered for sale, subscription or percentage of the capital stock of a
delivery by the owner thereof, or by his corporation which should be subscribed
representative for the owner’s account, such before it can be registered and duly
sale or offer for sale, subscription or delivery incorporated, or its authorized capital
not being made in the course of repeated and increased.
successive transactions of a like character by j) The exchange of securities by the
such owner, or on his account by such issuer with its existing security holders
representative and such owner or exclusively, where no commission or other
representative not being the underwriter of remuneration is paid or given directly or
such security. indirectly for soliciting such exchange.
d) Distribution by a corporation, actively k) The sale of securities by an issuer
engaged in the business authorized by its AOI, to fewer than twenty (20) persons in the
of securities to its stockholders or other Philippines during any twelve-month period.
security holders as a stock dividend or other l) The sale of securities to any
distribution out of surplus. number of the following qualified buyers: (i)

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 Bank; (ii) Registered investment house; knowledge that a simultaneous order or orders of
(iii)insurance company; (iv) Pension fund or substantially the same size, time and price for the
retirement plan maintained by the Government sale or purchase of such security has, or will be
of the Philippines or any political subdivision entered by or for the same or different parties.
thereof or managed by a bank or other
persons authorized by the Bangko Sentral to Note: Wash sale and matched orders
engage in trust functions; (v) investment become illegal when they are used as a
company or; (vi) Such other person as the means to create false appearance of active
Commission may by rule determine as trading in the security concerned.
qualified buyers, on the basis of such factors
as financial sophistication, net worth, 3. Marking the close – placing the purchase
knowledge, and experience in financial and order, at or near the close of the trading period. The
business matters, or amount of assets under price that was closed will then be the price that will
management. be posted on the following trading day.
4. Painting the tape – involves a series of
PROTECTION OF SHAREHOLDERS INTEREST transactions that are reported publicly to give the
impression of an activity in a security.
1. Tender Offers (Sec 19) 5. Squeezing the float – the part of an
2. Proxy solicitation (Sec 20) outstanding security intentionally held by dealers or
3. Internal record keeping and other persons with a view of reselling them later for
accounting (Sec 22) profit.
6. Hype and dump – Act employed by a
TENDER OFFER – A publicly announced intention person or group of persons of purchasing the
acting alone or in concert with others to acquire equity outstanding capital stock of a dormant public shell
securities of a company. (2002 Bar Exams) company for a nominal amount and merge it with
their privately held company. They would then gain
Instances when Tender Offer is Required control of the majority stocks of the merged entity.
1. When the person intends to acquire Stock certificates are often re-issued in the name of
15% or more of the equity share of a public the merged entity to relatives and associates who
company pursuant to an agreement made act as nominees of the person or persons employing
between or among the person and one or the device. They would then look for a broker-
more sellers; dealer who would be willing to make a “hype” of the
2. When the person intends to acquire securities. The broker-dealer then generates
30% or more of the equity share of a public volume and advance bid price. When the market
company within a period of 12 months; reaches a high price, they would “dump” their
3. When the person intends to acquire shareholdings and bail out.
shares that would result in an ownership of 7. Boiler Room Operations – involves an
more than 50% of the equity shares of a public intensive selling campaign through numerous
company. salesmen by telephone or through direct mail
offerings for securities of either a certain type or
PROXY SOLICITATION from a specific issuer. Investors are induced to
purchase through hard-sell based on unfounded
NOTE: A broker or dealer who holds or acquires the predictions and mailing of misleading market letters.
proxy for at least ten per centum (10%) or such
percentage as the Commission may prescribe of the Note: Marking the close, Painting the tape,
outstanding share of the issuer, shall submit a report Squeezing the float, Hype and dump, Boiler
identifying the beneficial owner within ten (10) days Room Operations become unlawful if it is
after such acquisition, for its own account or customer, effected to either raise the price or induce
to the issuer of the security, to the Exchange where the purchase of a security or of a
the security is traded and to the Commission. (Sec controlling, controlled, or commonly
20.5) controlled company by others or to depress
the price to induce the sale of a security,
FRAUDULENT TRANSACTIONS AND OTHER whether of the same or of a different class,
MARKET MANIPULATIONS of the same issuer or of a controlling,
controlled company or common controlled
1. Wash Sale (Sec 24.1(a)(i)) – any transaction company by others or to create active
in a security which involves no change in the beneficial trading to induce the purchase through said
ownership thereof. devices or schemes.
2. Matched Order (Sec 24.1(a)(ii)) – order or
orders for the purchase or sale of security with the

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8. Circulating or Disseminating Information – Person other than an officer or employee of
circulating an information that any of the security listed the corporation, its parent or subsidiaries, or any
in the exchange will or is likely to rise or fall because of other individual having a relationship with the
manipulative market operations of any one or more corporation, which would interfere with the exercise
persons conducted for the purpose of raising or of independent judgment in carrying out the
depressing the price of the security and thus inducing responsibilities of a director.
the purchase of such security.
9. Making False or Misleading Statements with Corporations which require an Independent
respect to any material fact which he knew or had Director
reasonable ground to believe was so false or 1. An exchange; or
misleading for the purpose of inducing the purchase or 2. Any corporation with a class of equity
sale of such security. securities listed for trading on an Exchange or with
10. Pegging or Fixing Or Stabilizing the price of assets in excess of P50M and having 200 or more
security effected either alone or with others through holders, at least 200 of which are holding at least
any series of transactions for the purchase or sale 100 shares of a class of its equity securities or
thereof, if done for such purpose. which has sold a class of equity securities to the
11. Short sale – selling of security which the public pursuant to an effective registration statement
vendor does not own unless done in accordance with shall have at least two (2) independent directors or
the rules and regulations of the SEC. such independent directors shall constitute at least
12. Insider Trading – the act of an insider to buy 20% of the members of such board, whichever is
or sell security of the issuer while in possession of the lesser.
material information with respect to such security that
is not generally made known to the public unless (a) OPTION TRADING
The insider proves that the information was not gained  Put – a transferrable option or offer to
from such relationship; or (b) If the other party selling deliver a given number of shares of stock at a stated
to or buying from the insider (or his agent) is identified, price on any given time during the stated period.
the insider proves: (i) that he disclosed the information  Call – a transferrable option to buy a
to the other party, or (ii) that he had reason to believe specified number of share at a stated price
that the other party otherwise is also in possession of  Straddle – a combination of put and call.
the information.
SETTLEMENT OFFERS
Note: When is information “material non- At any time, during an investigation or
public”? - if: (a) It has not been generally proceeding under this Code, parties being
disclosed to the public and would likely affect investigated and/or charged may propose in writing
the market price of the security after being an offer of settlement with the Commission. The
disseminated to the public and the lapse of a Commission may only agree to a settlement offer
reasonable time for the market to absorb the based on its findings that such settlement is in the
information; or (b) would be considered by a public interest. Any agreement to settle shall have
reasonable person important under the no legal effect until publicly disclosed. Such decision
circumstances in determining his course of may be made without a determination of guilt on the
action whether to buy, sell or hold a security. part of the person making the offer.

Note: Who is an “insider”? - “Insider” DAMAGES

means: (a) the issuer; (b) a director or officer All suits to recover damages shall be
(or person performing similar functions) of, or brought before the Regional Trial Court, which shall
a person controlling the issuer; (c) a person have exclusive jurisdiction to hear and decide such
whose relationship or former relationship to suits. The Court is authorized to award damages in
the issuer gives or gave him access to an amount not exceeding triple the amount of the
material information about the issuer or the transaction plus actual damages.
security that is not generally available to the
public; (d) a government employee, or director, NOTES
or officer of an exchange, clearing agency  If there are goods involved in the
and/or self-regulatory organization who has multimarket, it is beyond the jurisdiction of SEC (Ex
access to material information about an issuer First Quadrant)
or a security that is not generally available to  Criminal charge for violation of SRC is a
the public; or (e) a person who learns such specialized dispute, hence it must be first referred
information by a communication from any of with SEC (Baviera vs. Paglinawan G.R. No. 168380
the foregoing insiders. Feb 8, 2007)
INDEPENDENT DIRECTOR

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 T3 Rule in trading of Securities – Trading
day + 3 more days you must comply with your
obligations.

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