POINTERS IN CORPORATION LAW

clarence

Sec. 16, Art. XII (1987 Constitution)

The Congress shall not, except by general law, provide for the formation, organization or
regulation of private corporations. GOCCs may be created or established by special charters in
the interest of the common good and subject to the test of viability.

ATTRIBUTES OF A CORPORATION
(1) it is an artificial being
(2) it is created by operation of law
(3) it has the right of succession
(4) it has only the powers, attributes, and properties authorized by law or incident to its
existence.

MATTERS PERTAINING TO THE CORPORATION AS A PERSON

Liability for torts (committed by its officers for corporate purpose)
Liability for crimes- a corporation does not have malice, therefore, the responsible officers
will be liable
A corporation is entitled to due process, equal protection, protection against unreasonable
search and seizure
BUT a corporation is not entitled to the privilege against self-incrimination.
A corporation is not entitled to moral damages (except for besmirched reputation)
A corporation cannot engage in the practice of a profession, although it may hire one,
since a profession is based on personal accountability which is all lost where one acts as
a mere agent, or alter ego of unlicensed corporations or persons.

A corporation cannot form a partnership. Why? Under the principle of mutual agency in
partnerships where the partner(s) can bind the partnership and the other partners which principle
is violative of the principle under the Corporation Code that only the BOD may bind the
corporation.

Theory of Concession- that the corporation owes its existence to the State, its birth being purely
dependent on its will. A corporation will have no higher right than that of its creator and cannot
refuse to yield to obedience to acts of its state organs. Requirements should be met in order for
the State to grant corporate personality.

Theory of Corporate Enterprise or Economic Unit- that the corporation is not merely an artificial
being, but more as an aggregate of persons doing business. This is the underlying theory behind
the application of piercing the corporate veil and doctrine of estoppel. lex cervus

ADVANTAGES OF A CORPORATION
(1) A strong and separate juridical personality distinct from its SHs or Ms.
(2) Limited liability to investors
(3) Free transferability of units of ownership
(4) Centralized management

ATTACK ON VALIDITY OF A CORPORATION

GEN. RULE: only a direct attack through a quo warranto proceeding
IF A VOID CORPORATION: collateral attack allowed since it has no personality to sue
IF A DE FACTO CORPORATION: direct attack required (Sec. 20). Why? There is a valid
attempt to incorporate. It must have a Certificate of Incorporation.
IF A DE JURE CORPORATION: cannot be attacked directly or collaterally because it is a
valid corporation and there is nothing to attack

GOCCs- governed by the Civil Service Law and their respective charters; thus NLRC has no
jurisdiction as GOCCs are not governed by the Labor Code.
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Nationalized corporations:100% Filipino-owned

Mass media, rural banks, rice and corn industry
70%-Filipino- owned:
Advertising, banks and other rural banks and new banks established by
consolidation of branches or agencies of foreign banks in the Philippines (RA
337), private development banks (RA 4093)
60%-Filipino-owned:
Financing companies, fishery industry, exploration, development and utilization of
natural resources, ownership of lands, operation of public utilities, educational
institutions other than those established by religious groups, and any business
reserved by Congress (Source: ssc bar ops 2002 hand-out)
Retail Trade is no longer restricted to Filipinos (RA 8762)

Moral damages in favor of a corporation

The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having existence only in legal contemplation, it has no feelings, no
emotions, no senses. Therefore, it cannot experience physical suffering and mental anguish,
which can only be experienced by one having a nervous system. (ABS-CBN case, 301 SCRA
573)
MORAL DAMAGES
Gen. Rule: A corporation is not entitled to moral damages
Exception: besmirched reputation (Jardine v. CA, 333 SCRA 684)

BY-LAWS
By-laws cannot operate to restrict property rights of SHs. Authority granted to a
corporation to regulate the transfer of its stock does not empower the corporation to
restrict the right of a SH to transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be followed in effecting transfer.
(Thomson v. CA, 298 SCRA 280)
The place of meeting of SHs is provided in the BLs (city or municipality where the
principal office is located); BUT the place of meeting of the BODs or trustees may be
provided for in the BLs; place of meeting of directors or trustees may be outside the
Philippines if so provided for in the BLs.
BINDING EFFECT OF BY-LAWS TO THIRD PARTIES: third parties are not bound by the
by-laws, except when they have knowledge of the provisions either actually or
constructively.
Third parties should have knowledge of the BLs at the time of the transaction with the
SHs. The corporation should have informed the pledgee of its BLs when it sent notice
formally recognizing pledgee of its shares registered in the name of the SH of record.
The corporations belated notice at the time of foreclosure will not suffice. (China Bank v.
CA, 270 SCRA; Villanueva, p. 691)

DIRECTORS/ SHS/ OFFICERS

President must be a director

Treasurer may or may not be a director
Secretary who shall be a resident and Filipino citizen
Thus, a Spanish citizen can be a President provided he is a director except in the
nationalized business; he can also be a Director except in the nationalized business; the
Spanish citizen, however, cannot be a Secretary but he may be a manager except in the
nationalized business.
Notes: INCORPORATORS (5-15)- natural persons, of legal age, and majority of them
must be residents and must own at least 1 share of stock. DIRECTORS- own at least one
share registered in the books of the corporation and continuously hold such, otherwise,
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he ceases to be a director; majority must also be residents.

In a stock corporation, the power to determine who the officers should be and the power
to elect them are lodged in the BOD by majority vote; in those matters, the SHs have no
say.
In a non-stock corporation, unless otherwise provided for in the AOI or the BLs, officers of
a non-stock corporation may be elected by the members.
Since the Executive Secretary is not provided for in the BLs of the association, the
incumbent is not a corporate officer and is not subject to the discretion of the BOD to
terminate. Being a non-officer, she enjoys security of tenure and can only be dismissed
for cause. (Mita Pardo case, 112 SCRA 243; Villanueva, p. 640)
In instances where the term of an officer is not fixed by contract or in the BLs, he may be
removed at any time with or without cause at the pleasure of the BOD since the power to
elect or appoint officers being vested with the BOD, the power of removal must
necessarily be exercised by it.
The corporate officers position and issues such as termination are intra-corporate
disputes within the jurisdiction of the SEC (now RTC) and not the NLRC since it falls
within the exercise of the BODs of their business judgment. (Ongkingco v. NLRC, 270
SCRA 613). The determination of the concomitant rights and liabilities arising from the
ouster from such positions would be an intra-corporate controversy. (Tabang v. NLRC,
266 SCRA, Villanueva, p.641)

Powers exercised by BOTH the BOD & SHs

Amending Articles of Incorporation
Selling all or substantially all of corporate property
Merger
Dissolution
Investment in a purpose other than the primary purpose
Extension or shortening of the corporate term

Corporations which may not issue no par value shares

Banks
Insurance companies
Building and Loan Associations
Public utility companies without approval of any of the appropriate boards
Trust companies
lex cervus fraternity SSC-R

NON-VOTING SHARES
NO share shall be deprived of voting rights except those classified and issued as
preferred or redeemable. Treasury shares are also non-voting.

NON-VOTING SHARES MAY VOTE ON THESE MATTERS:

Amendment of AOI
Adoption & amendment of BL
Sale or other disposition of all or substantially all of the corporate property
Incurring, creating or increasing bonded indebtedness
Increase or decrease in capital stock
Merger or consolidation with other corporation(s)
Investment of funds in another corporation or for a different purpose
Corporate dissolution. (Sec. 6)

LIMITATIONS ON THE ISSUANCE OFNO PAR VALUE SHARES

It cannot have an issued price of less than P5.00
The entire consideration for its issuance constitutes capital so that no part of it
should be distributed as dividends
They cannot be issued as preferred shares
They cannot be issued by banks, trust companies, insurance companies, building
and loan associations, public utilities
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The AOI must state they are issued as no par value shares
Once issued, they are fully paid and non-assessable

PREFERRED SHARES
Entitles the holder thereof to certain preferences over the holders of common stock.
(1) Preferred shares as to assets,
(2) Preferred shares as to dividends.
(2.1.) Cumulative preferred share- entitles the holder to payment of current
dividends and also to dividends in arrears
(2.2.) Non-cumulative preferred share
(2.3.) Participating preferred share- share in stipulated dividends at the
preferred rate and also to the remaining profits pro rata after the common
shares have been paid the amount of the stipulated dividend at the same
preferred rate.
(2.4.) Non- participating preferred share

REDEEMABLE SHARES
Issuable only if expressly provided for in the AOI. They have to be purchased or
taken up by the corporation on the expiration of the period specified in said shares. The
purchase takes place whether or not the corporation has unrestricted retained earnings when
the expiry date arrives.
Notes:
RIGHT OF APPRAISAL
Gen. Rule: Allowed only when the corporation has URE, meaning the amount in
excess of the legal capital; otherwise, the legal capital would be disturbed.
Exceptions:
(1) In case of redeemable shares (Sec. 8)
This is subject to the condition that the corporation has, after such
redemption, assets in its books to cover debts and liabilities inclusive of
capital stock. Redemption therefore, may not be made where the corporation
is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature. (Villanueva, p. 614)
(2) In case of close corporation (Sec. 104)

Treasury shares
TREASURY SHARES- shares of stock which have been issued and fully paid for, but
subsequently re-acquired by the corporation by purchase, redemption, donation or through
some other lawful means.

TS may not be voted. Why? They are in the name of the corporation. It is as if
the management would vote for themselves.
TS shall have no voting rights as along as stock remains in the treasury
TS are not entitled to dividends. Why? The result would be that the corporation
would be paying itself

WAYS OF INCREASING CAPITAL STOCK

By increasing the number of shares and retaining the par value
By increasing the par value of existing shares without increasing the number of
shares
By increasing both the number of shares and the par value

GROUNDS FOR REJECTION OF AOI OR AMENDMENTS

(1) Non-compliance with the form prescribed
(2) Purpose is illegal or immoral
(3) Treasurers affidavit is false
(4) Non-compliance with percentage requirement of ownership required by the Constitution
(sec.17)
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NON-USER OF CORPORATE CHARTER AND CONTINUOUS INOPERATION OF

CORPORATION
(A) Non-user for 2 years, corporation does not formally organize or commence
business- deemed dissolved (automatic)
(B) Non-user for 5 years- started business but becomes subsequently inoperative for
at least 5 continuous years- a ground for revocation or suspension of corporate
franchise (therefore, not automatic)

DERIVATIVE SUIT
A suit filed by an individual SH on behalf of the corporation wherein he holds stock in
order to vindicate or protect corporate rights whenever: (1) the officials of the corporation refuse to
sue; (2) the officials are the ones to be sued; (3) the officials hold control over the corporation.
lex cervus fraternity ssc-r
Requisites for derivative suit:
(1) Existing cause of action in favor of the corporation (as where the BOD perform
ultra vires acts or wastes corporate funds);
(2) Exhaustion of intra-corporate remedies;
(3) The SH or member must have been as such at the time of the objectionable
transaction unless such transactions continue and are injurious to him or affect
him in some other way;
(4) The action must be brought by the SH or member in the name and for the benefit
of the corporation. (De Leon, p. 568)
(5) The minority SH suing must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all the other SHs
similarly situated. (Tam v. Makasiar, 350 SCRA; Villanueva, p. 659)

A derivative suit filed by the SHs on behalf of the corporation will be dismissed
when the reliefs sought for under the petition pertain to the SHs and not the
corporation. (Evangelista v. Santos, 86 Phil. 387)

REQUISITES FOR VALID RATIFICATION OF ULTRA VIRES ACT

(1) The act or contract must be consummated, not merely executory
(2) The creditors must not be prejudiced
(3) The rights of the State are not involved
(4) All SHs have given their consent (Villanueva, p. 661)

The filing of the surety bond, which was ultra vires, but not illegal per se, and which was
ratified by the acceptance by the mining company of the benefits attendant to the opening
of a post office in the mining compound, is binding on the corporation. (Republic v. Acoje,
3 SCRA 361; Villanueva, p. 662)
Even when the contract entered into in behalf of the corporation is outside the usual
powers of the corporate officer, the corporations ratification of the contract and
acceptance of benefits arising therefrom have made such contract binding upon the
corporation. (Peoples Aircargo v. CA, 297 SCRA 170)
An ultra vires act is not necessary illegal BUT an illegal act is always ultra vires.
Effects of ultra vires acts:
(1) executed contract: courts will not interfere
(2) executory contract: void and unenforceable
(3) partly executed, partly executory: principle of no unjust enrichment
applies
(4) executory contracts apparently authorized but ultra vires: principle of
estoppel will apply.
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Tests in determining the applicability of the doctrine of piercing the veil of corporate fiction
CONTROL, not mere majority or complete stock control, but COMPLETE
DOMINATION, not only of finances but of policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own.
Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right; and
The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of. (Lim v. CA, 323 SCRA 103)

Tests in determining whether a subsidiary may be treated as a mere instrumentality of the parent
corporation that will justify piercing the corporate veil
(1) The parent corporation owns all or most of the capital stock of the subsidiary
(2) The parent and subsidiary corporations have common directors or officers
(3) The parent corporation finances the subsidiary
(4) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation
(5) The subsidiary has grossly inadequate capital
(6) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
(7) In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or
financial responsibility is referred to as the corporations own
(8) The parent corporation uses the property of the subsidiary as its own
(9) The directors or executives of the subsidiary do not act independently in the interest of
the subsidiary but take orders from the parent corporation
(10)The formal legal requirements of the subsidiary are not observed. (PNB v. Ritratto, 31
July 2001)

Instances when a director, trustee or officer is PERSONALLY liable

When he assents to patently unlawful acts of the corporation
For bad faith or gross negligence in directing corporate affairs
For conflict of interest, resulting in damages to the corporation
When he assents to the issuance of WATERED STOCK or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection thereto
When he agrees to hold himself personally and solidarily liable with the corporation; or
He is made, by a specific provision of law, to personally answer for his corporate action.
(Equitable Bank v. NLRC, 273 SCRA 352; sec. 31 Corporation Code)

DOCTRINE OF CORPORATE OPPORTUNITY

A rule by the Corporation Code making a director account to his corporation, gains
and profits from any transaction entered into by him or another competing corporation or
entity where he has a substantial interest which could have been a transaction undertaken by
his corporation. (READ sec.34 on disloyalty of a director) Sec. 34 is applicable
notwithstanding the fact that the director risked his own funds. However, his act may be
ratified by 2/3 vote of the OCS.

CONTRACT BETWEEN CORPORATION AND DIRECTOR/TRUSTEE OR OFFICER

Gen. Rule: voidable
Exceptions: (valid in these instances)
(1) Presence of such director in the meeting was not necessary to constitute a
quorum
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(2) Vote of such director is not necessary for the approval of the contract
(3) Contract is fair and reasonable
(4) In case of an officer, the contract with the officer has been previously authorized
by the BODs. (sec. 32)

Notes: In case 1 & 2 are absent, it may still be ratified by 2/3 OCS provided there
is full disclosure of adverse interest.
Note the difference between sec. 32 (self-dealing director) and sec. 33
(interlocking directors).

REMEDIES IN CASE OF MISMANAGEMENT OR ABUSE OF POWERS BY THE BOD OF THE

CORPORATION
(1) Receivership
(2) Injunction if the act has not yet been done
(3) Dissolution if abuse amounts to a ground for quo warranto but SOLGEN refuses to act
(4) Derivative suit or complaint filed with the SEC (now RTC)

QUALIFICATIONS OF DIRECTORS
At least 1 share
Majority of the corporate directors must be residents of the country
Must not be convicted of an offense BY FINAL JUDGMENT of more than 6 years
Does not COMMIT a violation of the Corporation Code 5 years prior to his election or
appointment (conviction not required, mere commission suffices)

CUMULATIVE VOTING
a SH shall have as many votes as he has number of shares times the number of
directors up for election.
Outstanding shares x desired no. of directors + 1
Total number of directors + 1
Enable minority SHs to vote their representative in the BOD
Mandatory in stock corporations but not in non-stock corporations unless
provided in the BLs

PRE-EMPTIVE RIGHT OF SHS

PRE-EMPTIVE RIGHT- Right of SHs at the time of issue of CS, in preference to other
persons, and as between themselves, to subscribe for, or purchase, the unissued stocks in
proportion to the number of shares of the original stock held by them respectively.
EXCEPTIONS: (no pre-emptive right)
(1) Stock offerings to the public in compliance with laws requiring such offerings
(2) Stocks issued in exchange for property needed for corporate purposes
(3) Stocks to pay a previously contracted debt. (sec. 39)
(4) When denied by the AOI or an amendment thereto.
Notes:
Pre-emptive rights extend to all classes of shares including treasury shares.
Where a corporation increases capital stock, SHs are entitled to a pre-emptive right to
subscribe to a sufficient number of shares in order to maintain their previous relative
voting power. The corporation must give the SH a reasonable period within which to
exercise the right.

VACANCY IN THE OFFICE OF DIRECTOR OR TRUSTEE

FILLED UP BY THE REMAINING MEMBERS OF THE BOARD,
CONSTITUTING A QUORUM:
If vacancy is due to death, resignation or legal disqualification

IF

STILL

FILLED BY A VOTE OF SHs OR MEMBERS

In case of removal of a member of the board or trustees
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If the remaining members of the board does not constitute a quorum and
therefore could not fill the vacancies created by death, resignation or
disqualification of a director or trustee
In case a director ceases as such because of expiration of term
If the vacancy is created because of increase in the number of directors at any
time of the year.

POWERS OF A CORPORATION
EXPRESS POWERS:
Sue and be sued in its corporate name
Succession
Adopt and use a corporate seal
Amend its AOI
Adopt by-laws and to amend or repeal the same
Sell or issue stocks (Stock Corp) or sell treasury shares
To purchase, receive, convey real or personal property
Enter into merger or consolidation
Make reasonable donations
Power to deny pre-emptive right (sec. 39)
Power to extend or shorten corporate term (sec. 38)
Sale or other disposition of assets (sec. 40)
Power to acquire own shares (sec. 41)
Power to invest funds in another corporation (sec. 42)
Power to declare dividends (sec. 43)
Power to enter into management contract (sec. 44)
IMPLIED POWERS:
Acts in the usual course of business
Acts to protect debts owing to the corporation
Acts which involve embarking in a different business
Acts which are in whole or in part intended to protect or aid employees
Acts to increase the business

RIGHTS OF STOCKHOLDERS
MANAGEMENT RIGHTS
Voting rights (sec.6)
Limitations on the right to vote:
Rule on non-voting shares (with exceptions)-sec.6
Preferred/redeemable shares- cannot vote if so provided
Fractional shares cannot vote unless it constitutes one full share
(sec.41)
Treasury shares- no voting rights so long as they remain in the
treasury
Stocks declared delinquent cannot vote
A transferee of stock cannot vote if his share is not registered in
the corporate books
Right to remove directors (sec. 28)
PROPRIETARY RIGHTS
Right to dividends
Appraisal right (sec. 81)
Right to issuance of stock certificate for fully paid shares (sec. 64)
Proportionate participation in the distribution of assets in liquidation (sec. 118-119
Right to transfer or stocks in corporate books (sec. 63)
Pre-emptive right (sec.39)
Right to inspect corporate books (sec. 74)
Right to recent financial statements (secs. 74-75)
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 Right to recover stocks unlawfully sold for delinquent payment of subscription

REMEDIAL RIGHTS
Individual suit
Derivative suit
Representative suit

REASON FOR LIABILITY FOR ISSUANCE OF WATERED STOCK

It will violate the Trust Fund Doctrine since it will affect the legal capital.
Sec. 65- solidary liability of the director and the SH concerned for the difference
between the fair value received at the time of issuance of the stock and the par or issued
value.

Test to determine whether the sale involves all or substantially all of the corporate property
If because of the sale, the corporation can no longer continue accomplishing the
purpose for which it was incorporated, then there is a sale of all or substantially all of the
corporate property.

KINDS OF DIVIDENDS
(1) Cash
(2) Stock
(3) Property

(4) Bond
(5) Liquidating

POWER TO DECLARE DIVIDENDS

CASH dividends- BOD majority
STOCK dividends- BOD maj. + 2/3 of OCS. Why 2/3 OCS? Bec. there is an increase
in legal capital, thus 2/3 OCS required.

KINDS OF SURPLUS
(1) earned surplus
(2) paid-in surplus

(3) revaluation surplus

(4) reduction surplus

A non-SH may not receive stock dividends because he is not a stockholder of record.

In case of unrecorded transfers

As between the parties, the transferee, if at the time of the transaction, he is already a
stockholder at the time of the declaration.
As between the corporation: the transferor

DISPOSITION OF CORPORATE ASSETS (sec. 40)

Despite approval by the SHs or members, it is not mandatory for the Board to
continue with the disposition. (Villanueva, p. 675)

TRUST FUND DOCTRINE

Under sec. 43, the corporation can declare dividends only out of unrestricted retained
earnings and that under sec. 122, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities.
(Villanueva, p. 676)
Under the TFD, the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors. (CIR v. CA, 301
SCRA 152)

POWER TO ENTER INTO MANAGEMENT CONTRACT

Gen. Rule:
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MANAGING CORPORATION
Majority vote of board + majority
of OCS

MANAGED CORPORATION
Majority board + majority of OCS

Exceptions: (need for 2/3 vote of SHs representing OCS if)

(1) A SH representing same interest of both managing and managed corporation own or
control more than 1/3 of the OCS entitled to vote of the managing corporation.
(2) Where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the BOD of the managed corporation.

MEETINGS
BOARD OF DIRECTORS
REGULAR MTG: monthly unless BLs provide otherwise
SPECIAL MTG: at any time upon the call of the President or as provided in the BLs
PLACE: in or outside the Philippines unless otherwise provided in the BLs
NOTICE: one week prior unless otherwise provided in the BLs
SHS OR MEMBERS
REGULAR MTG: annually as fixed in the BLs, otherwise, on any date in April
SPECIAL MTG: at any time provided one week notice unless otherwise provided in the BLs.
PLACE: principal office. Any provision in the BLs changing such place is illegal. (sec. 51)

PROXIES
Valid only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than 5 years at any one time. (sec.58)
Filed in writing, signed by the SH or member and filed before the scheduled meeting
with the corporate secretary.

VOTING TRUSTS
Gen. Rule: one or more SHs may create a VT for the purpose of conferring upon a trustee
or trustees the right to vote and other rights pertaining to the shares for a period not
exceeding 5 years.
Exception: in the case of a VT specifically required as a condition in a loan agreement,
said VT may be for a period exceeding 5 years BUT shall automatically expire upon full
payment of the loan.
FORM OF VOTING TRUST:
(1) In writing
(2) Certified copy filed with the SEC; otherwise the VT is ineffective and
unenforceable
(3) Cancel old certificate of stock(s) (COS) and issue new ones in the name of the
trustee(s) stating that they are issued pursuant to the VT agreement
(4) Note the VT in the books of the corporation
(5) The trustee(s) shall execute to the transferors VT certificates which shall be
transferable in the same manner and with the same effect as COS.
Notes:
The owner of the share(s) is only deprived of the right to vote BUT shall retain all
other rights like the right to dividends
No VT if it will violate laws against monopolies and illegal combinations in
restraint of trade
The voting trustee may vote by proxy unless the agreement provides otherwise
A TRUSTEE may be elected to the BOD.
A director who executes a VT over all his shares is automatically disqualified
since he only remains as a beneficial owner and not one with legal title over the
shares. Hence, ceasing to own the shares, he is now disqualified from being a
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director in the corporation.

CONSIDERATION FOR STOCKS

(1) Cash
(2) Property
(3) Labor performed for or services actually rendered to the corporation
(4) Previously incurred indebtedness by the corporation
(5) Amounts transferred from URE to stated capital
(6) Outstanding shares exchanged for stocks in the event of reclassification or
conversion.

STOCK CERTIFICATE
Best evidence of ownership
BUT if a subscription has not been paid and is not delinquent, then the subscriber is
deemed a SH for the full number of shares subscribed by him and he may vote such
number of shares at a SHs meeting even though he may not have been issued a
certificate of stock.
Should be signed by the President or VP and counter-signed by the corporate secretary
and sealed with the seal of the corporation
The issued certificate of stock is prima facie evidence of the genuineness and validity of
the stock but this may be rebutted by evidence to the contrary such as the books and
records of the corporation and even the stock and transfer book.
Endorsement plus delivery and registration in the corporate books required to transfer
ownership.
The transfer of shares must be recorded in the books of corporation, otherwise, though
valid between the parties, it cannot be effective as against the corporation and the
unrecorded transferee cannot vote nor be voted for. The purpose of registration is twofold: (1) to enable the transferee to exercise all the rights of a SH, including the right to
vote and to be voted for, and (2) to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to the rights and subject to the
liabilities of a SH.
The delivery of the stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the transferee. (sec.63)

MERGER AND CONSOLIDATION

Merger: A + B = A or B
Consolidation: A+ B =C (the parties are called constituent corporations)

2 kinds of merger
(1) Legal merger- by law
(2) Quasi-merger: rights and liabilities may vary according to the terms of the merger.

EFFECTS OF MERGER (SEC. 80)

Constituent corporations become a single corporation
Separate existence of constituent corporations cease except that of the surviving
corporation or consolidated corporation
The surviving/consolidated corporation shall assume all rights, privileges, immunities,
franchises and powers
Assumption of liabilities
AOI of absorbed corporation need not be amended
Absorbed corporation need not execute a deed of assignment
Exemption from capital gains tax

INSTANCES WHEN RIGHT OF APPRAISAL MAY BE EXERCISED:

(1) In case the amendment of the AOI has the effect of:
(a) Restricting the rights of any SH or class of shares
(b) Authorizing preferences in any respect superior to those of outstanding
shares of any class, or
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(c) Extending or shortening corporate term of corporate existence

(2) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of
all or substantially all of the corporate and assets as provided by the Code
(3) In case of merger or consolidation
(4) In case of investment of funds in another corporation or business purpose other
than the primary purpose
(5) In close corporation, a SH may compel the corporation to purchase his shares at
fair value for any reason.
Notes:
Increase in ACS, no appraisal right. Why? Not in the enumeration
Exception to the rule that a corporation cannot buy back its own shares:
A stockholder exercising his appraisal right

RIGHT OF APPRAISAL
Gen. Rule:
Allowed only when the corporation has URE, meaning the amount in excess of the
legal capital; otherwise, the legal capital would be disturbed.
Exceptions:
(1) In case of redeemable shares (Sec. 8)
(2) In case of close corporation (Sec. 104)
Notes:

UNRESTRICTED RETAINED EARNINGS

Who determines value?
BOD, in the absence of agreement as to the fair value as of the day prior to the date
on which the vote was taken excluding any appreciation or depreciation in anticipation of such
corporate action
IF THERE IS DISAGREEMENT: it shall be appraised by three disinterested persons,
one named by the SH, another by the corporation and last, by the first and second member.

If the dissenting SH is not paid within 30 days from after the award, he
shall automatically be restored to all his rights as SH. (Villanueva, p. 728)
INSTANCES WHEN RIGHT OF APPRAISAL IS LOST:
(1) Failure to make demand within 30 days after the vote was taken
on the corporate act
(2) Failure to surrender COS within 10 days from demand for
notation
(3) Non-existence of unrestricted profit to cover payment of the fair
value of dissenting shares within 30 days from date of reward;
(4) Subsequent transfer of the shares which have been annotated
when the new certificates of stock are issued;
(5) When the corporation consents a demanding SH to withdraw the
right of appraisal
(6) Abandonment of corporate action
(7) Disapproval by SEC of corporate action

UNRESTRICTED RETAINED EARNINGS- those free for dividend distribution to

SHs if they have not been reserved or set aside by the BOD for some corporate
purpose or for some other purpose in accordance with managerial, legal or
contractual requirements. For purposes of dividend declaration, the term surplus
profits may be used synonymously with URE. lex cervus fraternity

When does the right of a SH to be paid the fair value of his shares cease?
(1) When the corporation gives its consent to the withdrawal
(2) When the corporate action is abandoned or rescinded by the corporation
(3) When the corporate action is disapproved by the SEC where such approval is necessary
(4) When the SEC determines that such SH is not entitled to the right of appraisal
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EFFECTS OF DELINQUENCY SALE

Delinquent shares shall not be voted for or be entitled to vote or to representation at
any SH meeting
The holder thereof shall not be entitled to any of the rights of a SH except the right to
dividends.

HOW A CORPORATION COLLECTS BALANCE ON THE SUBSCRIPTION

Judicial action (sec. 70)
Declaration of cash dividends
Sale at public auction (extra-judicial)
Procedure (extra-judicial):
(1) File affidavit stating circumstances as to how the certificates were lost
(2) Publication
(3) Instead of waiting for one year, a bond may be filed and a new certificate
may be issued even before the one year expires, PROVIDED that if there
is a pending contest as to ownership, the issuance of the new certificate
will be suspended until the final decision of the court.

RIGHT TO INSPECT CORPORATE BOOKS

Defenses that may be availed of by the CORPORATION:
(1) That the person demanding to examine corporate records has improperly used
any information secured through any prior examination of such records
(2) That he was not acting in good faith
(3) That demand was not for a legitimate purpose.

RIGHT TO FINANCIAL STATEMENTS/ BALANCE SHEET/PROFIT AND LOSS STATEMENT

Within 10 days from receipt of a written request
However, if the paid-up capital of the corporation is less than P5,000, the FS may
be certified by the Treasurer or any responsible officer.

NON-STOCK CORPORATIONS
Members entitled to only one vote. There is no cumulative voting in NSC unless
otherwise provided in the AOI
Membership in a NSC is personal and non-transferable unless the AOI or BLs
provide otherwise.
As a rule: the registered owner of the shares is entitled to vote on the said
shares. Exception: sequestered shares of private persons acquired with ill-gotten
wealth. TESTS: (1) is there prima facie evidence showing that the said shares
are ill-gotten and thus belong to the state? (2) Is there a danger of dissipation,
thus, justifying the their continued sequestration and voting by the PCGG while
the main issue is pending before the Sandiganbayan? (Villanueva, p. 732)
Trustees- may be more than 15 in number; they may classify themselves for
purposes of the expiration of term of 1/3 of their number for every year;
subsequently elected Trustees have a term of three (3) years.
Take note of the rules on distribution of assets in case of dissolution (Villanueva,
p. 734)

CLOSE CORPORATION (sec. 96)

CLOSE CORPORATION- a corporation whose AOI provide that: (1) all of the
corporations issued stocks of all classes, exclusive of treasury shares, shall be held of record
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by not more than a specified number of persons, not exceeding 20; (2) All of the issued stock
of all classes shall be subject to one or more specified restrictions on transfer permitted by
this Title; (3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class.
THE FOLLOWING CANNOT BE A CLOSE CORPORATION: mining, oil companies,
stock exchanges, banks, insurance companies, public utility, educational institution, other
corporations vested with public interest.
PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS: shall extend to all stocks to be
issued, whether for money or property or personal services, unless the AOI provide otherwise.
(sec. 102)

CHARACTERISTICS OF A CLOSE CORPORATION: (1) SHs act as directors without

need of election and therefore liable as directors; (2) quorum may be greater than mere
majority; (3) transfer of stocks to others, which would increase the number of SH to more than
the maximum are valid; (4) corporate actions binding even without formal board meeting, if
the SH has knowledge or ratified the informal action; (5) pre-emptive right extends to all
stocks issued; (6) deadlocks in board are settled by the SEC, on the written petition by any
SH; (7) SH may withdraw and exercise his right of appraisal.
SPECIAL RULE ON CLOSE CORPORATION: a corporation is not deemed a
close corporation whenever 2/3 of the voting stocks or voting rights is owned or
controlled by another corporation which is not a close corporation.
Notes:
READ Sec. 99 (4)- Transfer of stock in breach of conditions; transfer of stock to
one who is not entitled; effect.
Ownership of 99.866% of the OCS does not justify the conclusion that a
corporation is a close corporation. There should be compliance with Sec. 96 in
order that it be a close corporation. Ownership of almost all corporate stocks
does not justify piercing the corporate veil. (Villanueva, p. 737)
Sec. 104 on DEADLOCKS- petition with the SEC
Sec.105-as long as there is unrestricted profits, the corporation can be compelled
to buy out the SH.

MODES OF DISSOLUTION OF A CORPORATION

A. Voluntary dissolution
i.
Where no creditors are affected (sec. 118)
ii.
Where creditors are affected (sec. 119)
B. By shortening corporate term (sec. 120)
C. Involuntary dissolution (sec.121)
Grounds:
non-user for years
non-user for 5 years
dissolution by SEC based on existing laws etc.
misrepresentation
fraud or misrepresentation as to the paid-up capital
refusal to adopt BLs (Villanueva, p. 750)

3 MODES OF LIQUIDATION:
by the BOD/ Trustees
conveyance to a trustee made within the 3-year period
by management committee or rehabilitation receiver
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Notes:
In the Gelano case, the counsel of the dissolved corporation was considered a
trustee. In the later case of Clemente v.CA (242 SCRA) we held that the BODs
may be permitted to complete the corporate liquidation by continuing as trustees
by legal implication. [see sec.145; Reburiano v. CA, 301 SCRA; Villanueva, p.
752)
Liquidation involves the winding up so that assets are distributed to those entitled
to receive them. It is the process of reducing assets to cash, discharging liabilities
and dividing surplus. Meanwhile, rehabilitation is the opposite, it connotes the
reopening or reorganization of a continuing corporate life.

FOREIGN CORPORATIONS
A corporation formed, organized or existing under any law other than those of the
Philippines, and whose laws allow Filipino citizens and corporations to do
business in its own country or state. (sec. 123)

Test to determine nationality of foreign corporations

INCORPORATION TEST- determined by the state of incorporation regardless of
the nationality of the SHs.
DOMICILE TEST
CONTROL TEST- determined by the nationality of the controlling SHs or
members in the Philippines (also known as war-times test)

DOING BUSINESS
Implies a continuity of commercial dealings and arrangements, and contemplates
to some extent the performance of acts or works or the exercise of some
functions normally incident to and in progressive pursuit of the purpose and
object of its organization.
IT INCLUDES: soliciting orders, service contracts, opening offices whether liaison
or branches, appointing representatives to stay in the Philippines for more than
180 days, participating in the management of a domestic corporation, any other
act which implies a continuity of commercial dealings.

IT DOES NOT INCLUDE: (a) mere investment as a shareholder by foreign equity

in domestic corporations or the exercise of such rights as investor; (b) having a
nominee director or officer to represent its interests; (c) appointing a distributor or
representative domiciled in the Philippines which transacts business in its own
name and for its own account.

Reinsurance does not per se constitute doing business: REINSURANCE is a

separate and distinct arrangement from the original contract of insurance, whose
contracted risk is insured in the reinsurance agreement. Hence, the original
insured has generally no interest in the contract of reinsurance. (Avon v. CA, 278
SCRA; Villanueva, p. 760)

Tests to determine whether the foreign corporation is doing business

(1) Substance test- if it maintains the main business or has passed it on to another
(2) Continuity test- if it is exercising some of the functions normally incident to and in
progressive prosecution of the purpose and object of its organization.

SUABILITY OF FOREIGN CORPORATION

A. Foreign corporation doing business
i.
with license: may sue and be sued
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ii.

without license: cannot sue but may be sued in the Philippines

(sec.133)
B. Foreign corporation not doing business in the Philippines, on an isolated
transaction: may sue and be sued.

SUITS AGAINST THE FOREIGN CORPORATION

Although foreign corporations not doing business in the Philippines would have
no presence here and therefore cannot generally be subject to our laws and
jurisdiction, mush less to our judicial processes, the SC has enunciated that they
are susceptible to Philippine jurisdiction either by consent, stipulation as to venue,
estoppel, or by principle of equity.
Indeed, if a foreign corporation, not engaged in business in the Philippines, is not
barred from seeking redress from courts in the Philippines a fortiori, that same
corporation cannot claim exemption from being sued in Philippine courts for acts
done against a person or persons in the Philippines. (Facilities Mgmt., 89 SCRA)

Status of contracts entered into without license

Does not affect the validity BUT removes its legal standing to sue in local courts.
However, the defect may be cured by obtaining the required license. (Home
Insurance v. Eastern Shipping, 123 SCRA)
Note the doctrine of estoppel

Legal standing to sue on corporate names, trademarks and tradenames:

Although not doing business in the country, it has legal standing to sue to oppose the
registration of trademark when it is shown that its products are being imported and sold in the
Philippines. (General Garments v. Director, 41 SCRA; Villanueva, p. 764)

RESIDENT AGENT
Either Filipino or domestic corporation
Power of attorney required to receive SEC processes

ISSUANCE OF LICENSE TO FOREIGN CORPORATION

Appointment of resident agent
Proof that country of origin grants reciprocal rights to Filipinos
Establish an office
Assets
Undertaking that in case of insolvency, Filipino creditors will be preferred
6 months notice prior to termination of operations
franchises and patents must remain in the Philippines, if this is possible
P100T bond
That within 6 months after each fiscal year, SEC shall require the deposit of
additional securities equivalent to 2% of the amount in excess of P5M of gross
revenue.

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