CORPORATION LAW
Corporation is one of the types of
business organizations. It is also the
most important in economic
development.
INTRODUCTION
Sole Proprietorship
- One man form of business entity,
personally answers all liabilities, but
enjoys all the profits with the exclusion
of others
- Limited shareholders responsibility
- Paid subscription in full, you are no
longer liable
Partnership
- Based on mutual trust and confidence
Joint venture
- one time grouping of persons whether
they be natural or juridical
- does not entail continuity because
after the undertaking is completed it is
already the end
- particular partnership and joint venture
would be similar, but there is already a
decision of the Supreme Court
declaring them as different
- when they do not register, it does not
exist
- Foreign corporations enters into an
agreement with a domestic
corporation, it must be registered.
Generally they do not need to be
registered.
Corporations
- They may enter into joint venture,
but generally they cannot enter into
a partnership, but there are
exceptions allowed by the SEC: the
3 exceptions must go hand in hand
1. The articles of incorporation
expressly authorized the
corporation to enter into
contracts of partnership;
2. The agreement or articles of
partnership must provide that all
the partners will manage the
partnership; and
3. The articles of partnership must
stipulate that all the partners are
and shall be jointly and severally
liable for all obligations of the
partnership.
Definition and Attributes
4 Attributes of a Corporation
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties
expressly authorized by law or
incident to its existence.
Doctrine of limited capacity
- Only such powers as are expressly
granted to it by law and by its
articles of incorporation including
others which are incidental to such
conferred powers, those reasonably
necessary to accomplish its purpose
and those which may be incidental
to its existence
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- Can do things as the law asks or
allows it to do
- If it does anything beyond, it shall be
considered as ULTRA VIRES
General rule: Moral damages cannot
be granted to corporations
Exception: Filipinas Broadcasting
Network Inc. vs. Ago Med
- In cases of slander, libel and other
forms of defamation (should not qualify
because the code does not qualify
whether natural or juridical) Art. 2219
of the civil code:
Art. 2219. Moral damages may
be recovered in the following and
analogous cases:
(1) A criminal offense resulting in
physical injuries;
(2) Quasi-delicts causing physical
injuries;
(3) Seduction, abduction, rape, or
other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or
arrest;
(6) Illegal search;
(7) Libel, slander or any other form of
defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in
Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
The parents of the female seduced,
abducted, raped, or abused, referred
to in No. 3 of this article, may also
recover moral damages.
The spouse, descendants,
ascendants, and brothers and
sisters may bring the action
mentioned in No. 9 of this article, in
the order named.
Advantages:
1. Capacity to act as a single unit
2. Limited shareholder's liability
3. Continuity of existence
4. Feasibility of greater undertaking
5. Transferability of shares
6. Centralized Management
7.Standardized method of
organization, management, and
finance.
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
Disadvantages:
1. Formal proceeding (such as
board of meetings) are required;
2. Business transactions limited to
the State unless authorized by
foreign State;
3. Credit is limited in view of
shareholder's limited liability;
4. Unity of incompatible and
conflicting elements in view of
transferability of shares;
5. Minority shareholders have
practically no say in the conduct of
corporate affairs;
6. In large scale enterprises,
stockholders' voting rights may
become merely fictitious and
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 theoretical because of disinterested
in management, wide-scale ownership
and inaccessible place of meeting;
7. "Double taxation" may be imposed
on corporate income;
8. Corporation are subject to many
legal controls and restrictions.
A corporation is a person, therefore
protected by the due process clause
and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
Section 3 Stock and non-stock
- Importance of knowing, determining
what provisions of the code or the law
may be applicable
Section 3. Classes of corporations. -
Corporations formed or organized
under this Code may be stock or non-
stock corporations. Corporations
which have capital stock divided
into shares and are authorized to
distribute to the holders of such
shares dividends or allotments of
the surplus profits on the basis of
the shares held are stock
corporations. All other corporations are
non-stock corporations. (3a)
Non-stock- (title 10)
Non-stock corporation - of those where no
part of their income is distributable as
dividends to its members, trustees or officers
subject to provisions on dissolution.
- primarily exist for purposes other than for
profit, it does not follow that they cannot
make profits as an incident to their
operations.
- profits obtained cannot be distributed as
dividends but are used merely for the
furtherance of their purpose or purposes.
Stock (Section 51)
Two (2) requisites must be complied with,
1. a capital stock divided into
shares, and
2. authorized to distribute dividends
or allotments as surplus profits to its
stockholders on the basis of the
shares held by each of them.
Stockholders must generally cast
their votes in the meeting; section 4
governed primarily by the law
creating them
Section 4. Corporations created by
special laws or charters. -
Corporations created by special
laws or charters shall be governed
primarily by the provisions of the
special law or charter creating them
or applicable to them, supplemented
by the provisions of this Code,
insofar as they are applicable. (n)
Section 3
- The two (2) requisites must always
concur
1. That they have a capital stock
divided into shares; and,
2. That they are authorized to distribute
dividends or allotments as surplus
profits to its stockholders on the
basis of the shares held by each of
them.
Section 4
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- Created by a special law, they have - Restrictions to transfer shares
their own character
- Only those indicated can own
- They are not immune from suit unless shares
provided by the law of their creation
- Article must provide that there will
- Primarily governed by the law creating be no public offering
them
Open corporation
- Their subsidiaries are entirely different
or independent from that of the other - openly admit investors

Close corporation - example: stock exchange

- There is no exemption it is absolute Domestic/ Foreign

Public corporation Test

- Political or governmental purposes - Incorporation test

- Those formed or organized for the - If incorporated under the laws of the
government or a portion of the State or Philippines it is a domestic
any of its political subdivision and corporation
which have for their purpose the ME Gray vs. CA
general good and welfare
- Parent or Holding/ subsidiaries and
Private Corporation
affiliates
- Immediate benefit, aim or advantage - Affiliates- no majority vote
of private individuals
SMC 12%
- Those formed for some private
purpose, benefit, aim or end
CBP
- Distinction: public for governmental HERSHEY CBPl 12%
purpose 12%

Corporation Sole
Affiliate is subject to common control by the
- Exemption to the rule because it is 12 % owners
composed only of one person
De jure
- An incorporator may also be a juridical
person - cannot be attached by the state
even in a quo warranto proceeding
Close corporation
De facto
- There is exclusivity of shares of stock

- Section 96-105
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 - exists by virtue of colorable
compliance
- Attached directly only by the state in a
quo warranto proceeding
Corporation by estoppel
- So defectively formed, but still
considered corporation, but only in
relation to those who cannot deny their
existence section 20 and 21
FORMATION AND ORGANIZATION
3 stages
1. Creation
2. Re-organization or quasi-
reorganization
3. Dissolution/winding-up
Purpose clause
- Defining the scope of authority of the
corporate enterprise or undertaking.
Both confirmed and limited
4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and
secondary must be specified
4. Lawfully combined
- Provision that states, cannot be issued
less than par, exception is treasury
shares because it can be issued less
than par
- A corporation commences only upon
issuance of the certificate, prior thereto
it has no being and cannot transact
business. Promoters cannot act for a
projected corporation
- Metro Manila - paid up capital
requirement is 10 M
- Non- stock- mere mention of the
operating capital
- Mention the authorized capital
- Restrictions
- Mandatory in close
- Not mandatory in ordinary
- Non-stock
- If value is not more than 100,000
A corporation cannot use any other
name unless it has been amended
Section 19
- If confusingly similar it will not be
allowed to be registered
- Verification slip from the records
officer
Section 19. Commencement
of corporate existence. - A private
corporation formed or organized
under this Code commences to have
corporate existence and juridical
personality and is deemed
incorporated from the date the
Securities and Exchange
Commission issues a certificate of
incorporation under its official seal;
and thereupon the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is
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 extended or the corporation is sooner
dissolved in accordance with law. (n)
- Words corporation or inc. either in full
or abbreviated form must be included
Section 18. Corporate name. -
No corporate name may be allowed by
the Securities and Exchange
Commission if the proposed name is
identical or deceptively or confusingly
similar to that of any existing
corporation or to any other name
already protected by law or is patently
deceptive, confusing or contrary to
existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the
amended name. (n)
Doctrine of secondary meaning
- A word or phrase originally incapable
of exclusive appropriation [usually
generic] with reference to an article in
the market, because of geographically
or otherwise descriptive, might
nevertheless have been used so long
and so exclusively by one producer
with reference to his article that, in that
trade and to that branch of the
purchasing public, the word or phrase
has become to mean that the article
was his product.
Section 18
- Lyceum of the Philippines case, the
additional geographical name does not
make it confusingly similar
- actual confusion is not necessary-
Philips case it is enough that there is
probable confusion
2 requisites must be proven
- that the complainant corporation
acquired a prior right over the use of
such corporate name
- identical, deceptively or confusingly,
patently deceptive
Principal Office
- statement of principal office is
required
- city and municipality not only
province must be specified
- principal office NOT operations
office
- necessary because it will establish
the residence of corporations
- venue of actions for or against the
corporations
- venue of meetings
- section 51 meetings may only be
within the boundaries of the city
where the principal office
- non-stock may be held anywhere in
the Philippines, if provided in its by-
laws
- where summons may be served
- registration of chattel mortgage must
be registered in the register of deeds
where the principal office is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
Term of existence
- corporate term required
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- determining what point in time the
juridical personality will cease to exist
- enter into contract only when it has
juridical personality
- once it ceases to exist, it no longer has
personality
- exist for another 3 years only for
purposes of liquidation
- Dissolution - it is automatic
When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable
reasons
May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases
to exist it has no vested politic, exist
only for a period of 3 years only for
liquidation and for that purpose only
How many incorporators should there
be?
- 5-15
May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and
corporation primarily organized to hold
equities in rural banks
How about minors?
- NO, because they must be of legal age
- May a corporation organized by
incorporators consisting solely of
foreigners
- Yes, there is no nationality
requirement only residence, as long
as majority are residents of the Phil
Define incorporators <sec.5>
- Those person mentioned in the
articles as originally forming the
corporation and who are signatories
of the articles of incorporation.
- Must be signatories to be
incorporators
Section 5. Corporators and
incorporators, stockholders and
members. - Corporators are those
who compose a corporation,
whether as stockholders or as
members. Incorporators are those
stockholders or members mentioned
in the articles of incorporation as
originally forming and composing the
corporation and who are signatories
thereof.
Corporators in a stock
corporation are called stockholders
or shareholders. Corporators in a
non-stock corporation are called
members. (4a)
Define corporators <sec.5>
- All persons who compose the
corporation at any given time and
need not be among those who
execute the articles of incorporation
at the start of its formation and
organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock
corporation are called stockholders
or shareholders. Corporators in a
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 non-stock corporation are called
members. (4a)
May a corporation be a corporator?
- YES. There is nothing to prevent a
corporation from being a stockholder
- Incorporator must subscribe to 1 share
- There are those that are exclusively
reserved to Filipinos
- An incorporator maybe a corporator as
long as he is a stockholder
section 6
Section 6. Classification of
shares. - The shares of stock of stock
corporations may be divided into
classes or series of shares, or both,
any of which classes or series of
shares may have such rights,
privileges or restrictions as may be
stated in the articles of incorporation:
Provided, That no share may be
deprived of voting rights except those
classified and issued as "preferred" or
"redeemable" shares, unless otherwise
provided in this Code: Provided,
further, That there shall always be a
class or series of shares which have
complete voting rights. Any or all of the
shares or series of shares may have a
par value or have no par value as may
be provided for in the articles of
incorporation: Provided, however, That
banks, trust companies, insurance
companies, public utilities, and building
and loan associations shall not be
permitted to issue no-par value shares
of stock.
Preferred shares of stock
issued by any corporation may be
given preference in the distribution of
the assets of the corporation in case of
liquidation and in the distribution of
dividends, or such other preferences
as may be stated in the articles of
incorporation which are not violative
of the provisions of this Code:
Provided, That preferred shares of
stock may be issued only with a
stated par value. The board of
directors, where authorized in the
articles of incorporation, may fix the
terms and conditions of preferred
shares of stock or any series
thereof: Provided, That such terms
and conditions shall be effective
upon the filing of a certificate thereof
with the Securities and Exchange
Commission.
Shares of capital stock issued
without par value shall be deemed
fully paid and non-assessable and
the holder of such shares shall not
be liable to the corporation or to its
creditors in respect thereto:
Provided; That shares without par
value may not be issued for a
consideration less than the value of
five (P5.00) pesos per share:
Provided, further, That the entire
consideration received by the
corporation for its no-par value
shares shall be treated as capital
and shall not be available for
distribution as dividends.
A corporation may,
furthermore, classify its shares for
the purpose of insuring compliance
with constitutional or legal
requirements.
Except as otherwise provided
in the articles of incorporation and
stated in the certificate of stock,
each share shall be equal in all
respects to every other share.
Where the articles of
incorporation provide for non-voting
shares in the cases allowed by this
Code, the holders of such shares
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 shall nevertheless be entitled to vote
on the following matters:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-
laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock;
6. Merger or consolidation of the
corporation with another corporation or
other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the
immediately preceding paragraph, the
vote necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights. (5a)
How many directors should there be?
- General rule: Not less than 5 not more
than 15
- Exceptions:
1. Educational corporations registered as
non stock corporation whose number
of trustees, though not less than five
and not more than [15] should be
divisible by five [5], meaning they must
have either five, ten, or fifteen
trustees and no other;
2. In close corporations where all the
stockholders are considered as
members of the board of directors
thereby effectively allowing twenty
members in the board.
3. The by-laws of a corporation may
provide for additional qualifications
and disqualifications of its members
of the board of directors or trustees.
However it may not do away with the
minimum disqualifications lay down
by the Code.
Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of
directors or trustees. - Unless
otherwise provided in this Code, the
corporate powers of all corporations
formed under this Code shall be
exercised, all business conducted
and all property of such corporations
controlled and held by the board of
directors or trustees to be elected
from among the holders of stocks, or
where there is no stock, from among
the members of the corporation, who
shall hold office for one (1) year until
their successors are elected and
qualified. (28a)
Every director must own at
least one (1) share of the capital
stock of the corporation of which he
is a director, which share shall stand
in his name on the books of the
corporation. Any director who
ceases to be the owner of at least
one (1) share of the capital stock of
the corporation of which he is a
director shall thereby cease to be a
director. Trustees of non-stock
corporations must be members
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 thereof. A majority of the directors or Govt vs. El hogar Filipino,
trustees of all corporations organized Gokongwei vs. SMC
under this Code must be residents of
the Philippines. Capital structure

May a domestic corporation have a Foundation- minimum paid-up capital 3M

governing board consisting solely of
Authorized capital 1 M No. of shares 1M
foreigners?
shares par value 1.00
- YES, section 23 majority of them must
Amount of shares subscribed
be residents of the Philippines, no
nationality requirement 50 K A
Anti-dummy act <sec.2-A> 50 K B

- If the business undertaking or activity C 250K

is only partially nationalized, aliens can
be elected as such directors, [unless D
the law provides otherwise] but their E
number shall only be in proportion to
their equity or participation in the PAID UP =62,500
capital stock of the corporation.
Corporation cannot exceed more than 1 M
Disqualifications <sec.27> it is the maximum amount it cannot issue
more unless amended
- The disqualifications provided for is
absolute and may not be done away Maximum shares it can issue is 1M shares
with. Corporate by-laws may, however, unless amended
provide for additional qualifications and
How much shares should be
disqualifications.
subscribed?
Section 27. Disqualification of - Must be at least 25% of the
directors, trustees or officers. - No
authorized capital stock
person convicted by final judgment of
an offense punishable by Paid- up must be at least 25%-
imprisonment for a period exceeding
six (6) years, or a violation of this Code minimum
committed within five (5) years prior to
Section 13
the date of his election or appointment,
shall qualify as a director, trustee or - Total subscription compliance with
officer of any corporation. (n)
minimum 25% total
Section 27 and 23 minimum
- Any combination would comply with
disqualifications and qualifications the minimum required by section 30
Lee vs. CA
Section 30. Compensation of
- By laws may provide for additional directors. - In the absence of any

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 provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for 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 least a majority of the
outstanding capital stock at a regular
or special stockholders' meeting. In no
case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of
the corporation during the preceding
year. (n)
Minimum for a domestic corporation?
- In no case shall the paid- up capital be
less than 5k
Is there a minimum authorized capital
imposed by the code?
- If there is minimum paid-up logically
there should also be a minimum
capital =5000
Minimum paid-up capital for a
financing company metro manila 10 M
if located in MM
Shares of stock
Purpose of classification
- To specify and define the rights and
privileges of the stockholders;
- For regulation and control of the
issuance of sale of corporate securities
for the protection of purchasers and
stockholders.
- As a management control device.
- To comply with statutory
requirements particularly those
which provide for certain limitations
on foreign ownership and shares like
overseas employment agencies
requiring to own at least 75% of the
shares of stock thereof.
- To better insure return on investment
which can be affected through the
issuance of redeemable shares or
preferred shares, i.e., granting the
holders thereof, preference as to
dividends and/or distribution of
assets in case of liquidation; and,
- For flexibility in price, particularly, no
par shares may be issued or sold
from time to time at different price
depending on the net worth of the
company since they do not purport
to represent an actual of fixed value.
Section 6
- Each shall be equal in all respects to
every other share
Preferred shares
- Specific preference
- Dividends or during liquidation
No par
- Can sell it with the network of the
corporation
Distinction between the subscribed
and outstanding stocks?
- Section 137
Section 137. Outstanding
capital stock defined. - The term
"outstanding capital stock", as used
in this Code, means the total shares
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 of stock issued under binding
subscription agreements to
subscribers or stockholders, whether
or not fully or partially paid, except
treasury shares. (n)
- Voting and dividend rights, it refers to
the outstanding capital stocks
- Only outstanding stocks are allowed to
vote and receive dividends
- Actually the same
Treasury shares
- are also subscribed shares
- while they remain in the treasury, no
voting and dividend rights
- may be reissued by the corporation
- once reissued they become
outstanding stocks again
Common shares
- carry the right to vote
Preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the
remaining assets upon dissolution or
- both
- YOU MUST STATE THE
PREFERENCE BECAUSE IF NOT
THEY ARE PRESUMED TO BE
EQUAL
- It may include such other preferences
not inconsistent with the Code. This is
so because Section 6 of the said law
allows a stock corporation to issue
preferred shares subject only to the
limitations imposed therein which
are:
a. They can be issued only with sated
par value; and,
b. The preferences must be stated in
the articles of incorporation and in
the certificate of stock, otherwise,
each share shall be, in all respect,
equal to every other share.
Participating
- Must be stated because the
presumption is that it is participating
Cumulative
- Irrespective of whether or not they
where earned
Preferred
- May be denied
- Unless denied they are still entitled
What if hindi i-declare kahit na may
dividends rights for the previous
years? May they be denied dividend
rights because they are non holders
of non-cumulative? NOTE: YOU
CANNOT COMPEL THE
CORPORATION TO DECLARE
DIVIDENDS UNLESS IT EXCEEDS
100 % PAID UP CAPITAL SEC. 43
Section 43. Power to declare
dividends. - The board of directors of
a stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends
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 due on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock corporations are
prohibited from retaining surplus profits
in excess of one hundred (100%)
percent of their paid-in capital stock,
except: (1) when justified by definite
corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation
is prohibited under any loan
agreement with any financial institution
or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet
been secured; or (3) when it can be
clearly shown that such retention is
necessary under special
circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
- It depends because there are three
types of non-cumulative preferred
shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit
type
Compare cumulative share from non-
cumulative, earned cumulative or
dividend credit type
- Cumulative share whether or not
earned
- Non-cumulative earned cumulative
or dividend credit type- only if
earned
Par
- stated par value; shall not be issued
less than par
No par
- without stated par value
- once fully paid no longer liable
Corporations cannot use its capitals
in declaring dividends; not all can
issue no par value section 6
Voting
- entitled to vote at any motion
brought up in writing
Non-voting
- not entitled to vote
What types of shares may be denied
of the right to vote?
- Preferred and redeemable shares
Is it correct to state that common
shares can never be denied the right
to vote?
- Only preferred and redeemable
shares are denied unless provided
in this code
- PWEDENG MA-DENY YUNG
COMMON SHARES, KASI YUNG
FOUNDERS SHARES MERON
SILANG EXCLUSIVE RIGHTS NA
SILA LANG ANG MERON, SO
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 PWEDE SILANG BUMOTO WITH
REGARDS TO SOMETHING NA
HINDI NA SAKOP NG COMMON
SHARE RIGHTS
- Example: founders shares- may be
given certain rights and privileges
- Even common shares may be denied
the right to vote of founders shares
issued <sec.7>
Section 7. Founders' shares. -
Founders' shares classified as such in
the articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for a
limited period not to exceed five (5)
years subject to the approval of the
Securities and Exchange Commission.
The five-year period shall commence
from the date of the aforesaid approval
by the Securities and Exchange
Commission. (n)
Do you include non-voting shares in
passing a valid corporate act?
- Even non-voting shares are entitled to
vote under section 6
Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
Generally a corporation can reacquire
its own shares if it has unrestricted
retained earnings
Exception: redeemable shares may be
reacquired irrespective of retained
earnings
Treasury shares
- They are treasury while in the
treasury account of the corporation
May they be reissued by the
corporation?
- YES
If they are reissued will they be
denied the right to vote?
- Once reissued they shall become
outstanding stocks again and
purchasers shall be entitled to all the
rights and privileges as the other
holders have
Section 57 treasury shares have no
voting and dividend rights. Why not?
Section 57. Voting right for
treasury shares. - Treasury shares
shall have no voting right as long as
such shares remain in the Treasury.
(n)
- Answer: commissioner vs. manning
page 62 first par.
Although authorities may
differ on the exact legal and
accounting status of so-called
treasury shares, they are more or
less in agreement that treasury
shares are stocks issued and fully
paid for and reacquired by the
corporation either by purchase,
donation, forfeiture or other means.
Treasury shares are therefore
issued shares but being in the
treasury they do not have the status
of outstanding shares.
Consequently, although a treasury
share, not having been retired by the
corporation re-acquiring it, may be
re-issued or sold again, such
shares, as long as it is held by the
14
 corporation as a treasury share,
participates neither in dividends,
because dividends cannot be declared
by the corporation to itself, nor in
meetings of the corporation as voting
stock, for otherwise equal distribution
of voting powers among stockholders
will be effectively lost and the directors
will be able to perpetrate their control
of the corporation, though it still
represents a paid for interest in the
property of the corporation. The
foregoing essential features of a
treasury stocks are lacking in the
questioned shares.
In this case, and under the
terms of the trust agreement, the
shares of stock of Reese
participated in dividends which the
trustee received and the said shares
were voted upon by the trustee in all
corporation meetings. They were not,
therefore, treasury shares.
When the law speaks of outstanding
rights it does not include treasury
shares
Treasury shares may be reissued
- They are actually assets of the
corporation
- Once re-issued they become
outstanding stocks again
- The corporation may cancel them; in
effect there will be a reduction in the
outstanding capital stocks
- The code does not require ordinary
corporations to provide for restrictions,
but it does not likewise prohibit
restrictions
- Example: right of first refusal
- The restriction must be contained in
the articles of incorporation
- If provided in by-laws but not in the
articles of incorporation then it will
not be binding
- Restrictions and preferences are
mandatorily required in close
corporations
- If it does not provide restrictions it is
not a close corporation
- Specified persons- close
corporations
- If not one of those specified you are
not included because there is
exclusivity in close corporations
- Should also be in the by-laws not
only in the articles of incorporation
No transfer clause
Execution clause
Acknowledgment
Treasurer affidavit part of the articles
of incorporation
Section 23-27 minimum
qualifications, but there may be
additional
Grounds for disapproval
- Only substantial and not strict is
required
May the SEC refuse or reject
registration?
- <Section 17>
15
 Section 17. Grounds when
articles of incorporation or amendment
may be rejected or disapproved. - The
Securities and Exchange Commission
may reject the articles of incorporation
or disapprove any amendment thereto
if the same is not in compliance with
the requirements of this Code:
Provided, That the Commission shall
give the incorporators a reasonable
time within which to correct or modify
the objectionable portions of the
articles or amendment. The following
are grounds for such rejection or
disapproval:
1. That the articles of incorporation or
any amendment thereto is not
substantially in accordance with the
form prescribed herein;
2. That the purpose or purposes of the
corporation are patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulations;
3. That the Treasurer's Affidavit
concerning the amount of capital stock
subscribed and/or paid is false;
4. That the percentage of ownership of
the capital stock to be owned by
citizens of the Philippines has not been
complied with as required by existing
laws or the Constitution.
No articles of incorporation or
amendment to articles of incorporation
of banks, banking and quasi-banking
institutions, building and loan
associations, trust companies and
other financial intermediaries,
insurance companies, public utilities,
educational institutions, and other
corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favorable recommendation of the
appropriate government agency to the
effect that such articles or
amendment is in accordance with
law. (n)
- But the grounds in section 17 are
not exclusive
When will the corporation
commence to exist?
- Section 19
Section 19. Commencement
of corporate existence. - A private
corporation formed or organized
under this Code commences to have
corporate existence and juridical
personality and is deemed
incorporated from the date the
Securities and Exchange
Commission issues a certificate of
incorporation under its official seal;
and thereupon the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is
extended or the corporation is
sooner dissolved in accordance with
law. (n)
A corporation de jure can come into
existence only upon the issuance of
the certificate of registration by the
SEC? TRUE OR FALSE?
- TRUE
- EXCEPTION: CORPORATION
SOLE <sec. 112>
Section 112. Submission of
the articles of incorporation. - The
articles of incorporation must be
verified, before filing, by affidavit or
affirmation of the chief archbishop,
bishop, priest, minister, rabbi or
16
 presiding elder, as the case may be,
and accompanied by a copy of the
commission, certificate of election or
letter of appointment of such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified
to be correct by any notary public.
From and after the filing with the
Securities and Exchange Commission
of the said articles of incorporation,
verified by affidavit or affirmation, and
accompanied by the documents
mentioned in the preceding paragraph,
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of
the religious denomination, sect or
church theretofore administered or
managed by him as such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in
trust by him as a corporation sole, for
the use, purpose, behalf and sole
benefit of his religious denomination,
sect or church, including hospitals,
schools, colleges, orphan asylums,
parsonages and cemeteries thereof.
(n)
- CORPORATION SOLE- upon filing of
the verified articles of incorporation,
once filed it is vested with a judicial
capacity
General rule section 19
- Vested with judicial capacity upon
issuance of the certificate by the SEC
o However it is not accurate
according to atty. Ladia
because there are those that
can issue for example
cooperatives- BUREAU OF
COOPERATIVES which
register, home insurance
guaranty corporation- HOME
OWNERS
Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance
by the CONCERNED government
corporation or agency
- Prior there to it has no being
- The transfer of the property was not
valid, it likewise did not have the
right to transfer
De jure
- Strict or substantial compliance
De facto
- 4 requisites must go hand in hand
take out anyone of them there can
be no de facto corporation
1. There is a valid statute under which
the corporation could have been
created as a de jure corporation.
2. An attempt, in good faith, to form a
corporation according to the
requirements of law, which goes far
enough to amount to a colorable
compliance with the law;
3. A user of corporate powers, the
transaction of business in some way
as if it were a corporation; and,
4. Good faith in claiming to be and
doing business as a corporation.
Are the rights and obligations
between officers and directors of a
de jure and de facto the same?
17
- YES. Governed by the same law, rules
and regulations
Only important in determining, is for
the purpose of applying the rules with
regards to the direct and collateral
attack
The existence of a de jure cannot be
questioned even by the State, either
directly or indirectly
Existence of a de facto can be
questioned only by the State directly in
a quo warranto proceeding only
Municipality of Malabang vs. Benito
- What is the missing link so as to
consider it a de facto? A law, because
the executive order is unconditional
- An unconditional act affords no rights,
creates no office
- Legal contemplation it was never
passed at all
- It can therefore be questioned by any
person
If the certificate of registration has not
been issued, may a corporation de
facto exist?
- NO!
- Number 4 requirement, good faith in
claiming to be and doing business as a
corporation
Hall vs. Piccio
- Missing link is good faith
- The certificate was not yet issued by
the SEC, the members knew and
therefore they were not acting in good
faith, therefore anybody can
question its existence
Corporation by estoppel
- So defectively formed so that they
are not to be considered a de jure or
de facto
- General partners- liable even
beyond his promise even his
personal properties are prone to
attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3 rd persons
involved and the problem arises
between there members, therefore
they themselves know that there is
no corporation by estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing
agency
- A person purporting in behalf of a
non existing corporation
- Section 21, you arrive at the same
decision
Chiang Kai Siek vs. CA
- SC based its decision from the
provision of the education act
- It cannot immune itself by virtue of
its non compliance with the law
18
 Assuming there was no law?
- YES, it may still be sued as a school
for the past 32 years the school
represented itself as possessed of
juridical personality
General rule: a 3rd party transacting
with a non existent corporation shall be
estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a
person who has dealt with a non
incorporated corporation shall be
stopped to deny from actions in which
it had benefited
- Exemptions: when there is fraud the
general rule shall not apply
Salvatierra vs. Garlitos
- As a general rule a person who has
contracted it a corporation lacking
personality
- Doctrine is not applicable where fraud
takes part in the transaction
Another exemption
International express travel and tours
vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to
escape from a contract where he is
benefited
- In this case petitioner is not trying to
escape liability, but rather the one
claiming from the contract
Would this apply to foreign
corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
A foreign corporation cannot gain
access to our courts unless they
attain a license to engage in
business in the Philippines but
applying corporation by estoppels,
the court allowed
Municipality of Malabang case
- No law, hence may be questioned
by any person
- An unconstitutional act is not a law, t
confers no rights, it imposes no
duties, it affords no protections, it
crates o office, it is in legal
contemplation, as inoperative as
though it had never been passes
Hall vs. Piccio
- No good faith
Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members
themselves there must be a 3rd party
- Cannot escape when benefited
- General rule: you deal with a
corporation, as to estop it
- Exceptions: 1. fraudulently
misrepresents the third person may
file an action directly to those
members, 2. 3rd party will not be
estopped if he is not trying to escape
liability
19
 2 possible remedies - Corporation exist separately and
independently from the stockholders
- Chiang kai siek case
- Stockholders cannot bring an action,
- Albert case to bring back the properties of a
What would be the effect if the corporation
corporation failed to commence - Corporation has no interest in the
transaction? individual properties of its members
- Automatic

Operated but becomes subsequently Sulo ng Bayan vs. Araneta

inoperative for 5 years only a ground
for suspension, proper notice and - Corporation cannot bring an action
hearing for the recovery of the properties of
its members
Commencement
Caram vs. CA
- Example realty company
- Stockholders cannot be held liable
CORPORATE CHARTER AND ITS for the legitimate obligations of the
AMENDMENTS corporation, they exist separately
and independently from one another
What do you understand by the word
charter? Is it the same as articles of Cruz vs. Dalisay
incorporation?
- Final judgment against a corporation
- Corporate charter is broader cannot be enforced against
stockholders
Franchise
Rustan Pulp vs. CA
- Primary power granted by the state to
be and act as a corporation - Corporation exist separately and
independently
- Secondary franchise is the right or
privilege that the corporation may - Corporation are juridical entities,
exercise they exist only in legal
contemplation, can act only through
You cannot issue investment contracts
its authorized representatives
without a secondary franchise,
kailangan primary muna hindi pwede Soriano vs. CA
mauna secondary kasi sa section 19 it
does not exist until issued with a - They are not personally liable
certificate of registration or
- They where signed for and in behalf
incorporation
of the corporation
Corporate entity
Palay inc. vs. Clave
20
- Liabilities incurred by the corporation must be clearly and convincingly
cannot be enforced against established
stockholders, etc., even if
- Fraud must be proven by clear and
stockholders, etc. happens to own a
substantial interest in the corporation, convincingly evidence amounting to
mere ownership does not disregard more than preponderance. It cannot
the corporate entity theory be justified by speculation and can
never be presumed. And only if it
Corporate entity for legal or legitimate sought to hold the stockholders
purposes only liable directly for corporate debt

Two or more corporations, one of them Palacio vs. Fely

will be treated as a mere alter-ego
- Piercing the veil of corporate fiction
You cannot pierce the veil of corporate
- Fely trans and the other corporation
fiction when there are no facts
is one and the same
attendant in the case
Marvel bldg. vs. David
Corporate Entity Theory
- There must be facts before the court
- The corporation is possessed with a
will be justified in piercing the veil of
personality separate and distinct from
corporate fiction
the individual stockholders or
members and is not affected by the - Corporation was a mere extension
personal rights, obligations or of the personality of the person
transactions of the latter
Yutivo and sons vs. Court of Tax
Instrumentality rule Appeals
- Where one corporation is so organized - What where the facts or
and controlled and its affairs are circumstances arrived by the court
conducted so that it is, in fact, a mere here?
instrumentality or adjunct of the other,
the fiction of the corporate entity of the - Subscribed capital where all
instrumentality may be disregarded advanced by Yutivo, the board
where the same as Yutivo
- Courts are concerned with reality and
not form Commissioner of Internal Revenue
vs. Norton and Harrison
- Mere ownership of all or substantially
all of the shares of stock of a - Court applied the general rule
corporation is not, in itself, insufficient
- Mere substantial ownership does
ground for disregarding the separate
not mean that it has a same
corporate personality. And for the
corporate entity
separate personality of the corporation
to be disregarded, the wrong doing

21
 La Campana Coffee Factory, Inc. vs.
KKM
- Two corporations managed by the
same family, workers were made
interchangeably
Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in
their official capacity)
Tesco vs. WCC
- The two corporations where located in
the same office
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the
instrumentality rule? where one
corporation is so organized and
controlled and its affairs are conducted
so that it is, in fact, a mere
instrumentality or adjunct of the other,
the fiction of the corporate entity of the
instrumentality may be disregarded.
- Has no separate mind of its own. What
is the degree of control?
1. 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.
2. 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
rights; and,
3. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of.
- The absence of one of the elements
prevents piercing the corporate
veil. In applying the instrumentality
or alter ego doctrine, the courts are
concerned with reality and not form,
with how the corporation operated
and the individual defendants
relationship to that operation.
There must facts and circumstances
before warrant piercing the veil of
corporate fiction
The control necessary does not
mean stock ownership
MCConnel vs. CA
- were located in the same floor
- while the mere ownership of all or
nearly all of the capital stock of a
corporation does not necessary
mean that it is a mere business
conduit of the stockholder, that
conclusion is amply justified where it
is shown, as in the case before us,
that the operations of the
corporation were so merged with the
stockholders as to be practically
indistinguishable from them. To hold
the latter liable for the corporations
obligations is not to ignore the
corporations separate entity, but
merely to apple the established
principle that such entity cannot be
22
 invoked or used for purposes that Indophil Textile Mill vs. CALICA
could not have been intended by the
law that created that separate - How do you distinguish this ruling to
personality. La Campana, having the same
issues:
Tan boon bee vs. Jarencio
- La campana, one payroll,
- Why would a drug company need a employees were made
printing machine interchangeable. Acrylic had its own
standards
- The property must be in pursuance of
a company business PNB vs. Ritratto Group

Cease vs. CA - Control test

- Alter-ego or the extension of the - Not mere majority but rather

person of forest ware does the court complete
pierced the veil of corporate fiction
- Twin ace was only a subsequent
- As to not deprive the holders of their interested party
successional rights
- Assets and machineries
- Mere ownership of all or substantially
all is not a justification of piercing the Amendment of the articles of
veil of corporate fiction incorporation

Fraud must be proven by clear and - Express power granted to a

convincing evidence cannot presume corporation
or speculate, there must be facts and Section 16
circumstances
- Appraisal right
Fraud must be clear and convincing
evidence more than preponderance - Section 81 to object on certain acts
and transactions
Remo Jr. vs. IAC
Section 81. Instances of
- The resolution was not entered to
appraisal right. - Any stockholder of
defraud anyone a corporation shall have the right to
dissent and demand payment of the
Del Rosario vs. National Labor fair value of his shares in the
Commission following instances:
- The wrongdoing must be clearly 1. In case any amendment to the
established articles of incorporation has the
effect of changing or restricting the
- There must be facts to support rights of any stockholder or class of
shares, or of authorizing preferences
- Payment of claims cannot thus be in any respect superior to those of
presumed
23
 outstanding shares of any class, or of 1 & 2=absent
extending or shortening the term of 1&2=absent but gave their written
corporate existence; assent
2. In case of sale, lease, exchange, 3 & 4= objected
transfer, mortgage, pledge or other 3&4=objected
disposition of all or substantially all of
the corporate property and assets as 5 & 6= approved the amendment
provided in the Code; and 5&6=approved
3. In case of merger or consolidation. Would there be a valid amendment
(n)
Special amendments 37 & 38
- Right granted only in specified shortening that would result to
instances dissolution require prior approval by
the SEC
Are non-voting shares included in amending
the articles of incorporation
Section 37. Power to extend
1 100/s or shorten corporate term. - A private
corporation may extend or shorten
XYZ-----ABC
its term as stated in the articles of
2 100/s incorporation when approved by a
majority vote of the board of
To directors or trustees and ratified at a
meeting by the stockholders
10 100/s representing at least two-thirds (2/3)
of the outstanding capital stock or by
=1M/S what would at least two-thirds (2/3) of the
be the 2/3? members in case of non-stock
corporations. Written notice of the
Section 6 last paragraph proposed action and of the time and
place of the meeting shall be
Voting shares are excluded except the addressed to each stockholder or
foregoing instances member at his place of residence as
shown on the books of the
1 1 corporation and deposited to the
addressee in the post office with
2 2 postage prepaid, or served
personally: Provided, That in case of
3 3 extension of corporate term, any
dissenting stockholder may exercise
his appraisal right under the
4 4
conditions provided in this code. (n)

5 5 Section 38. Power to

increase or decrease capital stock;
6 6 incur, create or increase bonded
indebtedness. - No corporation shall
increase or decrease its capital

24
stock or incur, create or increase any
bonded indebtedness unless approved
by a majority vote of the board of
directors and, at a stockholder's
meeting duly called for the purpose,
two-thirds (2/3) of the outstanding
capital stock shall favor the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness. Written notice
of the proposed increase or diminution
of the capital stock or of the incurring,
creating, or increasing of any bonded
indebtedness and of the time and
place of the stockholder's meeting at
which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered,
must be addressed to each
stockholder at his place of residence
as shown on the books of the
corporation and deposited to the
addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must
be signed by a majority of the directors
of the corporation and countersigned
by the chairman and the secretary of
the stockholders' meeting, setting
forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock,
the amount of capital stock or number
of shares of no-par stock thereof
actually subscribed, the names,
nationalities and residences of the
persons subscribing, the amount of
capital stock or number of no-par stock
subscribed by each, and the amount
paid by each on his subscription in
cash or property, or the amount of
capital stock or number of shares of
no-par stock allotted to each stock-
holder if such increase is for the
purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the
meeting;
(6) The amount of stock represented
at the meeting; and
(7) The vote authorizing the increase
or diminution of the capital stock, or
the incurring, creating or increasing
of any bonded indebtedness.
Any increase or decrease in
the capital stock or the incurring,
creating or increasing of any bonded
indebtedness shall require prior
approval of the Securities and
Exchange Commission.
One of the duplicate
certificates shall be kept on file in
the office of the corporation and the
other shall be filed with the
Securities and Exchange
Commission and attached to the
original articles of incorporation.
From and after approval by the
Securities and Exchange
Commission and the issuance by
the Commission of its certificate of
filing, the capital stock shall stand
increased or decreased and the
incurring, creating or increasing of
any bonded indebtedness
authorized, as the certificate of filing
may declare: Provided, That the
Securities and Exchange
Commission shall not accept for
filing any certificate of increase of
capital stock unless accompanied by
the sworn statement of the treasurer
of the corporation lawfully holding
25
 office at the time of the filing of the
certificate, showing that at least
twenty-five (25%) percent of such
increased capital stock has been
subscribed and that at least twenty-five
(25%) percent of the amount
subscribed has been paid either in
actual cash to the corporation or that
there has been transferred to the
corporation property the valuation of
which is equal to twenty-five (25%)
percent of the subscription: Provided,
further, That no decrease of the capital
stock shall be approved by the
Commission if its effect shall prejudice
the rights of corporate creditors.
Non-stock corporations may
incur or create bonded indebtedness,
or increase the same, with the
approval by a majority vote of the
board of trustees and of at least two-
thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation
shall be registered with the Securities
and Exchange Commission, which
shall have the authority to determine
the sufficiency of the terms thereof.
(17a)
The vote must be cast at the meeting
called for that purpose
Written assent would not suffice
When do amendments become valid
and effective?
- Only upon the approval of the SEC
TRUE OR FALSE?
- FALSE because it can be valid upon
the date of filing if not acted upon
within 6 months without fault
attributable to the corporation
Why is it retroactive?
What provision may be amended,
altered or repealed
Can you change name, address for
example she married or changed
address?
- NO. you cannot change that
Fait accompli, are beyond the
powers or authority of the
corporation to change, alter or
modify. These would include the
following:
- Names of the incorporators and
- The incorporating directors or
trustees,
- The name of the treasurer originally
or first elected by the subscribers or
members to act as such until his
successor has been duly elected
and qualified,
- The number of shares and amount
originally subscribed and paid out of
the original authorized capital stock
of the corporation,
- The date and place of execution of
the articles of incorporation,
- The signatories and
acknowledgment thereof.
- All other provisions or matters stated
or contained in the articles are
subject to amendment.
Founders or signatories hindi
pwede palitan
Names, nationalities- you cannot
Capital- right granted by law to all
corporation
26
 Paid up capital- NO
Restriction and transfer of shares in
ordinary stock corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a
close corporation
Section 96. Definition and
applicability of Title. - A close
corporation, within the meaning of this
Code, is one whose articles of
incorporation provide that: (1) All the
corporation's issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified number of persons,
not exceeding twenty (20); (2) all the
issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by
this Title; and (3) The corporation shall
not list in any stock exchange or make
any public offering of any of its stock of
any class. Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting stock
or voting rights is owned or controlled
by another corporation which is not a
close corporation within the meaning
of this Code.
Any corporation may be
incorporated as a close corporation,
except mining or oil companies, stock
exchanges, banks, insurance
companies, public utilities, educational
institutions and corporations declared
to be vested with public interest in
accordance with the provisions of this
Code.
The provisions of this Title shall
primarily govern close corporations:
Provided, That the provisions of other
Titles of this Code shall apply
suppletorily except insofar as this
Title otherwise provides.
Transfer clause, executor clause,
acknowledgment, treasury affidavit-
NO
Philippine First Insurance case
- Mere change in the name of a
corporation or by merely complying
with the law is general amendment
- It does not change its personality. It
is the same person in a different
name. the charter is the same
Amendment of a corporate term
- Extending the same can never be
made 7 years prior? TRUE or
FALSE
- FALSE. It can be if there are
justifiable reasons for earlier
extension as may be determined by
the SEC
Can you extend the corporate term if
it has already expired?
- Once the term expires without an
amendment having happen it
ceases to exist as a body politic. It is
dissolved automatically on the day it
expires.
Alhambra cigar and PNB case
Instances when the SEC allowed
extension whose term has already
expired
- All of them involved are institutions
of learning, it was the case in order
to avoid confusion that would arise
later on.
27
BOARD OF DIRECTORS/TRUSTEES
Section 23
Section 23. The board of
directors or trustees. - Unless
otherwise provided in this Code, the
corporate powers of all corporations
formed under this Code shall be
exercised, all business conducted and
all property of such corporations
controlled and held by the board of
directors or trustees to be elected from
among the holders of stocks, or where
there is no stock, from among the
members of the corporation, who shall
hold office for one (1) year until their
successors are elected and qualified.
(28a)
Every director must own at least
one (1) share of the capital stock of the
corporation of which he is a director,
which share shall stand in his name on
the books of the corporation. Any
director who ceases to be the owner of
at least one (1) share of the capital
stock of the corporation of which he is
a director shall thereby cease to be a
director. Trustees of non-stock
corporations must be members
thereof. A majority of the directors or
trustees of all corporations organized
under this Code must be residents of
the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the
day to day
- Stockholders may have all the profit
but will turn over the management to
the governing board
- But unless the law provides the power
may be delegated
General rule
- Corporations must sit and act as a
body
- Will be bound by corporate officers if
they acted within the 5 classification
page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez
in this case? TREASURER
- Why did the court rule that actions of
Fernandez bound the corporation
when he is not even a board of
director?
if a man is found acting for a
corporation with the external indicia
of authority, any person not having
notice of want of authority, may
usually rely upon those
appearances; and if it be found that
the directors had permitted the
agent to exercise that authority and
thereby held him out as a person
competent to bind the corporation,
or had acquiesced in a contract and
retained the benefit supposed to
have been conferred by it, the
corporation will be bound,
notwithstanding the actual authority
may never have been granted.
- Contracts must be made by the
director and not the stockholders
- Actions of the stockholders in such
matters is only advisory and not in
any way binding in the corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board
of directors
28
- Stockholders action is merely advisory
except their approval or vote is
necessary to prove a valid corporate
act
Qualifications:
- No citizenship requirement, at least
majority must be residents
- Can have a governing board
consisting solely of foreigners
- But we have to take into consideration
partly nationalized industries and other
laws which prohibits or limits foreign
ownership
- Anti-dummy act
- Utilization development of natural
resources 60% must be owned by
Filipino citizens, therefore they only
own 40%---10 members they can only
have 4 seats, but not entirely correct
because the law may provide
otherwise; educational institutions
restricted to Filipinos, but there are
exceptions when created by religious
and charitable institutions.
- By-laws may provide additional
qualifications and disqualifications
- To qualify as a director he must own at
least 1 share
Should the stockholder be the
equitable or beneficial owner in order
to qualify as a director?
- NO, it is not necessary, as long as you
are listed in the books as owner of one
share
Lee vs. CA
- As long as you are listed in the
books as owner of one share
- Under the old law he must be the
beneficial owner and legal owner
thereof but in the new law it is not
required as long as it stands in his
name he is qualifies
1 A-100t/S B (own in the trust of X) is B
qualified to be a director?
2
3-10
2 transferring there voting rights in favor
of VT
Other rights will accrue in favor of them, but
not the voting rights
voting rights must be recorder in the books
of the corporation that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares
and PNB-IFL now will be able to be
nominated
Gen. Rule:
- Term of one year who will serve as
such until there successors are
elected and qualified
Exception:
- Non-stock corporation can serve for
a term of 3 years
- Educational non-stock- term of the
governing board can be 5 years
May this term exceed one year?
29
 - Yes, they may serve in a hold over
capacity until their successors have
been duly elected and qualified
Detective and protective bureau vs.
Cloribel
=1MS
1&2 is absent, 3&4 ayaw tumakbo and
hindi nagvote 6-10, tumakbo and
ninominate nila yung sarili nila and cast all
their shares on themselves

- In the by-laws, managing director must Who wins? Or who gets elected?
be elected from among themselves
- No vote requirement, the one who
- Must be duly elected and qualified gets the most number of votes gets
elected, section24.
How are the directors elected?
What is cumulative voting?
1-100T/S
- Process of multiplying the number of
2-100T/S
shares to the number of director to
3-100T/S be elected

to 10=1M/S - Matter of right granted to

Do you include the vote of 1 & 2 to
have a quorum to have a valid
meeting?
- NO, quorum requirements is 401,000
Quorum requirement is 501k
Holders of non-voting shares are only entitled
to vote in last par. Of section 6
1-200k
2-200k
stockholders in a stock corporation
1 to 5 has 200k/s and members of the
same family- majority 800k they have 4M
votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
Cumulative to allow the minority to
have a rightful representation in the
board
Is it allowed in a non-stock
corporation?

3-200k - Not generally available

4-100k - Section 89 unless the articles or by-

laws allow cumulative voting
5-100k
Section 89. Right to vote. -
6-100k The right of the members of any
class or classes to vote may be
7-50k limited, broadened or denied to the
extent specified in the articles of
8-40k
incorporation or the by-laws. Unless
so limited, broadened or denied,
9-5k
each member, regardless of class,
10-5k shall be entitled to one vote.
30
 Unless otherwise provided in officers which shall require the vote
the articles of incorporation or the by- of a majority of all the members of
laws, a member may vote by proxy in the board.
accordance with the provisions of this
Code. (n) Directors or trustees cannot
attend or vote by proxy at board
Voting by mail or other similar meetings. (33a)
means by members of non-stock
corporations may be authorized by the Is the president required to be a
by-laws of non-stock corporations with stockholder? YES
the approval of, and under such
conditions which may be prescribed The chairman may be another
by, the Securities and Exchange person
Commission.
The president may also be another
Other corporate officers other than the
person
governing board section 25
Prohibited is president to be
Section 25. Corporate secretary or treasurer at the same
officers, quorum. - Immediately after time
their election, the directors of a
corporation must formally organize by Board of director must sit and act as
the election of a president, who shall a body to arrive at a corporate act
be a director, a treasurer who may or
may not be a director, a secretary who What would constitute a quorum if 5
shall be a resident and citizen of the
then 3 must be present
Philippines, and such other officers as
may be provided for in the by-laws. May the vote of 2 members past a 5
Any two (2) or more positions may be
held concurrently by the same person, man governing board pass a valid
except that no one shall act as corporate act?
president and secretary or as
president and treasurer at the same - YES. Voting requirement is majority
time. of directors present at which there
where a quorum
The directors or trustees and
officers to be elected shall perform the 1 1 and 2 present=valid voting
duties enjoined on them by law and requirement
the by-laws of the corporation. Unless
the articles of incorporation or the by- 2 1 and 2 voted yes
laws provide for a greater majority, a
majority of the number of directors or 3 3 voted no
trustees as fixed in the articles of
incorporation shall constitute a quorum 4
for the transaction of corporate
5
business, and every decision of at
least a majority of the directors or Is it absolute?
trustees present at a meeting at which
there is a quorum shall be valid as a
corporate act, except for the election of
31
- NO, except in the election because it
requires the majority of all the
members of the board
- If by-laws or articles provide a higher
voting requirement
Artificial beings must act through its
members and act as a body to have a
valid corporate act
Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed
with actual or apparent authority
- Otherwise it will not bind the
corporation
Yao Ka Sin Trading case already
asked in the bar
- Only bind the corporation to the extent
of authority confined to him or virtue of
customs, usage and policy
- Must pass first the controller and
counsel
What if the notice requirement is not
complied with?
Lopez Realty vs. Fotencha
- Notice requirement must be complied
with hence it should have been with
force and effect, but according to the
SC, it may be ratified expressly if there
is a subsequent meeting called for that
purpose
- Impliedly through acts
- Asuncion was aware of the
corporations obligation
- There was implied ratification or she
was estopped
Pua Casim & Co. vs. W. Neumark
and Co.
- Considered 3 circumstanced
- Check which was the proceed of the
loan which was endorsed and
deposit in the corporate account
- W. Neumark as president and also
stockholder
Yu Chuck vs. Kong Li Po
- General manager usually has the
power to hire but the SC said the
contract must be reasonable
- The contract here is so onerous that
it would throw the corporation into
insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding
effect of the telegram
- Only 15 months later that the
corporation said there was a mistake
- The silence coupled with the
unconditional acceptance of the
other subsequent remittances is
binding to the corporation
Board of Liquidators vs. Kalaw
Settled jurisprudence has it
that where similar acts have been
approved by the directors as a
matter of general practice, custom
and policy, the general manager
may bind the company without
formal authorization of the board of
directors. In varying language,
32
 existence of such authority is
established, by proof of the course of
business, the usages and practices of
the company and by the knowledge
which the board of directors has, or
must be presumed to have, of acts and
doings of its subordinates in and about
the affairs of the corporation. So also,
xx authority to act for and bind a
corporation may be presumed from
acts of recognition in other instances
where the power was in fact
exercised. xx Thus, when, in the
usual course of business of a
corporation, an officer has been
allowed in his official capacity to
manage its affairs, his authority to
represent the corporation may be
implied from the manner in which he
has been permitted by the directors to
manage its business.
In the case at bar, the practice
of the corporation has been to allow its
general manager to negotiate and
execute contracts in its copra trading
activities for and in NACOCOs behalf
without prior board approval. If the by-
laws were to be literally followed, the
board should give its stamp of prior
approval on all corporate contracts.
But that Board itself, by its acts and
through acquiescence, practically laid
aside the by-law requirement of prior
approval.
- Implied ratification is through:
silence or acquiescence,
acceptance benefits and lastly
recognition or adoption
- An unauthorized act may
nevertheless be binding either by
express or implied by estoppels
- By virtue of silence the board had
impliedly accepted the act
- By recognition or adoption
- By virtue of payment of obligations
arising therefore- Lopez realty
May directors or trustees be disqualified to
act as such?
- YES, crime, etc. disqualifications in
book
- Possess or dispossess any of the
qualifications or disqualifications ,
cease to hold at least one share
May directors be ousted from office?
- At least 2/3 of members
representing outstanding capital
stock. Again notice requirement
must be complied with
1-200 1-5 same family
2-200
3-200

- Kalaw signed alone and said contracts 4-100

were submitted to the board of
directors after its consummation and 5-100 electing
not before 6-100 6 to 10 not
Buenaseda vs. Bowen related

7-50
- Express ratification is made through a
formal board action 8-40
33
 9-5
10-5 outstanding
director
Meetings called by the president or the
secretary ordered by the president
It depends if the removal is without
cause they cannot do so because
removal without cause shall not
deprive the minority stockholders or
members of the right of representative
If with cause they can even if it will
prejudice the rights of the minority,
provided of course additional
requirements by-laws and articles of
incorporation
Who will fill up the vacancy created
due to the ouster of a member of the
board of directors <section 29>
Section 29. Vacancies in the
office of director or trustee. - Any
vacancy occurring in the board of
directors or trustees other than by
removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be
filled by the stockholders in a regular
or special meeting called for that
purpose. A director or trustee so
elected to fill a vacancy shall be
elected only or the unexpired term of
his predecessor in office.
Any directorship or trusteeship
to be filled by reason of an increase in
the number of directors or trustees
shall be filled only by an election at a
regular or at a special meeting of
stockholders or members duly called
for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in
the notice of the meeting. (n)
Other than by removal or expiration
of term they do not have the power
When will the vacancies be filled
up?
Is notice required, to fill up
vacancies due to removal?
What if the vacancy is due to an
increase, can it be filled up in the
same meeting where in the number
is increased?
Election due to removal-in the same
meeting notice is not required
Election due to increase in number-
it must be so stated in the meeting
Section 30
Section 30.Compensation
of directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for 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 least a majority of
the outstanding capital stock at a
regular or special stockholders'
meeting. In no case shall the total
yearly compensation of directors, as
such directors, exceed ten (10%)
percent of the net income before
income tax of the corporation during
the preceding year. (n)
- Generally not entitled to receive
compensation because they render
it gratuitously
34
- Unless the by-laws allows - The SC ruled that the 10% ceiling
will not likewise apply if they acted in
- Stockholders may also grant pursuant a capacity other than as such
to a majority vote directors
- Must not exceed net income of 10% Government vs. El Hogar
tax of the preceding year
- Judicial intervention is not proper
- Acting in special capacity
- The appropriates remedy is to those
- In, sum directors may receive
who can make or unmake the by-
compensation when
laws
1. there is a provision in the by-laws to
Liability of corporate officers
that effect
- Obligations incurred by those acting
2. When the stockholders, by a majority
for and in behalf of the corporations
vote of the outstanding capital stock
are not theres BUT there are
grant the same; and,
exceptions even if they are acting for
3. If the director renders extra-ordinary or and in behalf of the corporation
unsual service
Tramat vs. CA
Central Cooperative Exchange vs.
- General rule was applied in the case
Tibe
- Ong acted as officers and acted
- By-laws may allow, stockholders may
within the scope of his authority
also allow such
- Court laid down 4 instances when
What do you understand by the phrase
even if acting within the scope of his
as such directors
authority he is held solidarily liable
Western Institute vs. Salas
1. He assents (a) to a patently unlawful
- Compensation was granted without by- act of the corporation, or (b) for bad
laws authority faith, or gross negligence in directing
its affairs, or (c) for conflict of
- Prohibition is not a sweeping rule interest, resulting in damages to the
corporation, its stockholders or other
- Members of the board may receive
persons;
when they receive in a special capacity
2. He consents to the issuance of
- Mere act of the board will suffice
watered stocks or who, having
Is the 10% ceiling applicable to other knowledge thereof, does not
officers? forthwith file with the corporate
secretary his written objection
- NO. the phrase as such director was thereto;
used twice <Section 30>

35
3. He agrees to hold himself personally
and solidarily liable with the
corporation;
4. He is made, by a specific provision of
law, to personally answer for his
corporate action.
- Watered stocks- issued, fully paid up
when in fact they have not been fully
paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be
used as a defense to escape liability in
violation of B.P. 22
- Where the check is drawn by a
corporation the persons who signed
the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and
officers are solidarily liable with the
corporation for the termination of
employment of corporate employee
done with malice and bad faith
3 fold duty of directors
- obedient
- diligent
- loyal
Business judgment rule
- Questions of policy and management
are left solely to the honest decision of
the board of directors and the courts
are without authority to substitute its
judgment as against the former. The
directors are the business managers of
the corporation and as long as they act
in good faith, its actuations are not
subject to judicial review.
Montelibano vs. Bacolod Murcia
Milling
- questions of policy and management
are left solely to the board of
directors
- BOD, business manager of the
corporation and as long as they act
in good faith, its actuations are not
subject to judicial review
- They are not insurer of the property
of the company, they were
guarantors that the enterprise
undertaken by the corporation shall
be successful
Montelibano vs. Bacolod Murcia
Milling Co.
- Directors are not liable due to
imprudence or honest error of
judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when
corporate officers may violate loyalty
- 32,33 self-dealing and interlocking
director
Corporate opportunity doctrine
- It places a director of a corporation
in the position of a fiduciary and
prohibits him form seizing a
business opportunity and/or
developing it at the expense and
with the facilities of the corporation.
He cannot appropriate to himself a
business opportunity which in
36
 fairness should belong to the for 25M the fair market
corporation. value is 30M

Last paragraph of section 31 and the D

provision of section 34 make reference
E
to recovery of forbidden profits
E goes to Z and offers to pay the property
Distinction between section 31 and 34
for 26 M and later he sells it for 30M
relative to the ratification by the
making 4M profit, one of the stockholders
stockholders
learned and complains that he should
- The second paragraph of section 31 submit the profits. E said that he will move
which makes a director liable to for ratification of his actuation. Can it be
account for profits if he attempts to ratified?
acquire or acquires any interest
- It can be ratified he merely acquired
adverse to the corporation in respect
a business owning to the corporation
to any matter reposed in him in
confidence as to which equity imposes - It would be different if it was
a disability upon him to deal in his own entrusted in his confidence
behalf is not subject to ratification by
the stockholders. Whereas, in section Another scenario:
34 if a director acquires for himself a
Had A not attended the meeting he would
business opportunity which should
not have known of the sale it is then a
belong to the corporation, he is bound
matter reposed in him in confidence
to account for such profits unless his
act is ratified by the stockholders A corporation cannot reaquire its
owning ore representing at least 2/3 of share if it has no restricted
the outstanding capital stock. unretained earnings

- If reposed in him in confidence, not Strong vs. Rapide

subject to ratification
- What duty did he violate?
- If the acquisition is merely that of a
business opportunity which has not - He violated his duty of loyalty
been reposed in him in confidence, the
- The law would be impotent if the
same may be subject to ratification by
sale were not invalidated
the stockholders.
- Self-dealing director and interlocking
Director x co.
director
A-REALTY
What is a self-dealing director?
B
- Director of a corporation dealing or
C Z owns property and is transacting business with his
going abroad never to corporation
Return, he wants to sell
37
Are the contracts and dealing of a self-
dealing director valid?
General rule: voidable
May the contracts of a self-dealing director be
valid per se.
- 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 contract was approved was not
necessary to constitute a quorum for
such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
reasonable under the circumstances;
and
4. That in case of an officer, the contract
has been previously authorized by the
board of directors.
When do they become voidable?
- When any of the two requisites are
absent it is voidable, but subject to
ratification by 2/3 of the outstanding
capital stock or 2/3 of the member
Requisites for ratification (subject to
ratification by the stockholders holding
or representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members.)
- it must be at a meeting called for the
purpose
- full disclosure of the adverse interest
of the director concerned must be
made
- the contract is fair and reasonable
under the circumstances
Problem if self-dealing director
involved owns all or substantially all
of the shares of stock of the
corporation thereby making it easily
possible to have the contract ratified
- last sentence of section 32 should
be made to apply by determining the
reasonableness and fairness of the
contract
Section 32. Dealings of
directors, trustees or officers with
the corporation. - A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all the following
conditions are present:
1. That the presence of such director
or trustee in the board meeting in
which the contract was approved
was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
reasonable under the
circumstances; and
4. That in case of an officer, the
contract has been previously
authorized by the board of directors.
Where any of the first two
conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee,
such contract may be ratified by the
vote of the stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock or of
38
 at least two-thirds (2/3) of the - Yes on the ground of fraud or if it is
members in a meeting called for the unfair
purpose: Provided, That full disclosure
of the adverse interest of the directors - May be subject to the provision of
or trustees involved is made at such section 32
meeting: Provided, however, That the
contract is fair and reasonable under - Section 32 contract may become
the circumstances. (n) voidable, hence it may also be
ratified
Prime White Cement vs. IAC
X Co. Y Co.
- a director of a corporation owes a
position in trust A owe 20% A owe 20%

- in case of conflict between himself and Is it generally valid or voidable? VALID

that of the corporation, he cannot
sacrifice the interest of the corporation
to his own advantage
- as a director he should have acted in a
manner as not to unduly prejudice the
corporation
- he cannot be allowed to enrich himself
May corporate directors purchase the
corporate property?
Mead vs. Mccullogh
- interlocking director- a director of one
corporation who deals and transacts
business with another corporation who
is himself a director
A- director of X company also a director
of Y corporation
B-
C-
D-
E-
Both companies enter into a contract
and A sits, is the contract valid?
25% 25% VALID
15% 25% VOIDABLE SUBJECT
TO section 32
More than 20 substantial
BOD mismanages corporate
officers. Who may file a suit?
- General rule: BOD which can
institute a case because it has all
the powers. To allow stockholders to
file would violate the doctrine of
corporate entity and may result to
multiplicity of suits
- Stockholders cannot therefore
generally file a case EXCEPT of
course in a DERIVATIVE SUIT
Derivative suit
- An action based on injury to the
corporation-to enforce a corporate
right- wherein the corporation itself
is joined as a necessary party, and
recovery is in favor of and for the
corporation.
- Remedy granted by law to
stockholders to institute a case to
remedy a wrong done directly to the
39
 corporation and indirectly to the
stockholders, if the board refuses to do
so. Otherwise if not they would be left
without any recourse
Available suits
Individual or Personal
- Wrong done against his person as a
stockholder
Class suit
- Filed by a stockholder in
representation of other stockholders
- A wrong or redress done, a derivative
suit in nature
Intra-corporate remedies
- Demand to the BOD to institute such
action
- Negated by the BOD
- The one who instituted must be a
stockholder at the date when the act
was done, must have been a
stockholder by that time
Demand will not be required if the
majority of the BOD are the ones
guilty of the wrong charged
The corporation must be made a party
in the case whatever side will not
matter because under Philippine law
misjoinder is not a ground for dismissal
Non-joinder is a ground for dismissal
Any benefit should inure to the
corporation
Stockholder bringing the action is
entitled to reimbursement such as
attorneys fee ONLY IF the case is
SUCCESSFUL to avoid harassment
suit to their management
Pascual vs. Orozco
- By virtue of the fact that he is a
stockholder, may maintain a
derivative suit
- Depend on how, when and what
reason
- Seeking for the years 1898 all the
way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward
because he must be a stockholder
- The right of action is personal in
nature. He became a stockholder
only in 1902
Derivative suit
- By a stockholder to address a wrong
done against the corporation and the
stockholder indirectly
- Essential requisite must have been
a stockholder from the time the act
complained of took place
- Cannot institute an action from the
years he was still not a stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily
commence suit in equity and such is
in the hands of its BOD however
there are exceptions when the BOD
will not sue since they are
themselves principals to the fraud.
Republic vs. Cuaderno
40
- The facts constitute sufficient cause of
action
- It is not the corporate interest to shield
one from criminal prosecution which is
personal interest
- Perez is not suing in his behalf, but in
behalf of the corporation
Western Institute vs. Salas
- Assuming it was filed in the proper
forum would there argument that it is a
derivative suit prosper? NO. it is
people of the Philippines vs. individual
director, it must be stated in the
complaint that it is being instituted as a
derivative suit and for and in behalf of
the corporation
- Granting arguendo, that this is a
derivative suit, the same is still
outrightly dismissible for having been
wrongfully filed in the regular court
devoid of any jurisdiction to entertain
the complaint. The case should have
been filed with the SEC which
exercises original and exclusive
jurisdiction over derivative suits, they
being intra-corporate disputes, per
Section 5 (b) of P.D. 902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he
objected in the board meeting, but still
it was adopted therefore it was useless
Chase vs. Buencamino
- Argument that he should be in
estoppels since he filed in the U.S.
- Assuming the case prospered in the
U.S. would not estoppels apply as
against him? NO for estoppels to
step in it must be a case by the
corporation
Reyes vs. Tan
- Corporate director are guilty of
breach of trust
- A stockholder may institute an action
to remedy a wrong done
- Fraud in the conduct of corporate
affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this
case
- They are not vindicatory damage
done to the corporation, but rather
they where vindicating damage
against him
- Violation of their rights as
individuals, hence derivative suit is
not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the
corporation, but rather his individual
benefit
From the cases above cited, these
are the requirements and the
procedures that must be followed in
order that a derivative suit may
prosper
1. That the party bringing the suit
should be a stockholder as of the
time the act or transaction
41
 complained of took place, or whose
shares have evolved upon him since
by operation of law. This rule, however,
does not apply if such act or
transaction continues and is injurious
to the stockholder or affect him
specifically in some other way.
The number of his hares is immaterial
since he is not suing in his own behalf
or for the protection or vindication of
his own right, or the redress of a wrong
done against him, individually, but in
behalf and for the benefit of the
corporation.
2. He has tried to exhaust intra-corporate
remedies, he has made a demand on
the board of directors for the
appropriate relief but the latter had
failed or refused to heed his plea.
Demand, however, is not required if
the company is under the complete
control of the directors who are the
very ones to be sued (or where it
becomes obvious that a demand upon
them would have been futile and
useless) since the law does not require
a litigant to perform useless acts;
3. The stockholder bringing the suit must
allege in his complaint that he is suing
on a derivative cause of action on
behalf of the corporation and all other
stockholders similarly situated,
otherwise, the case is dismissible. This
is because the cause of action actually
devolves on the corporation and not to
a particular stockholder.
4. The corporation should be made a
party, either as party-plaintiff or
defendant, in order to make the courts
judgment binding upon it, and thus,
bar future litigation of the same issues.
On what side the corporation
appears loses importance when it is
considered that it lay within the
power of the court to direct the
making of amendment of the
pleading, by adding or dropping
parties, as may be required in the
interest of justice. Misjoinder of
parties is not a ground to dismiss
action; and,
5. Any benefit or damages recovered
shall pertain to the corporation. This
is so because in all instances,
derivative suit is instituted for and in
behalf of the corporation and not for
the protection or vindication of a
right or rights of a particular
stockholder, otherwise, the
aggrieved stockholder should
institute, instead, an individual or
personal suit to vindicate his
personal or individual right. Or, for
that matter, representative or class
suit for all other stockholders whose
rights are similarly situated, injured
or violated, personally or individually.
Executive committee
- Not allowed under the OLD law
How may executive committee
created and constituted?
- Section 35
Section 35. Executive
committee. - The by-laws of a
corporation may create an executive
committee, composed of not less
than three members of the board, to
be appointed by the board. Said
committee may act, by majority vote
of all its members, on such specific
matters within the competence of
the board, as may be delegated to it
42
 in the by-laws or on a majority vote of
the board, except with respect to: (1)
approval of any action for which
shareholders' approval is also
required; (2) the filing of vacancies in
the board; (3) the amendment or
repeal of by-laws or the adoption of
new by-laws; (4) the amendment or
repeal of any resolution of the board
which by its express terms is not so
amendable or repealable; and (5) a
distribution of cash dividends to the
shareholders.
- Said committee may act and bind the
corporation by the majority vote of all
its members except with respect to
those matters provided for in sec. 35
these are:
1. Approval of any action for which
shareholders approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the
adoption of new by-laws;
4. Amendment or repeal of any resolution
of the board which by its express
terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the
shareholders.
May the board alone create an
executive committee without any
authority provided for the by-laws?
- NO board of directors must sit and act
as a body to have a valid transaction
May a non-member of the board of
directors be a member of the executive
committee?
- NO, all of them must be members of
the board of directors
- BOD cannot act by proxy it would be
abdication of powers
Purpose clauses necessary because
it confers and also limits the actual
authority of the corporation
CORPORATE POWERS AND
AUTHORITY
Corporate authority may be
classified into three classes namely:
1. Those expressly granted or
authorized by law inclusive of the
corporate charter or articles of
incorporation;
2. Those impliedly granted as are
essential or reasonably necessary to
the carrying out of the express
powers;
3. Those that are incidental to its
existence.
Section 36 to 45- POWER
GRANTED BY LAW
Section 36. Corporate powers and
capacity. - Every corporation incorporated
under this Code has the power and
capacity:
1. To sue and be sued in its
corporate name;
2. Of succession by its corporate
name for the period of time stated in
the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate
seal;
4. To amend its articles of
incorporation in accordance with the
provisions of this Code;
43
 5. To adopt by-laws, not contrary to
law, morals, or public policy, and to
amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to
issue or sell stocks to subscribers and
to sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and otherwise deal with
such real and personal property,
including securities and bonds of other
corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require,
subject to the limitations prescribed by
law and the Constitution;
8. To enter into merger or
consolidation with other corporations
as provided in this Code;
9. To make reasonable donations,
including those for the public welfare
or for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation,
domestic or foreign, shall give
donations in aid of any political party or
candidate or for purposes of partisan
political activity;
10. To establish pension, retirement,
and other plans for the benefit of its
directors, trustees, officers and
employees; and
11. To exercise such other powers as
may be essential or necessary to carry
out its purpose or purposes as stated
in the articles of incorporation. (13a)
Section 37. Power to extend or
shorten corporate term. - A private
corporation may extend or shorten its term
as stated in the articles of incorporation
when approved by a majority vote of the
board of directors or trustees and ratified at
a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3)
of the members in case of non-stock
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 of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That in case
of extension of corporate term, any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this code. (n)
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. - No
corporation shall increase or decrease its
capital stock or incur, create or increase
any bonded indebtedness unless approved
by a majority vote of the board of directors
and, at a stockholder's meeting duly called
for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the
increase or diminution of the capital stock,
or the incurring, creating or increasing of
any bonded indebtedness. Written notice of
the proposed increase or diminution of the
capital stock or of the incurring, creating, or
increasing of any bonded indebtedness
and of the time and place of the
stockholder's meeting at which the
proposed increase or diminution of the
capital stock or the incurring or increasing
of any bonded indebtedness is to be
considered, must be addressed to each
stockholder at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally.
44
A certificate in duplicate must be signed by a
majority of the directors of the corporation
and countersigned by the chairman and the
secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock,
the amount of capital stock or number
of shares of no-par stock thereof
actually subscribed, the names,
nationalities and residences of the
persons subscribing, the amount of
capital stock or number of no-par stock
subscribed by each, and the amount
paid by each on his subscription in
cash or property, or the amount of
capital stock or number of shares of
no-par stock allotted to each stock-
holder if such increase is for the
purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at
the meeting; and
(7) The vote authorizing the increase
or diminution of the capital stock, or
the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock
or the incurring, creating or increasing of any
bonded indebtedness shall require prior
approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept
on file in the office of the corporation and the
other shall be filed with the Securities and
Exchange Commission and attached to the
original articles of incorporation. From and
after approval by the Securities and
Exchange Commission and the issuance
by the Commission of its certificate of filing,
the capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for
filing any certificate of increase of capital
stock unless accompanied by the sworn
statement of the treasurer of the
corporation lawfully holding office at the
time of the filing of the certificate, showing
that at least twenty-five (25%) percent of
such increased capital stock has been
subscribed and that at least twenty-five
(25%) percent of the amount subscribed
has been paid either in actual cash to the
corporation or that there has been
transferred to the corporation property the
valuation of which is equal to twenty-five
(25%) percent of the subscription:
Provided, further, That no decrease of the
capital stock shall be approved by the
Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the
same, with the approval by a majority vote
of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting
duly called for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and
Exchange Commission, which shall have
the authority to determine the sufficiency of
the terms thereof. (17a)
Section 39. Power to deny pre-
emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, unless such right
45
is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be
issued in compliance with laws requiring
stock offerings or minimum stock ownership
by the public; or to shares to be issued in
good faith with the approval of the
stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
Section 40. Sale or other disposition
of assets. - Subject to the provisions of
existing laws on illegal combinations and
monopolies, a corporation may, by a majority
vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of
its property and assets, including its goodwill,
upon such terms and conditions and for such
consideration, which may be money, stocks,
bonds or other instruments for the payment of
money or other property or consideration, as
its board of directors or trustees may deem
expedient, when authorized by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in
case of non-stock corporation, by the vote of
at least to two-thirds (2/3) of the members, in
a stockholder's or member's meeting duly
called for the purpose. 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 of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions provided
in this Code.
A sale or other disposition shall be deemed to
cover substantially all the corporate property
and assets if thereby the corporation would
be rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated.
After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other
disposition of property and assets, subject
to the rights of third parties under any
contract relating thereto, without further
action or approval by the stockholders or
members.
Nothing in this section is intended to restrict
the power of any corporation, without the
authorization by the stockholders or
members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of
any of its property and assets if the same is
necessary in the usual and regular course
of business of said corporation or if the
proceeds of the sale or other disposition of
such property and assets be appropriated
for the conduct of its remaining business.
In non-stock corporations where there are
no members with voting rights, the vote of
at least a majority of the trustees in office
will be sufficient authorization for the
corporation to enter into any transaction
authorized by this section.
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own
shares for a legitimate corporate purpose
or purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out
of stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
sold during said sale; and
46
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code. (a)
Section 42. Power to invest corporate
funds in another corporation or business or
for any other purpose. - Subject to the
provisions of this Code, a private corporation
may invest its funds in any other corporation
or business or for any purpose other than the
primary purpose for which it was organized
when approved by a majority of the board of
directors or trustees and ratified by the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at
least two thirds (2/3) of the members in the
case of non-stock corporations, at a
stockholder's or member's meeting duly
called for the purpose. Written notice of the
proposed investment and the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval of
the stockholders or members shall not be
necessary. (17 1/2a)
Section 43. Power to declare
dividends. - The board of directors of a stock
corporation may declare dividends out of the
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all
stockholders on the basis of outstanding
stock held by them: Provided, That any cash
dividends due on delinquent stock shall first
be applied to the unpaid balance on the
subscription plus costs and expenses, while
stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,
That no stock dividend shall be issued
without the approval of stockholders
representing not less than two-thirds (2/3)
of the outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
any financial institution or creditor, whether
local or foreign, from declaring dividends
without its/his consent, and such consent
has not yet been secured; or (3) when it
can be clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for
probable contingencies. (n)
Section 44. Power to enter into
management contract. - No corporation
shall conclude a management contract with
another corporation unless such contract
shall have been approved by the board of
directors and by stockholders owning at
least the majority of the outstanding capital
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly
called for the purpose: Provided, That (1)
where a stockholder or stockholders
representing the same interest of both the
managing and the managed corporations
own or control more than one-third (1/3) of
the total outstanding capital stock entitled
to vote of the managing corporation; or (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 board of directors of the
managed corporation, then the
management contract must be approved by
the stockholders of the managed
corporation owning at least two-thirds (2/3)
of the total outstanding capital stock
47
entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock
corporation. No management contract shall
be entered into for a period longer than five
years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to manage
or operate all or substantially all of the
business of another corporation, whether
such contracts are called service contracts,
operating agreements or otherwise: Provided,
however, That such service contracts or
operating agreements which relate to the
exploration, development, exploitation or
utilization of natural resources may be
entered into for such periods as may be
provided by the pertinent laws or regulations.
(n)
Section 45. Ultra vires acts of
corporations. - No corporation under this
Code shall possess or exercise any corporate
powers except those conferred by this Code
or by its articles of incorporation and except
such as are necessary or incidental to the
exercise of the powers so conferred. (n)
Section 36
Where should the corporation be
sued?
- principal office is important because it
establishes the residence of the
corporation and determining service of
summons, venue of action
- it can be sued in the city or
municipality where its principal office is
found
Principal office is also important for
venue of meetings
Non-stock corporation may provide in
its by-laws that the venue of meeting
be anywhere in the Philippines
Upon whom service of summons be
made?
- Section 11. Service upon domestic
private juridical entity- when the
defendant is a corporation,
partnership or association organized
under the laws of the Philippines
with a juridical personality, service
may be made upon the president,
managing partner, general manager,
corporate secretary, treasurer, or in
house counsel.
Delta motor vs. Mangosing
- strict compliance is necessary
- should be served to those named in
the statute
- secretary of a dept are not those
included in the statute
E.B. Villarosa vs. Benito
- decision En Banc repeals all other
pronouncement
- section 13 Rule 14 was repealed
- the old rules was ambiguous and
broad and at all time illogical
the particular revision under Section
11 of Rule 14 was explained by
retired Supreme Court Justice
Florenz Regalado, thus:
xxx the then section 13 of
this Rule allowed service
upon a defendant corporation
to be made on the president,
manager, secretary, cashier,
agent or any of its directors.
The aforesaid terms were
obviously ambiguous and
48
 susceptible of broad and
sometimes illogical
interpretations, especially the
word agent of the corporation.
The Filoil case, involving the
litigation lawyer of the
corporation who precisely
appeared to challenge the
validity of service of summons
but whose very appearance for
that purpose was seized upon
to validate the defective service,
is an illustration of the need for
this revised section with limited
scope and specific terminology.
Thus the absurd result in the
Filoil case necessitated the
amendment permitting service
only on the in-house counsel of
the corporation who is in effect
an employee of the corporation,
as distinguished from an
independent practitioner.
o notes: additional knowledge
- special appearance enter for that
particular appearance you are not the
counsel in the case
- would apply only if it does not involve
an intra-corporate controversy
(controversy between and among the
stockholders)
- upon any of the statutory officers or
officers fixed in the by-laws any
secretary, any of the directors; any
managers in the by-laws
Seal
- merely ministerial or permissive
Power to amend
- section 16
- special 37,38,120
Power to adopt by-laws
- section 46-48
Power to issue or sell stocks and to
admit members
- stock of stockholders and provision
governing non-stock
Power to acquire or alienate real or
personal property
- is there any limitation? YES
- Two specific limitation
1. Section 36, as lawful transactions of
business of the corporation may
reasonably and necessarily require
2. Constitution and law
Luneta vs. A.D. Santos
- Importance of the purpose clause
It confers and determine the limits the
actual authority of the corporation.
- Cannot have the power to acquire
- Cannot engage in land
transportation
- Doctrine of limited capacity
Govt vs. El Hogar
- As the lawful transaction of its
business may reasonably represent
Director of Lands vs. CA
- Exception to the rule in the
constitution
49
 - Alienable public land
- Converts the property to a private land
automatically once converted it can
now be registered
Power to make donation
- Limitation Section 36 par.9
Provided, That no corporation, domestic or
foreign shall give donations in aid of any
political party or candidate or for purposes of
partisan political activity.
- These are circumstances, however,
under which a donation by a
corporation may be to its benefit as a
means of increasing its business or
promoting patronage. Thus, paragraph
9 of section 36 expressly authorizes a
corporation to make donations. The
only limitations imposed are the
following:
1. The donation must be reasonable;
2. It must be for public welfare, or for
hospital, charitable, scientific, cultural
or similar purpose; and,
3. It shall not be in aid of political party or
candidate, or for purposes of partisan
political activity.
Power to establish pension
- Include any act to promote and
improve the convenience, welfare and
benefit of the employees or offices
Republic vs. Acoje
- While as a rule an ultra-vires act is
one committed outside the object for
which a corporation is created as
defined by law, there are however
certain corporate acts that may be
performed outside of the scope of
the powers expressly conferred if
they are necessary to promote
the interest or welfare of the
corporation. Thus, it has been held
that although not expressly
authorized to do so a corporation
may become a surety where the
particular 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
reasonable and proper adjunct to
the conduct of the business of
appellant company. Indeed, such
post office is a vital improvement in
the living condition of its employees
and laborers who came to settle in
its mining camp which is far
removed from the postal facilities or
means of communication accorded
to people living in a city or
municipality.
Power to exercise such other
powers essential or necessary to
carry out its purpose (implied
power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the
corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or
aid employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs.
P.S.C.
- Examined the articles of
incorporation to arrive at its decision
50
 National Power vs. Vera
- For purpose of prohibiting the
NAPOCOR
- The court must decide whether or not
a logical and necessary relation exists
between the act questioned and the
corporate purpose expressed in the
NPC charter
Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel
mortgage
Powers vs. Marshall
Power to extend its terms
- Once its term expires, already
dissolved automatically, thus can no
longer ask for extension
- After dissolution, it has 3 years to
windup
What are the modes of increasing
capital stock?
1. Increasing the par value of the existing
number of shares without increasing
the number of shares;
2. Increasing the number of existing
shares without increasing the par
value thereof; and,
3. Increasing the number of existing
shares and at the same time
increasing the par value of the shares.
Why a corporation increases it
capital stock?
- Generate funds, business
expansion, or payment of liabilities,
purposes of acquiring other
business. (example: to buy cars for
the officers, purpose of acquiring
other business, expansion, other
valid reasons)
How do you decrease capital
stock and why a corporation
decreases?
- Reduce or wipeout existing deficit
where no creditors would thereby be
effected
- When capital is more than
necessary to procreate the business
or reduction of capital surplus
- To write down the value of its fixed
assets to reflect those present and
actual
o NOTE: any increase or decrease of
capital stock requires approval of
government agency like SEC it can
never take place unless SEC
approves the same
Relevance of decrease of capital?
1. To reduce or wipe out existing deficit
where no creditors would thereby be
affected;
2. When the capital is more than what
is necessary to procreate the
business or reduction of capital
surplus; or,
3. To write down the value of its fixed
assets to reflect there present actual
value in case where there is a
51
 decline in the value of the fixed assets
of the corporation.
- Examples: Php 10M capital for grocery
business, mayor didnt want to issue
license/permit because mayor has 3
other grocery stores, only allowed sari-
sari store permit, reduce capital for
sari-sari so that the money will not
sleep in bank
- Example: car rental agencies-Php 10M
capital for 20 taxis, after some time
each taxi is only 250K, nagmura ang
taxi, to reduce capital is to show actual
assets
Limitation imposed by law
- Decrease shall not in any way affect
the rights of the creditors
Philippine Trust Company vs.
Rivera
- Without the appraisal of SEC, a
decrease in capital stocks has no
effect
TRUST FUND DOCTRINE:
- Subscription to capital stock of a
corporation constitute a fund to which
the creditors have a right to look upon
for satisfaction of their claims and that
the assignee in insolvency can
maintain an action upon any unpaid
stock subscription in order to realize
assets for the payment of its debts.
Madrigal vs. Zamora
- Decrease in capital has a subterfuge
to evade payment
- Thus not valid and effective
- Must not prejudice creditors which
includes the employees
Bond
- Commonly understood as an
obligation of a state, its subdivision
or a private corporation, represented
by a certificate or an instrument for
the principal and by detachable
coupons for the payment of
interests. In its simplest term, it is
one where an obligor obliges himself
to pay a certain sum of money to
another at a day named.
- There are different kinds of bond but
before they may be issued or floated
by the corporation, the same must
be registered and approved by the
SEC subject to the rules and
regulations that may be adopted by
that agency. The procedure and
requirements set forth in section 38
is the same as in increasing or
decreasing the capital stock except
that the certificate does not have to
state the matters required in sub-
section 2 & 3 thereof.
Pre-emptive rights
- A right granted by law to all existing
stockholders of a stock corporation
to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective
stockholdings, subject only to the
limitations imposed under section 39
of the Code.
- Internationally granted
Pre-emptive rights, why it is
granted?
52
- In order that the existing stockholders
may maintain their proportionate right
as not to dilute their right
Power to deny pre-emptive rights
Section 39. Power to deny
pre-emptive right. - All stockholders
of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues
or disposition of shares of any class, in
proportion to their respective
shareholdings, unless such right is
denied by the articles of incorporation
or an amendment thereto: Provided,
That such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public; or to shares to be issued
in good faith with the approval of the
stockholders representing two-thirds
(2/3) of the outstanding capital stock,
in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt.
May it be denied? How?
- Yes, if provided by articles of
incorporation or by an amendment
- However, pre-emptive rights is
unavailable to shares in trading in
stock exchange otherwise
stockholders must waive first their right
before they may sell such.
Exceptions
1. When the shares to be issued is in
compliance with laws requiring
stock offerings or minimum stock
ownership by the public
2. Shares to be issued in good faith
with the approval of the
stockholders representing 2/3 of
the outstanding capital stock
either
a. In exchange for property
needed for corporate purpose
or,
b. In payment of a previously
contracted debt
- The exceptions, however will not
apply to stockholders of a close
corporation by virtue of a
subsequent and specific provision of
the Code which provides that the
pre-emptive right of a stockholder in
a close corporation shall extend to
all stock to be issued, including
reissuance of treasury shares,
whether for money, property or
personal services or in payment of a
corporate debt, unless the articles of
incorporation provide otherwise, if
not entirely absolute, in that it
extends to all issuance and
disposition of shares
- Such right of pre-emption may be
lost by waiver of the stockholder,
expressly or impliedly by his inability
or failure to exercise it after having
been notified of the proposed
issuance or disposition of shares
When is it unavailable?
- In shares traded openly in stock
exchange/market
Is it applicable to close
corporations?
- See section 96, close corporations
must provide it first on its articles of
incorporation, that its articles does
53
 not really deny such pre-emptive
rights.
Section 102, will not apply to close
corporations
The right of pre-emptive rights is absolute in
close corporations
All issues or depositing shares of any class
form part of ACS
Certain instances when a
stockholder may nevertheless be
unable to exercise this right:
- Issued for public ownership
- Issued in good faith, with approval of
2/3 of outstanding capital stock either
a) in exchange for property needed or
b) for payment of a previously
contracted debt
Pre- emptive rights of stockholders
in ordinary stock corporations may
be denied
- if the shares are to be issued in
compliance with laws requiring stock
offering or minimum stock ownership
by the pubic
- In exchange for property needed for
corporate purposes
- In payment of previously contracted
debts
This rule, however, does not apply
in a close corporation as the pre-
emptive rights of the stockholders
thereof is broadened to include all
issues without exceptions unless,
of course, denied or limited by the
articles of incorporations. Section
102 provides:
Section 102. Pre-emptive
right in close corporations. - The
pre-emptive right of stockholders in
close corporations shall extend to all
stock to be issued, including
reissuance of treasury shares,
whether for money, property or
personal services, or in payment of
corporate debts, unless the articles
of incorporation provide
otherwise.
Denial will not apply to a close
corporation, ABSOLUTE
- section 96 - Definition and
Applicability of Close Corporation.
May a stock holder in a close
corporation insist in the exercise
of his pre-emptive rights?
- Yes, section 102
What type or shares are covered
by pre-emptive rights?
Does it include those originally
unsubscribed?
- NO. Benito vs. SEC
Will the stockholders be able to
exercise their pre-emptive right
with respect to the old unissued
shares? No.
- Pre-emptive rights is applicable
only to new issued shares and not
to the old unissued shares because
it is presumed that the original
subscribers is deemed to have taken
his shares knowing that they form a
definite proportionate part of the
whole number of authorized shares
54
 - When the shares, left unsubscribed If 1-5 became 200K each, may 6-
are re-offered, he cannot therefore 10 demand the exercise their pre-
claim. DILUTION OF INTEREST emptive right?

Will the acquiring purchaser be - YES

liable for debts of the former
corporation?
- Generally no, corporate entity theory
because there may be instances when
purchasing corporation may be held
liable
May a corporation acquire its own
shares?
- Yes
May 1-5 subscribe to the
unsubscribed capital stock to the
exclusion of 6-10?
- If a corporation makes 2M
unrestricted retained earnings, it is
the shares and not the number of
persons that matters
May 6-10 complain for a dilution
of their interest?

Is there any restriction provided for - YES, its an internationally

by law in reacquiring its own
shares?
- Yes, it must have been unrestricted
retained earnings appearing in the
books of corporation
A corporation can never acquire its
own shares if it has no unrestricted
retained earnings
- False, exception close corporation and
redeemable shares
recognized right because it includes
all issues and disposition of shares
of any class and all kinds of shares
new or old
- If the remaining unsubscribed
shares are issued, its an issuance
of any class
May a corporation sell/dispose all
or substantially all of its
corporate assets and liabilities?
- YES

- 1) RESOLUTION 2)
EXAMPLE:
AUTHORIZATION 3)
ACS 2M RATIFICATION 4) PRIOR WRITTEN
NOTICE 5) SALE SUBJECT TO
SUBSCRIBED 1M PROVISIONS OF EXITING LAWS
6) DISSENTING STOCKHOLDERS
PAID UP 1M
HAVE THE RIGHT TO EXERCISE
1 100K THEIR APPRAISAL RIGHT

2 100K If a corporation sells substantially

all of it assets and properties, will
TO the buyer assume liability?
10 100K
55
 - NO, EXCEPT 500K RESERVES IN A
CLOSE CORPORATION IT CAN USE
1) Express or implied agreement to the THIS TO REACQUIRE ISSUED STOCKS
purchase
X REALTY CORPORATION
2) Where the transaction amounts to
consolidation or merger of the THE ONLY PROPERTY OF THE
corporations CORPORATION

3) When purchasing corporation is BOARD OF DIRECTORS DECIDED

merely a continuation of the selling TO SELL IT
corporation
Will it need the approval of the
4) Where the transaction is entered into stockholders?
fraudulently in order to escape liability
for such debt - NO, if the same is necessary in the
usual and regular course of
Legitimate purpose: for a business of said corporation or if the
corporation to reacquire its own proceeds of the sale or other
shares disposition of such property and
assets be appropriated for the
- Limitation: it must have
conduct of its remaining business
surplus/unrestricted retained earnings
- If X is a manufacturing company,
- Exception: may redeem irrespective of
then it can sell its only property upon
unrestricted retained earnings
approval of the stockholders
1) Exercise of stockholders right to because it will render itself capable
compel close corporation to purchase of continuing its business, BUT if the
his shares proceeds will be used to purchase a
better one for the continuance of its
2) Where corporation has sufficient business, then it does not need the
assets in its books to cover its debts approval of the stockholders
and liabilities exclusive of capital stock
Conditions for the valid exercise
ACS 1M of this power are the following
SUBSRIBED 1M 1. Resolution by the majority vote of
PAID-UP 1M the board of directors/trustees

2. Authorization from the stockholders

ASSETS 500K
representing at least 2/3 of the
1M PROFITS outstanding capital stock or 2/3 of
the members;
- 500K LIABILITIES
3. The ratification of the stockholders
____________________ or members must be made at a
meeting duly called for that purpose
56
4. Prior written notice of the proposed
action and of the time and place of
meeting must be made addressed to
all stockholders of record, either by
mail or personal service;
5. The sale of the assets shall be subject
to the provisions of existing laws on
illegal combinations and monopolies
6. Any dissenting stockholder shall have
the option to exercise his appraisal
right
IDP vs. CA
- Consent of the members was not
secured
Edward Nell Co. vs. Pacific Farms
- Generally where one corporation sells
or otherwise transfers all of its assets
to another corporation, the latter is not
liable for the debts and liabilities of the
transferor, except:
1. Where the purchaser expressly or
impliedly agrees to assume such
debts;
2. Where the transaction amounts to
a consolidation or merger of the
corporations;
3. Where the purchasing corporation
is merely a continuation of the
selling corporation;
4. Where the transaction is entered
into fraudulently in order to escape
liability for such debts.
Power to acquire own shares
Section 41. Power to acquire
own shares. - A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate purpose or purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional shares
arising out of stock dividends;
2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of
this Code. (a)
The corporation must at all times
have unrestricted retained
earnings to exercise this
corporate power
Steinberg vs. Velasco
- For as long as there are debts and
liabilities, a corporation may not
reacquire its shares (subject to
exceptions)
- Creditors of a corporation have the
right to assume that so long as there
are outstanding debts and liabilities,
the board of directors will not use
the assets of the corporation to
purchase its own stock, and that it
will not declare dividends to
stockholders when the corporation is
insolvent.
Power to invest funds <sec.42>
Section 42. Power to invest
corporate funds in another
57
 corporation or business or for any
other purpose. - Subject to the
provisions of this Code, a private
corporation may invest its funds in any
other corporation or business or for
any purpose other than the primary
purpose for which it was organized
when approved by a majority of the
board of directors or trustees and
ratified by the stockholders
representing at least two-thirds (2/3) of
the outstanding capital stock, or by at
least two thirds (2/3) of the members in
the case of non-stock corporations, at
a stockholder's or member's meeting
duly called for the purpose. Written
notice of the proposed investment and
the time and place of the meeting shall
be addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have
appraisal right as provided in this
Code: Provided, however, That where
the investment by the corporation is
reasonably necessary to accomplish
its primary purpose as stated in the
articles of incorporation, the approval
of the stockholders or members shall
not be necessary. (17 1/2a)
- For any other purpose other than the
primary purpose, stockholders
consent or approval is necessary
- Thus, if its for the secondary purpose,
it is necessary
- If its in connection with the primary
purpose, only board resolution is
necessary
Requirements and steps to be
followed for a valid investment of
corporate funds are:
1. Resolution by the majority of the
board of directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
the members in case of non-stock
corporations;
3. The ratification must be made at a
meeting duly called for that purpose;
4. Prior written notice of the proposed
investment and the time and place
of the meeting shall be made,
addressed to each stockholder or
member by mail or by personal
service, and;
5. Any dissenting stockholder shall
have the option to exercise his
appraisal right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not
remote connection between the
sugar bags and the sugar
manufacture, thus stockholders
approval is not necessary for validity
- A private corporation, in order to
accomplish its purpose as stated in
its articles of incorporation, and
imposed by the Corporation Law,
has the power to acquire, hold,
mortgage, pledge, or dispose of
shares bonds, securities and other
evidences of indebtedness of any
domestic or foreign corporation.
Such an act, if done in pursuance of
the corporate purpose, does not
need the approval of the
stockholders; but when the purchase
of shares of another corporation is
done solely for investment and not
58
 to accomplish the purpose of its
incorporation, the vote of approval of
the stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is
necessarily connected with its primary
purpose and this was ratified in a
meeting
- Submission of previous action is a
sound corporate practice
Redeemable shares
Closed corporation (see section
105)
- For any reason, compel the value of
shares withdrawal shares provided
corporation has sufficient funds to
cover its debts and liabilities
Section 105. Withdrawal of
stockholder or dissolution of
corporation. - In addition and without
prejudice to other rights and remedies
available to a stockholder under this
Title, any stockholder of a close
corporation may, for any reason,
compel the said corporation to
purchase his shares at their fair value,
which shall not be less than their par
or issued value, when the corporation
has sufficient assets in its books to
cover its debts and liabilities exclusive
of capital stock: Provided, That any
stockholder of a close corporation
may, by written petition to the
Securities and Exchange Commission,
compel the dissolution of such
corporation whenever any of acts of
the directors, officers or those in
control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation
or any stockholder, or whenever
corporate assets are being
misapplied or wasted.
If shares are reacquired, what
happens?
- It becomes treasury shares
- Stockholders consent/ approval is
not necessary and mere board
action is sufficient if in accordance
with primary purpose
- The logical relation of act done and
primary purpose of corporation and
between the board of directors to
undertake submission of acts is a
sound corporate practice
Dividends
Section 43. Power to
declare dividends. - The board of
directors of a stock corporation may
declare dividends out of the
unrestricted retained earnings which
shall be payable in cash, in property,
or in stock to all stockholders on the
basis of outstanding stock held by
them: Provided, That any cash
dividends due on delinquent stock
shall first be applied to the unpaid
balance on the subscription plus
costs and expenses, while stock
dividends shall be withheld from the
delinquent stockholder until his
unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders
representing not less than two-thirds
(2/3) of the outstanding capital stock
at a regular or special meeting duly
called for the purpose. (16a)
Stock corporations are
prohibited from retaining surplus
profits in excess of one hundred
(100%) percent of their paid-in
59
 capital stock, except: (1) when justified
by definite corporate expansion
projects or programs approved by the
board of directors; or (2) when the
corporation is prohibited under any
loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends
without its/his consent, and such
consent has not yet been secured; or
(3) when it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
What are dividends?
- Corporate profits set aside, declared
and ordered by the Board of Directors
to be paid to the stockholders.
What are property dividends?
- Those paid in property surplus
Like tables and chairs? Can tables
and chairs make surplus profits?
- No, they do not make surplus, bonds,
etc.
Where should dividends come
from?
- Stock dividends are declared as stocks
coming from corporation
Who declares dividends to be
declared? Do stockholders have
any say?
- Board of Directors, if stock approval of
2/3 outstanding capital stock
ACS-1M SUB-1M P.U.-1M
1M-U.R.E. (surplus profits of the corporation)
1-100k
2-100k
To
10-100k
1M
Board decides to declare 1M, how
much will each receive? May the
board declare stock dividend
- NO. that would be over issuance of
shares, violation of securities
regulation code
- It must have a free portion
- The corporation may increase its
capital
Z co. 1M to X Co. is 2/3 of X Co.
Stockholders reacquired?
- No, because in property 2/3 is not
required
What is the effect of declaration
of dividends with regards to the
assets of a company?
- As compared to stock dividends, the
declaration of cash or property
dividends have the effect of reducing
corporate assets to the extent of
dividends declared.
- Neither would stock dividends
increase the proportionate interest of
the stockholders of the corporation
although it will have the effect of
increasing the subscribed and paid-
up capital of the corporation. It gives
the stockholders nothing in the way
of distribution of assets but merely
divides his existing shares into
smaller units.
60
 - Earnings belong to the corporation 1M RE
until declared or given
1 100K
Revocation
2 100K
- No revocation of dividend may be has
TO
unless it has not been officially
communicated to the stockholders or 10 100K
is in the form of stock dividends which
is revocable at any time prior to 1M
distribution.
May they be compelled?
Stock dividends- no reduction, you
- NO. You cannot declare if it does not
capitalize your restricted retained
come from unrestricted retained
earnings, what is issued is a piece
earnings.
of paper. The restricted earnings
remain in the corporation 1. 1M-U.R.E. (is it true there is no way
to compel?)
Cash and property- reduces
corporate assets 2. 2M-U.R.E.

Stock dividends increase corporate May they be compelled to declare

assets? No, it will only have the effect dividends
of increasing the subscribed and paid-
- Mandatory if earned, the board may
up capital of the corporation
be compelled to declare dividends
Will there be a corresponding
- if exceeds 100% of the paid-up
increase in their proportionate
capital the boards may be compelled
interest?
ACS 2M 1M U.R.E.
- REMAINS THE SAME
SUB 1M
Exception: when stock dividends will result
in a fractional share PU 800K
ACS-2M 1-100K 200 (10%) 1-100K 50K PU
*VOTING AND DIVIDEND RIGHTS
STILL THE SAME 2-100K 50K

SUB-1M TO 10% TO

PU-1M 10-100K 10-100K

ACS 2M 1M

SUB 1M Will 1 and 2 receive full amount of

dividends?
PU 1M

61
 - YES. They are entitled however if they 1M
are declared delinquent, the amount
Insofar as 1 and Y who has a
due them shall first be applied to his
delinquency plus expenses. better right? Already declared, but
not yet paid?
Delinquency occurs, you are called
- Right to receive vest upon
to pay, but you failed to pay. In case
of stock dividend, the delinquent declaration. Who ever owns at the
stock holder will not be entitled time of declaration owns the
thereto until he has paid his dividends
subscription in full. - Unless there is a stipulation to the
Are non-stockholders entitled to contrary
receive dividends? TRUST FUND DOCTRINE
- No, tock dividends are civil fruits of the - The power to declare it if paid-up
original investment, and to the owners capital is not maintained or is
of the shares belong the civil fruits. impaired
How did the court decide dividends - Trust fund must be kept intact for the
in the case of Neilsen protection of creditors who have the
right to rely on such subscription and
- Stock dividends cannot be issued to a
the paid-up capital for the
person who is not a stockholder in
satisfaction of their claims
payment of services rendered.
- Cannot accumulate surplus
- Whether cash, property or stock, only
unreasonably
stockholders may receive dividends.
Dividends are fruits of investments. - Basis is the paid-up capital
They come from the U.R.E. or surplus
profits of the corporation. - Entitled to dividends

ACS 2M 1M U.R.E. - Irrespective of whether the

subscription is full
SUB 1M JULY 24 DECLARATION
JULY 31 - Illegally declared

PU 1M - Declare dividend with the belief that

it formed part of the U.R.E., but yun
1 100K 100T JULY 26-Y pala sa capital
(NEW ONE WAS DECLARED TO
Y) JULY 30- 100K Directors are not liable, unless
sec31 acted in bad faith or gross
2
negligence in the conduct of
TO HAVE THE TRANSFER RECORDED corporate affairs

10 100K

62
 Directors even if acting in behalf of the substantially all of the business of
corporation, may still be held solidarily another corporation, whether such
liable contracts are called service
contracts, operating agreements or
Power to enter into management otherwise: Provided, however, That
such service contracts or operating
contract
agreements which relate to the
- New provision exploration, development,
exploitation or utilization of natural
resources may be entered into for
Section 44. Power to enter
such periods as may be provided by
into management contract. - No
the pertinent laws or regulations. (n)
corporation shall conclude a
management contract with another
The requirement for a valid
corporation unless such contract shall
management contract are as
have been approved by the board of
follows:
directors and by stockholders owning
at least the majority of the outstanding
1. Resolution of the board of directors
capital stock, or by at least a majority
2. Approval by the stockholders
of the members in the case of a non-
holding or representing a majority of
stock corporation, of both the
the outstanding capital stock or
managing and the managed
majority of the members in case of
corporation, at a meeting duly called
non-stock corporation of both the
for the purpose: Provided, That (1)
managing and the managed
where a stockholder or stockholders
corporation
representing the same interest of both
3. The approval of the stockholders or
the managing and the managed
members must be made at the
corporations own or control more than
meeting called for that purpose
one-third (1/3) of the total outstanding
4. The contract shall not be for a period
capital stock entitled to vote of the
longer than 5 years for any one
managing corporation; or (2) where a
term, except those which relate to
majority of the members of the board
exploration, development or
of directors of the managing
utilization of natural resources which
corporation also constitute a majority
may be entered into for such periods
of the members of the board of
as may be provided by pertinent
directors of the managed corporation,
laws and regulations
then the management contract must
be approved by the stockholders of the
Every corporate act emanates
managed corporation owning at least
two-thirds (2/3) of the total outstanding from the BOARD
capital stock entitled to vote, or by at
least two-thirds (2/3) of the members Is the voting requirements of a
in the case of a non-stock corporation. majority stockholder ABSOLUTE?
No management contract shall be
entered into for a period longer than - Not only a majority but 2/3 of the
five years for any one term. outstanding capital stock or 2/3 of
the members in a non-stock
The provisions of the next corporation would be required for
preceding paragraph shall apply to any the approval of a management
contract whereby a corporation
contract in the following instances:
undertakes to manage or operate all or
63
1. Where the stockholders representing
the same interest of both the
managing and managed corporation
own or control more than 1/3 of the
total outstanding capital stock of the
managing corporation; and
2. Where a majority of the members of
the board of directors of the managing
corporation also constitute a majority
of the directors of the managed
corporation
3. Where the contract would constitute
the management or operation of all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts.
If it will not constitute the management
of all or substantially all of the
business of another corporation the
first paragraph of section 44 will apply
and not that of the second, that is, only
the vote of the stockholders holding or
representing at least a majority of the
outstanding capital stock or majority of
the members in the case of non-stock
corporation will be required.
How long?
- Not longer than 5 years for any one
term
- Exception: exploration, development or
utilization of natural resources
What is an ultra-vires act or
contract?
- Doctrine of limited capacity.
Corporation can do such acts and
things as it is allowed to do
- Acts beyond it will be ultra vires,
allowing a collateral attack
- If not illegal per se merely voidable.
Can be ratified expressly or
impliedly or even stopped as
equitable grounds
- Ultra-vires acts which are not illegal
per se may become binding and
enforceable either by satisfaction,
estoppels or equitable grounds
Consequences of ultra-vires
acts?
1. On the corporation itself
- The proper forum, in accordance
with the provisions of PD 902-A, as
amended and R.A. No. 8799 may
suspend or revoke, after proper
notice and hearing, the franchise or
certificate of registration of the
corporation for serious
misrepresentation as to what the
corporation can do or is doing to the
great damage or prejudice of the
general public
2. On the rights of the stockholders
- A stockholder may bring either an
individual or derivative suit to enjoin
a threatened ultra-vires act or
contract. If the act or contract has
already been performed, a derivative
suit for damages against the
directors may be filed, but their
liability will depend on whether they
acted in good faith and with
reasonable diligence in entering into
the contract.
3. On the immediate parties
- The courts have not agreed as to
the legal effect of a corporate
contract outside of its authorized
business but Ballatine gives the
64
 following summary of the doctrines - Ratified by passing the resolution in
evolved: question

a. If the contract is fully executed on Carlos vs. Mindoro sugar Co.

both sides, the contract is effective
and the courts will no interfere to - PTC- trust company as such, it also
deprive either party of what has has implied powers as to make them
been acquired under it more attractable

b. If the contract is executory on both - Not ultra-vires in pursuance of its

sides, as a rule, neither party can legitimate business
maintain an action for its non-
Japanese war notes vs. SEC
performance
- Non-stock corporations cannot make
c. Where the contract is executor on
profits and distribute profits to its
one side only, and has been fully
shareholders
performed on the other, the courts
differ as to whether an action will lie - Ultra-vires because Japanese war
on the contract against the party notes is a non-stock corporation
who has received benefits of
performance under it. Majority of Crisologo-Jose vs. CA (ALWAYS
the courts, however, hold that the ASKED BY DEAN SUNDIANG)
party who has received benefits
- The negotiable instruments law
from the performance is estopped
which holds an accommodation
to set up that the contract is ultra-
party liable on the instrument to a
vires to defeat an action on the
holder for value, although such
contract. This is more in conformity
holder at the time of taking the
with the doctrine that no person
instrument knew him to be only an
shall be allowed to enrich himself at
accommodation party, does not
the expense of another
include nor apply to corporations
Privano vs. Dela Rama which are accommodation parties.
This is because the issue or
- Court looked into the purpose clause indorsement of negotiable paper by
a corporation without consideration
- The purpose clause empowers and
and for the accommodation of
limits
another is ultra-vires
- Articles likewise provide that it may
- Corporate officers may guarantee or
deal with any of its money
endorse an accommodation only if
- deal broad enough to cover the specifically authorized
donation it is not then ultra-vires
Section 36 paragraph 11
- Not illegal per se hence (law of
Section 10
agency) excess powers are subject to
ratification Section 14 and 15
65
 Corporate powers depend on the
agreement of the stockholders
rather than any director
- It may sell and it may guarantee,
contract not necessarily illegal, it will in
the absence of proof to the contrary
presumed within its power.
Corporations are presumed to contract
with in its powers- CARLOS CASE
- Purpose clause may be stretched to
cover PLDT internet. It may be within
its business.
- May it sell computers? NO! other line
of business. Its trading!
BY-LAWS
By-Laws
- Rule adopted by the corporation for its
internal governance
Is the adoption of by-laws
mandatory?
When should the by-laws be
adopted or filed? Can it not be
adopted earlier?
- After incorporation- within 1 month
(emanates from the BOARD)
- Prior-more convenient (signed by the
incorporators)
Who will sign the adoption clause?
- Majority of the stockholders or
members attested to by the corporate
secretary
What happens if the corporation
fails to adopt the by-laws from the
tie provided by the law? Would
there be an automatic revocation
or suspension?
- Proper notice and hearing, must first
be complied with
Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be
proper notice and hearing
- Not affect the status of the
corporation as a juridical person
- Subject the corporation to a fine, as
may be issued by the SEC
When do by-laws become
effective?
- Until and unless the SEC gives it
stamped of approval
- Suspension of any government
agency. The permission must first be
secured- section 46
Elements of a valid by-law
1. It must not be contrary to law, public
policy or morals;
2. It must not be inconsistent with the
articles of incorporation;
3. It must be general and uniform in its
effect or applicable to all alike or
those similarly situated;
4. It must not impair obligations and
contracts or vested rights; and
66
5. It must be reasonable. - Rules governing equity, considering
the fact that there was always lack
- Must not be inconsistent with existing
of quorum
laws. Not be inconsistent with articles
of incorporation - Section 29 BOD if still constituting a
quorum may fill up a vacancy other
By-laws
than by removal, etc.
- None filing would not affect the status Gokongwei vs. SEC
of the corporation, Loyola grand villas
case - Section 48 allows a corporation to
amend it by-laws
- The word must is not always
imperative - Section 47 of the code, the by-laws
may provide for the qualification and
- Stockholders are conlusively
disqualification
presumed to know the provisions of
the by-laws - It cannot be said Gokongwei has a
vested rights
How about 3rd persons?
- Prevent directors from taking
- NO. unless there is actual knowledge advantage of position to promote his
of the same they are not presumed to individual interest to the damage of
know of the provisions of the by-laws others
Fleischer vs. Botika Nolasco - The validity or reasonableness of a
by-laws is a question of law
- Shares of stock are personal
properties - Subject to the limitations that
reasonableness of a by-law is a
- Shares of stock may transfer to whom
mere matter of judgment
ever he wishes
- Rule of the majority and not the
- The by-laws is contrary to law
tyranny of the minority
Articles of incorporation
May the by-laws be amended
- May provide reasonable restriction altered or appealed?

- By-laws merely internal laws - YES. HOW? Two modes

- Articles is the contract between and 1. By a majority vote of the directors or

among the parties and corporation
Govt vs. El Hogar
- Did the court categorically ruled here
that the provision in the 5th cause of
action is valid?
trustees and the majority vote of the
outstanding capital stock or
members in a non-stock corporation,
at a regular or special meeting
called for that purpose;

67
2. By the board of directors alone when
delegated by 2/3 of the outstanding
capital stock or 2/3 of the members in
a non-stock corporation.
- This delegated power, however, is
considered revoked whenever a
majority of the outstanding capital
stock or members shall so vote at a
regular or special meeting.
If it is to be amended what is the
proceeding?
- Section 48 2nd paragraph provides:
Section 48. Amendments to
by-laws. - The board of directors or
trustees, by a majority vote thereof,
and the owners of at least a majority of
the outstanding capital stock, or at
least a majority of the members of a
non-stock corporation, at a regular or
special meeting duly called for the
purpose, may amend or repeal any by-
laws or adopt new by-laws. The
owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds
(2/3) of the members in a non-stock
corporation may delegate to the board
of directors or trustees the power to
amend or repeal any by-laws or adopt
new by-laws: Provided, That any
power delegated to the board of
directors or trustees to amend or
repeal any by-laws or adopt new by-
laws shall be considered as revoked
whenever stockholders owning or
representing a majority of the
outstanding capital stock or a majority
of the members in non-stock
corporations, shall so vote at a regular
or special meeting.
Whenever any amendment or
new by-laws are adopted, such
amendment or new by-laws shall be
attached to the original by-laws in the
office of the corporation, and a copy
thereof, duly certified under oath by
the corporate secretary and a
majority of the directors or trustees,
shall be filed with the Securities and
Exchange Commission the same to
be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws
shall only be effective upon the
issuance by the Securities and
Exchange Commission of a
certification that the same are not
inconsistent with this Code. (22a
and 23a)
Baretto vs. La Previsora
- Any corporate act emanates from
the board
- Directors themselves cannot amend
the by-laws if they were not granted
the same
Section 48
The power granted is not subject
to revocation T or F?
- FALSE
If the by-laws are amended when
will they become valid?
- Upon issuance of the SEC that they
are not inconsistent
What if the SEC failed to act
within 10 months without fault
attributable to the corporation?
T or F any amendment of the by-
laws will never become valid until
it gives its stamp of approval
even after 1 year
- TRUE. Articles of incorporation and
by-laws are different
68
MEETINGS
Meetings
- Meetings of stockholders
Date fixed in the by-laws or by-law
- Meetings of director or trustees
- Meetings are regular and special
- Meetings of stockholders
What is regular and what is special?
When are regular meetings of the
stockholders held?
- Fixed date provided by the by-laws
What if there is no date?
- April
Why april?
- Point in time the audited financial
statement have been prepared
What if in the date specified in the
by-laws or by the law itself the
meeting was not convened, for
instance lack of quorum or force
majeure?
- It may be postponed on a reasonable
date
Notice requirement?
- Regular- 2 weeks prior notice
- Special- 1 week
May the notice requirement be
lessened?
- By-laws may provide a longer or a
shorter duration
What if the notice requirement is
not complied with?
What happened to any act passed
1.
in a meeting when notice
requirement was not required
with?
- Voidable, subject to ratification
Board of directors vs. Tan
- Notice requirement is the by-laws is
a mandatory requirement
- Improperly served, any action will be
invalidated at the objection of any
stockholder or member
Must be held in the proper place
Where should it be held?
- Apparent from the foregoing
provision is that meetings of
stockholders must, at all times, be
held in the city or municipality where
the principal office of the corporation
is located and, as far as practicable,
in the principal office of the
corporation.
May the by-laws of a corporation
provide that meetings be held
anywhere in the Philippines?
- While there is no provision
authorizing a stock corporation to
hold stockholders meetings outside
of the City of Municipality where the
principal office is located, the law
allows a non-stock corporation to
provide in its by-laws any place of
members meeting provided that
proper notice is sent to all members
indicating the date, time and place of
69
 the meeting which shall be within the
Philippines.
- Section 28 only instance
T or F the by-laws of a stock
corporation may validly provide that
meetings shall be held anywhere in
the Philippines?
- FALSE. Non-stock corporations lang
pwede provided nakalagay sa by-laws
and provided proper notice is given
Corporation can do only such
things as the law allows it to do,
DOCTRINE OF LIMITED CAPACITY
San Miguel office located in Ortigas
Center. May stockholders meeting
be held in PICC center?
- YES. Metro Manila, one single city
Must be called by the proper party
Who calls?
- President until and unless there is a
provision , secretary on order of the
president
What if there is nobody who can
call?
- The petitioner, stockholder may
petition the court
What if there is a person who can
call, but he fails or neglects to call
the meeting? May a stockholder
petition to authorize a meeting?
- Ponce case only applies when there is
NO person authorized to call the
meeting. If there is a person, but
neglects his duty. Ponce will not apply.
Writ of injunction may never be
issued ex parte
Is there any exception?
Section 28. Removal of
directors or trustees. - Any director
or trustee of a corporation may be
removed from office by a vote of the
stockholders holding or representing
at least two-thirds (2/3) of the
outstanding capital stock, or if the
corporation be a non-stock
corporation, by a vote of at least
two-thirds (2/3) of the members
entitled to vote: Provided, That such
removal shall take place either at a
regular meeting of the corporation or
at a special meeting called for the
purpose, and in either case, after
previous notice to stockholders or
members of the corporation of the
intention to propose such removal at
the meeting. A special meeting of
the stockholders or members of a
corporation for the purpose of
removal of directors or trustees, or
any of them, must be called by the
secretary on order of the president
or on the written demand of the
stockholders representing or holding
at least a majority of the outstanding
capital stock, or, if it be a non-stock
corporation, on the written demand
of a majority of the members entitled
to vote. Should the secretary fail or
refuse to call the special meeting
upon such demand or fail or refuse
to give the notice, or if there is no
secretary, the call for the meeting
may be addressed directly to the
stockholders or members by any
stockholder or member of the
corporation signing the demand.
Notice of the time and place of such
meeting, as well as of the intention
to propose such removal, must be
given by publication or by written
notice prescribed in this Code.
Removal may be with or without
cause: Provided, That removal
70
 without cause may not be used to
deprive minority stockholders or
members of the right of representation
to which they may be entitled under
Section 24 of this Code. (n)
Cases of removal or ouster of a
director
Mandamus would be appropriate
remedy if there is a person authorized
but refuses
Quorum and voting requirement
- Majority stockholders or members
constitute a quorum
Is the presence of the majority
owners of the outstanding capital
stock ABSOLUTE to have a
quorum?
- NO. when the code requires a higher
quorum it must also be equivalent to
the vote required
Do you include non-voting shares in
arriving at the voting requirement to
have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the
penultimate par. Of section 6
Five requisites of a valid meeting
1. It must be held on the date fixed in the
by-laws or in accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must
be met
Date not complied with, notice,
place, not complied with and the
person who called not authorized,
what happens to any resolution
called?
- Section 51, any meeting shall be
valid provided all the stockholders
are present or duly represented and
provided it is within the power of the
corporation. 3RD paragraph of 324
- If the voting requirement is met, any
resolution passed in the meeting,
even if improperly held or called will
be valid if all the stockholders or
members are present or duly
represented thereat. The last
paragraph of section 51 is clear on
the matter when it provides:
all proceedings had and any
business transacted at any
meeting of the stockholders
or members, if within the
powers or authority of the
corporation, shall be valid
even if the meeting be
improperly held or called,
provided all the stockholders
or members of the
corporation are present or
duly represented at the
meeting.
Directors/trustees meeting
Regular (monthly) and special
(anytime)
May that be restricted (within or
outside the Phil)
- YES. unless the by-laws provide
otherwise.
71
 Is there any notice requirement?
- YES. 1 day unless otherwise provided
by the by-laws
What happens if notice is not
complied with?
- If the notice requirement is not
complied with the meeting is illegal
and will not bind the corporation
except when subsequently ratified or in
the case of a close corporation where
the act of any one director may bind
the corporation even without a meeting
under the special provision of Section
101 of the Code.
Can notice be waived? <sec.53>
Section 53. Regular and
special meetings of directors or
trustees. - Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly,
unless the by-laws provide otherwise.
Special meetings of the board
of directors or trustees may be held at
any time upon the call of the president
or as provided in the by-laws.
Meetings of directors or trustees
of corporations may be held anywhere
in or outside of the Philippines, unless
the by-laws provide otherwise. Notice
of regular or special meetings stating
the date, time and place of the
meeting must be sent to every director
or trustee at least one (1) day prior to
the scheduled meeting, unless
otherwise provided by the by-laws. A
director or trustee may waive this
requirement, either expressly or
impliedly. (n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid
without notice where the
directors are all present or
where they consent to the
meeting. Presence at the
meeting waives the want of
notice. Moreover, it has been
ruled that the meeting of the
directors without a formal call
first being had, and notice
thereof given to the members,
did not operate to invalidate it
or to render the proceedings
which were taken at it void,
for every member of the
board were present, and their
joint action had completely
bound the corporation as if
the meeting has been called
with due formality, and
everyone of the directors had
received proper notice.
What is the quorum and voting
requirement in the directors
meeting?
- Majority of the members of the
board of directors (entire
membership)
Vote required to pass a valid
corporate act?
- Majority of those present at which
there is a quorum (3 present, vote of
2 sufficient)
- Exception, majority of all the
members of the board in case of
election of corporate officers, unless
the articles provide for a greater
quorum or voting requirement
Should the director or trustees be
physically present?
72
 - General rule, must sit and act as a
body to have a valid corporate act
Five man member board, a meeting
was called today, should the
physical presence or warm bodies
requires to constitute a quorum?
- NO. it is not required. Teleconference
or video conference is allowed, E-
commerce law
Membership subject to laws
Stockholder not yet
May director vote by proxy?
- NO
If A is a director and a meeting is
called for the purpose of electing a
new set of BOD can A vote by
proxy?
- YES. Because it is a stockholders
meeting
If directors meeting, cannot vote by
proxy
Stockholders right to vote
- Inherent in stock ownership
- However this right is not always
inherent, because it may be denied:
1. Redeemable and preferred shares,
however if founders shares are
issued others may be denied the
right to vote.
2. May be denied by the articles of
incorporation or contracts
- When not denied they may do so in
person or by proxy
May the right to vote by proxy be
denied?
May the articles of incorporation
deny?
May the by-laws validly provide
that proxy voting is not allowed?
- NO
Only non-stock may be denied
proxy voting (may be broaden,
limited or denied)
Proxy voting is a matter of right
granted by law
Requirements of a valid proxy?
- Section 58
Section 58. Proxies. -
Stockholders and members may
vote in person or by proxy in all
meetings of stockholders or
members. Proxies shall in writing,
signed by the stockholder or
member and filed before the
scheduled meeting with the
corporate secretary. Unless
otherwise provided in the proxy, it
shall be valid only for the meeting for
which it is intended. No proxy shall
be valid and effective for a period
longer than five (5) years at any one
time. (n)
How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is
intended
Is proxy revocable?
73
- Generally revocable, unless coupled
with interest
Revocation
- A proxy, like agency in general is
revocable unless coupled with an
interest and revocation need not be
made by formal notice in writing.
Revocation may be expressed to the
proxy holder, to the election
committee, by a subsequent proxy to
another or by sale of the shares. Thus
it may be revoke orally by conduct
such that appearing and asserting the
right to vote at a meeting by the
registered owner of the shares revokes
a proxy previously given.
Must be submitted to a validation
committee
By-laws of non-stock corporations
may deny proxy voting
What is voting trust agreement?
- One created by an agreement
between a group of stockholders of a
corporation and a trustee, or a group
of identical agreements between
individual stockholders and a common
trustee, whereby it is provided that for
a term o years or for a period
contingent upon a certain event, or
until the agreement is terminated,
control over the stock owned by such
stockholders, shall be lodged in the
trustee, either with or without
reservation to the owners or persons
designated by them the power to direct
how such control shall be issued.
- It is a devise of binding stockholders to
vote as a unit and thus assuring a
desirable stability and continuity in
management in situations where it is
needed.
What is the effect of a voting trust
agreement relative to the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock
are separated from the other
attributes of ownership;
2. That the voting rights granted are
intended to be irrevocable for a
definite period of time; and,
3. That the principal purpose of the
grant of voting rights is to acquire
voting control of the corporation.
During the duration of the trust
they are irrevocable unless there
is a violation either by fraud
Requisites
- Section 59
Section 59. Voting trusts. -
One or more stockholders of a stock
corporation may create a voting trust
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
five (5) years at any time: Provided,
That in the case of a voting trust
specifically required as a condition in
a loan agreement, said voting trust
may be for a period exceeding five
(5) years but shall automatically
expire upon full payment of the loan.
A voting trust agreement must be in
writing and notarized, and shall
specify the terms and conditions
thereof. A certified copy of such
agreement shall be filed with the
corporation and with the Securities
and Exchange Commission;
74
otherwise, said agreement is
ineffective and unenforceable. The
certificate or certificates of stock
covered by the voting trust agreement
shall be cancelled and new ones shall
be issued in the name of the trustee or
trustees stating that they are issued
pursuant to said agreement. In the
books of the corporation, it shall be
noted that the transfer in the name of
the trustee or trustees is made
pursuant to said voting trust
agreement.
The trustee or trustees shall
execute and deliver to the transferors
voting trust certificates, which shall be
transferable in the same manner and
with the same effect as certificates of
stock.
The voting trust agreement filed
with the corporation shall be subject to
examination by any stockholder of the
corporation in the same manner as
any other corporate book or record:
Provided, That both the transferor and
the trustee or trustees may exercise
the right of inspection of all corporate
books and records in accordance with
the provisions of this Code.
Any other stockholder may
transfer his shares to the same trustee
or trustees upon the terms and
conditions stated in the voting trust
agreement, and thereupon shall be
bound by all the provisions of said
agreement.
No voting trust agreement shall
be entered into for the purpose of
circumventing the law against
monopolies and illegal combinations in
restraint of trade or used for purposes
of fraud.
Unless expressly renewed, all
rights granted in a voting trust
agreement shall automatically expire
at the end of the agreed period, and
the voting trust certificates as well as
the certificates of stock in the name
of the trustee or trustees shall
thereby be deemed cancelled and
new certificates of stock shall be
reissued in the name of the
transferors.
The voting trustee or trustees
may vote by proxy unless the
agreement provides otherwise. (36a)
Does it need to be notarized?
- Yes, otherwise it is ineffective and
unenforceable
Only legal ownership is
transferred
Being still the beneficial owner
they may transfer these rights
Is the right granted to a voting
trust agreement absolute? (to
inspect)
- NO.
- The voting trust agreement filed with
the corporation shall be subject to
examination by any stockholder of
the corporation in the same manner
as any other corporate book or
record. Provided, that both the
transfer and the trustee or trustees
may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of
this Code.
Legal title is transferred to the
voting trustee
May the voting trustee vote by
proxy?
75
- Yes, legal owner may vote by proxy - Normally executed in favor of
banking and financial institutions
May the proxy holder vote by
proxy? - So that they can vote a certain set of
directors
- NO, (AGENT) an agent can have no
other agent unless specifically allowed - They will be more secured
by the principal
Voting pull agreement
Stockholder executing as a proxy, is
- Enters into an agreement
he qualified to be voted as a
director? - Pull all their shares to cast one vote
Why is he qualified to act as a - Covered by rules governing
director if the stockholder executes contracts
as a director?
- By pulling their votes they can
- The beneficial owner of the shares in a decline the resolution passed by the
voting trust is disqualified to be a board
director in a voting trust whereas in a
proxy, the owner of the shares may be END OF MIDTERMS
elected as such since legal title thereof
remains with him
STOCKS AND STOCKHOLDERS
- YES he remains to be the owner
3 modes
Is the stockholder executing in a
voting trust agreement, is he 1. By a contract of subscription with the
qualified to act as a director? corporation;

- NO. ceases to be stockholder of 2. By purchase of treasury shares from

record, no longer the legal owner of the corporation; and,
shares
3. By purchase or acquisition of shares
May the corporation enforce the from existing stockholders.
voting trust agreements executed
by its stockholders? Section 60 subscription

- NO. NIDC vs. AQUINO - Any contract

- Not a privy to the contract - Whether existing or still to be formed

- Rights liabilities of a stockholder are Section 60. Subscription contract.

there in their individual capacity- - Any contract for the acquisition of
corporate entity theory unissued stock in an existing
corporation or a corporation still to be
Voting trust agreements formed shall be deemed a subscription
within the meaning of this Title,

76
 notwithstanding the fact that the parties
refer to it as a purchase or some other
contract. (n)
Under the old law the 4th mode is
PURCHASE
Purchase
- Reciprocal in nature
- Purchaser can neither require the
issuance
X Co. Inc.
P STOCKHOLDER ONLY IF PAID IN
Authorized capital 1M
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS
GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment
remainder December 08
o he will not be considered a stockholder
unless he has paid in full
August 08 property is ravaged by fire all are
turned into shares
Is Z liable to pay the balance of his
acquisitions?
- YES, no matter how the party refer to
it, it is considered subscription
- Once you subscribe, you become a
stockholder which is entitled to all the
liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
Z did not pay on the date called and was
declared a delinquent share
Corporation paid 100T/S therefore
the corporation reacquired the
shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY
FIRE, IS HE STILL LIABLE TO PAY THE
UNPAID PORTION?
IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A
FULL IS HE LIABLE?
- NO, because that was a purchase
- First example galing sa unissued
stock
- 2nd example galling sa treasury
shares hindi sa unissued share
NO such thing as purchase of
unissued stocks
A subscription contract can be
conditional provided there is nothing
in the charter or statute prohibiting it
and not against public order, law,
etc.
Must it be in writing?
- NO, it may be oral
5M should it be in writing to be valid
and binding as a subscription?
- NO, statutes of frauds only applies
to SALES
Trillana vs. Quezon College
77
- Counter proposal, therefore there was
a need for an acceptance
- Facultative because it is in his own
free will, it is void
What may be used as a consideration
and how much should be the
consideration?
- Section 62 provides:
Section 62. Consideration for
stocks. - Stocks shall not be issued for
a consideration less than the par or
issued price thereof. Consideration for
the issuance of stock may be any or a
combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible,
actually received by the corporation
and necessary or convenient for its
use and lawful purposes at a fair
valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services
actually rendered to the corporation;
4. Previously incurred indebtedness of
the corporation;
5. Amounts transferred from
unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for
stocks in the event of reclassification
or conversion.
Where the consideration is
other than actual cash, or consists of
intangible property such as patents of
copyrights, the valuation thereof shall
initially be determined by the
incorporators or the board of directors,
subject to approval by the Securities
and Exchange Commission.
Shares of stock shall not be
issued in exchange for promissory
notes or future service.
The same considerations
provided for in this section, insofar
as they may be applicable, may be
used for the issuance of bonds by
the corporation.
The issued price of no-par
value shares may be fixed in the
articles of incorporation or by the
board of directors pursuant to
authority conferred upon it by the
articles of incorporation or the by-
laws, or in the absence thereof, by
the stockholders representing at
least a majority of the outstanding
capital stock at a meeting duly called
for the purpose. (5 and 16)
Amounts transferred from
unrestricted retained earnings to
stated capital what does it mean?
- Stock dividends will in effect
capitalize the unrestricted retained
earnings
After 5 years the founders shares
may be converted into common
shares or other kinds of shares
May shares of stocks be issued
without consideration? Why?
- NO, two reasons by the SC,
discriminatory against other
stockholders and second unlawful, it
prejudices the right of the creditors
Trust Fund Doctrine
If issued without a consideration
78
- Section 65, they will be considered as paid, is entitled to exercise all the
watered stocks rights of a stockholder and the
corresponding liability that attach
Section 65. Liability of directors thereunder. Thus, the Code
for watered stocks. - Any director or provides:
officer of a corporation consenting to
the issuance of stocks for a Section 72. Rights of unpaid
consideration less than its par or shares. - Holders of subscribed
issued value or for a consideration in shares not fully paid which are not
any form other than cash, valued in
excess of its fair value, or who, having delinquent shall have all the rights of
knowledge thereof, does not forthwith a stockholder. (n)
express his objection in writing and file
the same with the corporate secretary, Is the issuance of a certificate of
shall be solidarily, liable with the stock necessary to consider the
stockholder concerned to the subscriber a stockholder?
corporation and its creditors for the
difference between the fair value - NO, shall be considered a
received at the time of issuance of the stockholder even without a
stock and the par or issued value of certificate of stock
the same. (n)
Instances when he may not be able
- Subscribers may be compelled to pay to exercise his rights as such
the value stockholder
Issuance of a certificate of stock is - Declared delinquent
another thing
- When he exercises his appraisal
What are the requisites for the right
issuance of a valid certificate of stock?
Are certificate of stocks
1. It must be signed by the president or transferrable?
vice-president and countersigned by
the secretary or assistant secretary; - YES

2. It must be sealed with the corporate Are certificate of stocks considered

seal; and the entire value thereof negotiable?
(together with interest or expenses, if
- Quasi-negotiable
any) should have been paid.
Why are they considered quasi-
While it appears, that a subscriber to
shares of stock cannot be entitled to negotiable when it may be
the issuance of a certificate of stock transferred through endorsement
until the full amount of his subscription and delivery?
together with interest and expenses (in
case of delinquent shares) if any is 100t/s 001
10/s
due, has been paid, a subscriber to
shares of stock, even if not yet fully Abc co.
79
B stole and forged the signature
C is purchaser in good faith and for value will
C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not
regarded as negotiable in the same sense
that a bill or note is negotiable, even if it is
endorsed in blank. Thus, while it may be
transferred by endorsement coupled with
delivery thereof, and therefore merely quasi-
negotiable, it is nonetheless non-negotiable
in that the transferees takes it without
prejudice to all the rights and defenses which
the true and lawful owner may have except in
so far as the principles governing estoppels
may apply.
He acquired it by virtue of a forged
instrument; no matter how innocent the
purchaser is because it is subject to all the
rights and defenses
What if A endorsed it?
- He is estopped, unless there are other
available defenses
Transfer is required to be recorded in
the books of the corporation, however
even if not recorded, it will be valid
between the parties. Non-registration
will not however, affect the validity
thereof at least in so far as the
contracting parties are concerned.
Section 63. Certificate of
stock and transfer of shares. - The
capital stock of stock corporations
shall be divided into shares for
which certificates signed by the
president or vice president,
countersigned by the secretary or
assistant secretary, and sealed with
the seal of the corporation shall be
issued in accordance with the by-
laws. Shares of stock so issued are
personal property and may be
transferred by delivery of the
certificate or certificates indorsed by
the owner or his attorney-in-fact or
other person legally authorized to
make the transfer. No transfer,
however, shall be 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.
No shares of stock against
which the corporation holds any
unpaid claim shall be transferable in
the books of the corporation. (35)
Until registration is accomplished,
the transfer, though valid between
the parties, cannot be effective as
against the corporation. Thus the,
unrecorded transfer cannot enjoy
the status of a stockholder; he
cannot vote nor be voted for, and he
will not be entitled to dividends. The
corporation will be protected when it
pays dividend to the registered
owner despite a previous transfer of
which it had no knowledge. The
purpose of registration therefore is
twofold: to enable the transferee to
exercise all the rights of a
stockholder and to inform the
corporation of any change in shares
80
 ownership so that it can ascertain the
persons entitled to the rights and
subject to the liabilities of a
stockholder.
Thus, it was also ruled by the
High Court in Nautica Canning
Corp. vs. Yumul that A transfer
of shares not recorded in the
stock and transfer book of the
corporation is non-existent in so
far as the corporation is
concerned. This is so because
the corporation looks only
through its books for the
purpose of determining who its
stockholders are.
Registration is necessary for the
following:
1. To enable the corporation to know who
its stockholders are;
2. To enable the transferee to exercise
his rights a s stockholders;
3. To afford the corporation an
opportunity to object or refuse
registration of the transfer in case
allowed by law;
4. To avoid fictitious and fraudulent
transfers; and,
5. To protect creditors who have the right
to look upon stockholders, in case of
no-payment or watered shares, for the
satisfaction of their claims.
Duty of the secretary is ministerial,
hence mandamus will lie if the
secretary refuses to record the
transfer, but he cannot be compelled
when the transferees title to the said
shares has no prima facie validity or
uncertain
Transfer- absolute and unconditional
transfer to warrant registration in the
books of the corporation in order to
bind the latter and other third
persons.
Other restrictions on the right to
transfer shares would include:
1. It is not valid, except as between the
parties, until recorded in the books
of the corporation;
2. Shares of stock against which the
corporation holds any unpaid claim
shall not be transferable in the
books of the corporation; unpaid
claims, refer to claims arising from
unpaid subscription and not to any
indebtedness which a stockholder
may owe the corporation such as
monthly dues;
3. Restrictions required to be indicated
in the articles of incorporation, by-
laws and stock certificates of a close
corporation;
4. Restrictions imposed by special law,
such as the Public Service Act
requiring the approval of the
government agency concerned if it
will vest unto the transferee 40% of
the capital of the public service
company;
5. Sale to aliens in violation of
maximum ownership of shares
under the Nationalization Laws;
6. Those covered by reasonable
agreement of the parties.
Monserat vs. Ceron
- Does it include mortgage?
81
- NO, it is not an absolute transfer - Reasonable agreement by the
parties
- Will not affect the transfer through
mortgage - Reasonable as to length of time

- Absolute and unconditional transfer Padgett vs. Babcock

- Only the transfer or absolute - Any attempt to restrain transfer

conveyance of the ownership of the
title to a share need be entered and - SC, in the absence of a valid lien
noted upon the books of the upon its shares
corporation in order that such transfer - Valid restrictions shares are
may be valid, therefore, inasmuch as a applicable
chattel mortgage of the aforesaid title
is not a complete and absolute - Any restriction on a stockholders
alienation of the dominion and right to dispose of his shares must
ownership thereof, its entry and be construed strictly; and any
notation upon the books of the attempt to restrain a transfer of
corporation is not necessary requisite shares is regarded as being in
to its validity restraint of trade, in the absence of a
valid lien upon its shares, and
Chua guan vs. Magsasaka
except to the extent that valid
- Was the mortgage valid and effective restrictive regulations and
as against subsequent third parties agreements exist and are
applicable. Subject only to such
- Register of deeds where the restrictions, a stockholder cannot be
corporation resides and if different in controlled in or restrained from
the register of deeds of owners exercising his right to transfer by the
domicile corporation or its officers or by other
stockholders, even though the sale
Unson vs. Dinamito is to a competitor of the company, or
- All transferred not register will not have to an insolvent person, or even
a valid force and effect though a controlling interest is sold
to one purchaser.
Right to transfer may be regulated
Certificate of stocks are
May not be unreasonably restricted transferrable

Violation of nationalization law- Central - By endorsement and delivery of the

Bank stock certificate to the transferee

Lambert vs. Fox In order to be valid, must be

registered in the books. If not, will
- Valid , may be reasonably regulated, only be binding among parties
restricted by agreement of parties

82
 How may shares of stock be - Petitioner failed to establish a clear
transferred? legal right and alleged ownership is
without merit
- Endorsement of stock certificate by
owner or attorney-in-fact with delivery - Did not acquire ownership by virtue
of the contract of pledge
Embassy farms vs. CA
- In a contract of pledge there must be
- Must be endorsed by owner or foreclosure
attorney-in-fact coupled with delivery
- In the case there was no attempt to
- Endorsed not delivered foreclose
- Proper mode and manner must be - Petitioner must have a prima facie
complied with right
Razon vs. IAC Nava vs. Peers Marketing
- Delivered not endorsed - A stock subscription is a subsisting
liability from the time the
- Reverse of Embassy Farms
subscription is made
- Endorsement alone is not sufficient nor
- The subscriber is as much bound to
delivery without endorsement is not
pay his subscription as he would be
allowed
to pay any other debt
- Endorsement plus delivery is
- No stock certificate was issued.
mandatory
Without stock certificate, which is
Is there any other mode of transferring the evidence of ownership of
stock? corporate stock, the assignment of
corporate shares is effective only
- Notarized deed between the parties to the
transaction
- Deed of assignment
Exception to the general rule
Rural bank of Salinas vs. CA
Rural Bank of Lipa vs. CA
- If denied or refused without good
cause, mandamus will lie - By notarized deed
Tay vs. CA - Certificate of stocks already issued
must be coupled with delivery,
- Mandamus may issue if petition has a
exception (TAN vs. SEC)
clear legal right
Stock certificate has already been
- Never issued in doubtful cases
issued it must be coupled with the
delivery

83
 After certificate of stock is issued, may
it be effectively transferred even
without endorsement or delivery of the
stock certificate?
- Person sought to be a stockholder is
an officer and has custody
Endorsement and delivery is not
necessary (TAN vs. SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE
IS ESTOPPED)
- Persons sought to be stockholder is
officer and has custody of the book
(estopped)
General Rule for valid transfer
- Certificate of stock must be endorsed
by owner or attorney-in-fact coupled
with delivery
Exceptions
- Section 63 uses the word may
- Showing that there may be other
modes of transferring shares
Is there a time frame or fixed period as
when transfer can be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even
if not recorded in corporation books
- Right accrues only if refused
- Statute of limitations does not apply in
registration of shares of stock
- Must determined from the time of
refusal
Why are they non-negotiable when
they may be transferred?
- Transferees pays it without prejudice
to all the rights and defenses as the
true and lawful owner may have
under the law except insofar as such
rights and defenses are subject to
the limitations imposed by the
principles governing estoppels
Delos Santos vs. Republic
- Why is he, not considered as the
owner of shares? When it has been
said that when endorsed by the
owner it is considered as strict
certificate? Because certificate of
stocks are non-negotiable
- Although a stock-certificate is
sometimes regarded as quasi-
negotiable, in the sense that it may
be transferred by endorsement,
coupled with delivery, it is well
settled that the instrument is non-
negotiable, because the holder
thereof takes it without prejudice to
such rights or defenses as the
registered owner or creditor may
have under the law, except insofar
as such rights or defenses are
subject to the limitations imposes by
the principles governing estoppels.
Unauthorized issuance of stock
certificates
100/s
100
XYZCo
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
84

ENDORSEMENT FORM
C armed with the endorsement form
certificate, sold to D (innocent
purchaser for value), will D acquire
title?
- NO, subject to such rights and
defenses as the true and lawful owner
may have
What if C now goes to the corporation
and presents the form?
- Then the corporation shall cancel the old
certificate and issues a new one, now
in the name of C, now registered in the
name of C, will C acquire title?
A found out what happened and goes
to the corporation who has a better title
C or A?
- A, A cannot be deprived of his right by
virtue of an unauthorized transfer
Corporation can compel C to deliver
the new stock certificate because he
made a representation that the
certificate where good.
Armed with the new certificate issued
to C, C delivers to D a purchaser in
good faith and for value will D acquire
title?
- D will acquire title took the shares not by
virtue of a forged or unauthorized
transfer, but on the reliance that the
stock certificate is valid and owned by
C recognition of both stockholders
Stock certificate now in possession
of D. A knew of what happened and
went to the corporation and
complains. Who will have a better
title?
- the corporation may be compelled to
recognize both, A as stockholder
(non-negotiable) D, reliance that the
stock certificate is valid and existing
and owned by C
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
corporation in such case has been
guilty of no misrepresentation. On
the other hand, it is the duty of the
purchaser to determine that the
indorsement of the owner is
genuine. However, if the new
certificate issued to the purchaser
comes into the hands of a bona fide
purchaser for value, the corporation
will be stopped from denying validity
thereof, since by issuing such new
certificate it represents that the
person named therein is a
stockholder of the corporation. The
corporation is thus forced to
recognize both the original certificate
and new certificate-the original,
because the true owner could not be
deprived of his title by a forged
transfer, and the new, because of its
representation that the person
named therein is the owner of
shares in the corporation. But if the
would result in an over issue of
85
 shares, then only the original and true
owner can be recognized as a
stockholder. The bona fide purchaser
of the new certificate will however
have a right of damages against the
corporation. The corporation, in turn,
would have a right of action against
the person who made false
representations and in whose favor it
issued a new certificate. The true
owner of the shares which were
wrongfully transferred would of course
have a right to compel the corporation
to issue him a certificate in lieu of the
original one which was wrongfully
cancelled.
Authorized capital stock 1M shares
All are subscribed who will the
corporation recognize as rightful owner
A or D? if both will be recognized there
will be over issuance
- only A citing citizens national bank vs.
state (but if recognition of both
stockholders would result in an over
issue of shares, then only the original
and true owner can be recognized as
a stockholder)
- by virtue of the doctrine of non-
negotiability of certificate of stocks
The true and lawful owner will never
be deprived of his rights
What happens to D?
- D will have a cause of action against the
corporation for the value of his
acquisition cost inclusive of damages,
attorneys fees and cost of suit
D sues the corporation for the value of
his acquisition cost, inclusive of
damages, attorneys fees and cost
of suit. What may the corporation
do?
- NO defense, no valid defense,
because it was represented to other
parties that the certificate of stocks
is valid, subsisting, etc.
2nd situation, what cause of action
may the corporation have?
Remedy?
- Third party complaint against C, but
what if he is a purchaser for value?
4th party claim against B
When may certificate of stocks be
issued?
- Section 64 provides:
Section 64. Issuance of
stock certificates. - No certificate of
stock shall be issued to a subscriber
until the full amount of his
subscription together with interest
and expenses (in case of delinquent
shares), if any is due, has been
paid. (37)
A certificate of stock cannot be
issued unless he fully paid the
amount subscribed
Subscription to the capital stocks of
the corporation are indivisible
Clear mandate of section 148 of the
code is that the ruling of the court in
Baltazar vs. Lingayen Gulf, no
longer holds true
Section 148. Applicability to
existing corporations. - All
corporations lawfully existing and
doing business in the Philippines on
the date of the effectivity of this
86
 Code and heretofore authorized,
licensed or registered by the Securities
and Exchange Commission, shall be
deemed to have been authorized,
licensed or registered under the
provisions of this Code, subject to the
terms and conditions of its license, and
shall be governed by the provisions
hereof: Provided, That if any such
corporation is affected by the new
requirements of this Code, said
corporation shall, unless otherwise
herein provided, be given a period of
not more than two (2) years from the
effectivity of this Code within which to
comply with the same. (n)
Subscription to shares of stocks are
indivisible
Also apparent is that once a subscriber
has paid his subscription in full, he
becomes entitled to be issued a stock
certificate and in the event that the
corporation refuses to do so, the
stockholder my institute a case for
mandamus with damages. Thus, it has
been said that the duty of the
corporate officers to issue stock
certificates to those entitled thereto is
a ministerial duty enforceable by
mandamus.
Fua Cun vs. Summers and China
Banking Corp.
- The court erred in holding the plaintiff
as the owner of 250 shares of stock;
the plaintiffs rights consist in equity in
500 shares and upon payment of the
unpaid portion of the subscription price
he becomes entitled to the issuance of
certificate for said 500 shares in his
favor.
- No certificate of stock until the full
amount has been paid.
Watered stock
- One which is issued by the
corporation as fully paid-up shares,
when in fact the whole amount of the
value thereof has not been paid.
- Basis is par value and not the fair
market value
Section 62 states that stocks shall
not be issued for a consideration
less than par or issued price thereof,
while section 13 states that in no
case shall be paid-up capital be less
than five thousand [P5000] pesos.
If issued below par, issued value
considered as water
How may watered stocks be issued?
1. For a monetary consideration less
than its par or issued value;
2. For a consideration in property,
tangible or intangible, valued in
excess of its fair market value;
3. Gratuitously or under an agreement
that nothing shall be paid at all; or
4. In the guise of stock dividends when
there are no surplus profits of the
corporation.
Why is stock watering illegal?
1. The corporation is deprived of its
capital thereby hurting its business
prospects, financial capability and
responsibility;
2. Stockholders who paid their
subscriptions in full, or promised to
pay the same, are injured and
prejudiced by the reduction of their
87
 proportionate interest in the
corporation; and,
3. Present and future creditors are
deprived of the corporate assets for
the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right
to look upon corporations properties
for the satisfaction of their claims
What is the effect of issuance of
watered stocks
1. As to the corporation - when a
corporation is guilty of ultra-vires or
illegal acts which constitute an injury to
or fraud upon the public, or which will
tend to injure or defraud the public, the
State may institute a quo-warranto
proceeding to forfeit its charter for the
misuse or abuse of its franchise.
2. As between the corporation and the
subscriber- The subscription is void.
Such being the case, the subscriber is
liable to pay the full par or issued value
thereof, to render it valid and effective.
3. As to the consenting stockholders -
They are stopped from raising any
objection thereto;
4. As to dissenting stockholders - In view
of the dilution of their proportionate
interest in the corporation, they may
compel the payment of the water in
the stock solidarily against the
responsible and consenting directors
and officers inclusive of the holder of
the watered stocks;
5. As to creditors - They may enforce
payment of the difference in the
price, or the water in the stock,
solidarily against the responsible
directors/officers and the
stockholders concerned; and
6. As against transferees of the
watered stock His right is the
same as that of his transferor. If,
however, a certificate of stock has
been issued and duly indorsed to a
bona fide purchaser, without
knowledge, actual or constructive,
the latter cannot be held liable, at
least as against the corporation,
since he took the shares on reliance
of the misrepresentation made by
the corporation that the stock
certificate is valid and subsisting.
This is because a corporation is
prohibited from issuing certificates of
stock until the full value of the
subscriptions have been paid and
could not, therefore, deny the
validity of the stock certificate it
issued as against a purchaser in
good faith. Thus, Ballentine states
that whether there is any liability on
the part of the transferee of watered
stock is made to depend upon
whether he acquired the same
without notice, either as purchaser
or donee. If he had knowledge
thereof, he is subject to the same
liability as his transferor.
What is the nature of the liability of
the corporate directors consenting to
the issuance of watered stocks and
the extent of their liabilities?
- Solidarily liable with the holder of the
watered stocks to the extent of the
water from said shares of stocks
88
 Will all the directors be liable? What if
you objected will you also be liable?
- If you do not issue a written objection,
you are still liable
- Even passive directors may be liable
- Those having knowledge thereof, but
did not interpose their objection shall
be liable
- Section 65 provides:
Section 65. Liability of directors
for watered stocks. - Any director or
officer of a corporation consenting to
the issuance of stocks for a
consideration less than its par or
issued value or for a consideration in
any form other than cash, valued in
excess of its fair value, or who, having
knowledge thereof, does not forthwith
express his objection in writing and file
the same with the corporate secretary,
shall be solidarily, liable with the
stockholder concerned to the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of the
stock and the par or issued value of
the same. (n)
ACS-100M 100M/S PAR
VALUE-1.00
SUBSCRIBED-50M FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A -
B relationship
C -
D para kumita
There is a denial of pre-emptive rights
and directors A,B,C,D,E decided to
issue the remaining 50M and
subscribed for 10M each at 2 per share.
Is there stock watering if the fair
market value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more
than the par value indicated in the
articles of incorporation
3 days later they sold their 10M share
for P11.00 each, therefore making a
profit.
Can you question there actuations?
What would be the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as
such directors
- They cannot advance their own
motives to the damage prejudice of
the corporation which they
represents and stockholders as a
whole instead of it being sold
outside
- 500M would have gone to the
coffers of the corporation, 500M
should be there for the protection of
creditors
They are placed in a fiduciary
Sila lang ba ang kikita, pano naman
yung corporation, opportunity na yun
89
 When are unpaid subscriptions due
and payable?
- Section 67. Payment of balance of
subscription. - Subject to the
provisions of the contract of
subscription, the board of directors of
any stock corporation may at any time
declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same
or such percentage thereof, in either
case with accrued interest, if any, as it
may deem necessary.
Payment of any unpaid subscription or
any percentage thereof, together with
the interest accrued, if any, shall be
made on the date specified in the
contract of subscription or on the date
stated in the call made by the board.
Failure to pay on such date shall
render the entire balance due and
payable and shall make the
stockholder liable for interest at the
legal rate on such balance, unless a
different rate of interest is provided in
the by-laws, computed from such date
until full payment. If within thirty (30)
days from the said date no payment is
made, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale
as hereinafter provided, unless the
board of directors orders otherwise.
(38)
Remedies of the corporation to enforce
payment of unpaid subscription
1. By board action in accordance with the
procedure laid down in sections 67 to
69 of the code
2. By a collection case in court as
provided for in section 70
Are subscribers of shares of stocks not
fully paid, liable to pay interest?
- General rule is they are not liable to
pay interest because the code says
unless requires in the by-laws
- Aside from the mandate of the law
that subscribers to shares of stock
must pay the full value of their
subscription, they may likewise be
required to pay interest on all unpaid
subscriptions if so imposed in the
contract or in the corporate by-laws
at such rate as may be indicated
thereat or the legal rate if not so
fixed. Unless so required or
provided, however, subscribers to
shares of stock, not fully paid, are
not liable to pay interest on their
unpaid subscriptions. The code thus
provides:
Section 66. Interest on
unpaid subscriptions. - Subscribers
for stock shall pay to the corporation
interest on all unpaid subscriptions
from the date of subscription, if so
required by, and at the rate of
interest fixed in the by-laws. If no
rate of interest is fixed in the by-
laws, such rate shall be deemed to
be the legal rate. (37)
Until a call is made, they are not due
and payable, but still subject to the
provisions of the contracts
Procedures in case of sale of
delinquent stocks
Section 68. Delinquency sale. - The board
of directors may, by resolution, order the
sale of delinquent stock and shall
specifically state the amount due on each
subscription plus all accrued interest, and
the date, time and place of the sale which
shall not be less than thirty (30) days nor
more than sixty (60) days from the date the
stocks become delinquent.
Notice of said sale, with a
copy of the resolution, shall be sent
to every delinquent stockholder
either personally or by registered
90
mail. The same shall furthermore be
published once a week for two (2)
consecutive weeks in a newspaper of
general circulation in the province or
city where the principal office of the
corporation is located.
Unless the delinquent
stockholder pays to the corporation, on
or before the date specified for the
sale of the delinquent stock, the
balance due on his subscription, plus
accrued interest, costs of
advertisement and expenses of sale,
or unless the board of directors
otherwise orders, said delinquent stock
shall be sold at public auction to such
bidder who shall offer to pay the full
amount of the balance on the
subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share. The stock so purchased shall
be transferred to such purchaser in the
books of the corporation and a
certificate for such stock shall be
issued in his favor. The remaining
shares, if any, shall be credited in favor
of the delinquent stockholder who shall
likewise be entitled to the issuance of
a certificate of stock covering such
shares.
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the
subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share, the corporation may, subject to
the provisions of this Code, bid for the
same, 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 covered by the
subscription shall be vested in the
corporation as treasury shares and
may be disposed of by said
corporation in accordance with the
provisions of this Code. (39a-46a)
Who is the winning bidder in a
delinquency sale?
- Bidder who shall offer to pay the full
amount of the balance on the
subscription together with accrued
interest, cost of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share.
X Co. has 1M authorized capital
stock
500 thousand is already subscribed
A subscribed to 100 thousand
shares, 50 thousand is already paid
leaving 50 thousand unpaid
The corporation is at a loss of 250
thousand, the board decides to
make a call for the payment of the
unpaid subscriptions, however A
could not paid, hence declared
delinquent and decides to sell his
share at a public auction
55 thousand is to be paid, remaining
balance plus cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning
bidder)
Assume there is no bidder, may the
corporation bid?
- NO. It cannot bid because the law
says, subject to the provisions of this
CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
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 Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the
subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share, the corporation may, subject to
the provisions of this Code, bid for
the same, 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 covered by the
subscription shall be vested in the
corporation as treasury shares and
may be disposed of by said
corporation in accordance with the
provisions of this Code. (39a-46a)
- There was no unrestricted retained
earnings in the example given
therefore the corporation cannot bid ,
section 41, it states that:
Section 41. Power to acquire
own shares. - A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate purpose or purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional shares arising
out of stock dividends;
2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of
this Code. (a)
What if the shares of A were sold
without compliance of the
requirements? May A question the
sale?
- The law prescribes two conditions
before an action to recover
delinquent stocks irregularly sold
may be allowed. These are:
1. The party seeking to maintain such
action first pays or tenders to the
party holding the stock the sum for
which the same was sold, with
interest from the date of the sale at
the legal rate; and,
2. The action shall be commenced by
the filing of a complaint within six
months from the date of the sale.
- The reason for such is the stability of
transactions of the shares of stock
Suppose in the example, since there
are no unrestricted retained
earnings, hence the corporation
cannot bid, is the corporation left
without any recourse?
Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall
prevent the corporation from collecting by
action in a court of proper jurisdiction the
amount due on any unpaid subscription,
with accrued interest, costs and expenses.
(49a)
Velasco vs. Poizat
- The subscriber is as much bound to
pay the amount of the share
subscribed by him as he would be to
pay any other debt, and the right of
the company to demand payment is
no less incontestable.
- Two available remedies: the first and
most special remedy given by the
statute consist in permitting the
corporation to put up the unpaid
stock and dispose of it for the
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 account of the delinquent subscriber.
The other remedy is by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board
of directors to do whatever is provided
in the said article relative to the
application of the part of the 70
percent of the profit distributable in
equal parts on the payment of the
shares subscribed to and fully paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide
compromise or to set off a debt due
from the corporation, a release
supported by consideration, will be
effectual as against dissenting
stockholders and subsequent and
existing creditors. A release which
might originally have been held invalid
may be sustained after a considerable
lapse of time
Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due
and payable only upon certain
instance
- Call or if there is a stipulation in
contract
- If no call and no stipulation in contract
then it will not be demandable or
payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to
the capital of a corporation constitute a
fund to which the creditors have a right
to look for satisfaction of their claims
and that the assignee in insolvency
can maintain an action upon any
unpaid stock subscription in order to
realize assets for the payment of its
debts.
PNB vs. Bitulak
- Where it not for the promise, the
defendants would have not
subscribed
- Trust Fund Doctrine, it is established
doctrine that subscriptions to the
capital of a corporation constitute a
fund to which creditors have a right
to look for satisfaction of their claims
and that the assignee in insolvency
can maintain an action upon any
unpaid stock subscription in order to
realize assets for the payment of its
debts.
- A corporation has no power to
release an original subscriber to its
capital stock from the obligation of
paying for his shares, without a
valuable consideration for such
release; and as against creditors a
reduction of the capital stock can
take place only in the manner and
under the conditions prescribed by
the statute or the charter or the
articles of incorporation.
Edward Keller and Co. vs. COB
- May the stockholder be held liable
for the debts of the corporation?
YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders,
it is settled that a stockholder is
personally liable for the financial
obligations of a corporation to the
extent of his unpaid subscriptions
Is there a prescriptive period
wherein a demand for unpaid
subscription should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
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 - Never became due and payable until
there is a call made
- Prescription will not run until and
unless there is demand
- Prescription should be determined
from the time demand has been made
and not from the time of subscription
If declared delinquent, what would be
the effect as to the owner of said
shares?
Section 71. Effect of delinquency. - No
delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless he pays the amount due on
his subscription with accrued interest, and the
costs and expenses of advertisement, if any.
(50a)
- However if the shares are not
delinquent, subscribers to the capital
of a corporation, though not fully paid,
are entitled to all the rights of a
stockholder, according to section 72
Section 72. Rights of unpaid
shares. - Holders of subscribed shares
not fully paid which are not delinquent
shall have all the rights of a
stockholder. (n)
May the rules governing delinquency
sale apply to a non-stock corporation?
Are there unpaid shares in a non-stock
corporation?
- Rules governing stock corporations,
when applicable, also applies to a non-
stock corporation
- There are delinquent shareholders
also in a non-stock corporation.
Example is membership dues
A corporation paid 50% of subscription
and was later on declared delinquent
when he could not pay upon call; A
is also a director of the corporation.
Will A, upon declaration of
delinquency , still be able to exercise
his right as a director?
- Yes, he loses all his right as a
stockholder except his right to
receive dividends
- He remains to be a director, only
qualification to be a director is he
must own at least 1 share and since
it still stands in his name pending
the sale, he remains to be and act
as a director
- Even if there is sale, he may still be
director because the winning bidder
may not bid or pay for all the shares
or there might be remaining shares,
which would be credited in favor of
the delinquent stockholder
- Section 43 provides:
Section 43. Power to declare
dividends. - The board of directors of
a stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends
due on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and
expenses, while stock dividends
shall be withheld from the delinquent
stockholder until his unpaid
subscription is fully paid: Provided,
further, That no stock dividend shall
be issued without the approval of
stockholders representing not less
than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock corporations are
prohibited from retaining surplus
profits in excess of one hundred
94
 (100%) percent of their paid-in capital
stock, except: (1) when justified by
definite corporate expansion projects
or programs approved by the board of
directors; or (2) when the corporation
is prohibited under any loan
agreement with any financial institution
or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet
been secured; or (3) when it can be
clearly shown that such retention is
necessary under special
circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
When a certificate of stock is loss or
destroyed, what must be done by the
owner thereof?
Section 73. Lost or destroyed certificates. -
The following procedure shall be followed for
the issuance by a corporation of new
certificates of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of a
certificate of stock in a corporation or
his legal representative shall file with
the corporation an affidavit in triplicate
setting forth, if possible, the
circumstances as to how the certificate
was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the
certificate and the name of the
corporation which issued the same. He
shall also submit such other
information and evidence which he
may deem necessary;
2. After verifying the affidavit
and other information and evidence
with the books of the corporation, said
corporation shall publish a notice in a
newspaper of general circulation
published in the place where the
corporation has its principal office,
once a week for three (3)
consecutive weeks at the expense
of the registered owner of the
certificate of stock which has been
lost, stolen or destroyed. The notice
shall state the name of said
corporation, the name of the
registered owner and the serial
number of said certificate, and the
number of shares represented by
such certificate, and that after the
expiration of one (1) year from the
date of the last publication, if no
contest has been presented to said
corporation regarding said certificate
of stock, the right to make such
contest shall be barred and said
corporation shall cancel in its books
the certificate of stock which has
been lost, stolen or destroyed and
issue in lieu thereof new certificate
of stock, unless the registered owner
files a bond or other security in lieu
thereof as may be required, effective
for a period of one (1) year, for such
amount and in such form and with
such sureties as may be satisfactory
to the board of directors, in which
case a new certificate may be
issued even before the expiration of
the one (1) year period provided
herein: Provided, That if a contest
has been presented to said
corporation or if an action is pending
in court regarding the ownership of
said certificate of stock which has
been lost, stolen or destroyed, the
issuance of the new certificate of
stock in lieu thereof shall be
suspended until the final decision by
the court regarding the ownership of
said certificate of stock which has
been lost, stolen or destroyed.
Except in case of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no
action may be brought against any
corporation which shall have issued
certificate of stock in lieu of those
95
 lost, stolen or destroyed pursuant to
the procedure above-described. (R.A.
201a)
- The rationale of the above-quoted law
is to avoid duplication of certificates of
stock and the avoidance of fictitious
and fraudulent transfers.
When will the replacement certificate
be issued?
- The code provides that:
after the expiration of one (1)
year from the date of the last
publication, if no contest has been
presented to said corporation
regarding said certificate of stock, the
right to make such contest shall be
barred and said corporation shall
cancel in its books the certificate of
stock which has been lost, stolen or
destroyed and issue in lieu thereof
new certificate of stock,
Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner
files a bond or other security in lieu
thereof as may be required, effective
for a period of one (1) year, for such
amount and in such form and with
such sureties as may be satisfactory to
the board of directors, in which case a
new certificate may be issued even
before the expiration of the one (1)
year period provided herein:
Provided, That if a contest has been
presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock
which has been lost, stolen or
destroyed, the issuance of the new
certificate of stock in lieu thereof shall
be suspended until the final decision
by the court regarding the ownership
of said certificate of stock which has
been lost, stolen or destroyed.
May corporate officers be held liable
for the unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no
action may be brought against any
corporation which shall have issued
certificate of stock in lieu of those
lost, stolen or destroyed pursuant to
the procedure above-described.
(R.A. 201a)
Assuming the last paragraph is not
there; would it be not the same, that
they should be held liable due to
fraud, bad faith or negligence?
- YES. Section 31 provides that:
Section 31. Liability of
directors, trustees or officers. -
Directors or trustees who willfully
and knowingly vote for or assent to
patently unlawful acts of the
corporation or who are guilty of
gross negligence or bad faith in
directing the affairs of the
corporation or acquire any personal
or pecuniary interest in conflict with
their duty as such directors or
trustees shall be liable jointly and
severally for all damages resulting
there from suffered by the
corporation, its stockholders or
members and other persons.
When a director, trustee or
officer attempts to acquire or
acquires, in violation of his duty, any
interest adverse to the corporation in
respect of any matter which has
been reposed in him in confidence,
as to which equity imposes a
disability upon him to deal in his own
96
 behalf, he shall be liable as a trustee 8. To institute and file a derivative suit;
for the corporation and must account 9. To recover shares of stock
for the profits which otherwise would unlawfully sold for delinquency as
have accrued to the corporation. (n) may be allowed under section 69;
10. To inspect the books of the
Certificate of stock was lost, the owner corporation subject only to the
transfers his shares by way of a limitations imposed by section 73;
notarized deed will it be valid? 11. To be furnished by the most recent
financial statement of the
- He cannot do so, if a certificate of corporation as by section 75;
stock is issued by a corporation, a 12. To be issued a new stock certificate
mere notarized deed will not suffice in lieu of the lost or destroyed one
- Deed of assignment was not sufficient subject to the procedure laid down in
since there was no endorsement section 73;
(Rural Bank of Lipa vs. CA) 13. To have the corporation dissolved
under section 118 to 121, and
Rights and liabilities of stockholders section 105 in a close corporation;
14. To participate in the distribution of
- RIGHTS the assets of the corporation upon
dissolution under section 122;
1. Participation in the management of the 15. In the case of a close corporation, to
corporate affairs by exercising their petition the SEC to arbitrate in the
right to vote and be voted upon either event of a deadlock as allowed
personally or by proxy as provided for under section 104; and,
under sections 50 and 58 of the code; 16. Also in the case of a close
2. To enter into a voting trust agreement corporation, to withdraw therefrom,
subject to the procedure, requirements for my reason, and compel the
and limitations imposed under section corporation to purchase his shares
50; as provided for under section 105.
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;
7. To exercise their appraisal right in
accordance with the provision of
section 81 and in those instance
allowed by law such as section 42 and
105;
97
LIABILITIES
1. To pay to the corporation the balance
of his unpaid subscriptions subject to
the provision of section 67 to 70;
2. To pay interest on his unpaid
subscription if required by the by-laws
or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the
unpaid portion of his subscription
under the TRUST FUND DOCTRINE;
4. To answer the water in his stocks as
provided for in section 65;
5. To be liable, as general partners, for all
debts, liabilities and damages of a
determinable corporation as
envisioned under section 21
(corporation by estoppel); and,
6. To be personally liable for torts, in the
event that a stockholder in a close
corporation actively participates in the
management of the corporate affairs.
CORPORATE BOOKS AND RECORDS
What are these books and records that
are required to be kept?
Section 74. Books to be kept; stock transfer
agent. - Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in
detail the time and place of holding the
meeting, how authorized, the notice given,
whether the meeting was regular or
special, if special its object, those present
and absent, and every act done or ordered
done at the meeting. Upon the demand of
any director, trustee, stockholder or
member, the time when any director,
trustee, stockholder or member entered or
left the meeting must be noted in the
minutes; and on a similar demand, the
yeas and nays must be taken on any
motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member
on any action or proposed action must
be recorded in full on his demand.
The records of all business
transactions of the corporation and
the minutes of any meetings shall be
open to inspection by any director,
trustee, stockholder or member of
the corporation at reasonable hours
on business days and he may
demand, in writing, for a copy of
excerpts from said records or
minutes, at his expense.
Any officer or agent of the
corporation who shall refuse to allow
any director, trustees, stockholder or
member of the corporation to
examine and copy excerpts from its
records or minutes, in accordance
with the provisions of this Code,
shall be liable to such director,
trustee, stockholder or member for
damages, and in addition, shall be
guilty of an offense which shall be
punishable under Section 144 of this
Code: Provided, That if such refusal
is made pursuant to a resolution or
order of the board of directors or
trustees, the liability under this
section for such action shall be
imposed upon the directors or
trustees who voted for such refusal:
and Provided, further, That it shall
be a defense to any action under
this section that the person
demanding to examine and copy
excerpts from the corporation's
records and minutes has improperly
used any information secured
through any prior examination of the
records or minutes of such
corporation or of any other
corporation, or was not acting in
good faith or for a legitimate purpose
in making his demand.
Stock corporations must also
keep a book to be known as the
98
 "stock and transfer book", in which
must be kept a record of all stocks in
the names of the stockholders
alphabetically arranged; the
installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment; a statement of every
alienation, sale or transfer of stock
made, the date thereof, and by and to
whom made; and such other entries as
the by-laws may prescribe. The stock
and transfer book shall be kept in the
principal office of the corporation or in
the office of its stock transfer agent
and shall be open for inspection by
any director or stockholder of the
corporation at reasonable hours on
business days.
No stock transfer agent or one
engaged principally in the business of
registering transfers of stocks in behalf
of a stock corporation shall be allowed
to operate in the Philippines unless he
secures a license from the Securities
and Exchange Commission and pays
a fee as may be fixed by the
Commission, which shall be renewable
annually: Provided, That a stock
corporation is not precluded from
performing or making transfer of its
own stocks, in which case all the rules
and regulations imposed on stock
transfer agents, except the payment of
a license fee herein provided, shall be
applicable. (51a and 32a; P.B. No.
268.)
To summarize:
1. Records of all business transactions
which include, among others, journals,
ledger, contracts, vouchers and
receipts, financial statements and
other books of accounts, income tax
returns, and voting trust agreements
which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of
stockholders or members and of the
directors or trustees setting forth in
detail the date, time, and place of
meeting, how authorized, the notice
given whether the same be regular
or special, and if special, the
purpose thereof shall be specified,
those present and absent, and every
act done or ordered done there at
which ,must likewise be kept at the
principal office of the corporation;
and,
3. Stock and transfer book showing the
names of the stockholders, the
amount paid or unpaid 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, and by
whom and to whom made which
must also be kept at the principal
office of the corporation or in the
office of its stock transfer agent.
These corporate books and records,
inclusive of all business transactions
and minutes of meetings, are
subject to inspection by any of the
directors, trustees, stockholders or
members of the corporation at
reasonable hours on business days
and a copy of excerpts of said
records may be demanded. In fact,
in so far as financial statement is
concerned, the Code clearly
provides:
Section 75. Right to financial
statements. - Within ten (10) days
from receipt of a written request of
any stockholder or member, the
corporation shall furnish to him its
most recent financial statement,
which shall include a balance sheet
as of the end of the last taxable year
and a profit or loss statement for
said taxable year, showing in
reasonable detail its assets and
99
 liabilities and the result of its
operations.
At the regular meeting of stockholders
or members, the board of directors or
trustees shall present to such
stockholders or members a financial
report of the operations of the
corporation for the preceding year,
which shall include financial
statements, duly signed and certified
by an independent certified public
accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00,
the financial statements may be
certified under oath by the treasurer or
any responsible officer of the
corporation. (n)
May books and records be examined?
Who may examine? Can they copy
them? In whose expense?
- Yes, according to the code:
The records of all business
transactions of the corporation and
the minutes of any meetings shall
be open to inspection by any
director, trustee, stockholder or
member of the corporation at
reasonable hours on business days
and he may demand, in writing, for
a copy of excerpts from said
records or minutes, at his expense.
Is there any defense available that
could be raised? By the corporate
officers to justify the refusal?
- Yes, the code provides that:
and Provided, further, That it
shall be a defense to any action under
this section that the person
demanding to examine and copy
excerpts from the corporation's
records and minutes has
improperly used any information
secured through any prior
examination of the records or
minutes of such corporation or of
any other corporation, or was not
acting in good faith or for a
legitimate purpose in making his
demand.
What is the stock and transfer?
Where should stock and transfer be
kept? Can it be kept elsewhere?
Stock corporations must also
keep a book to be known as the
"stock and transfer book", in which
must be kept a record of all
stocks in the names of the
stockholders alphabetically
arranged; the installments paid
and unpaid on all stock for which
subscription has been made, and
the date of payment of any
installment; a statement of every
alienation, sale or transfer of
stock made, the date thereof, and
by and to whom made; and such
other entries as the by-laws may
prescribe. The stock and transfer
book shall be kept in the principal
office of the corporation or in the
office of its stock transfer agent
and shall be open for inspection by
any director or stockholder of the
corporation at reasonable hours on
business days.
Stock and transfer agent
- Records every movement
- Person who monitors movement by
the minutes or by the hours
- Non-stock corporation- stock and
transfer books
- Club share- membership
Are stockholders entitled to financial
statements?
100
- Yes, they are entitled to a copy, the
code provides that:
Section 75. Right to financial
statements. - Within ten (10) days from
receipt of a written request of any
stockholder or member, the
corporation shall furnish to him its
most recent financial statement, which
shall include a balance sheet as of the
end of the last taxable year and a profit
or loss statement for said taxable year,
showing in reasonable detail its assets
and liabilities and the result of its
operations.
At the regular meeting of
stockholders or members, the board of
directors or trustees shall present to
such stockholders or members a
financial report of the operations of the
corporation for the preceding year,
which shall include financial
statements, duly signed and certified
by an independent certified public
accountant.
However, if the paid-up capital
of the corporation is less than
P50,000.00, the financial statements
may be certified under oath by the
treasurer or any responsible officer of
the corporation. (n)
- Audited financial statement filed in the
SEC, 120 days from the end of the
final year, or must be filed on or before
April of each year
- Must be stamp received by the BIR
- Yes, as compared to a stockholder
Those in the stock exchange
- Disclosure of any matter that have to
do with increasing and decreasing
- If not kulong violation of securities
and regulation act
Why is this right of inspection granted
to a stockholder?
- The basis of the right of the
stockholder to inspect the books and
records of the corporation for a
proper purpose is to protect his
interest as a stockholder. Thus, it
has been said that:
The right of the shareholders
to ascertain how the affairs of
his company are being
conducted by its directors and
officers is founded by his
beneficial interest through
ownership of shares and the
necessity of self-protection.
Managers of some
corporations deliberately
keep the shareholders in
ignorance or under
misapprehension as to the
true condition of its affairs.
Business prudence demands
that the investor keep a
watchful eye on the
management and the
condition of the business.
Those in charge of the
company may be guilty of
gross incompetence or
dishonesty for years and
escape liability if the
shareholders cannot inspect
the records and obtain
information.
Is there any distinction of the right of
inspection of a stockholder and that
of a director?
or member, the right of a director or
trustee to inspect and examine
corporate books and records is
considered absolute and unqualified
and without regard to motive. This is
because a director supervises,
directs and manages corporate
business and it is necessary that he
be equipped with all the information
and data with regard to the affairs of
101
 the company in order that he may
manage and direct its operations
intelligently and according to his best
judgment in the interest of all the
stockholders he represents. Thus,
while stockholders and members are
entitled to inspect and examine the
books and records as provided in
sections 74 and 75 they may not gain
access to highly sensitive and
confidential information. In the case of
directors. it is not denied that they
have such access. This would include,
among others,
a. Marketing strategies and pricing
structure;
b. Budget for expansion and
diversification;
c. Research and development;
d. Sources of funding, availability of
personnel, proposals of mergers or
tie-ups with other firms
May this right be exercised, other than
by the stockholders themselves?
- Yes, while the right is founded on stock
ownership thus personal in nature it
may be made by the stockholders
agent or representative since it may be
unavailing in many instances
What if the right of the stockholder to
inspect is denied? What is his
remedy?
1. Mandamus
2. Damages either against the
corporation or responsible officer who
refused the inspection
3. Criminal complaint for violation of his
right to inspect and copy excerpts of all
business transactions and minutes of
meeting. Section 74 provides that Any
officer or agent of the corporation who
shall refuse to allow any director,
trustees, stockholder or member of the
corporation to examine and copy
excerpts from its records or minutes, in
accordance with the provisions of
this Code, shall be liable to such
director, trustee, stockholder or
member for damages, and in
addition, shall be guilty of an offense
which shall be punishable under
Section 144 of this Code. The latter
provision imposes a penalty of a fine
of not less than P1,000 but not more
than P10,000 or an imprisonment for
not less than 30 days but not 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 shall be
imposed upon the directors or
trustees who voted for such refusal.
Defense of the responsible
corporate officer
1. That the person demanding has
improperly used any information
secured through any prior
examination of the records or
minutes of such corporation or of
any other corporation;
2. That he was not acting in good faith
or for a legitimate purpose in making
his demand;
3. The right is limited or restricted by
special law or the law of it creation.
W.G. Philpotts vs. Philippine
Manufacturing Co.
- The right of inspection given to a
stockholder can be exercised either
by himself or by any proper
representative or attorney-in-fact,
and either with or without the
attendance of the stockholder
- The right may be regarded as
personal, in the sense that only a
stockholder may enjoy it; but the
inspection and examination may be
made by another. Otherwise it would
be unavailing in many instances.
102
 o Note: Usually hires an auditor or
accountant to safeguard his
interest
Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised
during reasonable hours on any
business days, the by-laws cannot
deny this right all together
- The general right given by the statute
may not be lawfully abridged to the
extent attempted in this resolution. It
may be admitted that the officials in
charge of a corporation may deny
inspection when sought at unusual
hours or under other improper
conditions; but neither the executive
officers nor the board of directors have
the power to deprive a stockholder of
the right altogether.
- The corporation, or its responsible
directors and officers cannot unduly
restrict this right of inspection and may
not arbitrarily set a few days of the
year within which the stockholder may
make the inspection.
- A by-law unduly restricting the right of
inspection is undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the
unqualified right to inspect the books
and records of the corporation at all
reasonable hours.
- We do not conceive, however, that a
director or stockholder has any
absolute right to secure certified
copies of the minutes of the
corporation until these minutes have
been written up and approved by the
directors.
May a stockholder of a holding
company inspect the books and
records of a subsidiary?
- It depends
- The right of the stockholders to
examine corporate books extends to
wholly-owned subsidiary which is
completely under the control and
management of the parent company
where he is such a stockholder. But
if the two entities (subsidiary and
parent) are legally being operated as
separate and distinct entities, there
is no such right of inspection on the
part of the stockholder of the parent
company.
AYALA- HOLDING
COMPANY/PARENT COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA
LAND (not wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in
order to be a PARENT
COMPANY
A, is a stockholder of Ayala, does he
have a right to inspect the records of
its subsidiaries?
- If wholly owned pwede, but its
subsidiaries are not wholly owned
kaya hindi pwede
Gokongwei vs. SEC
- San Miguel corporation owns all of
the shares of stock of San Miguel
International
- It is wholly-owned
- It would be in accord with equity,
good faith and fair dealing to
construe the statutory right of
petitioner as stockholder to inspect
the books and records of such
wholly-owned subsidiary which are
in respondent corporations
possession and control
If being operated as separate and
distinct corporations, there is no
such right
103
 Telecommunications- special
franchise, it is a legislative grant
Gonzales vs. PNB
- Provisions of the old law was
unqualified, when it granted
stockholders the right to inspect
- However, whole seemingly enlarging
the right of inspection, the new code
has prescribed limitations to the same.
It is now expressly required as a
condition for such examination that the
one requesting it must not have been
guilty of using improperly any
information secured through a prior
examination and that the person
asking for such examination must be
acting in good faith and for a legitimate
purpose in making his demand
- Admittedly, he sought to be a
stockholder in order to pry into
transactions entered into by the
respondent bank even before he
became a stockholder. His obvious
purpose was to arm himself with
materials he can use against the
respondent bank for acts done by the
latter when the petitioner was a total
stranger to the same.
- Bank was created by a special law, it
has its own charter and primarily
governed by the law creating them
- The bank is only subject to the
inspection of the Central Bank and any
information pertaining to the bank is
confidential and shall not be revealed
to any person other than the President
of the Philippines, the Secretary of
Finance and the Board of Directors,
nor shall any information relative to the
funds in its custody, its current
accounts or deposits belonging to
private individuals, corporations or
other entities except by order of a
Court of Competent Jurisdiction, hence
inspection sought to by the petitioner is
violative of the provisions of its charter
and is even subject to penal sanctions
Assuming you are a stockholder of
PNB, and then it was privatized,
may you already have the right to
inspect?
- No, unless its charter has been
altered or repealed it is still subject
to the same law
3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the
corporation
- The last would be its death or
dissolution
MERGER AND CONSOLIDATION
Merger and consolidation
- In corporate parlance it is called
spin-off
- Almost a year ago San Miguel
separated its brewery business
- San Miguel Corporation is now a full
time holding company; it can later on
absorb the company
- Corporations are granted by the
code to merge or consolidate
- most common type of corporate
recognition
- not the same in every case
- but most common in the weal
financial or insolvent condition, aim
is to bring it back to its financial
capability
- also a method of recapitalization
o purchase and sale of corporate
assets is another form of
corporate reorganization
How do you value the assets of the
merging corporation, do you
consider goodwill?
First secure favorably
recommendation of government
agency
104
 Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein
above required, shall be submitted to the
Securities and Exchange Commission in
quadruplicate for its approval: Provided,
That in the case of merger or
consolidation of banks or banking
institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
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
corporations concerned is not inconsistent
with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or
consolidation shall be effective.
If, upon investigation, the
Securities and Exchange Commission
has reason to believe that the
proposed merger or consolidation is
contrary to or inconsistent with the
provisions of this Code or existing
laws, it shall set a hearing to give the
corporations concerned the
opportunity to be heard. Written notice
of the date, time and place of hearing
shall be given to each constituent
corporation at least two (2) weeks
before said hearing. The Commission
shall thereafter proceed as provided in
this Code. (n)
Merger
- A union effected by absorbing one or
more existing corporations by another
which survives and continues the
combined business
- It is the uniting of two or more
corporations by the transfer of property
to one of them which continue in
existence, the other or the others
being dissolved and merged therein.
A B
A transfers all assets, properties,
rights, obligations, liabilities to B
B issues shares of stocks in
exchange of the transfer
A is then dissolved and B
SURVIVES
o Parties to a merger are called
constituent corporation
Consolidation
- The uniting or amalgamation of two
or more existing corporations to form
a new corporation
- In merger there is a surviving
corporation, the others are
dissolved, while in consolidation, all
constituent are dissolved and a new
one organized
A B
C
Like all other corporate acts, it
emanates from the board
1. The board of directors or trustees of
each constituent corporations shall
approve a plan of merger or
consolidation setting forth the
matters required in section 76;
2. Approval of the plan by the
stockholders representing 2/3 of
the outstanding capital stock or
2/3 of the member in non-stock
corporations of each of such
corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a
copy or summary of the plan of
merger or consolidation shall be
given to all stockholders or members
105
 at least two (2) weeks prior to the
scheduled meeting, either personally
or registered mail stating the purpose
thereof;
4. Execution of the articles of merger or
consolidation by each constituent
corporations to be signed by the
president or vice-president and
certified by the corporate secretary
or assistant secretary setting forth
the matters required in section 78;
5. Submission of the articles of
merger or consolidation in
quadruplicate to the SEC subject to
the requirement of section 79 that if it
involve corporations under the direct
supervision of any other government
agency or governed by special laws
the favorable recommendation of the
government agency concerned shall
first be secured and;
6. Issuance of the certificate of merger
or consolidation by the SEC at which
time the merger or consolidation shall
be effective. If the plan, however, is
believed to be contrary to law, the SEC
shall set a hearing to give the
corporations concerned an opportunity
to be heard upon proper notice and
thereafter, the Commission shall
proceed as provided in the Code.
Although merger and consolidation is
an express power granted to
corporation, it is subject to limitations,
as maybe proscribed by law
What would be the effect of merger or
consolidation? <sec. 80>
1. There will only be a single corporation.
In case of merger, the surviving
corporation or the consolidated
corporation in case of consolidation;
2. The termination of the corporate
existence of the constituent
corporations, except that of the
surviving corporation or the
consolidated corporation;
3. The surviving corporation or the
consolidated corporation will
possess all the rights, privileges,
immunities and powers and shall be
subject to all the duties and liabilities
of a corporation organized under the
Code;
4. The surviving or consolidated
corporation shall possess all the
rights, privileges, immunities and
franchises of the constituent
corporations, and all property and all
receivables due, including
subscriptions to shares and other
choses in action, and every other
interest of, or belonging to or due to
the constituent corporations shall be
deemed transferred to and vested in
such surviving or consolidated
corporation without further act and
deed; and,
5. The rights of creditors or any lien on
the property of the constituent
corporations shall not be impaired
by the merger or consolidation.
Is there a liquidation process in case
of merger or consolidation?
- None, there is nothing to distribute
Associated Bank vs. CA
- By virtue of a specific provision in
the merger agreement
- Although the subject promissory
note names CBTC as the payee, the
reference to CBTC in the note shall
be construed, under the very
provision of the merger agreement,
as a reference to petitioner bank, as
if such reference (was a) direct
reference to the latter for all intents
and purposes
- Section 80 par. 4 states:
The surviving or the
consolidated corporation shall
thereupon and thereafter possess all
the rights, privileges, immunities and
106
 franchises of each of the constituent
corporations; and all property, real or
personal, and all receivables due on
whatever account, including
subscriptions to shares and other
choses in action, and all and every
other interest of, or belonging to, or
due to each constituent corporation,
shall be deemed transferred to and
vested in such surviving or
consolidated corporation without
further act or deed; and
- Without further acts, meaning it is
automatic
When do merger and consolidation
become effective? What if the SEC
fails to act on it without fault
attributable to the corporation
involved?
- It will never become valid until and
unless the SEC gives its stamp of
approval
- It will be up to the constituent
corporation to follow it up
- It will never take effect until the SEC
gives its approval and issues the
articles of merger
o Granted 3 years to wing up unless
there is a trustee to wing up its
affairs
Could there be liquidators and winding
up with respect to the corporation in
consolidation and merger?
- No, there is none
- No assets properties or rights to
collect, they are transferred
- No debts and liabilities to pay because
they become the liabilities of the
surviving corporations
- No properties transferred because
they will be the properties of the
surviving corporations
o Hardest part is the financial act,
regarding how many shares
would be issued, probability of
collection and the like
o In merger and consolidation,
there is due diligence and an
economist is usually hired
APPRAISAL RIGHT
Define appraisal
- Right to withdraw from the
corporation and demand payment of
the fair value of his shares after
dissenting from certain corporate
acts involving fundamental changes
in corporate structure <sec. 81>
What property? When may this right
be exercises?
- Section 81 provides:
Section 81. Instances of
appraisal right. - Any stockholder of
a corporation shall have the right to
dissent and demand payment of the
fair value of his shares in the
following instances:
1. In case any amendment to the
articles of incorporation has the
effect of changing or restricting the
rights of any stockholder or class of
shares, or of authorizing preferences
in any respect superior to those of
outstanding shares of any class, or
of extending or shortening the 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 property and assets
as provided in the Code; and
3. In case of merger or
consolidation. (n)
107
 May it be exercised by a stockholder
who dissents to the act of a business
other than a primary purpose?
X Co. inc
Principal office is in Quezon city, it was
changed to Paranaque
A objects and makes a written
demand. May he exercise his right of
appraisal?
- It is not available in all amendments of
the corporation
- It must be changing or restricting the
rights of any stockholder
What if the principal office is changed
from QC to TAWI-TAWI, will it change
or affect the rights of A?
- To some it may change or restrict the
rights to others it may not
How is the right exercised?
- According to section 82 of the code:
Section 82. How right is
exercised. - The appraisal right may be
exercised by any stockholder who
shall have voted against the proposed
corporate action, by making a written
demand on the corporation within thirty
(30) days after the date on which the
vote was taken for payment of the fair
value of his shares: Provided, That
failure to make the demand within
such period shall be deemed a waiver
of the appraisal right. If the proposed
corporate action is implemented or
affected, the corporation shall pay to
such stockholder, upon surrender of
the certificate or certificates of stock
representing his shares, the fair value
thereof 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 within a period of sixty (60)
days from the date the corporate
action was approved by the
stockholders, the withdrawing
stockholder and the corporation
cannot agree on the fair value of the
shares, it shall be determined and
appraised by three (3) disinterested
persons, one of whom shall be
named by the stockholder, another
by the corporation, and the third by
the two thus chosen. The findings of
the majority of the appraisers shall
be final, and their award shall be
paid by the corporation within thirty
(30) days after such award is made:
Provided, That no payment shall be
made to any dissenting stockholder
unless the corporation has
unrestricted retained earnings in its
books to cover such payment: and
Provided, further, That upon
payment by the corporation of the
agreed or awarded price, the
stockholder shall forthwith transfer
his shares to the corporation. (n)
X Co.
Principal Office- QC, it was changed
to Manila
A objects and makes a written
demand for payment of fair value of
shares. Can he make a demand of
payment of shares?
True or False, no stockholder in a
stock corporation can ever demand
if the principal office is amended,
changing it from QC to Manila
- False, a stockholder in a close
corporation may for any reason
compel the close corporation that he
be paid the fair value of his shares
108
 Can he exercise his appraisal rights in
the first place? He hasnt even paid his
subscription in full.
May a stockholder who hasnt paid his
subscription in full exercise his
appraisal rights?
- Yes, he can exercise his appraisal
rights, by reconciling the provisions of
section 72, section 82 and section 86
Section 72. Rights of unpaid
shares. - Holders of subscribed shares
not fully paid which are not delinquent
shall have all the rights of a
stockholder. (n)
Section 82. How right is
exercised. - The appraisal right may be
exercised by any stockholder who
shall have voted against the proposed
corporate action, by making a written
demand on the corporation within thirty
(30) days after the date on which the
vote was taken for payment of the fair
value of his shares: Provided, That
failure to make the demand within
such period shall be deemed a waiver
of the appraisal right. If the proposed
corporate action is implemented or
affected, the corporation shall pay to
such stockholder, upon surrender
of the certificate or certificates of
stock representing his shares, the
fair value thereof 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 within a period of sixty (60)
days from the date the corporate
action was approved by the
stockholders, the withdrawing
stockholder and the corporation cannot
agree on the fair value of the shares, it
shall be determined and appraised by
three (3) disinterested persons, one of
whom shall be named by the
stockholder, another by the
corporation, and the third by the two
thus chosen. The findings of the
majority of the appraisers shall be
final, and their award shall be paid
by the corporation within thirty (30)
days after such award is made:
Provided, That no payment shall be
made to any dissenting stockholder
unless the corporation has
unrestricted retained earnings in its
books to cover such payment: and
Provided, further, That upon
payment by the corporation of the
agreed or awarded price, the
stockholder shall forthwith transfer
his shares to the corporation. (n)
Section 86. Notation on
certificates; rights of transferee. -
Within ten (10) days after
demanding payment for his shares,
a dissenting stockholder shall submit
the certificates of stock representing
his shares to the corporation for
notation thereon that such shares
are dissenting shares. His failure to
do so shall, at the option of the
corporation, terminate his rights
under this Title. If shares
represented by the certificates
bearing such notation are
transferred, and the certificates
consequently cancelled, the rights of
the transferor as a dissenting
stockholder under this Title shall
cease and the transferee shall have
all the rights of a regular
stockholder; and all dividend
distributions which would have
accrued on such shares shall be
paid to the transferee. (n)
- Notation is not mandatory, it is even
discretionary because the code
provides at the option of the
corporation because it never issued
one for that matter since the
subscriptions are not yet fully paid
109
 May the corporation be compelled to
pay the interest of A
300 T, 150T, 150T and 0 unrestricted
retained earnings
No stockholder may be able to compel
the corporation to pay the value of his
shares if the corporation has no
unrestricted retained earnings
- False, a stockholder of a close
corporation may for any reason,
provided only that the corporation has
sufficient assets to cover its debts and
liabilities
o General rule: there should be
unrestricted retained earnings
o Exception: section 105 close
corporation
The procedure and requirements for
the valid exercise of this rights are:
1. The stockholder must have voted
against the proposed corporate action
in any of the instances allowed by law
for the exercise of the right of
appraisal;
2. The written demand for payment must
be made by the dissenting stockholder
within thirty (30) days after the date on
which the vote was taken thereon.
Failure to make the demand within the
said period shall be deemed a waiver
on the part of the stockholder
concerned to exercise his appraisal
right;
3. Surrender of the certificate of stock by
the dissenting stockholder for notation
in the corporate books and the
payment by the corporation of the fair
market value of the said shares as of
the day prior to the date on which the
vote was taken. If the stockholder and
the corporation cannot agree on the
fair market value thereof, the same
shall be determined in accordance with
the provision of paragraph 2 of
section 82;
4. The fair value of the shares of the
dissenting stockholder must be paid
by the corporation only if it has
unrestricted retained earnings in its
books to cover such payment. If the
corporation has no unrestricted
retained earnings, the dissenting
stockholder may not, therefore, be
able to effectively exercise his
appraisal rights;
5. Upon payment of the shares by the
corporation, the dissenting
stockholder shall transfer his shares
to the corporation.
What would be the effect if the
stockholder exercises his appraisal
rights? What happens to his voting
and dividend rights if he exercises
his appraisal rights?
- It will be suspended, with a limitation
of 30 days, as provided for by
section 83 of the code:
Section 83. Effect of demand
and termination of right. - From the
time of demand for payment of the
fair value of a stockholder's shares
until either the abandonment of the
corporate action involved or the
purchase of the said shares by the
corporation, all rights accruing to
such shares, including voting and
dividend rights, shall be
suspended in accordance with
the provisions of this Code,
except the right of such
stockholder to receive payment of
the fair value thereof: Provided,
That if the dissenting stockholder
is not paid the value of his shares
within 30 days after the award, his
voting and dividend rights shall
immediately be restored. (n)
How do you compare the rights of a
stockholder, declared delinquent
110
 compared to a dissenting stockholder
exercising his appraisal rights
What if a stockholder exercising his
appraisal rights is also a director, will
he also lose his rights as a
stockholder?
- The shares remain to stand in his
name until he is paid, unless there is a
stipulation in the by-laws
When may the right to be paid the
value of his shares cease? Can he
withdraw his right of appraisal?
- Yes, he may withdraw, but there must
be consent by the corporation as
provided for by section 83 of the code:
Section 84. When right to
payment ceases. - No demand for
payment under this Title may be
withdrawn unless the corporation
consents thereto. If, however, such
demand for payment is withdrawn with
the consent of the corporation, or if the
proposed corporate action is
abandoned or rescinded by the
corporation or disapproved by the
Securities and Exchange Commission
where such approval is necessary, or if
the Securities and Exchange
Commission determines that such
stockholder is not entitled to the
appraisal right, then the right of said
stockholder to be paid the fair value of
his shares shall cease, his status as a
stockholder shall thereupon be
restored, and all dividend distributions
which would have accrued on his
shares shall be paid to him. (n)
Instances when the right of a
dissenting stockholder to be paid the
fair value of his shares ceases.
1. When he withdraws his demand for
payment and the corporation
consents thereto;
2. When the proposed action is
abandoned or rescinded by the
corporation;
3. When the proposed action is
disapproved by the SEC where such
approval is necessary;
4. When the SEC determines that he is
not entitled to exercise his appraisal
right;
5. When he fails to submit the stock
certificate within ten (10) days from
demand to the corporation for
notation that such shares are
dissenting shares; and,
6. If the shares are transferred and the
certificate subsequently cancelled.
Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the
corporation is lower than the fair
value of the shares of the
dissenting stockholder as
determined by the appraisers;
b. Where an action is filed by the
dissenting stockholder to recover
such fair value and the refusal of
the stockholder to receive
payment is found by the court to
be justified.
- Dissenting stockholder will be liable
for the cost and expenses of
appraisal when
a. When the price offered by the
corporation is approximately the
same as the fair value
ascertained by the appraisers;
b. Where the action filed by the
dissenting stockholder and his
refusal to accept payment is
found by the court to be
unjustified.
111
 The dissenting stockholder may also How is the right to vote exercised in
sell, transfer or assign his shares a non-stock corporation compared to
a stock corporation
Section 86. Notation on
certificates; rights of transferee. -
Within ten (10) days after demanding May a member in a non-stock
payment for his shares, a dissenting corporation vote cumulatively?
stockholder shall submit the
certificates of stock representing his - General rule is NO
shares to the corporation for notation
thereon that such shares are May it be granted or allowed by the
dissenting shares. His failure to do so by-laws?
shall, at the option of the corporation,
terminate his rights under this Title. If - Yes
shares represented by the
certificates bearing such notation May the right to cumulative voting be
are transferred, and the certificates denied in a stock corporation?
consequently cancelled, the rights
of the transferor as a dissenting - No, Doctrine of Limited Capacity
stockholder under this Title shall
cease and the transferee shall have May members in a non-stock
all the rights of a regular
corporation vote by proxy?
stockholder; and all dividend
distributions which would have
- Yes, section 89 provides that:
accrued on such shares shall be
paid to the transferee. (n)
Unless otherwise provided in
the articles of incorporation or the
NON-STOCK CORPORATIONS
by-laws, a member may vote by
proxy in accordance with the
What is a non-stock corporation?
provisions of this Code. (n)
- A non-stock corporation is one where May the right to vote by proxy be
no part of its income is distributable as
validly denied in a stock
dividends to its members, trustees, or
corporation?
officers, subject to the provisions of
this code on dissolution
- No, it is a matter of right in a stock
corporation
What provision of the code will govern
non-stock corporations? Would the
May member of a non-stock
provision governing stock corporations
corporation cast their vote by text?
also apply to non-stock corporations?
- Yes, subject to the approval and
- Yes, 2nd par. Of section 87 provides:
terms and conditions of the SEC
<sec. 89>
The provisions governing stock
corporation, when pertinent, shall be
Voting by mail or other
applicable to non-stock corporations,
similar means by members of non-
except as may be covered by specific
stock corporations may be
provisions of this Title. (n)
authorized by the by-laws of non-
112
 stock corporations with the approval
of, and under such conditions which
may be prescribed by, the Securities
and Exchange Commission.
How about in stock?
- Voting by mail or other similar means
may also be authorized and allowed by
the by-laws of non-stock corporations.
Generally, in stock corporations, the
vote must be cast at a duly constituted
meeting. The only exception, in case
of the latter, is in the matter of general
amendment of the articles of
incorporation where the written assent
of the stockholder may be sufficient.
How is the governing board constituted
in a non-stock corporation? How many
members?
- It may exceed 15 in a non-stock
corporation unless the AOI or by-laws
provide otherwise, as provided for by
section 92 of the code:
Section 92. Election and term
of trustees. - Unless otherwise
provided in the articles of incorporation
or the by-laws, the board of trustees of
non-stock corporations, which may be
more than fifteen (15) in number as
may be fixed in their articles of
incorporation or by-laws, shall, as soon
as organized, so classify themselves
that the term of office of one-third (1/3)
of their number shall expire every year;
and subsequent elections of trustees
comprising one-third (1/3) of the board
of trustees shall be held annually and
trustees so elected shall have a term
of three (3) years. Trustees thereafter
elected to fill vacancies occurring
before the expiration of a particular
term shall hold office only for the
unexpired period.
No person shall be elected as
trustee unless he is a member of the
corporation.
Unless otherwise provided in
the articles of incorporation or the
by-laws, officers of a non-stock
corporation may be directly elected
by the members. (n)
Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of
the Philippines; and,
3. Other qualifications as may be
provided for in the by-laws.
Governing board in a non-stock
- Board of Trustees, however section
138 provides that:
Section 138. Designation of
governing boards. - The provisions
of specific provisions of this Code to
the contrary notwithstanding, non-
stock or special corporations
may, through their articles of
incorporation or their by-laws,
designate their governing boards
by any name other than as board
of trustees. (n)
Disqualifications
- Section 27 also applies to a non-
stock corporation, same holds true
to the manner of removal <sec. 29
ad 30>
Section 27. Disqualification
of directors, 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 this
Code committed within five (5) years
prior to the date of his election or
appointment, shall qualify as a
113
director, trustee or officer of any
corporation. (n)
Section 29. Vacancies in the
office of director or trustee. - Any
vacancy occurring in the board of
directors or trustees other than by
removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be
filled by the stockholders in a regular
or special meeting called for that
purpose. A director or trustee so
elected to fill a vacancy shall be
elected only or the unexpired term of
his predecessor in office.
Any directorship or trusteeship
to be filled by reason of an increase in
the number of directors or trustees
shall be filled only by an election at a
regular or at a special meeting of
stockholders or members duly called
for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the
notice of the meeting. (n)
Section 30. Compensation of
directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for 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 least a majority of the
outstanding capital stock at a regular
or special stockholders' meeting. In no
case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of
the corporation during the preceding
year. (n)
Who elects the other officers?
- Directly by the general members
unless the by-laws or articles
provide otherwise. <sec.92>
Unless otherwise provided in
the articles of incorporation or the
by-laws, officers of a non-stock
corporation may be directly elected
by the members. (n)
In stock corporations who elect
officers?
- Directors
The provision that stock
corporations cannot validly provide
that members cannot be voted by
stockholders is only a general rule
because there is an exception
section 97 of the code states that:
The articles of
incorporation of a close
corporation may provide that the
business of the corporation shall be
managed by the stockholders of
the corporation rather than by a
board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need
be called to elect directors;
2. Unless the context clearly
requires otherwise, the stockholders
of the corporation shall be deemed
to be directors for the purpose of
applying the provisions of this Code;
and
3. The stockholders of the
corporation shall be subject to all
liabilities of directors.
The articles of
incorporation may likewise provide
that all officers or employees or
114
 that specified officers or employees
shall be elected or appointed by the
stockholders, instead of by the
board of directors.
Nature of membership is non-
transferrable and personal in nature
unless the articles of incorporation or
by-laws provide otherwise
Section 90. Non-transferability
of membership. - Membership in a
non-stock corporation and all rights
arising there from are personal and
non-transferable, unless the articles of
incorporation or the by-laws otherwise
provide. (n)
How is a membership requirement in a
non-stock corporation
A holds a membership certificate
B goes to the corporation and compels
the corporation to record the transfer in
his name
- Membership in non-stock corporations
may be acquired by complying with the
provisions of its rules prescribed in the
by-laws. This is in consonance with the
express power granted by law under
section 36, paragraph 6 of the code,
authorizing them to admit members
thereof and that authority carries with it
the power to prescribe rules on
membership. It has thus been stated
that in the absence of charter or
statutory restrictions, non-stock
corporations may determine who shall
be admitted to membership and how
they shall be admitted.
Section 36. Corporate powers
and capacity. - Every corporation
incorporated under this Code has the
power and capacity:
6. In case of stock corporations, to
issue or sell stocks to subscribers and
to sell stocks to subscribers and to
sell treasury stocks in accordance
with the provisions of this Code; and
to admit members to the corporation
if it be a non-stock corporation;
- They can provide the manner in
which to admit depending on their
own rules
The power or authority to terminate
members in non-stock corporations
is said to be inherent but strict
compliance with the manner and
procedure laid down in the by-laws
must be observed, otherwise it may
render the expulsion ineffective and
invalid.
Section 91. Termination of
membership. - Membership shall be
terminated in the manner and for the
causes provided in the articles of
incorporation or the by-laws.
Termination of membership shall
have the effect of extinguishing all
rights of a member in the
corporation or in its property, unless
otherwise provided in the articles of
incorporation or the by-laws. (n)
Power is inherent and may be
exercised in certain situations:
1. When an offense is committed
which, although it has no
immediate relation to a members
duty as such, it is so infamous as
to render him unfit for society of
honest men, which is indictable
at common law;
2. When the offense is a violation of
his duty as member of the
corporation; and,
3. When the offense is of a mixed
nature, being both against his
duty as a member of the
corporation, and also indictable
at common law.
115
 If the conduct of the member comes
within any of this cases, it is a ground
for valid expulsion although it may not
be expressly made so by the by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who
the members are, cannot be inquired
or intervened by the court
- The appealed decision thus
contravened the establish principle
that the courts cannot strip a member
of a non-stock corporation of his
membership therein without cause.
Lions Club International vs. CA
- Courts will not generally interfere on
matters involving the internal affairs of
an unincorporated association such as
election contest unless the acts
complained of are arbitrary,
oppressive, fraudulent, violative of civil
rights and the like
- General rule is that the courts will not
interfere with the internal affairs of an
unincorporated association so as to
settle disputes between the members,
or questions of policy, discipline, or
internal government, so long as the
government of the society is fairly and
honestly administered in conformity
with its by-laws and the law of the
land, and no property or civil rights are
involved.
- Exceptions are the following:
a. Where law and justice so require,
and the proceedings of the
association are subject to judicial
review where there is fraud,
oppression, or bad faith, or where
the action complained of is
capricious, arbitrary, or unjustly
discriminatory
b. To grant relief in case property or
civil rights are invaded, although it
has also been held that the
involvement of property rights
does not necessarily authorize
judicial intervention, in the
absence of arbitrariness, fraud or
collusion.
c. Are violative of the laws of the
society, or the law of the land, as
by depriving the person of due
process of law
d. There is lack of jurisdiction on
the part of the tribunal
conducting the proceedings,
where the organization exceeds
its powers, or where the
proceedings are otherwise illegal
Corporations, stock and non-stock,
may be dissolved in accordance and
pursuant to the provisions of
Sections 118 to 121 of the
Corporation Code and the pertinent
provisions of P.D. 902-A, as
amended. If such be the case, the
assets of the corporation are to be
distributed in accordance with law
and established jurisprudence.
If a non-stock corporation is
dissolved how will its properties be
distributed?
Section 94. Rules of
distribution. - In case dissolution
of a non-stock corporation in
accordance with the provisions of
this Code, its assets shall be
applied and distributed as
follows:
1. All liabilities and obligations of
the corporation shall be paid,
satisfied and discharged, or
adequate provision shall be
made therefore;
2. Assets held by the corporation
upon a condition requiring return,
transfer or conveyance, and
which condition occurs by reason
116
 of the dissolution, shall be returned,
transferred or conveyed in
accordance with such
requirements;
3. Assets received and held by the
corporation subject to limitations
permitting their use only for
charitable, religious, benevolent,
educational or similar purposes, but
not held upon a condition requiring
return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities
in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
distribution adopted pursuant to
this Chapter;
4. Assets other than those
mentioned in the preceding
paragraphs, if any, shall be
distributed in accordance with the
provisions of the articles of
incorporation or the by-laws, to the
extent that the articles of
incorporation or the by-laws,
determine the distributive rights of
members, or any class or classes
of members, or provide for
distribution; and
5. In any other case, assets may be
distributed to such persons,
societies, organizations or
corporations, whether or not
organized for profit, as may be
specified in a plan of distribution
adopted pursuant to this Chapter.
(n)
Non-stock corporations with 4Billion
funds, may it be distributed for and
among its members?
Section 94 number 3 provides:
3. Assets received and held
by the corporation subject to
limitations permitting their use only
for charitable, religious, benevolent,
educational or similar purposes, but
not held upon a condition requiring
return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities
in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
distribution adopted pursuant to this
Chapter;
- If there is no distributive agreement
then they may do so through a plan
of distribution under section 95
Section 95. Plan of
distribution of assets. - A plan
providing for the distribution of
assets, not inconsistent with the
provisions of this Title, may be
adopted by a non-stock corporation
in the process of dissolution in the
following manner:
The board of trustees shall,
by majority vote, adopt a resolution
recommending a plan of distribution
and directing the submission thereof
to a vote at a regular or special
meeting of members having voting
rights. Written notice setting forth the
proposed plan of distribution or a
summary thereof and the date, time
and place of such meeting shall be
given to each member entitled to
vote, within the time and in the
manner provided in this Code for the
giving of notice of meetings to
members. Such plan of distribution
shall be adopted upon approval of at
least two-thirds (2/3) of the members
having voting rights present or
represented by proxy at such
meeting. (n)
117
CLOSE CORPORATIONS
Section 96. Definition and applicability
of Title. - A close corporation, within
the meaning of this Code, is one
whose articles of incorporation provide
that: (1) All the corporation's issued
stock of all classes, exclusive of
treasury shares, shall be held of
record by not more than a specified
number of persons, not exceeding
twenty (20); (2) all the issued stock
of all classes shall be subject to one
or more specified restrictions on
transfer permitted by this Title; and
(3) The corporation shall not list in
any stock exchange or make any
public offering of any of its stock of
any class. Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting stock
or voting rights is owned or controlled
by another corporation which is not a
close corporation within the meaning
of this Code.
- Between and among themselves, they
feel and act alike
- Not more than 20 stockholders
- Specified persons, if you are not
specified, you cannot be a stockholder
- All the issued stocks of all classes is
subject to restrictions
- Shall not be listed in the stock
exchange not publicly offered
- 3 qualifying conditions must be
contained in the articles of
incorporation, to be considered as a
close corporation, if not, it will not be
considered as such and will be
governed by the general provisions of
the code
- Even if 100 % is owned by one person
it will not be considered a close
corporation without the 3 qualifying
provisions
- Identity of stockholders, specified
persons
- Active management either as
directors or partners in management
- Combination of the corporation and
partnership type of business
May any type of corporation, be
organized as such close
corporation?
- No, the 3 qualifying conditions must
be present
What if 2/3 of the outstanding capital
stock is owned by another
corporation which is also a close
corporation, will it be a close
corporation?
- No, it will only be a closed
corporation if 2/3 of the voting stocks
of a close corporation is also owned
by a close corporation. It must be
voting stocks
- Even if another corporation owns or
controls 2/3 of the voting stocks of a
close corporation, the latter may still
be considered as such close
corporation if the corporation owning
or controlling the shares is also a
close corporation.
Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting
stock or voting rights is owned or
controlled by another corporation
which is not a close corporation
within the meaning of this Code.
What kind of corporations cannot be
a close corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
118
6. Corporations vested with public
interest
Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a
right
Section 97 is a permissive provision
Section 97. Articles of
incorporation. - The articles of
incorporation of a close corporation
may provide:
1. For a classification of shares or
rights and the qualifications for owning
or holding the same and restrictions on
their transfers as may be stated
therein, subject to the provisions of the
following section;
2. For a classification of directors into
one or more classes, each of whom
may be voted for and elected solely by
a particular class of stock; and
3. For a greater quorum or voting
requirements in meetings of
stockholders or directors than those
provided in this Code.
After classification what then?
- After classification, qualification and
then restriction as provided for under
the 3 qualifying conditions in section
96
Cumulative voting is restricted in close
corporations if will be elected solely by
a particular class
In a close corporation, the articles of
incorporation may provide for a greater
quorum and voting requirement in
meetings of both stockholders or
directors to increase the veto power of
minority stockholders, unlike in a stock
corporation wherein only directors
meetings may provide for greater
quorum requirement and in
stockholders meeting which may not
be altered or increased, as provide
for in section 25, following the
doctrine of limited capacity
The articles of a close corporation
may likewise provide that the
business of the corporation shall be
managed by the stockholders rather
than by the board of directors.
However the same must contain the
continuing provisions required in
paragraph 2 of section 97, that is:
1. No meeting of stockholders need
be called to elect directors;
2. Unless the context clearly
requires otherwise, the
stockholders of the corporation
shall be deemed to be directors;
and;
3. The stockholders of the
corporation shall be subject to all
liabilities of directors.
Liability of stockholders acting as
directors in a close corporation are
more extensive since they are
personally liable for corporate torts
unless the corporation has obtained
a reasonable adequate liability
insurance, unlike a ordinary stock
corporation, wherein directors
thereof are only liable for corporate
torts only if they have been negligent
or acted fraudulently in the
performance of their functions.
Restrictions
- In ordinary stock corporations, the
restrictions must appear in the
articles of incorporation as well as
the certificate of stocks
- In a close corporation, the
restrictions must appear in the
articles of incorporation, the by-laws
119
 and the certificate of stocks.
Otherwise, the same shall not be
binding on any purchaser thereof in
good faith
What if the stockholders do not want to
exercise their right or option to
purchase may it be sold to any
person?
- Yes, any third person, section 98
provides:
Section 98. Validity of
restrictions on transfer of shares. -
Restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as
well as in the certificate of stock;
otherwise, the same shall not be
binding on any purchaser thereof in
good faith. Said restrictions shall not
be more onerous than granting the
existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder
with such reasonable terms, conditions
or period stated therein. If upon the
expiration of said period, the
existing stockholders or the
corporation fails to exercise the
option to purchase, the transferring
stockholder may sell his shares to
any third person.
o ordinary stock corporations are
liable only if acted in Bad faith,
fraud or negligence in
performance of duty
What if there are already 20
stockholders and they want to add 2
more, may it compel?
- In ordinary stock corporations, they
may compel by mandamus
- In close corporations, may not be
compelled to admit because it
breaches the qualifying conditions
Since they cannot be compelled,
may they admit?
- Yes, provided all the stockholders
consented or instead of consenting
they decide to amend their articles
of incorporation
- Will have to amend the articles of
incorporation to accommodate other
purchasers of share
- Will cease to be a close corporation
if it amends and becomes in excess
of 20
o Unless all the stockholders
consent they may
What if the other stockholders object
to register? What will be the remedy
of the transferee?
- His remedy is rescission. The effect
of rescission is mutual restitution
How about the stockholder, what is
his recourse?
- He may compel the close
corporation to purchase his shares
at their fair value for any reason,
provided the corporation has
sufficient assets in its books to cover
the debts and liabilities exclusive of
capital
- In a close corporation, there is a
withdrawing stockholder, unlike in an
ordinary stockholder where there is
none, they may only do so in the
exercise of appraisal rights
Section 105. Withdrawal of
stockholder or dissolution of
corporation. - In addition and without
prejudice to other rights and
remedies available to a stockholder
under this Title, any stockholder of
a close corporation may, for any
reason, compel the said
corporation to purchase his
shares at their fair value, which
120
 shall not be less than their par or
issued value, when the corporation
has sufficient assets in its books to
cover its debts and liabilities
exclusive of capital stock: Provided,
That any stockholder of a close
corporation may, by written petition to
the Securities and Exchange
Commission, compel the dissolution of
such corporation whenever any of acts
of the directors, officers or those in
control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation
or any stockholder, or whenever
corporate assets are being misapplied
or wasted.
Agreements may also be entered in a
close corporation <sec.100>
- They can even agree to be partners in
management
- Pre-incorporation
- Manner in which the business of the
corporation shall be managed
Board resolution
- Ordinary stock corporations- sit and
act as a body at a duly constituted
meeting, they may do so by virtue of
the E-Commerce Act through
teleconference or video conference
Exception to the rule: other officers
may be directly appointed and hired by
the stockholders
Close corporations may validly act
even without a meeting provided the
conditions are obtained
Section 101. When board
meeting is unnecessary or improperly
held. - Unless the by-laws provide
otherwise, any action by the directors
of a close corporation without a
meeting shall nevertheless be deemed
valid if:
1. Before or after such action is
taken, written consent thereto is
signed by all the directors; or
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing; or
3. The directors are accustomed to
take informal action with the express
or implied acquiescence of all the
stockholders; or
4. All the directors have express or
implied knowledge of the action in
question and none of them makes
prompt objection thereto in writing.
Pre-emptive rights in a close
corporation is absolute
Section 102. Pre-emptive
right in close corporations. - The
pre-emptive right of stockholders in
close corporations shall extend to all
stock to be issued, including
reissuance of treasury shares,
whether for money, property or
personal services, or in payment of
corporate debts, unless the articles
of incorporation provide otherwise.
Why is it said to be absolute?
- Because there is no public offering
in a close corporation, otherwise it
will not be considered as close
In a close corporation the pre-
emptive rights is broadened to
include all issues without exception
unless denied or limited by the
articles of incorporation
Section 39 is the governing
provision concerning rights of the
stockholder in an ordinary stock
corporation and it may be denied. If
it is not denied a stockholder can
121
 exercise his pre-emptive rights for all the aforesaid provisions, at a
issues of shares whether money, meeting duly called for the purpose.
property or previously incurred
indebtedness. What happens if there is a
deadlock?
Section 39. Power to deny pre-
emptive right. - All stockholders of a - Section 104 provides for a remedy
stock corporation shall enjoy pre-
emptive right to subscribe to all issues Section 104. Deadlocks. -
or disposition of shares of any class, in Notwithstanding any contrary
proportion to their respective provision in the articles of
shareholdings, unless such right is incorporation or by-laws or
denied by the articles of incorporation agreement of stockholders of a
or an amendment thereto: Provided, close corporation, if the directors or
That such pre-emptive right shall not stockholders are so divided
extend to shares to be issued in respecting the management of the
compliance with laws requiring stock corporation's business and affairs
offerings or minimum stock ownership that the votes required for any
by the public; or to shares to be issued corporate action cannot be obtained,
in good faith with the approval of the with the consequence that the
stockholders representing two-thirds business and affairs of the
(2/3) of the outstanding capital stock, corporation can no longer be
in exchange for property needed for conducted to the advantage of the
corporate purposes or in payment of a stockholders generally, the
previously contracted debt. Securities and Exchange
Commission, upon written petition
Are treasury shares covered in the by any stockholder, shall have the
exercise of pre-emptive rights in power to arbitrate the dispute. In the
ordinary stock corporations? exercise of such power, the
Commission shall have authority to
make such order as it deems
As regards amendments appropriate, including an order: (1)
canceling or altering any provision
Section 103. Amendment of contained in the articles of
articles of incorporation. - Any incorporation, by-laws, or any
amendment to the articles of stockholder's agreement; (2)
incorporation which seeks to delete or canceling, altering or enjoining any
remove any provision required by this resolution or act of the corporation
Title to be contained in the articles of or its board of directors,
incorporation or to reduce a quorum or stockholders, or officers; (3)
voting requirement stated in said directing or prohibiting any act of the
articles of incorporation shall not be corporation or its board of directors,
valid or effective unless approved by stockholders, officers, or other
the affirmative vote of at least two- persons party to the action; (4)
thirds (2/3) of the outstanding capital requiring the purchase at their fair
stock, whether with or without voting value of shares of any stockholder,
rights, or of such greater proportion of either by the corporation regardless
shares as may be specifically provided of the availability of unrestricted
in the articles of incorporation for retained earnings in its books, or by
amending, deleting or removing any of the other stockholders; (5)
122
 appointing a provisional director; (6) 2. Cancel, alter or enjoin any
dissolving the corporation; or (7) resolution or other act of the
granting such other relief as the corporation or its board of
circumstances may warrant. directors, stockholders or officers
3. Prohibit any act of the
A provisional director shall be corporation or its board of
an impartial person who is neither a directors, stockholders or officers
stockholder nor a creditor of the or other persons party to the
corporation or of any subsidiary or action;
affiliate of the corporation, and whose 4. Requiring the purchase of the
further qualifications, if any, may be par value of the shares of any
determined by the Commission. A stockholders, either by the
provisional director is not a receiver of corporation regardless of
the corporation and does not have the availability of unrestricted
title and powers of a custodian or earnings, or by the other
receiver. A provisional director shall shareholders,
have all the rights and powers of a 5. Appointment of a provisional
duly elected director of the corporation, director
including the right to notice of and to 6. Dissolving the corporation; or
vote at meetings of directors, until 7. Other relief as the circumstances
such time as he shall be removed by may warrant.
order of the Commission or by all the
stockholders. His compensation shall Section 105
be determined by agreement between
him and the corporation subject to - Dishonesty is a ground for
approval of the Commission, which dissolution of a close corporation
may fix his compensation in the - Even one stockholder may petition
absence of agreement or in the event for dissolution
of disagreement between the
provisional director and the o when there is a relief
corporation. available, dissolution would
not be available in an
- Powers of the SEC in intra-corporate ordinary corporation
concerns has been transferred to the
proper commercial courts CLOSE ORDINARY
- Prohibit, even if acting in good faith CORPORATIO STOCK
- Provisional director appointed by the N CORPORATION
court 1. The No limitation as to
- Requiring the purchase, irrespective of number of number of
unrestricted retained earnings stockholders shareholder
- The provision of the law above-quoted cannot
gives the SEC a very wide discretion in exceed 20
respect to management of a close 2. To the Maximum number
corporation in the event of a deadlock. extent that all of directors is 15
It may: stockholders
can be
1. Cancel or alter any provision in the deemed
articles of incorporation, by-laws or directors, the
any stockholders agreement number of
directors can
123
 effectively be the business of the Board to
more than 15 can validly be manage corporate
3. Shares Generally no made affairs
of stock are restriction on 9. To the Ordinarily, no such
subject to transfer of shares extent that classification and
specified directors may no restrictions on
restrictions be classified cumulative voting
4. Shares No prohibition into one or
of stock are more classes
prohibited and to be
from being voted solely
listed in the by a particular
stock class of stock,
exchange or cumulative
offered for voting may, in
sale to the effect, be
public restricted
5. Stockhol Management is 10. The Officers are
ders may take lodged in the articles of elected by the
an active part Board of Directors incorporation Board of Directors
in corporate may provide
management that all
by vesting officers shall
management be elected or
to them rather appointed by
than a Board the
of Director stockholders
6. Those Directors are liable 11. It may Although the
active in for torts only if they provide for articles of
management have acted greater incorporation or
are personally negligently or quorum and by-laws may
liable for fraudulently voting provide for greater
corporate requirements quorum and voting
torts unless in meetings of requirements in
the stockholders directors meeting
corporation and directors under section 25,
has obtained those for
an adequate stockholders
liability meeting cannot
insurance generally be
7. Directors Directors must, as altered
can validly act a rule, act as a 12. Restricti Valid and binding if
even without body at a duly on on transfer indicated in the
a meeting constituted of shares articles of
meeting should be incorporation and
8. Agreeme Not valid and indicated in stock certificates
nts between binding since the articles of
stockholders stockholders incorporation,
regarding the agreement cannot by-laws and
operations of limit the discretion stock
124
 certificates among amended
13. Pre- Pre-emptive rights others,
emptive rights may be denied as provides for in
of provided for in section 105
stockholders section 39
is broader as
it include all Manuel Dulay Enterprises vs. CA
issues without
exception - What was the position of Manuel
14. A Unless he sells his Dulay here? President, General
stockholder shares, a Manager and Treasurer
may withdraw stockholder cannot
and compel get back his - Cannot act both as president and
the investment nor treasurer at the same time
corporation to compel the - Since it is a close corporation owned
purchase his corporation to buy by the family of Manuel Dulay, save
shares for any his shares except and except the secretary, it should
reason with in the exercise of be governed by Title XII
the limitation his appraisal right - Petitioner is classified as a close
only that the corporation and consequently a
corporation board resolution authorizing the sale
has sufficient or mortgage of the subject property
assets to is not necessary to bind the
cover its corporation for the action of its
liabilities president. At any rate, a corporate
exclusive of action taken at a board meeting
capital stock without proper call or notice in a
15. The Courts cannot close corporation is deemed ratified
proper forum interfere I the by the absent director unless the
may interfere business judgment latter promptly files his written
in the of the objection with the secretary of the
management directors/stockhold corporation after having knowledge
of a close ers BUSINESS of the meeting which, in this case,
corporation in JUDGMENT petitioner Virgilio Dulay failed to do.
case of RULE - Virgilio Dulay is a signatory witness,
deadlocks he knows very well about the deed
under Section of absolute sale, he is estopped
104, even of
the Naguiat vs. NLRC
directors/stoc
kholders are - Section 100 par. 5. To the extent
acting in good that the stockholders are actively
faith engaged in the management or
16. Any Dissolution may be operation of the business and affairs
stockholder had only on the of a close corporation, the
may petition grounds provided stockholders shall be held to strict
the SEC for by the provisions fiduciary duties to each other and
corporate of the Code on among themselves. Said
dissolution on dissolution and stockholders shall be personally
grounds P.D. 902-A, as liable for corporate torts unless the
125
 corporation has obtained reasonably
adequate liability insurance.
Family corporations is not
automatically a close corporation the 3
qualifying conditions must be present.
SPECIAL CORPORATIONS
2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
2.2 Religious Societies
What provision governs educational
corporations?
Section 106. Incorporation. -
Educational corporations shall be
governed by special laws and by the
general provisions of this Code. (n)
- Special laws like they Education Act of
the Philippines
- These institutions of learning, once
recognized by the government as such
are mandated by law to be
incorporated within ninety (90) days
under the provisions of the Corporation
Code and must, perforce, comply with
the requirements and procedure laid
down there under. Their failure to so
will not immune the educational
institution from suit as a corporation.
(Chiang Kai Siek Case)
- Favorable recommendation of
government agency involved
Two types of educational corporations
- Certificate of completion in the
academic field
- Vocational and technical ones
o Recommendation of DECS if
certificate of completion in the
academic field
How is the governing board of an
educational institution instituted?
- Non-stock- multiples of 5 only
(example: 5,10,15)
- Stock- can be anywhere between 5
to 15
Can they consist of 7 or 9
members?
- Yes, if stock
Can they be incorporated also as
non-stock?
- Yes
- B.P. 232 allows the organization of
an educational institution that is
stock corporation, only if they do not
issue a certificate of completion in
the academic field
Qualifications and disqualifications
of the membership in the board of
an educational corporation
- Educational corporations are
governed by special laws and
general provisions, hence if there is
no provision in the special law, you
go back to section 25 and 27 of the
general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional
qualifications and disqualifications
Section 25. Corporate
officers, quorum. - Immediately after
their election, the directors of a
corporation must formally organize
by the election of a president, who
shall be a director, a treasurer who
may or may not be a director, a
secretary who shall be a resident
and citizen of the Philippines, and
such other officers as may be
provided for in the by-laws. Any two
(2) or more positions may be held
126
 concurrently by the same person,
except that no one shall act as
president and secretary or as
president and treasurer at the same
time.
The directors or trustees and
officers to be elected shall perform the
duties enjoined on them by law and
the by-laws of the corporation. Unless
the articles of incorporation or the by-
laws provide for a greater majority, a
majority of the number of directors or
trustees as fixed in the articles of
incorporation shall constitute a quorum
for the transaction of corporate
business, and every decision of at
least a majority of the directors or
trustees present at a meeting at which
there is a quorum shall be valid as a
corporate act, except for the election of
officers which shall require the vote of
a majority of all the members of the
board.
Directors or trustees cannot attend or
vote by proxy at board meetings. (33a)
Section 27. Disqualification of
directors, 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 this
Code committed within five (5) years prior to
the date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation. (n)
Article 14 section 4 par. 2 of the
Constitutions
Educational institutions, other
than those established by religious
groups and mission boards, shall be
owned solely by citizens of the
Philippines or corporations or
associations at least sixty per centum
of the capital of which is owned by
such citizens. The Congress may,
however, require increased Filipino
equity participation in all educational
institutions. The control and
administration of educational
institutions shall be vested in
citizens of the Philippines.
No educational institution shall be
established exclusively for aliens
and no group of aliens shall
comprise more than one-third of the
enrollment in any school. The
provisions of this sub section shall
not apply to schools established for
foreign diplomatic personnel and
their dependents and, unless
otherwise provided by law, for other
foreign temporary residents.
- Management is left solely to citizens
of the Philippines
- Board of Directors manages the
corporate affairs, foreigners cannot
therefore be elected in the board
- Exceptions are, mission boards and
religious orders, which may have a
governing board consisting of
foreigners
Term of office of governing board in
an educational institutions
- Can serve a term of 5 years. If that
be the case, 1/5 of their number
shall expire every year
Non-stock or stock, can they serve
for a 1 year term only?
- Yes, the articles of incorporation
may provide that it be 1 year only
What are these religious
corporations spoken off?
- Corporation sole and religious
societies
What is a corporation sole?
127
- Consists of one person only and his
successor in some particular station,
who are incorporated by law in order to
give them some legal capacities and
advantages, particularly that of
perpetuity, which in their natural
persons they could not have had
May a corporation be organized by
less than 5 natural persons?
- General rule, 5 to 15 natural
persons(except cooperatives and
corporations primarily organized to
hold equities in rural banks and may
rightfully become incorporators
thereof)
- Exception, corporation sole, consist of
only one person
May any person form or organize a
corporation sole?
- No, not any person can form a
corporation sole, section 110 provides:
Section 110. Corporation sole. -
For the purpose of administering and
managing, as trustee, the affairs,
property and temporalities of any
religious denomination, sect or church,
a corporation sole may be formed by
the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder
of such religious denomination, sect or
church. (154a)
Is it required to file the articles of
incorporation in the SEC?
- Yes
What should be contained in the
articles of incorporation?
- Section 111 and section 112 provides
for the contents and procedures
Section 111. Articles of
incorporation. - In order to become a
corporation sole, the chief
archbishop, bishop, priest, minister,
rabbi or presiding elder of any
religious denomination, sect or
church must file with the Securities
and Exchange Commission articles
of incorporation setting forth the
following:
1. That he is the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder of his religious
denomination, sect or church and
that he desires to become a
corporation sole;
2. That the rules, regulations and
discipline of his religious
denomination, sect or church are not
inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder, he is charged with
the administration of the
temporalities and the management
of the affairs, estate and properties
of his religious denomination, sect or
church within his territorial
jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi of presiding elder is required to
be filled, according to the rules,
regulations or discipline of the
religious denomination, sect or
church to which he belongs; and
5. The place where the principal
office of the corporation sole is to be
established and located, which place
must be within the Philippines.
The articles of incorporation
may include any other provision not
128
 contrary to law for the regulation of the
affairs of the corporation. (n)
Section 112. Submission of the
articles of incorporation. - The articles
of incorporation must be verified,
before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest,
minister, rabbi or presiding elder, as
the case may be, and accompanied by
a copy of the commission, certificate of
election or letter of appointment of
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, duly
certified to be correct by any notary
public.
From and after the filing with the
Securities and Exchange Commission
of the said articles of incorporation,
verified by affidavit or affirmation, and
accompanied by the documents
mentioned in the preceding paragraph,
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of
the religious denomination, sect or
church theretofore administered or
managed by him as such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in
trust by him as a corporation sole, for
the use, purpose, behalf and sole
benefit of his religious denomination,
sect or church, including hospitals,
schools, colleges, orphan asylums,
parsonages and cemeteries thereof.
(n)
Is it required to indicate its terms of
execution? Why not?
- Not required because they are
supposed to exist in perpetuity
- However, it does not mean that it shall
continue to exist forever, it merely
means that it has the capacity of
continuous existence during a property is situated upon proof made
particular period until dissolved in
accordance with law
When will it acquire judicial
personality? How do you compare
this to other types of corporation?
- After the filing the verified articles of
incorporation along with the
documents required in Section 112
with the SEC, immediately becomes
endowed with corporate personality,
this serves as an exception to the
rule that a corporation acquires
juridical personality only upon the
issuance of a certificate of
incorporation by the said
government agency.
- Upon filing of verified articles of
incorporation with the SEC, will not
require the approval of SEC
A corporation sole is possessed with
the same power, rights and
privileges, to own, acquire and hold
or convey properties like any other
corporation? True or False
- False, they have the same power
rights and privileges, but when it
comes to alienation and acquisition,
it must possess a court order,
however when there is a regulated
method, a court order may be
dispensed with <sec. 113>
Section 113. Acquisition and
alienation of property. - Any
corporation sole may purchase and
hold real estate and personal
property for its church, charitable,
benevolent or educational purposes,
and may receive bequests or gifts
for such purposes. Such corporation
may sell or mortgage real property
held by it by obtaining an order for
that purpose from the Court of First
Instance of the province where the
to the satisfaction of the court that
129
 notice of the application for leave to
sell or mortgage has been given by
publication or otherwise in such
manner and for such time as said court
may have directed, and that it is to the
interest of the corporation that leave to
sell or mortgage should be granted.
The application for leave to sell or
mortgage must be made by petition,
duly verified, by the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder acting as corporation
sole, and may be opposed by any
member of the religious denomination,
sect or church represented by the
corporation sole: Provided, That in
cases where the rules, regulations and
discipline of the religious
denomination, sect or church, religious
society or order concerned
represented by such corporation sole
regulate the method of acquiring,
holding, selling and mortgaging real
estate and personal property, such
rules, regulations and discipline shall
control, and the intervention of the
courts shall not be necessary. (159a)
Since a corporation sole is consists
only of one person, will the registration
of the property in the name of the
corporation sole vest unto the head
thereof the ownership of the property?
- No, it will not vest unto the head, the
head is acting merely as a guardian
Roman Catholic Apostolic Adm. Of
Davao, inc. vs. Land Reg. Comm, et
al.
- Act only as a guardian
- Ownership devolves upon the
congregation or religious denomination
- A corporation consists of one person
only and his successors (who will
always be one at a time, in some
particular station), who are
incorporated by law in order to give
them some legal capacities and
advantages, particularly that of
perpetuity, which in their natural
persons they could not have had
- Roman Catholic Church has no
nationality and that the framers of
the Constitution, as will be
hereunder explained, did not have in
mind the religious corporations sole
when they provided that 60 percent
of the capital thereof be owned by
Filipino citizens.
Director of Lands vs. CA
- Alienable public land is converted
into private land when the same has
been openly, continuously and
exclusively in possession of the
property as concept of an owner for
30 years, automatically that is
Republic of the Philippines vs. IAC
- Determination of the character of the
land should be in mind
- If they still form part of public domain
they cannot be owned, but if they
are converted into private land, the
constitutional prohibition will not
apply
If there is vacancy who will fill up the
same? What if there is none, what
must the successor do?
- According to section 114:
Section 114. Filling of
vacancies. - The successors in office
of any chief archbishop, bishop,
priest, minister, rabbi or presiding
elder in a corporation sole shall
become the corporation sole on their
accession to office and shall be
permitted to transact business as
such on the filing with the Securities
and Exchange Commission of a
copy of their commission, certificate
of election, or letters of appointment,
duly certified by any notary public.
130
 During any vacancy in the office
of chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any
religious denomination, sect or church
incorporated as a corporation sole, the
person or persons authorized and
empowered by the rules, regulations or
discipline of the religious
denomination, sect or church
represented by the corporation sole to
administer the temporalities and
manage the affairs, estate and
properties of the corporation sole
during the vacancy shall exercise all
the powers and authority of the
corporation sole during such vacancy.
(158a)
If a corporation exists in equity may it
not be dissolved?
Section 115. Dissolution. - A
corporation sole may be dissolved and
its affairs settled voluntarily by
submitting to the Securities and
Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set
forth:
1. The name of the corporation;
2. The reason for dissolution and
winding up;
3. The authorization for the dissolution
of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation.
Upon approval of such
declaration of dissolution by the
Securities and Exchange Commission,
the corporation shall cease to carry on
its operations except for the purpose
of winding up its affairs. (n)
- While section 115 of the code
provides for the process and
procedure for the dissolution of a
corporate sole, there is nothing in
the law itself which would prohibit it
from amending its articles of
incorporation
- It is believed that authorization for
the dissolution by the particular
religious denomination, sect or
church, as required in sub-
paragraph 3 of section 115 would
still be necessary in the case of
amending the articles of
incorporation to affect dissolution.
o Expiration of a corporate term
will not apply to a religious
corporation
May a corporation sole be dissolved
by judicial decree?
- General rule: No, because a
corporation sole, is by its very nature
ecclesiastical and religious (doctrine
of separation of church and state)
- Exception: police power of the state,
if its purpose is being carried out
and is instead being used for illegal
purpose, it may be so dissolved
What are religious societies?
- Under common law, a religious
society is a body of persons
associated together for the purpose
of maintaining religious worship.
Is it also required to file its articles of
incorporation to the SEC?
- No <sec. 116> may
What should be contained in the
articles of incorporation?
131
- Section 116 provides:
Section 116. Religious
societies. - Any religious society or
religious order, or any diocese, synod,
or district organization of any religious
denomination, sect or church, unless
forbidden by the constitution, rules,
regulations, or discipline of the
religious denomination, sect or church
of which it is a 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 two-thirds (2/3) of its
membership, incorporate for the
administration of its temporalities or for
the management of its affairs,
properties and estate by filing with the
Securities and Exchange Commission,
articles of incorporation verified by the
affidavit of the presiding elder,
secretary, or clerk or other member of
such religious society or religious
order, or diocese, synod, or district
organization of the religious
denomination, sect or church, setting
forth the following:
1. That the religious society or
religious order, or diocese, synod, or
district organization is a religious
organization of a religious
denomination, sect or church;
2. That at least two-thirds (2/3) of its
membership have given their written
consent or have voted to incorporate,
at a duly convened meeting of the
body;
3. That the incorporation of the
religious society or religious order, or
diocese, synod, or district organization
desiring to incorporate is not forbidden
by competent authority or by the
constitution, rules, regulations or
discipline of the religious
denomination, sect, or church of which
it forms a part;
4. That the religious society or
religious order, or diocese, synod, or
district organization desires to
incorporate for the administration of
its affairs, properties and estate;
5. The place where the principal
office of the corporation is to be
established and located, which place
must be within the Philippines; and
6. The names, nationalities, and
residences of the trustees elected by
the religious society or religious
order, or the diocese, synod, or
district organization to serve for the
first year or such other period as
may be prescribed by the laws of the
religious society or religious order, or
of the diocese, synod, or district
organization, the board of trustees to
be not less than five (5) nor more
than fifteen (15). (160a)
Is it required to indicate its term of
existence?
- Likewise to exist in perpetuity, the
law does not require to indicate its
term of existence
When will it acquire juridical
personality?
- Only a corporation sole may come
into existence without SEC approval,
section 19 will thus govern, Vested
with judicial capacity upon issuance
of the certificate by the SEC
o However it is not accurate
according to atty. Ladia
because there are those that
can issue for example
cooperatives- BUREAU OF
COOPERATIVES which
register, home insurance
guaranty corporation- HOME
OWNERS
132
 How may religious societies be
dissolved?
- Go to the general rules governing
dissolution, because the rules under
special corporations do not provide for
such rule
DISSOLUTION
What is dissolution?
- Extinguishment of the corporate
franchise and the termination of
corporate existence
3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary
franchise (voluntary dissolution);
3. By revocation of its corporate franchise
(involuntary dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life
expires, the corporation ceases to be a
body corporate for purposes of
continuing the business for which it is
organized. But it shall nevertheless be
continued as a body corporate for
three years after the time when it
would have be dissolved, for the
purpose of prosecuting and defending
suits by or against it and for enabling it
gradually to settle and close its affairs
to dispose of and convey its property
and to divide its assets. There is no
need for the institution of a proceeding
for quo warranto to determine the time
and date of the dissolution of a
corporation because the period of
corporate existence is provided in the
articles of incorporation. When such
period expires and without any
extension having been made pursuant
to law, the corporation is dissolved
automatically insofar as the
continuation of its business is
concerned.
- The rights of the lessor and the
lessee over the improvements which
the latter constructed on the leased
premises are governed by Article
1678 of the Civil Code. The
provision gives the lessee the right
to remove the improvements if the
lessor chooses not to pay one half of
the value thereof. However, in the
case at bar the law will not apply
because the parties herein have
stipulated in the contract their own
terms and conditions concerning the
improvements before the termination
of the lease. Petitioner PNB as
assignee of PBM succeeded to the
obligation of the latter under the
contract of lease. It could not
possess rights more than what PBM
had as lessee under the contract.
Hence, petitioner was duly bound to
remove the improvements before
the expiration of the period of lease.
Its failure to do so when the lease
was terminated was tantamount to a
waiver of its rights and interest over
the improvements on the leased
premise.
o 3 modes of dissolution, 3
modes of voluntary
dissolution and 3 modes of
liquidation and winding up-
FREQUENTLY ASKED IN
THE FINALS
What are the 3 modes of voluntary
dissolution?
1. Voluntary dissolution where no
creditors are affected; <sec.118>
2. Voluntary dissolution where creditors
are affected; <sec. 119>
3. Shortening of corporate term. <sec.
120>
Voluntary dissolution where no
creditors are affected <sec.118>
133
- The formal and procedural
requirements necessary are the
following:
1. Majority vote of the board of directors
or trustees;
2. Sending of notice of each stockholders
or member either by registered mail or
personal delivery at least thirty (30)
days prior to the meeting (scheduled
by the board for the purpose of
submitting the board action to dissolve
the corporation for approval of the
stockholder or members.);
3. Publication of the notice of time, place
and subject of the meeting for three (3)
consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located or in a newspaper of general
circulation in the Philippines;
4. Resolution adopted by the affirmative
vote of the stockholders owning at
least 2/3 of the outstanding capital
stock or 2/3 of the members at the
meeting duly called for the purpose;
5. A copy of the resolution authorizing the
dissolution must be certified by a
majority of the board of directors or
trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution
by the SEC.
Should this be strictly complied with?
- Yes, compliance with the requirements
and formalities prescribed above is
mandatory such that failure to comply
therewith will have no effect on the
legal existence of the corporation.
Will dissolution be effective and valid
by a mere resolution of the BOD and
stockholders?
- No, a mere resolution by the
stockholders or the BOD of a
corporation to dissolve the same does
not affect the dissolution but that some
other steps, administrative or judicial
is necessary. (Daguhoy Enterprises
vs. Ponce)
- Since it is the State which grants its
right to exist, it is only through the
State which can allow the
termination of its existence; without
consent of the State, it will not be
dissolved.
Voluntary dissolution where creditors
are affected <sec.119>
- By virtue of a petition, when there
are creditors affected
- The following formalities would thus
be required:
1. Affirmative vote of the stockholders
representing at least 2/3 of the
outstanding capital stock or at least
2/3 of the members at a meeting
duly called for that purpose;
2. Petition for dissolution shall be filed
with the SEC signed by a majority of
its board of directors or trustees or
other officers having the
management of its affairs, verified
by the president or secretary or one
of its directors or trustees, setting
forth all claims and demands against
it.
3. Issuance of an order by the SEC
reciting the purpose of the petition
and fixing the date on or before
which objections thereto may be
filed by any person, which date shall
not be less than thirty days nor more
than sixty days after entry of the
order.
4. Before such date, a copy of the
order must be published once a
week for three (3) consecutive
weeks in a newspaper of general
circulation published in the city or
municipality where the principal
office is situated or in a newspaper
of general circulation in the
Philippines.
134
5. Posting of the same order for three (3)
consecutive weeks in three (3) public
places in such city or municipality.
6. Upon five (5) days notice, given after
the date on which the right to file
objections has expired, the SEC shall
hear the petition and try any issue
made by the objections filed.
7. Judgment dissolving the corporation
and directing of its assets as justice
requires and the appointment of a
receiver (if necessary in its discretion)
to collect such assets and pay the
debts of the corporation.
o The foregoing are also
mandatory requirements
Is the appointment of a receiver
mandatory?
- No, it is merely permissive or
discretionary on the part of the court.
The code uses the word may; the law
intended to let the shareholders have
the control of the assets of the
corporation upon dissolution and
winding up.
- The directors may also undertake
liquidation and winding up of its
corporate affairs, and sound business
judgment, on how they will wind up
Dissolution by shortening of corporate
term <sec.120>
- Will be valid upon approval of the
SEC, unlike general amendments,
which will be deemed approved if not
acted upon by the SEC within 6
months from the date of filing for a
cause not attributable to the
corporation.
- Shortening of the corporate term
partakes the nature of an amendment
of the articles of incorporation. Section
16 under general amendments allows
written assent section 37 mandates
that the vote must be cast at a duly
constituted meeting.
Section 120. Dissolution by
shortening corporate term. - A
voluntary dissolution may be
effected by amending the articles of
incorporation to shorten the
corporate term pursuant to the
provisions of this Code. A copy of
the amended articles of
incorporation shall be submitted to
the Securities and Exchange
Commission in accordance with this
Code. Upon approval of the
amended articles of incorporation of
the expiration of the shortened term,
as the case may be, the corporation
shall be deemed dissolved without
any further proceedings, subject to
the provisions of this Code on
liquidation. (n)
o Intra-corporate- special
commercial courts
Another way of dissolving a
corporation is through involuntary
dissolution
Section 121. Involuntary
dissolution. - A corporation may be
dissolved by the Securities and
Exchange Commission upon filing of
a verified complaint and after proper
notice and hearing on the grounds
provided by existing laws, rules and
regulations. (n)
- Dissolution is tantamount to the
imposition of death penalty
- Instead of dissolving the corporation,
courts normally enjoin the further
commission of the questioned act
- The relief of dissolution will be
awarded only where no other
remedy is available and it will not be
allowed where the rights of the
stockholders can be, or are,
protected in some other way
(Republic vs. Bisaya Land Trans.
Co. Inc.)
135
 What are the grounds for involuntary
dissolution?
- It is commenced through a verified
complaint or motu proprio by the
proper courts
- Section 6 of PD 902-A provides for the
grounds for involuntary dissolution as
follows:
1. Fraud in procuring its certificate of
registration;
2. Serious misrepresentation as to what
the corporation can do or is doing to
the great prejudice of or damage to the
general public;
3. Refusal to comply or defiance of any
lawful order of the Commission
restraining commission of acts which
would amount to a grave violation of its
franchise;
4. Continuous inoperation for a period of
at least five (5) years;
5. Failure to file by-laws within the
required period;
6. Failure to file required reports in
appropriate forms as determined by
the Commission within the prescribed
period.
- Other grounds are provided for in the
corporation code itself: among them
are:
1. Violation of any provision of the Code
under section 144;
2. In case of deadlock in a close
corporation as provided for in section
105;
3. In a close corporation, any acts of
directors, officers or those in control of
the corporation which is illegal or
fraudulent or dishonest or oppressive
or unfairly prejudicial to the corporation
or any stockholder or whenever
corporate assets are being misapplied
or wasted under section 105.
- Mere dishonesty is also a ground in a
close corporation
- Other grounds can be found in other
special laws like the Securities
Regulation Code and the General
Banking Act as well as the Insurance
Code.
Government vs. Philippine Sugar
Estate
- It is necessary in order to secure
judicial foreclosure of respondents
charter to show a mis-user of its
franchise justifying such a forfeiture
- Object is to protect the public, and
not to redress private grievances,
the mis-user must be such as to
work or threaten a substantial injury
to the public, or such as to amount
to a violation of the fundamental
condition of the contract by which
the franchise was granted and thus
defeat the purpose of the grant
- Courts proceed with extreme caution
which has for their object the
forfeiture of corporate franchise, and
forfeiture will not be allowed, except
under express limitation, or for plain
abuse of power by which the
corporation fails to fulfill the design
and purpose of its organization. But
when the abuse or violation
constitutes or threatens a substantial
injury to the public or such as to
amount to a violation of the
fundamental conditions of its charter,
or its conduct is characterized by
obduracy or pertinacity in contempt
of law, dissolution will be granted
- Did the court dissolve the
corporation? No, it did not, it granted
the corporation 6 months to cease
and desist the performance of the
questioned act otherwise it will be
dissolved
Government vs. El Hogar
- 3 causes of action, the first is that
the corporation violated the law by
holding on the property beyond that
136
 provide for by law, the second is that
the corporation undertook the
management f petitioners belonging to
delinquent shareholders of the
association, and lastly that the by-law
provision, which empowers the BD to
cancel shares and to return to the
owners thereof the balance returning
from the liquidation
Compare to Philippine Sugar Estate,
wherein the court ruled conditional
dissolution. Why decree conditional
dissolution in one and not in the other
case?
- Because in El Hogar the government
was at fault, the government wasnt
able to issue the certificate of title on
time
- When the case was instituted, El
Hogar was already able to dispose the
properties in question, in Philippine
Sugar Estate it was still the holding the
properties in order to enrich itself at
the expense of the taxpayers
Republic vs. Security Credit and
Acceptance Corp. et al.
- The corporation here is a lending
institution and not a banking institution
- Defendant corporation violated the law
because before a corporation may
engage into a banking activity it must
first obtain a secondary franchise from
the Central Bank
- Defendant corporation threatens
substantial injury to the general public,
dissolution is warrant
- If there is a bank run kawawa naman
yung depositors
Republic vs. Bisaya Land
Transportation Co. Inc
- The relief of dissolution will be
awarded only where no other remedy
is available and it will not be allowed
where the rights of the stockholders
can be, or are, protected in some
other way
- Misuse and misapplication of the
funds and assets of the respondent
were committed particularly by the
corporate officers, where they can
instead be held personally liable
- Since there is another remedy
available dissolution is not
warranted
Assuming the above stated
corporation is a close corporation,
would the court decree otherwise?
- Yes, because in a close corporation,
mere dishonesty is a ground for the
dissolution
- Can even be dissolved by petition of
only one stockholder on the
grounds stated in the code < sec.
105>
Financing Corporation of the
Philippines vs. Teodoro
- Minority stockholders may not ask
for the dissolution of a corporation in
private suits and that such actions
should be brought by the
Government through its legal
officers, except in cases where the
intervention of the State, for one
reason or another, cannot be
obtained, as when the State is not
interested because the complaint
is strictly a matter between the
stockholders and does not
involve, in the opinion of the legal
officer of the Government, any of
the acts or omissions warranting
quo warranto proceeding , in
which minority stockholders are
entitled to have such dissolution.
It should be exercised if necessary
in order not to entirely ignore and
disregard the rights of said minority
stockholders, especially when said
minority stockholders are unable to
obtain redress and protection of their
137
 rights within the corporation itself.
Stockholders should not be left without
recourse
Present set up
- Any stockholder or member of a
corporation can institute a dissolution
proceeding against his own
corporation before the proper forum
- Special Commercial Courts, shall hear
and decide intra-corporate disputes
May a corporation ask for dissolution
of the corporation when there is no
prejudice to the general public?
- Yes, in a close corporation, a petition
for the dissolution of the corporation
may be instituted by any one individual
shareholder on the ground, even by
mere dishonesty
Effects of dissolution
- The dissolution of a corporation not
only terminates its primary franchise to
be a corporation, but generally
prevents it from further exercising
other or secondary franchises which
have been conferred to its. It
terminates its power to enter into
contracts or t o continue the business
as a going concern.
- Based on this general rule, the
Supreme Court held that a corporation,
whose corporate life expired, cannot
lawfully pursue the business for which
it was organized. It cannot apply for a
new certificate or a secondary
franchise for it is incapable of receiving
a grant. Neither can it enforce a
contract executed prior its dissolution
for the purpose of continuing the
business of its organization.
- In general the rights and liabilities of
the corporation are not extinguished by
its dissolution.
Section 145. Amendment or
repeal. - No right or remedy in favor
of or against any corporation, its
stockholders, members, directors,
trustees, or officers, nor any liability
incurred by any such corporation,
stockholders, members, directors,
trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or
of any part thereof. (n)
Buenaflor vs. Camarines Sur
Industry Corp.
- From that time on Camarines Sur
was plying in an activity that was
illegal
- A corporation where the corporate
life has expired it cannot lawfully
pursue the business for which it was
organized.
- the Supreme Court held that a
corporation, whose corporate life
expired, cannot lawfully pursue the
business for which it was organized.
It cannot apply for a new certificate
or a secondary franchise for it is
incapable of receiving a grant.
- Awarding it to Camarines Sur is
tantamount to a medal for its illegal
acts
- It cannot apply for a new certificate
or a secondary franchise for it is
incapable of receiving a grant. It was
not even a corporation de facto. And
then, there is no application
subscribed by the new corporation
- And yet as stated, the new
corporation has not filed any
application for certificate of public
convenience in Sabang, and has not
published such application.
Cebu Port Labor Union vs. State
Marine Co
138
- Even a cursory reading of the
provision would convey the idea
clearly manifested in the limitation but
not for the purpose of continuing the
business for which it was established,
that the 3-year period allowed by the
law is only for the purpose of winding
up its affairs.
- Preference may be participating or
Gonzales vs. Sugar Regulatory
Administration
Dissolved corporations are granted
- Instead of applying the corporation
code, the court applied the
constitutional provision
- Cannot be read as permitting to
destroy the substantive rights
- Such would collide with the non-
impairment of contracts clause of the
constitution
- Complainants will have the right to
follow the assets of the corporation in
the hands of SRA or any other agency
for that matter
After dissolution what next?
- Liquidation and winding up should
follow
What is the definition of liquidation and
winding up?
- Collection of all corporate assets, the
payments of all its debts and
settlement of its obligations and the
ultimate distribution of the corporate
assets, if any of it remains, to all
stockholders in accordance with their
proportionate stockholdings in the
corporation or in accordance with their
respective contracts of subscription.
Preference upon liquidation
- If there are preferred shares, the
preference granted to such should be
complied with
- Preferred shares may give the holder
thereof, preference only in the
dividends but also in the distribution
of corporate assets upon liquidation
or termination of the corporate
existence. If such is the intent, the
contract of subscription must so
indicate lest they are placed on
equal footing with common
shareholders
non-participating
a period of 3 years to liquidate
Section 122. Corporate
liquidation. - Every corporation
whose charter expires by its own
limitation or is annulled by forfeiture
or otherwise, or whose corporate
existence for other purposes is
terminated in any other manner,
shall nevertheless be continued as a
body corporate for three (3) years
after the time when it would have
been so dissolved, for the purpose
of prosecuting and defending suits
by or against it and enabling it to
settle and close its affairs, to dispose
of and convey its property and to
distribute its assets, but not for the
purpose of continuing the business
for which it was established.
At any time during said three
(3) years, the corporation is
authorized and empowered to
convey all of its property to trustees
for the benefit of stockholders,
members, creditors, and other
persons in interest. From and after
any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
members, creditors and others in
interest, all interest which the
corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial
interest in the stockholders,
139
 members, creditors or other persons in
interest.
Upon the winding up of the
corporate affairs, any asset
distributable to any creditor or
stockholder or member who is
unknown or cannot be found shall be
escheated to the city or municipality
where such assets are located.
Except by decrease of capital
stock and as otherwise allowed by this
Code, no corporation shall distribute
any of its assets or property except
upon lawful dissolution and after
payment of all its debts and liabilities.
(77a, 89a, 16a)
However the 3 year period is not
absolute
Liquidation may be undertaken in
either of the 3 ways
1. By the corporation itself through the
BOD
- Usual method or procedure of
liquidating a corporation and although
there is no law authorizing it, neither is
there anything that prohibits the BOD
from undertaking the same
- If this method is resorted to, the board
will only have a period of 3 years to
finish its task of liquidation
- Claims for or against the corporate
entity not filed within the period will
become unenforceable as there exist
no corporate entity against which they
can be enforced
- Actions pending for or against the
corporation when the 3 year period
expires, are abated since after the
period, the corporation ceases for all
intents and purposes and is no longer
capable of suing or being sued
2. By a trustee appointed by the
corporation
- The corporation may opt to convey
all corporate assets to a trustees
who will take charge of liquidation
- If this method is used, the three year
period limitation imposed by section
122 will not apply provided the
designation of the trustee is made
within that period
3. By appointment of a receiver
- A receiver may be appointed by the
proper forum on petition or motu
proprio upon the dissolution of the
corporation
- The appointment of a receiver is,
however, permissive rather than
mandatory and the law tends to
recognize that in cases of voluntary
dissolution there is no occasion for
the appointment of a receiver except
under special circumstances and
upon proper showing
- If a receiver is appointed, the 3 year
period fixed by law within which to
complete the task of liquidation will
not likewise apply because the
dissolved corporation is substituted
by the receiver who may sue or be
sued even after that period
o Mere appointment of a
receiver without anything
more does imply in the
dissolution of a corporation
National Abaca other Fibers Co. vs.
Pore
- Actions pending for or against the
corporation when the 3 year period
expires, are abated since after that
period, the corporation ceases for all
intents and purposes and is no
longer capable of suing or being
sued
- May be continued by the trustee
provided done within the 3 year
period
140
- Should the corporation, therefore, finds
it difficult to finish its liquidation, it may,
at any time during the three year
period, convey all its assets and
receivables to a trustee to prosecute
and defend suits by or against the
corporation begun before the
expiration of said period
- The effect of the conveyance is to
make the trustees the legal owners of
the property conveyed, subject to the
beneficial interest therein of creditors
and stockholders
Sumera vs. Valencia
- Thus it was held that when a
corporation is dissolved and the
liquidation of the assets is placed in
the hands of receiver or assignee, the
period of 3 years prescribed by law is
not applicable and the assignee may
institute all actions leading to the
liquidation of the corporation even after
the expiration of 3 years.
- If the corporation carries out the
liquidation of its assets through its own
officers and continues and defends the
actions brought by or against it, its
existence shall terminate 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 properties within 3
years, the legal interest passes to the
assignee, the beneficial interest
remaining in the members,
stockholders, creditors and other
interested persons and said assignee
may bring an action, prosecute that
which has already been commenced
for the benefit of the corporation, or
defend the latter against any other
action already instituted or which may
be instituted even outside of the period
of three years fixed for the offices of
the corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or
liquidator, it can continue
prosecuting suit even beyond the 3
year period fixed by law because he
becomes the legal owner of the
rights, assets and properties
conveyed to him
Gelano vs. CA
- Trustee as used in the corporation
statute must be understood in its
general concept which could include
the counsel to whom was entrusted
in the instant case, the prosecution
of the suit filed by the corporation.
The purpose in the transfer of the
assets of the corporation to a trustee
upon its dissolution is more for the
protection of its creditors and
stockholders. Debtors like the
petitioners herein may not take
advantage of the failure of the
corporation to transfer its assets to a
trustee, assuming it has any to
transfer which petitioner has failed to
show, in the first place. To sustain
petitioners contention would be to
allow them to enrich themselves at
the expense of another, which all
enlightened legal systems condemn.
- The counsel who prosecuted and
defended the interest of the
corporation may be considered as a
trustee at least with respect to the
matter in litigation only
May a corporation that is already
dissolved, transfer and assign its
assets and properties to a new
corporation which will continue the
business of the dissolved one?
- Yes, provided all the stockholders
gave their consent (Chung Ka Bio
vs. IAC)
Republic vs. Marsman Development
Company & Chung Ka Bio vs. IAC
141
- During the three year period granted to
a corporation to liquidate or wind up its
affairs, the BOD is not normally
permitted to undertake any activity
outside the usual liquidation of the
corporation. There is, however, nothing
to prevent the stockholders from
conveying their respective
shareholdings toward the creation of a
new corporation to continue the
business of the old. This is because
winding up is the sole activity of the
dissolved corporation that does not
intend to incorporate a new. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
transfer the assets of the dissolved
corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Republic vs. Marsman Development
Company)
- Winding up is the sole activity of a
dissolved corporation that does not
intend to incorporate anew. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
transfer the assets of the dissolved
corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Chung Ka Bio vs. IAC)
What happens to the remaining assets
and properties of the dissolved
corporation if liquidation and winding
up as provided in section 122 is not
complied with, as a result of which the
3 year period has elapsed
- If the three year extended life has
expired without a trustee or receiver
having been expressly designated by
the corporation within that period, the
board of directors o trustees itself,
following the rationale of the Supreme
Courts decision in Gelano vs. CA may
be permitted to do so continue as
trustees by legal implication to
complete the liquidation. Still in the
absence of a BOD or BOT, those
having any pecuniary interest in the
assets, including not only the
shareholders but likewise the
creditors of the corporation, acting
for and in its behalf, might make
proper representations with the
SEC, which has primary and
sufficiently broad jurisdiction in
matters of this nature, for working
out a final settlement of the
corporate concerns (Clemente vs.
CA)
o According to atty. Ladia the
ruling of the Supreme Court
in the case of Clemente vs.
CA is wrong, opinion is further
discussed after the Clemente
Case
Clemente vs. CA
- Who owns the properties?
SOCIEDAD ANONIMA
- The termination of the life of a
juridical entity does not by itself
cause the extinction or diminution of
the rights and liabilities of such entity
or those of its owners and creditors.
If the three year extended life has
expired without a trustee or receiver
having been expressly designated
by the corporation within that period,
the board of directors o trustees
itself, following the rationale of the
Supreme Courts decision in Gelano
vs. CA may be permitted to do so
continue as trustees by legal
implication to complete the
liquidation. Still in the absence of a
BOD or BOT, those having any
pecuniary interest in the assets,
including not only the shareholders
but likewise the creditors of the
corporation, acting for and in its
behalf, might make proper
representations with the SEC, which
has primary and sufficiently broad
jurisdiction in matters of this nature,
142
 for working out a final settlement of the
corporate concerns
o the ruling is wrong according
to atty. Ladia
According to atty Ladia: What happens
to a corporation that is already
dissolved, that has not been able to
appoint a trustee with in the 3 year
period?
- a corporation dissolved which failed to
exercise its rights granted in section
122 after the 3 year period has
elapsed, ceases to exist for all intents
and purposes, it can no longer sue or
be sued
- according to 122 of the code, the
property should be escheated,
accordingly:
Section 122. Corporate
liquidation. - Every corporation whose
charter expires by its own limitation or
is annulled by forfeiture or otherwise,
or whose corporate existence for other
purposes is terminated in any other
manner, shall nevertheless be
continued as a body corporate for
three (3) years after the time when it
would have been so dissolved, for the
purpose of prosecuting and defending
suits by or against it and enabling it to
settle and close its affairs, to dispose
of and convey its property and to
distribute its assets, but not for the
purpose of continuing the business for
which it was established.
At any time during said three (3)
years, the corporation is authorized
and empowered to convey all of its
property to trustees for the benefit of
stockholders, members, creditors, and
other persons in interest. From and
after any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
members, creditors and others in
interest, all interest which the
corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial
interest in the stockholders,
members, creditors or other persons
in interest.
Upon the winding up of the
corporate affairs, any asset
distributable to any creditor or
stockholder or member who is
unknown or cannot be found shall
be escheated to the city or
municipality where such assets
are located.
Except by decrease of capital
stock and as otherwise allowed by
this Code, no corporation shall
distribute any of its assets or
property except upon lawful
dissolution and after payment of all
its debts and liabilities. (77a, 89a,
16a)
FOREIGN CORPORATIONS
Definition
- Section 123. Definition and rights of
foreign corporations. - For the
purposes of this Code, a foreign
corporation is one formed, organized
or existing under any laws other
than those of the Philippines and
whose laws allow Filipino citizens
and corporations to do business in
its own country or state. It shall have
the right to transact business in the
Philippines after it shall have
obtained a license to transact
business in this country in
accordance with this Code and a
certificate of authority from the
appropriate government agency. (n)
What if the law of the state of the
foreign corporation does not allow
143
 Filipino citizens to do business in their
country?
- The phrase and whose laws allow
Filipino citizens and corporations to do
business in its own country or state is
not, however, an accurate inclusion in
the definition as ay corporation
registered or organized under the laws
of another state is necessarily a
foreign corporation whether or not the
state of its incorporation allow Filipino
citizens or corporations to do business
in that forum.
- The said phrase was inserted by the
framers of the law only as a condition
precedent to the grant of a license of a
foreign corporation to do business in
the Philippines.
Composed of 100% Americans;
organized under the laws other than
the Philippines
- The test is the incorporation test
- General rule: the place of its
incorporation irrespective of the
nationality
- Exception: control test would apply in
determining the corporate nationality,
i.e., the citizenship of the controlling
stockholders determines the nationality
of the corporation
If a foreign corporation wants to
transact business in the Philippines,
what must it do?
- Obtain a license
How may it do so?
- According to sec. 125:
Section 125. Application for a
license. - A foreign corporation
applying for a license to transact
business in the Philippines shall
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified
in accordance with law, and their
translation to an official language of
the Philippines, if necessary. The
application shall be under oath and,
unless already stated in its articles
of incorporation, shall specifically set
forth the following:
1. The date and term of
incorporation;
2. The address, including the street
number, of the principal office of the
corporation in the country or state of
incorporation;
3. The name and address of its
resident agent authorized to accept
summons and process in all legal
proceedings and, pending the
establishment of a local office, all
notices affecting the corporation;
4. The place in the Philippines
where the corporation intends to
operate;
5. The specific purpose or purposes
which the corporation intends to
pursue in the transaction of its
business in the Philippines:
Provided, That said purpose or
purposes are those specifically
stated in the certificate of authority
issued by the appropriate
government agency;
6. The names and addresses of the
present directors and officers of the
corporation;
7. A statement of its authorized
capital stock and the aggregate
number of shares which the
corporation has authority to issue,
itemized by classes, par value of
shares, shares without par value,
and series, if any;
144
8. A statement of its outstanding
capital stock and the aggregate
number of shares which the
corporation has issued, itemized by
classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually
paid in; and
10. Such additional information as may
be necessary or appropriate in order to
enable the Securities and Exchange
Commission to determine whether
such corporation is entitled to a license
to transact business in the Philippines,
and to determine and assess the fees
payable.
Attached to the application for
license shall be a duly executed
certificate under oath by the authorized
official or officials of the jurisdiction of
its incorporation, attesting to the fact
that the laws of the country or state of
the applicant allow Filipino citizens and
corporations to do business therein,
and that the applicant is an existing
corporation in good standing. If such
certificate is in a foreign language, a
translation thereof in English under
oath of the translator shall be attached
thereto.
The application for a license to
transact business in the Philippines
shall likewise be accompanied by a
statement under oath of the president
or any other person authorized by the
corporation, showing to the satisfaction
of the Securities and Exchange
Commission and other governmental
agency in the proper cases that the
applicant is solvent and in sound
financial condition, and setting forth
the assets and liabilities of the
corporation as of the date not
exceeding one (1) year immediately
prior to the filing of the application.
Foreign banking, financial
and insurance corporations shall, in
addition to the above requirements,
comply with the provisions of
existing laws applicable to them. In
the case of all other foreign
corporations, no application for
license to transact business in the
Philippines shall be accepted by the
Securities and Exchange
Commission without previous
authority from the appropriate
government agency, whenever
required by law. (68a)
Is there any deposit or security
requirement?
- Yes, within 60 days after the
issuance of the license, a foreign
corporation, except those engaged
in foreign banking or insurance, shall
deposit with the SEC, for the benefit
of creditors, securities consisting of
bonds or other evidence of
indebtedness of the Philippine
government or its political
subdivision, or of government owned
or controlled corporation, shares of
stock in registered enterprises as
this term is defined in R.A. 5186,
shares of stock in domestic
insurance companies and banks or
any combination thereof with an
actual market value of 100,000
- Additional securities may be
required by the SEC if the actual
market value of the securities on
deposit has decreased by at least
10%. Section 126 of the code
provides:
Section 126. Issuance of a
license. - If the Securities and
Exchange Commission is satisfied
that the applicant has complied with
all the requirements of this Code
and other special laws, rules and
regulations, the Commission shall
issue a license to the applicant to
145
transact business in the Philippines for
the purpose or purposes specified in
such license. Upon issuance of the
license, such foreign corporation may
commence to transact business in the
Philippines and continue to do so for
as long as it retains its authority to act
as a corporation under the laws of the
country or state of its incorporation,
unless such license is sooner
surrendered, revoked, suspended or
annulled in accordance with this Code
or other special laws.
Within sixty (60) days after the
issuance of the license to transact
business in the Philippines, the
license, except foreign banking or
insurance corporation, shall deposit
with the Securities and Exchange
Commission for the benefit of present
and future creditors of the licensee in
the Philippines, securities satisfactory
to the Securities and Exchange
Commission, consisting of bonds or
other evidence of indebtedness of the
Government of the Philippines, its
political subdivisions and
instrumentalities, or of government-
owned or controlled corporations and
entities, shares of stock in "registered
enterprises" as this term is defined in
Republic Act No. 5186, shares of stock
in domestic corporations registered in
the stock exchange, or shares of stock
in domestic insurance companies and
banks, or any combination of these
kinds of securities, with an actual
market value of at least one hundred
thousand (P100,000.) pesos;
Provided, however, That within six (6)
months after each fiscal year of the
licensee, the Securities and Exchange
Commission shall require the licensee
to deposit additional securities
equivalent in actual market value to
two (2%) percent of the amount by
which the licensee's gross income for
that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities
and Exchange Commission shall
also require deposit of additional
securities if the actual market value
of the securities on deposit has
decreased by at least ten (10%)
percent of their actual market value
at the time they were deposited. The
Securities and Exchange
Commission may at its discretion
release part of the additional
securities deposited with it if the
gross income of the licensee has
decreased, or if the actual market
value of the total securities on
deposit has increased, by more than
ten (10%) percent of the actual
market value of the securities at the
time they were deposited. The
Securities and Exchange
Commission may, from time to time,
allow the licensee to substitute other
securities for those already on
deposit as long as the licensee is
solvent. Such licensee shall be
entitled to collect the interest or
dividends on the securities
deposited. In the event the licensee
ceases to do business in the
Philippines, the securities deposited
as aforesaid shall be returned, upon
the licensee's application therefor
and upon proof to the satisfaction of
the Securities and Exchange
Commission that the licensee has
no liability to Philippine residents,
including the Government of the
Republic of the Philippines. (n)
Other than section 125 and 126.
What other requirements are set
under Philippine Law before a
foreign corporation may transact
business in the Philippines
- Yes. A Resident agent is required.
As a condition precedent to the
grant of a license to do or transact
business in the Philippines, the
foreign corporation is required to
designate its resident agent on
146
 whom summons and other legal
processes may be served in all actions
or legal proceedings against such
corporation
- Section 128 provides:
Section 128. Resident agent;
service of process. - The Securities
and Exchange Commission shall
require as a condition precedent to the
issuance of the license to transact
business in the Philippines by any
foreign corporation that such
corporation file with the Securities and
Exchange Commission a written power
of attorney designating some person
who must be a resident of the
Philippines, on whom any summons
and other legal processes may be
served in all actions or other legal
proceedings against such corporation,
and consenting that service upon such
resident agent shall be admitted and
held as valid as if served upon the duly
authorized officers of the foreign
corporation at its home office. Any
such foreign corporation shall likewise
execute and file with the Securities
and Exchange Commission an
agreement or stipulation, executed by
the proper authorities of said
corporation, in form and substance as
follows:
"The (name of foreign
corporation) does hereby stipulate and
agree, in consideration of its being
granted by the Securities and
Exchange Commission a license to
transact business in the Philippines,
that if at any time said corporation
shall cease to transact business in the
Philippines, or shall be without any
resident agent in the Philippines on
whom any summons or other legal
processes may be served, then in any
action or proceeding arising out of any
business or transaction which occurred
in the Philippines, service of any
summons or other legal process may
be made upon the Securities and
Exchange Commission and that
such service shall have the same
force and effect as if made upon the
duly-authorized officers of the
corporation at its home office."
Whenever such service of
summons or other process shall be
made upon the Securities and
Exchange Commission, the
Commission shall, within ten (10)
days thereafter, transmit by mail a
copy of such summons or other
legal process to the corporation at
its home or principal office. The
sending of such copy by the
Commission shall be necessary part
of and shall complete such service.
All expenses incurred by the
Commission for such service shall
be paid in advance by the party at
whose instance the service is made.
In case of a change of
address of the resident agent, it
shall be his or its duty to
immediately notify in writing the
Securities and Exchange
Commission of the new address.
(72a; and n)
- The necessity of the appointment of
a resident agent is only for the
purpose of receiving summons and
other legal processes in any legal
action or proceeding against the
foreign corporation
Who may be appointed as a resident
agent?
- Section 127 provides that:
Section 127. Who may be a
resident agent. - A resident agent
may be either an individual residing
in the Philippines or a domestic
corporation lawfully transacting
business in the Philippines:
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 Provided, That in the case of an
individual, he must be of good moral
character and of sound financial
standing. (n)
May a partnership be appointed as a
resident agent?
- Yes, domestic corporation taken in its
general sense not legal sense
If there is a resident agent appointed.
May summons be served to any
officers of the corporation?
- No, if there is a resident agent, the
designation is exclusive and service
must be made only to the resident
agent or else the service is without
force and effect unless made to him
- Thus, while the law allows service
upon the SEC or any of its officers or
agents within the Philippines
- The two modes may become effective
only if the foreign corporation failed or
neglected to designate such a person
or an agent
- Summons must be made only to
resident agent except when there is no
resident agent appointed
- Where such foreign corporation
actually doing business here has not
applied for a license to do and has not
designated an agent to receive
summons, then service of summons
on it will be made pursuant to the
provisions of the rules of court. If such
foreign corporation has a license to do
business, then summons to it will be
served on the agent designated by it
for the purpose, or otherwise in
accordance with the Corporation Law
(General Corporation of the
Philippines vs. Union Insurance Soc.
Of Canton Ltd.)
If the foreign corporation conducts
business in the Philippines without the
license requirement. What is the
effect?
- Section 133 provides:
Section 133. Doing business
without a license. - No foreign
corporation transacting business in
the Philippines without a license, or
its successors or assigns, shall be
permitted to maintain or intervene in
any action, suit or proceeding in any
court or administrative agency of the
Philippines; but such corporation
may be sued or proceeded against
before Philippine courts or
administrative tribunals on any valid
cause of action recognized under
Philippine laws. (69a)
- if they do so, the responsible officers
may be subjected to the penal
sanctions provided for in section 144
of the code, which may either be fine
or imprisonment
What if it is not doing business
without a license?
- If it is not transacting business in the
Philippines, even without a license, it
can sue before the Philippine Courts
The general rule is that it is not the
lack of required license but doing
business without a license which
bars a foreign corporation form
access to our courts.
Exception:
1. Foreign corporations can sue
before the Philippine Courts if the
act or transaction involved is an
isolated transaction or the
corporation is not seeking to
enforce any legal or contractual
rights arising from, or growing
out of, any business which it has
transacted in the Philippines
2. Neither is a license required
before a foreign corporation may
sue before the forum if the
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 purpose of the suit is to protect its A foreign corporation not doing
trademark, trade name, corporate business in the Philippines, may it
name, reputation or goodwill; be sued?
3. Or where it is based on a violation
of the Revised Penal Code; - If it is not transacting business in the
4. Or merely defending a suit filed country it cannot be sued for lack of
against it jurisdiction
5. Or where a party is stopped to
challenge the personality of the Is there any sanction that can be
corporation by entering into a enforced to foreign corporations
contract with it. which are doing business without
the required license?
Rules laid down by the SC
- Penal sanctions under section 144
A. As to B. As to - Any violation of the code is subject
whether whether to such penal sanctions
or not it or not it
can sue can be What would constitute doing
sued business?
A foreign A foreign
corporation corporation - The true test, however, seems to be
transacting or transacting whether the foreign corporation is
doing business business in the continuing the body or substance of
in the Philippines with the business or enterprise for which
Philippines with the requisite it was organized or whether it has
a license can license can be substantially retired from it and
sue before sued in the turned it over to another. The term
Philippine Philippine Courts implies a continuity of commercial
Courts dealings and arrangements, and
Subject to A foreign contemplates, to that extent, the
certain corporation performance of acts or works or the
exceptions, a transacting exercise of some of the functions
foreign business in the normally incident to, and in
corporation Philippines progressive prosecution of, the
doing business without a license purpose and object of its
in the country can be sued in organization (Mentholatum Co. Inc.
without a Philippine Courts vs. Mangaliman)
license cannot
sue in Mentholatum vs. Mangaliman
Philippine
Courts - The true test, however, seems to be
If it is not if it is not doing whether the foreign corporation is
transacting business in the continuing the body or substance of
business in the Philippines, it the business or enterprise for which
Philippines, cannot be sued it was organized or whether it has
even without a in Philippine substantially retired from it and
license, it can Courts for lack of turned it over to another. The term
sue before the jurisdiction implies a continuity of commercial
Philippine dealings and arrangements, and
Courts contemplates, to that extent, the
149
 performance of acts or works or the
exercise of some of the functions
normally incident to, and in
progressive prosecution of, the
purpose and object of its organization
- Whatever transaction the Philippine-
American Drug Co. had executed in
view of the law, the Mentholatum Co.
did it itself. And the Mentholatum Co.
being a foreign corporation doing
business in the Philippines without the
license required by section 68 of the
Corporation Law, it may not prosecute
this action for violation of trade mark
and unfair competition
Why is foreign corporations barred
access from our courts if they do
business without a license?
- Marshall-Wells Co. vs. Henry W. Elser
and Co.
Marshall-Wells Co. vs. Henry W. Elser
and Co.
- The object of the statute was to
subject the foreign corporation doing
business in the Philippines to the
jurisdiction of its courts. The object of
the statute was not to prevent the
foreign corporation from performing
single acts, but to prevent it from
acquiring a domicile for the purpose of
business without taking the steps
necessary to render it amenable to suit
in local courts.
Bulakhidas vs. Navarro
- It is settled that if a foreign corporation
is not engaged in business in the
Philippines, it may not be denied the
right to file an action in Philippine
courts for isolated transactions
- The object of section 68 and 69 of the
Corporation law was not to prevent the
foreign corporation from performing
single acts, but to prevent it from
acquiring a domicile for the purpose of
business without taking the steps
necessary to render it amenable to
suit in the local courts. It was never
the purpose of the Legislature to
exclude a foreign corporation which
happens to obtain an isolated order
for business from the Philippines,
from securing redress in the
Philippine courts
The Swedish East Asia Co., Ltd. Vs.
Manila Port Service
- It must stated that the section is not
applicable to a foreign corporation
performing single acts or isolated
transactions. There is nothing to
show that the petitioner has been in
the Philippines engaged in
continuing business or enterprise for
which it was organized, when the
sixteen bundles were erroneously
discharged in manila, for it to be
considered as transacting business
in the Philippines. The fact is that the
bundles, the value of which is
sought to be recovered, were landed
not as a result of a business
transaction, isolated or otherwise,
but due to a mistaken belief that
they were part of the shipment of
forty similar bundles consigned to
persons or entities in the Philippines,
there is no justification therefore, for
invoking the section
There were 3 contracts entered into,
how come they were still not
considered as doing business?
(Antam Consolidted, Inc. vs. CA)
- Every case shall be judged in the
light of its peculiar circumstances,
where a single act or transaction
however, is not merely incidental or
casual but indicates the foreign
corporations intention to do other
business in the Philippines, said
single act or transaction constitutes
doing or engaging in or
150
 transacting business in the
Philippines
- In the case at bar, the transaction
entered into by the respondent with the
petitioners are not a series of
commercial dealings which signify an
intent on the part of the respondent to
do business in the Philippines but
constitute an isolated one which does
not fall under the category of doing
business.
- The records show that the only reason
why the respondent entered into the
second and third transactions with the
petitioner was because it wanted to
recover the loss it sustained from the
failure of the petitioners to deliver the
crude coconut oil under the first
transaction and in order to give the
latter a chance to make good on their
obligation. From these facts alone, it
can be deducted that in reality there
was only one agreement between the
petitioners and the respondent.
- The three seemingly different
transactions were entered into by the
parties only in an effort to fulfill the
basic agreement and in no way
indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which will
categorize it as a foreign corporation
doing business in the Philippines
- 3 contracts, but according to the court
was not doing business in the
Philippines
Far East Intl import vs. Nankai Kogyo
Co. Ltd.
- Only one contract , but according to
the Supreme Court was doing
business in the Philippines
- Every case shall be judged in the light
of its peculiar circumstances, where a
single act or transaction however, is
not merely incidental or casual but
indicates the foreign corporations
intention to do other business in the
Philippines, said single act or
transaction constitutes doing or
engaging in or transacting
business in the Philippines
- In the instant case, the testimony of
Atty. Pablo Ocampo, that appellant
was doing business in the
Philippines corroborated by no less
than Nabuo Toshida, one of
appellants officers, that he was sent
to the Philippines to look into the
operation of mines, thereby
revealing the defendants desire to
continue engaging in business here,
after receiving the shipment of the
scrap iron under consideration,
making the Philippines a base
thereof.
- In such a case, the single act of
transaction is not merely incidental
or casual, but is of such character as
distinctly to indicate a purpose on
the part of the operations for the
conduct of a part of corporations
ordinary business
If a corporation appoints a distributor
or a representative, will it
necessarily imply doing business in
the country?
- If the foreign corporation maintained
an independent status during the
existence of the disputed contract.
- Appointment of a distributor or
representative in the Philippines,
unless it has an independent status
(transacts and does business in its
own name and for its account and
not of the foreign corporation)
- if that be the case the mere
appointment of a distributor will not
constitute doing business
How do you know if it has an
independent status?
- Communications Materials and
Design vs. CA
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 Communications Materials and Design
vs. CA
- A perusal of the agreements between
petitioner ASPAC and the respondents
show that there are provisions which
are highly restrictive in nature, such as
to reduce petitioner ASPAC to a mere
extension or instrument of the private
respondents
- ITEC was doing business without a
license, however ASPAC is estopped
- by entering into the Representative
Agreement with ITEC, petitioner is
charge with knowledge that ITEC was
not licensed to engage in business
activities in the country, and is thus
stopped from raising in defense such
incapacity of ITEC, having chosen to
ignore or even presumptively take
advantage of the same
- In top-weld we ruled that a foreign
corporation may be exempted from the
license requirements in order to
institute an action in our courts if its
representative in the country
maintained an independent status
during the existence of the disputed
contract. Petitioner is deemed to have
acceded to such independent
character when it entered into the
Representative Agreement with ITEC
Western Equipment and Supply Co.
vs. Reyes
- The company is not here seeking to
enforce any legal or contract rights
arising from, or growing out of any
business which it has transacted in the
Philippine Islands. The sole purpose of
the action is to protect its reputation,
its corporate name, its goodwill,
whenever that reputation, corporate
name or goodwill have through the
natural development of its trade,
established themselves
- And it contends that its rights to the
use of its corporate and trade name, is
a property right, a right in rem, which
may assert and protect against all
the world, in any of the courts of the
world even in jurisdictions where it
does not transact business just the
same as it may protect its tangible
property, real or personal, against
trespass, or conversion
- Since it is the trade and not the mark
that is to be protected a trademark
acknowledges no territorial
boundaries or municipalities or
states or nations, but extends to
every market where the traders
goods have become known and
identified by the use of the mark
General Garments Corporation vs.
Director of Patents
- A foreign corporation which has
never done business in the
Philippine Islands and which is
unlicensed and unregistered to do
business here, but is widely and
favorably known in the Islands
through the use therein of its
products bearing its corporate and
trade name has a legal right to
maintain an action in the Islands
- Mentholatum case was
subsequently derogated when
Congress, purposely to counteract
the effects of said case, enacted
R.A. 638, inserting Section 21-A in
the Trademark Law, which allows a
foreign corporation or juristic person
to bring an action in Philippine
Courts for infringement of a mark or
trade-name, for unfair competition,
or false designation of origin and
false description, whether or not it
has been licensed to do business in
the Philippines under Act Numbered
Fourteen hundred and fifty-nine, as
amended, otherwise known as
Corporation Law, at the time it brings
complaint.
152
 Puma Sporschufabriken Rudolf
Dassler, K.G. vs. IAC and MIL-ORO
MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the
case of Vanity Fair Mills Inc. vs. T.
Eaton Co. this court further said:
By the same token, the
petitioner should be given the
same treatment in the
Philippines as we make
available to our own citizens.
We are obliged to assure to
nationals of countries of the
Union an effective protection
against unfair competition on
the same way that they are
obligated to similarly protect
Filipino Citizen and firms
- The ruling in the aforecited case is in
consonance with the Convention of the
Union of Paris for the protection of
Industrial Property to which the
Philippines became a party. Article 8
thereof provides that a trade name
shall be protected in all the countries
of the Union without the obligation of
filing or registration, whether or not it
forms part of the trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access
to our courts, in the first place it was
not doing business in the Philippines
- The marketing of its products in the
Philippines is done through an
exclusive distributor, Rustan
Commercial Corporation. The latter is
an independent entity which buys and
then markets not only products of the
petitioner but also many other products
bearing equally well-known and
established trademarks and trade-
names
Assuming Rustans had no
independent status would the SC
grant Lacoste access to our courts?
- Even if Lacoste did business in the
Philippines it can bring action
because the case involves a
violation of our penal code
- Such was a violation of article 189 of
the RPC, if prosecution follows after
the completion of the preliminary
investigation being conducted by the
Special Prosecutor the information
shall be in the name of the People of
the Philippines and no longer the
petitioner which is only an aggrieved
party since a criminal offense is
essentially an act against the State.
It is the latter which is principally the
injured party although there is a
private right violated
- The records show that the goodwill
and reputation of the petitioners
products bearing the trademark
Lacoste date back even before 1964
when Lacoste clothing apparels
were forst marketed in the
Philippines. To allow Hemandas to
continue using the trademark
Lacoste for the simple reason that
he was the first registrant in the
Supplemental Register of a
trademark used in international
commerce and not belonging to him
is to render nugatory the very
essence of the law on trademarks
and trade names
Atlantic Mutual Insurance Co. vs.
Cebu Stevedoring Co.
- The law denies to a foreign
corporation the right to maintain suit
unless it has previously complied
with a certain requirement, then
such compliance, or the fact that the
suing corporation is exempt there
from, becomes a necessary
averment in the complaint
153
- These are matters peculiarly within the
knowledge of appellants alone, and it
would be unfair to impose upon
appellee the burden of asserting and
proving the contrary. It is enough that
foreign corporations are allowed by
law to seek redress in our courts under
certain conditions: the interpretation of
the law should not go so far as to
include, in effect, an inference than
those conditions have been met from
the mere fact that the party suing is a
foreign corporation
Olympia Business Machines Co. vs. E.
Razon
- How do you distinguish this case with
Atlantic?
- In Atlantic it dismissed the case, while
in Olympia it did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can
be a propos in the case at bar, since
the petitioner is not maintaining any
suit but is merely defending one
against itself; it did not file any
complaint but only a corollary
defensive petition to prohibit the lower
court from further proceeding with a
suit that it had no jurisdiction to
entertain
What law govern foreign corporation
doing and transacting business in the
Philippines with a license
- Laws of the Republic of the Philippines
save and except that would normally
be those matters which concern its
formation, organization or dissolution,
or those fixing the relationship,
liabilities, responsibilities, or duties of
the stockholders, members or officers
of the foreign corporation or their
relations to each other.
- In effect, intra-corporate or internal
matters not affecting creditors or the
public in general are governed not
by Philippine laws but the law under
which the foreign corporation was
formed or organized
Section 129. Law applicable.
- Any foreign corporation lawfully
doing business in the Philippines
shall be bound by all laws, rules and
regulations applicable to domestic
corporations of the same class,
except such only as provide for the
creation, formation, organization or
dissolution of corporations or those
which fix the relations, liabilities,
responsibilities, or duties of
stockholders, members, or officers
of corporations to each other or to
the corporation. (73a)
Will the pre-emptive rights of a
foreign corporation be governed by
the same section of the code? Is the
pre-emptive rights of a stockholder
in a domestic corporation same as
the pre-emptive of a stockholder of a
foreign corporation.
- No
M.E. Grey vs. Insular Lumber
Company
- PNB vs. Gonzales, will this apply to
a foreign corporation? How do you
distinguish this case from a
Philippine law?
- Since it concerns the rights of
stockholders it is the law of New
York that should govern
Is the license to do business of a
foreign corporation subject to
suspension or revocation? What are
the grounds?
- Section 134 provides:
Section 134. Revocation of
license. - Without prejudice to other
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grounds provided by special laws, the
license of a foreign corporation to
transact business in the Philippines
may be revoked or suspended by the
Securities and Exchange Commission
upon any of the following grounds:
1. Failure to file its annual report or
pay any fees as required by this Code;
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title;
3. Failure, after change of its resident
agent or of his address, to submit to
the Securities and Exchange
Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities
and Exchange Commission an
authenticated copy of any amendment
to its articles of incorporation or by-
laws or of any articles of merger or
consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivisions;
7. Transacting business in the
Philippines outside of the purpose or
purposes for which such corporation is
authorized under its license;
8. Transacting business in the
Philippines as agent of or acting for
and in behalf of any foreign
corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render
it unfit to transact business in the
Philippines. (n)
SEC does not have the sole
authority to suspend or revoke the
license of a foreign corporation
doing business in the Philippines,
other government agencies like the
Central Bank , the Insurance
Commission may also do so within
their respective dominion, despite
the provision of section 134
If the SEC believes that revocation
is warranted, section 135 provides
that:
Section 135. Issuance of
certificate of revocation. - Upon the
revocation of any such license to
transact business in the Philippines,
the Securities and Exchange
Commission shall issue a
corresponding certificate of
revocation, furnishing a copy thereof
to the appropriate government
agency in the proper cases.
The Securities and Exchange
Commission shall also mail to the
corporation at its registered office in
the Philippines a notice of such
revocation accompanied by a copy
of the certificate of revocation. (n)
Voluntary withdrawal of license
- All 3 conditions must be complied
with
Section 136. Withdrawal of
foreign corporations. - Subject to
existing laws and regulations, a
foreign corporation licensed to
transact business in the Philippines
may be allowed to withdraw from the
Philippines by filing a petition for
withdrawal of license. No certificate
of withdrawal shall be issued by the
Securities and Exchange
155
 Commission unless all the following
requirements are met;
1. All claims which have accrued in the
Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments,
and penalties, if any, lawfully due to
the Philippine Government or any of its
agencies or political subdivisions have
been paid; and
3. The petition for withdrawal of license
has been published once a week for
three (3) consecutive weeks in a
newspaper of general circulation in the
Philippines.
P.D. 902-A
P.D. 902-A was amended by R.A. 8799
or the SECURITIES REGULATION
CODE in the year 2000
The jurisdiction of SEC for cases
falling under section 5 thereof was
transferred to the courts of general
jurisdiction designated by the SC, they
were called special commercial courts,
the only exceptions were revocation of
corporate franchise and calling of
elections
However the SEC retained
receivership or suspension payments
within June 20,2000
Jurisdiction of special commercial
courts are exclusive and original,
jurisdiction is conferred by law; 1
Special Commercial Court per region
except MAKATI and QUEZON CITY
which has two
Devices or Schemes
- Pyramid scheme
(misrepresentation)-Special
Commercial Courts
- Syndicated estafa- not bailable
Alleje case
- Falls squarely under sec. 5 (a)
Special Commercial Courts
- Allegation corporate officers
employing schemes in diverting
- Not only detrimental to corporation,
but general membership
- Fraud must be stated with
particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with
particularity otherwise it may be filed
to any court
Intra-corporate
- Exclusive and original jurisdiction of
special commercial courts
- Sole criteria is there must be an
intra-corporate relationship
- Pertaining to a controversy (speaks
also of intra-partnership controversy,
that partnership must be registered
with the SEC)
Rule now
1. Necessarily be an intra-corporate
relationship; and,
2. The controversy must arise out of
said relationship
Intra-corporate relationship alone
will not suffice to put it in the ambit of
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 special commercial courts and courts
of general jurisdiction may take
cognizance
Case of a transferee of shares of stock
to compel the corporation to recognize
him as a stockholder
How can it be intra-corporate when he
is not yet fully paid
- When the transferee has done all he
can be required to do to render the
transfer effectual and the corporation
refuses to register the transfer, the
requirement of the registration is
waived and the transferee is
considered technically a stockholder
who may sue to enforce the right to
have the transfer registered
Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery,
they are not yet prima facie; it will not
be considered intra-corporate
Controversies in the appointment
(asked in the bar)
- Cases involving election, appointment
and removal
In Andaya the court said that a
corporate officer elected or appointed
by the BOD is always a corporate act
- The fact that petitioner sought
payment of his back wages, other
benefits as well as moral and
exemplary damages and attorneys
fees in his complaint will not operate to
prevent the SEC from exercising its
jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the NLRC
just because of that
Tabang vs. NLRC
- Jurisdiction lies originally and
exclusively to special commercial
courts and not in the NLRC
- SEC has jurisdiction over cases of
removal from employment of
corporate officers
- The relationship of a person to a
corporation, whether as officer or as
agent or employee or not
determined by the nature of the
servides performed, but by the
incidents of the relationship on they
actually exist
- Corporate officers dismissal is
always a corporate act or intra-
corporate controversy
Midland construction vs. Movilla
- NLRC will be possessed of
jurisdiction exception will not apply
to mere recovery
Main consideration
- Asserts his right to the office or
questions the propriety or validity of
his ouster or removal, it will be the
special commercial courts and not
the NLRC
Securities Regulation Code
- Transferred jurisdiction of the SEC
to Special Commercial Courts
- Suspension of payment,
appointment of management
receivership
What is the reason for suspension of
all claims?
157
- The reason for suspending actions for
claims against the corporation is not
really to enable the management
committee or the rehabilitation receiver
to substitute the defendant in any
pending action against it before any
court, tribunal or body. The real
justification is to enable the
management committee or
rehabilitation receiver to effectively
exercise his powers free from any
Judicial or extra-judicial interference
that might unduly hinder or prevent the
rescue of the debtor company. To
allow such other actions to continue
would only add to the burden of the
management committee pr
rehabilitation receiver, whose time,
effort and resources would be wasted
in defending claims against the
corporation instead of being directed
towards restructuring and
rehabilitation.(PAL vs. Spouses Sadic
and Kurangking)
- To enable the receiver to effectively
exercise his or her power free form
any judicial or extra-judicial that may
disturb
3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims
against a distress company; ask the
court to be given time to the payment
of liability by postponing the payment
- When it has sufficient assets and
liabilities but forces the impossibility of
meeting them when they respectively
fall due
2. Suspension of receiver with
management committee with
rehabilitation play or suspension of
payments accompanied by a
proposal for rehabilitation (with or
without rehabilitation)
- corporation has sufficient assets to
cover its liabilities, but sees the
possibility; is or without rehabilitation
plans; normally would attach the
rehabilitation plan
- For purpose of economic
development
3. Suspension of payments when the
corporation has no sufficient assets
to its liabilities
May it still be revived?
- Yes, it may still be revived
How can a corporation with more
liabilities than assets continue its
operations profitably?
- Even if the distressed company has
no sufficient assets and liabilities it
can go for suspension
- It asked for a management
committee without a receiver plan
(Victorius Milling case)
Convert their claims into equity
- Their liability was almost wiped out
they became stockholders instead of
creditors
- After 5 years those who converted
sold it back to the corporation,
thereby making profits
Amendment is for the economic
development of the country
a
a
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 What if walang amendment, e mas
maraming liabilities kesa assets
Suspension order- all actions for
claims against the corporation are
accordingly suspended at whatever
stage the proceedings maybe
without a lien, no creditor may
enforce his lien while rehabilitation is
going (Alemar case)
- No preference shall be given
RCBC vs. IAC

Effect of suspension- you cannot - Decided on motion for

reconsideration
foreclose
- It court 7 years to decide
What are claims?
authentication
- Debts or demands of pecuniary nature.
Rule of the thumb
Assertion of a right to have money
paid - Automatic suspension even if not
decreed in the decision itself
- Claims against the corporation shall be
suspended, assertion of a right to have - Once lifted the preferred creditors
money paid; it must present a will regain their preference
monetary claim, liquidated or
unliquidated Appointment of a management
committee
Nullification of corporations does not
present a monetary claim of pecuniary - Take over the management
nature committee of the distressed
corporation
Union vs. CA
- Extraordinary and drastic remedy
- It does not allow a mere individual to
file the petition which is limited to - Without any remedy
corporations partnership or
What is an intra-corporate
associations.
controversy?
- Where no authority is granted to hear
- Section 5(B)
petitions of individuals for suspension
of payments, such petition are beyond - Sole criteria is whether there exists
the competence of the SEC an intra-corporate dispute is that if
there is an intra-corporate
What happens if there is a suspension
relationship
order?
Why is there suspension of all
Explain the key phrase quality is
actions against claims when a
equity
receiver is appointed?
- All creditors stand on equal footing,
- To enable the management
secure or unsecure, holding or lien or
committee to exercise its powers
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 Sy Chim vs. Sy Siy Ho (before a Section 5 and 6(D) governed by
management committee may be opt separate rules; interim rules and
by a court) intra-corporate controversy

- 2 requisites for a valid appointment of Venue of actions

management committee
- Rules of court- where the parties are
1. Imminent danger of dissipation, loss, residing
wastage or destruction of assets or
other corporate properties - Intra-corporate- no matter where the
parties are residing it will be in the
2. Paralysis of business operations, the city or municipality where the
mere apprehension of future principal office is located
misconduct based upon prior
management Rehabilitation proceedings venue

- Save and except in the case of a close - In rem

corporation in case of deadlock
- Acquired upon publication without
management committee is allowed to
furnishing the creditors a copy of the
take over right away
petition and attachments thereof
Jacinto case
- A creditor may now file the
- 2nd par of page 676 suspension proceedings; provides
that creditors owns at least 25%
- 2 requisites where present
Intra-corporate- rule 1 section 6
- Wala ng mapautang, there was a
paralyzation Service of summons- rule 2 section
5
Sy Chim
- Summons may be made to anyone
- Did not appoint a management
committee In case of intra-corporate dispute,
elections, fraud, etc; if they are
- In the absence of a strong showing of governed by interim rules of
an imminent danger of dissipation, loss procedure on intra-corporate
wastage or destruction of assets or controversies
other properties of a corporation and
paralysis of its business operations, Venue
the mere apprehension of future
- Special commercial courts where
misconduct based upon prior
principal office is located/established
mismanagement will not authorize the
(section 5 rule 1)
appointment of a management
committee - Matters of payment/suspension
must be filed in the city/ municipality
where corporation is located
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 Under old rule, creditors have no right
to institute an action for receivership;
now creditors, if they sold 20% they
can institute an action for receivership
Section 5
- Service of summons may be made by
fax/e-mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-
corporate controversy
If the controversy arose out of an intra-
corporate dispute rules on interim rules
of procedure of intra-corporate
controversies shall govern
Rule 4 section 17- immunity from suit
Rehabilitation receiver shall not
subject to any action, claim or demand
in connection with any act done
omitted by him in good faith in the
exercise of his functions and powers
herein conferred
Claim
- Right to payment, whether or not it is
reduced to judgment, liquidated or
unliquidated, fixed or contingent,
matured or unmatured, disputed or
undisputed, legal or equitable and
secured or unsecured
Investment contracts
- A contract, transaction or scheme
whereby a person invests his money in
a common enterprise and is led to
expect profits primarily from the effects
of others
The management committee and
rehabilitation receiver are
empowered to:
1. Take custody and control of all
assets of the corporation
2. Evaluate assets and liabilities,
earnings operations of the
corporation
3. Determine the best way to protect
the investors and creditors
4. Study, review evaluate the feasibility
of continuing operation and
structures
5. Submit recommendations to the
RTC regarding rehabilitation plan
6. Rehabilitate the corporation if
determined to be feasible by the
RTC
7. Report to the RTC until the
corporation is dissolved
THE SECURITIES REGULATION CODE
(RA8799)
- Also known as the Blue Sky Law since it
was enacted to protect the public from
unscrupulous promoters who stake
business which have no basis and sell
shares and interest therein to investors,
who are then left holding certificates
representing nothing more than a claim to a
square of the blue sky.
-SEC. 2. Declaration of State Policy. The
State shall establish a socially conscious,
free market that regulates itself, encourage
the widest participation of ownership in
enterprises, enhance the democratization
of wealth, promote the development of the
capital market, protect investors, ensure full
and fair disclosure about securities,
minimize if not totally eliminate insider
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trading and other fraudulent or manipulative
devices and practices which create
distortions in the free market.
BROKER - person who buys and sells
securities for the account of others.
DEALER - person who buys and sells
securities for his/her own account in the
ordinary course of business.
NOTE: No person shall engage
in the business of buying or selling
securities in the Philippines as a
broker or dealer, or act as a
salesman, or an associated person
of any broker or dealer unless
registered as such with the
Commission. (Sec 28)
SECURITES - shares, participation or
interests in a corporation or in a commercial
enterprise or profit-making venture and
evidenced by a certificate, contract,
instrument, whether written or electronic in
character. It includes:
CODE: COFDIPS
a) Certificates of assignments,
certificates of participation, trust
certificates, voting trust certificates or
similar instruments;
b) Other instruments as may in the future
be determined by the Commission;
c) Fractional undivided interests in oil,
gas or other mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certificates of
deposit for a future subscription;
f) Proprietary or non proprietary
membership certificates
incorporations; and
g) Shares of stock, bonds, debentures,
notes, evidences of indebtedness,
asset-backed securities;
GR: Securities shall not be sold or offered for
sale or distribution within the PH, without a
registration statement filed with and approved
by SEC. Prior to such sale, information on
the securities, in such form and with such
substance as the Commission may
prescribe, shall be made available to each
prospective purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or
guaranteed by the Government of
the PH, or by any political
subdivision or agency thereof, or by
any person controlled or supervised
by, and acting as an instrumentality
of said Government.
b) Any security issued or
guaranteed by the government of
any country with diplomatic relations
with the PH, or by any state,
province or political subdivision
thereof on the basis of reciprocity:
Provided, that the SEC may require
compliance with the form and
content of disclosures the
Commission may prescribe.
c) Certificates issued by a
receiver or by a trustee in
bankruptcy duly approved by the
proper adjudicatory body.
d) Any security or its derivatives
the sale or transfer of which, by law,
is under the supervision and
regulation of the Office of the
Insurance Commission, Housing and
Land Use Regulatory Board, or the
Bureau of Internal Revenue.
e) Any security issued by a bank
except its own shares of stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an
executor, administrator, guardian or
receiver or trustee in insolvency or
bankruptcy.
b) By or for the account of a
pledge holder, or mortgagee or any
other similar lien holder selling or
offering for sale or delivery in the
ordinary course of business and not
for the purpose of avoiding the
provisions of this Code, to liquidate a
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bona fide debt, a security pledged in
good faith as security for such debt.
c) An isolated transaction in which
any security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owners account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transactions of a like
character by such owner, or on his
account by such representative and
such owner or representative not being
the underwriter of such security.
d) Distribution by a corporation,
actively engaged in the business
authorized by its AOI, of securities to
its stockholders or other security
holders as a stock dividend or other
distribution out of surplus.
e) Sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly in connection with
the sale of such capital stock.
f) Issuance of bonds or notes
secured by mortgage upon real estate
or tangible personal property, where
the entire mortgage together with all
the bonds or notes secured thereby
are sold to a single purchaser at a
single sale.
g) Issue and delivery of any
security in exchange for any other
security of the same issuer pursuant to
a right of conversion entitling the
holder of the security surrendered in
exchange to make such conversion:
Provided, That the security so
surrendered has been registered under
this Code or was, when sold, exempt
from the provisions of this Code, and
that the security issued and delivered
in exchange, if sold at the conversion
price, would at the time of such
conversion fall within the class of
securities entitled to registration under
this Code. Upon such conversion the
par value of the security surrendered in
such exchange shall be deemed the
price at which the securities issued
and delivered in such exchange are
sold.
h) Brokers transactions,
executed upon customers orders,
on any registered Exchange or other
trading market.
i) Subscriptions for shares of
the capital stock of a corporation
prior to the incorporation thereof or
in pursuance of an increase in its
authorized capital stock under the
Corporation Code, when no expense
is incurred, or no commission,
compensation or remuneration is
paid or given in connection with the
sale or disposition of such securities,
and only when the purpose for
soliciting, giving or taking of such
subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation which should be
subscribed before it can be
registered and duly incorporated, or
its authorized capital increased.
j) The exchange of securities by
the issuer with its existing security
holders exclusively, where no
commission or other remuneration is
paid or given directly or indirectly for
soliciting such exchange.
k) The sale of securities by an
issuer to fewer than twenty (20)
persons in the Philippines during any
twelve-month period.
l) The sale of securities to any
number of the following qualified
buyers: (i) Bank; (ii) Registered
investment house; (iii)insurance
company; (iv) Pension fund or
retirement plan maintained by the
Government of the Philippines or
any political subdivision thereof or
managed by a bank or other persons
authorized by the Bangko Sentral to
engage in trust functions; (v)
investment company or; (vi) Such
other person as the Commission
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 may by rule determine as qualified
buyers, on the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in financial
and business matters, or amount of
assets under management.
PROTECTION OF SHAREHOLDERS
INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and
accounting (Sec 22)
TENDER OFFER A publicly announced
intention acting alone or in concert with others
to acquire equity securities of a company.
(2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to
acquire 15% or more of the equity
share of a public company pursuant to
an agreement made between or
among the person and one or more
sellers;
2. When the person intends to
acquire 30% or more of the equity
share of a public company within a
period of 12 months;
3. When the person intends to
acquire shares that would result in an
ownership of more than 50% of the
equity shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or
acquires the proxy for at least ten per centum
(10%) or such percentage as the
Commission may prescribe of the
outstanding share of the issuer, shall submit
a report identifying the beneficial owner within
ten (10) days after such acquisition, for its
own account or customer, to the issuer of the
security, to the Exchange where the security
is traded and to the Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND
OTHER MARKET MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) any
transaction in a security which involves no
change in the beneficial ownership thereof.
2. Matched Order (Sec 24.1(a)(ii))
order or orders for the purchase or sale of
security with the knowledge that a
simultaneous order or orders of
substantially the same size, time and price
for the sale or purchase of such security
has, or will be entered by or for the same or
different parties.
Note: Wash sale and matched
orders become illegal when they are
used as a means to create false
appearance of active trading in the
security concerned.
3. Marking the close placing the
purchase order, at or near the close of the
trading period. The price that was closed
will then be the price that will be posted on
the following trading day.
4. Painting the tape involves a
series of transactions that are reported
publicly to give the impression of an activity
in a security.
5. Squeezing the float the part of an
outstanding security intentionally held by
dealers or other persons with a view of
reselling them later for profit.
6. Hype and dump Act employed by
a person or group of persons of purchasing
the outstanding capital stock of a dormant
public shell company for a nominal amount
and merge it with their privately held
company. They would then gain control of
the majority stocks of the merged entity.
Stock certificates are often re-issued in the
name of the merged entity to relatives and
associates who act as nominees of the
person or persons employing the device.
They would then look for a broker-dealer
who would be willing to make a hype of
the securities. The broker-dealer then
generates volume and advance bid price.
When the market reaches a high price, they
164
would dump their shareholdings and bail
out.
7. Boiler Room Operations involves
an intensive selling campaign through
numerous salesmen by telephone or through
direct mail offerings for securities of either a
certain type or from a specific issuer.
Investors are induced to purchase through
hard-sell based on unfounded predictions and
mailing of misleading market letters.
Note: Marking the close, Painting the
tape, Squeezing the float, Hype and
dump, Boiler Room Operations
become unlawful if it is effected to
either raise the price or induce the
purchase of a security or of a
controlling, controlled, or commonly
controlled company by others or to
depress the price to induce the sale of
a security, whether of the same or of a
different class, of the same issuer or of
a controlling, controlled company or
common controlled company by others
or to create active trading to induce
the purchase through said devices or
schemes.
8. Circulating or Disseminating
Information circulating an information that
any of the security listed in the exchange will
or is likely to rise or fall because of
manipulative market operations of any one or
more persons conducted for the purpose of
raising or depressing the price of the security
and thus inducing the purchase of such
security.
9. Making False or Misleading
Statements with respect to any material fact
which he knew or had reasonable ground to
believe was so false or misleading for the
purpose of inducing the purchase or sale of
such security.
10. Pegging or Fixing Or Stabilizing the
price of security effected either alone or with
others through any series of transactions for
the purchase or sale thereof, if done for such
purpose.
11. Short sale selling of security which
the vendor does not own unless done in
accordance with the rules and regulations
of the SEC.
12. Insider Trading the act of an
insider to buy or sell security of the issuer
while in possession of material information
with respect to such security that is not
generally made known to the public unless
(a) The insider proves that the information
was not gained from such relationship; or
(b) If the other party selling to or buying
from the insider (or his agent) is identified,
the insider proves: (i) that he disclosed the
information to the other party, or (ii) that he
had reason to believe that the other party
otherwise is also in possession of the
information.
Note: When is information
material non-public? - if: (a) It
has not been generally disclosed to
the public and would likely affect the
market price of the security after
being disseminated to the public and
the lapse of a reasonable time for
the market to absorb the
information; or (b) would be
considered by a reasonable person
important under the circumstances
in determining his course of action
whether to buy, sell or hold a
security.
Note: Who is an insider? -
Insider means: (a) the issuer; (b) a
director or officer (or person
performing similar functions) of, or a
person controlling the issuer; (c) a
person whose relationship or former
relationship to the issuer gives or
gave him access to material
information about the issuer or the
security that is not generally
available to the public; (d) a
government employee, or director,
or officer of an exchange, clearing
agency and/or self-regulatory
organization who has access to
material information about an issuer
or a security that is not generally
available to the public; or (e) a
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 person who learns such information by
a communication from any of the
foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or
employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which would
interfere with the exercise of independent
judgment in carrying out the responsibilities of
a director.
determination of guilt on the part of the
person making the offer.
DAMAGES
All suits to recover damages shall be
brought before the Regional Trial Court,
which shall have exclusive jurisdiction to
hear and decide such suits. The Court is
authorized to award damages in an amount
not exceeding triple the amount of the
transaction plus actual damages.

Corporations which require an NOTES

Independent Director
1. An exchange; or
2. Any corporation with a class of equity
securities listed for trading on an Exchange or
with assets in excess of P50M and having
200 or more holders, at least 200 of which are
holding at least 100 shares of a class of its
equity securities or which has sold a class of
equity securities to the public pursuant to an
effective registration statement shall have at
least two (2) independent directors or such
independent directors shall constitute at least
20% of the members of such board,
whichever is the lesser.
If there are goods involved in the
multimarket, it is beyond the jurisdiction of
SEC (Ex First Quadrant)
Criminal charge for violation of SRC
is a specialized dispute, hence it must be
first referred with SEC (Baviera vs.
Paglinawan G.R. No. 168380 Feb 8,
2007)
T3 Rule in trading of Securities
Trading day + 3 more days you must
comply with your obligations.

OPTION TRADING
Put a transferrable option or offer to
deliver a given number of shares of stock at a
stated price on any given time during the
stated period.
Call a transferrable option to buy a
specified number of share at a stated price
Straddle a combination of put and
call.

SETTLEMENT OFFERS
At any time, during an investigation or
proceeding under this Code, parties being
investigated and/or charged may propose in
writing an offer of settlement with the
Commission. The Commission may only
agree to a settlement offer based on its
findings that such settlement is in the public
interest. Any agreement to settle shall have
no legal effect until publicly disclosed. Such
decision may be made without a
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