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FrequentlyAskedQuestions: (PRELIMS&MIDTERMS) T/F.Commonsharecanneverbedeniedtherighttovote?

T/F.Acorporationcanneverbeorganizediftherebeless
than5persons?
F. Sole Corporation may be formed by the chief
archbishop,bishop,priest,minister,rabbiorpresidingelder
ofanyreligiousdenomination,sectorchurch.(Sec.110)
F.Commonsharescarrieswithittherighttovote,
unless the: a) AOI and, b) certificate of stock provide
otherwise, c) it can also be denied in case founders shares
areissued.
T/F. When do amendments become valid and effective,

T/F. A de facto corporation is similarly situated with ade onlyupontheapprovaloftheSECTRUEORFALSE?

jurecorporation?
Sec.16OrdinaryAmendments
T. A De Facto Corporation is in all respects,
similarly situated with a De Jure corporation except, that a) UponapprovaloftheSEC
thestatemayquestionitsexistenceinadirectproceeding. b) Approval by inaction (within 6 months from the
It possesses all the powers, attributes and date of filing for a cause not attributable to the
liabilitiesthatattachtoaDeJurecorporationinitsrelation corporation)
withallpersons,exceptastothestate.
Sec.37and38SpecialAmendments(onlyuponapprovalof
T/F. May a corporation organized by incorporators SEC)
consistingsolelyofforeigners?
T/F.Moraldamagescannotbeawardedtocorporation?
T. There is no nationality requirement only
residence,aslongasmajorityareresidentsofthePhil
F. A corporation, being an artificial being and
existing only in contemplation of the law is entitled to the
T/F.AcorporationmustatalltimeshaveURE?
awardofmoraldamages.

F.GeneralRule:(Sec41)Acorporationmustatall
timeshaveURE. It was ruled that a corporations claim for moral
damagesinthatcasesfallsunderART.2219(7)oftheNCC,
Exceptions: whichauthorizestherecoveryofmoraldamagesincasesof
a) In cases of redemption of
libel, slander or any form of defamation (Filipinas
redeemable share where the
BroadcastingNetworkV.AgoMedical).
corporation may also require its
shares regardless of the existence
ofUREasprovidedforinSec.8 Further, a corporation may have a good
b) In cases of SHs right to compel a reputation which if besmirched, may also be a ground for
close corporation to purchase his theawardofmoraldamages(MeralcoV.T.E.A.M)
share, for any reason, under Sec.
105, when the corporation has
Art 2219(7) of the NCC, does not qualify if it is a
sufficient assets in its books to
naturalorjuridicalperson.
cover its debts and liabilities

exclusiveofcapitalstock.
T/F. Names, nationalities and residence of the

incorporatorsaresubjecttoamendment?
T/F.TotalSubscription
F.Becausetheyarefaitaccompli.

The law is not particular that each and every
Sec.5theyarethose:
subscriberorSHmustpay25%ofhistotalsubscription.The
a) Originallyformingand
lawrequiresonlythatatleast25%ofthetotalsubscription
must be paid regardless of the amount of payment by the b) Composingthecorporationand
individualsubscribers. c) Whoaresignatoriesthereof.

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T/F.StockCorporation
Sec.3providesthatacorporationwith:
a) Capitalstockdividedintoshares;and
b) Are authorized to distribute dividends or
allotments as surplus profits to its SHs on
the basis of the shares held by them are
stockcorporation.
(takeoutanyofthem,notastockcorporation)
BusinessJudgmentRule
Questions of policy and management are left
solely to the honest decision of the BODs and the courts
are without authority to substitute its judgment as against
theformer.
The directors are the business manager of the
corporation and as long as they act in good faith, its
actuations are not subject to judicial review. (Montelibano
V.Bacolod)
ForbiddenProfitRule
Whereadirector,byvirtueofhisoffice,acquires
for himself a business which should belong to the
corporation, thereby obtaining profits to the prejudice of
suchcorporation.
InstrumentalityRule
Where one corporation is so organized and
controlled and it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the corporate entity of
theinstrumentalitymaybedisregarded.
3elements/test:
a) Theremustbeanabsolutecontrol
b) Such control must have been committed or is
taintedwithfraudorwrong
c) The said control is the proximate cause of the
injury or unjust loss complained of (concept of
BuilderV.NLRC)
Mereownershipofallorsubstantiallyalloftheshares
ofstockofacorporationisnot,initself,insufficientground
fordisregardingtheseparatecorporatepersonality.Andfor
the separate personality of the corporation to be
disregarded, the wrong doing must be clearly and
convincinglyestablished.
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Fraud must be proven by clear and convincingly
evidenceamountingtomorethanpreponderance.Itcannot
bejustifiedbyspeculationandcanneverbepresumed.And
only if it sought to hold the stockholders liable directly for
corporatedebt.
Theabsenceofoneoftheelementspreventspiercing
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
individualdefendantsrelationshiptothatoperation.
There must facts and circumstances before
warrantpiercingtheveilofcorporatefiction
The control necessary does not mean stock
ownership
CorporateEntityTheory
The corporation is possessed with personality
separateanddistinctfromtheindividualSHsmembersand
is not affected by the personal rights, obligations or
transactionsofthelatter.
Whenmaycorporateentitybedisregardedorpierced?
a) When it is used to defeat public convenience,
justify wrong, protect fraud, defend crime,
confuselegitimateissue;or
b) Tocircumventlaworperpetuatedeception;or
c) Used as an alterego or adjunct or business
conduit for the sole benefit of a SH for another
corporation;or
d) BP22
DoctrineofSecondaryMeaning
A word/phrase originally incapable of exclusively
appropriation, usually generic, with reference to an article
in the market, because of geographical or otherwise
deceptive, might nevertheless have been used so long and
soexclusivelybyoneproducerwithreferencetohisarticle
that, in that trade and to that branch of the purchasing
public, the word or phrase has become to mean that the
articlewashisproduce.
Lyceum of the Philippines case, the additional
geographical name does not make it confusingly
similar
actualconfusionisnotnecessaryPhilipscaseit
isenoughthatthereisprobableconfusion
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Tworequisitesmustbeproven
1) thatthecomplainantcorporationacquiredaprior
rightovertheuseofsuchcorporatename
2) identical, deceptively or confusingly, patently
deceptive.
CorporateOpportunityDoctrine
When a director, trustee/officer attempts to
acquire/(s), inviolationofhisduty,anyinterestadverseto
the corporation in respect to any matter, which has been
reposedtohiminconfidence.(citeForbiddenProfitRule)
DoctrineofLimitedCapacityorAuthority
No corporation under the corporation code shall
possess or exercise any corporate powers except those
conferredby:
a) law
b) itsAOI
c) thoseimpliedfromexpresspowers,and
d) those as are necessary or incidental to the
exerciseofthepowerssoconferred.
IncorporationTest
Thenationalityofacorporationisdeterminedby
the State of incorporation, regardless of the nationality of
theSHs.
GeneralRule:theplaceofitsincorporationirrespectiveof
thenationality
Exception: control test would apply in determining the
corporatenationality,i.e.,thecitizenshipofthe
controlling stockholders determines the
nationalityofthecorporation
Instanceswhencorporatedirectorsareheldpersonallyor
solidarilyliablefortheiracts.
TramatCase
a) Whenhevotes/assentstoapatentlyunlawfulact
of the corporation of for bad faith or gross
negligenceorheacquirespecuniaryinterest.
b) When he consents to the issuance of watered
stock.
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c) When he agrees to hold himself personally and
solidarilyliablewiththecorporation.
d) When he is made to personally answers for his
corporateaction.
e) BP22
f) Issuanceofwateredstock.
Director/officer may be held personally/solidarily liable
evenwhenheisactingforandinbehalfofacorporation.
a) When fraud takes place in the business
transaction.
b) When they acted as if they possess juridical
personality.
rd
c) Whentheytrytoescapeliabilitytoa3 partyon
acontractfromwhichtheybenefited.
d) If they act/purporting to act on behalf of a
corporationwhichhasnovalidexistenceandthey
assumeobligationsortheyenteredintocontracts.
Instanceswherethecorporationisnotliableforthedebts
andliabilitiesofthetransferor.
NielV.PacificFarms
a) Where the purchaser expressly/impliedly agrees
toassumesuchdebts.
b) Where the transaction amounts to a
consolidation/mergerofthecorps.
c) Where the purchasing corporation is merely a
continuationofthesellingcorporation.
d) Wherethetransactionisenteredintofraudulently
inordertoescapeliabilityforsuchdebts.
AdvantageandDisadvantage(TransferabilityofShares)
a) Advantage shares of stocks, being personal
properties, can be transferred by the owner
withouttheconsentoftheotherSHs.
b) Disadvantage transfers of share may result to
uniting incompatible and conflicting interest.
(GokongweiV.SEC)
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Advantage and disadvantage (Limited Shareholders
Liability)
a) Advantage an individual SH may contribute as
muchoraslittleheseesfit.Thisisthelimitofhis
liability because SHs are not personally liable for
thedebtsofthecorporation.
b) Disadvantagetendstolimitthecreditavailable
tothecorporationasacorporatelegalentity.
InhisownrightV.Standinginhisownname
a) In his own right pertains to the beneficial
ownership of shares. Lee V. CA (both legal title
andbeneficialownership)
b) Standinginhisownnameinordertobeeligible
as a director, what is material is the LEGAL TITLE
of the stick as appearing on the books of the
corporation.
Cumulative type of preferred shares V. Non cumulative
typeofshare
a) Cumulative type of PS are those which entitle
theownerthereoftopaymentnotonlyforcurrent
dividends but also back dividends not previously
paid, whether or not during the past years,
dividendswerenotdeclaredpaid.
b) Non cumulative type of PS are those which
grant the holders of such shares only to back
dividends, when and if dividends are paid, to the
extentagreeduponbeforeanyotherSHsarepaid
thesame.
CumulativeVoting(StockCorpV.NonstockCorp)
a.) StockCorpitisamatterofrightgrantedbylaw
toeachSHofacorporationwithvotingrights.SH
isentitledtogiveacandidateasmanyvoteasthe
number of directors to be elected multiplied by
thenumberofhisshares.
b.) Nonstock Corp generally, not allowed, unless,
itsAOIorBLprovideotherwise.
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Whyshouldthecorporationclassifyitsshares?
1) To specify and define the rights and privileges of
theSHs
2) For regulation and control of the issuance of
sale/transfer of shares of stock/corporate
securities for the protection of purchasers and
SHs
3) Asamanagementcontroldevice
4) Tocomplywithstatutoryrequirements
5) Toguarantythereturnoninvestment
6) Forflexibilityinprice.
ExpirationofCorporateTerm
Oncethetermexpiresitisautomaticallydissolved
and it ceases to have a corporate personality. (Al Hambra
Cigarcase;ipsofactodissolved)
Sec. 122 3 years from dissolution, corporation continues
as a body corporate only for the purposes of prosecuting
and defending suits for/against the corporation and by
enablingitgraduallytosettleitscloseaffairs.
EXTENSIONcanbemadeearlierthan5yearspriortothe
original or subsequent expiry date(s) UNLESS there are
JUSTIFIABLE REASONS for an earlier extension as may be
determinedbytheSEC.
Corporation Sole, religious societies has no expiration
becausetheyexistinperpetuity.
Importantreasonsforthestatementoftheprincipaloffice
a) Itestablishestheresidenceifthecorporation
b) It is important in determining the venue in an
actionbyoragainstthecorporation
c) It determines the province where a chattel
mortgageofsharesshouldberegistered
d) Venueofmeetings(Sec.51)
PlaceofMeetings
Sec. 51 SHs or members meeting, whether regular or
special shall be held in the city or municipality where the
principal office of the corporation is located and, as far as
practicable,intheprincipalofficeofthecorporation.
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ThatMetroManilashall,purposesofthissection InterlockingDirector
beconsideredacity/municipality.
A director in one corporation who deals or
Nonstock Corporation the law allows NSC to provide in transacts business with another corporation of which he is
its By Laws any place of members meetings. Provided that alsoadirector.
NOTICEissenttoallmembersindicatingthedate,timeand The contract is void if he owns 20% of the
placeofthemeetingwhichshallbeinthePhilippines. outstanding capital stock and his interest in the other
corporationisnominal.
If outside the Philippines, it should be in relation
to the nature of their business. (applicable only in ExecutiveCommittee
directors/trusteesmeeting).

The corporate powers, properties and business

ServiceofSummons
conducted shall be exercised and controlled by the
E.BVillarosaV.BenitounderSec.11ofRule14,Rulesof BODs/Trustees because the board are elected for their
Court,serviceofsummonsshallbemadeonthe: knowledgeandexpertiseinthemanagementofbusinessof
thecorporation.
a) President
b) Managingpartner May the board alone create an executive committee
c) Generalmanager withoutanyauthorityprovidedforthebylaws?
d) Corporatesecretary
e) Treasureror NO board ofdirectors must sitand act as abody
f) Inhousecounsel
tohaveavalidtransaction

This requirement is applicable only if the corporation is

beingsuedbyathirdpartyoroutsider,nottoSHs
In case of INTRACORPORATE CONTROVERSIES Sec. 5.
Rule 2 of Interim Rules of Procedure Service upon
domestic private juridical entities, shall be deemed
adequate, is made upon any of the statutory or corporate
officersfixedbytheByLawsortheirrespectivesecretaries.
ContractofSelfDealingDirector
A selfdealing director is one who deals or
transactsbusinesswithhisowncorporation.Thecontractof
selfdealing director is voidable unless the following
conditionsarepresent:
a) That the presence of such director/trustee in the
board meeting in which the contract was
approved was not necessary to constitute a
quorumforsuchmeeting;
b) That the vote of such director/trustee was not
necessaryfortheapprovalofthecontract;
c) Thatthecontractisfairandreasonableunderthe
circumstances;and
d) That in case of an officer, the contract has been
previouslyauthorizedbytheboard.(Sec.32)
Mayanonmemberoftheboardofdirectorsbeamember
oftheexecutivecommittee?
NO,allofthemmustbemembersoftheboardof
director
Section 35. Executive committee. The bylaws of a
corporationmaycreateanexecutivecommittee,composed
of not less than three members of the board, to be
appointedbytheboard.
Compensation(WesternInstituteofTechV.Salas)
Assuchthedirectorscannotgrantthemselves
salaries for being directors but they are not prohibited to
get compensation if aside from being a director they are
alsoofficersofthecorporation(Sec.30)
Theycanhavecompensationif:
a) There is a fix grant of compensation in the By
Laws
b) Ifthedirectors granteditbythevoteoftheSHs
representing at least a majority of the
outstanding capital stock at a regular meeting or
specialmeeting
c) Whentheyrenderservicesotherthantheirusual
orordinaryduties

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Innocaseshallthetotalyearlycompensationofdirectors,
as such directors, exceed 10% of the net income BEFORE
incometaxofthecorporationduringtheprecedingyear.
Howdoyoudecreasecapitalstockandwhyacorporation
decreases?
1) Reduce or wipeout existing deficit where no
creditorswouldtherebybeeffected
2) Whencapitalismorethannecessarytoprocreate
thebusinessorreductionofcapitalsurplus
Steinbergvs.Velasco
For as long as there are debts and liabilities, a
corporation may not reacquireits shares (subject
toexceptions)
Creditors of a corporation have the right to
assume that so long as there are outstanding
debtsandliabilities,theboardofdirectorswillnot
use the assets of the corporation to purchase its
ownstock,andthatitwillnotdeclaredividendsto
stockholderswhenthecorporationisinsolvent.

3) To write down the value of its fixed assets to ElementsofvalidByLaws

reflectthosepresentandactual
NOTE: any increase or decrease of capital stock
requiresapprovalofgovernmentagencylikeSECitcan
nevertakeplaceunlessSECapprovesthesame
Relevanceofdecreaseofcapital?
1. To reduce or wipe out existing deficit where no
creditorswouldtherebybeaffected;
2. When the capital is more than what is necessary
to procreate the business or reduction of capital
surplus;or,
1) It must not be contrary to law, public policy or
morals;
2) ItmustnotbeinconsistentwiththeAOI;
3) It must be general and uniform in its effect or
applicabletoallalikeorthosesimilarlysituated;
4) It must not impair obligations and contracts or
vestedrights;and
5) Itmustbereasonable
Whenshouldthebylawsbeadoptedorfiled?Canitnotbe
adoptedearlier?
a) After incorporation within 1 month (emanates
fromtheBOARD)

3. To write down the value of its fixed assets to b) Priormore convenient (signed by the
reflect the present actual value in case where incorporators)
thereisadeclineinthevalueofthefixedassetsof
Whowillsigntheadoptionclause?
thecorporation.
Majority of the stockholders or members attested to
PowertoAcquireOwnShares
bythecorporatesecretary
1) Toeliminatefractionalsharesarisingoutofstock
Whathappensifthecorporationfailstoadoptthebylaws
dividends;
2) Tocollectorcompromiseanindebtednesstothe from the time provided by the law? Would there be an
corporation,arisingoutofunpaidsubscription,in automaticrevocationorsuspension?
a delinquency sale, and to purchase delinquent
sharessoldduringsaidsale;and a) Propernoticeandhearing,mustfirstbecomplied
3) To pay dissenting or withdrawing stockholders with
entitled to payment for their shares under the
provisionsofthisCode.(a) b) Subjectthecorporationtoafine,asmaybeissued
bytheSEC
The corporation must at all times have unrestricted
retainedearningstoexercisethiscorporatepower

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AmendmentofByLaws
Sec.48,lastpar.amendment/repealoftheBylawsshall
only be effective upon the issuance by the SEC of a
certificatethatthesameisnotinconsistentwiththecode.
Absence of the STAMP APPROVAL of the SEC, it will not
becomevalid.
PowertoInvestFunds
Refers to invest in the form of money, stock,
bonds and other liquid assets and does not include real
propertiesorotherfixedassets.(Seerequirements)
Note: the approval of the stockholders or members is not
required where the investment is reasonably necessary to
accomplishitsprimarypurpose.
Section 42. Power to invest corporate funds in
anothercorporationorbusinessorforanyotherpurpose.
SubjecttotheprovisionsofthisCode,aprivatecorporation
mayinvestitsfundsinanyothercorporationorbusinessor
foranypurposeotherthantheprimarypurposeforwhichit
wasorganizedwhenapprovedbyamajorityoftheboardof
directors or trustees and ratified by the stockholders
representing at least twothirds (2/3) of the outstanding
capitalstock,orbyatleasttwothirds(2/3)ofthemembers
inthecaseofnonstockcorporations,atastockholder'sor
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
memberathisplaceofresidenceasshownonthebooksof
thecorporationanddepositedtotheaddresseeinthepost
officewithpostageprepaid,orservedpersonally:Provided,
Thatanydissentingstockholdershallhaveappraisalrightas
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,theapprovalofthestockholdersormembers
shallnotbenecessary.(171/2a)
For any other purpose other than the
primary purpose, stockholders consent or
approvalisnecessary
Thus, if its for the secondary purpose, it is
necessary
If its in connection with the primary
purpose,onlyboardresolutionisnecessary
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Delaramavs.MaaoSugar
There is a substantial and not remote connection
between the sugar bags and the sugar manufacture, thus
stockholdersapprovalisnotnecessaryforvalidity
A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and
imposedbytheCorporationLaw,hasthepowertoacquire,
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
sharesofanothercorporationisdonesolelyforinvestment
andnottoaccomplishthepurposeofitsincorporation,the
voteofapprovalofthestockholdersisnecessary.
Gokongwei,Jr.V.SEC
Anunauthorizedinvestmentwhichisnotillegalor
voidabinitioornotcontrarytolaw,morals,publicorderor
public policy, is merely voidable and may become binding
andenforceablewhenratifiedbythestockholders.
PowertodeclareDividends(retainingsurplusprofit)
General Rule: Stock corporations are prohibited from
retaining surplus profit in excess of 100%
oftheirpaidincapitalstock.
Exceptions:(justificationtorefusedeclarationofdividends)
1) When justified by definite corporate
expansionprojectsorprogramsapprovedby
theBOD;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/hisconsent,andsuchconsenthasnotyet
beensecured;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
reserveforprobablecontingencies.
Note: BODexerciseexclusiveauthorityastowhetheror
not the corporations declare cash or property
dividends.
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But as to the declaration of stock dividends, the
approval of the stockholders, holding or
representing at least 2/3 of the outstanding
capitalstockisrequired.
Power to Sell/Disposition of all/Substantially all of its
assets
Sec.40(2)Majorityvoteisnotrequiredif:
a) The sale/disposition does not involve all or
substantiallyalloftheassetsofthecorporationas
to render it incapable of continuing the business
or accomplishing the purpose for which it was
incorporated.
b) The same is necessary in the usual and regular
courseofbusiness,suchasRealtyCompany.
Thesaleorotherdispositionofallorsubstantiallyallofthe
corporate property or assets must be voted for by the
legitimateboardandconcurredinbybonafidestockholders
ormembers.(IslamicDirectorofthePhil.V.CA)
General Rule: Where a corporation sells or otherwise
transfers all of its assets to another
corporation,thelatterisnotliableforthe
debtsandliabilitiesofthetransferor.
Exceptions:
1) Where the purchaser expressly or impliedly
agreestoassumesuchdebts;
2) Wherethetransactionamountstoaconsolidation
ormergerofthecorporations;
3) Where the purchasing corporation is merely a
continuationofthesellingcorporation;and
4) Wherethetransactionisenteredintofraudulently
inordertoescapeliabilityforsuchdebts.
PreEmptiveRight
Sec. 39 all SHs of a stock corporation shall enjoy pre
emptive right to subscribe to all issues/dispositions of
shares of ANY CLASS, in proportion to their respective
shareholdings UNLESS such right is denied by the AOI or
amendmentthereto.
PreEmptiveRightincludes:
a) New shares to be issued pursuant to an increase
incapitalstock;or
b) From unissued shares which form part of the
originalauthorizecapitalstock;and
c) Alsocoverstradingstock
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Astockholdermaynotbeabletoexercisethepreemptive
rightinthefollowinginstances:
a) When the shares to be issued is in compliance
with the laws requiring stock offerings or
minimumstockownershipbythepublic;or
b) Shares to be issued in good faith with the
approval of the SHs representing 2/3 of the
outstandingcapitalstockeither:
1) In exchange for property needed for
corporatepurposeor
2) In payment of previously contracted
debts.
Stockholders or members or other persons shall be
solidarilyliableforalldamagessufferedbythecorporation
1) Whowillfullyandknowinglyvotefororassentto
apatentlyunlawfulactsofthecorporation
2) Whoareguiltyofgrossnegligenceorbadfaithin
directingtheaffairsofthecorporation;or
3) Whoacquiresanypersonalpropertyorpecuniary
interestinconflictwiththeirdutyassuchdirector.
General Rule: A director is not liable for misconduct of
codirectorsorotherofficers.
Exceptions:
1) Heconnivesorparticipatesinit;or
2) He is negligent in not discovering or acting to
preventit.
Resolutions passed in good faith by the board of directors
arevalidandbinding,andwhetherornotitwillcauselosses
or decrease in profits are not subject to the review of the
court.(MontelibanoV.BacolodMurciaMilling)
ThreeFoldDutyofDirectors
1) Obedience violated when willfully and
knowingly voting or assenting to a patently
unlawfulacts.
2) Diligence violated when the director fails to
manage the corporate affairs with reasonable
careandprudence.
3) Loyaltyviolatedwhen:
a) Whenadirectorortrusteeacquiresany
personalorpecuniaryinterestinconflict
withhisdutyassuchdirector;
b) Thenheattemptstoacquire,inviolation
of his duty, any interest adverse to the
corporation in respect to any matter
which has been reposed in him in
confidence;
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c) When he, by virtue of his office, CorporationbyEstoppel

acquires for himself a business
opportunitywhichshouldbelongtothe So defectively formed so that they are not to be
corporation, thereby obtaining profit to consideredadejureordefacto.
theprejudiceofsuchcorporation.
General partners liable even beyond his promise even his
Testindeterminingwhetheracorporationhastheimplied personalpropertiesarepronetoattachment.
powerstodocertainacts
To be liable, as general partners, for all debts,
a) Whether the act in question is in direct and liabilities and damages of a determinable corporation as
immediate furtherance of the corporation envisionedundersection21(corporationbyestoppel).
corporationsbusiness;
b) Fairlyincidenttotheexpresspowers;and When there is no 3rd persons involved and the
c) Reasonablynecessarytotheirexercise. problem arises between there members, therefore they
themselvesknowthatthereisnocorporationbyestoppel.
Ifso,thecorporationhasthepowertodoit,otherwisenot.

Who has a better right, already declared but yet paid
(shareofstock)

Righttoreceivevestupondeclaration.Whoeverowns
atthetimeofdeclarationownsthedividends

Unlessthereisastipulationtothecontrary

RequisitesofDeFactoCorporation

1. There is a valid statute under which the
corporationcouldhavebeencreatedasadejure

corporation.


2. An attempt, in good faith, to form a corporation

accordingtotherequirementsoflaw,whichgoes
farenoughtoamounttoacolorablecompliance
withthelaw;

3. A user of corporate powers, the transaction of
businessinsomewayasifit wereacorporation;
and,

4. Goodfaithinclaimingtobeanddoingbusinessas

acorporation.


Note: 4 requisites must go hand in hand take out
anyoneofthemtherecanbenodefactocorporation.

Ifthecertificateofregistrationhasnotbeenissued,maya
corporationdefactoexist?

NO!
Number 4 requirement, good faith in claiming to
beanddoingbusinessasacorporation.

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FrequentlyAskedQuestions:(FINALS/Enumeration)
1.Effectsofdeclarationofdelinquencyvisvis,therights
ofthestockholder:
a.) To vote and be voted upon No delinquent
stockholder shall be voted for or be entitled to
vote or to representation at any stockholders
meeting, nor shall the holder thereof be entitled
to any of the rights of a stock holder except the
righttoreceivedividends.
b.) To receive cash and stock dividends Any cash
dividends due on delinquent stock holder shall
first be applied to the unpaid balance on his
subscription plus cost and expenses, while stock
dividends shall be withheld until his unpaid
subscriptionispaidinfull.
2.Threemethodsofliquidationandtheireffectsonthe3
yearperiodtoliquidatethecorporateaffairs.
1. By the corporation itself through the Board of
Directorsorthegoverningboards.
Effects:
a) Claims for/against the corporation not
filed within 3 yrs. will become
unenforceable.
b) Actions pending for or against the
corporation when the 3 yr. period
expiresareabated.
2. By a trustee or by an assignee appointed by the
corporation.
Effects:
a) The3yr.periodwillnotapplyprovided
that the designation of the trustee is
madewithinthatperiod.
b) A dissolved corporation is still liable for
all its debts, liabilities in an action filed
against it, even if the case is filed
beyondthe3yr.period.(itmaybesued
evenbeyondthe3yr.period)
3. Byappointmentofareceiver.
Effects:
a) 3 yr. period will not apply because the
dissolved corporation is substituted by
the receiver who may sue or be sued
evenafterthatperiod.
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3. The general requirements for a valid Stock Holders
meeting.
Mustbeheldonthedatefixedinthebylawsorin
accordancewithlaw.
Priornoticemustbegiven.
Itmustbeheldintheproperplace.
Itmustbecalledbytheproperparty.
Votingandquorumrequirementsmustbemet.
4. Explain The right of a stockholder to compel the
corporation to pay the value of his shares is broader in a
closecorporation.
a) Close Corporation may withdraw and compel
the corporation to purchase his shares for any
reason with the limitation that the corporation
has sufficient assets to cover its liabilities
exclusiveofcapitalstocks.
b) OrdinaryCorporationunlesshesellshisshares,
astockholdercannotgetbackhisinvestmentnor
compel the corporation to buy his shares except
intheexerciseofhisappraisalright.
5. Explain in cases of deadlocks in a close corporation,
the courts can interfere in the management of the
corporateaffairs.
The court has a wide discretion in the
managementofthecorporationin casesofdeadlocks.The
court can interfere because the directors/stockholders are
so divided respecting the management of the corporations
business and affairs. The votes required for any corporate
actioncannotbeobtained.Asaconsequence,thebusiness
and affairs of the corporation can no longer be conducted
to the advantage of the stockholders. The business
judgmentrulecannotbeappliedhere.
6.ElementsofavalidByLaws
a) It must not be contrary to law, public policy or
morals.
b) It must not be inconsistent with the Articles of
Incorporation.
c) Itmustbegeneralanduniforminitseffect.
d) It must not impair obligations and contracts or
vestedrights.
e) Itmustbereasonable.
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7.InspectionofbooksofSubsidiaryCorporation
General Rule: The right of stockholders to examine
corporate books extends to a wholly owned subsidiary
whichiscompletelyunderthecontrolandmanagementof
the parent company where he is such a stock holder.
(Gokongweivs.SEC)
Exception:Thesubsidiaryandtheparentarelegallybeing
operatedasseparateanddistinctentities.
GeneralRule:Anyofficeroragentofthecorporationwho
refuses to allow the inspection of corporate books and
records,oranydirectorortrusteewhothrougharesolution
by the board votes for such refusal shall be liable for
damages and shall be guilty of an offense which shall be
punishableunderSec.144.
Exception:Itshallbeadefensethatthepersondemanding
inspection
Has improperly used any information secured
through any prior examination of the records or
minutes of such corporation or of any other
corporation;or
8.Instanceswhenthestockholdercannotavailofits
votingrights.
1) Declareddelinquent
2) TreasuryShares
3) Unregisteredtransfersofsharesofstock
4) NonVotingSharesexceptunderSec.6
9.Groundsforrevocationoflicense(ForeignCorporation)
1. Failuretofileitsannualreportorpayanyfeesas
requiredbytheCode;
2. Failure to appoint and maintain a resident agent
inthePhils;
3. Failure, after change its resident agent or if his
address,tosubmittotheSECastatementofsuch
change;
4. Failure to submit to the SEC an authenticated
copy of any amendment to its articles of
incorporation or bylaws or if any articles of
mergerorconsolidationwithinthetimeprescribe
bythecode.

Was not acting in good faith or for a legitimate 5. Misrepresentation of any material matter in any
purposeinmakinghisdemand. application, report, affidavit or other document
submitted;

Directorsofacorporationhavetheunqualifiedrightto 6. Failure to pay any and all taxes, impost,

inspect the books and records of the corporation at all
reasonable hours. However, there is no absolute right to
secure certified copies of the minutes of the corporation
untiltheseminuteshavebeenwrittenupandapprovedby
thedirectors.(Vergaruthvs.IsabelaSugarCo.,Inc.)
It is a required condition for the inspection of
corporate books that the one requesting it must not have
been guilty of using improper any information secured
throughapriorexaminationandthatthepersonaskingfor
such examination must be acting in good faith and for a
legitimate purpose in making his demand. (Gonzales vs.
PNB)
Remedies of a stockholder who is denied inspection of
corporatebooks:
1) Mandamus
2) Damages either against the corporate or the
responsibleofficer,or
3) CriminalcomplaintbasedonSec144oftheCode.
assessmentorpenalties,ifany,lawfulduetothe
PhilGovernmentoranyofitsagenciesorpolitical
subdivisions;
7. Transacting business in the Phils. outside of the
purpose for which such corporation is authorized
underitslicense;
8. Transacting business in the Phils. as agent of or
actingforandinbehalfofanyforeigncorporation
or entity not duly licensed to do business in the
Phils;
9. Any other grounds as would render it unfit to
transactbusinessinthePhils.
Othergroundsforrevocationoflicenseunderspeciallaws:
GeneralBankingActimminentdangerofinsolvency.
InsuranceCodeunsoundcondition,failuretocomplywith
the provisions of law or regulation obligatory upon it, a
conditionormethodofbusinesshazardoustothepublicor
its policy holders, impairment of its security deposit, or
deficiencyinthemarginofsolvency.

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Omnibus Investment Code willful violation of the Exception: The Corporation will continue as a body
provisions of existing laws and implementing guidelines or corporate for another period of 3 years from the time it is
violationofthetermsandconditionsofitslicense. dissolved for the purpose of winding up its affairs and the
liquidationofitsassets.

10. Requirements and procedure for the withdrawal of
ForeignCorporations:
1. Filingofapetitionforwithdrawaloflicense;
2. All claims which accrued in the Phils. have been
paid,compromiseorsettled;
3. All taxes, imposts, assessment and penalties, if
any,lawfullyduetothePhilippineGovernmentor
any of its agencies or political subdivisions have
beenpaid;
4. Publication of the petition for withdrawal once a
week for 3 consecutive weeks in a newspaper of
generalcirculationinthePhilippines;and
5. IssuanceofcertificateofwithdrawalbytheSEC.
11. Instances when a Foreign Corporation w/ no license
todobusinessinthePhilippinescansue:
a) The act or transaction involved is an isolated
transaction;(Bulakhidasvs.Navarro);
b) The foreign corporation is not seeking to enforce
any legal or contractual rights arising from, or
growing out of any business which it has
transactedinthePhilippines;
Threemodesofdissolution:
1. Bytheexpirationofthecorporateterm;
2. By voluntary surrender of its primary franchise
(voluntarydissolution);or
3. By the revocation of its corporate franchise
(involuntarydissolution).
Voluntarydissolutionwherenocreditorsareaffected:
Formalandproceduralrequirements;
1. Majority vote of the board of directors
andtrustees;
2. Sendingofnoticetoeachstockholderor
member either by registered mail or
personal delivery at least 30 days prior
tothemeeting;
3. Publication of the notice of time, place
and subject of the meeting for 3
consecutive weeks in a newspaper
published in the place where the
principal office of the said corp. is
located or in a newspaper of general
circulationinthePhils.

c) Thepurposeofthesuitistoprotectitstrademark, 4. Resolution adopted by the affirmative

tradename, reputation or good will. (Western
EquipmentandSupplyCo.vs.Reyes);
d) The suit is based on violation of the RPC;
(LechemiseLacostevs.Fernandez);
e) Theforeigncorporationismerelydefendingasuit
filedagainstit.(Time,Inc.vs.Reyes);
f) Thepartyisestoppedtochallengethepersonality
ofthecorporationbyenteringintoacontractwith
it. (Communication Materials and Design, Inc vs.
CA)
12.Whatisdissolution?
Itistheextinguishmentofthecorporatefranchise
andtheterminationofcorporateexistence.
voteofthestockholdersowningatleast
2/3 of the outstanding capital stock or
2/3ofthemembersatthemeetingduly
calledforthepurpose.
5. Acopyoftheresolutionauthorizingthe
dissolution must be certified by a
majority of the Board of Directors or
Trustees and countersigned by the
corporatesecretary.
6. Issuanceofacertificateofdissolutionby
theSEC.
Amereresolutionbythestockholderortheboard
ofdirectorsofacorporationtodissolvethesamedoesnot
affectthedissolutionofacorporation.(DaguhoyEnterprises
vs.Ponce)

GeneralRule:Whenacorporationisdissolved,itceasesto
beajuridicalentityandcannolongerpursuethebusiness
forwhichitisincorporated.

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Voluntarydissolutionwherecreditorsareaffected:
Formalandproceduralrequirements:
1. Affirmative vote of the stockholder
representing at least 2/3 or the outstanding
capital stock or at least 2/3 of the members
atameetingdulycalledforthatpurpose;
2. Petitionforthedissolutionshallbefiledwith
theSECsignedbythemajorityofitsboardof
directorsortrusteesorotherofficershaving
themanagementofitsaffairs,verifiedbythe
presidentorsecretaryoroneofitsdirectors
or trustees, setting forth all claims and
demandsagainstit;
3. Issuance of an order by the SEC reciting the
purposeofthepetitionandfixingthedateon
or before which objections thereto may be
filed by any person, which date shall not be
lessthan30daysnormorethan60days;
4. Before such date, a copy of the order must
be published once a week for 3 consecutive
weeks in a newspaper of general circulation
published in the city or municipality where
the principal office is situated or in a
newspaperofgeneralcirculationinthePhils.;
5. Posting the same order for 3 consecutive
weeks in 3 public places in such city or
municipality;
6. Upon5daysnotice,givenafterthedateon
which the right to file objects has expired,
the SEC shall hear the petition and try any
issuemadebytheobjectionsfiled;and
7. Judgment dissolving the corporation and
directing disposition of its assets as justice
requiresandtheappointmentofareceiver.
Appointment of a receiver is only permissive and
notmandatory.Thelawisintendedtoletthestockholders
have control of the assets of the corporation upon
dissolutionandwindingupofitsaffairs.
13. Grounds for Involuntary Dissolution under Sec. 6 PD
902A
1. Fraudinprocuringthecertificateofregistration;
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudiceofordamagetothegeneralpublic;
3. Refusaltocomplyordefianceofanylawfulorder
oftheCommissionrestrainingcommissionofacts
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which would amount to a grave violation of its
franchise;
4. Continuous inoperation for a period of at least 5
years;
5. Failuretofilebylawswithintherequiredperiod;
and
6. Failure to file required reports in appropriate
forms as determined by the Commission within
theprescribedperiod.
OthergroundsprovidedforintheCorporationCode:
1. ViolationofanyprovisionoftheCode(Sec.144);
2. In case of deadlock in a close corporation (Sec.
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
(SEC.105).
14.Distributionofassetsupondissolution
Rulesofdistribution:
1. All liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or
adequateprovisionshallbemadetherefore;
2. Assets held by the corporation upon a condition
requiring return, transfers or conveyance, and
which condition occurs by reason of the
dissolution, shall be returned, transferred or
conveyedinaccordancewithsuchrequirements;
3. Assets received and held by the corporation
subjecttolimitationspermittingtheiruseonlyfor
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
requiringreturn,transferorconveyancebyreason
of the dissolution, shall be transferred or
conveyed to one or more corporations, societies
ororganizationsengagedinactivitiesinthePhils.
substantially similar to those of the dissolving
corporation;
4. Assets other than those mentioned in the
precedingparagraphs,ifanyshallbedistributedin
accordance with the provisions of the AOI or the
bylaws,totheextentthattheAOIorthebylaws,
determine the distributive rights of members, or
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any class or classes of members, or provide for 17.Effectsofmergerandconsolidation:

distribution;and
1. Therewillbeasinglecorporation.Incaseof
5. In any other case, assets may be distributed to merger,thesurvivingcorporation,orincase
such persons, societies, organization or of consolidation, the consolidated
corporations,whetherornotorganizedforprofit,
corporation.
asmaybespecifiedinaplanofdistribution.
2. Termination of the corporate existence of
Procedure and Requirement for a plan of distribution
assets: the constituent corporations, except that of
thesurvivingorconsolidatedcorporation.
1. Majorityvoteoftheboardoftrusteesadoptinga
planofdissolution; 3. The surviving or the consolidated
corporation will possess all the rights,
2. Approval of such plan by at least 2/3 of the
privileges, immunities and powers and shall
members having voting rights present or
representedbyproxyataregular/specialmeeting besubjecttoallthedutiesandliabilitiesofa
forthatpurpose;and corporationorganizedunderthisCode.
3. Prior written notice setting forth the proposed 4. The surviving or the consolidated
planofdistributionorasummarythereofandthe corporation shall possess all the rights,
date, time and place of such meeting shall be privileges, immunities and franchise of the
giventoeachmemberentitledtovote. constituentcorporation,andallpropertyand
all receivables due on whatever account,
includingtheinterestof,orbelongingto,or
15. Three ways in w/c a person may become a
due to its constituents corporation shall be
stockholder:
deemed transferred to and vested in such
1. Byacontractofsubscriptionwiththecorporation; surviving or consolidated corporation
2. By the purchase of treasury shares from the withoutfurtheractordeed;and
corporation;and 5. The surviving or consolidated corporation
3. Bypurchaseoracquisitionofsharesfromexisting shall be responsible and liable for all the
stockholders (includes purchase from the stock liabilities and obligations of each of the
exchange). constituent corporations. The rights of
16.Considerationfortheissuanceofstockmaybeanyor creditors or liens upon the property of any
acombinationofanytwoormoreoftheff: such constituent corporations shall not be
impairedbysuchmergerorconsolidation.
1. Actualcashpaidtothecorporation;

2. Property, tangible or intangible, actually received
by the corporation and necessary or convenient
foritsuseandlawfulpurposesatafairvaluation

equal to the par or issued value of the stock
issued;
3. Labor performed or services actually rendered to
the corporation (stocks shall not be issued in

exchange of promissory notes or future services.
Theirrealizationisuncertain);
4. Previously incurred indebtedness by the
corporation;

5. Amounts transferred from unrestricted retained
earningstostatedcapital;and

6. Outstanding shares in exchange of stocks in the

eventofreclassificationorconversion.

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FrequentlyAskedQuestions:(FINALS/Definitions)
1.WashSaleanytransactioninasecuritywhichinvolves
nochangeinthebeneficialownershipthereof
2.MatchedOrderreferstoanorder/sforthepurchaseor Whoisaninsider?
sale of security with the knowledge that a simultaneous
order/sofsubstantiallythesame:
a) Time
b) Sizeand
c) Prizeforthesaleorpurchaseofsuchsecurityhas,
orwillbeenteredbyorforthesameordifferent
parties.
3.WashSaleandMatchOderWhentheymaybecome
illegal:
Theymustbeusedasmeanstocreateafalseor
misleading appearance of active trading in the security
concerned.
4.SortSale
Sellingsecurityw/cthevendordoesnotown.
Illegal per se, unless done in accordance w/ the
rulesandregulationsoftheSEC.
5.InsiderTrading
General Rule: An insider may not sell or buy a security of
the issuer while in possession of material information with
respect to the issuer or the security that is not generally
availabletothepublic.
Exceptions:
1. The insider proves that the information was not
gainedfromsuchrelationship;or
2. The insider disclosed the information to a party
reasonablybelievedbytheinsidertopossessthe
information.
Material non publication information has not been
generallydisclosetothepublicand;
1. Would likely affect the market price of the
security after being disseminated to the public
andthelapseofareasonabletimeforthemarket
toabsorbtheinformation;or
2. Would be considered by a reasonable person
important under the circumstances in
determininghiscourseofactionwhethertobuy,
sellorholdasecurity.
An insider may not communicate material nonpublic
information to any person who will likely buy or sell a
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security of the issuer while in possession of such
information
Trading by persons who have material nonpublic
informationaboutatenderofferisprohibited.
a) Theissuer;
b) A director or officer (or person performing a
similar functions) of, or a person controlling the
issuer;
c) A person whose relationship or former
relationshiptotheissuergivesorgavehimaccess
to material information about the issuer or the
security that is not generally available to the
public;
d) Agovernmentemployee,ordirector,orofficerof
an exchange, clearing agency and/or self
regulating organization who has access to
materialinformationaboutanissuerorasecurity
thatisnotgenerallyavailabletothepublic;or
e) A person who learns as such information by
communication from any of the foregoing
insiders.
6.Markingtheclosetheplacingofpurchase/saleorder,
atornearthecloseofthetradingperiod.
Note: Marking the close, painting the tape, squeezing
the float, hype and dump, and boiler room operations are
illegalwhentheyareeffectedto:
1. Raise the price or induce the purchase of a
security or controlling, controlled or commonly
controlledcompanybyothers;
2. Depress their 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
companyofothers;and
3. Createsactivetradingtoinducesuchpurchaseor
salethroughsaiddevisesorschemes.
7. Distinguish between voting rights of stockholder in a
stock corporation and members in a nonstock
corporation:
Nonstockcorpmaybelimited,broadened/deniedbythe
bylaws.
Stock corp may vote personally, or by representative or
proxyorbyvotingtrustagreement,executor,administrator,
receiverorotherlegalrepresentativeappointedbycourt.
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8. Close Corporation distinguished from Ordinary Stock

The beneficial owner of the The owner of the shares
Corporation.
share is disqualified to be a maybeelectedasadirector
director sincelegaltitleremainswith
CLOSECORPORATION ORDINARYSTOCKCORP him

The number of stockholder No limitation as to number The purpose is to acquire Generally used to secure
cannotexceed20. ofshareholders. voting control of the voting and quorum
corporation requirements or merely for
Thenumberofdirectorscan Maximum number of thepurposeofrepresenting
effectivelybemorethan15. directorsis15. anabsentstockholder

Shares of stock are subject Generally no restriction on Irrevocable Revocable unless coupled
tospecifiedrestrictions. transferofshares. withinterest

Stockholders may take an Directors are liable for torts Thetrusteecanactandvote Aproxyholdercangenerally
active part in corporate only if they acted at any meeting during the act as such only at a
management by vesting negligentlyorfraudulently. duration of the voting trust particularmeeting
managementtothemrather agreement
than the a board of
directors The trustee may vote in Aproxyholdermustvotein
personorbyproxy person
TheAOImayprovidethatall Officers are elected by the
officers shall be elected or BoardofDirectors. The duration may exceed 5 The duration may not
appointed by the years exceed5years
stockholders.
Must be notarized and filed Need not be notarized nor
Preemptive rights of Preemptive rights may be withtheSEC filedwiththeSEC
stockholders are broader as denied as provided for in
itincludesallissueswithout Sec.39.
exception. 10.HighestBidder
Issuchbidderwhoshalloffertopaythefullamountof
Astockholdermaywithdraw Unless he sells his shares, a the balance on the subscription together with accrued
and compel the corporation stockholdercannotgetback interest,costofadvertisementandexpensesofsale,forthe
to purchase his shares for his investment nor compel smallestnumberofsharesorfractionofsale.
any reason with the the corporation to buy his
limitation only that sharesexceptintheexercise Groundstoquestionthedelinquencysale:
corporation has sufficient ofhisappraisalright.
1. Irregularities or defect on the notice of sale;
assets to cover its liabilities
or
exclusiveorcapitalstock.
2. Irregularitiesordefectinthesaleitself.

Twogroundsbeforeanactiontorecoverdelinquentstocks
9.VotingtrustdistinguishedfromProxy irregularitiessoldmaybeallowed:

VOTINGTRUST PROXY 1. The party seeking to maintain such action must

firstpaysortenderstothepartyholdingthestock
The beneficial owner of the Legal Title remains with the the sum for which the same was sold, with
shares ceases to be a beneficialowner interestfromthedateofthesaleatthelegalrate;
stockholderofrecordofthe and
corporation 2. The action shall be commenced by the filing of a
complaintwithinsixmonthsfromthedateofthe
The trustee votes as owner The proxy holder votes sale.
oftheshares merelyasanagent

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11. Isolated transaction/cases where subsequent
transactions were entered into by reason of principal
transaction.
Isolated transaction is an act or transaction that
does not implycontinuity of commercial dealings
orarrangements.
Bulakhidasvs.Navarro
MarshalWellsvs.ElserandCo.
12. Can the court determine therules in thecorporation
solewhentherearenorulesordiscipline?
No, the courts intervention is not necessary in
cases where the rules, regulations and discipline of the
corporation sole regulated the method of acquiring,
holding, selling and mortgaging real estate and personal
property.
13. Subscription for shares of stock of a corporation is
indivisible.
Sec.64.Nocertificateofstocksshallbeissuedto
a subscriber until the full amount of his subscription
together with interest and expenses (in case of delinquent
shares),ifanyisdue,hasbeenpaid.
14.Certificateofstockismerelyquasinegotiableandis
nonnegotiable.
While it may be transferred by endorsement
coupled with delivery thereof, and therefore merely quasi
negotiable, it is nonetheless nonnegotiable in that the
transferee takes it w/o prejudice to all the rights and
defensesw/cthetrueandlawfulownermayhaveexceptin
so far as the principles governing estoppel may apply.
(DelosSantosvs.McGrath).
15. Subscribing is equivalent w/ purchase of unissued
stock.
BP 68 eliminates the distinction between
subscribing and purchase of unissued stock. (automatically
becomesstockholder)
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16.VotingTrustAgreement
Is one created by an agreement between a group of
stockholders of a corporation and a trustee, whereby it is
provided that for a term of years, or for a period of
contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such
stockholders,shallbelodgedinthetrustee.
It is a device ofbinding stockholders to voteasa unit
and thus assuring a desirable stability and continuity in
managementinsituationswhereitisneeded.
17.AppointmentofMGMTCommittee
Special Commercial Court may create or
appoint a mgmt. committee upon petition or motu
propio to undertake the management of
corporations, partnership or association not
supervised or regulated by other government
agenciesinappropriatecaseswherethereis:
1. Imminentdangerofdissipation;and
2. Loss or wastage or destruction of
assets or other properties or
paralyzation of business operations
of such corporation or entities
which may be prejudicial to the
interest of minority stockholder,
parties litigant or the general
public. (Sy Chim vs. Sy Siy Ho and
SonsInc.)
Therehabilitationreceivershallnottakeover
the management and control of the debtor but shall
closely oversee and monitor the operations of the
debtorduringthependencyoftheproceedings.
Heshallbeprimarilytaskedtostudythebest
waytorehabilitatethedebtorandtoensure
that the value of the debtors property is
reasonably maintained pending the
determination of whether or not the debtor
shouldberehabilitate,aswellasimplement
therehabilitationplanafteritsapproval.
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PROBLEM1. AisthepresidentofXco,Inc.whousedhis
own properties to secure and guaranty a loan for the
corporationsoperationalneedsfromZFinancial,Inc.
When the funds were released, B, the chairman of the
Board misappropriated 10M for his personal use. The
minority stockholders later charge B for estafa under the
RPC and by virtue of the misappropriation, the minority of
theboardandstockholdersfiledapetitionforsuspensionof
payments for all claims against the corporation w/c was
grantedbytheproperforum.
a) B files a motion to dismiss the estafa cases
alleging that since the matter involves an intra
corporate controversy, the case falls w/in the
exclusive jurisdiction of the Special Commercial
Court.Ruleandexplain.
General Rule: The Special Commercial Courts shall have
original and exclusive jurisdiction to hear and decide cases
involvingdevicesorschemesemployedbyoranyactsofthe
board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation w/c
may be detrimental to the interest of the public and/or of
the stockholder, partners, members of associations or
organizationregisteredwiththeSEC.
Exception:Thecomplaintisbasedontheviolationofthe
RevisedPenalCode(Ex.Estafa).Criminalcaseispersonalin
natureandnotagainstthecorporation.
Inorderthattherebean intracorporatecontroversy.
Thefollowingmustoccur:
1. Anintracorporaterelationship:
a) Between and among the stockholders,
members, associates of a corporation,
partnershiporassociation;
b) Between them and the corporation,
partnershiporassociation;or
c) Betweenthecorporation,partnershipor
associationandtheState.
2. The controversy must arise out of said
relationship.
Note:Ifthepetitionerdoesnothaveaprimafacietitle
tothesharessoughttoberecordedinhisname,thedispute
isnotintracorporateandtheordinaryorregularcourtcan
assumejurisdictionoverthecase.(Riveravs.Florendo;Tay
vs.CA)
The dispute among the parties must be intrinsically
connected with the regulation of the corporation. If the
nature of the controversy involves matters that are purely
civil in character necessarily the case does not involve an
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intracorporate controversy (Speed Distributing Corp. vs.
CA)
b) Afterthegrantofsuspensionofpaymentsorder,z
FinancialInc.proceedstoextrajudiciallyforeclose
onthepropertiesofAwhomovesforexception
xxxIsthecontentionofAcorrect?
No,thecontentionofAisincorrect,citingthedecisionin
the Union Bank case, that if a corporation secures a loan,
and one of its key officers uses his private properties to
guarantee the loan, corporation files for suspension, the
bankmayforeclosethepropertybecauseitisnotanaction
foraclaimagainstthecorporation.
Note: The reason for suspension of payments for claims
against a distressed corporation is to enable the
management committee to effectively exercise its powers
free from judicial or extrajudicial interference that might
unduly hinder or prevent the recue of the debtor
company.(PALvs.Sps.SadicandKurangkingking)
EqualityandEquityduringsuspensiontheassetsareheld
intrustfortheequalbenefitofallcreditorstoprecludeone
fromobtaininganadvantageorpreferenceoveranotherby
the expediency of an attachment, execution or otherwise.
Thecreditorsshouldstandonequalfooting.Notanyoneof
themshouldbegivenanypreferencebypayingoneofthem
ahead of the others. (Alemars Sibal and Son, Inc. vs.
Elibenas)
Threetypesofsuspensionofpayments:
1. Simplesuspensionofpaymentsmeredeferment
of payment of debts and it refers to a petition
which is filed by a corporation which possesses
sufficientassetstocoveritsliabilitiesbutforesees
the possibility of meeting them when they
respectively fall due owing to temporary liquidity
problems.
2. Suspensionofpaymentswiththeappointmentof
a receiver with or w/o a rehabilitation plan. The
rehabilitation plan is a plan under which the
corporation will reschedule the payment of its
debts and liabilities. Either the petitioner
corporation will propose the plan or ask for the
appointment of a receiver who will study and
maketheplan.
3. Suspension of payments where the corporation
has no sufficient assets to cover its debts and
liabilities with or w/o the appointment of a
management committee with or w/o a
rehabilitationplan.
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Problem 2. Z corp. was registered in 1978 or before the thereafter transferred the latter certificate by
effectivity of the Corporation Code. The by laws of the endorsing and delivering it to D. Will D acquire
corporationallowittoissuecertificateofstockcoveringthe title?Explain.
corresponding number of shares w/c the subscriber may
Yes,DwillacquiretitletothestockcertificateNo.010as
havealreadypaid.
thiswouldbetheexceptiontothegeneralrule.
Asubscribedto1Msharesw/aPVof1.00/shareandhave
Exception: The Corporation will be estopped to deny the
paid 500K on his subscription. He now compels the
validity thereof. The subsequent purchaser in good faith
Corporation to issue a stock certificate covering 500K
tookthesharesbyvirtueofthegenuinessofthecertificates
shares.
issuedbythecorporationoroftherepresentationmadeby
a) The corporation seeks your advice as counsel. the corporation that the same is valid and subsisting and
Whatadvicewillyougive?Explain. that the person named therein is a stockholder of the
corporation.
Sec.64.IssuanceofstockcertificatesNocertificateof
stockshallbeissuedtoasubscriberuntilthefullamountof e) WillAbedeprivedofhistitle?Explain.
his subscription together with interest and expenses (in
No, A cannot be deprived of his right by virtue of an
case of delinquent shares), if any is due, has been paid.
unauthorizedtransfer.Hecangotothecorporationandask
Thus,AshouldcomplywiththeCorporationCode.
forthecancellationofthestockcertificatedue tofraudor
Astockholderwhosesubscriptionisnotfullypaidmay forgery.
not be issued a stock certificate for that portion already
D may compel the corporation to recognize him as a
paid. (Fua Chan vs. Summers and China Banking
stockholder or claim reimbursement and damages against
Corporation)
thelatter.
General Rule: Holders of subscribed shares not fully paid
f) Assume that the corporation has unissued and
areentitledtoalltherightsofastockholder.
unsubscribed shares worth 20M and the
Exception:Thattheshareshavebeendeclareddelinquent; corporation want to issue them at the PV of
orthestockholderexerciseshisappraisalright. P1.00/shareinsteadofitsFMVofP2.00/share.
b) Assume that A is now the owner of the stock Theyseekyouradviceascounseliftheycandoso
certificate No. 008. B, his brother stole the issued at P1.00. What advice will you give?
certificate,forgedthesignatureofAandsoldthe Explain.
same to C, who is a purchaser in good faith and
Yes,theycanissueitatthePVofP1.00/share,becauseit
forvalue.Whohasabetterrightovertheshares
is not below the par value. There is no watered stock
covered by stock certificate No. 008? A or B?
becausethebasisofwateredstockistheparvalueandnot
Explain.
thefairmarketvalue.
Astillhasabetterrightoverthesharesunderthedoctrine
Waysinwhichwateredstockmaybeissued:
ofnonnegotiabilityofcertificateofstock.
1. For monetary consideration less than its par or
GeneralRule: Inforgedorunauthorizedtransferofstock
issuedvalue;
thepurchaseracquiresnotitleasagainstthelawfulowner
and will have no right or remedy against the corporation 2. For a consideration in property, tangible or
(nonnegotiabilityofstockcertificates). intangible, valued in excess of its fair market
value;
c) Assume that C transfers the said stock certificate
to D. Who is also a bona fide purchaser, will D 3. Gratuitously or under agreement that nothing
acquiretitle?Explain. shallbepaidatall;or
No,samebasistothepreviousanswer. 4. Intheguiseofstockdividendswhenthereareno
surplusprofitsofthecorporation.
d) Assume that before C transferred the shares, he
surrendered the said stock certificate to the
corporate secretary for the
registration/cancellation and for issuance of a
new stock cert in his (Cs favor). The corporation
cancelled the said stock certificate and issued
stock certificate No. 010 in the name of C, who

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g) Further,assumethatthecorporationentersintoa
contractofsale/purchaseofsomeofitsremaining
unsubscribed shares w/ X who pays a down
paymentof50%w/aconditionthathe(X)willnot
be considered as a stockholder until the full
paymentoftheacquisitioncostandthatthenand
onlythenshallbeissuedastockcertificate.
Pending payment of the balance, the properties,
inventories and all assets of the corporation was
razedinfire.Thecorporationnowwantstocollect
the unpaid portion of the acquisition cost of the
shares.
X seeks exception in that the contract is one of
sale,andtheobligationofthepartiesisreciprocal
anddependentononeanother.RuleandExplain.
X is correct. X is not obliged to pay the balance because
the agreement is one of sale. Under the NCC, there is no
obligation to pay if there is no more consideration. Also, X
willbeliableonlyifhebecameastockholder.Inthecaseat
hand,Xwillbeastockholderonlyifhepaidthefullamount.
Problem3.XistheownerofP1MsharesofA,Inc.whose
sharesarelistedinthestockexchange.
The shares are being traded at P1.00/share. He has an
accountin2brokerfirms,B1andB2.
He directs B1 to sell 250T shares at 10:30 at
1.25/share;and
At10:32,hedirectsB2tobuythesameofshares
atthesameprice.
a) CanXbeliableforwashsaleandmatchedorder?
Explain.
Yes. Sec. 24 (a), SRC. X creates a false/misleading
appearance of active trading by effecting any transaction
which involves no change in the beneficial ownership
thereof and by entering an order or orders for the
purchasedoforsaleofsecuritywith theknowledgethata
simultaneousorder/sofsubstantiallythesame:
Time
Sizeand
Prizeforthesaleorpurchaseofsuchsecurityhas,
orwillbeenteredbyorforthesameordifferent
parties.
By performing similar acts where there is no change in
beneficialownership.
b) Ifhesellssharesofstockwhichhedoesnotown,
whatunlawfulactwillhecommit?
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If such would be the case, X is guilty of short sale. Short
saleisthe:
Sellingsecurityw/cthevendordoesnotown.
Illegal per se, unless done in accordance w/ the
rulesandregulationsoftheSEC.
Note: Wash Sale and Match Oder When they may
becomeillegal:
Theymustbeusedasmeanstocreateafalseor
misleading appearance of active trading in the security
concerned.
Note: For a valid transfer of stocks, the ff. must be strictly
compliedwiththemodeoftransferprescribebylaw.
1. Theremustbedeliveryofthestockcertificate;
2. Thecertificatemustbeendorsedbytheowneror
his attyinfact or other persons legally authorize
tomakethetransfer;and
3. Tobevalidagainstthirdparties,thetransfermust
berecordedinthebooksofthecorporation.
An assignment, without endorsement and delivery,
whilevalidasamongtheparties,doesnotnecessarily
makethetransfereffective.Theassigneecannotenjoy
thestatusofastockholder,cannotvotenorbevoted,
and will not be entitled to dividends insofar as the
assignedsharesareconcerned.(RuralBankofLipaCity
vs.CA)
After a valid transfer of share, the right to have such
registeredcommencestoexist.However,itwouldnot
followthatsaidrightshouldbeexercisedimmediately
orwithinadefiniteperiod.(Wonvs.WackWackGolf&
CountryClub,Inc.
Certificate of stocks are not negotiable instruments.
Consequently,atransfereeunderaforgedassignment
acquiresnotitlewhichcanbeassertedagainstthetrue
owner,unlesshisownnegligencehasbeensuchasto
create and estoppel against him. If the owner of the
certificatehasendorseditinblankanditisstolenfrom
him, no title is acquired by an innocent purchaser for
value.(DeLosSantosvs.Republic)
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Problem4.Xsubscribedtosharesofstockandpaidit.He conductedandtheresultsthereof.(LionsClubInternational
did not however register it on Feb 14, 2000, he assigned vs.CA)
saidsharesofstocktohisgirlfriend,Y,throughanotarized
Exception:
deed.Yaskedthecorporatesecretarytoregisteritbutthe
latter refused to do so. Hence Y filed for mandamus. The 1. Thereisfraud,oppressionorbadfaith;
corporate secretary filed a motion to dismiss contending
thatthereisnocauseofactionbecausethereisnoproper 2. The action complained of is capricious, arbitrary
party. orunjustlydiscriminatory;

a) Decidethecase. 3. Propertyandcivilrightsareinvaded;

The right of a transferee/assignee to have stocks 4. Theproceedingsareviolativeoflawsofsociety,or

transferredtohisnameisaninherentrightflowingfromhis the law of the land, as by depriving a person of
ownershipofstocks.Thecorporationsobligationtoregister dueprocessoflaw;
itisministerial.(RuralBankvs.Salinas) 5. Theres lack of jurisdiction on the part of the
b) What if it was transferred to Y through a pledge tribunalconductingtheproceedings;
where it was provided that in case of failure to 6. Theproceedingsareillegal;
pay,Xwasauthorizedtoforeclosesaidmortgage.
Willmandamuslie? 7. Theorganizationexceedsitspowers;or

No, the pledgee of shares of stock does not vest 8. An incorporated association or its members avail
ownership of such shares to the pledgee. The pledgor of the remedy of instituting an intracorporate
remainstheownerduringthependencyofthepledgeand dispute.
priortoforecloseandsale.Thus,thepledgeehasnorightto
demandtheregistrationofthepledgedsharesinhisname.

In order that a writ of mandamus may issue, it is
essential that the person petitioning for the same has a
clear legal right to the thing demanded and that is it the
imperative duty of the respondent to perform the act
required.(TayvsCA)

Problem5.A,B,andCareincorporatorsofXYZCorp.They
diedinanaccident.D,creditorofthecompany,alsodiedin
an accident. Can E, the son of D, claim against the
corporationbycitingthecaseofClementevs.CA?
OcanclaimagainstthecorporationbecauseDisthe
successorininterest of E. The Supreme Court ruled that,
those having any pecuniary interest in the assets including
not only the stockholders but likewise the creditors of the
corporation,canmakeproperrepresentationswiththeSEC.
(Gelanovs.CA)

Problem 6. X is the VP of Y company. The board passed a

resolution terminating the services of X for lack of
confidence. X filed a case before the NLRC for the illegal
dismissalforthereinstatementwithbackwages.Ifyouare
the counsel of Y company, what would you interpose as a
defense?
General Rule: The courts will not interfere on matters
involving the internal affairs of an unincorporated
association such as elections, the manner by which it was

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