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Relevant Provision:
Sec. 41. Power to acquire own shares. - A stock corporation shall have the
Sec 41. Power To Acquire Own Shares 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
May a corporation acquire back its own shares?
be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
GR: no, a corporation may not acquire back its own shares 2. To collect or compromise an indebtedness to the corporation, arising out of
It would be tantamount to distributing capital and it will be to the unpaid subscription, in a delinquency sale, and to purchase delinquent shares
prejudice of the creditors by virtue of the trust fund doctrine. sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.
1 | U N I V E R S I T Y O F S A N C A R L O S
Sec 42. Power To Invest Funds In Another Corp It was equivalent to the SH dividends, but instead of declaring
dividends they made it appear that it was an expense of the company
to finance the SH seminar abroad. It will not be considered as income
Relevant Provision: on the part of the SH, hence no tax.
Sec. 42. Power to invest corporate funds in another
corporation or business or for any other purpose. - Subject to Amendment of NIRC to address IAE
the provisions of this Code, a private corporation may invest its funds However, the BIR discovered this scheme. They came up with the
in any other corporation or business or for any purpose other than the amendment to the NIRC to impose improperly accumulated earnings
primary purpose for which it was organized when approved by a tax (IAET) as penalty for erring corporations. The corporation shall be
majority of the board of directors or trustees and ratified by the liable for IAET when its undistributed profits will exceed 100% of the
stockholders representing at least two-thirds (2/3) of the outstanding paid up capital.
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 XPT TO XPT: When accumulated earnings are allowed
meeting duly called for the purpose. Written notice of the proposed 1. When justified by definite corporate expansion projects or
investment and the time and place of the meeting shall be addressed programs;
to each stockholder or member at his place of residence as shown on 2. When the corporation is prohibited under any loan agreement
the books of the corporation and deposited to the addressee in the with any financial institution or creditor from declaring cash
post office with postage prepaid, or served personally: Provided, That dividends without securing its/his consent; or
any dissenting stockholder shall have appraisal right as provided in this 3. When it can be clearly shown that such retention is necessary
Code: Provided, however, That where the investment by the under special circumstances, such as when there is a need for
corporation is reasonably necessary to accomplish its primary purpose special reserve for probable contingencies.
as stated in the articles of incorporation, the approval of the Ex typhoons
stockholders or members shall not be necessary. 4. Issue stock dividends
Can the stockholders demand for the declaration of dividends? Important: Until I am able to encash it, I have not yet earned an
GR: No. The decision to declare dividends lies on the Board. The income. Stock dividends are not subject to income tax because it is
Board has the power to manage the corporation. Hence, when the not yet in cash. This is so because the value of the shares of stock
corporation has profits, it is the Board who decides what to do with it. may fluctuate depending upon its market value, book value or par
The Board, in its discretion, may not declare it as dividends but rather value. Because the stocks fluctuate, it is still not taxable because it is
use it for business expansion projects. still unrealized gain, and we wouldn’t know the value
XPT: When there is improper accumulation of profits. This happens Recall: Value Of Shares
when the corporation retains surplus profits in excess of 100% of
its paid-in capital stock. In which case, the stockholders can 1. Book value - Assets/Number of Shares
demand for the declaration of dividends. 2. Market Value - The value that the buyers in the market are
willing to buy and shareholders are willing to sell. Increases if
Situation: business of the corporation is good. Decreases if business is
You are a SH and in April of a taxable year, you heard that the doing badly. May be higher or lower than par value.
BOD intends to declare dividends. As per your computation, 3. Par Value - Pre-determined value, the result of the total number
your tax for the year would be high, excluding the taxes that of shares to be issued divided into the number of shares that the
you would soon incur upon receiving the dividends. Would you incorporators have
be happy that the BOD would declare dividends?
No. You would tell the BOD not to declare dividends because of the Types Of Dividends
additional taxes that you would incur.
Types Of Dividends
Can you compel the Corporation to declare dividends if the 1. Stock dividends
retained earnings has not reached more than 100% of the 2. Property dividends
paid up capital? 3. Cash dividends
No. 4. Combination of Cash, Stock or Property Dividends
Illustration: However, if dividends were declared and you still have unpaid
The SH would be attending a seminar abroad to observe the latest subscription?
trends of the business and all expenses were paid by the corporation. Apply first the dividends to the unpaid subscription.
2 | U N I V E R S I T Y O F S A N C A R L O S
Effect of Delinquency on Right to Dividends
TN: This is the amount that the corporation transfers from its surplus
profit account to its capital account. In effect, the capital stock is
Delinquent Stocks increased without any corresponding increase in the corporate assets
These are unpaid subscriptions that have become due and by the issuance of stock dividends.
demandable and no payment is made.
De Leon: If the actual capital is increased by accumulated profits and such
When Unpaid subscriptions become due and demandable profits are distributed to the stockholders in the form of stock dividends, the
1. Upon the arrival of the period / date specified within which to pay capital stock is increased, for the profits are reinvested in the corporation by
2. Upon call of the board – it is a demand to pay transferring the same from surplus account to a capital account. The amount
corresponding to the stock dividends declared may be used to cover the required
25% subscription to increase the authorized capital stock and, if sufficient, will
Rules on Delinquent Stocks: obviate the necessity of taking in new subscription.
When cash dividends are declared and there is still unpaid
subscription, would you still receive the dividends? How? Situation:
Cash dividends due on delinquent stock shall first be applied to the The ACS have all been subscribed, and the corporation needs
unpaid balance on the subscription. capital. There are available unrestricted retained earnings of
the corporation, but if they declare dividends, they will lose
Important: some assets, and they are not sure whether or not they could
Apply first the receivable declared cash dividends to the unpaid increase the capital with what’s left of the assets after
subscription of the stockholder then the excess will be given to him. declaration of dividends. They are also not sure if the
Offsetting will apply. stockholders will invest it back. What dividends should the
corporation declare to ensure that the money will remain with
Here, there is debtor-creditor relationship between the corporation and the corporation?
stockholder. On one hand, the corporation is creditor with regard to
unpaid subscription but debtor with regard to declared cash dividends. ANS The corporation should take the unrestricted retained earnings
On the other hand, the stockholder is creditor with regard to declared and invest it as capital so that the Authorized Capital Stock is
cash dividends but debtor with regard to the unpaid subscription. increased. Then issue new stock as dividends as a result of the
increased capital.
When stock dividends are declared and there is still unpaid
subscription, would you still receive the dividends? How?
Stock dividends shall be withheld from the delinquent stockholder until Stock Splits
his unpaid subscription is fully paid.
Stock Split
TN: We are assuming that the unpaid subscriptions are now This is an increase in the number of shares but there is no increase in
delinquent because they are already due and demandable for the capital value.
payment.
Situation:
Important: If it is not yet due, no offsetting/ withholding There are occasions where the par value of the share appears
Even if they are still unpaid subscriptions, and there are cash dividends to be expensive, and fractional shares cannot be issued, so to
declared and to be distributed, if these unpaid subscriptions are not attract investors, what must the corporation do? For example,
yet due and demandable, no offsetting/ withholding. The corporation the value of each share was 10, 000 and somebody was
cannot compel you to pay first the unpaid subscriptions. There can be willing to invest only 5, 000. Since the corporation cannot
offsetting only when both debts are due and demandable. issue only one half, what must they do instead?
Do a stock split since issuance of fractional shares is neither allowed
Stock Dividends nor encouraged. In fact, the corporation should eliminate the fractional
shares by buying them. So, instead of selling it a share at a value of
10, 000 per share, if only to attract more investors, the corporation
If the authorized capital stock of the corporation have all been may split said share. We now have 2 shares with 5, 000 per share.
subscribed, and additional capital is needed, the corporation
has the option to Increase the ACS. Reverse Stock Split
Decrease the number of shares and still retain the same capital value.
Illustration:
If original ACS of 1M is fully subscribed, they increased it by another On the other hand, we may also increase the value of these
million, the SCS should be 250K of the increased ACS and PUC is shares by reverse stock split.
62,500. Since all the SH do not have cash, they cannot pay. However
there are Unrestricted Retained Earnings of the corporation which they Example: Php 10, 000 is the par value of two shares. These shares will
wanted to declare as dividends, just enough to pay the minimum be made in two one and par value shall now be Php20,000.
requirement for subscriptions.
Therefore, there is enough money from the corporation. The money, if Unlawful Declaration of Dividends
declared as cash dividends, may be used by the shareholders to pay
their new subscriptions. However, once declared as dividends, the Situation:
corporation cannot be sure whether the SH would really invest the One day, they declared stock dividends without consulting the
stock—which the SH cannot be compelled to invest back. books of the corporation. They found out later on that at the
time they declared cash dividends, there were no retained
To be sure that the money will remain with the corporation, earnings at all. What in effect has happened here?
what dividends will the corporation instead declare? A: There was an invalid declaration of dividends. This is with respect
Declare stock dividends - by transferring the URE to capital asset. to the rule that dividends can only be declared provided there exists an
unrestricted retained earnings.
3 | U N I V E R S I T Y O F S A N C A R L O S
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,
Remedies if there is unlawful declaration of dividends That (1) where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control more than
1. Require all stock holders to return. 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
TN: However, this is not the popular decision because, chances directors of the managing corporation also constitute a majority of the members
are, people will no longer invest. of the board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed corporation
2. The better option: It would depend. Jurisprudence indicates: owning at least two-thirds (2/3) of the total outstanding capital stock 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
A. That if the corporation was insolvent at that time - than five years for any one term.
dividends must be returned because there was nothing to
distribute. The company’s liabilities exceeds its assets so The provisions of the next preceding paragraph shall apply to any contract
they should return. whereby a corporation undertakes to manage or operate all or substantially all of
the business of another corporation, whether such contracts are called service
B. If the corporation is solvent - there is no need to contracts, operating agreements or otherwise: Provided, however, That such
return because the creditors are still protected. However, service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered into
some authors would like to object saying there is still a for such periods as may be provided by the pertinent laws or regulations.
need to return because it violates the provisions of the
code which says dividends can only be declared if there
are unrestricted retained earnings. Sec 45. Ultra Vires Acts
TN: However, some say, if you will require them to return, ULTRA VIRES ACTS
that is the end of the corporation because nobody will trust Acts of the corporation which are not within its express, implied or
the board anymore. incidental powers.
Stock corporations are prohibited from retaining surplus profits in excess of one Important:
hundred (100%) percent of their paid-in capital stock, except: (1) when justified The purpose of the corporation is the basis for determining
by definite corporate expansion projects or programs approved by the board of whether an act is an ultra vires act.
directors; or (2) when the corporation is prohibited under any loan agreement This is because it is through the purpose that we can determine the
with any financial institution or creditor, whether local or foreign, from declaring powers of the corporation.
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
Business Judgment Rule vs Ultra Vires Acts
special reserve for probable contingencies. Why is it that under the rule on ultra vires acts, one can
question the act of a corporation while under business
judgment rule, one cannot question the act of a corporation?
Sec 44. Management Contracts Is the rule on ultra vires acts inconsistent with the business
judgment rule?
Management Contracts
Under a management contract, a corporation delegates the Situation: (continuation to the question)
management of its affairs to another corporation for a certain period. If the stockholder feels that the corporation is acting beyond
its powers, is he allowed to question the act because it is
Important: It should not constitute a total abdication of the powers already an ultra vires act, or is he prohibited from questioning
of the board. What is being delegated by the board to the managing the act under the doctrine of business judgment rule?
corporation only pertains to operational activities which are highly It may seem that there is inconsistency between the two but the rule
technical. is, it is only the State who can question the Board if there is an ultra
vires act because as to the other parties, the decision of the board is
Illustration: final under the business judgment rule.
A shipping company may enter into a management contract with a
managing corporation wherein the latter will manage the maintenance
and repairs of all the engines of the former. This is important Rules On Ultra Vires Acts
considering that the shipping corporation does not have the expertise,
skill or experience with regard to maintenance and repair of its ship
engines unlike the managing corporation. Situation Solution
Contract was already Nobody can question.
Relevant Provision: performed by the parties
Sec. 44. Power to enter into management contract. - No corporation shall Atty. E: The parties have to stay
conclude a management contract with another corporation unless such contract where they are. They have already
shall have been approved by the board of directors and by stockholders owning performed the act. It is useless to
at least the majority of the outstanding capital stock, or by at least a majority of find out whether the act is ultra vires
4 | U N I V E R S I T Y O F S A N C A R L O S
or not. Important: But a stockholder cannot question an ultra vires act of a
One party has performed The other party can either: corporation since it is only the State which can question such act.
while the other has not, a. Demand the performance of the
and that other party has contract; OR 2. Unauthorized act of an officer
benefited from the b. Demand the recovery/return of Caveat: There seemed to be no answer given in class with regard to
performance of the other the thing. what is the binding effect of an unauthorized act. He instead gave a
situation.
Contract is still in The parties should not perform at all
executory stage or no one because it is an ultra vires act. Situation:
has performed yet If a treasurer is authorized to borrow P10 million and the
treasurer instead borrowed P20 million. What kind of act?
Situation: It is an unauthorized act of the treasurer and not of the corporation.
In a contract of sale, the corporation bought something from
the other party and received the item but has not paid it yet, Can the bank demand tThe payment of the P20 million?
can the corporation tell the other party that it cannot pay The bank may only demand from the corporation P10 million since it is
because the act is ultra vires? only the extent of such amount that the corporation gave its authority.
No. The corporation has to pay. If it will not, it has to return the item
received. The rule is either pay or return. Caveat: It seems as though an unauthorized act binds the corporation only
to the extent of the authority it gave to the officer
Summary:
1. If the contract was already performed - stay as it is. TN: When you borrow from the bank, the bank would require a board
2. If the contract was partially performed - The party that resolution authorizing the treasurer to borrow only P10 million but the
performed may either ask the other party: bank lent P20 million. During the time that the bank will collect, there
i. Payment (Performance) could be a new set of officers, they cannot be compelled to pay P20
ii. Return what was received (Rescission) million. The bank definitely cannot demand the full amount from the
3. If there is no performance, yet. Wherein, none was corporation. That is importance of a board resolution.
executed - Do not perform the contract.
What do these rules say about ultra vires acts?
The moment we entertain questions about ultra vires act, imagine Author’s notes:
what would happen to the business world. If everybody would The board resolution serves as the best proof that the officer has
question the contract entered into by the corporation is ultra vires. acted within the authority granted by the corporation.
The business world would be in a stand still, the rules on ultra vires is Relevant Provision:
always look with disfavor, as much as possible do not talk about ultra Sec. 45. Ultra vires acts of corporations. - No corporation under
vires acts, except however to the STATE. this Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except
Important: The State granted power to the corporation, hence it is such as are necessary or incidental to the exercise of the powers so
the State that has the power to question the corporation in case of conferred.
ultra vires acts.
TITLE VI. BY-LAWS
Author’s notes
GR: no one can question ultra vires acts Sec. 46. Adoption of by-laws
XPT: the state can question the act of the corporation as ultra vires
BY- LAWS
Ultra Vires Act vs Illegal Act
Internal rules and regulations of a corporation.
Ultra Vires Acts Illegal Acts 2. It may be adopted and filed prior to incorporation, together with
Acts of the corporation which are Acts that are contrary to law, the articles of incorporation.
beyond the express, implied and public policy, morals, public
Important:
incidental powers granted to it. order.
You could already submit your by-laws even if you have not yet been
given the authority to exist.
Situation:
If a corporation borrows P50 million from the bank but the
Requisites for its adoption
bank allowed the corporation to borrow instead P70 million.
1. Vote of the stockholders representing at least a majority of the
What kind of act is this?
outstanding capital stock for stock corporations, or at least a
A: It is not an ultra vires act since borrowing from the bank is within
majority of the members in case of non-stock corporations
the powers of the corporation. However, it is an unauthorized act.
2. It shall be approved and signed by all the incorporators
3. Submitted to SEC
UNAUTHORIZED ACTS
Act by which the person has no authority to perform.
Binding effect of by - laws to public
Binding effect
GR: It does not bind the public.
1. An ultra vires act cannot bind the corporation.
XPN: A third person may be bound by the by-laws where he has
knowledge about it, either actual or constructive.
5 | U N I V E R S I T Y O F S A N C A R L O S
2. File to SEC for approval
3. SEC issues Certification of approval
Relevant Provision: TN: Once approved (as evidenced by the certification of the SEC), the
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, amended By-laws is the new By-laws of the corporation.
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For the adoption of by-laws by the Summary of Votes Required
corporation the affirmative vote of the stockholders representing at least a majority of 1. For Adoption of the by-laws
the outstanding capital stock, or of at least a majority of the members in case of non- a. Affirmative vote of the stockholders representing at least a
stock corporations, shall be necessary. The by-laws shall be signed by the stockholders majority of the OCS
or members voting for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or members during office hours. A copy 2. For Amendments of the by-laws
thereof, duly certified to by a majority of the directors or trustees countersigned by the a. Majority vote of the BOD and approval of majority of
secretary of the corporation, shall be filed with the Securities and Exchange stockholders representing the OCS; or
Commission which shall be attached to the original articles of incorporation. b. It can be delegated by the stockholders to the BOD by a
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted
vote of 2/3 of stockholders owning OCS.
and filed prior to incorporation; in such case, such by-laws shall be approved and
signed by all the incorporators and submitted to the Securities and Exchange TN: In adoption of the by- laws, no requisite of board approval yet
Commission, together with the articles of incorporation. because we still don’t have a board at that time
In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this
Code. Situation:
Zanganeh was a treasurer of USC. The BOD discovered that
The Securities and Exchange Commission shall not accept for filing the by-laws or any the she is also acting as treasurer of another corporation (UV)
amendment thereto of any bank, banking institution, building and loan association, – thus creating a potential problem in finance and accounting.
trust company, insurance company, public utility, educational institution or other
special corporations governed by special laws, unless accompanied by a certificate of The Board wanted to disqualify but they cannot come out with
the appropriate government agency to the effect that such by-laws or amendments are any provision in the By-Laws where she could be disqualified.
in accordance with law. Can the board disqualify just the same?
Sec. 47. Contents of By-Laws No, because it is not stated in the By-laws. But, they can amend the
By-laws to include a provision for the disqualification of holding a
position in a competing business.
Contents Of By- Laws
1. The time, place and manner of calling and conducting regular or Proposed Amendment Examples:
special meetings of the directors or trustees; 1. “No person shall be appointed as treasurer if the same
2. The time and manner of calling and conducting regular or special person is also a treasurer of a competing corporation.” -
meetings of the stockholders or members; VALID.
3. The required quorum in meetings of stockholders or members 2. “Zanganeh should be disqualified as treasurer because
and the manner of voting therein; she is also treasurer of UV.” - INVALID. It is discriminatory
4. The form for proxies of stockholders and members and the provision.
manner of voting them;
5. The qualifications, duties and compensation of directors or Important:
trustees, officers and employees; By laws and its amendments shall not be discriminatory.
6. The time for holding the annual election of directors of trustees By-laws, to be valid, must be reasonable. They must be general and
and the mode or manner of giving notice thereof; uniform in their operation and not directed against particular
7. The manner of election or appointment and the term of office of individuals.
all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
Prospective Application of Amendments of By-Laws
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs. Situation (continuation of Zanganeh):
If the amendment was then carried out and Zanganeh was
Qualifications and duties of board/ officers terminated, can she file a case with the Labor Arbiter and later
It is important to define the qualifications and duties of directors or on, appeal to the NLRC?
trustees, officers and employees in the by-laws in order to know the Yes. The termination is unlawful. The amended By-laws cannot bind
boundaries of their functions. her since she is already the elected treasurer at the time the amended
By-laws became effective.
Elections and appointment; Provisions on Election include
1. Time and Manner of conducting the election What could be a good argument in the proceedings in the
2. Manner of giving notice NLRC?
3. Term of office of all officers and directors The by-laws were amended after the treasurer was in office so it could
not affect her. Furthermore, the bylaws may be amended but it should
Sec. 48. Amendments to By-Laws be fair and reasonable. It is clear that the bylaws were amended
specially to for her.
Process of Amendment Author’s note: this is an invalid amendment for being discriminatory
1. Required votes met and for applying retroactively.
A. Approved by majority of the BOD/T in a meeting and
Approval by majority vote of the SH in a regular/ special
meeting called for that purpose; or Important:
B. It can be delegated by the stockholders to the BOD by a The amended or new By-laws should be made to apply
vote of 2/3 of stockholders owning OCS. prospectively, not retroactively.
6 | U N I V E R S I T Y O F S A N C A R L O S
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
Situation (Gokongwei Case): 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
A director and owner of a beer company A, was also a SH of Securities and Exchange Commission the same to be attached to the original
another beer company B. He wanted to become a director of articles of incorporation and original by-laws.
the beer company B so he bought more shares so that he can
be elected for the board next year. So Beer Company B The amended or new by-laws shall only be effective upon the issuance by the
amended there by laws stating that “no person holding at Securities and Exchange Commission of a certification that the same are not
least 10% of shares in another competing company shall be inconsistent with this Code.
allowed to be elected for the board.” Was this amendment
discriminatory? Can the director complain? TITLE VII. MEETINGS
ANS:Firstly, he cannot complain. The amendment disqualifying a Sec 49. Kinds of Meetings
director in a corporation whose business is in competition with or is
antagonistic to another corporation from election to the board of
directors of the latter corporation is valid. Relevant Provision:
Sec. 49. Kinds of meetings. - Meetings of directors, trustees,
Secondly, it is not discriminatory as the terms of the amended by-laws stockholders, or members may be regular or special.
provides that, “No person shall be allowed to be elected who is also a
director of another corporation who is in competition or antagonistic to Sec. 50-52. Regular and Special Meetings of Stockholders
thereto.” This provision is general in nature it does not single out a
particular individual such as the party involved herein.
Types Of Meetings
Third, it does not also run counter to the prospective application of the 1. Regular Meeting
amendment as the party involved has yet to be elected. a. Held annually on a date fixed by in the by-laws, or if not so
fixed, on any date in April of every year as determined by
Atty E: This is a case involving Gokongwei and San Miguel. The the board of directors or trustees
lawyers of Gokongwei said it is discriminatory because no one else in b. Written notice of regular meetings shall be sent to all
the Philippines owns so much in Asia Brewery and at the same time stockholders or members of record at least two (2) weeks
own stocks in San Miguel; thus, it should be an invalid amendment and prior to the meeting, unless a different period is required by
should not be approved. the by-laws
c. Shall be held in the city or municipality where the principal
TN: But the keyword here is ANTAGONISTIC. In other words, the office of the corporation is located, and if practicable in the
Supreme Court did not only look at the prospective or retroactive principal office of the corporation
effect but more on its being antagonistic, fierce competition, or direct
clash between two corporations involved in the same market. The SC 2. Special Meeting
is just trying to prevent a situation whereby one could take advantage a. Held at any time deemed necessary or as provided in the by-
over the other. laws
b. At least one (1) week written notice shall be sent to all
Atty E: Because imagine if Gokongwei in one meeting of San Miguel stockholders or members, unless otherwise provided in the
says “I understand that the sales of our corporation is going down, by-laws
maybe there is problem with the formula, it no longer taste the way it c. Shall be held in the city or municipality where the principal
should taste.” Most probably, the brew master might be compelled to office of the corporation is located, and if practicable in the
present themselves to the board and explain what happened, and be principal office of the corporation
required to present the formula. Once he gets his own copy of the
formula, he will give it to the rival company. We have copied the Relevant Provision:
Sec. 50. Regular and special meetings of stockholders or members. -
bottle, we will now copy the formula.SC said we do not want that
Regular meetings of stockholders or members shall be held annually on a date
situation. fixed in the by-laws, or if not so fixed, on any date in April of every year as
determined by the board of directors or trustees: Provided, That written notice of
Summary (Author’s notes) regular meetings shall be sent to all stockholders or members of record at least
1. By laws or amendment shall not be discriminatory two (2) weeks prior to the meeting, unless a different period is required by the
2. The amendment applies prospectively by-laws.
3. An amendment disqualifying a director in a corporation whose Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one
business is in competition with or is antagonistic to another
(1) week written notice shall be sent to all stockholders or members, unless
corporation from election to the board of directors of the latter otherwise provided in the by-laws.
corporation is not discriminatory, and valid Notice of any meeting may be waived, expressly or impliedly, by any stockholder
or member.
Relevant Provision:
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a Whenever, for any cause, there is no person authorized to call a meeting, the
majority vote thereof, and the owners of at least a majority of the outstanding Secretaries and Exchange Commission, upon petition of a stockholder or member
capital stock, or at least a majority of the members of a non-stock corporation, on a showing of good cause therefor, may issue an order to the petitioning
at a regular or special meeting duly called for the purpose, may amend or repeal stockholder or member directing him to call a meeting of the corporation by
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the giving proper notice required by this Code or by the by-laws. The petitioning
outstanding capital stock or two-thirds (2/3) of the members in a non-stock stockholder or member shall preside thereat until at least a majority of the
corporation may delegate to the board of directors or trustees the power to stockholders or members present have been chosen one of their number as
amend or repeal any by-laws or adopt new by-laws: Provided, That any power presiding officer.
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 Sec. 51. Place and time of meetings of stockholders or members. -
owning or representing a majority of the outstanding capital stock or a majority Stockholders' or members' meetings, whether regular or special, shall be held in
of the members in non-stock corporations, shall so vote at a regular or special the city or municipality where the principal office of the corporation is located,
meeting. and if practicable in the principal office of the corporation: Provided, That Metro
Manila shall, for purposes of this section, be considered a city or municipality.
7 | U N I V E R S I T Y O F S A N C A R L O S
Notice of meetings shall be in writing, and the time and place thereof stated The Executors, administrators, receivers, and other legal
therein. All proceedings had and any business transacted at any meeting of the representatives duly appointed by the court may attend and vote in
stockholders or members, if within the powers or authority of the corporation, behalf of the stockholders or members without need of any written
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
proxy
Relevant Provision:
the meeting.
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In
case of pledged or mortgaged shares in stock corporations, the pledgor or
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or
mortgagor shall have the right to attend and vote at meetings of stockholders,
in the by-laws, a quorum shall consist of the stockholders representing a majority
unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor
of the outstanding capital stock or a majority of the members in the case of non-
such right in writing which is recorded on the appropriate corporate books.
stock corporations.
Executors, administrators, receivers, and other legal representatives duly
Sec. 53 . Regular and Special Meetings of appointed by the court may attend and vote in behalf of the stockholders or
Directors/Trustees members without need of any written proxy.
1. Regular Meeting
Sec. 56. Voting in Joint Ownership of Stock
a. Held monthly, unless the by-laws provide otherwise
b. Notice of at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws Joint Ownership of Stocks
c. May be held anywhere in or outside of the Philippines, If there are two owners, the consent of the two are required otherwise
unless the by-laws provide otherwise they cannot exercise their right to vote
2. Special Meeting If there are 3 persons who jointly owned the stock, is the
a. Held at any time upon the call of the president or as consent of the 3 required to cast a vote?
provided in the by-laws No. Only a majority of them. Hence, the consent of 2 is sufficient.
b. Notice of at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws Caveat: We cannot find a legal basis for this answer. In fact, Section 56 of the
c. May be held anywhere in or outside of the Philippines, Corporation Code requires the consent of ALL the co-owners and NOT the majority.
However, when we once again asked sir outside class, he answered the same way
unless the by-laws provide otherwise
Relevant Provision:
But what if the shares are owned in an "and/or" capacity?
Sec. 53. Regular and special meetings of directors or trustees. - Regular Any one of the joint owners can vote.
meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise. Summary
GR: If joint ownership over stock, consent of ALL required in voting
Special meetings of the board of directors or trustees may be held at any time XPT: shares owned in an “and/or” capacity, any one of the joint
upon the call of the president or as provided in the by-laws.
owners may vote
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 Relevant Provision:
or special meetings stating the date, time and place of the meeting must be sent Sec. 56. Voting in case of joint ownership of stock. - In case of shares of
to every director or trustee at least one (1) day prior to the scheduled meeting, stock owned jointly by two or more persons, in order to vote the same, the
unless otherwise provided by the by-laws. A director or trustee may waive this consent of all the co-owners shall be necessary, unless there is a written proxy,
requirement, either expressly or impliedly. signed by all the co-owners, authorizing one or some of them or any other
person to vote such share or shares: Provided, That when the shares are owned
in an "and/or" capacity by the holders thereof, any one of the joint owners can
Sec. 54. Who Presides at Meetings vote said shares or appoint a proxy therefor.
GR: The pledgor or mortgagor shall have the right to attend and vote Sec. 58 – 59. Management Control Devices
at meetings of stockholders
XPT: the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the appropriate Management Control Devices
corporate books A tool or device used by management to regulate or control the
decisions of the stockholders so that these decisions will conform to
Voting Rights of Executors/ administrators/ legal the preferences of management
representative
8 | U N I V E R S I T Y O F S A N C A R L O S
Management devices ANS: The Stockholder votes. It would constitute a revocation of proxy
1. Proxy (sec 58) because the rule says that proxies are generally revocable – expressly
2. Voting trust agreement (sec 59) or impliedly.
Atty E: In this case, the president can now vote in behalf of the A voting trust agreement transfers legal title
absent SH, and vote favorably for the amendment. For example, 55% There is transfer of legal title to the trustee and NOT ownership,
of proxy will assure the amendment, hence, proxy is considered as a because beneficial ownership is retained with the trustor. Hence, the
management device. The proxy is a very good tool to control the trustee can exercise the rights of the shareholders (vote, to be voted
decision of the stockholders. upon, etc).
Rules if more than 1 proxy holder Once dividends are declared, what happens?
ANS: Will still redound to the benefit of the trustor, being the
Between two proxy holders, who is entitled to vote? beneficial ownership
1. Proxy whose proxy instrument bears the latest date.
Important:
2. If same date – Proxy whose proxy instrument bears the later
In a voting trust agreement, only the legal title is transferred.
time.
Beneficial ownership is retained by the trustor, which means that the
3. If same time – proxy holder who presents it first.
fruits shall redound to the benefit of the trustor.
4. All things being equal (same date, same time and presents at the
same time – proxy committee decides.
Proxy vs Voting Trust Agreement
Proxy Voting Trust Agreement
Revocation of Proxy
No legal Title to the shares of the SH Acquires legal title to the shares of
the SH
Situation: Revocable at any time unless coupled Irrevocable for a definite and
A proxy was declared and recognized as the proper and with interest limited period of time
appropriate proxy holder. However, when he went to the Can only act at the specified SH’s Not limited to any particular
meeting, the stockholder was also there. Who will vote? meeting meeting
Votes only in the absence of the owner of Can vote and exercise all the rights
9 | U N I V E R S I T Y O F S A N C A R L O S
stock of the transferring SH even when right to vote and other rights pertaining to the shares for a period not exceeding
the SH is present five (5) years at any time: Provided, That in the case of a voting trust specifically
Shorter duration Longer Duration required as a condition in a loan agreement, said voting trust may be for a
Need not be notarized nor a copy be filed Notarized and filed with SEC period exceeding five (5) years but shall automatically expire upon full payment
with the SEC of the loan. A voting trust agreement must be in writing and notarized, and shall
No right of inspection of corporate books Has such right specify the terms and conditions thereof. A certified copy of such agreement
Rights of a trustee in a Voting Trust Agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The
1. The right to vote certificate or certificates of stock covered by the voting trust agreement shall be
2. The right to be voted upon canceled and new ones shall be issued in the name of the trustee or trustees
3. The right to be represented stating that they are issued pursuant to said agreement. In the books of the
4. Right of inspection of all corporation books and records 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
Important: Basically, all the rights of the stockholders because he 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
has the legal title except the right to dividends because the beneficial
stock.
ownership is retained by the trustor.
The voting trust agreement filed with the corporation shall be subject to
In contrast, the proxy holder has limited rights in attending the examination by any stockholder of the corporation in the same manner as any
meeting (e.g. right to vote) because the proxy holder has no legal title other corporate book or record: Provided, That both the transferor and the
of the shares of stock. trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.
Term of VTA
Any other stockholder may transfer his shares to the same trustee or trustees
Voting Trust Agreement is valid for a period not exceeding five (5) upon the terms and conditions stated in the voting trust agreement, and
years at any one time. Once expired, everything will be returned to the thereupon shall be bound by all the provisions of said agreement.
real and lawful stockholder (trustor).
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
Prohibition against the use of management devices
for purposes of fraud.
Nationalized Corporations
Unless expressly renewed, all rights granted in a voting trust agreement shall
These are corporations which must be either be: automatically expire at the end of the agreed period, and the voting trust
(a) Wholly owned by Filipinos certificates as well as the certificates of stock in the name of the trustee or
(b) 60% is owned by Filipinos, 40% is of foreign ownership trustees shall thereby be deemed canceled and new certificates of stock shall be
reissued in the name of the transferors.
Purpose of 60% requirement
To make sure that the control shall be in the hands of the Filipino The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise.
stockholders, so that our natural resources will not be exploited by
foreigners.
TITLE VII. STOCKS AND STOCKHOLDERS
Example: 40% were Koreans in a legitimate Korean business. If there is
voting and 40% are Koreans, they cannot control the corporation, because STOCKS
majority of the control is held by the 60% Filipino ownership. For the purpose of measuring the value of the investment of the
shareholders, it’s the unit by which the stocks can be ascertained by its
Situation: value.
Koreans gave bonuses to the Filipino Shareholders, in
exchange, they asked that the shareholders execute proxies in How do you become a stockholder?
their favor. Thus, 60% of the Filipinos executed the proxy in 1. Subscription
favor of the Koreans. As a result, anything that will be decided 2. Purchase of treasury shares
in the Stockholders’ meeting will be controlled by the 3. Acquisition from existing stockholders’ outstanding shares
Koreans. Is there a problem with this?
Yes. This violates the nationalization law. Although they were not Buying shares v. Subscribing shares
forced to sign the proxy, the execution of the proxy is considered Buying Subscribe
invalid on the ground of being against public policy.
Subsequent acquisition of shares from You only subscribe newly issued
TN: Although in the books, there are 60% Filipino either an existing SH (outstanding shares or virgin shares directly from
stockholders/owners, but they have surrendered the power which shares) or treasury shares of the the corporation
accompanies ownership. The intention of the law, to maintain the corporation
exclusive control with the Filipinos to certain industries as enshrined in
the Constitution, is violated. Sec 60. Subscription Contract
Important: These management control devices cannot be used to Subscription Contract (SC)
circumvent or violate existing laws against monopoly, restraint of The agreement entered into when subscribing for shares.
trade, and other similar laws.
Important: Like any other contract, it shall have the elements of the
Relevant Provisions: contract, which are:
Sec. 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 1. Object or subject matter – In the subscription contract, it
the stockholder or member and filed before the scheduled meeting with the pertains to newly issued stocks.
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)
2. Consideration – In the subscription, it shall not be less than the
par value or issued value. It could be paid through any of these
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may means:
create a voting trust for the purpose of conferring upon a trustee or trustees the a) Actual Cash
10 | U N I V E R S I T Y O F S A N C A R L O S
b) Property
c) Labor or services actually rendered Atty E: If allowed revocation within the 6 months, the organization of
d) Amount transferred from unrestricted retained earnings to the corporation will be highly jeopardized, and nobody might be able
capital to start at all if the subscribers keep on withdrawing. The timetable
e) Shares which are reclassified and the filing of the articles might be unduly affected.
Important:
A pre - incorporation subscription is irrevocable for a period of 6 Dividends as consideration of subscription
months unless the AoI has already been submitted to the SEC.
Situation:
The moment you decide to buy, you enter in to a pre- subscription Tumagan subscribed for 10,000 shares and he only paid 5,000
agreement and it is irrevocable for 6 months. This means you are
shares. When will the unpaid subscriptions be due?
compelled to stay.
1. Upon the arrival of the period specified in the contract of
Purpose of irrevocability: to ensure creation of the corporation subscription, or
For pre-incorporation purposes in relation to the requirement of 25% 2. Upon the call of the BOD (if there is to time specified)
subscribed capital and 25% paid-in capital. To give the organizers the
chance to organize.
11 | U N I V E R S I T Y O F S A N C A R L O S
Can a subscriber just pay his unpaid subscription on a future TN: A good justification by the corporation in doing this is that such
month, say December because he will have dividends then? will increase the capital of the corporation considering that the
No, future dividends cannot be used to pay off delinquent shares unrestricted retained earnings are ploughed back to the corporation. In
because they are uncertain. the same way, the investments of the stockholders are also increased.
A. Cash dividends – apply first to the delinquent shares (set-off) Waiver of Right to Unpaid Subscription
B. Stock dividends – withheld, until the delinquent shares or amount
due is paid. Situation:
The Corporation wanted to grant bonuses but has no cash.
Author’s note: You cannot pay the unpaid subscription using future Hence, it instead declared that all unpaid subscriptions are
dividends, but once they are declared already, you may apply the rules deemed fully paid. Is it valid?
above (offset/withhold). No, it is not allowed because this will violate the trust fund doctrine
since there will be no more capital coming in the corporation. In the
Return of Stocks as Payment for New Subscriptions books, it is supposed to show that certain stocks are still unpaid and
therefore, it must be paid.
Situation:
Here is stockholder X of a corporation, his original
Waiving the unpaid subscriptions is no different from just returning to
subscription is 100 shares worth 100,000 of which he paid
the stockholders their investment. If the return of stocks is not
only 50,000. The corporation decided to increase its ACS.
allowed, then it should not be allowed to waive the payment of unpaid
Stockholder X now wants to subscribe in the increase of
subscriptions.
capitalization for another 100 shares worth 100,000. He said
he will return the 50 fully paid shares as payment for the
If you declare all unpaid subscriptions as fully paid, you are making it
newly issued shares. Is that allowed?
appear to the public and to creditors that the capital is inside already
No, it cannot be allowed because if we will allow the stockholder to
when in fact, no money came in. You are therefore, misleading the
return his shares of stocks, it would if in effect be returning capital
public.
(liquidation) to the stockholder in violation of the trust fund doctrine.
If unpaid subscriptions are not paid when the date for payment arrives
Application of Payments or when the Board makes the call for payment, they become
delinquent shares which means that they are due and demandable and
How are payments of shares of stocks applied? can be sold in a delinquent sale.
There is an option. In the absence of provisions in the by- laws to the
contrary, a corporation may apply payments made by subscribers Relevant Provision:
Section 62. Consideration for stocks. - Stocks shall not be issued for a
either:
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
1. Payment pro rata to each and all the entire number of shares following:
subscribed for; or 1. Actual cash paid to the corporation;
Illustration: Apply the 50,000 to all the 100 subscribed shares in effect 2. Property, tangible or intangible, actually received by the corporation and
there is no single share is fully paid necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;
2. Full payment for corresponding number of shares 3. Labor performed for or services actually rendered to the corporation;
Illustration: apply it to the 50 shares therefore the 50 shares are 4. Previously incurred indebtedness of the corporation;
already fully paid. 5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
Important:
conversion.
These 2 alternatives can not be availed of by the corporation at the
Where the consideration is other than actual cash, or consists of intangible
same time (de Leon) 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
Amounts Transferred from URE to capital
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
Situation: 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
The authorized capital stock (ACS) was increased from 1m to
pursuant to authority conferred upon it by the articles of incorporation or the by-
2m. Five (5) stockholders owned 20% each of the original 1m laws, or in the absence thereof, by the stockholders representing at least a
ACS. They then wanted to subscribe another 20% each of the majority of the outstanding capital stock at a meeting duly called for the
1M increase but they don’t have cash. However, there are purpose.
unrestricted retained earnings. What could be done?
The 5 stockholders may subscribe, and their subscription will be paid
Certificate of Stock & Transfer of Shares
out of the unrestricted retained earnings which should just be
transferred to the capital. Hence, instead of issuing cash dividends, the Sec 63. Certificate of Stocks
corporation will issue stock dividends to them.
12 | U N I V E R S I T Y O F S A N C A R L O S
It is the best evidence of ownership. It looks like a diploma which may and may be transferred by delivery of the certificate or certificates indorsed by
be worth 2 or 5 centavos, depending on the par value of the shares. 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
Contents of the parties to the transaction, the date of the transfer, the number of the
1. Name of the corporation (in bold, nicely written font) and the certificate or certificates and the number of shares transferred.
year it was founded
2. The name of the stockholder No shares of stock against which the corporation holds any unpaid claim shall be
3. The number of shares issued to stockholder transferable in the books of the corporation.
4. The serial number of the certificate of stock Sec 64. Issuance of Stock Cert
5. Date of issuance
Signatures required When will the corporation issue the stock cert?
1. Certificates signed by the president or in his absence, by the vice The Certificate of Stock will only be issued by the corporation upon the
president; full payment of the subscription.
2. Countersigned by the secretary or in his absence, by the
assistant secretary. TN: Initially, you only need to pay 25% of your subscription.
However, if you only paid 25%, you still can not demand for your
certificate
Nature of Certificate of Stocks
Situation:
1. It is NOT a negotiable instrument If you subscribed to 100 shares and paid 25% only, are the
2. It is, however, transferrable 100 shares fully paid? Can you demand a certificate already?
3. It is a personal property No. If you paid 25% and subscribed for 100 shares, the shares are not
yet considered fully paid.
A stock certificate is NOT negotiable instrument
What is a negotiable instrument? Important:
Section 1. Form of Negotiable Instruments. – An instrument to be However, You can still demand certificates of stocks if you exercised
negotiable must conform to the following requirements: the 2nd option in the rules of application of payment.
a) It must be in writing and signed by the maker or drawer
b) Must contain an unconditional promise or order to pay a sum Recall: Options in application of payment
certain in money 1. Apply payment proportionately to all subscriptions
c) Must be payable on demand, or at a fixed or determinable future 2. Apply payment to as many shares that may be fully paid
time
d) Must be payable to order or to bearer Important: Applying the 2nd option, the certificates of stocks for the
e) Where the instrument is addressed to a drawee, he must be shares fully paid, or 25 shares in the given example, may be
named or other indicated therein with reasonable certainty. demanded.
It lacks the 2nd requisite: to pay a sum certain in money Author’s note:
Certificates of stocks are not negotiable instruments because of the GR: No issuance of stock cert until full payment of subscription
absence of the 2nd requisite. The object of the certificate is the stock, XPT: exercise the 2nd option, where some shares will be considered
while in a negotiable instrument, it is the sum certain in money. fully paid, you may be granted the stock cert for those shares
However, the certificate of stock is transferable. MINISTERIAL DUTY OF CORP TO ISSUE STOCK CERT
Transferability is different from negotiability. Once the entire subscription has already been paid, it is the ministerial
duty of the corporation to issue the certificate.
What is transferrability?
When you transfer from one person to another, the intention is to Remedy of the SH if company refuses
constitute the transferee as the lawful holder The Stockholder can file an action against corporation for the issuance
of the certificate.
Important:
A Certificate of Stock is not a negotiable instrument but it is a Relevant Provision:
transferable instrument. It is transferable because it can confer rights 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
over the property. The intention is to constitute the transferee the interest and expenses (in case of delinquent shares), if any is due, has been
lawful holder of the Certificate of Stock. paid.
How is it transferred? Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall
By delivery with indorsement. The reverse side of the certificate has an pay to the corporation interest on all unpaid subscriptions from the date of
indorsement space where the stockholder signs 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.
Certificate of stock is a personal property
Once fully paid, you are entitled to the certificate. You need to be in
possession of the certificate because it is a personal property. It could A Stockholder is NOT a Co- owner of the Corporate
be offered as a security, or for any obligation or contract that you may Property
have entered into.
13 | U N I V E R S I T Y O F S A N C A R L O S
No. Ownership of the stock does not mean ownership to the
corporation’s property. A Stockholder is not a co-owner but only a Difference between two situations:
mere investor of the corporation. There is no co-ownership because
the property is owned by the corporation alone who has a separate Other situation (bonus) Watered stocks
and distinct personality. Newly issued shares are issued for a
Issued at par value.
price lower than the par value
Relevant Provision:
Sec 65. Watered Stocks 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
Metaphor: Story of the watered chicken cash, valued in excess of its fair value, or who, having knowledge thereof, does
You go to the market and buy a chicken. When weighed, the chicken’s not forthwith express his objection in writing and file the same with the
weight is 1.5 kg and then you bought it. However, when you went corporate secretary, shall be solidarily, liable with the stockholder concerned to
home and checked the weight of the chicken, it is already 1.2kg. This the corporation and its creditors for the difference between the fair value
is because the chicken was injected with water and then placed inside received at the time of issuance of the stock and the par or issued value of the
same.
the freezer so the water becomes ice. When placed in the weighing
scale, the chicken now weighs heavier. So when the chicken’s weight
Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall
was already 1.2kg, all the water was gone. This is why they call it the pay to the corporation interest on all unpaid subscriptions from the date of
watered chicken. 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
Watered stock
This happens when you pay lower than the par value of the stock. It is
a stock issued not in exchange for its equivalent or issued for less than Delinquent Stocks
its value.
Sec 67. Payment of Balance of Subscription
It is a reverse of watered chicken because in watered chicken you pay
more for a less chicken. In watered stock, you pay less for more Delinquent Stocks
shares. These are unpaid subscriptions that have become due and
demandable and no payment was made.
Atty E: Always remember that watered stock is the opposite of
watered chicken. When unpaid balance becomes due and demandable
1. Upon the arrival of the date stipulated in the contract of
Important: That is why the law does not allow the issuance of subscription; or
watered stocks, because you pay lower than the par value of the stock 2. If there is no stipulation, upon call by the BOD
Relevant Provision:
Liability for Watered Stocks 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
What happens when there is a watered stock? to the capital stock and may collect the same or such percentage thereof, in
SH becomes liable for difference between FMV and par value either case with accrued interest, if any, as it may deem necessary.
Who will be liable? 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
1. Consenting directors and officers subscription or on the date stated in the call made by the board. Failure to pay
2. The stockholder 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
When liable? 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
1. By consenting to the issuance of stocks for a consideration less stocks covered by said subscription shall thereupon become delinquent and shall
than its par or issued value or for a consideration in any form be subject to sale as hereinafter provided, unless the board of directors orders
other than cash valued in excess of its fair value. otherwise.
2. By not expressing his objection in writing and filing the same with
the corporate secretary despite having knowledge of such Sec 68 -71. Effect of Delinquency
issuance.
Effect of Delinquency
Nature of liability Once declared delinquent, you are longer treated as a Stockholder and
Such director or officer shall be solidarily liable with the SH concerned you lose all the rights pertaining to it
for the difference between the FV received at the time of issuance of
the stock and the par or issued value of the same. Rights denied to stockholders w/ delinquent stocks
1. Right to vote
To whom liable 2. Right to be voted upon
To the corporation and its creditors. 3. Right of representation at any stockholder’s meeting.
4. Other rights of a stockholder except the right to dividends
Situation:
Important: also, when stocks have been declared delinquent, it will
In the earlier situation when the board declared all the stocks
now be subject to a delinquency sale. The right to sell is given to the
fully paid (bonus situation), were those watered stocks? corporation because the shares are now delinquent.
No. Watered stocks only apply to unissued or virgin shares.
14 | U N I V E R S I T Y O F S A N C A R L O S
Author’s note: effects of delinquency
1. lose all rights of a stockholder except right to dividends (sec 71)
2. The delinquent stocks are subject to delinquency sale (sec 67) Sec 69. When Auction Sale may be questioned
15 | U N I V E R S I T Y O F S A N C A R L O S
Relevant Provision: (check codals, too long) TITLE IX. MERGER AND CONSOLIDATION
TITLE VIII. CORPORATE BOOKS AND RECORDS
Corporate Combinations
Sec 74. Books to be Kept Corporate Combinations
The corporation could always use some options to improve
Books To Be Kept
productivity, make the company more successful and profitable. This is
1. Articles of Incorporation
2. By-laws what they call Corporate Combinations. Some of these are:
3. Stock and transfer books 1. Sale of Assets
2. Stock Asset Swap
4. Stock certificates
3. Sale of Stocks
5. Minutes of the stockholders meeting
6. Minutes of the board meeting 4. Lease of Assets
7. Records of all business transactions of the corporation 5. Merger
6. Consolidation
(journals, ledgers, financial statements)
Section 75. Right to financial statements. - Within ten (10) days Sale of Assets
from receipt of a written request of any stockholder or member, the
corporation shall furnish to him its most recent financial statement, Sale of Assets
which shall include a balance sheet as of the end of the last taxable A union of corporations may be effected by one corporation selling all
year and a profit or loss statement for said taxable year, showing in or substantially all of its assets to another. (see Sec. 40) Such sale is
reasonable detail its assets and liabilities and the result of its usually, though not necessarily, made in the course of the dissolution
operations. of the vendor corporation. (De Leon)
At the regular meeting of stockholders or members, the board of Atty E:
directors or trustees shall present to such stockholders or members a Time may come that you may have to switch business, because your
financial report of the operations of the corporation for the preceding old business is no longer as good as before (called as the sunset
year, which shall include financial statements, duly signed and certified business)
by an independent certified public accountant. Example: Pentax has closed because no one uses cameras
anymore, because today everyone has a camera.
However, if the paid-up capital of the corporation is less than
P50,000.00, the financial statements may be certified under oath by TN: In that instance, the company may choose to sell their assets, in
the treasurer or any responsible officer of the corporation. cash or capital, and engage in another business.
Important:
In this instance, we have to amend Articles of Incorporation and
change our purpose.
16 | U N I V E R S I T Y O F S A N C A R L O S
Lease of Assets
If it sells all of its assets, what will happen?
Since the corporation has nothing to operate on then it may lead to Lease Of Assets
liquidation. When the corporation can just lease all their assets and wait for the
rentals without necessarily dissolving especially when the stockholders
Atty E: It is a “washed cash”
are in the sunset of their lives.
What may the corporation do with its cash?
It may invest/venture in to another business, to diversify and look for Stock - Asset Swap
another business (and possibly become a sunrise corporation)
Stock - Asset Swap
Does it still have assets?
Yes. Liquid assets in the form of cash. A corporation sells all of their assets, and in exchange, gets paid with
stocks of the other corporation.
TN: A corporation receives cash in this situation. The corporation may
distribute said cash and dissolve OR they may venture into another Atty E: It is up to them to keep the stocks in the name of the
business. It is up to them on how they would use their assets. corporation. It may earn dividends or subsequently sell it and receive
cash and then distribute the cash. Or the corporation may distribute
the stocks among themselves and dissolve. So they now become
Sale of Stocks
stockholders of the acquiring corp.
Sale of Stocks Important: The corporation that assigned its assets does not cease
The purpose of a holding company is to acquire a sufficient amount of to exist. It only acquired stocks of the other corporation.
the stock of another corporation for the purpose of control. The
acquiring corporation is called the parent or holding company. The Illustration:
corporation whose stocks are acquired is known as the subsidiary Stock-Asset Swap happens when the assets of Corpo. A are sold to
corporation. The legal identity of the corporation is retained. (De Leon) Corp. B and in exchange, Corp. B issues shares of stocks to Corp. A.
The stockholders of Corp. A become the stockholders of Corp. B. No
Illustration: need to close corporation A in this instance.
The existing corporation perhaps wants to engage in another business,
instead of selling the assets, they decided to buy a corporation.
Corporation B is operating a boat business, who was also no longer Merger and Consolidation
interested in pursuing its boat business. Your corporation may choose
to buy their business through buying their shares of stocks. There can Merger
also be stocks – assets swap here. Two or more corporations join together and only of them subsists
which is the surviving corporation (A + B = A/B)
Important: The selling corporation does not cease to exist.
Important: One ceases to exist and the other survives.
Why may a corporation want to sell stocks?
Because the corporation needs additional capital. Consolidation
Two or more corporations join together a new and separate
Recall: Options of a corporation to increase capital corporation is created (A + B = C)
1. Borrow from the financial institutions
2. Issue shares of stocks Important: All the constituent corporations cease to exist and a new
3. Issue redeemable shares. corporation is formed.
Important: Sale of Stock as it is, is not a corporate combination Why do you intend to marry?
because it may be a normal day to day activity. It may be a sale 1. Companionship: To grow old w/ me or to have a lifetime partner.
through the stock market or through another person. Sale of Stocks 2. Expanding my relationship and go bigger.
3. To have children.
becomes a corporate combination when consequently control is
transferred. Maybe when there is sale of 60% or above.
In merger, why would companies merge?
Companies merge for the following reasons:
Recall: How one becomes a stockholder: 1. They would want to expand their business operations.
1. Subscription 2. A company may have the necessary capital but not the necessary
2. Buying shares from existing stockholders managerial or technical skills.
3. Buying of treasury shares from corporation itself. 3. It might be a way to increase their assets.
4. It may be a means of reducing cost.
TN: You do not subscribe to treasury shares but you buy treasury
shares. Subscription refers to subscribing newly issued shares. Atty. E: Marriage and merger have just about the same objectives.
17 | U N I V E R S I T Y O F S A N C A R L O S
Examples: Illustration:
1. A banking corporation wants to engage into the food business. It Corporation A has net worth of 50M assets and 20M liabilities. Thus, its
only knows how to count money, not prepare food. It should net worth is 30M. Corporation B has 100M assets, 30M liabilities. Its
rather look for someone who could to immediately start the food net worth is 70M.
business rather than train itself to produce food which might take
time. Under the learning curve, it might not be easy. Better If the total shares in their capitalization to be distributed is 100K, then:
merge with someone who has the skill and expertise to perform 1. Corporation A is allotted with 30k shares – this is 30% of the
the new business in mind. 100K which is A’s share in proportion to its net worth
2. A bank in Cebu, wants to put up a branch in Mindanao. Rather 2. Corporation B is allotted 70K - 70% of the 100K of the sharing in
than looking for people in Cebu and bring them to Mindanao, it proportion to B’s net worth
can just look for existing banks who might be willing to partner
with it and share the same vision. Hopefully, establish a perfect Important: In the articles of merger, the distribution of the
marriage. capitalization is presented according to its percentage share in the
capital. It is in the articles of merger that we delegate that the total
Secs. 76 – 79. Process of Merger/Consolidation
If the articles of merger would provide 50% to A and 50% to
1. Conducting due diligence through verification process B, what could happen?
2. Approval of plan by majority of the board It would be prejudicial on the part of corporation B when it holds more
3. Approval of stockholders than 50%. Once presented to the respective stockholders of the
4. Execution of formal contract constituent corporation, this plan will not approved by the stockholders
5. Submission to SEC for approval of Corporation B.
6. Conduct of hearing by SEC
7. Issuance of Certificate by SEC 2. Approval of plan
The BOD/BOT or each corporation, party to the merger or
1. Conducting due diligence through verification process consolidation, shall approve a plan of merger or consolidation.
Before getting married, what should you do? Important: this must be authorized by Majority of the BOD or BOT
You must first check his assets, his background, his attitude, his age
and health, his family. 3. Submission to stockholders or members for approval
The plan shall be submitted for approval by the stockholders/members
TN: In the same way, you must also check the background of the (stockholders representing 2/3 of the outstanding capital stock or 2/3
other corporation. of the members) of each of such corporation.
a. Plan the merger and check the assets. 4. Execution of formal contract
The corporation should look at the assets and liabilities of the After approval by the prescribed vote of the stockholder/members, a
other corporation before merging. Corporation has to check formal contract known as articles of merger or of consolidation shall be
also the stockholders and officers of another corporation. executed by each of the constituent corporations, to be signed by the
Also, it has to check the parent and sister company of another president or VP and certified by the secretary or assistant secretary of
corporation. each corporation.
Atty E: the corporation should investigate as to the assets and 5. Submission to SEC for approval
liabilities of another corporation in actual inspection because the The articles shall then be submitted for approval to the SEC in
condition reflected in the list of assets as to status might be different. quadruplicate for its approval.
One should also look if the assets have claimants or have pending case
in court. TN: In case of merger or consolidation governed by special laws, the
favorable recommendation of the appropriate government agency shall
Important: Due diligence must be conducted. first be obtained.
The net worth is the basis of the sharing of the constituent The board of directors or trustees of each corporation, party to the merger or
corporations. The purpose of knowing the net worth is to be able to consolidation, shall approve a plan of merger or consolidation setting forth the
know how much each constituent corporation would share in the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter
capital. referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same
into effect;
3. A statement of the changes, if any, in the articles of incorporation of the
surviving corporation in case of merger; and, with respect to the consolidated
18 | U N I V E R S I T Y O F S A N C A R L O S
corporation in case of consolidation, all the statements required to be set forth bank refused because it claims that the titles belong to Corp A
in the articles of incorporation for corporations organized under this Code; and
and not Corp B. If you were the bank would you refuse?
4. Such other provisions with respect to the proposed merger or consolidation as
are deemed necessary or desirable. (n) ANS: Yes, you cannot blame the bank. The bank has nothing to do
with the merger. They do not know how the merger worked. So you
Section 77. Stockholder's or member's approval. - Upon approval by majority have to go to the Register of Deeds to transfer the names from Corp A
vote of each of the board of directors or trustees of the constituent corporations of the to Corp B. You do not need to present the Deeds of Sale for the
plan of merger or consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate corporate meetings parcels, all you need to show is the Articles of Merger. That would be
duly called for the purpose. Notice of such meetings shall be given to all stockholders sufficient to establish the transfer of these properties.
or members of the respective corporations, at least two (2) weeks prior to the date of
the meeting, either personally or by registered mail. Said notice shall state the purpose What would you do if you really want to borrow money?
of the meeting and shall include a copy or a summary of the plan of merger or
consolidation. The affirmative vote of stockholders representing at least two-thirds
1. Go to the Register of Deeds and have the title transfer from the
(2/3) of the outstanding capital stock of each corporation in the case of stock previous owner’s name to the surviving corporation’s name.
corporations or at least two-thirds (2/3) of the members in the case of non-stock 2. Present the Articles of Merger which will indicate that certain
corporations shall be necessary for the approval of such plan. Any dissenting properties have been transferred from one corporation to the
stockholder in stock corporations may exercise his appraisal right in accordance with
surviving corporation.
the Code: Provided, That if after the approval by the stockholders of such plan, the
board of directors decides to abandon the plan, the appraisal right shall be
extinguished. Important: There is no need for presentation of deeds of sale; it is
enough to present the articles of merger to establish the transfer of
Any amendment to the plan of merger or consolidation may be made, provided such these properties
amendment is approved by majority vote of the respective boards of directors or
trustees of all the constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or Situation:
of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, The records of deed showed that there was a pending case
together with any amendment, shall be considered as the agreement of merger or filed against Corporation A by a Plaintiff Debtor. When the
consolidation. (n)
hearing resumes, who will now appear in behalf of A?
Section 78. Articles of merger or consolidation. - After the approval by the
stockholders or members as required by the preceding section, articles of merger or Ans: The surviving or new corporation will appear in behalf of A.
articles of consolidation shall be executed by each of the constituent corporations, to
be signed by the president or vice-president and certified by the secretary or assistant
Important: Explain the circumstance to the court.
secretary of each corporation setting forth:
1) The plan of the merger or the plan of consolidation; As Counsel of B, the surviving Corporation, should manifest that:
2) As to stock corporations, the number of shares outstanding, or in the case of 1. Has entered into a merger agreement and corporation b has
non-stock corporations, the number of members; and decided to be the surviving corporation;
3) As to each corporation, the number of shares or members voting for and 2. Present a copy of the articles of merger for the guidance of the
against such plan, respectively. (n)
court and other counsels; and,
Section 79. Effectivity of merger or consolidation. - The articles of merger or of 3. Invite the attention of the Honorable Court to a certain paragraph
consolidation, signed and certified as herein above required, shall be submitted to the which states that all cases filed in behalf of the corporation
Securities and Exchange Commission in quadruplicate for its approval: Provided, That should now be assumed by the surviving corporation.
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 Important: Assets, claims and other debts due to the constituent
recommendation of the appropriate government agency shall first be obtained. If the corporation are automatically transferred to the surviving corporation.
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
What else will be automatically transferred?
certificate of merger or of consolidation, at which time the merger or consolidation
shall be effective. Liabilities, rights, privileges, franchises without need of execution of a
separate deed of assignment. The transfer is automatic.
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 What advantage will I have in entering into a merger?
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 Transfers, assignments, conveyances need not be contained in a
hearing shall be given to each constituent corporation at least two (2) weeks before separate document. The execution of the articles of merger will be
said hearing. The Commission shall thereafter proceed as provided in this Code. sufficient to effect the transfer and conveyance of all these things.
19 | U N I V E R S I T Y O F S A N C A R L O S
upon the property of any of such constituent corporations shall not be impaired Important: Here the closure was not because of serious business
by such merger or consolidation.
reversals since the selling corporation still has assets in the form of
Stock - Asset Swap vs. Merger stocks.
Closure of business is not equivalent to cessation of the existence of
Stock -Asset Swap Vs Merger the corporation. In other words, I can sell my business without
Stock asset swap Merger/ consolidation dissolving my corporation. In this situation, the employees can still
Metaphor: common law marriage/ Metaphor: marriage pursue against the selling corporation because it still exists and still
Living together has assets. Although they want to engage in another business, they
also have to take care of their employees who are entitled to
Effect: If you are living together you separation pay.
can do everything that a married
couple can only that there is no Follow-up situation: Merger
commitment What if this was a merger and not a stock - asset swap, what
No dissolution of either corporation Atleast one corporation is happens to the employees?
dissolved
Generally, in a stock-asset swap, All assets, liabilities and
Caveat: in answering this, the possible arguments of both the
there is no assumption of liability. collectibles will be assumed
employers and employees are as follows:
However, one can choose which by the surviving/ new
asset or liability to assume while in corporation
merger, there is assumption of all the Argument of employers: redundancy in positions.
assets and liabilities. If they automatically become employees, it will result in redundancy.
1. Janitors – 5 janitors from surviving corporation and another 5
Illustration: from the previous corporation, 10 janitors. We only need 5.
If Corp. A wants to enter into a stock-asset swap with Corp. B who has 2. Managers – We have 10 managers, another 10 coming in, we
a parcel of land in the mountains and another parcel of land in the city now have 20 managers.
but with squatters, then Corp. A can choose which among the parcels 3. Presidents - 1 president, another president from the other
of land to assume. corporation, we now have 2 presidents.
Atty. E: There are advantages and disadvantages. So it is highly
situational and one should be careful to find out what is best for the TN: This is Unfair for the surviving corporation.
corporation. The surviving corporation has its own policies on recruitment and the
kind of people it will invite to join its organization. It does not know
Caveat: To illustrate the difference of the effects of a merger versus who these employees are since it did not process their application nor
stock asset swap, sir asked the situation below… screen their papers. It does not know its biography. It might not be
fair to the surviving corporation.
Situation: Stock- Asset Swap
Selling corporation sold all its assets to the paying corporation Important: Remedy of employer - termination
who paid with its stocks. The selling corporation becomes a In redundancy, the employees can be validly terminated because it is
stockholder of the selling corporation. There is a problem. an authorized cause. The terminated employees have the right to ask
Before sale, the selling corporation had 100 employees, upon for separation pay from the surviving corporation
sale of all assets, what will now happen? There is a dilemma
of the employees, what will you advice them? Argument of employees: Man power forms part of assets
assumed
ANS: The employees will be entitled to separation pay from their In merger, the surviving corporation assumes the assets and liabilities
employer, the selling corporation, unless the closure was due to of the other constituent corporation. Employees are part of the merger
serious business losses/ reversals. It is the selling corporation, the because they are part of the assets.
employers of these employees, that is obliged to take care of them.
3 M’s considered as assets:
Employers obliged to pay separation pay for termination a. Machinery
based on authorized causes b. Money
This is because in labor law, the employee can ask for separation pay c. Man power
if the termination was based on authorized causes.
Decision of SC regarding manpower forming part of assets
What will the corporation use in paying these employees? Do However, in one case, the Supreme Court declared that People are not
they have cash? Stocks? assets, thus, not part of the merger. Unfortunately, the SC did not
Since there was an exchange of stocks and assets, the employees can agree with the employees position that people are part of assets. SC
go after the properties aside from the one exchanged by the selling insisted that people are not machineries nor assets. Therefore, they
corporation. If there are assets, why not proceed against them. cannot be part of merger. The surviving corporation cannot be
compelled to assume any liability insofar as the employees are
Amount of Separation pay concerned.1
GR: 1 month or ½ month per year of service
(15 days per year of service). Important:
XPT: If closure is due to serious business reversals.
1
Sir himself cannot sleep on such decision. How can the SC be wrong? But that
is the way it is.
20 | U N I V E R S I T Y O F S A N C A R L O S
The effect of this is that surviving corporation cannot be made liable there are instances when a SH should be given the privilege to leave
for the termination of the employees of the dissolved constituent the corporation. This is so when certain situations arise.
corporation.
Exclusivity Of The List
Employees are not automatically assumed by the surviving The law lists specific instances when appraisal right could be exercised.
corporation. There is no automatic assumption as to the liabilities in Other than those in the list, the stockholder cannot.
favor to the employees of the constituent corporation by the surviving
Reason: It would violate the trust fund doctrine because generally,
corporation.
the corporation cannot reacquire the shares of the stockholders.
Conversely, the stockholder cannot just return his shares of stocks and
Lesson of the story compel the corporation to pay back.
When two or more corporations would like to enter into a merger or
consolidation, the constituent corporations should express in their Atty. E: In short, once you are part of the corporation, you must stay for
agreement matters relating to the employees. They should not merely better or for worse. If you are a stockholder, you cannot just remain when
things are going well, and when things go sour, you can pull out anytime.
rely on the word “automatic assumption”. To protect your employees
That is not the case. Once you are part of the corporation, you have to stay,
you must state “take care of my employees” in the agreement. unless the instances when appraisal right can be exercised are present. This
is by way of exception.
summary: what happens to employees during corp combination?
Important:
1. in a stock - asset swap, the employees will be terminated, and You cannot demand for the return of capital because you are an
will be entitled to separation pay from the SELLING Corporation investor. Because as an investor, you take a risk when you invest,
because the selling corp still has assets (which includes the newly there’s no guarantee of profit - as compared to a creditor or a lender
acquired stocks). they may go after this. where there is an assurance that you will collect no matter what
happens to the business of the borrower. When you invest you should
2. In a merger, there will be redundancy, therefore the SURVIVING take the risk.
corp may terminate them, but is liable for separation pay. The SC,
Lesson of the story: When you invest, be very careful. The offer may
however, said that manpower is not an asset because people are not
be very attractive but also very dangerous.
assets, therefore they don’t form part of the assets acquired by the
surviving corp, hence, the surviving corp will not be liable to the TN: Always remember the rule on risk and return. Lower returns are
terminated employees. usually associated with lower risk investments. Higher potential returns
are associated with investments of higher risk. Hence, there is no such
thing as an investment, wherein there is low risk with high returns.
Title X – Appraisal Right
Always be careful.
21 | U N I V E R S I T Y O F S A N C A R L O S
6. The fair value shall be agreed upon but in case there is no The stockholder is in a bad situation because his rights have been
agreement within 60 days from the date the vote was taken, the suspended. Worse, he does not have the right to demand cash, and he
fair value shall be determined by an appraisal committee cannot compel payment because he has to wait URE exists.
Appraisal Committee Recall: Unrestricted Retained Earnings are surplus profit of the
Consists of 3 disinterested persons: one of whom shall be named by corporation which funds are not allocated by any plans - funds that are
the stockholder another by the corporation and the third, by the two free. The right is difficult to exercise because the corporation can
who were chosen. always say that they have reserved these funds somewhere.
22 | U N I V E R S I T Y O F S A N C A R L O S
the corporation or disapproved by the Securities and Exchange Commission Non-stock corporations are governed by the Board of Trustees. Their
where such approval is necessary, or if the Securities and Exchange Commission number may be more than 15.
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.
Relevant Provision:
Sec 85. Costs of Appraisal Right and transfer Section 87. Definition. - For the purposes of this Code, a non-stock
corporation is one where no part of its income is distributable as dividends to its
Who bears the cost? members, trustees, or officers, subject to the provisions of this Code on
1. By the Corporation dissolution: Provided, That any profit which a non-stock corporation may obtain
a. Where the price which the corporation offered to pay the as an incident to its operations shall, whenever necessary or proper, be used for
dissenting stockholder is lower than the fair value as the furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.
determined by the appraisers named by them
The provisions governing stock corporation, when pertinent, shall be applicable
b. Where an action is filed by the dissenting stockholder to to non-stock corporations, except as may be covered by specific provisions of
recover such fair value and the refusal of the stockholder to this Title. (n)
receive payment is found by the court to be justified
Sec 88. Purpose of a Non- Stock Corporation
2. By the Dissenting Stockholder
a. Where the price offered by the corporation is approximately Relevant Provision:
the same as the fair value ascertained by the appraisers Section 88. Purposes. - Non-stock corporations may be formed or organized
b. Where the same action is filled by the dissenting for charitable, religious, educational, professional, cultural, fraternal, literary,
stockholder and his refusal to accept payment is found by scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the special
the court to be unjustified.
provisions of this Title governing particular classes of non-stock corporations.
Effect of transfer
What is the effect of the act of transferring the certificates? Sec 89 - 91. Members
In effect, he abandoned his claim therefore it cancels his right of
appraisal. Thereafter he ceases to be a stockholder and the accrued Qualification of Members
dividends and the right to vote will now go to the transferee. Applicants have to go through the membership screening process
conducted by a membership committee in order to be a member of a
Relevant Provisions: corporation. This is because the non-stock corporation has to ensure
Section 85. Who bears costs of appraisal. - The costs and expenses of that it will only admit members who are in good behavior.
appraisal shall be borne by the corporation, unless the fair value ascertained by
the appraisers is approximately the same as the price which the corporation may Process of screening membership
have offered to pay the stockholder, in which case they shall be borne by the In membership, there is a committee that determines whether or not
latter. In the case of an action to recover such fair value, all costs and expenses
one may qualify to be a member. There are 5 members of the
shall be assessed against the corporation, unless the refusal of the stockholder to
receive payment was unjustified. (n)
screening committee. Each member has two balls: black ball and white
ball. When the applicant’s name is presented, each will have to go over
Section 86. Notation on certificates; rights of transferee. - Within ten the bio-data and they have the option to drop a black ball or a white
(10) days after demanding payment for his shares, a dissenting stockholder shall ball into a glass. If you do not want the applicant to be a member,
submit the certificates of stock representing his shares to the corporation for drop the black ball. That’s where the term blackballed was derived
notation thereon that such shares are dissenting shares. His failure to do so which means the person was denied.
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
Discipline of Members
dissenting stockholder under this Title shall cease and the transferee shall have The membership committee also has the power to discipline members.
all the rights of a regular stockholder; and all dividend distributions which would
have accrued on such shares shall be paid to the transferee. TN: In one case, there was a member who was just wearing his
bathing trunks while walking inside the restaurant of the non-stock
corporation. The membership committee can validly discipline him
because there were kids in the event
TITLE XI. NON - STOCK CORPORATIONS
Classification of Members
Sec 87. Definition
Can members be classified as Voting and Non-voting?
Yes
Non - Stock Corporations
One where no part of its income is distributable as dividends to its
Voting Rights in Stock and Non-stock Corporations
members, trustees, or officers and that any profit shall be used for the
Stock corporations Non-stock corporations
furtherance of the purposes for which the corporation was organized.
Generally, stockholders have Generally, members have voting
voting rights rights but it may be granted,
TN: They are still earning profits. However, these profits are just
limited, or totally denied
ploughed back to the corporation. In fact, these non-stock
corporations are commonly more profitable than stock corporations.
Important:
Board of Trustees
23 | U N I V E R S I T Y O F S A N C A R L O S
Members have voting rights but it may be granted, limited, or totally
denied by the corporation Sec 92-93. Election and Term of trustees
TN: in other words, there are members who: Caveat: he asked about election/ board in a non- stock corp compared
a. Can vote to that in a stock corporation
b. Can vote but only in certain instances or issues
c. Cannot vote at all STOCK NON- STOCK
Important: Manner of voting Cumulative Straight
A non-stock corporation has the power to classify its the members of
membership into as many classifications as it wishes so long as BOD/BOT
these are uniformly applied. Number of At least 5, not more At least 5, can be
directors/ trustees than 15 more than 15
Example: As a matter of fact, if you are a member of a club, you could Term of directors/ 1 year 3 years (staggered)
be a proprietary member or a non-proprietary member, which means trustees
that you could just play by claiming your playing rights but you could
Election of officers Vested in BOD May be Elected
not be part of the voting members. And even if you are already a
directly by members
holder of a membership certificate, it does not mean that you could
unless otherwise
automatically enjoy the facilities of the club.
provided in the
articles of
Ownership of a share is not membership incorporation or by-
laws
A share is worth million. So you can transfer your ownership, however, Relevant Provisions:
once you transfer it, you will lose all your privileges. One qualification Sec. 92. Election and term of trustees. - Unless otherwise provided in the
to become a member is to be an owner of one share. 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
Important: Ownership can be transferred, but membership cannot. 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
Relevant Provisions:
the board of trustees shall be held annually and trustees so elected shall have a
Section 89. Right to vote. - The right of the members of any class or classes
term of three (3) years. Trustees thereafter elected to fill vacancies occurring
to vote may be limited, broadened or denied to the extent specified in the
before the expiration of a particular term shall hold office only for the unexpired
articles of incorporation or the by-laws. Unless so limited, broadened or denied,
period.
each member, regardless of class, shall be entitled to one vote. Unless otherwise
provided in the articles of incorporation or the by-laws, a member may vote by
No person shall be elected as trustee unless he is a member of the corporation.
proxy in accordance with the provisions of this Code. (n)
Unless otherwise provided in the articles of incorporation or the by-laws, officers
Voting by mail or other similar means by members of non-stock corporations
of a non-stock corporation may be directly elected by the members. (n)
may be authorized by the by-laws of non-stock corporations with the approval of,
and under such conditions which may be prescribed by, the Securities and
Section 93. Place of meetings. - The by-laws may provide that the members
Exchange Commission.
of a non-stock corporation may hold their regular or special meetings at any
place even outside the place where the principal office of the corporation is
Section 90. Non-transferability of membership. - Membership in a non-
located: Provided, That proper notice is sent to all members indicating the date,
stock corporation and all rights arising therefrom are personal and non-
time and place of the meeting: and Provided, further, That the place of meeting
transferable, unless the articles of incorporation or the by-laws otherwise
shall be within the Philippines.
provide.
Section 91. Termination of membership. - Membership shall be terminated Sec. 94-95. Rules of Distribution of Assets
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 Relevant Provisions:
provided in the articles of incorporation or the by-laws.
24 | U N I V E R S I T Y O F S A N C A R L O S
Section 94. Rules of distribution. - In case dissolution of a non-stock Any expenses incurred by the members shall be charged to the
corporation in accordance with the provisions of this Code, its assets shall be corporation as long as the Receipts are returned. The receipts are
applied and distributed as follows: required as when the corporation files its income tax return. These are
corporate expenses, which are deductible from the income of the
1. All liabilities and obligations of the corporation shall be paid, satisfied and corporation.
discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer TN: If these were distributed as cash dividends, these are taxable as
or conveyance, and which condition occurs by reason of the dissolution, shall
(1) income of the corporation, then to the (2) individual stockholders
be returned, transferred or conveyed in accordance with such requirements;
after it is being distributed as their individual income. This is not tax
3. Assets received and held by the corporation subject to limitations
evasion but a form of tax avoidance.
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
2. Limited Liabilities
the Philippines substantially similar to those of the dissolving corporation To secure and protect the personal assets of the family. As
according to a plan of distribution adopted pursuant to this Chapter; stockholders, their liabilities will be limited to their investment,
4. Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of the articles of Illustration:
incorporation or the by-laws, to the extent that the articles of incorporation or The corporation got involved in an accident, in this incident, the
the by-laws, determine the distributive rights of members, or any class or claimants will only go after the assets of the corporation, and will
classes of members, or provide for distribution; and never go after the personal property of the family.
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 3. Right of Succession
specified in a plan of distribution adopted pursuant to this Chapter. (n) Just to be sure that no other group will be able to manage the
company.
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 A Metaphor: The Chinese funeral tale
adopted by a non-stock corporation in the process of dissolution in the following When the head of the family dies, the eldest son carries the picture of
manner: his deceased father and goes straight home without talking to anyone,
then he will place the picture his father in the altar. That means that
The board of trustees shall, by majority vote, adopt a resolution recommending a the son has succeeded his father’s obligation as head of the family.
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 Summary:
proposed plan of distribution or a summary thereof and the date, time and place The objectives of choosing a close corporation:
of such meeting shall be given to each member entitled to vote, within the time 1. It ensures the right of succession
and in the manner provided in this Code for the giving of notice of meetings to 2. Limited liability as to the stockholders
members. Such plan of distribution shall be adopted upon approval of at least 3. Serves as a Tax shelter – as a form of tax avoidance
two-thirds (2/3) of the members having voting rights present or represented by 4. Fiduciary nature
proxy at such meeting.
Relevant Provision:
Section 96. Definition and applicability of Title. - A close corporation, within the
TITLE XII meaning of this Code, is one whose articles of incorporation provide that: (1) All
CLOSE CORPORATIONS 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
Sec. 96. Definition and applicability of Title 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
CLOSE CORPORATION of any class. Notwithstanding the foregoing, a corporation shall not be deemed a
A close corporation, within the meaning of this Code, is one whose 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
articles of incorporation provide that:
corporation within the meaning of this Code. Any corporation may be
(1) All the corporation's issued stock of all classes, exclusive of incorporated as a close corporation, except mining or oil companies, stock
treasury shares, shall be held of record by not more than a exchanges, banks, insurance companies, public utilities, educational institutions
specified number of persons, not exceeding twenty (20); 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
(2) All the issued stock of all classes shall be subject to one or more close corporations: Provided, That the provisions of other Titles of this Code shall
specified restrictions on transfer permitted by this Title; and apply suppletorily except insofar as this Title otherwise provides.
(3) The corporation shall not list in any stock exchange or make any Section 97. Articles of incorporation. – The articles of incorporation of a close
public offering of any of its stock of any class. Notwithstanding corporation may provide:
the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or 1. For a classification of shares or rights and the qualifications for owning or
voting rights is owned or controlled by another corporation which holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
is not a close corporation within the meaning of this Code. 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
Reasons for Choosing a Closed Corporation 3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
1. It serves as a Tax Shelter
For purposes of tax avoidance, the corporation may, instead of The articles of incorporation of a close corporation may provide that the business
distributing profits in the form of cash, issue stock dividends or credit of the corporation shall be managed by the stockholders of the corporation
it as an expense 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
Crediting as an expense
corporation shall be deemed to be directors for the purpose of applying the
25 | U N I V E R S I T Y O F S A N C A R L O S
provisions of this Code; and Invalid. The restriction is contrary to the present policy that is
3. The stockholders of the corporation shall be subject to all liabilities of provided under SEC Opinion which provides that a person shall be
directors. given a month to decide whether or not he or she will buy shares. The
The articles of incorporation may likewise provide that all officers or employees
limitation of 5 days as provided in the Certificate of stock is restrictive
or that specified officers or employees shall be elected or appointed by the that cannot be a valid restriction.
stockholders, instead of by the board of directors.
Atty E: If that condition shall be stipulated, the stockholder will be
happy. Although the SEC will say that such is too short, if all the
stockholders will agree that they will be given 5days to sell, it is
deemed as favorable and everybody shall be bound.
Management of a Closed Corporation 4. “No stocks shall be issued unless first offered to all existing
stockholder who are residing in Cebu.”
It is unreasonable because those stockholders who are residing outside
Management of a Closed Corporation Cebu are absolutely denied of their right to buy the shares of stocks
Management is vested generally in the Board of directors. But they can even at a higher price.
be vested directly with the stockholders in the Articles of
Incorporation. There is no need to elect. The stockholders are the Relevant Provisions:
directors themselves. The point system will apply. 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
Is there a need to elect a Board of Directors in a closed the by-laws as well as in the certificate of stock; otherwise, the same shall not be
corporation? binding on any purchaser thereof in good faith. Said restrictions shall not be
No there is no need. The Board is the stockholders themselves. 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
Sec 98. Validity of Restrictions on Transfer of Shares 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.
Restrictions
To ensure that the closed corporation remains closed, the corporation Sec. 99. Effects of Issuance or Transfer of Stock in Breach
can put restrictions on the transfer of its shares. of Qualifying Conditions
In simpler terms, this pertains to the right of first refusal
“No shares of stock covered by the certificates, shall be sold to any If somebody buys despite the knowledge of the condition or
other person other than the existing stockholders, without first offering restriction what could happen?
this to the existing stockholders” The corporation is not bound to register the sale in the name of the
buyer and as a remedy the buyer can ask for the rescission of the
Important: contract and demand for the return of payment from the stockholder.
Although limitations as to time, place and terms are allowed, the same Or if he really wants to be a stockholder he could ask that all
shall be reasonable. stockholders waive the conditions or he could ask for the amendment
of the Articles of Incorporation
Conditions on Selling Shares of Stocks
These conditions must be indicated in the Articles of Incorporation, By- Effect of Transfer of a Stock in violation of the Right of First
laws and Certificate of Stocks. The stockholder will be bound and there Refusal in a Close Corporation
is a conclusive presumption that the stockholder is aware of the
conditions. GR:
The corporation may refuse to register the transfer of the stock in the
Illustrations: name of the transferee
Are the following restrictions valid?
XPT:
1. “No shares of stocks covered by these certificates shall be 1. When consented to by all the stockholders
sold to any other person other than the existing stockholders” 2. If the close corporation has amended its articles of incorporation
It is not valid because this is an absolute prohibition. The stockholder by majority vote of the board and approved by at least 2/3 of the
cannot sell the stock to persons other than the existing stockholders. stockholders representing the outstanding capital stock
26 | U N I V E R S I T Y O F S A N C A R L O S
on transfer of stock of the corporation, the transferee of the stock is conclusively Yes, unless a stockholder makes a timely objection.
presumed to have notice of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction. Relevant Provision:
4. Whenever any person to whom stock of a close corporation has been issued Section 101. When board meeting is unnecessary or improperly held. -
or transferred has, or is conclusively presumed under this section to have, notice Unless the by-laws provide otherwise, any action by the directors of a close
either (a) that he is a person not eligible to be a holder of stock of the corporation without a meeting shall nevertheless be deemed valid if:
corporation, or (b) that transfer of stock to him would cause the stock of the 1. Before or after such action is taken, written consent thereto is signed by all
corporation to be held by more than the number of persons permitted by its the directors; or
articles of incorporation to hold stock of the corporation, or (c) that the transfer 2. All the stockholders have actual or implied knowledge of the action and make
of stock is in violation of a restriction on transfer of stock, the corporation may, no prompt objection thereto in writing; or
at its option, refuse to register the transfer of stock in the name of the 3. The directors are accustomed to take informal action with the express or
transferee. implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
5. The provisions of subsection (4) shall not be applicable if the transfer of stock, and none of them makes prompt objection thereto in writing.
though contrary to subsections (1), (2) or (3), has been consented to by all the If a director’s meeting is held without proper call or notice, an action taken
stockholders of the close corporation, or if the close corporation has amended its therein within the corporate powers is deemed ratified by a director who failed to
articles of incorporation in accordance with this Title. attend, unless he promptly files his written objection with the secretary of the
6. The term “transfer”, as used in this section, is not limited to a transfer for corporation after having knowledge thereof.
value.
7. The provisions of this section shall not impair any right which the transferee
may have to rescind the transfer or to recover under any applicable warranty,
Situation:
express or implied. If the resolution was passed around and you were made to
sign and you signed. The resolution was carried out. However,
it turned out to be a sale of the apartment which was
Sec 100. Agreements by Stockholders
occupied by you. The buyer came and informed you of their
transfer to the apartment. Can you object?
In every family, there will always be factions. Very rarely is there a
family that is united all the time. Ans: No, because the stockholder already assented. Even if he doesn’t
know that what was authorized to be sold was the apartment occupied
Lesson: the SH can have factions and make agreements among by him, the sale is still binding because the stockholders can decide on
thesmselves, so long as they continue to comply with the existing by matters involving the corporation’s properties.
laws and articles of the corporation
Board Meetings and Formalities are Not Required in a Close Sec. 103. Amendment of Articles of Incorporation
Corporation
Generally, in a close corporation, resolutions approved without
Relevant Provisions:
conducting a board meeting is binding unless a director makes a timely
Section 103. Amendment of articles of incorporation. – Any amendment to the
objection. articles of incorporation which seeks to delete or remove any provision required
by this Title to be contained in the articles of incorporation or to reduce a
Important: In a close corporation, they can dispense with having a quorum or voting requirement stated in said articles of incorporation shall not be
board. In such case, the stockholders become the directors. valid or effective unless approved by the affirmative vote of at least two-thirds
(2/3) of the outstanding capital stock, whether with or without voting rights, or
When resolutions are approved without a meeting, are the of such greater proportion of shares as may be specifically provided in the
resolutions binding?
27 | U N I V E R S I T Y O F S A N C A R L O S
articles of incorporation for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose. TITLE XIII. SPECIAL CORPORATIONS
Special Corporations
These are entities governed by special laws and by the general
Sec. 104 - Deadlocks provisions of this Code.
28 | U N I V E R S I T Y O F S A N C A R L O S
Important: The favorable recommendation from Dep- Ed is only Classes Of Religious Corporations
required for institutions which offer formal academic classes. 1. Corporation Sole - It is a religious corporation incorporated by
one person and consists of one member or corporator only and
Other examples of institutions that don’t need recommendation of his successors. It is organized for the purpose of administering
Dep- Ed: and managing, as trustee, the affairs, property and temporalities
1. Schools which offer pure Technical or Vocational courses such of such religious denomination, sect or church.
as welding, masonry, carpentry, electrical
2. driving school 2. Religious Society - It is a religious corporation incorporated by
aggregate persons. The law does not require religious societies or
Important: There are, however instances when purely technincal churches to register as a corporation but they may do so in order
and vocational courses will be mixed with formal academic courses. In to acquire legal personality for the administration of their
those cases, the recommendation of DepEd is needed. temporalities or properties.
29 | U N I V E R S I T Y O F S A N C A R L O S
Said provision in the Articles of Incorporation was deleted
Modus Operandi of the Church before it was submitted to the SEC, while pending approval,
This will show how the church will operate. the group started to go around again the way they wanted to
pray. Do you think the police officers will apprehend them?
You must Indicate how the church will be funded. Yes, due to public disturbance. We have laws of decency, and laws to
Example: Some corporations are incorporated by requesting protect the children.
contribution from members. “ For Every Religious affair, we will pass
out something, and each one is requested to drop his contribution.” Situation (Follow-up)
How about if they would now wear jackets, comb their hairs
TN: This is necessary. No church can survive without funds. properly and walk around early morning, is there anything
wrong? No more. However, the police still apprehended them
You must also explain how the activities are done. and asked for the approved articles of incorporation. Can they
This not compulsory but it will give the state the idea how you run be stopped?
your church. If you so decide, for the purpose of promotion, you can No, because their existence as a religious organization doing spiritual
volunteer to state your manner of praying—by explaining how the activities does not need the approval of the SEC.
praying is done.
Relevant Provisions: Important: When Registration with SEC is required
Section 112. Submission of the articles of incorporation. – The articles of Registration with the SEC as required under the Corporation Code is
incorporation must be verified, before filing, by affidavit or affirmation of the not required in order for the church to engage in spiritual activities.
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
However, registration is required in order for it to administer the
letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or temporal affairs of the church.
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 So, what is the point of submitting the Articles of
incorporation, verified by affidavit or affirmation, and accompanied by the Incorporation to the SEC when in fact, we could go ahead with
documents mentioned in the preceding paragraph, such chief archbishop, our church activities already?
bishop, priest, minister, rabbi or presiding elder shall become a corporation sole Approval of the articles of incorporation is not necessary to exercise
and all temporalities, estate and properties of the religious denomination, sect or
church theretofore administered or managed by him as such chief archbishop,
their spiritual activities. Such approval is only needed for them to
bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a acquire a juridical personality in order to acquire properties.
corporation sole, for the use, purpose, behalf and sole benefit of his religious
denomination, sect or church, including hospitals, schools, colleges, orphan 2 functions of a religious corporation
asylums, parsonages and cemeteries thereof. (n) 1. Spiritual activities
2. Temporal activities
Purpose of Registration with SEC
Spiritual Activities
These pertain to functions of a priest which include presiding a mass,
Situation: baptism, confession, etc.
One religious corporation was applying for incorporation with
SEC. In their religion, when they pray every 4 o’çlock in the Temporal Activities
morning. All girls are required to have long hair and as they Temporal activities refer to the administration or management of the
move around the streets, they will have to bow so that their properties of the church. It includes the entering into contracts and
hair will drop. They will have to move their head left and right owning of properties in its name.
as they sing their chant. While doing this, they wear nothing
above, purely bare, but bowing their hair. Will the SEC Examples: making sure that church buildings are functional, or that all
approve the application of the cult? the titles of the properties are in order.
The SEC will not approve the application since the practice of their
religion is against public decency or the right to a decent community. Summary:
GR: Registration as a religious corporation is not required for exercise
Important: The freedom of religion is not absolute. There are also of spiritual activities
other members of the community who have rights, such as the right XPT: Required for the purpose of administering the temporal affairs of
not to be subjected to scandalous circumstances. the church
Atty E: How about the loudspeakers used for religious activities which
Sec. 113. Acquisition and Alienation of Property
would affect and disturb the community at the early hours of the day?
This practice shall also not be allowed.
Situation:
TN: True, there may be a freedom of religion but community members An Italian priest came to Cebu to establish a church. He was
also have the right to a decent community. We cannot be in a carrying with him the authorization from the chief priest in
scandalous community. Freedom of religion is not absolute. There are Italy. What should he do now?
also restrictions in this freedom. The other members of the community File the articles with SEC, together with the authorization.
are also entitled to their own freedom of religion.
Before the SEC approves, can he start baptizing?
What if the Association of all churches and Sect agree to the Yes. No need for approval from SEC, because the purpose of
practice of the church, would that be allowed? registration is for the exercise of temporal activities and not the
No, that is not the freedom we are talking about. Although all of the spiritual activities.
churches agree, it would still impair the other people in the community
who have other religious beliefs. They may be members of the SEC granted the registration. The Italian priest is now looking
community but they are not members of the church; more importantly, for a parcel of land to build a church. Can he buy a parcel of
they are entitled to their own peace and order (e.g atheist) land?
30 | U N I V E R S I T Y O F S A N C A R L O S
Yes. Since the SEC already granted the registration, he can now What rules govern distribution of assets upon dissolution?
purchase the land for the corporation. The corporation sole can Upon dissolution, being a Non-stock corporation, the rules on
purchase the land because it has no nationality. distribution of assets pertaining to Non-Stock Corporation shall apply.
31 | U N I V E R S I T Y O F S A N C A R L O S
3. Dissolution by Shortening of Corporate Term (sec 120) or if there be no such newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Sec.118 . Voluntary Dissolution when creditors are NOT
affected Upon five (5) day’s notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no such
Process objection is sufficient, and the material allegations of the petition are true, it shall
1. Resolution of the Board (majority of the Board) render judgment dissolving the corporation and directing such disposition of its
2. Approved by SH holding 2/3 OCS or 2/3 of the members assets as justice requires, and may appoint a receiver to collect such assets and
3. Signed by Pres. And countersigned by Sec. pay the debts of the corporation. (Rule 104, RCa)
4. Submitted to SEC
Section 120. Dissolution by shortening corporate term. – A voluntary
5. SEC issues Certificate of Dissolution
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
Relevant Provisions: amended articles of incorporation shall be submitted to the Securities and
Section 118. Voluntary dissolution where no creditors are affected. – If Exchange Commission in accordance with this Code. Upon approval of the
dissolution of a corporation does not prejudice the rights of any creditor having a amended articles of incorporation of the expiration of the shortened term, as the
claim against it, the dissolution may be effected by majority vote of the board of case may be, the corporation shall be deemed dissolved without any further
directors or trustees, and by a resolution duly adopted by the affirmative vote of proceedings, subject to the provisions of this Code on liquidation. (n)
the stockholders owning at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members of a meeting to be held upon call
of the directors or trustees after publication of the notice of time, place and Involuntary Dissolution
object of the meeting for three (3) consecutive weeks in a newspaper published
in the place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general circulation Involuntary Dissolution
in the Philippines, after sending such notice to each stockholder or member 1. Termination/ Expiration of Term
either by registered mail or by personal delivery at least thirty (30) days prior to 2. By Order of SEC
said meeting. A copy of the resolution authorizing the dissolution shall be a. Deadlock in a close corp.
certified by a majority of the board of directors or trustees and countersigned by
b. Failure of corp. to file reports
the secretary of the corporation. The Securities and Exchange Commission shall
thereupon issue the certificate of dissolution. (62a) c. Corp. became inoperative for a period of 5 years.
3. Failure to Organize the Corporation within 2 years from issuance
of certificate of Incorporation
Sec. 119. Voluntary Dissolution where creditors are 4. By Legislative Enactment
affected 5. When the court Orders Dissolution
32 | U N I V E R S I T Y O F S A N C A R L O S
d. Refusal to comply or defiance of any lawful order of the 4. The General Information Sheet - Corporations must make an
Commission annual report to the SEC indicating the Board and officers
e. Failure to file by-laws within the required period elected, names of the stockholders, and other data that would
f. Failure to file required reports have to be submitted every year.
Relevant Provisions:
Section 121. Involuntary dissolution. – A corporation may be dissolved by Sec. 122. Corporate Liquidation
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) Winding Up Includes
1. Payment of liabilities to creditors
2. Claim for amount receivables
3. Distribute the remaining assets to the stockholders
Assets include:
1. Cash,
2. Property,
3. Machineries,
4. Buildings and
5. Account receivables
De Jure vs. De Facto Corporation
What to do with account receivables?
File a collection case
De Jure Dissolution De Facto Dissolution
When there is compliance with The corporation is legally existent How long is the winding up?
the requirements provided for by but it can no longer able to 3 years
law for dissolution, and the answer for its liabilities and its
corporation will continue to exist function so essentially it is Atty E’s story: Experience of Sir on a pending case for 25
only for winding up of the corp. morally dissolved. years; Tug of War between Judiciary and Executive
Department. Do you think you can have a final judgment on
Example: such as insolvency. the collection case within three years?
No. Reality check, it cannot be done within three years. It would be
extremely lucky to have such case decided within three years.
Effect when there is De Jure Dissolution of a Corporation
It continues to be a body corporate for 3 years in order to facilitate the If it cannot collect within 3 years, what happens to the
winding up of its affairs. However, it is no longer able to enter into winding up?
new businesses or contracts except those contracts which facilitates its The corporation ceases to exist after 3 years, but the case continues if
winding up. the court will appoint a receiver for the purpose of winding up of the
corporation.
Effects of Dissolution
Important:
Effects of Dissolution The 3 year-period does not affect the authority of the receiver.
It ceases its operation. The corporation has three years to wind up
which may include: Liquidation by a Receiver; Role of the Receiver
1. Filing cases or entertain cases filed against the Corporation He/ she represents the creditors, stockholders of the corporation and
2. Enter into contracts to wind up the affairs of the Corporation. the court.
33 | U N I V E R S I T Y O F S A N C A R L O S
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
Why Foreign Corporations are Regulated
creditor or stockholder or member who is unknown or cannot be found shall be Why is it that the Philippine Government is interested in
escheated to the city or municipality where such assets are located. regulating foreign corporations?
1. So our local courts could assume jurisdiction
Except by decrease of capital stock and as otherwise allowed by this Code, no
2. To prevent manipulative practices w/c are against fair
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) competition. Their activities will not cause harm to the
Philippines.
3. To protect the interest of other parties when the foreign
TITLE XV . FOREIGN CORPORATIONS corporations engage in business in the Philippines.
4. Subject them to existing rules and regulations of the State.
Sec. 123. Definition and Rights of a Foreign Corp
34 | U N I V E R S I T Y O F S A N C A R L O S
value of shares, shares without par value, and series, if any; Requirements for becoming a resident agent
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 1. Sound financial capacity and
shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
2. Good moral standing.
10. Such additional information as may be necessary or appropriate in order to
enable the Securities and Exchange Commission to determine whether such Obligations of a resident agent
corporation is entitled to a license to transact business in the Philippines, and to 1. Represent the corporation
determine and assess the fees payable. 2. Receive the summons for the corporation
Attached to the application for license shall be a duly executed certificate under To whom will summons be served in case the resident agent is
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
kidnapped?
Filipino citizens and corporations to do business therein, and that the applicant is The summons shall be served to the SEC.
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 If the notice or summons is from the SEC?
attached thereto. If a corporation applies for a license, she signs something, to the effect
that if ever something happens or for any other reason the resident is
The application for a license to transact business in the Philippines shall likewise not in a position to receive, the SEC or any other officer may receive in
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
behalf and that would be considered an appropriate service of
Exchange Commission and other governmental agency in the proper cases that summons.
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 Relevant Provisions:
immediately prior to the filing of the application. 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
Foreign banking, financial and insurance corporations shall, in addition to the transacting business in the Philippines: Provided, That in the case of an
above requirements, comply with the provisions of existing laws applicable to individual, he must be of good moral character and of sound financial standing.
them. In the case of all other foreign corporations, no application for license to (n)
transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate Section 128. Resident agent; service of process. – The Securities and
government agency, whenever required by law. (68a) 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
Section 126. Issuance of a license. – If the Securities and Exchange such corporation file with the Securities and Exchange Commission a written
Commission is satisfied that the applicant has complied with all the requirements power of attorney designating some person who must be a resident of the
of this Code and other special laws, rules and regulations, the Commission shall Philippines, on whom any summons and other legal processes may be served in
issue a license to the applicant to transact business in the Philippines for the all actions or other legal proceedings against such corporation, and consenting
purpose or purposes specified in such license. Upon issuance of the license, such that service upon such resident agent shall be admitted and held as valid as if
foreign corporation may commence to transact business in the Philippines and served upon the duly authorized officers of the foreign corporation at its home
continue to do so for as long as it retains its authority to act as a corporation office. Any such foreign corporation shall likewise execute and file with the
under the laws of the country or state of its incorporation, unless such license is Securities and Exchange Commission an agreement or stipulation, executed by
sooner surrendered, revoked, suspended or annulled in accordance with this the proper authorities of said corporation, in form and substance as follows:
Code or other special laws.
“The (name of foreign corporation) does hereby stipulate and agree, in
Within sixty (60) days after the issuance of the license to transact business in the consideration of its being granted by the Securities and Exchange Commission a
Philippines, the license, except foreign banking or insurance corporation, shall license to transact business in the Philippines, that if at any time said corporation
deposit with the Securities and Exchange Commission for the benefit of present shall cease to transact business in the Philippines, or shall be without any
and future creditors of the licensee in the Philippines, securities satisfactory to resident agent in the Philippines on whom any summons or other legal processes
the Securities and Exchange Commission, consisting of bonds or other evidence may be served, then in any action or proceeding arising out of any business or
of indebtedness of the Government of the Philippines, its political subdivisions transaction which occurred in the Philippines, service of any summons or other
and instrumentalities, or of government-owned or controlled corporations and legal process may be made upon the Securities and Exchange Commission and
entities, shares of stock in “registered enterprises” as this term is defined in that such service shall have the same force and effect as if made upon the duly-
Republic Act No. 5186, shares of stock in domestic corporations registered in the authorized officers of the corporation at its home office.”
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 Whenever such service of summons or other process shall be made upon the
least one hundred thousand (P100,000.) pesos; Provided, however, That within Securities and Exchange Commission, the Commission shall, within ten (10) days
six (6) months after each fiscal year of the licensee, the Securities and Exchange thereafter, transmit by mail a copy of such summons or other legal process to
Commission shall require the licensee to deposit additional securities equivalent the corporation at its home or principal office. The sending of such copy by the
in actual market value to two (2%) percent of the amount by which the Commission shall be necessary part of and shall complete such service. All
licensee’s gross income for that fiscal year exceeds five million (P5,000,000.00) expenses incurred by the Commission for such service shall be paid in advance
pesos. The Securities and Exchange Commission shall also require deposit of by the party at whose instance the service is made.
additional securities if the actual market value of the securities on deposit has In case of a change of address of the resident agent, it shall be his or its duty to
decreased by at least ten (10%) percent of their actual market value at the time immediately notify in writing the Securities and Exchange Commission of the new
they were deposited. The Securities and Exchange Commission may at its address. (72a; and n)
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 Section 129. Law applicable. – Any foreign corporation lawfully doing
securities on deposit has increased, by more than ten (10%) percent of the business in the Philippines shall be bound by all laws, rules and regulations
actual market value of the securities at the time they were deposited. The applicable to domestic corporations of the same class, except such only as
Securities and Exchange Commission may, from time to time, allow the licensee provide for the creation, formation, organization or dissolution of corporations or
to substitute other securities for those already on deposit as long as the licensee those which fix the relations, liabilities, responsibilities, or duties of stockholders,
is solvent. Such licensee shall be entitled to collect the interest or dividends on members, or officers of corporations to each other or to the corporation. (73a)
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 Section 130. Amendments to articles of incorporation or by-laws of
licensee’s application therefor and upon proof to the satisfaction of the Securities foreign corporations. – Whenever the articles of incorporation or by-laws of a
and Exchange Commission that the licensee has no liability to Philippine foreign corporation authorized to transact business in the Philippines are
residents, including the Government of the Republic of the Philippines. (n) amended, such foreign corporation shall, within sixty (60) days after the
amendment becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate government agency, a
Sec. 128 . Resident Agent duly authenticated copy of the articles of incorporation or by-laws, as amended,
indicating clearly in capital letters or by underscoring the change or changes
35 | U N I V E R S I T Y O F S A N C A R L O S
made, duly certified by the authorized official or officials of the country or state
of incorporation. The filing thereof shall not of itself enlarge or alter the purpose Sec 133. Effect of Doing Business without a License
or purposes for which such corporation is authorized to transact business in the
Philippines. (n)
Situation 1:
Section 131. Amended license. – A foreign corporation authorized to transact A friend availed the services of an online Foreign Corporation
business in the Philippines shall obtain an amended license in the event it engaged in face-lifting (cosmetic surgery). So, the friend went
changes its corporate name, or desires to pursue in the Philippines other or to Korea in order for the operation to performed. However,
additional purposes, by submitting an application therefor to the Securities and the operation was unsuccessful and resulted to her having
Exchange Commission, favorably endorsed by the appropriate government
bloated lips. Can she sue the Foreign Corporation for
agency in the proper cases. (n)
damages?
Yes. However, there may be problems with regard to acquiring
Sec. 132. Merger/Consolidation involving Foreign jurisdiction over the person of the Foreign Corporation especially if it
Corporation Licensed in the Philippines does not have a resident agent here in the Philippines.
36 | U N I V E R S I T Y O F S A N C A R L O S
where in that treaty, they allow signatory countries to file Situation (follow up):
cases here. If the shipper was aware of the contract of reinsurance, and
there was a conformity between the local shipper and the
c. When foreign corporation entered into a transaction not foreign reinsurance company—local shipper having been
related in its business advised by the foreign reinsurance company that it is
d. When foreign corporation would enforce its right reinsuring the cargo up to 25M, can shipper sue the foreign
reinsurer?
Illustration:
There is a ship carrying the products of the foreign ANS: It can sue. Provided however, that both parties were in
corporation and the ship was in the port of Manila but it was agreement, and the local shipper conformed to the agreement prior to
for mere passage. Some of the items were then stolen so the contingency.
the foreign corporation sued in Phil. court to enforce their
right over their stolen products. Situation 2 (reverse situation: foreign reinsurer sues local
shipper):
Instances when foreign corporation cannot sue The domestic insurer did not pay the premium due to the
When foreign corporation is doing business in the Philippines and they foreign reinsurance company, the reinsurance being known to
do not have a license. the shipper. The foreign reinsurer now sues the shipper for
payment of the premium corresponding to the reinsured
Instances when foreign corporation can be sued portion, which the domestic insurer did not pay. Can the
At any instance. Foreign Corporation sue the balance?
Important:
However, there might be difficulty in acquiring jurisdiction over the ANS: There was no agreement that the shipper is solidarily liable with
foreign corporation because of the difficulty in serving summons unless the domestic corporation
extraterritorial summons are allowed in a given circumstance.
How about it being a foreign corporation?
If it has a license, then it can file a suit. If he did not have a license,
Foreign Insurance Company
he cannot file a suit
Situation 1 (local shipper sues foreign reinsurer): Situation 3 (foreign shipper sues foreign insurer):
Author’s Synopsis: Cargo by a local shipper was insured by local insurance
A foreign company is an exporter of Shell products. Here is the
company for 50M and reinsured by foreign insurance company up to 50% of 50M
(25M). The contract of insurance was between the local shipper and local domestic carrier that ships the products with a foreign vessel
insurer, and the contract of reinsurance was between the local insurer and from Cebu, Philippines to Spain. To insure the cargoes,
foreign reinsurer. Cargo perished and local insurance company does not pay the because this was a foreign vessel, they went to a foreign
local shipper the entire 50M. Question: Can the local shipper sue the foreign insurance company, who insured the cargoes. If something
reinsurer for the 25M? happens to the cargoes, may the shipper of the cargoes sue
There is a Foreign Corporation in England. This foreign the foreign insurance company?
corporation is engaged in insurance business. A local
insurance company in the Philippines entered into insurance ANS: Yes a foreign corporation can be sued any time.
contract with a shipping vessel for its cargo up to 50M. The
local insurance company would like to distribute its risk by re-
insuring the cargoes to the foreign corporation in England up Right of Subrogation
to 50% (25M). Re-insurance company agrees. In effect, it has
reinsured the entire cargo. While domestic business involves Situation (foreign insurer sues manufacturer, pursuant to
the domestic insurance company and the cargo owner or the right of subrogation):
shipper, the reinsurance contract is between the domestic So that foreign insurance company who has the right of
insurance company and the foreign insurance company. reimbursement or subrogation came over and sued the
Should the cargo get lost and the domestic insurance manufacturer of the cargoes, because there were some
company refuses to pay for the entire 50M, can the shipper defects in the goods it exploded while on board, that’s why
sue that foreign company who reinsured the remaining half of the goods were destroyed. While the insurance company paid
the cargo? the local shipper, he will now be entitled to subrogation. Can
the foreign insurance company sue the manufacturer?
ANS: The shipper can sue. Foreign Corporation can be sued in ALL
instances. Although the agreement was originally between the ANS: General rule is that “No license, they cannot sue”. If a foreign
Domestic insurer and the local shipper, but because there was an corporation is doing business in the Philippines and it does not have a
agreement between the domestic insurer and the foreign insurer with license, they cannot sue. Subrogation from a domestic corporation is
the consent of the local shipper, then it is binding. There is no problem not an exception to secure a license otherwise they would always
with privity of contract. argue that they are stepping into the shoes of a domestic corporation.
License is necessary.
Atty E’s qualified answer:
1. If the shipper was aware before the incident that half of his Atty E: If we keep on saying, you must secure a license before you
cargo was reinsured, and by virtue of that knowledge, and the can sue, unless it will result to unjust enrichment, it will be nothing, it
foreign company agreed, there was in effect a contract. will never comply with the license
2. If the shipper was not aware, then there was no privity of
contract. Relevant Provisions:
The shipper has no right to go after the foreign corporation. Section 133. Doing business without a license. – No foreign corporation
Under the rules on privity of contract, the local shipper has no transacting business in the Philippines without a license, or its successors or
personality to sue that foreign corporation. Thus, the domestic assigns, shall be permitted to maintain or intervene in any action, suit or
insurer is liable for the full 50M. The shipper cannot sue the proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
foreign company because it is not privy.
administrative tribunals on any valid cause of action recognized under Philippine
laws. (69a)
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Section 134. Revocation of license. – Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to transact business TITLE XVI. MISCELLANEOUS PROVISIONS
in the Philippines may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds: Sec. 137. Outstanding Capital Stock Defined
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; Capital Structure
3. Failure, after change of its resident agent or of his address, to submit to the 1. Authorized Capital Stock – maximum amount of the capital or
Securities and Exchange Commission a statement of such change as required by investment that a corporation can have. This is stated in the
this Title; Articles of Incorporation
4. Failure to submit to the Securities and Exchange Commission an authenticated 2. Subscribed Capital Stock – the amount of the promise or
copy of any amendment to its articles of incorporation or by-laws or of any
commitment of the each of the stockholders. This is at least 25%
articles of merger or consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit of the Authorized Capital Stock
or other document submitted by such corporation pursuant to this Title; 3. Paid up Capital Stock – the amount that the stockholders actually
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, paid. This is at least 25% of the Subscribed Capital Stock
lawfully due to the Philippine Government or any of its agencies or political
subdivisions; Outstanding Capital Stock
7. Transacting business in the Philippines outside of the purpose or purposes for It means the total shares of stock issued under binding subscription
which such corporation is authorized under its license;
agreements to subscribers or stockholders, whether or not fully or
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 partially paid, except treasury shares. (Sec. 137, Corporation Code)
Philippines; or
9. Any other ground as would render it unfit to transact business in the Subscribed Capital Stock
Philippines. (n) At least 25% must be paid up
38 | U N I V E R S I T Y O F S A N C A R L O S
However, although technically it cannot be transferred, can
you think of another way on which the stocks can be Example: Issues rules on how to comply with financial statements to the SEC.
transferred without a valid certificate? It may provide a requisite on the format and how many copies shall be
You can assign or transfer your shares even if it is not paid, on the submitted. It can also collect and demand fines for non-compliance.
condition that the transferee will assume the obligation to pay the
unpaid balance of the subscription. So the corporation can still trace Relevant Provision:
Section 143. Rule-making power of the Securities and Exchange
the share, and the corporation can still demand the unpaid balance. Commission. – The Securities and Exchange Commission shall have the power
and authority to implement the provisions of this Code, and to promulgate rules
Relevant Provision: and regulations reasonably necessary to enable it to perform its duties
Section 137. Outstanding capital stock defined. – The term “outstanding hereunder, particularly in the prevention of fraud and abuses on the part of the
capital stock”, as used in this Code, means the total shares of stock issued under controlling stockholders, members, directors, trustees or officers. (n)
binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares. (n)
Sec. 149. Effectivity of Corporation Code
TN: Before, this was covered by a Presidential Decree 902-A which Section 142. Confidential nature of examination results. – All
was issued by Marcos. Everything was given to the SEC. Because such interrogatories propounded by the Securities and Exchange Commission and the
answers thereto, as well as the results of any examination made by the
was under the supervision of the President, under the executive
Commission or by any other official authorized by law to make an examination of
department, decisions of the SEC will be appealable to the office of the the operations, books and records of any corporation, shall be kept strictly
President so that he has the complete control of the economy and confidential, except insofar as the law may require the same to be made public
business of the country. or where such interrogatories, answers or results are necessary to be presented
as evidence before any court. (n)
Rule-making Power
Section 144. Violations of the Code. – Violations of any of the provisions of
Issue additional rules in order to comply with what is provided under
this Code or its amendments not otherwise specifically penalized therein shall be
the Corporation Code. punished by a fine of not less than one thousand (P1,000.00) pesos but not
39 | U N I V E R S I T Y O F S A N C A R L O S
more than ten thousand (P10,000.00) pesos or by imprisonment for not less than SC: The property now belongs to Madecor/MegaPrime. It is no longer
thirty (30) days but not more than five (5) years, or both, in the discretion of the belonging to PNEI and that the PNB Madecor is a separate and distinct
court. If the violation is committed by a corporation, the same may, after notice personality from PNEI.
and hearing, be dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the Atty E: The transfer of the assets was of arms length basis. There
corporation responsible for said violation: Provided, further, That nothing in this was no fraud at all. As a matter of fact, the transfer was by virtue of a
section shall be construed to repeal the other causes for dissolution of a foreclosure. Pantranco did not pay its obligations. So the transfer was
corporation provided in this Code. (190 1/2 a) valid and ownership by Madecor cannot be presumed to be the same
ownership as that of Pantranco.
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,
The second issue, according to the Laborers was?
members, directors, trustees, or officers, shall be removed or impaired either by Firstly, the laborers were trying to pursue the assets. They filed a
the subsequent dissolution of said corporation or by any subsequent amendment money claim against the Pantranco assets, and were suing against the
or repeal of this Code or of any part thereof. (n) transfer of the assets from Pantranco to PNB, PNB Madecor and Mega
Prime, since the assets were transferred to PNB, Madecor, and
Section 146. Repealing clause. – Except as expressly provided by this Code, Megaprime from Pantranco
all laws or parts thereof inconsistent with any provision of this Code shall be
deemed repealed. (n)
How did they raise and argue the issue that since
Madecor/Megparime is now the owner of properties then now
Section 147. Separability of provisions. – Should any provision of this Code it will be liable for the liabilities of Pantranco.
or any part thereof be declared invalid or unconstitutional, the other provisions, They argued that there was a merger. Because in a merger the
so far as they are separable, shall remain in force. (n) surviving corporation will assume the liabilities/assets of the dissolved
corporation. In a merger there is assumption of liability. And the
Section 148. Applicability to existing corporations. – All corporations ownership is now transferred, then it follows liabilities are transferred.
lawfully existing and doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized, licensed or registered by the
Securities and Exchange Commission, shall be deemed to have been authorized, SC: In this case, there was no merger and that these corporations
licensed or registered under the provisions of this Code, subject to the terms and were separate and distinct personalities from another, and that one
conditions of its license, and shall be governed by the provisions hereof: company cannot be liable for the obligations that is to be fulfilled by
Provided, That if any such corporation is affected by the new requirements of the other company. In other words, there was just a transfer of assets
this Code, said corporation shall, unless otherwise herein provided, be given a and not a merger. Because in transfer of assets, what is only acquired
period of not more than two (2) years from the effectivity of this Code within by the acquiring corporation are just those assets and not the liabilities
which to comply with the same. (n)
of the other corporation.
So, the employees of Pantranco were able to secure a Author’s note: Sir had no inputs for this case
favorable judgment. To whom did the Labor Arbiter execute
its favorable judgment against? PNB, PNB Madecor and to PNEI.
Parischa vs. Don Luis Rison Realty
However, the property was no longer in the name of
Pantranco as it went to Madecor & Megaprime. What did it
(Madecor & MegaPrime) allege when the employees went Why was Ms. Bautista’s authority questioned?
against the properties of Madecor and Megaprime? Her authority was questioned because there was no board resolution
It cannot be liable for the money claims against PNEI. authorizing her to represent the corporation in the case. But however,
she later on was able to present a Secretary’s Certificate to sue in
The first issue, according to the Laborers was? behalf of the corporation. And assuming arguendo that Ms. Bautista
Laborers said they were one and the same. The transfer was intended has the right to represent the corporation, petitioners still argued that
to defraud them. Thus, we could lift the veil of corporate fiction and the corporation cannot sue because their certificate of incorporation
pursue against whoever is the owner of these assets. was already revoked by the SEC, because it was presented already
when the corporation was already dissolved.
40 | U N I V E R S I T Y O F S A N C A R L O S
SC: The corporation can sue because the revocation was only had
after the case was filed. The point was, legal capacity of the
corporation to sue existed while the case was being filed against the
petitioner.
41 | U N I V E R S I T Y O F S A N C A R L O S