HLP2009-3B

CORPORATION LAW FINALS 09 A. By-laws 1. Definiti n f by-laws

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These are regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance. By laws define the rights and obligations of various officers, persons or groups within the corporate structure and provide rules for routine matters such as calling meetings. Every corporation under this code shall have the power and capacity: ( ! to adopt by"laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this code (#ec $%! a# $t %y-laws &Se'ti n ()*

!. W"en t

Every corporation formed under this code must within & month after receipt of official notice of the issuance of its certificate of incorporation by the #E' adopt a code of by"laws for its government not inconsistent with this code. (#ec (%! )ay be adopted and filed prior to incorporation, in such case, shall be approved and signed by all incorporators submitted to #E' together with A* (#ec (%!

+oyola ,rand -illas .omeowners Ass v. 'A The #upreme 'ourt held that although the 'orporation 'ode re/uires the filing of by"laws within one month after the issuance of the 'ertificate of *ncorporation, it does not e0pressly provide for the conse/uences of non" filing within the said period. *t should be noted, however, that under #ection % of 12 345"A, the #E' can revoke the certificate of registration of corporations for failure to file the by"laws within the re/uired period but only after proper notice or hearing. There is no automatic dissolution for failure to file by"laws within the re/uired period. 6leischer v. Botica 7olasco The by"laws of the 'orporation which effectively gives the corporation preferential right of the shares in /uestion is in direct conflict with the 'orporation +aw. The owner of the shares, which are personal property, has the uncontrollable right to alienate them which attaches to the ownership of any other species of property.

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The right to impose restrictions on transfer of shares must be conferred upon the corporation by a governing statute or by the A8*. *t cannot be done by a by"law without statutory or charter authority. ,ov9t of 1hils. -. El .ogar The by"laws provision which empowers the board to cancel shares and return to the owner the balance resulting from the li/uidation by a vote of absolute ma:ority of the members is an AB#8+;TE 7;++*T<. This is in direct conflict with the 'orporation +aw which declares that the board shall not have the powers to force the surrender and withdrawal of unmatured stock e0cept in case of li/uidation or forfeiture of stock. The practice of the directorate filling"up the vacancies by the action of the directors themselves is valid. The 'orporation +aw does not undertake to prescribe the rate of compensation for the directors of the corporation. The power to fi0 compensation is left to the corporation itself to be determined in the by"laws. .ence, the distribution to directors of El .ogar of = net profit in proportion to their attendance at board meetings is valid. *f a mistake has been made or the rule adopted in the by"laws has been found to work harmful results, the remedy is in the hands of the #.s who have the power at any lawful meeting to change the rule. The provisions in the by"laws which re/uire that the persons elected to the board be holders of shares with paid"up value of 1 > and that directors who loan from the association waive their rights as #.s are -A+*2. The 'ode specifically gives the power to the corporation to provide in its by"laws for the /ualifications of directors, and the re/uirement of security from them for the proper discharge of the duties of their office is highly prudent and in conformity with good practice. The 'ode also has safeguards on directors from making loans to themselves, designed to prevent the possibility of looting of the corporation. +. , w file# )ust be approved by the affirmative vote of the #tockholders representing the ma:ority of the outstanding capital stock or ma:ority of members (#ec (%! )ust be signed by the stockholders or members voting for it (#ec (%! )ust be filed with the #E' certified by the ma:ority of directors?trustees and countersigned by the secretary of the corporation which shall be attached to original A* (#ec (%!

(. W"e-e .e$t )ust be kept in the principal office of the corporation@ sub:ect to inspection of stockholder or member during office hours (#ec (%!

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/. 0ffe'ti1ity f %y-laws

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Effective only from the issuance of #E' of certification that bylaw are not inconsistent with the 'ode (#ec (%! 'annot bind stockholders ? corporation pending approval By laws, like A* are contracts of adhesion. They will bind the corporation and stockholders including those who vote against as well as those who became members after approval 'ontracts entered into without strict compliance with by"laws may be binding on the corporation due to long ac/uiescence and usage By laws are mere internal rules among stockholders and cannot affect or pre:udice $rd persons who deal with the corporation unless they have knowledge of the same

). C ntents &Se'ti n (2* #ub:ect to the provisions of the 'onstitution, this 'ode, other special laws, and the articles of incorporation, a private corporation may provide in its by"laws for: a! The time, place and manner of calling and conducting regular or special meetings of the directors or trustees@ b! The time and manner of calling and conducting regular or special meetings of the stockholders or members@ c! The re/uired /uorum in meetings of stockholders or members and the manner of voting therein@ d! The form for pro0ies of stockholders and members and the manner of voting them@ e! The /ualifications, duties and compensation of directors or trustees, officers and employees@ f! The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof@ g! The manner of election or appointment and the term of office of all officers other than directors or trustees@ h! The penalties for violation of the by"laws@ i! *n the case of stock corporations, the manner of issuing stock certificates@ and :! #uch other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. f %y-laws &Se'ti n (5*

2. P- 'e#3-e f - a4en#4ent

-oting Ae/uirement: board of directors or trustees by a ma:ority vote and the owners of at least a ma:ority of the outstanding capital stock, or ma:ority of the members of a non"stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by"laws or adopt new by"laws

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2elegation of power to amend to the B82: The owners of two"thirds (5?$! of the outstanding capital stock or two"thirds (5?$! of the members in a non"stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by"laws or adopt new by"laws Aevocation of the delegation of power to amend: Any power delegated to the board of directors or trustees to amend or repeal any by"laws or adopt new by"laws shall be considered as revoked whenever stockholders owning or representing a ma:ority of the outstanding capital stock or a ma:ority of the members in non"stock corporations, shall so vote at a regular or special meeting Bhenever any amendment or new by"laws are adopted, such amendment or new by"laws shall be attached to the original by"laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a ma:ority of the directors or trustees, shall be filed with the #ecurities and E0change 'ommission the same to be attached to the original articles of incorporation and original by"laws. The amended or new by"laws shall only be effective upon the issuance by the #ecurities and E0change 'ommission of a certification that the same are not inconsistent with this 'ode.

B. N n-3se f C"a-te- 6 C ntin3 3s In $e-ati n &. 7on"user for 5 years (non"use of charter!" when the corporation does not formally organiCe and commence the transaction of its business or the construction of its works within 5 years from the date of its incorporation. *ts corporate powers cease and the corporation shall be deemed dissolved (automatic! 6ormal organiCation D 7ot only means adoption of by"laws but also the organiCation of the Board. This may consist in the election of new board of directors or trustees and corporate officer The A8* names the initial members of the Board who are to act until the &st set of directors are duly elected and /ualified. This interim board can perform the functions of a regular board until the date of the election of directors. 8nce elected, the directors must complete the organiCation of the corporation by electing the officers. 'ommencement of business D This is after the approval of the by"laws and the election of directors and officers elected. This may take the form of contracting for lease or sale of properties to be used as business site of the corporation and other preparatory acts geared towards fulfillment of the purpose for which the corporation was established 5. 7on"user for years (continuous inoperation!" when the corporation has commenced the transaction of its business but subse/uently becomes continuously inoperative for a period of at least years. The same shall be a ground for the suspension or revocation of its corporate franchise or 'ertificate of *ncorporation (not automatic!. 7otice and hearing is re/uired.

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$. E0ception: cause or non"use or operation was due to causes beyond the control of the corporation as determined by #E' (e0. )ineral lands to be developed by the corporation as per its purpose are the ob:ect of court litigation and a court in:unction against the corporate activities has been issued! POW0RS
OF

CORPORATIONS

P-i4a-y R3le7 All corporate powers shall be e0ercised and all corporate businesses shall be conducted by the board of directors of the corporation (#ec. 5$! 08'e$ti n7 #pecific instances when the 'ode re/uires the consent and ratification of the #.s, particularly where the underlying contractual relationship between the parties: The corporation, the #.s?members, and the #tate is being amended or alterd How is consent expressed by the parties? Corporation: Through the Board State: Through act of the regulatory body (SEC) SHs: Through a!ority or "#$ %ote where applicable (&ote: 'issenting SHs in certain instances are gi%en the option to withdraw fro the relationship through the exercise of appraisal right)

A. In 9ene-al (#ection $%! &. To sue and be sued in its corporate name@ 5. #uccession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation@ $. To adopt and use a corporate seal@ (. To amend its articles of incorporation in accordance with the provisions of this 'ode@ . To adopt by"laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this 'ode@ %. *n case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this 'ode@ and to admit members to the corporation if it be a non"stock corporation@ E. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily re/uire, sub:ect to the limitations prescribed by law and the 'onstitution@ F. To enter into merger or consolidation with other corporations as provided in this 'ode@ 3. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: 1rovided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity@

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&4. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees@ and &&. To e0ercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (in the purpose clause! #ources of power o #ection $% o 1urpose clause (#ec. FF"7on stock 'orporations!: charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agriculture and like chambers or any combination thereof. GAecreationalH is omitted. #ec $F par && grants such power as are essential or necessary to carry out its purpose or purposes as stated in the A*. A corporation is presumed to act within its powers and when a contract is not on its face necessarily beyond its authority, it will in the absence of proof to the contrary presumed valid 5 general restrictions on the power of the corporation to ac/uire and hold properties: o that the property must be reasonably and necessarily re/uired by the transactions of its lawful business o that the power shall be sub:ect to the limitations prescribed by other special laws and the constitution (corporation may not ac/uire more than $4= of voting stocks of a bank@ corporations are restricted from ac/uiring public lands e0cept by lease of not more than &444 hectares!

B. S$e'ifi' P we-s E0tend or shorten the corporate term *ncrease or decrease capital stock *ncur, create or increase bonded indebtedness 2eny preemptive right #ell or otherwise dispose of substantially all its assets Ac/uire its own shares *nvest in another corporation or business 2eclare dividends Enter into management contracts '. T e8ten# - s" -ten ' -$ -ate te-4 (#ection $E!

&. Approval and -oting and 7otice Ae/uirement: a! Approved by a ma:ority vote of the board of directors or trustees and b! Aatified at a meeting by the stockholders representing at least two" thirds (5?$! of the outstanding capital stock or by at least two"thirds (5?$! of the members in case of non"stock corporations. c! Britten notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his

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place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. 5. Appraisal right D *n case of e0tension of corporate term, any dissenting stockholder may e0ercise his appraisal right under the conditions provided in this code. 2. T in'-ease - #e'-ease 'a$ital st '.: T % n#e# in#e%te#ness (#ection $F! in'3-; '-eate; in'-ease;

&. Approval and -oting and 7otice Ae/uirement: a! Approved by a ma:ority vote of the board of directors b! Two"thirds (5?$! of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness in a meeting duly called for the purpose c! Britten notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholderIs meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally 5. 'ertificate of 6iling: A certificate in duplicate must be signed by a ma:ority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholdersI meeting, setting forth: a! That the re/uirements of this section have been complied with@ b! The amount of the increase or diminution of the capital stock@ c! *f an increase of the capital stock, the amount of capital stock or number of shares of no"par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no"par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no"par stock allotted to each stock"holder if such increase is for the purpose of making effective stock dividend therefor authoriCed@ d! Any bonded indebtedness to be incurred, created or increased@ e! The actual indebtedness of the corporation on the day of the meeting@ f! The amount of stock represented at the meeting@ and g! The vote authoriCing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.

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$. Approval of #E': Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall re/uire prior approval of the #ecurities and E0change 'ommission. 8ne of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the #ecurities and E0change 'ommission and attached to the original articles of incorporation. (. Effectivity: 6rom and after approval by the #ecurities and E0change 'ommission and the issuance by the 'ommission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authoriCed, as the certificate of filing may declare . Treasurer Affidavit: 1rovided, That the #ecurities and E0change 'ommission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty"five (5 =! percent of such increased capital stock has been subscribed and that at least twenty"five (5 =! percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is e/ual to twenty"five (5 =! percent of the subscription 2ecrease of capital stock: 7o decrease of the capital stock shall be approved by the 'ommission if its effect shall pre:udice the rights of corporate creditors 7on"stock corporations: )ay incur or create bonded indebtedness, or increase the same, with the approval by a ma:ority vote of the board of trustees and of at least two"thirds (5?$! of the members in a meeting duly called for the purpose. Aegistration of bonds" Bonds issued by a corporation shall be registered with the #ecurities and E0change 'ommission, which shall have the authority to determine the sufficiency of the terms thereof. 7o appraisal right here, a dissenting #. can simply sell his shares. A grant of appraisal right would defeat the purpose which is to raise funds.

E. T

#eny $-e-e4$ti1e -i9"ts (#ection $3!

&. 2efinition of pre(e pti%e rights D All stockholders of a stock corporation shall en:oy pre"emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto This is to prevent dilution in shareholding

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*f you increase common stock and some of the stockholders do not want to subscribe, get from them a waiver of pre"emptive right (There are authorities saying that the right is applicable when there is reduction of shares! Basis of right@ common law rule 1reemptive right: option privilege of an e0isting #. to subscribe to a proportionate part of shares subse/uently issued by the corporation before the same can be disposed in favor of others 'ommon"law right granted to #.s of a corporation to be granted the first option to subscribe to any opening of the unissued capital stock, or to any increase from the authoriCed capital stock JEconomic aspect: right to invest capitalJthe right becomes valuable when the enterprise has demonstrated that it will earn a higher rate of return on the capital than the #. could get were he to invest it in the open market J+imited to shares issued in pursuance of an increase in the authoriCed capital stock@ does not apply to additional issues of originally authoriCed shares forming part of the e0isting capital stock JAn original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authoriCed shares JBhen unsubscribed shares are later reoffered, the #. cannot claim that his interest would be diluted J1reemptive rights are not statutory rights, but common law rights J1reemptive rights are personal rights of the #. 7eed not be stipulated in the A8* or by"laws )ay be removed, denied, or altered only through specific provisions in the A8* or amendment thereto #E': vote by ma:ority of #.s to waive the right is 7;++ and -8*2@ such waiver must be given individually by the #.s concerned But unanimous vote of all will bind them )n close corporations: Balance of power in close corporations may be disturbed by an indiscriminate issuance of new shares without regard to preemptive right of #.s. *n a close corp, e0ceptions in #ec $3 are not applicable

5. +imitation to e0ercise of pre"emptive right: a! #uch pre"emptive right shall not e0tend to shares to be issued in compliance with laws re/uiring stock offerings or minimum stock ownership by the public@ b! 7ot e0tend to shares to be issued in good faith with the approval of the stockholders representing two"thirds (5?$! of the outstanding capital stock, in e0change for property needed for corporate purposes or in payment of a previously contracted debt

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c! #hall not take effect if denied in the Articles of *ncorporation or an amendment thereto. 1reemptive right D option privilege of an e0isting stockholder to subscribe to a proportionate part of shares subse/uently issued by the corp before same can be disposed of in favor of the others@ includes all issues and disposition of shares of any class *ncludes not only new shares in pursuance of an increase of capital stock but would cover the issue of previously unissued shares which form part of the e0isting capital stock as well as treasury shares (#ec. 3 used the phrase, Gdisposition of shares of any classH, furthermore since the funds used in reac/uiring T?# come from surplus profits which could have been declared instead as dividends, it is desirable policy to recogniCe the pre" emptive rights of #.s! Bhere the shares are issued in e0change for property needed for corporate purposes or for debt previously granted, #. cannot demand his pre"emptive right for right may pre:udice corporate interest *n :oint ventures, you can e0pand pre"emptive rights even in instances under #ec $3

$. Aemedies in case of unwarranted denial: a! *n:unction b! )andamus in any case, the suit should be individual and not derivative because the wrong done is to the stockholders individually Aight of 6irst Aefusal refers to the offering of the shares first to the other stockholders before it is sold?transferred to outsiders. As distinguished to A*,.T 86 6*A#T AE6;#A+, the latter is contractual, while 1AE"E)1T*-E A*,.T e0ists even if not stated in A8*, that9s why there is a need to e0pressly deny it. 6urthermore, the right must be e0ercised within $4 days, hence not indefinite. Bhile e0ercise of pre"emptive right is usually fi0ed by a resolution. 6. T sell - #is$ se f ' -$ -ate assets (#ection (4!

&. Aestrictions: #ub:ect to the provisions of e0isting laws on illegal combinations and monopolies 5. #cope of power: To sell, lease, e0change, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem e0pedient )eaning of disposition of substantially all of the corporate property and assets" if thereby the corporation would be rendered incapable of

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continuing the business or accomplishing the purpose for which it was incorporated. $. Approval, voting and notice re/uirement: a! )a:ority vote of its board of directors or trustees, b! AuthoriCed by the vote of the stockholders representing at least two" thirds (5?$! of the outstanding capital stock, or in case of non"stock corporation, by the vote of at least to two"thirds (5?$! of the members, in a stockholderIs or memberIs meeting duly called for the purpose. c! Britten notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally Bhen #. approval not necessary " *f disposition is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. *n non"stock corporations where there are no members with voting rights " the vote of at least a ma:ority of the trustees in office will be sufficient authoriCation for the corporation to enter into any transaction authoriCed by this section.

(. Appraisal right: That any dissenting stockholder may e0ercise his appraisal right under the conditions provided in this 'ode . Abandonment of the sale, leaseK " After such authoriCation or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, e0change, mortgage, pledge or other disposition of property and assets, sub:ect to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members.

,. T

a'<3i-e

wn s"a-es (#ection (&!

A stock corporation shall have the power to purchase or ac/uire its own shares for a legitimate corporate purpose or purposes (treasury shares! provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or ac/uired Trust *und doctrine D the re/uirement of unrestricted retained earnings is because subscription to the capital of a corporation constitute a fund to which creditors have a right to look for the satisfaction of their claims +egitimate purpose includes: a! To eliminate fractional shares arising out of stock dividends@

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b! To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delin/uency sale, and to purchase delin/uent shares sold during said sale@ and c! To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this 'ode. A corporation must have unrestricted retained earnings in ac/uiring own shares e0cept: a! shares are ac/uired in the redemption of redeemable shares b! shares are re"ac/uired to effect a decrease in capital stock approved by the #E' c! shares are reac/uired by a close corporation pursuant to the order of the #E' acting to arbitrate a deadlock - %3siness (#ection

.. T in1est ' -$ -ate f3n#s in an t"e- ' -$ -ati n (5!

&. #ub:ect to the provisions of this 'ode, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organiCed 5. Approval, voting and notice re/uirement a! )a:ority of the board of directors or trustees and b! ratified by the stockholders representing at least two"thirds (5?$! of the outstanding capital stock, or by at least two thirds (5?$! of the members in the case of non"stock corporations, at a stockholderIs or memberIs meeting duly called for the purpose. c! Britten notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally $. Appraisal right " any dissenting stockholder shall have appraisal right as provided in this 'ode (. Bhen #. approval not necessary" where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation To avoid #. approval, include other business undertakings in the secondary purpose . Aules in case a corporation will invest its funds in another corporation a! *f it is the same purpose or incidental or related to its primary purpose, the board can invest the corporate fund without the consent of the stockholders. Bhat is re/uired is only the vote of the ma:ority of the B82. 7o appraisal right

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b! *f the investment is in another corporation of different business or purpose, the affirmative vote of ma:ority of the board consented by 5?$ 8# capital stock is re/uired T %3y t"e s"a-es f an t"e- ' -$ -ati n &+)* $- 1i#e#7 a. Aeasonably necessary for its lawful business b. The other corporation must be engaged in an allied business or not alien to the purposes of the purchasing corporation ((5! This means a corporation can enter into a :oint venture with another person, partnership or another corporation But a corporation cannot enter into a partnership contract ente- int a $a-tne-s"i$

P we- t

,A: corporation cannot enter into partnerships with other corporations or with individuals E0ception: e0pressly allowed by statute or charter o Loint ventures o +imited partnerships (;# +aw! *. T #e'la-e #i1i#en#s (#ection ($! The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them. Any cash dividends due on delin/uent stock shall first be applied to the unpaid balance on the subscription plus costs and e0penses, while stock dividends shall be withheld from the delin/uent stockholder until his unpaid subscription is fully paid Approval M voting re/uirement: a! Approval of B82 b! *n case of stock dividend: *t shall be not be issued without the approval of stockholders representing not less than two"thirds (5?$! of the outstanding capital stock at a regular or special meeting duly called for the purpose. +imitation on retention of surplus profits" #tock corporations are prohibited from retaining surplus profits in e0cess of one hundred (&44=! percent of their paid"in capital stock, e0cept: a! when :ustified by definite corporate e0pansion pro:ects or programs approved by the board of directors@ or b! when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its?his consent, and such consent has not yet been secured@ or c! when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

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Stoc+ di%idends: distribution to stockholders of company9s own stock. 'orporate profits or earnings are transferred to capital stock and shares of stock representing the increase in capitaliCation are distributed. )ay be issued out of premium surplus. o +imitation on the issue of stock dividends: there must be unissued shares of the corporation there must be unrestricted retained earnings cannot be issued to non"stockholders even for services rendered Bhether or not there should be a distribution of dividends in whatever form, such matters are always sub:ect to the business :udgment of the B82 and the courts will not interfere with the former9s discretion e0cept: o when tainted with bad faith o when tainted with fraud o when tainted with gross negligence o when profits accumulated are in e0cess of &44= of the corporations paid"in capital stock unless e0empted Bhen right to 2ividends -ests: o ,eneral rule: as soon as the same have been lawfully declared by the B82, becomes a debt owing to the #.. 7o revocation can be made o Exceptions: not yet announced or communicated to the public, revocable before announcement to shareholders when stock dividends are declared since these are not distributions but merely represent changes in the capital structure, may be revoked prior to actual issuance Aights of transferee to dividends D Aight to dividends vests upon declaration so whoever owns the stock at time or stockholders of record also owns the dividend. #ubse/uent transfer of stock would not carry with it right to dividends Aecord date D The date on which a stockholder must be registered on a corporation9s stock and transfer book in order to be entitled to a dividend or voting rights. ente- int 4ana9e4ent ' nt-a't (#ection ((!

L.

Approval and -oting Ae/uirement: o Approval by the board of directors, and o Approval by stockholders owning at least the ma:ority of the outstanding capital stock, or by at least a ma:ority of the members of both the managing and the managed corporation
7ote: if managing other corporations is the primary purpose, ratificatory vote is not re/uired

o 5?$ vote re/uired when: (#1E'*A+ A;+E! a. where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more

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than one"third (&?$! of the total outstanding capital stock entitled to vote of the managing corporation@ or b. where a ma:ority of the members of the board of directors of the managing corporation also constitute a ma:ority of the members of the board of directors of the managed corporation -ationale for special rule: entering into a anage ent contract is a de%iation fro the ,eneral -ule that the board anages the corporation and that the board of the anaging co pany should de%ote its affairs to its own corporation Term of management contract: 7o management contract shall be entered into for a period longer than five years for any one term. These provisions shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise #ervice contracts or operating agreements which relate to the e0ploration, development, e0ploitation or utiliCation of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. )anagement contract D any contract whereby a corporation undertake to manage or operate all or substantially all of the business of another corporation *f managing a partnership or individual not a corporation, not covered

>. =lt-a1i-es a'ts (#ection ( ! 2efinition of ultra%ires acts D These are acts which a corporation is not empowered to do or perform because they are not based on the powers conferred by its A8* or by the 'orporation 'ode on corporations in general, or because they are not necessary or incidental to the e0ercise of the powers so conferred. Aule on ;ltravires acts of corporations D 7o 'orporation under this 'ode shall possess or e0ercise any corporate powers e0cept those conferred by this 'ode or by its articles of incorporation and e0cept such as are necessary or incidental to the e0ercise of the powers so conferred. J Based on two (5! principles: &. 'orporation is a creature of law and has only such powers and privileges as are granted by the #tate&
1

'orporations are now more of a product of the agreement of the incorporating parties rather than a mere Gcreature of the #tate:H #ec &4 allows or more persons to form a private corporation for any lawful purpose?s #ec $% par && allows every corporation the power to e0ercise such other powers as may be essential or necessary to carry out the purpose?s in the A8* The corporation9s powers depends on its purpose in the A8* #ince parties are entirely free to insert any number of purposes in its A8*, it follows that the e0tent of the corporation9s powers depends largely on their agreement, and not merely on a

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5. The doctrine upholds the duty of trust and obedience owed by the corporation9s directors and officers to the #.s a. 2efense of ultra vires rests on the violation of trust or duty towards #.s, and should not be entertained where its allowance will do greater wrong to innocent $rd parties There are $ types of ;+TAA"-*AE# acts: a. Acts beyond the powers of the corporation as stipulated in law or A8* b. Acts or contracts entered in behalf of the corporation by persons w?o corporate authority ,A: *n the absence of an authority from the board, no person , not even the officers can validly bind the corporation E0ception: 2octrine of apparent Authority@ *n dealing with corporations, the public at large is bound to rely upon outward appearances, and relying on such, if it be found that the directors permitted the agent to hold himself out as having authority to bind or ac/uiesced in the contract and accepted the benefits therefrom, the corporation will be bound. (AamireC v. 8rientalist! c. Acts or contracts which are per se illegal. i. This cannot be gi%en legal effect and are %oid B;T in .arden v. Benguet, #' upheld a patently void contract as between the contracting parties. #' said that public policy is controlling in the grant of mining rights. The violation of the prohibition against mining corporations from owning stock of another corporation though illegal did not in any way affect the contract. This violation can only be proceeded upon by way of a criminal prosecution or by /uo warranto which can be maintained only by the #tate. *nsofar as the parties are concerned, no civil wrong had been committed between them, and if public wrong had been committed, then the directors of both Balatoc and .arden were the active inducers of that wrong. Thus, since the contract has been performed on both sides and there is no possibility of undoing what has been done, and though the corporate contracts are illegal per se, when only the public or government policy or interests are at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual stipulations. ii./ltra( 0ires 1cts which are not per se illegal are hence can be ratified by SHs. (2iro%ano case) erely %oidable

direct grant from the #tate, unless of course the purposes are illegal. *nstances where an act can or cannot be reasonably implied from the purposes due to poor draftsmanship or lack of foresight of the drafters, the purpose clause may be reasonably stretched to accommodate the new and une0pected situations, otherwise, a proper amendment of the A8* would be necessary.

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*n the case of 1irovano v. 2ela Aama, which involves the issue of whether or not the donation by the corporation of the proceeds of the insurance is an ultra"vires act, #' held that such donation is not ultra"vires. #' said that it comes within the broad power under the A8* that the 'orporation may invest and GdealH with moneys of the company not immediately re/uired. The word GdealH is broad enough to include any manner of disposition. 6urthermore, assuming that it was ultra"vires, there was ratification by the #.s. 6inally, the donation was already consummated. The defense of ultra"vires cannot be set"up against completed or consummated transactions.

6orm of Aatification: a. E0press act of #.(if act is by the Board! or Board(if act is by the officers! b. *mplied through acceptance of benefits c. Through estoppel on the part of Board or the officers

Effect?s of Aatification: 'ures the infirmity and makes it perfectly valid and enforceable, 1A8-*2E2 that it pre:udices no creditors and if it has been partially e0ecuted and not merely e0ecutory

Atrium v. 'A Atrium )anagement 'orporation filed with AT' action for collection of the ( postdated checks issued by the .i"cement 'orporation, though its signatories de +eon, treasurer, and de las Alas, chairman of the corporation to a certain ET .enry and 'o which the latter endorsed to Atrium for rediscounting. The act of issuing was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultravires act. An ultravires act is distinguished from illegal act, the former being voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. #' however, held de +eon negligent.

Aepublic of the 1hilippines vs. Aco:e )ining 'o. The company is estopped from denying liability on the ground that the board resolution is ultravires. Assuming arguendo that the resolution is an ultra vires act, the same is not void for it was approved not in contravention of law, customs, public order and public policy. N*n this case, even if the setting up of a post office in the mining camp is outside the

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e0press powers, it is necessary to promote the interest and welfare of the corporationO The term ultravires should be distinguished from an illegal act for the former is merely voidable which may be enforced while the latter is void and cannot be validated. ,eneral conse/uences of ultravires acts are as follows: a! 'orporation may be dissolved under a /uo warranto proceeding but in most cases, the court merely en:oins the corporation from commission of the ultra vires acts b! 'ertificate of Aegistration may be suspended or revoked by #E' c! 1arties to the ultravires contract if e0ecutory on both sides neither party can ask for specific performance. Bill be left as they are if the contract has been fully e0ecuted on both sides. *f one party has performed his part, the contract will be enforced provided it is not illegal d! 'ontract proceeding from an ultra"vires act is voidable e! Any stockholder may bring either an individual or derivative suit to en:oin a threatened ultravires act or contract. *f act or contract has already been performed, a derivative suit for damages may be filed against the directors, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into contracts. Bhen based on tort, cannot set"up the defense of ultravires against in:ured party who had no knowledge that such was ultravires f! )ay become binding by the ratification of all stockholders unless third parties are pre:udice thereby or unless the acts is illegal Le9al C nse<3en'es f =lt-a->i-es A'ts &Classifie#*

&. 8n the 'orporation *f the act is *++E,A+, involuntary dissolution under a /uo warranto proceeding by the #ol,en Aevocation or suspension of the certificate of registration by #E' 5. 8n the parties to the ultra"vires contract 1arties are left as they are and no rescission would lie Bhere there has been partial performance by one party and the other has not, the latter having benefited from the performance, is estopped from claiming ultra"vires $. 8n the rights of #tockholders A #. can file an individual or derivative suit to en:oin a threatened ultra vires act or contract or a derivative suit for damages if the contract has been performed +iability would depend on whether the contracting parties acted in ,6 and with reasonable diligence@ an honest mistake would not give rise to liability *f action is based on tort, the #.s cannot set up the defense of ultra vires against the in:ured party who had no knowledge that the

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corporation was engaging in an act not included e0pressly or impliedly in its purpose clause 7apocor v. -era The issue in this case is whether or not the act of 71' in taking over #ea +ion9s stevedoring services is an ultra"vires act. #' held that it is not ultra"vires. 71' is empowered by its charter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. The ruling in Aco:e )ining was upheld, where the company is not restricted by its e0press powers as long as the act will promote the interests and welfare of the corporation. ,overnment of 1.*. v. El .ogar 1. B?7 el .ogar is illegally owning and holding a business lot in e0cess of the reasonable re/uirements and in contravention of the 'orpo law that every corporation has the power to purchase hold lease real property as reasonable and necessary re/uired for the transaction of the lawful business .: The law e0pressly declares that corporations may ac/uire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created@ and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was ac/uired. A different ruling on this point would compel important enterprises to conduct their business e0clusively in leased offices J a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. Be are furthermore of the opinion that, inasmuch as the lot referred to was lawfully ac/uired by the respondent, it is entitled to the full beneficial use thereof. 7o legitimate principle can discovered which would deny to one owner the right to en:oy his (or its! property to the same e0tent that is conceded to any other owner. !. B?7 el .ogar has engaged in activities foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends, specifically: (&! the administration of the offices in the El .ogar building not used by the respondent itself and the renting of such offices to the public@ (5! the administration and management of properties belonging to delin/uent shareholders of the association@ ($! the management of some parcels of improved real estate situated in )anila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so .: (&! The activities here criticiCed clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. *f the respondent had the power to ac/uire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful. (5! The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section &F of the 'orporation +aw. *t will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, Pat the option of the board of directors,P and this remedy is not made e0clusive. Be see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the security for the delin/uent debt and to manage it with a view to the satisfaction of the

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obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt. ($! The practice described in the passage above /uoted from the agreed facts is in our opinion unauthoriCed by law. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the owner of the property may have been re/uired to subscribe to one or more shares of the association with a view to /ualifying him to receive this service is of no significance. *t is a general rule of law that corporations possess only such e0press powers. The management and administration of the property of the shareholders of the corporation is not e0pressly authoriCed by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the e0ercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly e0tended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be en:oined from further activities of this sort. +. B?7 the royalty paid to the founder of el .ogar, Antonio )elian, as compensation for his services rendered by him during the early stages of the organiCation of the corporation, is unconscionable, e0cessive, and thus necessitates dissolution .: 7o possible doubt e0ists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organiCing and maintaining the corporation. *t is true that contracts with promoters must be characteriCed by good faith@ but could it be said with certainty, in the light of facts e0isting at the time this contract was made, that the compensation therein provided was e0cessiveQ *f the amount of the compensation now appears to be a sub:ect of legitimate criticism, this must be due to the e0traordinary development of the association in recent years. *f the )elian contract had been clearly ultra vires J which is not charged and is certainly untrue J its continued performance might conceivably be en:oined in such a proceeding as this@ but if the defect from which it suffers is mere matter for an action because )elian is not a party. *t is rudimentary in law that an action to annul a contract cannot be maintained without :oining both the contracting parties as defendants. )oreover, the proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect. (. B?7 el .ogar had abused its franchise in issuing special shares, which is alleged to be illegal and inconsistent with the plan and purposes of building and loan associations,and that these are held by well"to"do people purely for investment purposes and not by wage"earners for savings .: The ground for supposing the issuance of the PspecialP shares to be unlawful is that special shares are not mentioned in the 'orporation +aw as one of the forms of security which may be issued by the association. ;pon e0amination of the nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind of shares that, in some American :urisdictions, are generally known as advance payment shares@ in if close attention be paid to the language used in the last sentence of section &EF of the 'orporation +aw, it will be found that special shares where evidently created for the purpose of meeting the condition cause by

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the prepayment of dues that is there permitted. The language of this provision is as follow Ppayment of dues or interest may be made in advance, but the corporation shall not allow interest on such advance payment at a greater rate than si0 per centum per annum nor for a longer period than one year.P *n one sort of special shares the dues are prepaid to the e0tent of 1&%4 per share@ in the other sort prepayment is made in the amount of 1&4 per share, and the subscribers assume the obligation to pay 1&4 monthly until 1&%4 shall have been paid. *t will escape notice that the provision /uoted say that interest shall not be allowed on the advance payments at a greater rate than si0 per centum per annum nor for a longer period than one year. The word Pinterest P as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the dues upon which it is contemplated that the interest may be paid. 7ow, in the absence of any showing to the contrary, we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares@ and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in accordance with section &FF of the 'orporation +aw, sufficiently compensates the shareholder for the advance payments made by him@ and no other incentive is necessary to induce inventors to purchase the stock. *t will be observed that the final 54 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholderIs participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. *t follows that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par. 6rom what has been said it will be seen that there is e0press authority, even in the very letter of the law, for the emission of advance"payment or PspecialP shares, and the argument that these shares are invalid is seen to be baseless. *n addition to this it is satisfactorily demonstrated in #everino vs. El .ogar 6ilipino, supra, that even assuming that the statute has not e0pressly authoriCed such shares, yet the association has implied authority to issue them. The complaint conse/uently fails also as regards the stated in the ninth cause of action. /. B?n El .ogar is pursuing illegally a policy of depreciating, at an e0cessive rate at the discretion of its Board, the value of real properties ac/uired by it at its sales, thereby frustrating the right of #.s to participate annually and e/ually in the earnings. .: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. *f the criticism contained in the brief of the Attorney" ,eneral upon the practice of the respondent association with respect to depreciation be well founded, the +egislature should supply the remedy by defining the e0tent to which depreciation may be allowed by building and loan associations. 'ertainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well founded.

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). B?n el .ogar9s charter should be revoked because it illegally maintains e0cessive reserve funds and because it pursues a policy, allegedly unlawful, of paying a straight annual dividend of &4= regardless of losses suffered and profits made by the corporation and in violation of the re/uirement s of the corpo code. .: *t is insisted in the brief of the Attorney",eneral that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section &FF of the 'orporation +aw. ;pon careful consideration of the /uestions involved we find no reason to doubt the right of the respondent to maintain these reserves. *t is true that the corporation law does not e0pressly grant this power, but we think it is to be implied. *t is a fact of common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most solid of financial institutions, are nevertheless sub:ect to vicissitudes. 6luctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence. )oreover, it is said that the practice of the association in declaring regularly a &4 per cent dividend is in effect a guaranty by the association of a fi0ed dividend which is contrary to the intention of the statute. The government insists upon an interpretation of section &FF of the 'orporation +aw that is altogether too strict and literal. 6rom the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall e0ercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met. 8ur conclusion is that the respondent has the power to maintain the reserves criticiCed in the eleventh and twelfth counts of the complaint@ and at any rate, if it be supposed that the reserves referred to have become e0cessive, the remedy is in the hands of the +egislature. *t is no proper function of the court to arrogate to itself the control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit. 2. B?n el .ogar illegally departed from its charter because it has made loans which were intended to be used by the borrowers for other purposes than the building of homes. There is no statute here e0pressly declaring that loans may be made by these associations solely for the purpose of building homes. 8n the contrary, the building of homes is mentioned in section &E& of the 'orporation +aw as only one among several ends which building and loan associations are designed to promote. 6urthermore, section &F& of the 'orporation +aw e0pressly authorities the Board of directors of the association from time to time to fi0 the premium to be charged. *n the brief of the plaintiff a number of e0cerpts from te0tbooks and decisions have been collated in which the idea is developed that the primary design of building and loan associations should be to help poor people to procure homes of their own.

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This beneficent end is undoubtedly served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But in this :urisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an e0clusive manner, and the e0ercise of the broader powers must in the end approve itself to the business community. 5. B?n the el .ogar charter may be revoked because various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans, and that some of these :uridical entities became shareholders merely for the purpose of /ualifying themselves to take loans from the association. .: the 'orporation +aw declares that Pany personP may become a stockholder in building and loan associations. The word PpersonP appears to be here used in its general sense, and there is nothing in the conte0t to indicate that the e0pression is used in the restricted sense of both natural and artificial persons, as indicated in section 5 of the Administrative 'ode. Be would not say that the word PpersonP or persons,P is to be taken in this broad sense in every part of the 'orporation +aw. 6or instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section % it is said that five or more PpersonsP, although in section % it is said that five or more Ppersons,P not e0ceeding fifteen, may form a private corporation. But the conte0t there, as well as the common sense of the situation, suggests that natural persons are meant. Bhen it is said, however, in section &E$, that Pany personP may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the /uestion whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans@ and it is not alleged in the complaint that they were without power in the premises. 8f course the mere motive with which subscriptions are made, whether to /ualify the stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the si0teenth cause of action, or in the facts developed in connection therewith, that would :ustify us in granting the relief. 9. B?n el .ogar, in disposing of real estate purchased in the collection of defaulted loans, on credit at first and then sold and mortgaged to el .ogar to secure payment of the purchase price, had incurred several outstanding loans, and that that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant. .: This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the 'orporation +aw re/uiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. *t seems to be supposed that, when the respondent sells property ac/uired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in re/uiring the respondent to sell real estate which it ac/uires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or

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that the purchaser shall be a shareholder in the corporation. #uch sales can of course be made upon terms and conditions approved by the parties@ and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. 7or does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it a loan in law. The contention of the ,overnment under this head is untenable. I4$lie# - Ne'essa-y P we-s ,A: all acts other than those specified in #ec $%"(( and in other special provisions would be ultra vires 08'e$ti n: those which are: necessary or in'i#ental to the e8e-'ise f t"e $ we-s so conferred (( !, or essential or ne'essa-y to carry out its $3-$ se or $3-$ ses as stated in the A8*. ($F! 1resumption that a corporation can act within its powers and when a contract is not on its face necessarily beyond its authority, it will, in the absence of proof to the contrary, presumed to be valid. #ec $%(&&!: corporations have the power and capacity to e0ercise such other powers as may be essential or necessary to carry out its purpose(s! as provided for in the A8* o Aestated: the management of a corporation has discretionary authority, in the absence of e0plicit restrictions, to enter into contracts or transactions deemed reasonably necessary or incidental to its business purposes. In'i#ental6In"e-ent P we-s #ec 5: powers, attributes, and properties e0pressly authoriCed by law or in'i#ent t its e8isten'e *ncidental powers: those that attach to a corporation at the moment of its creation without regard to its e0press powers or particular primary purpose, and is inherent in it as a legal entity E0amples: i. To sue and be sued ii. To grant and receive in the corporate name iii. To purchase hold and convey real and personal property for its purposes iv. To have a corporate seal v. To adopt and amend by"laws for its government vi. To disenfranchise or remove members 1owers that go into the very nature and e0tent of a corporation9s :uridical entity cannot be presumed to be incidental or inherent powers

CONTROL AND ?ANA@0?0NT T"-ee le1els f ' nt- l7 (&! board of directors or trusteesR formulate the corporate policies (5! corporate officersR e0ecute the policies

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($! stockholders or membersR have residual powers over fundamental corporate changes Rati nale f 'ent-aliAe# 4ana9e4ent one of the advantageous features of the corporationJacting through centraliCed management the congruence of authority and responsibility in the same person, committee, or board always promote efficiency W" e8e-'ises ' -$ -ate $ we-sB

1. % a-# f #i-e't -s (for stock corporations! or t-3stees (for non"stock corporations! governing body sole authority to determine the policy and conduct the ordinary business of the corporation within the scope of the charter so long as the board acts honestly, in ,6, and not in defraud of creditors or abusive of the rights of minority #.s ,A: in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation E0ception: with respect to $rd persons, actions of the corporation even without formal board approval may still bindS (e0. 1roof of usage, ac/uiescence of the board despite knowledge of the act, receipt of benefits, implied ratification, estoppel P-i4a-y %Ce'ti1e f t"e B a-#

primary obligation of directors is to seek the ma0imum amount of profits for the corporation, and characteriCed the position as a position of trust o in case director9s interest conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit o fiduciary or trust relationship is not a matter of statutory or technical law, but springs from the control and guidance of corporate affairs and property and hence the property interest of the #.s

BOARD

OF

DIR0CTORS f ' -$ -ate $ we-s (#ection 5$!

A. A3t" -ity: Re$ sit -y

The board of directors or trustees are responsible for corporate policies and general management of the business affairs of the corporation ;nless otherwise provided in the 'orporation 'ode, the Board of 2irectors control and e0ercise: o the corporate powers of corporation o all business conducted, o all property of such corporation The board e0ercises almost all corporate powers, lays down all business policies and is responsible for the efficiency of management. The

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stockholders have no right to interfere with the board9s e0ercise of its powers and functions e0cept where the law e0pressly gives them the final say, like in cases of removal of a director, amendment of articles of incorporation, and other ma:or changes. Their resolutions on matters other than the e0ceptions are legally not effective nor binding and may be treated as merely advisory or may be totally disregarded. G;nless 8therwise 1rovidedH D may pertain to instances where a management contract is entered hence corporate posers are e0ercised by the managing company and not the board The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. 'ontracts entered into without a formal board resolution does not bind the corporation e0cept when ma:ority of the board has knowledge of the contract and the contract benefited the corporation. 2irectors owe their duties to corporation as a whole rather than to individual shareholders of classes of shareholders

Ra4i-eA 1 O-ientalist C D Fe-nan#eA 8rientalist 'o engaged in the theater business, desired to be the e0clusive agent of AamireC, who is based in 1aris, for two film outfitsJTclair 6ilms and )ilano films. Through the active involvement and negotiations of Aamon GEl 1residenteH 6ernandeC, a director of 8rientalist and also its treasurer, with AamireC, 8rientalist was able to secure an offer, the terms of which were acceptable to the Board as well as to the stockholders. *t appears that this acceptance of the terms of the offer was decided during an informal meeting of the board, and conveyed to AamireC in two letters signed only by 6ernandeC, both in his individual and his capacity as treasurer of 8rientalist. *t turns out that the company was not financially capable to comply with the obligations set forth in the agency contract, and about this time films had already been delivered to the company. Two stockholders meetings were organiCed, the first adopted a resolution approving the action of the board on the offer, the second raising the contingency of the lack of funds and the proviso that the four officers involved, including 6ernandeC would continue importing the films using their own funds. AamireC sues 8rientalist and 6ernandeC for what is due on the contract. T' ruled 8riental as the principal debtor while 6ernandeC is subsidiarily liable. .: (&! it was incumbent upon the corporation if it desired to /uestion the authority of 6ernandeC to bind it, to deny the due e0ecution of the contract made by him. *n pleading lack of authority of an officer of a corporation to bind the latter through a contract e0ecuted by the former is a special defense which should be specially pleaded and the answer setting up this defense must be verified under oath. The denial shall be specific, and a mere attack on the instrument in general terms is insufficient, even though under oath. *n dealing with corporations the public at large is bound to rely to a large e0tent upon outward appearances. *f a man is found acting for a corporation with the e0ternal indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances, and if it be found that the directors had permitted the agent to e0ercise that authority and thereby held him

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out as a competent person to bind the corporation, or had ac/uiesced in a contract and retained the benefit supposed to have conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor re/uired to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. *t is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be re/uired, is it denies his authority, to state such defense in his answer. This failure of 8rientalist to make any issue in its answer with regard to the authority of Aamon 6ernandeC to bind it and its failure to deny specifically under oath the genuineness of the due e0ecution of the contracts sued upon, have the effect of eliminating the /uestion of his authority from the case. (5! 6ernandeC had no authority to bind the corporation. 'orporate powers is e0ercised by the board of directors, and is recogniCed in the bylaws of 8rientalist. The fact that the power to make contracts is thus vested in the borad does not always signify that a formal vote of the board must always be taken before contractual liability can be fi0ed@ the board can create liability, like an individual, by other means than by formal e0pression of its will. *t may be established without reference to official records of the proceedings of the board, by proof of the usage to which the company had permitted to grow up in the business, and of the ac/uiescence of the board charged with the duty of supervising and controlling the company9s business. 6ernandeC was the most active in the effort to secure the films. The negotiations were conducted by him with the knowledge and consent of the other members of the board. The board, before the financial inability of the corporation was revealed, had already recogniCed the contracts as being in e0istence and had proceeded to take the steps necessary to utiliCe the films, particularly the publication of announcements in the papers. *n light of this, the contracts in /uestion were thus inferentially approved by the board and that the company is bound unless the subse/uent failure of the stockholders to approve the same had the effect of abrogating the liability created. ($! the action of the stockholders, whatever its character, must be ignored. #tockholders or members resolutions dealing with matters other than the e0ceptions are not legally effective nor binding on the board, and may be treated as merely advisory or may even be completely disregarded. The functions of the stockholders of a corporation are, of a limited nature. The theory is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives or agents, called the directors, making by"laws, and e0ercising special powers defined by law. Thus contracts between a corporation and third persons must be made by the directors and not by the stockholders. The corporation is represented by the directors and not the stockholders. Third persons can have little or no information as to what occurs in corporate meetings, and must necessarily rely on e0ternal manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fi0ed upon in by its agents in accordance with law. *f a corporation knowingly permits

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one of its officers or any other person to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing the power to do these acts, the corporation will be estopped from denying such authority as against anyone who has dealt with the corporation in ,6. 08$e-t-a1el D T 3-s 1 CA an# E -ean Ai-lines. 6: >orean Airlines, through Atty. Aguinaldo, filed a 'omplaint against E0pertravel with the AT' for the collection of the principal amount of 15%4,& 4.44, plus attorney9s fees and e0emplary damages. The verification and certification against forum shopping was signed by Atty. Aguinaldo, who indicated therein that he was the resident agent and legal counsel of >A+ and had caused the preparation of the complaint. E0pertravel filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authoriCed to e0ecute the verification and certificate of non" forum shopping as re/uired by the Aules of 'ourt. >A+ opposed the motion, contending that Atty. Aguinaldo was its resident agent and was registered as such with the #ecurities and E0change 'ommission (#E'! as re/uired by the 'orpo'ode, and was further alleged that Atty. Aguinaldo was also the corporate secretary of >A+. Atty. Aguinaldo also claimed that he had been authoriCed to file the complaint through a resolution of the >A+ Board of 2irectors approved during a special meeting held on Lune 5 , &333, wherein the board of directors conducted a special teleconference on Lune 5 , &333, which he and Atty. Aguinaldo attended. *t was also averred that in that same teleconference, the board of directors approved a resolution authoriCing Atty. Aguinaldo to e0ecute the certificate of non"forum shopping and to file the complaint. #uk >yoo >im also alleged, however, that the corporation had no written copy of the aforesaid resolution. T' denies )T2, 'A affirms. .: *t is settled that the re/uirement to file a certificate of non"forum shopping is mandatory and that the failure to comply with this re/uirement cannot be e0cused. The certification is a peculiar and personal responsibility of the party, an assurance given to the court or other tribunal that there are no other pending cases involving basically the same parties, issues and causes of action. .ence, the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware of such facts. .ence, the re/uisite certification e0ecuted by the plaintiff9s counsel will not suffice. *n a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf of the said corporation, by a specifically authoriCed person, including its retained counsel, who has personal knowledge of the facts re/uired to be established by the documents. The corporation, such as the petitioner, has no powers e0cept those e0pressly conferred on it by the 'orporation 'ode and those that are implied by or are incidental to its e0istence. *n turn, a corporation e0ercises said powers through its board of directors and?or its duly"authoriCed officers and agents. 1hysical acts, like the signing of documents, can be performed only by natural persons duly"authoriCed for the purpose by corporate by"laws or by specific act of the board of directors. The respondent9s allegation that its board of directors conducted a teleconference on Lune 5 , &333 and approved the said resolution (with Atty. Aguinaldo in attendance! is incredible, given the additional fact that no such allegation was made in the complaint. *f the resolution had indeed been approved on Lune 5 , &333, long before the complaint was filed, the respondent should have incorporated it in its complaint, or at least appended a copy thereof. The respondent failed to do so. *t was only on

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Lanuary 5F, 5444 that the respondent claimed, for the first time, that there was such a meeting of the Board of 2irectors held on Lune 5 , &333@ it even represented to the 'ourt that a copy of its resolution was with its main office in >orea, only to allege later that no written copy e0isted. *t was only on )arch %, 5444 that the respondent alleged, for the first time, that the meeting of the Board of 2irectors where the resolution was approved was held %ia teleconference. Borse still, it appears that as early as 3anuary 456 4777 , Atty. Aguinaldo had signed a #ecretary9s?Aesident Agent9s 'ertificate alleging that the board of directors held a teleconference on 3une "86 4777. 7o such certificate was appended to the complaint, which was filed on #eptember %, &333. )ore importantly, the respondent did not e0plain why the said certificate was signed by Atty. Aguinaldo as early as Lanuary 3, &333, and yet was notariCed one year later (on Lanuary &4, 5444!@ it also did not e0plain its failure to append the said certificate to the complaint, as well as to its 'ompliance dated )arch %, 5444. *t was only on Lanuary 5%, 544& when the respondent filed its comment in the 'A that it submitted the #ecretary9s?Aesident Agent9s 'ertificateN$4O dated Lanuary &4, 5444. The 'ourt is, thus, more inclined to believe that the alleged teleconference on Lune 5 , &333 never took place, and that the resolution allegedly approved by the respondent9s Board of 2irectors during the said teleconference was a mere concoction purposefully foisted on the AT', the 'A and this 'ourt, to avert the dismissal of its complaint against the petitioner. Citi%an. NA 1 C"3a. -eleC deposited his unfunded personal checks with his current account with the petitioner. But prior to depositing said checks, he would present his personal checks to a bank officer asking the latter to have his personal checks immediately credited as if it were a cash deposit and at the same time assuring the bank officer that his personal checks were fully funded. .aving already gained the trust and confidence of the officers of the bank because of his past transactions, the bankIs officer would always accommodate his re/uest. After his re/uests are granted which is done by way of the bank officer affi0ing his signature on the personal checks, private respondent 'resencio -eleC would then deposit his priorly approved personal checks to his current account and at the same time withdraw sums of money from said current account by way of petitioner bankIs managerIs check. 1rivate respondent would then deposit petitioner bankIs managerIs check to his various current accounts in other commercial banks to cover his previously deposited unfunded personal checks with petitioner bank. 7aturally, petitioner bank and its officers never discovered that his personal check deposits were unfunded. 8n the contrary, it gave the petitioner bank the false impression that private respondentIs construction business was doing very well and that he was one big client who could be trusted. This deceptive and criminal scheme he did every banking day without fail from #eptember (, &3F up to )arch &&, &3F%. The amounts that he was depositing and withdrawing during this period (#eptember (, &3F to )arch &&, &3F%! progressively became bigger. *t started at 1(%,444.44 on #eptember (, &3F and on )arch &&, &3F% the amount of deposit and withdrawal already reached over 1$,444,444.44. At this point in time ()arch &&, &3F%!, the private respondent 'resencio -eleC presumably already feeling that sooner or later he would be caught and that he already wanted to cash in on his evil scheme, decided to run away with petitionerIs money. 8n )arch &&, &3F%, he deposited various unfunded personal checks totaling 1$,43 ,444.44 and re/uested a bank officer that the same be credited as cash and after securing the approval of said bank officer, deposited his various personal checks in the amount of 1$,43 ,444.44 with his current account and at the same time withdrew the sum of 1$,5((,444.44 in the form of petitionerIs managerIs check. *nstead of using the proceeds of his withdrawals to cover his unfunded personal

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checks, he ran away with petitioner bankIs money. Thus, private respondent 'resencio -eleCIs personal checks deposited with petitioner bank on )arch &&, &3F% in the total aggregate amount of 1$,43 ,444.44 bounced. The checks bounced after said personal checks were made the substantial basis of his withdrawing the sum of 1$,5((,444.44 from his current account with petitioner bank. 'itibank sues on the grounds of violation of B1 55. Before pre"trial conference, and in pursuance of the authority granted to him by petitioner bankIs by"laws, its E0ecuting 8fficer appointed Billiam B. 6erguson, a resident alien, as its Attorney"in"6act empowering the latter, among other things, to represent 'itibank in court cases such as the present case. *n turn, Billiam B. 6erguson e0ecuted a power of attorney in favor of L.1. ,arcia M Associates (petitioner bankIs counsel! to represent petitioner bank in the pre"trial conference before the lower court. *: There are thus two issues in this case. 6irst, whether a resolution of the board of directors of a corporation is always necessary for granting authority to an agent to represent the corporation in court cases. .: *n the corporate hierarchy, there are three levels of control: (&! the board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation@ (5! the officers, who in theory e0ecute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations@ and ($! the stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation. .owever, :ust as a natural person may authoriCe another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. *t is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by"laws or by resolution or other act of the board of directors. *n addition, an officer who is not a director may also appoint other agents when so authoriCed by the by"laws or by the board of directors. #uch are referred to as e0press powers. There are also powers incidental to e0press powers conferred. *t is a fundamental principle in the law of agency that every delegation of authority, whether general or special, carries with it, unless the contrary be e0press, implied authority to do all of those acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to carry into effect the main authority conferred. #ince the by"laws are a source of authority for corporate officers and agents of the corporation, a resolution of the Board of 2irectors of 'itibank appointing an attorney in fact to represent and bind it during the pre"trial conference of the case at bar is not necessary because its by"laws allow its officers, the E0ecuting 8fficer and the #ecretary 1ro"Tem, F to e0ecute a power of attorney to a designated bank officer, Billiam B. 6erguson in this case, clothing him with authority to direct and manage corporate affairs. #ince paragraph UU* (of the by"laws! specifically allows 6erguson to delegate his powers in whole or in part, there can be no doubt that the special power of attorney in favor, first, of L.1. ,arcia M Associates and later, of the bankIs employees, constitutes a valid delegation of 6ergusonIs e0press power (under paragraph U-** above! to represent petitioner bank in the pre"trial conference in the lower court. *: The second issue is whether the by"laws of the petitioner foreign corporation which has previously been granted a license to do business in the 1hilippines, are effective in this :urisdiction. *f the by"laws are valid and a board resolution is not necessary as petitioner bank claims, then the declaration of default would have no basis.

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.: A careful reading of the #ec (% of 'orpo 'ode would show that a corporation can submit its by"laws, prior to incorporation, or within one month after receipt of official notice of the issuance of its certificate of incorporation by the #E'. Bhen the third paragraph of the above provision mentions Pin all casesP, it can only refer to these two options@ i.e., whether adopted prior to incorporation or within one month after incorporation, the by"laws shall be effective only upon the approval of the #E'. But even more important, said provision starts with the phrase PEvery corporation formed under this 'odeP, which can only refer to corporations incorporated in the 1hilippines. .ence, #ection (%, in so far as it refers to the effectivity of corporate by"laws, applies only to domestic corporations and not to foreign corporations. 8n the other hand, #ection &5 of the same 'ode re/uires that a foreign corporation applying for a license to transact business in the 1hilippines must submit, among other documents, to the #E', a copy of its articles of incorporation and by(laws, certified in accordance with law. ;nless these documents are submitted, the application cannot be acted upon by the #E'. #ince under #ec &5% of 'orpo 'ode the #E' will grant a license only when the foreign corporation has complied with all the re/uirements of law, it follows that when it decides to issue such license, it is satisfied that the applicantIs by"laws, among the other documents, meet the legal re/uirements. This, in effect, is an approval of the foreign corporationIs by"laws. *t may not have been made in e0press terms, still it is clearly an approval. Therefore, petitioner bankIs by"laws, though originating from a foreign :urisdiction, are valid and effective in the 1hilippines.

B ye--R 8as 1 CA. (.idden -alley Apocalypse 7ow case!. The corporation, .eirs of Eugenia Ao0as *nc, was established to engage in agriculture to develop the properties inherited from Eugenia Ao0as and Eufroncio Ao0as, which includes the land upon which the .idden -alley #prings Aesort was put up, including various improvements thereon, using corporate funds (used as site for filming Apocalypse 7ow!. The A8* of .eirs *nc was amended for this purpose. .eirs *nc claims that Boyer"Ao0as and ,uillermo Ao0as had been in possession of the various properties and improvements in the resort and only upon the tolerance of the corporation. *t was alleged that they committed acts that impeded the corporation9s e0pansion and normal operation of the resort. They also did not comply with court and regulatory orders, and thus the corporation adopted a resolution authoriCing the e:ectment of the defendants. T' grants. 'A affirms. Boyer and Ao0as contend that, being #.s, their possession of the properties of the corporation must be respected in view of their ownership of an ali/uot portion of all properties of the corporation. .: Aegarding properties owned by the corporation, the #. of ,uanCon case says that Gproperties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Bhile shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an ali/uot part of the corporation9s property, or the right to share in its proceeds to that e0tent when distributed according to law and e/uity, but its holder is not the owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or assets. The #. is not a co"owner or tenant in common of the corporate property. The corporation has a personality distinct and separate from its members and transacts business only through its officers or agents. Bhatever authority these officers or agents may have derived from the board or other governing body, unless conferred by the charter of the corporation itself. *n this case the elder Ao0as who then controlled the management of the corporation, being the ma:ority #., consented to the petitioner9s use and stay within the properties. The Board did not ob:ect and were allowed to stay until it adopted a resolution to the effect of

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authoriCing moves to e:ect them. #ince their stay was merely by tolerance, in deference to the wishes of the ma:ority #. who controlled the corporation, when Ao0as died his actions cannot bind the company forever. There is no provision in the by"laws or any other resolution authoriCing their continued stay.

Pe'3lia- A9en'y R le

f t"e % a-#

in a manner of speaking, the board acts as an agent of the corporation, and is bound by the rules applying to agency relationship o although the board is an agent of the corporation, since the principal is a mere :uridical concept, it realistically is not in a position to countermand the decisions of its agent o unlike in an ordinary principal"agent relationship, the corporate principal does not really have its own mind to allow it to decide matters for itself o the board stands both as an agent of the corporation, and the very personification of the corporation in the commercial and legal world board has sole power to decide whether a corporation could sue, purchase or sell property, enter into a contract, or perform any other act #. resolutions on matters other than the e0ceptionsR not legally effective nor binding on the board@ may be treated as merely advisory (AamireC case! ,A: to the #. go the profits, to the board goes the management for educational institutions:

B. Re<3i-e4ents Vualifying share (#ection 5$!" Every director must own at least one (&! share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (&! share of the capital stock of the corporation of which he is a director shall thereby cease to be a director.

Lee 1 CA #ummons was served upon +ee and +acdao, president and vice president of A+6A The two, however contended that they are no longer corporate officers of the corporation because of the voting trust agreement e0ecuted to 2B1 hence not authoriCed to receive summons. #ummons must be served upon 2B1 2B1 however refused to receive the alias summons claiming it was not authoriCed because it has not yet taken over A+6A )otion for 2eclaration of proper service of summons filed by #acoba -oting trust results from the separation of voting rights of a stockholder from his other rights such as rights to receive dividends or inspect books of corporation

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'riteria for a valid voting trust: o -oting rights of the stock separate from other attributes of ownership o -oting rights granted are intended to be irrevocable for a definite period of time o 1rincipal purpose is to ac/uire voting control of the corporation E0ecution of a voting trust creates a dichotomy between e/uitable or beneficial ownership of the corporate shares of a stock holder and legal title thereto The change from the old code to the new code with respect to /ualifying shares of directors is the omission of the phrase Gin his own rightH pertaining to beneficial ownership of shares. *n the new corpo code, persons may be directors if they are stockholders although not Gin their own rightH hence includes trustees There is clear indication that to be a director, what is material is legal title and not beneficial ownership Bith the e0ecution of the voting trust agreement, +ee and +acdao were divested of their legal title to their shares hence can no longer be directors and are no longer corporate officers. Because of this, they are not authoriCed to receive summons Ae/uirements?2is/ualifications: o Aesidence (#ection 5$! " a ma:ority of the directors or trustees of all corporations organiCed under this 'ode must be residents of the 1hilippines o 7ationality no re/uirement for citiCenship of a director or trustee so even an alien may be elected as such e0cepts in business activities totally closed to aliens o 2is/ualification of directors, trustees or officers (#ection 5E!: 'onvicted by final :udgment of an offense punishable by imprisonment for a period e0ceeding si0 (%! years, or -iolation of this 'ode committed within five ( ! years prior to the date of his election or appointment By laws may provide for additional /ualifications?dis/ualifications as long as such additional /ualifications?dis/ualifications shall not modify re/uirements as prescribed in the corporation code or be in conflict with such prescribed re/uirements Term: o 2irectors D shall hold office for & year. .owever, incumbent directors shall continue to be directors?trustees as long as their successors have not been elected and /ualified (#ection 5$!

C. , w ele'te# (#ection 5(! )anner of election: o There must be present in person or by representative ma:ority of the outstanding capital stock ? member

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*n any form@ or must be by ballot when re/uested by any voting stock holder or member o -oting may be in person or by pro0y At all elections of directors or trustees, there must be present owners of a ma:ority of the outstanding capital stock, or if there be no capital stock, a ma:ority of the members entitled to vote. Every stockholder entitled to vote shall have the right to vote the number of shares of stock standing, at the time fi0ed in the by"laws, in his own name on the stock books of the corporation, or where the by"laws are silent, at the time of the election Time to determine voting right o As per share standing in one9s name at the time fi0ed by the By"+aws o Bhere By"laws silent, at time of election 'umulative voting D A system of voting designed to increase he voting power of minority stockholders in the election of corporate directors when more than one director is to be elected. o A stockholder shall have as many votes as he has number of shares times the number of directors up for election o 'umulative voting is allowed for election of members of the Board in a stock corporation. )embers of the Board in a 7on"stock 'orporation shall not be voted cumulatively unless specifically provided for in the By"laws. o The total number of votes cast by a stockholder shall not e0ceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected o ,ives the minority an opportunity to elect a representative to the board of directors. 'annot itself give the minority control of corporate affairs but may affect and limit the e0tent of ma:ority9s control o By"laws cannot provide against cumulative voting since this right is mandated in #ec 5( o 7o delin/uent stock shall be voted 7on"stock corporation: o ;nless otherwise provided in the articles of incorporation or in the by" laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. o 'andidates receiving the highest number of votes shall be declared elected. o Any meeting of the stockholders or members called for an election may ad:ourn from day to day or from time to time but not sine die or indefinitely if: 6or any reason, no election is held, or *f there not present or represented by pro0y, at the meeting, the owners of a ma:ority of the outstanding capital stock, or if there be no capital stock, a ma:ority of the member entitled to vote.

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#ince the provision re/uires presence, meeting of stockholders is re/uired

D. , w -e4 1e# (#ection 5F! Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing 5?$ of the outstanding capital stock, or if the corporation be a 7on"stock 'orporation, by a vote of 5?$ of the members entitled to vote (with or without cause!. 7ote: #uch removal shall take place either at a regular meeting or at a special meeting call for the purpose of removal of 2irectors or Trustees, with previous notice of the time and place of such meeting, as well as the intention to propose such removal. *f the officers refuse to call a meeting to consider the removal of the 2irector, it may be called at the instance of any stockholder or member, but with due notice. A director elected because of the vote of minority stockholders who united in cumulative voting cannot be removed without cause The board cannot remove a director or trustee as member of the board

0. , w 1a'an'y fille# (#ection 53! Any vacancy occurring in the Board of 2irectors or Trustees other than by removal by the stockholders or members or by e0piration of terms may be filled: o *f still constituting /uorum, by the vote of at least a ma:ority of the remaining directors or trustees o 8therwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the une0pired term of his predecessor in office. f ele'ti n f #i-e't -s; t-3stees; D ffi'e-s (#ection 5%!

F. Re$ -t

Bithin $4 days after the election of the directors, trustees, and officers of the corporation@ the #ecretary or any other officer of the corporation shall submit to the #E', the names, nationalities, and residences of the directors, trustees, and officers elected. #hould a director, trustee, or officer die, resign, or in any manner cease to hold office, his heirs in case of his death, the secretary or any other officer of the corporation, or the director, trustee, or officer himself, shall immediately report such fact to the #E'.

@. , w ' 4$ensate# (#ection $4!

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*n the absence of any provision in the By"laws fi0ing their compensation, the directors shall not receive any compensation, e0cept for reasonable per diems. Any such compensation (other than per diems! may be granted to the directors by the vote of the stockholders representing at least a ma:ority of the outstanding capital stock at a regular or special stockholder9s meeting. +imit: *n no case shall the total yearly compensation of directors, as such directors, e0ceed &4= of the net income before income ta0 of the corporation during the preceding year.

Ba--ett

1 La P-e1is -a Fili$ina. 6: #uit by the resigned directors of a building and loan association to recover &= of the profits to each complainant in accordance with an amendment to the by"laws, which stipulate that they are entitled to a lifetime annuity from the profits of the corporation.

.: The amended by"laws does create any obligation to pay to the persons name therein such a life gratuity or pension out of the profits. A by"law of this nature must be clearly regarded as beyond the lawful powers of a mutual building and loan association and is thus ultra vires. As it were, the by"law cannot be held to establish a contractual relation between the parties.

The authority conferred upon corporations in the code refers to providing compensation for future services of directors, officers, and employees after the adoption of the by"law and cannot in any sense be held to authoriCe the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by the them to the corporation. To permit the transaction would be to create an obligation unknown to the law, and to countenance a misapplication of funds of the building and loan association to the pre:udice of #.s. 'ontracts between a corporation and third persons must be made by or under authority of its board and not by the #.s. The action of the #.s is only advisory and is not binding on the corporation. Weste-n Instit3te f Te'"n l 9y 1 Salas

*n a meeting of the Board of Trustees of Bestern *nstitute of Technology, Aesolution was passed granting monthly compensation to officers respondents who are members of the Board D validQ

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Aespondents are entitled to compensation because they are not :ust directors but officers as well. The prohibition under #ec $4 does not apply to them f Di-e't -sG a'ti n (vote by ma:ority of the

,.

?atte-s -e<3i-in9 B a-# board! &. 5. $. (. .

Amendment of A* E0tending and #hortening 'orporate Term *ncreasing ? 2ecreasing capital stock ? bonded indebtedness #ale or disposition of all, substantially all of corporate assets *nvestment of corporate funds in another corporation or for a purpose other than main purpose %. *ssuance of stock dividends E. 'orporate mergers or consolidation F. -oluntary dissolution of the corporation whether or not creditors are pre:udiced 3. Approval of management contract &4. Amendment to by"laws, repeal of by"laws, adoption of new by"laws &&. 2eclare cash dividends I. Lia%ility f B a-# f Di-e't -s

&. *n ,eneral (#ection $&! 2irectors or trustees shall be liable solidarily for all damages resulting therefrom suffered by the corporation, its stockholders, or members and other persons when: o They willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation. o They ac/uire any personal or pecuniary interest in conflict with their duty as such directors or trustees. Three fold duty of directors to the corporation: o 2iligence o +oyalty o 8bedience

Bhat are re/uired and e0pected of directors: o To posses at least ordinary knowledge and skill to enable them to make sound business decision o To attend directors meetings with reasonable regularity o To e0ercise reasonable care in the management of the corporation o To keep themselves sufficiently informed about the general condition of the business

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'auses of director9s liability: o >nowing authoriCation of wrongful acts o 7egligence o 'onflict of interest E0tent of +iability: All damages resulting from knowing authoriCation of wrongful acts, negligence and conflict of interest suffered by the corporation, its stockholders, and other persons The degree of care and diligence re/uired is usually that which men prompted by self"interest, generally e0ercise in their own affairs. *n determining whether reasonable diligence has been e0ercised, the particular circumstances of each case must be considered. The nature of the business is an important factor.

5. Business !udg ent rule Board of 2irectors has authority to modify the proposed terms of the contracts of the corporation for the purpose of making the terms more acceptable to the other contracting partiesKThe test to be applied is whether the act in /uestion is the direct and immediate furtherance of the corporation9s business, fairly incidental to the e0press powers and reasonably necessary to their e0ercise. *f so, the corporation has the power to do it@ otherwise not. N)ontelibano v. Bacolod )urcia )illing 'o.O

$. #elf"dealing director (#ection $5! A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: o That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a /uorum for such meeting@ o That the vote of such director or trustee was nor necessary for the approval of the contract@ o That the contract is fair and reasonable under the circumstances@ and o That in case of an officer, the contract has been previously authoriCed by the board of directors. Bhere any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two" thirds (5?$! of the outstanding capital stock or of at least two"thirds (5?$! of the members in a meeting called for the purpose 6ull disclosure of the adverse interest of the directors or trustees involved must be made at such meeting The contract is voidable whether the corporation suffered damages or not The burden of proving fairness is on the director

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P-i4e W"ite Ce4ent 1 IAC. 1rime Bhite 'ement entered into a dealership agreement with one of its directors, Ale:andro Te, for the latter to be the e0clusive distributor of 54,444 bags of 1rime Bhite cement per month W 13.E4 per bag for the entire )indanao area for years, and that a letter of credit be opened to secure payment. Te advertised his dealership and was able to obtain possible clients, and entered into agreements with several hardware stores for the purchase of the cement. Te then informed 1rime Bhite of the orders, but the latter imposed additional conditions, which effectively delayed the delivery of the cement, lowered the number of bags to be delivered, and increased the price per bag. *t also made the prices sub:ect to change unilaterally and additional conditions on the manner of payment. Te refused to comply and 1rime Bhite cancelled the dealership agreement. Te sued for specific performance and damages. T' ruled ifo Te. *: B?7 the dealership agreement is a valid and enforceable contract binding on the 'orporation. .: 7o. it is not valid and enforceable. All corporate powers are e0ercised by the Board. *t may also delegate specific powers to its 1resident or other officers. *n the absence of e0press delegation, a contract entered into by the 1resident in behalf of the corporation, may still bind the latter if the board should ratify e0pressly or impliedly. *n the absence of e0press or implied ratification, the 1resident may as a general rule bind the corporation through a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are applicable where the 1resident or other officer acting for the corporation is dealing with a third person. The situation is different where a director or officer is dealing with his own corporation. Te was not an ordinary stockholder@ he was a member of the Board and Auditor of the corporation. .e is what is often called a Gself"dealingH director. As a director, he holds a position of trust and owes a duty of loyalty to his corporation. *n case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. The trust relationship springs from the control and guidance of the corporate affairs and property interests of the stockholders. A director9s contract with his corporation is not in all instances void or voidable. *f the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. The contract in this case is neither fair nor reasonable. At the time of the contract, the corporation had not yet even started producing the cement. 1rices of cement, :ust like any other commodity, are not stable and e0pected to rise. Bithin a period of si0 years from the date of dealership agreement the prices were certain to rise, and yet the contract pegged the rate to 13.E4 per bag. This according to the 'ourt was not fair and reasonable at all, and unduly pre:udiced the corporation. The contracts he entered into after the dealership agreement were such as to completely shield him from any increase in the price of cement. The contracts were only for two years at a time, even if the dealership was good for . .e was attempting to enrich himself at the e0pense of the corporation. There is no showing that the stockholders ratified the dealership agreement. Thus the same was not valid and he cannot be allowed to reap the fruits of his disloyalty.

(. 'ontracts between the corporations with interlocking directors (#ection $$! A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone, e0cept cases of fraud.

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The contract is fair and reasonable under the circumstances. *f the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be sub:ect to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. #tockholdings e0ceeding twenty (54=! percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Ae/uisites of a valid contract between the corporation and one or more of its directors, trustees or officers: o That the presence of such director or trustee in the Board meeting in which the contract was approved was not necessary to constitute a /uorum for such meeting o That the vote of such director or trustee was not necessary for the approval of the contract o That the contract is fair and reasonable under the circumstances o That in case of an officer, the contract with the officer has been previously authoriCed by the Board of 2irectors . 2isloyalty (#ection $(!

Bhere a director, by virtue of his office, ac/uires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the pre:udice of such corporation, he must account to the latter for all such profits by refunding the same ;7+E## his act has been ratified by a vote of the stockholders owning or representing at least two"thirds (5?$! of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. 2octrine of corporate opportunity " Bhen a director, trustee or officer attempts to ac/uire or ac/uires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which e/uity imposes a liability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. The last paragraph of #ection $& and #ection $( contain the doctrine of corporate opportunity. *n case of such conflict of interests, and the director acts against the good of the corporation, he shall be accountable for the profits he obtained, even if he had risked his own funds.

%. ;se of inside information The fiduciary position of insiders, directors, and officers prohibits them from using confidential information relating to the business of the

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corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest. The liability of a director or officer guilty of using inside information is to the corporation and not to any individual stockholder #ince loss and pre:udice to the corporation is not a re/uirement for liability, the corporation has a cause of action as long as there is unfair use of inside information *t is inside information if it is not generally available to others and is ac/uired because of the close relationship of the director or officer of the corporation ,eneral rule: ()a:ority view! 2irectors owe no fiduciary duty to stockholders but they may deal with them at arm9s length. 7o duty to disclose facts known to the director or officer #pecial facts doctrine D 'onceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances or facts are present which make it ine/uitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud.

@ . n9wei 1 S0C. This involves two actions in the #E' filed by Lohn ,okongwei, a #an )iguel 'orporation stockholder by himself and through the ;A' and '6', who sued the ma:ority of the #)' Bo2 (#oriano, Xobel, Ao0as, 8rtigas, 1rieto et al! and #)' itself to declare null and void the amended by"laws and a cancellation of the certificate of filing the amended by"laws. .e alleges the following: #)'B82 acted without authority in amending the by"laws without the prescribed 5?$ vote of stockholders holding subscribed and paid"up capital stock #ome members of the #)'B82 amended the by"laws which state that in determining whether or not a person is engaged in competitive business, the Board may look into factors such as competitive business and family relationship, thus purposely providing for ,okongwei9s dis/ualification as director, and effectively dis/ualified him from being elected as director ,okongwei also files an action in the #E' to compel #)' to allow him to inspect the records of the corporation, including the minutes of the last stockholders meeting, copy of the management contract with A7#'8A, latest financial statements among others, including the authority of the stockholders to invest corporate funds in #an )iguel *nternational *nc. The #orianos counter by alleging that ,okongwei as president and ma:ority stockholder of ;A' and '6', conducted bad publicity against the #)' to generate support from the stockholders in his effort to secure a seat in the board. They add the fact ,okongwei was re:ected by the stockholders because he was engaged in competitive business and securing a seat would have sub:ected #)' to grave disadvantages. #E' grants ,okongwei motion but denies the motion to inspect the financial statements and records of #an )iguel *nternational as he is not a stockholder thereof. #E' also allowed him to run as director but cannot sit as long as the validity of the by"laws has been settled. )eanwhile the #)'B82 submitted the amended by"laws to the stockholders, who ratified the same.

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*: were the a ended by(laws %alid and reasonable .: *n the case at bar, there are facts which cannot be denied, viC.: that the amended by"laws were adopted by the Board of 2irectors of the #an )iguel 'orporation in the e0ercise of the power delegated by the stockholders ostensibly pursuant to section 55 of the 'orporation +aw@ that in a special meeting on 6ebruary &4, &3EE held specially for that purpose, the amended by"laws were ratified by more than F4= of the stockholders of record@ that the foreign investment in the .ongkong Brewery and 2istellery, a beer manufacturing company in .ongkong, was made by the #an )iguel 'orporation in &3(F@ and that in the stockholdersI annual meeting held in &3E5 and &3EE, all foreign investments and operations of #an )iguel 'orporation were ratified by the stockholders. *: 9hether or not the a ended by(laws of S:C of dis;ualifying a co petitor fro no ination or election to the Board of 'irectors of S:C are %alid and reasonable .: ,okongwei claims that the amended by"laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board, at the same time depriving petitioner of his Pvested rightP to be voted for and to vote for a person of his choice as director. ;pon the other hand, respondents Andres ). #oriano, Lr., Lose ). #oriano and #an )iguel 'orporation content that the e0clusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided +oyalty to the corporation@ that it is essentially a preventive measure to assure stockholders of #an )iguel 'orporation of reasonable protective from the unrestrained self"interest of those charged with the promotion of the corporate enterprise. ;nder ;# corporate law, corporations have the power to make by"laws declaring a person employed in the service of a rival company to be ineligible for the corporationIs Board of 2irectors. ... NAOn amendment which renders ineligible, or if elected, sub:ects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid.P This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. #uch an amendment Padvances the benefit of the corporation and is good.P *n the 1hilippines, section 5& of the 'orporation +aw e0pressly provides that a corporation may make by"laws for the /ualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utiliCing information he has received as such officer, under Pthe established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or in:ures the business of the corporation of which he is an officer or director.H *t is also well established that corporate officers Pare not permitted to use their position of trust and confidence to further their private interests.P *n a case where directors of a corporation cancelled a contract of the corporation for e0clusive sale of a foreign firmIs products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for e0clusive sale of its products, the court held that e/uity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a Pfaultless fiduciary may not reap the fruits of his misconduct to the e0clusion of his principal.H *: 9#& ,o+ongwei6 as SH of S:C6 has a %ested right to be %oted as director in the

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corporation.

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.: *t is further argued by #)' that there is no %ested right of any stoc+holder under 2hilippine <aw to be %oted as director of a corporation . 1ursuant to section &F of the 'orporation +aw, any corporation ay a end its articles of incorporation by a %ote or written assent of the stoc+holders representing at least two(thirds of the subscribed capital stoc+ of the corporation )f the a end ent changes6 di inishes or restricts the rights of the existing shareholders then the dissenting inority has only one right6 %i=.: Pto ob:ect thereto in writing and demand payment for his share.P ;nder section 55 of the same law, the owners of the ma:ority of the subscribed capital stock may amend or repeal any by"law or adopt new by"laws. *t cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was ac/uired contained the prescription that the corporate charter and the by"law shall be sub:ect to amendment, alteration and modification. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, Pthey occupy a fiduciary relation, and in this sense the relation is one of trust.P GThe ordinary trust relationship of directors of a corporation and stockholdersP, according to 1sha an %. :iller6P is not a matter of statutory or technical law. *t springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. E/uity recogniCes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof. *: 9hether or not respondent San :iguel Corporation could6 as a easure of self( protection6 dis;ualify a co petitor fro no ination and election to its Board of 'irectors. .: *t is alleged that petitioner, as of )ay %, &3EF, has e0ercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in #an )iguel 'orporation. According to respondent #)', in &3E%, the areas of competition affecting #)' involved product sales of over 1(44 million or more than 54= of the 15 billion total product sales of #)'. The '6'"Aobina group was in direct competition on product lines which, for #)', represented sales amounting to more than 1(EF million. *n this :urisdiction, under section 5& of the 'orporation +aw, a corporation may prescribe in its by"laws Pthe /ualifications, duties and compensation of directors, officers and employees ... P This must necessarily refer to a /ualification in addition to that specified by section $4 of the 'orporation +aw, which provides that Pevery director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... P Any person Pwho buys stock in a corporation does so with the knowledge that its affairs are do inated by a a!ority of the stockholders and that he i pliedly contracts that the will of the ma:ority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by" laws and not forbidden by law.P To this e0tent, therefore, the stockholder may be considered to have Pparted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the ma:ority of his fellow incorporators. ... *t cannot therefore be :ustly said that the contract, e0press or implied, between the corporation and the stockholders is infringed ... by any act of

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the former which is authoriCed by a ma:ority...P

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*t is not denied that a member of the Board of 2irectors of the #an )iguel 'orporation has access to sensitive and highly confidential information, such as: (a! marketing strategies and pricing structure@ (b! budget for e0pansion and diversification@ (c! research and development@ and (d! sources of funding, availability of personnel, proposals of mergers or tie"ups with other firms. *t is obviously to prevent the creation of an opportunity for an officer or director of #an )iguel 'orporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he ac/uires as director to promote his individual or corporate interests to the pre:udice of #an )iguel 'orporation and its stockholders, that the /uestioned amendment of the by"laws was made. 'ertainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. #ound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well re/uire that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. *t would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director. *ndeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of #an )iguel 'orporation would sub:ect the latter to a competitive disadvantage and un:ustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of e0isting or new markets of e0isting or new products could enable said competitor to utiliCe such knowledge to his advantage. @l %e W len C 1 =ti'a @as D 0le't-i'. 6: ,lobe Boolen needed electric power to run its mills. *ts president and ma:ority #., )aynard, was able to get a contract with the electric company ;tica ,as which was ratified by the e0ecutive committee of ,lobe9s board. )aynard was a nominal #. in the electric company also, and did not vote in the meeting. ,lobe desires to enforce the contract. .: 'ontracts are voidable at the instance of ;tica ,as. ,lobe argues that by refusing to vote, )aynard shifted responsibility to his associates, and may reap a profit from their errors. 8ne does not divest oneself so readily of one9s duties as trustee. The refusal to vote, has indeed this importance: it gives to the transaction the form and presumption of propriety, and re/uires one who would invalidate it to prove beneath the surface. The trustee or director holds a duty of constant and un/ualified fidelity. .e cannot rid himself of the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the surface, or lurking beneath it. There was an influence in this case which was e0erted by )r )aynard the president of ,lobe Boolen. 6rom beginning to end he dealt with a subordinate, who was alert to serve at his pleasure. The unfairness in the contract is startling and the conse/uences could be disastrous. 7o matter how large the business, or how great the increase in prices of labor or fuel, or there be e0tensions to the plant, the electric company had pledged that for &4 years there will be saving of Y%44?month, Y$44 for

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each mill, YE544?year. As a result of that pledge it has supplied the plaintiff with electric current for practically nothing, and even owes it some money thereafter. )r )aynard knew the unfairness of the contract, and he cannot have failed to know that he held a one"sided contract which left the defendant at his mercy. Thus his refusal to vote does not nullify, as of course an influence and predominance e0erted without a vote. A constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust, but rather to protect and renounce he gains what is unfair. D3ty f DILI@0NC0 CAS0S

Ben93et 0le't-i' C $e-ati1e 1 NLRC. 'osalan, ,) of the Benguet Electric 'ooperative, was informed by '8A that cash advances received by officers and employees of Benguet Electric had been virtually written off the books, that per diems and allowances showed substantial inconsistencies with the directives of the 7ational Electricifcation Administration, and that several irregularities in the utiliCation of funds released by 7EA to Benguet. 'osalan then implemented the remedial measures recommended by '8A. Board members of Benguet responded by abolishing the housing allowance of 'osalan, reduced his salary, representation and other allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out as principal signatory of Benguet Electric. The Board adopted another series of resolutions which resulted in te ouster of 'osalan as ,). 'osalan nonetheless continued to work as ,), contending that only the 7EA can suspend and remove him. The Board then refused to act on 'osalan re/uest to release compensation due him. 'osalan files a complaint with the 7+A' against the Board of Benguet Electric, and impleaded Benguet Electric itself as well as the individual members of the board in their official and private capacities. +abor Arbitrer rules ifo 'osalan, holding both the company and the board solidarily liable to 'osalan. 7+A' modifies award to 'osalan by declaring Bengeut alone, and not the Board members, was liable to 'osalan. Benguet appeals. .: the Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in ,6, do no become liable, civilly or otherwise, for the conse/uences of their acts. Those acts are properly attributed to the corporation alone and no personal liability is incurred. *n this case, the board members obviously wanted to get rid of 'osalan and acted with indecent haste in removing him from his ,) position. This shows strong indications that the members of the board had illegally suspended and dismissed him precisely because he was trying the rectify the financial irregularities. The Board members are also liable for damages under #ec $& of the 'orpo 'ode, which by virtue of #ec ( thereof, makes it applicable in a supplementary manner to all corporations, including those with special or individual charters so long as these are not inconsistent therewith. The Board members are also guilty of gross negligence and B6 in directing the affairs of the corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their authority. Otis D C . 1 Pennsyl1ania Rail- a# C . 6: 8tis M 'o is a #. in and among the wholly"owned subsidiaries of the 1ennsylvania Aailroad 'o (1AA!, which included 1ennsylvania 8hio E 2etroit Aailroads (182!. 8ne of its subsidiaries had an outstanding bond issuance of Y5F.(). The parent then negotiated with a third party, >uhn, +oeb and 'o, to refinance the bonds. The directors of 182 approved a resolution authoriCing the sale of the new #eries 2 bonds at a best obtainable price.

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Bonds were then sold to >uhn and +oeb. Another buyer was willing to purchase the bonds at a better price but the directors declined. The *nterstate 'ommerce 'ommission found that the corporation was not able to get the best price for the sale and that other options were not e0plored, that negotiations were only with one investment house and were at Garms"length dealingH, and that it was possible to have greater savings. *: B?7 the directors are liable for failing to e0ercise ordinary care and :udgment in the issuance and sale of Y5F) in bonds, which resulted in alleged losses suffered by the corporation. .: Business :udgment rule: courts will not interfere in matters of business :udgment, in which it is presumed that :udgmentJreasonable diligenceJhas in fact been e0ercised. A director cannot close his eyes to what is going on about him in the conduct of business :udgment. 'ourts have given directors wide latitude in the management of the affairs of the corporation provided that the :udgment is unbiased, honest and reasonably e0ercised. 7egligence must be determined as of the time of transaction. )istakes or errors in the e0ercise of honest business :udgment do not sub:ect the officers and directors to liability for negligence in the discharge of their appointed duties. 2irectors are entrusted with the management of the affairs of the corporation. *f in the course of management they arrive at a decision for which there is a reasonable basis, and they acted in ,6 as the result of their independent :udgment, and uninfluenced by any other consideration than what they honestly felt was in the best interests of the corporation. *n the present case, the #' found that the officers and directors of the corporations acted honestly in ,6 and sought to e0ercise their best :udgment for the best interests of their corporation. 7o fraud was present, but only a faint suggestion of B6. The directors had the right to negotiate privately with >uhn and +oeb. *n contracting with the latter, the directors were not contracting with another firm in which they were interested, nor did the directorship or officership positions interlock. There is no contention that fraud e0isted and fraudulent acts will not be presumed. ? nteli%an et al 1. Ba' l #-?3-'ia ?illin9 C In'. )ontelibano et al are sugar planters adhered to the )illing 'ompany9s sugar central mill under identical contracts. The contracts would be in force for $4 years and provide that the resulting product should be divided in the ratio of ( = for the mill and = for the planters. *t was proposed to e0ecute the milling contracts, increasing the planter9s shares to %4= of the manufactured sugar and molasses and e0tending the period from $4 to ( years. The Board of the )illing company then adopted a resolution granting further concessions to the planters over and above the amended contract. &E years later, )ontelibano sues the )illing company, contending that the $ sugar centrals with a total annual production e0ceeding &?$ of the production of all sugar millis in 7egros, had already granted %5. = participation to their planters, and in accordance with 1ara 3 of the resolution, it had become obligated to grant similar concessions to them. .: Bhen a resolution is passed in ,6 by the board, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. Vuestions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its :udgment for that of the board@ the board is the business manager of the corporation and so long as it acts in ,6 its orders are not reviewable by the courts Litwin 1 Allen et al. .: The officers are liable for the transaction because the entire

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arrangement was so improvident, risky, and unusual and contrary to fundamental concepts of prudent banking practice. A bank director when appointed takes oath that he will diligently and honestly administer the affairs of the bank or trust company. .onesty alone would not suffice@ there must be more than honestyJthere must be diligence, and that means care and prudence as well. Bhat sound reason is there for a bank, desiring to make an investment, to buy securities under an arrangement whereby any appreciation will insure to the benefit of the seller and any loss will be borne by the bank. There is here more than a /uestion of business :udgment. The directors plainly failed to bestow the care which the situation demanded. A director, however, is not liable for loss or damage other than what was pro0imately caused by his own acts or omissions in breach of his duty. The directors in this case are liable only for the loss attributable to the improper transaction itself, and not after the option on the improper transaction had e0pired. Wal.e- 1 ?an et al. 6?.: 'orporation was engaged in real estate and advanced a loan to a third person taking as security his 17. The loan was not authoriCed by the board and was not for the benefit of the corporation nor was it in aid of its business. 7o effort was done to collect on the loan, which became due and demandable. The corporation went bankrupt, and the receiver sues the directors to collect on the amount due the insolvent corporation and for damages. 'ourt held that the director was negligent. Stein%e-9 1 >elas' . 6: The board of the corporation authoriCed the purchase of $$4 shares of capital stock of the corporation and the declaration of dividends at a time when the corporation was indebted and in such a bad financial condition. The directors relied on the face value on the books of its A?A, which had little or no value. 6urthermore it appears that two of the directors were permitted to resign so that they could sell their stock to the corporation. The corporation became insolvent, and the receiver #teinberg sues the directors. .: The corporation did not have a bona fide surplus with which dividends could be declared and paid out. The directors did not act in ,6 and were grossly ignorant of their duties. 2irectors were held personally liable for causing the corporation to purchase their own shares and declaring dividends, which because of such failure to take into consideration of worthless receivables, worked to the detriment of the creditors. The directors did not act with diligence in taking the word of their chairman and not making an informed decision based on the facts then available to them and on not relying on other documents available to them. 'reditors have the right to assume that so long as there are outstanding debts and liabilities, the board will not use the corporate assets to purchase its own stock, and that it will not declare dividends to #.s when the corporation is insolvent Ba-nes 1 An#-ews. 6: 'orporation manufactures starters for 6ord motor vehicles and airplanes. 2irector Andrews, the largest #., who was induced by the 1resident to become director, held only 5 board meetings. 2uring his term, the company business was mismanaged. Barnes was then appointed receiver after the corporation had gone under, and was found that the company had no funds. .e alleged that Andrews failed to give ade/uate attention to the affairs of the company, which had been conducted incompetently and without regard to the wastage in salaries. Bork had languished from incompetence and e0travagance and /uarrels between the factory manager and the other personnel affected production.

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.: 6irst liability must rest upon the director9s general inattention to his duties. .e cannot be charged with neglect in attending director meetings, since there had been only 5. But his liability must depend upon his failure in general to keep advised of the conduct of the corporate affairs. Bhile directors are collectively managers of the company, they are not e0pected to interfere individually in the actual conduct of its affairs. To do so would disturb the authority of the officers and destroy their individual responsibility, without which no proper discipline is possible. .aving accepted a post of confidence, Andrews was charged with an active duty to learn whether the company was moving to production, and why it was not, and to consider what could be done to avoid the conflicts among personnel or correct their incompetence, which was slowly bleeding the business to death. .e must go further to show that he should have been more active, as the cause of action against him by the receiver rests upon a tort of omission as though it had rested on a positive act on his part. Bhen a business fails from general mismanagement or business incapacity, could the blame be placed upon a single director and could he have saved the company if he had triedQ A director could have least fulfilled his duties to the company and to the #.s to have made the company prosper, or at least to show that he had done his duty enough to have broken the fall of the company. This Andrews failed to do. 0 True, Andrews was not well"suited by e0perience for the :ob he had undertaken. 2irectors are not specialists, but they must have good sense, and must have ac/uainted themselves with the corporate affairs, but they need not have any technical talent. They are the general advisers of the business, and if they faithfully give such ability as they have, it would not be lawful to hold them liable. )ust a director guarantee that his :udgment is goodQ 'an #.s call him to account for deficiencies which their votes assured him did not dis/ualify him for officeQ Bates 1 D-esse-. 6: Bank employee was able to embeCCle cash from the branch operations for a considerable period of time, unbeknown to the bank officers, who relied to heavily and trusted the employee. .e was able to swindle money by concealing his withdrawals through entries in the records of the bank, and matched it with the correct statements which were relied upon by the cashier. .: ;nder the circumstances of this case, the directors did not neglect their duty in accepting the statement of the cashier and failing to inspect the depositor9s ledger. They should not be held answerable for taking the cashier9s statement to be as correct as the statement of assets always was. The statement of assets were always correct. A committee was appointed to e0amine the operations of the bank. The bank itself was in sound financial condition. Their confidence seemed warranted by the semi"annual e0aminations by the government e0aminer and they were encouraged in their belief that all was well by the president. They were not bound by virtue of the office gratuitously assumed by them to call in the passbooks and compare them with the ledger, and until the event showed the possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud. The position of the president, however, is different. 1ractically he was the master of the situation. .e was at the bank daily for hours, had the ledger in his hands at time. .e had hints and warnings of the une0plained shortages and rapid decline in deposits. .e knew the errant employee had been living at a fast pace and had been dabbling in stocks. .e had been put on his guard, and had they been heeded by the 1resident, it would have led to an e0amination of the ledger9s and would have prevented future thefts. *n accepting the presidency 2resser must be taken to have contemplated responsibility for losses to the bank.

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S0IHIN@ CORPORAT0 OPPORT=NITI CAS0S Sin9e- et al 1 Ca-lisle. 6: #inger et al are #.s of the ;nited 'orporation which owns all capital stock of its subsidiary, 7< ;nited 'orp, both of which are engaged in the business of underwriting securities. 'arlisle et al are directors of the two corporations. 8ther defendants are investment houses L1 )organ, 2re0el M 'o, and )organ #tanley. ;nited 'orp ac/uired substantial voting stock of various holding and operating companies?utilities, which were all publicly listed and obtained their funds through the public sale of their securities. L1 )organ et al were able to obtain large profits from the underwriting of such securities to the e0clusion of ;nited and 7< ;nited. 1laintiff #inger charge that the defendant bankers and investment houses and the directors of the two corporations fraudulently caused the latter corporations to use their influence and control over the subsidiaries in order to induce them to award the underwriting business to the defendant bankers. .aving eliminated ;nited 'orp and 7< ;nited as their competitors for the underwriting business of the subsidiaries, the defendants allegedly proceeded to utiliCe their control and influence to obtain the business for themselves. #inger et al also claimed that the directors of the corporation, as fiduciaries, eliminated their cestui as a competitor in the underwriting profits. .: ;nited and 7< ;nited were also engaged in underwriting as do the defendant banks. *t was the duty of their directors and officers to make every effort consonant with good, honest :udgment to obtain for those corporations as much of the underwriting business as possible, and to make this business as profitable as possible. This does not mean, however, that the directors and controlling #.s of ;nited and 7< ;nited were re/uired to do anything detrimental to the affairs of other corporations of which they were officers and directors, and to the affairs of ;nited and 7< ;nited. 8ne in control of a ma:ority of the stock and of the board of a corporation occupies a fiduciary relation towards the minority, and is charged with the duty of e0ercising a high degree of ,6, care, and diligence for the protection of the same. Every act in its own interest to the detriment of the minority interests becomes a breach of duty and of trust, and entitled them to plenary relied. #o strict is the rule of undivided loyalty to the beneficiary that the mere fact that a trustee has an interest inconsistent with the interest of his cestui, casts upon him that burden of :ustification. Bhere this duty e0ists, the duty of the trustee is to manage the property and affairs of the corporation with an eye single to the advantage of the corporation itself. *t is not proper for the fiduciary to take those opportunities unto itself, while at the same time it stayed the processes of its subsidiary directed towards the same business ends. *t is not only a case of a fiduciary seiCing business opportunities of the cestui. The trustee at the same time kept its dominant hand over the cestui, suppressing any attempt by the cestui to go out and compete with the trustee. Bhere a fiduciary is engaged in a business in competition with his corporation, he cannot actively use his position and power over his corporation so as to prevent the corporation from seeking certain businesses in competition with himself. *t is charged that the directors here not only failed and refused any attempt to obtain certain business for their own corporation, but that they affirmatively prevent the corporation from competing with them for that business. This they may not do. 2irectorship in two competing corporation does not in and of itself constitute a wrong. *t is only when a business opportunity arises which places the director in a position of serving two masters, and when dominated by one, he neglects his duty to the other, that a wrong has been done.

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I-1in9 T-3st C 1 De3ts'" et al. 6: *rving is the trustee of the insolvent company #onora Acoustic. Acoustic desired the patents of the 2e 6orest company and wanted gain at least minority stake to have a voice in the management of its patents and products, which goes to Acoustic9s corporate purpose. Aeynolds M 'o, receiver of the insolvent 2e 6orest, offered to give Acoustic &?$ participation in the purchase of %44,444 shares of 2e 6orest stock. *t also stipulated that Acoustic9s nominees should hold ( of 3 seats in the board and that it should have the right to enter into a contract to handle the managing and selling of 2e 6orest products. This offer was presented to the board of Acoustic and a resolution was passed authoriCing its president, 2eutsch, to obtain sufficient funds to enable Acoustic to carry out its obligations in case it accepts the offer. 7o funds were obtained but Biddle and 2eutsch et al, agreed to put up the money and accept the certificates of 2e 6orest stock issued when date of payment came under the offer. Aeynolds agreed and issued the certificates. The deal was consummated on the purchase of 2e 6orest stock. *t was then traded in the e0change and Biddle, 2eutsch et al were able to reap huge profits in selling their shares. Acoustic declares bankruptcy and sues the Biddle group, three of whom were directors of 2e 6orest, appropriated to themselves Acoustic9s right under its contract, when as fiduciaries they were obligated to preserve those rights for Acoustic and were forbidden to take position where personal interest would conflict with the interest of their principal. .: The theory of the suit is that a fiduciary may make no profit for himself out of a violation of duty of the cestui, even though he risked his own funds in the venture, and that any one who assists in the fiduciary9s dereliction is likewise liable to account for the profit so made. *t is clear that there is no contract between Acoustic and Aeynolds because the offer did not run to Acoustic but to the Biddle group as individuals. The management contract, once entered into, would enable access to the patents, stock ownership in 2e 6orest as a going concern after receivership was lifted, and were all concededly legitimate corporate purposes. Thus the proposed purchase is not ultra vires. The facts of the present case militate strongly against the directors since in this case, they absolutely bound Acoustic by contract to make payments to Aeynolds and e0posing it to risk of a suit for damages for nonperformance, without committing themselves to it to relieve it of this obligation if necessary when time for payment arrives. 2irectors of a solvent corporation are forbidden to take over for their own profit a corporate contract on the plea of the corporation9s financial inability to perform. *f the directors are uncertain whether the corporation can make the necessary outlays, they need not embark upon the venture. *f they do, they cannot substitute themselves for the corporation any place along the line and divert possible benefits into their own pockets. Litwin 1 Allen et al. 6: L1 )organ, in disposing of &,5 4,444 shares of '# of Alleghany corporation, offered 44,444 to ,uaranty 'orporation to be sold on a commission at Y5(?share. Before the public offering, )organ also offered the other E 4,444 to friends at Y54. Among those receiving the shares were some directors of ,uaranty 'orp, who received (4,444 shares. The market opened at a premium and the directors were able to dispose of their stock at a substantial profit. .: A director of a corporation is in a position of fiduciary. .e will not be permitted to improperly profit at the e0pense of the corporation. ;ndivided loyalty will ever be insisted upon. 1ersonal gain will be denied to a director when it comes because he has taken a position adverse to or in conflict with the best interests of the corporation. The fiduciary relationship imposes a duty to act in accordance with the highest standard. There is thus no basis for holding that in ac/uiring stock through L1

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)organ at Y54, any of the defendants were guilty of a breach of fiduciary duty. The '# purchased did not represent in any case a business opportunity for the ,uaranty 'orporation. .aving fulfilled their duty to the corporation in accordance to their best :udgment, the directors were not precluded from a transaction for their own account and risk. *n order to constitute a corporate opportunity that was deprived by the directors, it was necessary to prove the ff: The shares purchase were in contemplation of e/uity offered to the cestui That the cestui had some legitimate right or e0pectancy in these shares The /uestion to ask is, have the directors profited at the e0pense of their corporation@ have they gained because of disloyalty to its interest and welfareQ *n this case, the GopportunityH was a routine piece of business wholly lacking in the uni/ue and special /uality which distinguished other corporate opportunity cases. The interest of the directors in the stock was purely speculative, and they even incurred a definite risk which at the time was totally eliminated from the cestui9s position in the same stock. *n other words, the profit of the cestui was assured@ that of the directors were still at haCard. D3ty f C nt- llin9 Inte-ests

Ins3-ans"a-es C -$ -ati n 1 N -t"e-n Fis'al C -$. 6: The )anagement group (composed of 1hiladelphia banks! transferred control over the *nsuranshares 'orporation, an investment trust specialiCing in shares of small life insurance companies, to the Boston ,roup, none of whom ever had any interest of any in it. Bith the control went plenary power under the by"laws to sell or transfer all the securities in the company9s portfolio. #uch ac/uisition of control was the first step of a grand scheme, planned by the Boston ,roup with the connivance of brokers, to strip the corporation of its valuable assets, leaving a mere shell to the remaining #.s. .: This case involves more than :ust a /uestion of liability in the sale of corporate stock: it is the sale of control by a minorityJbut controllingJinterest. Those who control a corporation either by the ma:ority or minority stock ownership owe some duty to the corporation in respect of the transfer of the control to outsiders. 8wners of control in a corporation are under a duty not to transfer ownership to outsiders if the circumstances surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his guard. *n this case the evidence shows that the Boston group were ac/uiring control over the corporation by improper means and for an improper purpose. E. *ssuance of watered stock (#ection % ! +iability of directors for watered stocks: #hall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

F. #eiCing corporate opportunity A director has a duty to refrain from usurping a business opportunity rightly belonging to the corporation. *n case of breach of this obligation, he has a duty to account to the corporation all profits received by him (#ection $(!

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J.

Page 52

;7+E##, his act has been ratified by a vote of the stockholders owning or representing at least 5?$ of the outstanding capital stock 8fficers can be held liable under (#ection $&! f 4is4ana9e4ent

Re4e#ies in 'ase

Aeceivership *n:unction if the act has not been done 2issolution if the abuse amounts to a ground for /uo warranto but the #olicitor ,eneral refuses to act 2erivative suit a complaint filed with the #E'

;ichico, et al. vs. 7+A': The petitioners, who are officers and directors of 'rispa, *nc., assailed the decision of the 7+A' holding them solidarily liable with 'rispa for the payment of separation pay and backwages to the private respondents. *t was the contention of the petitioners that the award of separation pay and backwages is a corporate obligation and must therefore be assumed by 'rispa alone. Bhile the general rule is that obligations incurred by a corporation, acting through its directors, officers and employees, are its sole liabilities, there are times when solidary liabilities may be incurred such as in this case where it is undisputed that petitioners had a direct hand in the illegal dismissal of respondent employees. They were the ones, who as high" ranking officers and directors of 'rispa, signed he Board resolution retrenching the private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited profit and loss statement which had no evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for which they can be held :ointly and severally liable with 'rispa for all the money claims of the illegally terminated respondent employees. Tramat )ercantile, *nc. vs. 'A: 1ersonal liability of a corporate director, trustee or officer along (although not necessarily! with the corporation may so validly attach, as a rule, only when: .e assents (a! to a patently unlawful act of the corporation, or (b! for bad faith or gross negligence in directing its affairs, or (c! for conflict of interest, resulting in damages to the corporation, its stockholders or other persons@ .e consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written ob:ection thereto@ .e agrees to hold himself personally and soidarily liable with the corporation@ or

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.e is made, by a specific provision of law, to personally answer for his corporate action.

E. 08e'3ti1e ' 44ittee (#ection $ ! The by"laws of a corporation may create an e0ecutive committee, composed of not less than three members of the board, to be appointed by the board. #aid committee may act, by ma:ority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by"laws or on a ma:ority vote of the board, e0cept with respect to: o approval of any action for which shareholdersI approval is also re/uired@ o the filing of vacancies in the board@ o the amendment or repeal of by"laws or the adoption of new by"laws@ o the amendment or repeal of any resolution of the board which by its e0press terms is not so amendable or repealable@ and o a distribution of cash dividends to the shareholders. 'annot go as far as to render the bond powerless and free from all responsibilities imposed on it by law )ust be provided in the by laws, composed of not less than $ members of the board Essential the e0ecutive committee acts by ma:ority vote of all the members

OFFIC0RS A. C -$ -ate ffi'e-s

The officers e0ecute the polices laid down by the board but in practice have wide latitude in determining the course of business operations

&. )inimum set of officers and Vualification (#ection 5 ! *mmediately after their election, the directors of a corporation must formally organiCe the election of: a. A president, who shall be a director b. A treasurer who may or may not be a director c. A secretary who shall be a resident and citiCen of the 1hilippines, and d. #uch other officers as may be provided for in the By"laws Any two (5! or more positions may be held concurrently by the same person, e0cept that no one shall act as president and secretary or as president and treasurer at the same time.

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5. 2is/ualifications (#ection 5E!

Page 54

7o person convicted by final :udgment of an offense punishable by imprisonment for a period e0ceeding si0 (%! years, or a violation of this 'ode committed within five ( ! years prior to the date of his election or appointment, shall /ualify as a director, trustee or officer of any corporation.

$. +iability in general (#ection $&! Bhen a director, trustee or officer attempts to ac/uire or ac/uires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which e/uity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

(. 2ealings with corporation (#ection $5! A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: o That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a /uorum for such meeting@ o That the vote of such director or trustee was nor necessary for the approval of the contract@ o That the contract is fair and reasonable under the circumstances@ and o That in case of an officer, the contract has been previously authoriCed by the board of directors. Bhere any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two" thirds (5?$! of the outstanding capital stock or of at least two"thirds (5?$! of the members in a meeting called for the purpose 1rovided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: 1rovided, however, That the contract is fair and reasonable under the circumstances. f ' -$ -ate ffi'e-

B. C 1e-a9e

8ngkingco v. 7+A' " Gwhere the By"laws of the condominium corporation specifically includes the position of G#uperintendent?AdministratorH in a roster of corporate officers, then such position is clearly a corporate officer position and issues of reinstatement would be within the :urisdiction of the #E' and not the 7+A'.H

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Tabaug v. 7+A' " GBhen the By"laws of the corporation provide that one of the powers of the BoTrustees is Gto appoint a )edical 2irector, 'omptroller?Administration, 'hief of #ervices, and such other officers as it may deem necessary and prescribe their powers and dutiesH then such specifically designated positions should be considered Gcorporate officersH positionsK.H f ' -$ -ate ffi'e-s

C. A3t" -ity

The authority of corporate officers to bind the corporation is usually not considered inherent in their office but is derived from law, the corporate by"laws or by delegation from the board either e0pressly or impliedly by habit, custom, or ac/uiescence in the general course of business ,en rule: A person dealing with a corporate officer is put on in/uiry as to the scope of the latter9s authority but an innocent person cannot be pre:udiced if he had the right to presume under the circumstances the authority of the acting officers. 1resident D no inherent powers by virtue of his office but acts done in the ordinary course of business is presumably within the scope of his authority unless the contrary is proven. *n many instances, he is impliedly vested with corporate powers through long ac/uiescence. .is acts may be subse/uently ratified and the corporation may be bound. .e cannot be secretary and treasurer at the same time -ice 1resident D no inherent power. Takes over when the president is absent #ecretary D duties are ministerial. 'annot bind the corporation unless authoriCed or named manager Treasurer D entrusted with authority to receive and keep funds and to disburse them as he may be authoriCed. 1owers are limited@ cannot bind the corporation unless authoriCed. ,eneral manager D takes care of the day to day affairs of the corporation. 1owers are limited to implementing the policies laid down by the board and perform such acts and enter into such contracts which are within the usual course of business unless the board has given a broader authority. Even if act is not within the usual course of business, if the board hd ac/uiesced in the past to similar acts, his subse/uent acts must be deemed within his implied authority. A third person has the right to presume that ,) had authority to perform acts in ordinary course of business 8ther agent D the corporation may employ such other persons as may be necessary to carry on the business

I3 C"3'. 1 E n9 Li P . >ong +i 1o is a corporation engaged in the publication of a 'hinese newspaper. *ts A8* provide for a president who shall sign all contracts and other instruments of writing, but does not provide for a business or general manager. '' 'hen or T' 'hen was appointed general business manager of the paper. .e then entered into an agreement with <u 'huck for the printing of the newspaper for 1 F4

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per month. <u 'huck worked for a year until they were discharged by the new manager Tan Tian .ong because '' 'hen had left for 'hina. <u 'huck sues the paper, claiming the the contract was for a period of $ years, and that discharge without :ust cause before the e0piration of this term entitles them to receive full pay for the remainder of the term. >ong +i 1o counters that '' 'hen was not authoriCed to enter into the contract with <u 'huck. T' ruled ifo of <u 'huck, concluding that the contract had been impliedly ratified by >ong +i 1o and that although he had no e0press authority to enter into the contract, since he was general business manager in charge of the printing of the paper and thus had implied authority to employ the petitioners *: B?7 '' 'hen had the power to bind the corporation through the contract mentioned. .: ,A: The power to bind a corporation by contract lies with its board of directors or trustees, but this power may either be e0pressly or impliedly delegated to other officers or agents of the corporation. EU'E1T*87: An officer or agent who has general control and management of the corporation9s business or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. E0ception to e0ception: Bhere the authority is vested e0pressly in the B82. As to the term of employment, a manager has authority to hire an employee for such a period as is customary or proper under the circumstances, but unless he is e0pressly authoriCed or held out to have such authority, he cannot make a contract of employment for a long future period, such as for $ years. There can be no doubt that '' 'hen as general manager of the >ong +i 1o, had implied authority to bind the defendant corporation by a reasonable and usual contract of employment with the plaintiffs. But the term of employment is unusually long, and the conditions are otherwise so onerous to the defendant corporation that the possibility of the corporation being thrown into insolvency thereby is e0pressly contemplated in the same contract. The corporation also did not impliedly ratify the contract, :ust because the president of >ong +i 1o saw the plaintiffs work as printers in the office one day. Before a contract can be ratified, knowledge of its e0istence must, of course, be brought home to the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed. 7o such knowledge or circumstances indicating knowledge is shown or proven in the case. )oreover, a ratification by him would have been to no avail@ in order to validate a contract, a ratification by the B82 was necessary. The fact that the president was authoriCed by the by"laws to sign documents evidencing contracts doesn9t mean that he had power to make the contracts. W #'"il# , l#in9s In' 1 R 8as 0le't-i' an# C nst-3'ti n C . The respondent posits that Ao0as was not so authoriCed under the )ay &E, &33& Aesolution of its Board of 2irectors to impose a burden or to grant a right of way in favor of the petitioner on +ot 7o. (3&"A"$"B"&, much less convey a portion thereof to the petitioner. .ence, the respondent was not bound by such provisions contained in the deed of absolute sale. .: ,enerally, the acts of the corporate officers within the scope of their authority are binding on the corporation. .owever, under Article &3&4 of the 7ew 'ivil 'ode, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts e0pressly or tacitly, or is estopped from denying them.

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Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation. Evidently, Ao0as was not specifically authoriCed under the said resolution to grant a right of way in favor of the petitioner on a portion of +ot 7o. (3&"A"$"B"& or to agree to sell to the petitioner a portion thereof. The authority of Ao0as, under the resolution, to sell +ot 7o. (3&"A"$"B"5 covered by T'T 7o. EF4F% did not include the authority to sell a portion of the ad:acent lot, +ot 7o. (3&"A"$"B"&, or to create or convey real rights thereon. 7either may such authority be implied from the authority granted to Ao0as to sell +ot 7o. (3&"A"$"B"5 to the petitioner Gon such terms and conditions which he deems most reasonable and advantageous.H The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it@ nor beside it. The act done must be legally identical with that authoriCed to be done. *n sum, then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not obtained@ hence, the assailed provisions are not binding on it. *t bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority@ second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority. There can be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or conduct of the principal must have been known and relied upon in good faith and as a result of the e0ercise of reasonable prudence by a third person as claimant and such must have produced a change of position to its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent. *t bears stressing that the respondent sold +ot 7o. (3&"A"$"B"5 to the petitioner, and the latter had taken possession of the property. As such, the respondent had the right to retain the 1 ,444,444, the purchase price of the property it had sold to the petitioner. 6or an act of the principal to be considered as an implied ratification of an unauthoriCed act of an agent, such act must be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name. Aatification is based on waiver D the intentional relin/uishment of a known right. Aatification cannot be inferred from acts that a principal has a right to do independently of the unauthoriCed act of the agent. )oreover, if a writing is re/uired to grant an authority to do a particular act, ratification of that act must also be in writing. #ince the respondent had not ratified the unauthoriCed acts of Ao0as, the same are unenforceable. .ence, by the respondent9s retention of the amount, it cannot thereby be implied that it had ratified the unauthoriCed acts of its agent, Aoberto Ao0as. B a-# f Li<3i#at -s 1 Ealaw. )a0imo >alaw is chairman of the board and general manager of the 7ational 'oconut 'orporation (7A'8'8!, a non"profit ,8'' empowered by its charter to buy sell barter e0port andK deal in coconut, copra, and dessicated coconut. Bocar, ,arcia and )oll were directors. *t entered into contracts for the trading and delivery of copra. 7ature intervenedJ( typhoons devastated agriculture and copra production. 7A'8'8 was on the verge of sustaining losses and could not be able to make good on the contracts. #ensing this, >alaw submitted the contracts to the board for approval and made a full disclosure of the situation. 7o action was taken, and no vote was taken on the matter. 8n 54 Lan &3(E the board met again with >alaw, Bocar, ,arcia, and )oll in attendance, and approved the

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contracts. 7A'8'8 however only partially performed the contracts. 8ne of the contracts concerns the +ouis 2rayfus M 'o., which sued 7A'8'8. 7A'8'8 settled out"of"court and paid 2rayfus 1 %E,45(. 5 representing E4= of total claims. The total settlements sum up to 1&.$). 7A'8'8 sues >alaw, and his directors Bocar, )oll and ,arcia to recover this sum, alleging negligence and B6 and breach of trust in approving the contracts, by not having them approved by the board. T' dismisses complaint. 7A'8'8 claims that the by"laws provide that prior Board approval is re/uired before the ,) can perform or e0ecute in behalf of 7A'8'8 all contracts necessary to accomplish its purpose. *: B?7 the >alaw contracts are valid despite its lack of prior board approval as re/uired by the 7A'8'8 by"laws .: The contracts in /uestion are Gforward salesH contractsJa sales agreement entered into, even though the goods are not yet in the hands of the seller. ,iven the peculiar nature of copra trading, ie copra must be disposed of asap else it would lose weight and would decrease its value, it necessitates a /uick turnover and e0ecution of the contract on short notice (w?in 5( hours!. *t would be difficult if not impractical to call a formal meeting of the board each time a contract is to be e0ecuted. 7A'8'8 board met the difficulties attendant to forward sales by leaving the adoption of the means to the sound discretion of >alaw. +ong before the contracts came into being, >alaw already contract by himself alone some %4 such contracts, and 7A'8'8 reaped a gross profit. These contracts were contracted without prior authority from the Board and were known to all the members, but nothing was said by them. Also contracts entered into by >alaw had been submitted to the board after e0ecution, not before as re/uired by the by"laws. The Board has knowledge of this and did not ob:ect to the same. Thus the practice of the corporation has been to allow its ,) to negotiate and e0ecute contracts in behalf of 7A'8'8 without prior Board approval, and by its acts and through ac/uiescence practically laid aside the re/uirement in the by"law. The contracts are therefore valid. Aatification by a corporation of an unauthoriCed act or contract by its officers relates back to the time of the act or contract ratified and is e/uivalent to original authority. The theory of corporate ratfication is predicated upon the right of a corporation to contract, and any ratification or adoption is e/uivalent to a grant of prior authority. Aatification Gcleanses the contract from all its defects from the moment it was constituted. By corporate confirmation of the contracts in dispute on 54 Lan, the >alaw contracts are thus purged of whatever vice or defects they may have. Thus even in the face of an e0press by"law re/uirement of prior approval, the law on corporations is not to be held so rigid and infle0ible as to fail to recogniCe e/uitable considerations. There was no B6 or breach of trust on the part of >alaw. The board knew, and >alaw had so informed it, that the contracts would cause heavy losses. The 'ourt found no trace of any dishonest purpose or moral obli/uity or ill will that partakes of the nature of fraud which would consitute B6 on the part of >alaw. The Board did not eventhink of raising their voice in protest against past contracts which brought enormous profits to 7A'8'8. The ratification was an act of simple :ustice and fairness to the ,) and to the best interest of the corporation whose prestige would have been seriously impaired by a re:ection of the board of those contracts which proved disadvantageous.

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?00TIN@S OF STOCE,OLD0RS A. Ein#s (#ection (3!

AND

DIR0CTORS

)eetings of directors, trustees, stockholders, or members may be o regular o special

B. W"en an# w"e-e "el#B (#ections 4, &, and $! )eetings of #tockholders (#ection 4! o #tockholders action is needed in ma:or changes in the corporation which would affect their contract with the corporation and although such action is usually initiated by the board, it is not sufficient to give them effect. #tockholders or members approval e0pressed in a meeting duly called and held for the purpose is still necessary. E0ceptions: #ec &% any corporation may amend its A* by ma:ority vote of B82 or written assent of 5?$ of the stockholders 'orporations may be bound by unanimous agreement of its stockholders although e0pressed elsewhere than at a meeting o Aegular meetings of stockholders or members shall be held annually on a date fi0ed in the by"laws, or if not so fi0ed, on any date in April of every year as determined by the board of directors or trustees o Bhen there is no person authoriCed to call a meeting, the #ecretaries and E0change 'ommission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice re/uired by this 'ode or by the by"laws. o The petitioning stockholder or member shall preside thereat until at least a ma:ority of the stockholders or members present have been chosen one of their number as presiding officer. o 1lace and time of meetings of stockholders of members " #tockholderIs or memberIs meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: 1rovided, That )etro )anila shall, for purposes of this section, be considered a city or municipality. o )embers of non"stock corporations may provide in by"laws that meetings may be held any place even outside the place where the principal office is located provided proper notice is sent and that it is within the 1hilippines o All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the

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corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (#ec &! )eetings of 2irectors or trustees (#ection &! o Aegular meetings of directors or trustees shall be held monthly, unless the by"laws provide otherwise. o #pecial meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by"laws. o )eetings of directors or trustees of corporations may be held anywhere in or outside of the 1hilippines, unless the by"laws provide otherwise. o Ae/uisites of board meetings )eeting of the Board duly assembled E0istence of /uorum (ma:ority of the board members! and 2ecision of the ma:ority of the /uorum duly assembled o 7ote: 2irectors in Board meetings cannot be represented or voted by pro0ies.

C. N ti'e# -e<3i-e# (#ection 4 and $! )eetings of #tockholders?)embers o Britten notice of regular meetings shall be sent to all stockholders or members of record at least two (5! weeks prior to the meeting, unless a different period is re/uired by the by"laws o Britten notice of special meetings shall be sent at least one (&! week prior to the meeting, unless otherwise provided in the by"laws. o 7otice of any meeting may be waived, e0pressly or impliedly, by any stockholder or member o 6ailure to give notice would render a meeting voidable. o Attendance to a meeting despite want of notice will be deemed implied waiver )eetings of 2irectors or trustees (#ection &! o 7otice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (&! day prior to the scheduled meeting, unless otherwise provided by the by"laws. o A director or trustee may waive this re/uirement, either e0pressly or impliedly

D. K3 -34 -e<3i-e# (#ection 5 and 5! )eeting of directors or trustees and officers (#ection 5 ! o ;nless the articles of incorporation or the by"laws provide for a greater ma:ority, a ma:ority of the number of directors or trustees as fi0ed in

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the articles of incorporation shall constitute a /uorum for the transaction of corporate business, and every decision of at least a ma:ority of the directors or trustees present at a meeting at which there is a /uorum shall be valid as a corporate act, e0cept for the election of officers which shall re/uire the vote of a ma:ority of all the members of the board. )eeting of stockholders (#ection 5! o ;nless otherwise provided for in this 'ode or in the by"laws, a /uorum shall consist of the stockholders representing a ma:ority of the outstanding capital stock or a ma:ority of the members in the case of non"stock corporations. o Bylaws may provide for a greater or lesser /uorum o Bhere /uorum is present at the start of a lawful meeting, stockholders present cannot without :ustifiable cause break the /uorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the ma:ority $-esi#es (#ection (!

0. W"

The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by"laws provide otherwise. Bhen there is no person authoriCed to call a meeting, the #ecretaries and E0change 'ommission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice re/uired by this 'ode or by the by"laws. The petitioning stockholder or member shall preside thereat until at least a ma:ority of the stockholders or members present have been chosen one of their number as presiding officer. ' 3l# atten# an# 1 teB (#ection 5 and F!

F. W"

#tockholder in person 1ro0ies: o #tockholders and members may vote in person or by pro0y in all meetings of stockholders or members. o 1ro0ies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. ;nless otherwise provided in the pro0y, it shall be valid only for the meeting for which it is intended. 7o pro0y shall be valid and effective for a period longer than five ( ! years at any one time. o 2irectors or trustees cannot attend or vote by pro0y at board meetings.

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J "nst n 1 J "nst n. +ogan, *rene, and 6elisa Lohnston, and +ouis and Aosario Lohnston, and EliCabeth Araneta are the ma:ority shareholders of a family stock corporation known as Lohnston +umber 'o *nc. A stockholders meeting was scheduled to elect a new set of directors who would in turn choose the new officers of the corporation. +ogan presented a pro0y by his mother, 6elisa, and another pro0y by his wife, *rene, which all"in"all represented &,5(5 of the 5,(%5 shares of the corporation. .e also re/uested that the duly endorsed shares of LB #olis be listed in the books for voting purposes. )inority #. +ouis Lohnston, as 'hairman of the board, denied the re/uest. +ogan /uickly sent for the original owners so that they could vote in his favor. +ouis also disallowed +ogan from voting the $4E shares of the elder Lohnston which he had been voting in his capacity as administrator of the estate because the estate proceedings were already terminated. Thereafter, and before the e0istence of a /uorum could be declared, +ogan et al walked out of the #. meeting and refused to recogniCe the validity of the meeting. +ouis9 group, the minority carried on and elected themselves directors and officers. Another #. meeting was called by +ouis at the instance of +ogan, which will cover matters not taken up or not finished during the regular #. meeting. 2uring the meeting +ogan moved for the election of a new board, claiming that there was no /uorum in the last meeting and thus was not validly held. +ouis denied the motion. +ogan, who represented ma:ority of the stocks, then nominated his own set of directors, and his group cast their votes in favor of the nominees, which were elected the new members of the board. This action was overruled again by +ouis as 'hair. +ogan *rene and 6elisa filed a /uo warranto suit alleging that they were the duly elected members of the B82 of Lohnston +umber 'o, and were also elected as the corporate officers thereof and praying for the ouster of +ouis, Araneta and Aosario Lohnston. *: (&! Bhich of the two factions, the +ogan group or the +ouis group, was validly elected as directors and officers of the corporation .: The #.s who remained after the group representing the ma:ority walked out without a /uorum being declared represented the minority and did no constitute a /uorum, and it is clear that they could not have validly transacted further business much less have elected a new set of directors. *t follows that if the election of the directors after the withdrawal of +ogan was null and void, then the subse/uent meeting of the board at which the +ouis group was elected was likewise null and void. *f the purpose in bolting the meeting was to deliberately defeat the e0istence of a /uorum, the absence of a /uorum, then it would produce the effect of nullifying the proceedings that follows. *t is to be noted that a #. can, for :ustifiable reasons, break the /uorum by w?drawing from the meeting. +ogan walked out because +ouis persistently and with reason overruled +ogan on his re/uests to vote the shares of the #ilos family, which he validly purchased. That +ogan did everything possible to register the stocks in order to vote them was substantial compliance with the charter and the by"laws. The denial by +ouis to vote the shares of the minor children of Albert Lohnston was likewise unreasonable. The withdrawal of +ogan, although it actually defeated the e0istence of a /uorum, was neither unreasonable nor un:ustifiable.

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The second meeting of #. was properly convened. All parties were present. The roll was called and a /uorum was declared. The contention of +ouis that the 5nd meeting did not amount to an election cannot be sustained. *t must be remembered that the +ogan group held the ma:ority of stocks when they cast their votes ifo the nominees. The inaction of the +ouis faction, did not have the effect of defeating or invalidating the election. *t is the essence of all elections that the will of the ma:ority, properly e0pressed, shall govern. A ma:ority of votes cast will decide, although some #.s who are present may refuse to vote, and thus the ma:ority of the votes cast may be less than a ma:ority of the persons or stocks present or represented. 7either may the second election be assailed on the ground that notice did not specifically include the election of the new board on the agenda. The notice provided that matters not taken up or finished during the first meeting will be part of the agenda, therefore the #.s knew that +ogan would press for the new board and they were prepared for it, having attended the first meeting. 6urthermore, all #.s were present either in person or by pro0y during the &st meeting and whatever defect in the notice was cured b their presence and ac/uiescence.

D0>IC0S AFF0CTIN@ CONTROL 1. P- 8ies

two meanings of pro0y: o person duly authoriCed by the stockholder to vote in his behalf at a stockholder9s meeting is actually an agent for a special purpose rules on agency apply to the relationship o the actual document evidencing this authority types of pro0y: o general pro0yJgives the power to vote for directors and on all ordinary matters which may be properly be taken in an #. meeting does not include the power to vote for an amendment to the A8* or other unusual transactions o limited pro0yJrestricts the authority to vote to specified matters only and may direct the vote to be case in a certain way 7ature of pro0y: a special form of agency governed by the laws on agency o #trictly fiduciary relation, and therefore as a ,A, revocable in nature despite contrary stipulations o E0ception: coupled with an interest *ncludes where the pro0y has parted with the value or incurred liability at the #.s re/uestK K which would mean to it is 78T the giving of onerous consideration that makes a pro0y one that is coupled with an interest, but that the pro0y is an integral part of the security by which a loan is to be paid re/uisites for valid pro0y ( F! o in writing o signed by #. or member o filed before the scheduled meeting term of pro0y: o pro0y may fi0 the period it may be used, but cannot e0ceed years, renewable for not more than years per renewal o no period specified: e0pires after the meeting for which it was given and cannot be used for another meeting unless it is renewed who may be appointed pro0yQ o #tock: no limitation, and B+ restrictions on #. right to appoint a pro0y will be -8*2 o 7on"stock: F3: A8* or B+ may restrict right to appoint pro0y

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revocability: o ,A revocable even before the period has e0pired and even if it e0pressly provides for irrevocability o E0ception: coupled with an interest *rrevocable for the period fi0ed ;pon e0piry, pro0y automatically ceases to be effective unless renewed Bhat constitutes sufficient interestQ 2epends from case to case 1rocedure?practice: o management usually sends a pro0y form with notice of the annual stockholders meeting o persons suggested as pro0ies have been selected by the incumbent directors and are sometimes referred to as the pro0y committee o the e0isting management who may own only a small portion of the corporation9s shares can retain its control over corporate affairs for as long as they can obtain the necessary number of pro0ies from absentee stockholders o pro0ies may not be appointed orally and the written pro0y should be filed with the corporate secretary before the meeting failure to comply will render the pro0y void and ineffective vote or presence counted on the basis of a void pro0y may result in the invalidation of any action, unless the number of shares re/uired for /uorum or voting is present o when a group of #. feel dissatisfied with management, they may seek control to correct such mismanagement by soliciting pro0ies for the ne0t election of directors o each block of #. will seek pro0ies of absentee #.s o since management has the right to defend its present policies, it can as a rule, use corporate funds and facilities in solicitation, as long as: it acts in ,6, the e0penses are reasonable under the circumstances and the pro0y war is not a personal one ,A: when the right to vote by pro0y is given by statute, a stockholder cannot be deprived of it by any by"law E0ception: non"stock corpsJ'ode allows for a waiver of the right provided this is made in the A8* or by"laws By"laws may also impose reasonable conditions as to the form and manner of voting by pro0y

In -e @iant P -tlan# Ce4ent. .: #tock transferred on the books of the corporation within 54 days prior to a stockholders meeting, for the election of directors, is temporarily disenfranchised, and cannot be voted either by the transferor or by the transferee. The persons on whose pro0ies the #. meeting were the #. of record within the provision of the statute, although they were not real beneficial or e/uitable owners of the stock. The right to vote shares of corporate stock, having voting powers, has always been incident to its legal ownership. Bhatever the rights of the mere unrecorded assignee of the stock certificate might be in the absence of a by"law or other contract provision re/uiring all transfers of shares to be recorded on the books of the corporation, it is not contended that such a provision is not authoriCed or is not binding as between #.s and the corporation. As between the transferor and the unrecorded transferee to the stock certificate, the legal title passes to the latter. A very different rule applies between the corporation and the mere unrecorded assignee of the certificate of stock. That is because limited contract restrictions relating to stock transfers, are for the benefit of the corporation, and to enable it to ascertain from its records who its members of #.s are. #o far as the corporation is concerned, until such a by"law is complied with, the record owner must therefore be regarded as the real owner of the stock, with the conse/uent general right to vote it by pro0y or otherwise. Bhen considered from a legal standpoint, there is no privity of contract between the mere holder of the certificate and the corporation, and he is not a real member of that organiCation until the transfer is recorded. ;ntil that time, the possible legal rights of the holder of the certificate are of an inchoate nature. *n other words, a real novation, whereby a new contract between the mere holder of the certificate and the corporation is substituted for the prior contract of the record owner, can

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only be brought about by complying with the corporate regulation relating to transfers of stock. The record owner may, therefore, be the mere nominal owner, or technically a trustee for the holder of the certificate, but legally he is still a stockholder in the corporation, and so far as the corporation is concerned, like the usual trustee, ordinarily has the right to vote the stock standing in his name. *n cases of this nature, when nothing more than a mere dry trust is involved the owners of the certificates can usually protect their rights by recording the transfers and having the new certificates issued@ but even though that could not be done in this case because the corporate transfer books were closed at the time of the assignments, they could have compelled the record owners to give them pro0ies to vote the stock standing in their names. A mere nominal owner naturally owes some duties to the real beneficial owner or e/uitable owner of the stock, and even if the right to demand a pro0y is not e0ercised, if the vendor e0ercises his legal right to vote in such a manner as to materially and in:uriously affect the rights of the vendee, he is perhaps answerable in damages in some cases. *t can hardly be contended that the actual consent of the holder of the certificate is ordinarily essential to the right of the record owners to vote stock standing in their names. Bhen the right and power of a mere record owner to vote is /uestioned, some ultra vires, negligent, or improper willful act or omission on the part of the corporation or its agents is relied upon and must appear. *n some cases the court may also re:ect votes cast by the record owners, which are regarded as improper, solely because of some peculiar ine/uitable circumstances affecting the relation between such apparent owners and the transferee of the certificates. 'onceding that as between a transferor who has parted will all the beneficial interest in stock and his transferee, the board e/uities are all in favor of the latter in the matter of its voting. State e8 -el 01e-ett T-3st 1 Pa'ifi' Wa8 . *: B?7 the pro0y to vote the stock owned by 1aine")itchell and Lordan was revocable .: The rules against perpetuities is usually stated as prohibiting the creation of future interest or estates, which by possibility may not become vested within a life or lives in being and 5& yearsK the rule however applies only to the vesting of future estates and does not apply to vested estates. The option agreement did not create a future estate or interest to become vested at some future time. *t was a promise by an owner of stock in a corporation that if at any time during the ne0t 54 years he desired to sell his stock he would give the promissee the first opportunity for a period of & days to purchase it a such price and upon such terms and conditions as the promisor offered. *t was in effect a promise to give an option in the even the promisor desired to sell his stock. ,A: a pro0y given by a #. to vote his corporate stock at a meeting of the #.s of a corporation is revocable by him even though the pro0y by its terms is e0pressly made irrevocable. E0ceptions: (&! where authority or power is coupled with an interestJa power coupled with an interest is a power or authority to do an act, accompanied by or connected with an interest in the sub:ect or thing itself upon which the power is to be e0ercised, the power and interest being united in the same person. The interest is not limited to the thing itself upon which the power is to be e0ercised, but is also included the sub:ect upon which the power is to be e0ercised. *t is however sufficient that the pro0y holder have an interest in the sub:ect matter upon which the power is to be e0ercised. The Gthing itselfH may refer to tangible shares or certificates of stock, but the sub:ect matter may refer to the intangible voting right and the incidental control of the corporation. (5! where authority is given as part of a security or is necessary to effectuate a securityJin such a case the interest of an agent is something more than an interest in being permitted to e0ercise the power, yet something less than an estate in the sub:ect matter or thing upon which the power is to be e0ercised. *t is clear from the pro0y agreement that the parties agreed that 1aine )itchell stock should be used in con:unction with the stock owned by Engle so that the policies of the respondent should be thus controlled. *n this situation Engle was more than a mere agent. *n voting stock he served purposes of his own in maintaining control of the corporation by his choice of directors and the determination of policies and business affairs of the corporation. This voting of the stock for these purposes was the sub:ect matter of the agency. Engle ac/uired an interest in the sub:ect matter of the power given to him and this interest was coupled with

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such power. The power to vote the stock was necessary in order to make Engle9s control of the corporation secure. The mutual agreement as a whole created something like a community of interest in the stockholdings of the parties having for its purpose the use of their stock as a unit and the effect of which was to give both parties an interest in the voting of the stock, although the power to vote was to be e0ercised by Engle after the death of Lordan or by 1aine" )itchell after the death of Engle. This power was couple with an interest and by the entire agreement between the parties the power was intended to be and became a security to effectuate the main purpose of the agency. The parties did no more than promise to give each other an option to purchase in the even either had a proposal to buy his or its stock@ but the option agreement must be considered with the pro0y agreement in determining the intention of the parties and whether Engle had an irrevocable pro0y. The conclusion is that Engle had a power coupled with an interest and that the authority was given to him as part of a security and was necessary to effectuate such security and therefore the pro0y was not revocable by the appellant. 1 proxy in fa%or of the pledgee of the shares sub!ect of the proxy is sufficient interest to render the proxy irre%ocable !. 1 tin9 t-3st a9-ee4ent 2ef9n: a trust agreement whereby a stockholder transfers his shares to a trustee who will e0ercise his voting rights. ;nder this arrangement, the stockholder remains the beneficial or e/uitable owner of the shares, but legal ownership is transferred to the trustee. Essence of voting trust: real ownership is separated from the voting rights *nvolves the complete surrender by the #. of his voting rights to a trustee or trustees -oting trustee is only a share owner vested with colorable and fictitious title for the sole purpose of voting upon stocks that he does not own Transferring #. ceases to become #. of record but retains the right of inspection of corporate books 2uring the period of the agreement, it is irrevocable for as long as the trustee has not violated the trust by his misconduct or fraud. 'onditions for the use of voting trustsJ#ec 3:

Ae/uisites of a valid voting trust: ( 3! o *n writing and notariCed o 'ertified copy filed with the corporation and the #E' o 1eriod not longer than years, but renewable each time for not more than years E0ception: where the voting trust is a condition of a loan agreement, in which case it may be for a longer period but not beyond the time when the loan is fully paid o 'ertificates of stock is to be cancelled, and new ones issued to the trustee stating that it is issued in pursuance of a voting trust agreement o Transfer must be entered in the corporate books o Trustee should issue voting trust certificates in favor of transferring #.s o 7ot for an illegal purpose, or for the benefit only of the trustee without any obligation to perform any useful service for the protection of the stockholders or creditors of the corporation it must have a legitimate business purpose to promote the best interest of the corporation or even to protect the legitimate interests of others in the corporation creation of voting trust: o transferring #.s receive transferable voting trust certificates as evidence of their rights rights other than voting rights may also be transferred to the trustee o but the #. ceases to be a #. and his rights are now against the trustee in accordance with the agreement o #. has the e0press right to inspect corporate books and records

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Trustee is also /ualified to become a director, since he is the registered owner of the shares and fulfills the /ualifications of the 'ode that at least one share is owned to become /ualified as director 7o voting trust agreement may be kept secret among the parties thereto@ it must be open to e0amination 7o voting trust agreement may be e0clusive, since the law gives a #. the right to transfer his shares to the trustee upon the same terms and conditions in the agreement

01e-ett 1 Asia Ban.in9. Teal M 'ompany is indebted to .B 1eabody M 'o. for 1$44> for tractors, plows, and parts delivered, of which it has paid 1& 4>. Asia Banking 'orp held drafts accepted by Teal under the .B 1eabody9s guarantee. Tractors were returned to .B 1eabody due to its being unsellable due to financial and agricultural depression in the A1. Teal ordered another lot of tractors from #mith >irkpatrick, but shipment was delayed until the rescission of the credit of Teal with Asia Bank. <et #mith still delivered the order, and Teal at the re/uest and advice of the Bank accepted the drafts and stored the same. Asia bank persuaded Teal, 1eabody, and #mith >irkpatrick to enter into a Gcreditors agreementH wherein it was mutually agreed that neither of the parties should take action to collect its debts from Teal for 5 years. Teal soon became indebted to Asia Bank for 1E 4,444, secured by mortgage. The Bank then suggested that, for the mutual protection of Teal and itself, it was advisable that the Bank should temporarily obtain control of the management and affairs of the company. To this end, it was necessary for the #.s to place their shares in a voting trust to be held by the Bank, then the Bank would finance Teal under its own supervision. The Teal #.s were thus induced to enter into the -oting Trust Agreement, with the purpose that the agreement will be intended for the protection of all parties from outside creditors. #hortly after the e0ecution and delivery of the voting trust and the )8A, )ullen as ,) of the Bank, caused the displacement and removal #. representatives in the Board and the substitution in their place of the Bank9s employees or representatives. The new Board, who have not purchased any share of stock of Teal, proceeded to remove the 'orp #ecretary, discharge all the old managers and displace them with creatures of their own choosing whose interest consisted wholly in pleasing themselves and the Bank, and who were wholly foreign to the stockholders. Aight of transferring #.s to set aside the trust agreement when their rights are trampled upon by the trustee. 'orpo 'ode now provides that no -TA will be used for purposes of fraud.

?a'.in 1 Ni' llete , tel. 2i0on was the owner of a leasehold interest in a tract of land in )inneapolis upon which stood what was known as the 7icollet .otel. 7icollet .otel *nc was organiCed for the purpose of adding to the hotel accommodation of that city. Arrangements were made to have 2i0on take 5 44 shares for his lease and to erect an new 7icollet .otel upon this property. 'ost was Y$), to be raised by the sale of Y&) mortgage bonds and Y&.5 ) of preferred stock. The )innesota +oan and Trust 'o approved the loan application of 7icollet for Y&.F) secured by the said mortgaged bond. The loan agreement stipulates that a voting trust agreement is entered covering the common stock of 7icollet. The #tate #ecurities 'ommission approved 7icollet9s application for the license to sell its preferred stock, provided that the common stock is to be trusted with three trustees for &4 years for the protection of preferred #.s. Thereafter a voting trust agreement was entered with 2i0on et al as voting trustees. )ackin is the owner of a trust certificate representing F4 shares of common stock, alleging that the voting trust is void and that the trustees and directors appointed have mismanaged the company and have caused large losses. The agreement also allegedly denied them the right to inspect the books, and they ask the court to declare the same null and void and appoint a receiver until the beneficial owners can elect a new set of directors. *: B?7 the voting trust is valid .: -oting trusts are not illegal per se. *n the instances where the voting trust has been held void, there e0isted invalidating circumstances such as want of consideration, voting power not coupled with an interest, fraud, illegal purpose, and so on. *n this case there was no charge of illegality or fraud, nor of any invalidating circumstance. The voting power of the three trustees is coupled with an interest because of one of the trustees is a substantial owner of the common stock, and all are charged with the duty of protecting and conserving property for the benefit of those who became purchasers of preferred stock and bonds. The whole purpose of

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the agreement is legitimate and wholesome. *t was a matter of civic pride and to make this possible, it involved the invitation of combinations of capital in substantial amounts, which could only be secured by having those who invested their money assured of the fact that there would be a continuity of management during a period of years until such time that the new enterprise would have an opportunity to :ustify a successful financial future. *t would be a manifest in:ustice to the large number of holders of bonds and preferred stocks, not to the parties to the suit, to ad:udge and hold illegal a trust agreement upon the strength of which they had invested their money in the enterprise. *t also appears that )ackin purchase the certificates of trust after the creation of the trust agreement and are presumed to have full knowledge of the limitation of their rights. NIDC 1 A<3in . Bat:ak, a manufacturer of coco oil and copra cake for e0port, is on the brink of bankruptcy. *t entered in to a 6inancial Agreement with 17B for additional operating capital for its $ processing mills and to pay its other debts to other banks. ;nder the agreement with 17B, 7*2', a wholly"owned subsidiary of 17B, would invest 1%.E) worth of preferred shares convertible within years into common stock to pay off the other debts and the balance to pay off its own due with 17B. 17B also granted various credit accommodations. Bat:ak as part of the deal, mortgaged all its properties in the province. A "year voting trust agreement was e0ecuted ifo 7*2' by the #.s representing %4= outstanding stock of Bat:ak. <ears later, 17B instituted foreclosure proceedings against the mortgaged properties due to Bat:ak9s insolvency, and soon became owner of the properties. Bat:ak failed to e0ercise its right to redeem within the period allowed and 17B transferred ownership of the 5 oil mills to 7*2'. $ years later, Bat:ak represented by ma:ority #.s, in/uired with 7*2' if it was still interested in negotiating the renewal of the voting trust agreement. 7*2' replied that its was no longer interested and re/uested turn"over of all Bat:ak assets and properties. Bat:ak demanded an accounting of all assets and properties and operations but 7*2' refused to comply. Bat:ak then filed an action for mandamus. '6* Ludge A/uino issued a TA8 prohibiting 7*2' from removing any record, report, or document or disposing all of the properties of Bat:ak, and allowed Bat:ak to inspect the same. Bat:ak then moved for the appointment of a receiver. 7*2' and 17B opposes, but overruled by '6*. )As denied. .: Bat:ak premises its right to possession through the receivership of the $ oil mills in the voting trust agreement, claiming that under said agreement, 7*2' was constituted as trustee of the assets, management, and operations of Bat:ak, and that due to e0piration of the agreement, 7*2' should turn over the assets to Bat:ak. Bhat was assigned to 7*2' was the power to vote the shares of stock representing %4= of #.s, who are signatories to the agreement. 7owhere in the agreement is mention made of any transfer or assignment to 7*2' of Bat:ak9s assets operations and management. 7*2' was constituted as trustee only of the voting rights of %4= of outstanding shares. Bhat was to be returned by 7*2' as trustee to Bat:ak9s #.s upon termination of the agreement, was the certificates of stock, not the properties or assets which were never delivered to 7*2' in the first place. The ac/uisition of 17B and 7*2' of the properties was not in its capacity as trustee but as a creditor in accordance with the financing agreement. #' failed to appreciate the fact that the voting trust was obtained from the #.s of the borrowing corporation precisely to allow 17B"7*2' to have management and undertake control in the operations of the borrowing corporation *n this case, the -TA was part and parcel of the loan arrangement, and should have been considered by the 'ourt as a means by which the lending institution obtains control over the management or operation of the borrowing corporation, and not merely as a transfer only of voting or other rights pertaining to the shares

>TA as $a-t f L an A9-ee4ent -TA as part of loan agreement can e0ceed years as an e0ception to the rule that -TAs cannot be for more than years -TA as part of loan agreement ensures that the lending institution would have a controlling interest in corporate votes 'onstitutes further security to the lending institution *n reality, the lending institution would have very little interest in the operations of the corporation as to re/uire a voting trust

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2efinition: an agreement between two or more #.s to vote their shares the same way. Through this kind of agreement, #.s who individually own only a minority of the shares but together represent the ma:ority, can obtain control of the management of the corporation. ;sually relates to the election of directors, which may either specify the name of the nominees to be voted for, or the number shares to be voted as a unit *n case of disagreement: arbitration #ince pooling agreements personal obligations to do, then although valid it cannot be enforced by action for specific performance These agreements have been upheld as valid provided they do not limit the discretion of the board or work fraud against the other #.s o E0. An agreement that directors once elected must vote for certain persons as officers would be void, since the choice of officers is vested in law in the board -oting agreement vs. voting trust: -A does not involve a transfer of stocks but is merely a private agreement between and among #.s to vote the same way. Breach would therefore give rise to liability for damages. *n close corporations: #ec &44:

(. '343lati1e 1 tin9 the system of cumulative voting gives the minority an opportunity to elect a representative to the board it is vital to both the ma:ority and the minority to cumulate their votes so that they can get as many seats as possible f s"a-es &Sec 6)

/. 'lassifi'ati n

device of classification of shares can be used to achieve the allocation of control desired by the parties if shares are classified into common voting and preferred non"voting shares, the management of corporate affairs will be controlled by whoever owns the ma:ority of the common voting, even though it may only be a minority of the total number of shares (voting and non"voting! control would depend not on the amount of investment, but on the number of voting shares ac/uired if non"voting shares are non"redeemable, the prospect that the investor may get back his investment at some future time before dissolution would be a compensating factor #E': to prevent abuses, it re/uires where no dividends are declared for $ consecutive years despite available profits, that preferred stocks be given the right to vote for directors until dividends are declared

*n a close corporation, it is allowed to classify its directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock ). -est-i'ti n n t-ansfef s"a-es (#ec. 3F!

common e0ample: a restriction which gives a first option to other #.s and?or the corporation to ac/uire the shares of a #. who wishes to sell o peculiar to close corps 2. $-es'-i%in9 <3alifi'ati ns f - #i-e't -s: &Se'. (2 $a-./* f 3n#e-sG s"a-es &Se'. 2*

definition of the /ualifications of directors or trustees may be provided in the by"laws e0amples: o a by"law provision that only #.s with a stated minimum number of shares fully paid up may be elected as directors is valid (,ovt v El .ogar!

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a by"law that dis/ualify a #. who is competing with the corporation, as the corporation has the right to protect itself from persons who may use inside information to its pre:udice (,okongwei v #E'! o a by"law that only holders of Gfounders sharesH may /ualify for directorship (#ec E! e0ception to #ec % that non"voting shares shall be limited to preferred and redeemable shares year period non"e0tendible #E' approval 5. 4ana9e4ent ' nt-a'ts &Se'. ((* B82 may decide to enter into mgt contracts with another corporation The managing corporation will then perform all the managerial functions usually pertaining to a ,) B82 must still retain control of the basic corporate policies and power to recall the contract where the corporation9s interest would greatly suffer from its continuance 7ot an e0ception to #ec 5$ which lays down the fundamental principle that all corporate powers shall be e0ercised by the B82 B82 cannot abdicate its responsibility to act as a governing body by giving absolute powers to offices or others by way of management contracts The management contract is therefore a mere contract to manage the day"to"day affairs of the corporation :ust like a ,) *t is one for lease of services and is not of agency

S"e-4an D 0llis 1 In#iana ?3t3al Cas3alty C . 6: *ndiana )utual 'asualty 'o was organiCed to take over the business of an unincorporated association engaged in writing policies covering risks created by the *ndiana Borkmen9s 'ompensation +aw. *t ratified an agreement with #herman M Ellis by which the management of the casualty company was conferred upon #herman Ellis for 54 years. *ndiana )utual terminated its contract after some difficulties arose between #herman Ellis and the *ndiana state department in which the latter tried to appoint a receiver for *ndiana )utual. #herman sues for specific performance to enforce the contract. .: the contract provides that the underwriting and e0ecutive management for *ndiana )utual will be performed by Ellis, president of #herman Ellis, and may appoint another officer to be the chief e0ecutive head and underwriting manager of the company. *t also provides that the managing company (#herman Ellis! shall have general supervision and charge of underwriting affairs and shall be entitled to &4= of the net earned premiums collected from all policyholders. The grant of corporate power by a state is upon the hypothesis that these powers shall be e0ercised by the corporation9s officers, annually elected by the #.s and not by the officers of another corporation. Although generally corporations may for a limited period delegate to a stranger certain duties performed by the officers, there are duties the performance of which may not be delegated to outsiders. *n this case the period of control of the managing corporation is 54 years. 7othing of importance was left for the B82 but the mere ministerial duties. The agreement contemplated the substitution of #herman Ells for the officers of *ndiana )utual. The principal business of *ndiana was write casualty insurance, which is now solely e0ercised by #herman Ellis. 7o other conclusion can be drawn other than that *ndiana )utual was to be an instrumentality through which #herman Ellis was to conduct a casualty business in the state of *ndiana. 9. 3n3s3al 1 tin9 an# <3 -34 -e<3i-e4ents &Se'. 92* a device which in effect increases the veto power of the minority usually involves the formation of a corporation which has clearly efined ma:ority and minority blocks. o *n e0change for the numerical ma:ority in the board, the minority might bargain for a provision in the A8* giving them strong veto power in m:or corporate decisions *n close corps, a re/uirement in the A8* that unanimous vote of all #.s is necessary would only have the effect of maintaining the status /uo. Beninten#i 1 Eent n , tel. 5 men owned in e/ual amounts all the stock of a domestic business corporation, made an agreement to vote for and adopt the by"laws of the corporation,

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providing that no action should be taken by the #.s e0cept by unanimous vote of the #. present in person or by pro0y should be sufficient, that the directors of the corporation should be the $ person receiving the unanimous vote of all #.s, that no action shall be taken by the directors e0cept by unanimous vote of all directors. The minority #.s sued to have the by"laws ad:udged valid and to en:oin the ma:ority from doing anything inconsistent therewith. .: the device is intrinsically unlawful because it contravenes an essential part of #tate policy. But a re/uirement, that there shall be no election of directors unless every single vote be cast for the same nominees is in direct opposition to the rule that the receipt of plurality of votes entitles a nominee to election. The by"law which re/uires unanimous action of #.s to pass any resolution or take action of any kind, is e/ually obno0ious to the statutory scheme of stock corporation management. The whole concept of a representative government in a corporation, with voting conducted conformably to statute, and with the power of decision lodged in certain fractions of the stock, is destroyed when the #.s by agreement or by"law or A8* provision as to unanimous action, give the minority interest an absolute, permanent and all"inclusive power of veto. The last by"law makes it impossible for the directors to act on any matter e0cept by unanimous vote of all of them. #uch a by"law is almost unworkable and unenforceable because, prima facie in all acts done by a corporation, the ma:or number must bind the lesser, or else differences could never be determined. Every corporation is given the privilege of enacting a by"law fi0ing its own /uorum re/uirement at a fraction not less than that mandated by law. But the very idea of a /uorum is that when that re/uired number of persons goes into session as a body, the votes of a ma:ority thereof are sufficient of binding action. 2issent: Bhile the 5 by"laws are indeed invalid because it is violative of the statutes, the courts should nonetheless enforce against either #. the agreement made by both of them which finds e0pression in those by"laws. De1i'es affe'tin9 ' nt- lL' 44 n #en 4inat - is t"e ' nt-a't3al %li9ati n #.s 78T of record: 'A778T vote, 'A778T be vote for 8nce voting rights are e0ercised by another, voting rights of the owner of shares are already impaired 1ro0ies: pro0y holder is an agent o 2oes it affect ownership rightsQ 7o. Aegistration of sharesQ 7o o Bhy do * need themQ 7o distinct and clear ma:ority to collate enough votes to form ma:ority Biggest #.s@ #hares are so widely held?dispersed o "year term of pro0ies only applies to revocable pro0ies o voting trusts and pro0ies coupled with an interest (security for obligations! o GdeemedH to have sufficient interest pledgor"pledgee: interest of pledgee in ensuring that the value of stock used as security may not be impaired, and may be sold at a premium to $ rd parties at public auction in case obligors?debtors defaultK -oting trust: beneficial owner is #.@ legal ownership is trustee o Aegistration with #E' and corporation of stock certificate (effect is constructive notice to $rd parties! o All stock certificates issued in name of participating #.s are presented for cancellation and issuance of new ones@ voting trust certificates are issued by the trustee o 8rig #.s are delisted@ replaced by trustees with notation that it holds stocks of orig #.s o The corp has no concern with the relation of #. and trustee o #. still has naked title@ he can still sell the shares by selling the -T'. But trustee is now #. of recordS o Total divorce of voting rights -oting rights: trustee@ Economic rights: #. o -TA is binding on participants even if there is disposition of the -T' 'an trustee sell sharesQ 78S it holds it in trust 'an transferee of -T' vote the sharesQ 78S only the trustee

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8nly binding arrangement would be the fiduciary arrangement *n pro0ies without an interest and pooing agreements, 78 fiduciary natureS o >ey to determining w?n -TAs e0ist: trustee e0ercises 2*#'AET*87 as to the vote, but it may also be consensual, i.e. trustees can agree among themselves who to vote There is also delegation of authority@ *t is not the corporation constituting the -TA, it is the #.sS 1ooling agreements: reciprocal arrangement of those who reach a consensus to e0ercise right to vote separately, but shares remain with #.s 'onsideration for voting devices o sufficient consideration: *n 'lark, *1A, services, Gsecret formulaH@ *n .arkert, loan?investment@ *n Aingling, A6A@ in Avalon, 1# with econ rights o #o long as consideration is in place, obligation satisfactorily performed, voting agreement is :ustified, enforceability should be thereS )anagement contracts: *s the manager?managing corp a trusteeQ 78K covered by contract Effect of higher /uorum or voting re/uirements o 'ontrolling interest of the corporation can be vetoed by the minority o Bould affect disposition of corporate assets o 'ontrolling interest has the authority to formulate the policies o Anarchy?tyranny of the ma:ority

S,AR0S

OF STOCES

#tockholders: owners of shares in a corporation which has a capital stock )embers: 'orporators of a corporation which has no capital stock #tockholders or members have residual power over fundamental corporate changes like amendment of the articles of incorporation S"a-es

A. S3%s'-i$ti n t

&. Subscription Contract Any contract for the ac/uisition of unissued stock in an e0isting or a corporation still to be formed shall be deemed a subscription contract, notwithstanding the fact that the parties may refer to it as a purchase or some other contract. (sec %4! Transfer for consideration of treasury shares is a sale by the corporation (not subscription!. A transfer of fully paid shares by a stockholder to a third person is a sale. But it seems that assignment by a subscriber of his unpaid subscription would re/uire that the re/uisites for valid release from subscription must be complied with #hareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set"off has no application 7ot necessarily re/uired to be in writing 5. 2re(incorporation subscription (#ection %&! 1re"incorporation subscription is a subscription for shares of stock of a corporation still to be formed. *t shall be irrevocable for a period of at least si0 (%! months from the date of subscription.

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*t can only be revoked, when: o when all of the other subscribers consent to the revocation, or o when the incorporation of the corporation fails to materialiCe within si0 (%! months or within a longer period as my be stipulated in the contract of subscription. After the submission of the articles of incorporation to the #E', no pre" incorporation subscription may be revoked.

F3a C3n 1 S344e-s. 6: 'hua #oco subscribed for 44 shares (1&44 par! of 'hina Banking 'orporation, paying Z and leaving a balance of 15 ,444. .e issued a 17 ifo 6ua 'un for the balance, securing the note with a ') on the shares of stock, and endorsing the receipt of the stock purchase!. 'hua #oco was also indebted to 'hina Bank (1$E,E$&.%F!, and upon default his interest in the 44 shareas was attached and the receipt seiCed by the sheriff. The attachment was levied after the bank knew of the fact that the receipt had been endorsed to 6ua 'un. 6ua 'un then sued, contending that by virtue of payment of Z the subscription price of the shares, 'hua #oco in effect became the owner of 5 4 shares and sought to have his lien on the shares be declared to hold priority over the claim of the bank. 'hina Bank argued that the interest of 'hua #oco was merely an e/uity which cannot be made the sub:ect of a '). T' ruled ifo 6ua 'un. .: T' erred in holding that 'hua #oco became owner of 5 4 shares. 6ua 'un9s rights consist in an e/uity of 44 shares and upon payment of the unpaid portion, he becomes entitled to the issuance of the certificate for 44 shares in his favor. As to the '), the ') would not prevail over liens of third persons without notice@ an e/uity in shares is of such an intangible character that is somewhat difficult to see how it can be treated as chattel and mortgaged in the same manner that the recording of the same will furnish constructive notice to third parties. There can be no doubt that an e/uity in shares of stock may be assigned and that the assignment is valid as between the parties and as to person to whom notice is brought home. #uch an assignment e0ists here, though it was made for the purpose of securing a debt. As against the rights of fua cun, the bank had no lien unless by virtue of the attachment, but the attachment was levied after the bank had received notice of the assignment of 'hua #oco9s interest to fua 'un and was therefore sub:ect to the rights of the latter. BaltaAa- 1 Lin9ayen @3lf 0le't-i' . 6: BaltaCar and Aose were incorporators of the +ingayen ,ulf Electric 1ower 'o. and subscribed to: BaltaCar R %44 shares (paid $ shares D after transfers, owned $(& shares w? cert. plus % shares w?o certificate! Aose R (44 shares (paid $E shares w? certs! leaving unpaid a certain portion thereof. *t is the company practice to issue certificates of stock to its individual subscribers for unpaid shares of stock. 2efendants ;ngson et al are small #.s ( [&44 shares! of the corporation, and are the ma:ority of the board. 'o"defendant Acena is the largest single #. with %44 shares and was responsible for election to the board of two of the ( ma:ority board members (;ngson ,roup!. BaltaCar was responsible for the election of the other 5 (BaltaCar ,roup!. ;ngson ,roup which controlled the corporation passed $ resolutions which threatened to e0pel the plaintiffs and prevent them from e0ercising their voting rights: (&! declaring watered stocks issued to Acena, BaltaCar, Aose and Lubenville of no value and cancelled the same@ (5! all unpaid subscriptions to bear interest, and all payments to be credited to interest first, capital debt second, and @ ($! all stock declared delin/uent on the accrued interest are incapacitated to avail of voting power. BaltaCar and Aose sought to allow them to vote their fully paid"up shares and to declare the resolutions invalid. A compromise deal was e0ecuted, but enforcement by the T' was en:oined by the ;ngon ,roup and asked for amendment. T' amended but was opposed by BaltaCar.

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The 'ourt then reversed the amending decision, ruling that all shares of the capital stock of the corporation covered by fully paid shares are entitled to vote in all meetings. BaltaCar claims that once a #. has subscribed to a certain number of shares, although he has made partial payments, but is issued a certificate for the paid"up shares, he is entitled to vote the whole number of shares subscribed, whether paid or not. The corporation counters that under the doctrine in the 6ua 'un case, a partial payment of a subscription does not entitle the #. to a certificate for the total number of shares subscribed by him, and his right consists only in e/uity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. *: B?7 a #. with a balance of unpaid shares subscribed is entitled to vote the latter .: <E#\ The present case does not come under the principle in 6ua 'un because it was the practice of the company since its inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. The present law re/uires as a condition before a #. can vote that his full subscription be paid in the case of no par value shares, and with respect to par value shares, the #. can vote the shares full paid, irrespective of the unpaid delin/uent shares. A corporation may now, in the absence of provisions in their by"laws to the contrary, apply payments made by subscribers either as full payment for the corresponding number of stock or as payment pro"rata to each and all the entire number of shares subscribed. *n this case, corporation chose to apply payments by the #.s to definite shares of stock and had full paid"up shares certificates for the payments. *ts call for payments of unpaid subscription and its declaration of delin/uency only affecting the remaining number of shares. .ere the corporation applied the payments made to the full par value of shares subscribed, instead of the accrued interest. This being the case, the application of payments must be deemed to have been agreed upon by the corporation and the #.s and cannot now be changed without the consent of the #.s concerned. *t would therefore result that a corporation may, upon the re/uest of an interested #., apply payments by them to the full par value of subscribed capital stock. #ince it was the practice of the corporation to issue stock certificates to not fully paid subscribers, it may not take away the right to vote granted by the certificate #tock certificates may be issued for less than the number of shares subscribed for o 1rovided the par value of each represented by the certificate has been paid o And it is not prohibited by the by"laws

Na1a 1 Pee-s ?a-.etin9 C -$. 6: ""1o was an incorporator of 1eers )arketing and subscribed to F4 shares (1&44 p.v.! paying 5 = of the amount of subscription. 7o certificate of stock was issued. ""1o sold to 7ava 54 of the shares. *n the deed of sale 1o represented that he was the absolute and registered owner of the 54 shares sold. "" 7ava re/uested the corporation to register the sale, but was denied because 1o had not fully paid the amount of subscription. (was informed that 1o was delin/uent in payment of his subscription and that corp had the claim to his entire subscription of F4 shares!. 7ava filed a mandamus action to compel the corporation to register the shares in the books. T' dismissed petition. ""7ava contends the ruling in 6ua 'un is not applicable in affirming corporation9s refusal to register in the books the sale to him of 54 shares. 7ava relies on the ruling in BaltaCar v +ingayen ,ulf Electric, which held that the corpo law re/uires as a condition before a #. can vote his shares that his full subscription be paid in the case of no par stock@ but in par value stocks, the #. can vote his shares fully paid by him, only, irrespective of the unpaid delin/uent shares. *: B?7 the corporation can be compelled to enter in its books the sale made by 1o to 7ava of 54 shares .: 78\\ The 7ava transfer is not the alienation sale or transfer of stock contemplated in the old +aw. As a rule, shares which may be alienated are those which are covered by certificates of stock.

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As prescribed in the corpo law, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. .owever, that cannot be followed in the instant case because the 54 shares are not covered by any stock certificate in 1o9s name. )oreover, a corporation has a claim on the said shares for the unpaid balance of the subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less contestable. A corporation cannot release an original subscriber from paying for his shares without valuable consideration, without the unanimous consent of the #.s. There is no clear duty here on the part of the officers of 1eers to register the 54 shares in 7ava9s name. The court also ruled that there is no parallelism between 7ava and the BaltaCar case. *n the latter, the #."incorporator was the holder of a stock certificate, and the issue was whether the said shares had voting rights although the incorporator had not fully paid the subscription, which is not the issue in this case. There is no stock certificate issued to 1o, and without itJwhich is the evidence of ownership of the stockJthe assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock certificate is essential for the protection of both the corporation and its #.s. 6ua 'un, +ingayen ,ulf and 7ava cases were all decided before the 'ode 6ua 'un: a contract of subscription is *72*-*#*B+E, unless the contrary is provided o 1artial payment 28E# 78T entitle the #. to the issuance of a certificate covering shares corresponding to the amount paid o 1ayment is in effect 1A8"AATE2 among all the shares, so that no one share is fully paid +ingayen ,ulf: shares may be deemed fully paid for the amount paid that corresponds thereto o *t was the practice of the corporation in +ingayen to issue certificates for stocks it considered to be fully paid, although the subscription has not been paid #E': in interpreting the two cases, a corporation has two (5! alternatives in applying payment for subscriptions: o Either apply the amount paid as full payment for the corresponding shares, (+ingayen! orK 'ertificate of stock would then be issued o K as payment pro"rata on each of the entire number of shares subscribed for (6ua 'un and 7ava! no certificate of stock may be issued until the subscription is full paid %(: no corporation can issue a certificate of stock until the subscriber has paid his subscription in full o applies to par and no"par shares o +ingayen gulf case no longer applies o #peaks of only of subscription

B. C nsi#e-ati n f - st '.s (#ec %5! #tocks shall not be issued for a consideration less than the par or issued price thereof. 'onsideration for the issuance of stock may be any or a combination of any two or more of the following: a! Actual cash paid to the corporation@ b! 1roperty, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation e/ual to the par or issued value of the stock issued o -aluation of consideration other than actual cash, or consists of intangible property such as patents of copyrights" initially be

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determined by the incorporators or the board of directors, sub:ect to approval by the #ecurities and E0change 'ommission. c! +abor performed for or services actually rendered to the corporation@ d! 1reviously incurred indebtedness of the corporation@ e! Amounts transferred from unrestricted retained earnings to stated capital@ and f! 8utstanding shares e0changed for stocks in the event of reclassification or conversion. 6air valuation is appraisal made in good faith 1rohibited consideration: #hares of stock shall not be issued in e0change for promissory notes or future service #ame consideration applies for the issuance of bonds by the corporation. 6i0ing of issued price of no"par value shares: The issued price of no"par value shares may be fi0ed: a! in the articles of incorporation or b! by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by"laws, or c! in the absence thereof, by the stockholders representing at least a ma:ority of the outstanding capital stock at a meeting duly called for the purpose. The value of the consideration received must be e/ual to the issue price of the shares of stocks which in no case shall be less than par Batered stock D shares issued as fully paid"up when in fact the consideration agreed to and accepted by the directors of the corporation was something known to be much less than the par value or issued value of the shares. Bater in stock refers to the difference between the fair market value at the time of the issuance and the par or issued value of said stock. #ubse/uent increase in the value of the property used in paying the stock does not do away with the water in the stock. The e0istence of such water is determined at the time of issuance of the stock.

'. Lia%ility f - wate-e# st '.s (#ec % ! Any director or officer of a corporation consenting to the issuance of stocks o for a consideration less than its par or issued value or o for a consideration in any form other than cash, valued in e0cess of its fair value, o or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

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&. *ssuance of stock certificates 2efinition Certificate of stoc+: *t is the document issued to stockholders evidence of their ownership of such number of shares in the corporation that issued the certificate. 7o certificate of stock shall be issued to a subscriber until the full amount of his subscription, together with the interest and e0penses (in case of delin/uent shares! if any is due, has been paid. (#ec %(! .ow issued: The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by"laws. (#ec %$! #hares are personal property D #hares of stock so issued are personal property and may be transferred (#ec %$! 5. Transfer of shares #hares of stock may be transferred as follows (#ec %$!: a! indorsed by the owner or his attorney"in"fact or other person legally authoriCed to make the transfer b! delivery of the certificate or certificates c! To be binding against third persons, transfer of shares should be recorded in the books of the corporation showing therein the ff.: names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. 7o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation (#ec %$!. Transfer of shares not tainted with any irregularity shall be valid as between the parties. 1urpose of registration a! enable the transferee to e0ercise all the rights of a stockholder b! to inform the corporation of any change in share ownership so that it can ascertain the persons (a! entitled to the rights (b! sub:ect to the liabilities of a #. c! until registration is accomplished, the transfer, though valid between the parties, cannot be effective against the corporation Effect of lack of registration: a! transferee cannot vote b! transferee cannot be voted for c! an outsider d! cannot prevail over rights of a subse/uent attaching creditor e! not entitled to dividends f! stockholder on record has the right to participate in meetings.

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;nauthoriCed transfers: a! certificates indorsed in blank D where the stockholder indorses his certificate in blank in such a manner as to clothe whoever may be in possession of it with apparent authority to deal with the shares as the latter9s own, he will be estopped from claiming the shares as against a bonafide purchaser. This is called the theory of /uasi"negotiability b! forged transfers D if the corporation should issue a new certificate pursuant to a forged transfer, it incurs no liability to the person in whose favor it issued it and may demand its return for cancellation. *t is the duty of the purchaser to determine that the indorsement was genuine. But with respect to a subse/uent purchaser in good faith and for value, the corporation is estopped from denying the validity of the newly issued certificate because by issuing such, it has represented that the person named therein is a stockholder of the corporation. E0cept where recognition of the original and new subscriber will result to an overissue of shares. The new #. would now have right to damages against the corporation and the latter against those who made false representations. A capital gains ta0 return must be presented ? doc stamps paid to corporate secretary before transfer is effected in the books of the corporation.

Bitong v. CA A certificate of stock cannot be considered issued in contemplation of law unless signed by the president or vice president and countersigned by the secretary or assistant secretary. The rule is that the endorsement of the certificate of the stock by the owner or his attorney D in D fact or any other person legally authoriCed to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. Thus, for a valid transfer of stocks, the re/uirements are as follows: a! There must be delivery of the stock certificate@ b! The certificate must be endorsed by the owner or his attorney"in"fact or other person legally authoriCed to make the transfer@ and c! To be valid against third parties, the transfer must be recorded in the books of the corporation.

Sunset View Condominium Corp v Campos #unset -iew 'ondominium corporation filed suit against Aguilar"Bernares Aealty and +im #iu +eng for collection of assessments levied on their respective condominium units which they bought on installments and had not yet fully paid

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Aespondents not shareholders of condominium corporation because they are not yet fully paid a! #ec 'ondominium Act D shareholding in a condominium corporation will be conveyed only in a proper case b! #ec ( of 'ondominium Act leaves to )aster 2eed the determination of when shareholding will be transferred to purchaser of a unit c! )aster 2eed provides that only owner of unit is a shareholder and that ownership of unit is ac/uired by purchaser sub:ect to conditions and terms of the instrument conveying the unit to such purchaser. d! 2eed of 'onveyance provide that ownership is conveyed only upon full payment of purchase price e! #ec &4 'ondominium Act D )embership in 'ondominium corporation shall not be transferable separately from condominium unit of which it is an appurtenance

Rivera v Florendo Akasako, allegedly the real owner of the shares of stock in the name of Aivera sold shares to Tsuchiya 8ther stockholders sold shares to them as well Thereafter, Aivera refused to make indorsement 'orporation refused to register the stock certificates Action for mandamus to cause registration of stock certificates This is not intra"corporate, Tsuchiya is an outsider and not yet owner of shares unless and until registered 2ispute cannot be the sub:ect of mandamus. 'orporate #ecretary cannot be compelled to register the transfer a! #hares of stock in /uestion (Aivera shares! are not even indorsed by registered owner. Tsuchiya and Lureidini has no clear legal right. b! Even the shares of stock purchased from other incorporators cannot be sub:ect of mandamus on the strength of mere indorsement of supposed owners without e0press instructions from them. c! These issues will have to be threshed out in an ordinary action

Abejo v dela Cruz Teletronics purchased shares of 1ocketbell from the Abe:o spouses and -irginia Braga, the latter being indorsed in blank 'orporate secretary refused to register the transfer due to alleged failure to respect pre"emtive rights Action for mandamus by Abe:o and Teletronics to compel corporate secretary to register the transfer This is an intra"corporate dispute a! *ssue on pre"emptive right is between stockholders, *.e., Braga9s pre" emptive right and Abe:o9s right to transfer

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b! -irginia9s street certificate is within special competence and :urisdiction of the #E' dealing with free transferability of corporate shares c! There is no re/uirement that stockholder must be registered in order that #E' may take cogniCance d! )andamus is proper e! Aegistration of the valid transfer of shares of stock involves a ministerial duty on the part of the corporate secretary f! The issue is not the ownership of shares but the non"performance of the 'orporate #ecretary of a ministerial duty

Tan v SEC Alfonso Tan is owner of (44 shares in -isayan Educational #upply 'orp evidenced by certificate 7o. 5 Alfonso transferred 4 shares to Angel 'ertificate 7o. 5 was cancelled and 'ertificate 7o. % was issued to Angel and 'ertificate 7o. F was issued to Alfonso. .owever, Alfonso did not make the proper endorsement and did not make delivery of cerificate no. 5 +ater on, Alfonso Tan elected to withdraw from the corporation. *n e0change for his shares, he received stocks in trade 'ertificate 7o. F was later on cancelled due to above After several years, Alfonso Tan filed a case with 'ebu #E' /uestioning the cancellation of his stock certificates despite non"endorsement and lack of delivery 2elivery and endorsement under # %$ of the corporation code is not mandatory because of the use of the word may 2elivery is not essential where it appears that the persons sought to be held as stockholders are officers of the corporation and have custody of the stock book as in this case To hold that cancellation of certificate of stock of Alfonso is null and void because of lack of delivery and endorsement of mother certificate of stock no. 5 which was deliberately withheld is to prescribe restrictions on the transfer of stock in violation of corporation law

Razon v IAC 'hudian was issued &, 44 shares at E AaCon *nc with the corresponding stock certificate no $ #aid stock certificates was delivered to Enri/ue AaCon allegedly because it was the latter who paid for all the subscription on the shares of stock in defendant corporation with the understanding that has was the owner of said shares of stock and was to have possession until such time as he was paid by other nominal incorporators?stockholders

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+ater on, parties delivered it for deposit with bank under the :oint custody of the parties Administrator of the estate of 'hudian filed a complaint against Enri/ue AaCon et al praying that the said stock certificates be delivered to estate of 'hudian along with all cash and stock dividends and pre"emptive rights accruing thereto. 'hudian is still owner a! #hares of stock is transferred by delivery and endorsement of the stock certificate b! #uch mode of transfer is not complied with in this case c! *n the books of the corporation, 'hudian is still the owner of the stocks. .e was even elected member of the board which proves that he is a stockholder d! 8ne who claims ownership should show that the same was trasferred to him in accord with the valid mode of transfer. This petitioner failed to show e! Endorsement is a mandatory re/uirement of law for an effective transfer

Rural Bank of Salinas v CA ,uerrero, 1resident of Aural Bank of #alinas and owner of shares in said corporation e0ecuted a #pecial 1ower of Attorney to his wife )elania giving her full power to sell or otherwise dispose of shares of stock of the Bank Before death of 'lemente, )elania, pursuant to said #1A, e0ecuted deed of Assignment of former9s shares After death of 'lemente, )elania presented to bank deed of assignment for registration which the bank refused )andamus filed by )elania to compel bank to register the transfer Transfer before death valid, stock not yet part of estate #hares of stock are personal property and may be transferred by delivery. Aegistration in corporate books is not necessary The transfer effected in this case is valid The corporation may not impose any restriction on such transfer The right of transferee?assignee to have stocks transferred to his name is inherent right, duty of the corporation to register the transfer is ministerial

Batangas aguna Ta!abas Bus Co" v Bitanga 2olores, )a0, )ercedelin 1otenciano, 2elfin <oro and )aya industries entered into #ale and 1urchase Agreement of their shares at Batangas +aguna Tayabas Bus 'ompany with B)B 1roperty .oldings represented by Bitanga. A month after, Bitanga and +im were elected board of directors

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#tockholders meeting on 7ov 5F, &33E elected Bitanga as 'hairman of the Board and +im as 'E8 The ne0t stockholder9s meeting was set on )ay &3, &33F. )a:ority stockholders attended hence meeting continued despite a postponement notice. The 1otencianos were re"elected The Bitangas, however, refused to relin/uish management contending the stockholder9s meeting was void because it was )ichael 1otenciano himself who re/uested postponement and there was no /uorum because B)B .oldings representing 4.5%= of B+TB shares were not present )eeting and Election valid Transfer of shares is not valid unless recorded in the books of the corporation The transfer of shares from the 1otenciano group to the Bitanga group has not yet been recorded in the books of the corporation *t is the 1otenciano group, in whose name the shares still stand were the ones entitled to attend and vote at the stockholders meeting ;ntil registration is accomplished, the transfer, though valid between the parties cannot be effective against the corporation. The unrecorded transferee cannot vote nor be voted for

Rural Bank of ipa v CA -illanueva e0ecuted a 2eed of Assignment of his shares in Aural Bank of +ipa in favor of stockholders of the Bank represented by its directors Bautista, custodio and >atigbak #ometime thereafter, he e0ecuted an Agreement recogniCing indebtedness to said Bank, assured the board that they will pay the debt otherwise Bank would be entitled to li/uidate their shareholdings -illanueva failed to settle obligation. Bank converted their shares to treasury stocks #tockholders of Bank met, -illanuevas were not notified -illanueva filed a petition for annulment of stockholder9s meeting and election of directors and officers )eeting *nvalid 'orporation 'ode specifically provides under #ec %$that to effect a valid transfer, there should be delivery of stock certificate endorsed by the owner a! Assignment of the shares in the case at bar was not coupled with delivery, this is a fatal defect b! Title may be vested in the transferee only by delivery of duly endorsed certificate of stock c! There must be strict compliance with mode of transfer prescribed by law d! 2eed of 'onveyance provide that ownership is conveyed only upon full payment of purchase price

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Transfer could be valid between the parties but this does not necessarily make transfer effective 1etitioners as mere assignees cannot en:oy the status of stockholders f s"a-es f st '.

E. Ple#9e

im Ta! v CA #y ,uiok and #y +im pledged their shares in ,o 6ay and 'o to +im Tay. They endorsed their respective share in blank and delivered the same to +im Tay #y ,uiok and #y +im failed to pay hence +im Tay went to the corporate secretary to ask the registration of the shares in his name. 'orporate secretary refused +im Tay instituted an action for mandamus at #E' to compel corporate secretary to register 'orporate9s secretary cannot be compelled to record transfer The duty of a corporate secretary to record transfers of stocks is ministerial o .owever, he cannot be compelled to do so when the transferees title to said shares has no prima facie validity or is uncertain )andamus will not issue to establish a right but only to enforce one already established. +im Tay failed to establish a legal right to have the shares registered in his name. o +im Tay failed to establish a legal right. .e is not owner of the shares without foreclosure and purchase at auction. .e is merely a pledgee. f s"a-es

6. Atta'"4ent

#ar$ia v %omouad *n a case for a collection of a sum of money, spouses Atinon obtained a :udgement against 2ico. Bhen :udgement became final and e0ecutory, sheriff Lomouad proceeded with the e0ecution and attached shares of 2ico in 'ebu 'ountry 'lub. #aid shares was levied and public auction thereof scheduled ,arcia filed action for in:uction on the following grounds: a! that ,arcia is the actual owner of the shares and merely lent the shares to 2ico as manager of his auto supply to assist him in entertaining clients b! when 2ico resigned, he returned to ,arcia the stock certificate. c! 2ico e0ecuted a deed of Transfer covering said stock certificate but this was not recorded d! 2ico resigned as proprietary member of the club and such was accepted by the B82 of the club

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The attachment prevails over the unrecorded transfer (from 2ico to ,arcia! ;nrecorded transfers are valid only as between parties to such transfer. All transfer of shares not so entered are invalid as to attaching or e0ecution creditors of the assignors as well as to the corporation and to subse/uent purchasers in good faith regardless of whether the attaching creditor had knowledge of the transfer or not @. =n$ai# S3%s'-i$ti ns &. Effects: ;npaid: a! .olders of subscribed shares not fully paid which are not delin/uent shall have all the rights of a stockholder. (#ec E5! b! 7o certificate of stock shall be issued to a subscriber until the full amount of his subscription, together with the interest and e0penses (in case of delin/uent shares! if any is due, has been paid. (#ec %(! c! 7o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation (#ec %$!. d! 7o registration?transfer of unpaid shares D does not necessarily mean that there is a previous call. As long as a portion of the subscription price remains unpaid, shares are not transferable on the books of the corporation

2elin/uent a! Any cash dividends due on delin/uent stock shall first be applied to the unpaid balance on the subscription plus costs and e0penses, while stock dividends shall be withheld from the delin/uent stockholder until his unpaid subscription is fully paid. (#ec ($! b! 7o delin/uent stock shall be: o voted for or o be entitled to vote or to o representation at any stockholderIs meeting, nor shall the holder thereof be entitled o to any of the rights of a stockholder c! E0cept the right to dividends in accordance with the provisions of this 'ode, until and unless he pays the amount due on his subscription with accrued interest, and the costs and e0penses of advertisement, if any. (#ec E&! d! 7ote that the provision on dividends pertain to delin/uent stock hence a call must have been made

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e! #tock dividends on delin/uent shares are not applied but are included in delin/uency sale wherein it is li/uidated 5. *nterest on unpaid subscriptions #ubscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so re/uired by, and at the rate of interest fi0ed in the by"laws. *f no rate of interest is fi0ed in the by" laws, such rate shall be deemed to be the legal rate. (#ec %%!

$. .ow to collect unpaid subscriptions (#ection %E and E4! Bhen call is necessary: board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. (#ec %E! 'ourt action to recover unpaid subscription: 7othing in this 'ode shall prevent the corporation from collecting by action in a court of proper :urisdiction the amount due on any unpaid subscription, with accrued interest, costs and e0penses. (#ec E4!

(. .ow do shares become delin/uent (#ection %E! 1ayment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. 6ailure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by" laws, computed from such date until full payment. *f within thirty ($4! days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delin/uent and shall be sub:ect to sale as hereinafter provided, unless the board of directors orders otherwise. 2espite the fact that the subscription is partially paid, the entire subscription becomes delin/uent . 1rocedure for delin/uency sale (#ection %F! a! The Board of 2irectors must make a call by resolution demanding the payment of the balance of the subscription. This is called the Pnotice of call.P b! The notice of call shall be served on each stockholder either personally or by registered mail. At this point, there is no need for publication.

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c! *f the stockholder does not pay the amount on the date designated in the notice, the Board shall issue, by resolution, a Pnotice of delin/uency.P d! 7otice of delin/uency shall be served on the non"paying subscriber either personally or by registered mail, 1+;# publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for two (5! consecutive weeks. The notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than $4 days nor more than %4 days from the date the stocks become delin/uent. e! The amount due in the notice must include all e0penses: publication, legal, etc. o 7ote: the notices are :urisdictional. f! *n the public auction, the highest bidder is one who is willing to pay the balance of the subscription for the least number of shares. The corporation will give the highest bidder the certificate of stock in the number of his bid@ the remaining number will be issued a certificate of stock in favor of the subscriber as fully paid. *f there are no bidders, the corporation must bid for the whole number of shares regardless of how much the stockholder has paid. #uch stocks will pertain to the corporation as fully paid treasury stocks. %. Bhen sale may be /uestioned (#ection %3! 7o action to recover delin/uent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delin/uent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate@ and 7o such action shall be maintained unless it is commenced by the filing of a complaint within si0 (%! months from the date of sale. *ssuance of 'ertificate D 8nce full payment for the stocks have been tendered to the corporation in any of the valid forms of consideration for the issuance of stocks, the purchaser or the subscribers entitled to be issued the corresponding certificate of stock which evidences their ownership of shares in a particular corporation

Apo$ada v & RC Apocada was employed in *ntans 1hil wherein he subscribed to & 44 shares .e subse/uently resigned and instituted a complaint with 7+A' against corporation for payment of unpaid wages, cola, balance of gasoline and representation e0penses, bonus

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'orporation applied what is due to Apocada the balance of his unpaid subscription #et"off is not proper o unpaid subscriptions are not yet due and payable. They become due and payable when a call is made by the corporation. There is no such call yet o set-off against wages not valid under labor code - #est- ye# 'e-tifi'ates (#ection E$!

,. L st

rocedure for re-issuance in case of loss, stolen or destroyed certificates &. The registered owner of certificates of stock or his legal representative shall file with the corporation an affidavit setting forth, if possible: a! the circumstances as to how the certificates were lost, stolen or destroyed@ b! the number of shares represented by each certificate, the serial numbers of the certificates@ c! the name of the corporation which issued the same@ d! such other information and evidence which he may deem necessary. 5. The corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for $ consecutive weeks at the e0pense of the owner. $. After the e0piration of one (&! year from the date of the last publication and if no contest has been presented, the corporation cancel in its books the certificate of stock and issue in lieu thereof new certificates of stock. The right to make such contest shall be barred after the e0piration of the one"year period. (. Even before the one year period e0pires, the new certificates may be issued if the registered owner files a bond or other security, running for a period of one (&! year for a sum and in such form and with such sureties as may be satisfactory to the Board of 2irectors. 1rovided, that if there is a pending contest regarding the ownership of said certificates, the issuance of new certificates shall be suspended until the final decision of the court. o 7ote: E0cept in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against the corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure.

STOCE,OLD0RS

HLP2009-3B
A. F3n#a4ental Ri9"ts &. 5. $. (. . %. f a St '." l#e- in a C -$ -ati n

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To have an evidence of ownership of stock issued to him To vote at meetings of stockholders in a corporation To receive profits (dividends! from the corporation To participate in the distribution of corporate assets upon dissolution *n certain cases, appraisal right To transfer his shares of stock f St '." l#e-s

B. ?atte-s -e<3i-in9 1 te

&. 5?$ of 8utstanding #tock along with ma:ority of the board: a! Amendment of A* b! E0tending and #hortening 'orporate Term c! *ncreasing ? 2ecreasing capital stock ? bonded indebtedness d! #ale or disposition of all, substantially all of corporate assets e! *nvestment of corporate funds in another corporation or for a purpose other than main purpose f! *ssuance of stock dividends g! 'orporate mergers or consolidation h! -oluntary dissolution of the corporation whether or not creditors are pre:udiced 5. 5?$ of outstanding stocks a! Aemoval of directors b! Aatification of contract with director or officer where first two re/uisites of sec $5 are lacking c! Bhere stockholders of managed corporation own more than &?$ of outstanding capital stock entitled to vote of the managing corporation are also the ma:ority of the board of managed corporation, such 5?$ vote is re/uired to approve management contract d! 2elegation to the board to amend, repeal by"laws or adopt new by" laws $. )a:ority of 8utstanding stocks with ma:ority of the board a! Approval of management contract b! Amendment to by"laws, repeal of by"laws, adoption of new by"laws (. )a:ority of outstanding stock a! 6or /uorum in electing members of the board by cumulative voting b! ,rant of compensation to members of the board c! Adoption of original by"laws d! Aevocation of delegated authority to the board of directors to amend or repeal or adopt new by"laws . The right to vote of non"voting stockholders may be limited or broadened to the e0tent specified in the A* or by"laws, however, they may still vote in instances specified in the code.

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The right to vote is significant because it is the only way that a stockholder can have a voice in the management of corporate affairs

&. 1ledgors, mortagors, e0ecutors, receivers and administrators (#ection ! *n case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders ;7+E##, the pledgee or mortgagee is e0pressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. E0ecutors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written pro0y. 5. Loint owner of stocks (#ection %! The consent of all the co"owners shall be necessary in order to vote, ;7+E## there is a written pro0y, signed by all the co"owners, authoriCing one or some of them or any other person to vote such share or shares 1A8-*2E2, That when the shares are owned in an Pand?orP capacity by the holders thereof, any one of the :oint owners can vote said shares or appoint a pro0y therefor. $. Treasury shares (#ection 3 and #ection E! These are shares of stock which have been issued and fully paid for but subse/uently re"ac/uired by the issuing corporation by purchase, redemption, donation or through some other lawful means. #uch shares may again be disposed of for a reasonable price fi0ed by the B82. Treasury shares shall have no voting right as long as such shares remain in the Treasury. (. 1ro0ies (#ection F! #tockholders and members may vote in person or by pro0y in all meetings of stockholders or members. Ae/uirements of pro0ies: a! in writing (oral pro0ies are not valid! b! signed by the stockholder or member c! filed before the scheduled meeting with the corporate secretary ;nless otherwise provided in the pro0y, it shall be valid only for the meeting for which it is intended. 7o pro0y shall be valid and effective for a period longer than five ( ! years at any one time (continuing pro0y!. )eaning of proxy: a! 1erson duly authoriCed by stockholder or member to vote in his behalf in a stockholders or members meeting. 1ro0y is an agent for a special

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purpose thus the general rules of agency would normally apply to the relationship created by pro0y b! 6ormal authority given by the holder of the stock who has the right to vote it to another to e0ercise the voting rights of the former c! *nstrument or document which evidences the authority of the agent 6ailure to comply with re/uirements will render pro0y void and ineffective. 1ro0y is revocable even when it is e0pressly provided to be irrevocable unless it is coupled with an interest Aevocation may be made orally, in writing or implied: a! appearance of the stockholder at the meeting will terminate the pro0y b! death of the stockholder will also terminate the pro0y

. 0oting trust (#ection 3! 2efinition: An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not e0ceeding five ( ! years at any time. The arrangement is embodied in a document called a voting trust agreement (-TA! A voting trust which is specifically re/uired as a condition in a loan agreement may be for a period e0ceeding five ( ! years but shall automatically e0pire upon full payment of the loan. Ae/uirements of a -TA: a! in writing b! notariCed c! shall specify the terms and conditions thereof d! certified copy of such agreement shall be filed with the corporation and with the #E' o 8T.EAB*#E, said agreement is ineffective and unenforceable 1rocedure: a! The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. b! *n the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. c! The trustee or trustees shall e0ecute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. Aight to inspect -TA: The voting trust agreement filed with the corporation shall be sub:ect to e0amination by any stockholder in the same manner as any other corporate book or record. The transferor and the trustee or trustees may e0ercise the right of inspection of all corporate books and records in accordance with the provisions of this 'ode. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust

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agreement, and thereupon shall be bound by all the provisions of said agreement. Aestriction: 7o voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Automatic e0piration of rights under the -TA: ;nless e0pressly renewed, all rights granted in a voting trust agreement shall automatically e0pire at the end of the agreed period. The voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by pro0y unless the agreement provides otherwise. 1urpose D to make possible a unified control of the affairs of the corporation and consistent policy@ to make possible for a ma:ority group of shareholders to dispose of a beneficial interest in a large proportion of their shares and still retain control of the corporation through the voting trustee Ae/uirements for a valid voting trust agreement: a! in writing and notariCed b! certified copy must be filed with the corporation as well as with #E' c! must not be for a period longer than years although may be renewed each time for not more than years d! certificates of stock must be cancelled, new ones issued to trustee stating therein that they were issued pursuance of the voting trust agreement e! entered on the corporate books with a similar statement f! should not be for an illegal purpose #tatus of transferee and transferor: a! voting trustee is only a share owner vested with apparent legal title for the sole purpose of voting upon stocks that he does not own b! transferring stockholder retains the right of inspection of corporate books which he can e0ercise concurrently with the voting trustee 1owers and rights of voting trustees: a! right to vote and other rights pertaining to the shares in their names sub:ect to terms and conditions of and for the period specified in the agreement b! vote in person or by pro0y unless agreement provides otherwise c! rights of inspection of corporate books and records d! legal title holder D /ualified to be a director +imitations on voting trust agreements: a! should not e0ceed years e0cept if a condition in a loan agreement, shall automatically e0pire upon full payment of the loan b! must not be for purposes of circumventing the law against monopolies and illegal combinations in restraint of trade

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c! must not be used for purposes of fraud d! must be in writing, notariCed, specify the terms and conditions thereof e! certified copy must be filed with corporation and #E' otherwise unenforceable f! agreement is sub:ect to e0amination by stockholder g! shall automatically e0pire at the end of the agreed period h! vote in person or by pro0y unless agreement provides otherwise i! rights of inspection of corporate books and records 2istinction between pro0y and voting trust 1ro0y -TA +egal title 7o legal title Ac/uires legal title Aevocability Aevocable unless coupled *rrevocable if validly with interest e0ecuted E0tent of 'an only act at a specified 7ot limited to any particular power stockholder9s or meeting member9s meeting Bhen to vote Absence of the owner Even when owner is present 2uration ;sually shorter but cant ;sually longer but cant e0ceed years e0ceed years e0cept in loan agreements %. 2ooling agree ent (#ection &44! Agreement between 5 or more stockholders to vote their shares in the same way ;sually relate to election of directors 1arties often provide for arbitration in case of disagreement -alid as long as they do not limit the discretion of the B82 in the management of corporate affairs or work any fraud against stockholders not party to the contract 2oes not involve a transfer of stocks but is merely a private agreement Agreements by stockholders (#ec &44!: o Agreements by and among stockholders e0ecuted before the formation and organiCation of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the e0tent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, e0cept those re/uired by this Title to be embodied in said articles of incorporation. o An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in e0ercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them.

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o

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7o provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: 1rovided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this 'ode on directors. To the e0tent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. #aid stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably ade/uate liability insurance.

E. 7on"voting shares (#ection % ! 7o other shares may be deprived the right to vote e0cept preferred or redeemable shares #ec usually re/uires preferred stocks to be given the right to vote if dividends were not declared for $ consecutive years #hares which has, generally, no voting rights@ e0cept in the following circumstances: a! Amendment of the A8* b! Adoption and amendment of by"laws c! #ale, lease, e0change, other disposition of all or substantially all of the corporate property d! *ncurring, creating or increasing bonded indebtedness e! *ncrease or decrease of capital stock f! )erger and consolidation g! *nvestment of corporate funds in another corporation or business h! 2issolution of the corporation F. *T6 shares D Gin trust forH 3. And?or shares (#ection %! That when the shares are owned in an Pand?orP capacity by the holders thereof, any one of the :oint owners can vote said shares or appoint a pro0y therefor. D. A$$-aisal -i9"t &. 2efinition (#ection F&!

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This is a remedy available to a stockholder who dissented and voted against certain e0traordinary matters to withdraw or get out of the corporation by demanding payment of the value of his shares

5. *nstances of appraisal right (#ection F&! a! *n case any amendment to the articles of incorporation which has the effect of: b! changing or restricting the rights of any stockholder or class of shares, or c! authoriCing preferences in any respect superior to those of outstanding shares of any class, or d! e0tending or shortening the term of corporate e0istence e! *n case of sale, lease, e0change, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the 'ode@ and f! *n case of merger or consolidation g! E0tension or shortening of the term of the corporation (#ection $E! h! *n case of investment of corporate funds in another corporation or business or for any other purpose (#ection (5! $. Bhat are the re/uirements for the successful e0ercise of appraisal rightQ (#ection F5 and F%! By making a written demand on the corporation within thirty ($4! days after the date on which the vote was taken for payment of the fair value of his shares o 6ailure to make the demand within such period shall be deemed a waiver of the appraisal right. By surrendering the certificate or certificates of stock, the corporation shall pay the fair value thereof as of the day prior to the date on which the vote was taken, e0cluding any appreciation or depreciation in anticipation of such corporate action. !f within a period of sixty "#$% days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three "&% disinterested persons o 8ne of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen The findings of the ma:ority of the appraisers shall be final The award shall be paid by the corporation within thirty ($4! days after such award is made 7o payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment ;pon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.

HLP2009-3B
(. Effect of demand and termination of right (#ection F$!

Page 95

6rom the time of demand for payment of the fair value of a stockholderIs shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended, EU'E1T the right of such stockholder to receive payment of the fair value thereof, 1A8-*2E2, if the dissenting stockholder is not paid the value of his shares within $4 days after the award, his voting and dividend rights shall immediately be restored. . Bhen right to payment ceases (#ection F(!

7o demand for payment may be withdrawn unless the corporation consents thereto. *nstances when right to payment ceases: a! *f such demand for payment is withdrawn with the consent of the corporation b! *f the proposed corporate action is abandoned or rescinded by the corporation c! *f the proposed corporate action disapproved by the #E' where such approval is necessary, d! *f the #E' determines that such stockholder is not entitled to the appraisal right *n such instances, 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.

%. Bho bears costs of appraisal (#ection F ! ,enerally, it shall be borne by the corporation E0ception: by the stockholder, when the fair value ascertained by the appraisers is appro0imately the same as the price which the corporation may have offered to pay the stockholder, *n the case of an action to recover such fair value, all costs and e0penses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was un:ustified.

E. 7otation on certificates@ rights of transferee (#ection F%! Bithin ten (&4! days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. .is failure to do so shall, at the option of the corporation, terminate his rights.

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Effect of transfer: a! The rights of the transferor as a dissenting stockholder shall cease@ b! The transferee shall have all the rights of a regular stockholder@ and c! All dividend distributions which would have accrued on such shares shall be paid to the transferee. f ' nt- llin9 inte-est

0. D3ty

A ma:ority stockholder is sub:ect to the duty of good faith when he acts by voting at a stockholders9 meeting with respect to a matter in which he has a personal interest 'ontrolling stockholders may dispose of their shares at any time and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are known as intending to raid the corporate treasury or otherwise improperly benefit themselves. *t is fraudulent for a stockholder to buy from another stockholder without disclosing his identity 1rincipal stockholders are likewise prohibited from using inside information in the purchase and sale of e/uity security

F. De-i1ati1e s3its derivative suit D suits of stockholders based on wrongful or fraudulent acts of directors or other persons 7ature and basis?distinguish from other suits: a! individual suit if wrong done is personal to #. b! class suit if wrong done is to a group of #. c! derivative suit if wrong done is to the corporation itself *n a derivative suit, the cause of action belongs to the corporation and not the stockholders but since the directors who are charged with mismanagement are the once who will decide who will sue then the corporation is left without redress hence #. is given the right to sue on behalf of the corporation Ae/uirements: a! The stockholder or member bringing the suit must have e0hausted his remedies within the corporation b! The stockholder or member must have been one at the time the transaction or act complained of took place, or in the case of a stockholder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues and is in:urious to the stockholder c! Any benefit recovered by the stockholder or member as a result of bringing the suit, whether by final :udgment, by :udicial compromise or by e0tra":udicial settlement, must be accounted for to the corporation, who is the real party in interest

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d! *f the suit is successful, the plaintiff is entitled to reimbursement from the corporation for the reasonable e0penses of litigation, including attorney9s fees

01an9elista 1 Sant s The in:ury complained of is thus primarily to the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any of the stockholders is allowed to bring suit. But in that case, the corporation is the real party in interest.

Bitong v CA Bitong, allegedly for the benefit of )r. M )s. 'o., *nc., filed a derivative suit to hold Eugenia and Lose Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest, and mismanagement of the corporation committed from &3F$ to &3FE Bitong alleged that she had been Treasurer and )ember of Board of 2irectors, and owner of &444 shares of stock of the corporation, presenting the stock and transfer book reflecting that LA>A shares were transferred to her in &3F$ and 'ertificate 7o. 44F in her name Bitong cannot file derivative suit. #he is not the owner of the shares of stock during the time when the acts sub:ect of the suit were committed (&3F$"&3FE! because 'ertificate no 44F, proof of said ownership, was signed by the president only in &3F3 a! 'ertificate of stock can be issued only upon compliance with certain re/uisites: (&! must be signed by president or vice, countersigned by secretary or assistant secretary, sealed with seal of corporation, (5! there must be delivery and indorsement, ($! must be fully paid, ((! original certificate must be surrendered b! A formal certificate of stock cannot be considered issued unless signed by president or vice"president and countersigned by secretary or assistant secretary The re/uirement under #ec %$ of the 'orporation code must be mandatorily complied with. 1resumption of regularity cannot apply. a! regularity and validity of transfer must be proved. There must be a valid delivery, endorsement, recording in the corporation9s books. b! Aecords are unclear on how Bitong ac/uired the shares of stock

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c! Even the records on the stock and transfer book is highly doubtful, it being in the possession of Bitong, the original being lost, and a possibility that even the original was not registered at all with the #E'.

Gilda Lim v Patricia Lim-Yu The Board of +*)1A7 approved a resolution making a partial payment to ,ilda +im for the latter9s legal services to be paid in shares of stock of the corporation. ,ilda ended up owning %5. = of the corporation9s shares of stock 1atricia +im"<u filed an alleged derivative suit against the Board for the latter9s alleged violation of her pre"emptive right to the shares ,ilda et al opposed on the ground of 1atricia9s lack of capacity to file a derivative suit by reason of the ff: a! a petition for guardianship filed by ,ilda praying for the issuance of letters of guardianship over 1atricia b! in said action, a Temporary Aestraining 8rder was issued by the court en:oining 1atricia from entering into actions, contracts or documents representing her family or the corporation, particularly +*)1A7 *nvestments c! because of said TA8, ,ilda contend that 1atricia cant file a derivative suit because a derivative suit is being filed in behalf of the corporation and such action can9t be done by 1atricia 1atricia may validly file derivative suit An action to enforce a pre"emptive right is being enforced on behalf and for the benefit of the shareholder and not the corporation hence is not a derivative suit a! 1atricia was merely praying that she be allowed to subscribe to additional shares of stock in proportion to her share holdings. #he was therefore not acting for the corporation but only in her own behalf out of the desire to protect and preserve her preemptive right. b! A TA8 en:oining her to file any action for the corporation does not affect the present action which is only for and in her behalf

Re$3%li' Ban. 1 C3a#e-n . 6: A derivative suit was brought against the officers and the board. 'omplaint alleged that the directors approved a resolution granting e0cessive compensation to the corporate officers. #uit was filed in order to prevent dissipation of the corporate funds for the payment of salaries of the said officers. Board claims the action cannot prosper for failure to compel the board to file the suit for and in behalf of the corporation. .: #uch a suit need not be authoriCed by the corporation where its ob:ective is to nullify the action taken by its manager and the board, in which case any demand for intra"corporate remedy would be futile, and thus necessitating the court to intervene by granting the petition for a derivative suit. A #. in a banking corporation has a right to maintain a suit for an in behalf of the corporation, but the e0tent of such right depends upon when and for what purpose he ac/uired the shares of stock of which he is the owner.

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Page 99

8n the issue that the relators controverted the right to /uestion the appointment and selection of 'uaderno and 2iCon, which they contend to be the resilt of corporate acts with which the plaintiff as #., cannot intervere, the #' held that an individual #. is permitted to institute a derivative suit in behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the official of the corporation refuses to sue, or are to ones to be sued. San ?i93el C -$ -ati n 1 Ea"n. .: Ae/uisites for a proper derivative suit: (a! party bringing suit should be a #. as of the time of the act or transaction complained of and at the time of filing of the suit. 7umber of shareholdings immaterial. A bona fide ownership by a #. in his own right suffices to invest him with standing to bring a derivative action in behalf of the corporation (b! party has tried to e0hausted intra"corporate remedies (made demand on the board to sue in behalf of the corporation, but the latter failed or refused! (c! cause of action actually devolves on the corporation, the wrongdoing or harm having been or being caused to the corporation itself and not to the suing #.

BOOES

AND

R0CORDS .s an# -e' -#s 43st a ' -$ -ati n .ee$B (#ection E(!

A. W"at %

Every corporation shall keep and carefully preserve at its principal office: o Aecord of all business transactions o )inutes of all meetings of stockholders or members, or of the board of directors or trustees which state the: Time and place of holding the meeting .ow authoriCed 7otice given Bhether the meeting was regular or special, if special its ob:ect, Those present and absent Every act done or ordered done at the meeting Time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes@ <eas and nays must be taken on any motion or proposition 1rotest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand o #tock and transfer book 7ames of the stockholders alphabetically arranged *nstallments paid and unpaid on all stock for which subscription has been made 2ate of payment of any installment #tatement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made #uch other entries as the by"laws may prescribe o Aecord of all business transactions include: book of inventories :ournal ledger book for copies of letters and telegrams

HLP2009-3B
B. C3st #y fianancial statements *TA9s vouchers M receipts contracts -TAs fB .s an# -e' -#s

Page 100

Torres et al v CA Ludge Torres, ma:ority stockholder of Tomil, assigned one share each to Tobias, Locson, Lurisprudencia, ACura and 1abalan. These assigned shares were in the nature of /ualifying shares so the latter would be eligible to be directors of the 'orporation At the back of the stock certificates, it is stated that@ Gthe present certificate, conformably to the purpose and intention of the deed of assignment is not held by me under any claim of ownership and * acknowledge that * hold the same as mere Trustee of Ludge Torres and for the sole purpose of /ualifying me as directorH The five were elected directors of the corporation Aespondents complained with #E' praying that election of petitioners be annulled because they are not legitimate owners of shares of stock and transfer to them violated minority stockholders right of pre"emption and it was not registered by the corporate secretary 1etitioners claim that transfer is valid because Ludge Torres himself recorded such in the stock and transfer book of the corporation Aecording in stock and transfer book not valid 'orporate #ecretary is the custodian of corporate records, keeps the stock and transfer book and make entries therein. #tock and transfer book of Tormil, however, was not kept by 'orporate #ecretary but by respondent Ludge Torres #tock Transfer book was not kept at principal office but at the residence of Ludge Torres in contravention with provisions Because of the above, entries made by Ludge Torres are not valid. 1abalan and 'o. cannot be considered stockholders f Ins$e'ti n (#ection E(! f -i9"t

C. Ri9"t Basis

*nherent in ownership of stocks #.s do not directly participate in the management of the business and have little knowledge, if at all, of how the corporate affairs are being run by the directors and officers As beneficial owners, #.s have the right to know only the financial condition but also how the corporate affairs are being run by their elected directors and the appointed officers

HLP2009-3B

Page 101

+aw grants them the right to inspect the records of the corporation to obtain information they need #ignificant for minority #.s The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation o At reasonable hours on business days o .e may demand, writing, for a copy of e0cerpts from said records or minutes, at his e0pense The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to e0amine and copy e0cerpts from its records or minutes, in accordance with the provisions of this 'ode, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under #ection &(( of this 'ode (1enalties for violation of the 'ode!. *f such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal *t shall be a defense to any action that the person demanding to e0amine and copy has improperly used any information secured through any prior e0amination of the records, or is not acting in good faith or for a legitimate purpose in making his demand *nspection should be made in a manner so as not to impede the efficient operations of a corporation. #. cannot demand that he be allowed to take corporate books out of the corporation9s principal office of inspection. #tockholder9s purpose for inspecting the books is material: o .is purpose is presumed to be a proper one o The burden of proving that the purpose is improper or illegal is thus on the corporation and its officers o A legitimate purpose is described as one which is germane to the in interests of the stockholder as such and is not contrary to the interests of the corporation o 1urpose must not be inimical to corporation9s interest and the info is desired for the purpose of crippling the corporation for the benefit of a business rival, must be denied Aemedies: o )andamus o *n:unction o Action for damages o 6ile an action to impose a penal offense by fine and?or imprisonment

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Page 102

The right to inspection is preventive as well as remedial: o 1reventive because it may to a limited e0tent serve as deterrent to an ill"intentioned management o Aemedial because a dissatisfied stockholder may resort to right of inspection as a preliminary step to seeking more direct remedies against abuses committed by management is a st '. t-ansfe- a9ent (#ection E(!

D. W"

7o stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the 1hilippines unless he secures a license from the #E' and pays a fee as may be fi0ed by the 'ommission, which shall be renewable annually 1rovided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, e0cept the payment of a license fee herein provided, shall be applicable. finan'ial state4ents

0. Ri9"t t

Bithin ten (&4! days from receipt of a written re/uest of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last ta0able year and a profit or loss statement for said ta0able year, showing in reasonable detail its assets and liabilities and the result of its operations At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. .owever, if the paid"up capital of the corporation is less than 1 4,444.44, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. 4ay e8e-'ise -i9"tB

F. W"

2irector, trustee, stockholder, member, personally or through an agent #tockholders of a parent corporation with respect to subsidiary: o *f two are legally separate and independent entity, no right of inspection o *f they are practically one and the same in so far as management and control and inspection is demanded because of gross management of subsidiary by the parent9s directors who are also directors of subsidiary, there can be inspection

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Page 103

Pa-# 1 ,e-'3les L34%e-. 6: 'orporate secretary of .ercules +umber refused to permit 1ardo, a #., or his agent to inspect the records and business transactions of the company at the times desired by 1ardo. Basis of the refusal was the provision in the company9s by"laws which stipulated that every #. may e0amine the books of the company and other documents upon the days which the board annually fi0es. .: The resolution of the board limiting the rights of #.s to inspect its records to a period of &4 days prior to the annual #. meeting is an unreasonable restriction in accordance with the 'orpo 'ode, which provides that the right to inspect can be e0ercised at reasonable hours. The right of inspection was interpreted to mean that the right may be e0ercised at reasonable hours on business days throughout the year, and not merely during an arbitrary period of a few days chosen by the directors. @ nAales 1 PNB. .: The 'ode has prescribed limitations to the right of inspection, re/uiring as a condition for e0amination that the person re/uesting must not have been guilty of using improperly any information secured through a prior e0amination, and that the person asking for such must be acting in ,6 and for a legitimate purpose. *t is the #. seeking to e0ercise the right of inspection to set forth the reasons and purposes for which he desires such inspection. #' held that the purpose of ,onCales, which was to arm himself with evidence which he can use against the bank for acts done by the latter when he was still a total stranger (i.e. not a #.!, were not deemed proper motives and his re/uest was denied. >e-a93t" 1 Isa%ela S39a- C . 6: 2irectors have the un/ualified right to inspect the books and records of a corporation at all reasonable times. 1rete0ts may not be put forward by the officers to keep a director or #. from inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the grounds that the director or #.s are on unfriendly terms with the officers. A director or #. has no absolute right to secure certified copies of the minutes until these minutes have been written up and approved by the directors. @ . n9wei 1. S0C. 6: ,okongwei, a ma:or #. of #an )iguel 'orporation, sought to e0ercise his right to inspect the books and records of #)' *nt9l, a foreign subsidiary wholly"owned and controlled by #)'. #ince he was not a #. of the subsidiary, #)' denied his re/uest to inspect its books. .: Bhere the right to inspect is granted by statute to the #., it is given to him as such and must be e0ercised by him with respect to his interest as a #. and for some purpose germane thereto or in the interest of the corporation. The inspection has to be germane to the petitioner9s interest as a #. and has to be proper and lawful in character and not inimical to the interest of the corporation. The #.9s right to inspect is based on his ownership of the assets and property of the corporation. *t is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an e/uitable ownership, beneficial ownership, or /uasi" ownership, and is predicated upon the necessity of self"protection. 8n application for mandamus to enforce the right, it is proper for the court to in/uire into and consider the #.9s ,6 and his purpose and motives in seeking inspection. But the impropriety of purpose such as will defeat enforcement must be set up by the corporation defensively if the 'ourt is to take cogniCance of it as a /ualification. *n other words, the specific provisions take from the #. the burden of showing the propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. The foreign subsidiary is wholly"owned by #)' and therefore under its control, and would be more in accord with e/uity, ,6, and fair dealing to construe the statutory right of ,okongwei as #. to inspect the books of the parent as e0tending to the books of the subsidiary in its control.

?0R@0RS

AND

CONSOLIDATION

HLP2009-3B

Page 104

A. W"at is a M' nstit3ent ' -$ -ati nNB A M' ns li#ate# ' -$ -ati nNB (#ection E%! Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation.

B. W"at is a 4e-9e- 6 ' ns li#ati nB Merger o 8ne of the constituent corporations remains as an e0isting :uridical person, whereas the other corporation shall cease to e0ist. )erger is the disappearance of one of the corporations with the other corporation ac/uiring all the assets, rights of action, and assuming all the liabilities of the disappearing corporation. o 8f course, there is an arrangement as to the shares of stocks that will be issued to the former stockholders of the two (5! corporations which were merged. #aid stockholders are now stockholders of the corporation which survives. The proportion between the two (5! corporations will be the basis of the shares of stocks that will be issued to the stockholders under the surviving corporation. Consolidation o *f there is consolidation, there will be disappearance of both the constituent corporations with the emergence of a new corporate entity which shall obtain all the assets of the disappearing corporations, and likewise shall assume all their liabilities. o Also, the number of shares that will be issued to each of the stockholders under the new corporation is determined by the ration between the assets of the two (5! corporations.

C. W"at ' -$ -ate a$$- 1als a-e -e<3i-e#B (#ec. EE! &. Approval by ma:ority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation. 5. Approval by the stockholders or members of each of such corporations. The affirmative vote of stockholders representing at least two"thirds (5?$! of the outstanding capital stock of each corporation in the case of stock corporations or at least two"thirds (5?$! of the members in the case of non" stock corporations shall be necessary for the approval of such plan $. 7otice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (5! weeks prior to the date of the meeting, either personally or by registered mail. #aid notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation.

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(. Any dissenting stockholder in stock corporations may e0ercise his appraisal right in accordance with the 'ode. 1rovided, 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 e0tinguished. . Amendment to the plan of merger or consolidation may be made by approved of the ma:ority 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 (5?$! of the outstanding capital stock or of two"thirds (5?$! of the members of each of the constituent corporations. #uch plan, together with any amendment, shall be considered as the agreement of merger or consolidation. D. W"at is a $lan f 4e-9e- ' ns li#ati nB (#ec. E%!.

&. 5. $.

(.

The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations@ The terms of the merger or consolidation and the mode of carrying the same into effect@ 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 corporation in case of consolidation, all the statements re/uired to be set forth in the articles of incorporation for corporations organiCed under this 'ode@ and #uch other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. f 4e-9e- ' ns li#ati nB (#ec. EF!

0. W"at a-e a-ti'les

&. 5. &. 5. $.

After the approval by the stockholders or members, articles of merger or articles of consolidation shall be e0ecuted by each of the constituent corporations: to be signed by the president or vice"president and certified by the secretary or assistant secretary of each corporation The articles of merger or consolidation shall set forth: The plan of the merger or the plan of consolidation@ As to stock corporations, the number of shares outstanding, or in the case of non"stock corporations, the number of members@ and As to each corporation, the number of shares or members voting for and against such plan, respectively. f 4e-9e- ' ns li#ati nB

F. W"en is t"e effe'ti1ity

HLP2009-3B

Page 106

Effectivity: ;pon issuance by the #E' of the certificate of merger and consolidation The articles of merger or of consolidation shall be submitted to the #ecurities and E0change 'ommission in /uadruplicate for its approval. *n the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. *f the 'ommission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this 'ode and e0isting laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. *f, upon investigation, the #ecurities and E0change 'ommission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this 'ode or e0isting laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Britten notice of the date, time and place of hearing shall be given to each constituent corporation at least two (5! weeks before said hearing. The 'ommission shall thereafter proceed as provided in this 'ode. f a 4e-9e- ' ns li#ati nB (#ec. F4!

@. W"at a-e t"e effe'ts

&. The constituent corporations shall become a single corporation which: *n case of merger, shall be the surviving corporation designated in the plan of merger@ and *n case of consolidation, shall be the consolidated corporation designated in the plan of consolidation@ 5. The separate e0istence of the constituent corporations shall cease, e0cept that of the surviving or the consolidated corporation@ $. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be sub:ect to all the duties and liabilities of a corporation organiCed under this 'ode@ (. The surviving or the consolidated corporation shall thereupon and thereafter possess: all the rights, privileges, immunities and franchises of each of the constituent corporations@ and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation these shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed@ and

HLP2009-3B
. The surviving or

Page 107
consolidated

corporation shall: be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations@ and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation - C ns li#ati n

,. P- 'e#3-e f - ?e-9e-

&. Board of each corporation shall draw up a plan of merger or consolidation, setting forth: names of corporations involved (constituent corporations! terms and mode of carrying it out statement of changes, if any, in the present articles of surviving corporation@ or the articles of the new corporation to be formed in case of consolidation. 5. 1lan for merger or consolidation shall be approved by ma:ority vote of each board of the concerned corporations at separate meetings. $. The same shall be submitted for approval by the stockholders or members of each such corporation at separate corporate meetings duly called for the purpose. 7otice should be given to all stockholders or members at least two (5! weeks prior to date of meeting, either personally or by registered mail. (. Affirmative vote of 5?$ of the outstanding capital stock in case of stock corporations, or 5?$ of the members of a non"stock corporation shall be re/uired. . 2issenting stockholders may e0ercise the right of appraisal. But if Board abandons the plan to merge or consolidate, such right is e0tinguished. %. Any amendment to the plan must be approved by the same votes of the board members of trustees and stockholders or members re/uired for the original plan. E. After such approval, Articles of )erger or Articles of 'onsolidation shall be e0ecuted by each of the constituent corporations, signed by president or -1 and certified by secretary or assistant secretary, setting forth: plan of merger or consolidation in stock corporation, the number of shares outstanding@ in non"stock, the number of members as to each corporation, number of shares or members voting for and against such plan, respectively

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Page 108

F. 6our copies of the Articles of )erger or 'onsolidation shall be submitted to the #E' for approval. #pecial corporations like banks, insurance companies, building and loan associations, etc., need the prior approval of the respective government agency concerned. 3. *f #E' is satisfied that the merger or consolidation is legal, it shall issue the 'ertificate of )erger or the 'ertificate of *ncorporation, as the case may be. &4. *f the #E' is not satisfied, it shall set a hearing, giving due notice to all the corporations concerned. N#ecs. E%"E3, 'orporation 'odeO I. Li4itati n n t"e -i9"t t 4e-9e 6 ' ns li#ate

&. #hould not create monopolies 5. #hould not eliminate free and healhty competition $. Act $ &F #ec 54 inhibits illegal combinations
Reyes 1. Bl 3se et al. 6: )inority #.s of the +aguna Tayabas Bus 'o file an action to en:oin Blouse et al from e0ecuting its resolution approved by 33 Z= of #.s to consolidate the properties and franchises of +aguna Tayabas with Batangas Transport. Blouse believes it is merely an e0change of properties and not a consolidation. *: B?n the real purpose of the resolution is merger or consolidation, and if so, whether it can be carried out under the old 'orpo +aw. .: The /uestioned resolution charges the board of +aguna to consolidate properties and franchises thereof with that of Batangas Transport. Both corporations have passed similar resolutions to take steps to effect the consolidation. *t is apparent that the purpose of the resolution is not to dissolve but to merely transfer its assets to a new corporation in e0change for its shares. This comes within the purview of the old corporation law, which provides that a corporation may sell, e0change, lease or otherwise dispose of all its property and assets when authoriCed by affirmative vote of 5?$ of #.s. The phrase Gotherwise dispose ofH covers mergers and consolidations. The transaction in this case cannot be considered, strictly speaking, as a merger or consolidation because a merger implies the termination or cessation of the merged corporations and not merely a merger of assets and properties. The two companies will not lose their corporate e0istence but will continue to e0ist after consolidation. Bhat is intended to be managed and operated by a new corporation, and not a merger. The court added that the merger?consolidation (if any! would still be carried out under the 1ublic #ervice +aw. *t does not impose any /ualification other that it shall be done with the approval of the 1#'. 0#wa-# Nell C 4$any 1 Pa'ifi' Fa-4s In'. 6: The Edward 7ell 'o secured a :udgment representing the unpaid balance of the price of a pump sold to *nsular 6arms. 1acific 6arms then purchased all or substantially all of shares of stock as well as real and personal property of *nsular, selling the shares to certain individuals who reorganiCed *nsular. The board of the reorganiCed *nsular then sold its assets to be sold to 1acific for 1&4444. The writ of e0ecution was returned, stating that *nsular had no leviable property. 7ell 'o sued 1acific 6arms, on the ground as a result of the purchase of all or substantially all assets of *nsular, 1acific became the alter ego of *nsular 6arms. .: ,A: where the corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former. E0ception: (&! purchaser e0pressly or impliedly assumes such debts@ (5! transaction amounts to a consolidation or merger@ ($! purchasing corporation is merely a continuation of the selling corp@ ((! there is fraud to escape liability for the debts *n the present case, no proof was submitted that 1acific e0pressly agreed to assume the debts of *nsular or that it is a continuation of *nsular, or that the transaction was tainted in fraud of creditors, or that the two parties merged or consolidated. *n fact, the sales took place, not only

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Page 109

over % months before :udgment, but also over a month before the filing of the case. 1acific also purchased the shares as the highest bidder at an auction sale held at the instance of a bank to which shares have been pledged as security by *nsular. 7ell 'o9s theory that 1acific is the alter ego of *nsular negates the fact of consolidation?merger, because a corporation cannot be its own alter ego. As to the allegation that the selling price of the assets of 1&4> was grossly inade/uate and thus tainted with fraud, the #' held that the sale was approved by the #E' and that it should be presumed that the price was fair and reasonable, and should be a matter litigated in another venue. #': since there is neither proof nor allegation that the transferee"corporation e0pressly or impliedly agreed to assume the debt of the corporation, or that the sale of either the shares or the assets to the appellee has been entered into fraudulently, in order to escape liability for the debt of the sub:ect corporation, there was no basis to hold the transferee liable for the debts and liabilities of the sub:ect corporation

NON-STOCE CORPORATIONS A. Distin93is" n n-st '. ' -$ -ati ns f- 4 st '. ' -$ -ati ns
787"#T8'> '8A18AAT*87# #T8'> '8A18AAT*87#

&. 2efinition A non"stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, sub:ect to the provisions of this 'ode on dissolution. 8ne which has a capital stock divided into shares and is authoriCed to distribute to the holders of such shares dividends or allotments of the surplus profits (i.e., retained earnings on the basis of the shares held (#ec. $!. *t is organiCed for profit.

5.

1urposes (#ec. FF! 7on"stock corporations may be formed or organiCed for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, sub:ect to the special provisions of this Title governing particular classes of non"stock corporations. 6ormation of corporation must be for +AB6;+ purpose )ust not include those which contradict or change its nature

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Page 110

$. 2istribution of income (#ec. FE! Any profit shall be used for the furtherance of the purpose or purposes for which the corporation was organiCed

1rofits are distributed as dividends to the stockholders in proportion to their shareholdings

(. #cope of right to vote (#ec. F3! Each member regardless of class shall be entitled to 87E vote unless limited, broadened, or denied to the e0tent specified in the articles of incorporation or the by"laws.

7o share may be deprived of voting rights, e0cept: 1referred or Aedeemable shares, unless otherwise provided by the 'ode 1A8-*2E2, there shall always be a class?series of shares which have a '8)1+ETE -8T*7, A*,.T# Each share of stock has one vote

. -oting by pro0y (#ec. F3! A member may vote by pro0y in accordance with the provisions of this 'ode unless otherwise provided in the Articles of *ncorporation or By"laws

#tockholders and members may vote in person or by pro0y in all meetings of stockholders or members provided the re/uisites are complied with (in writing, signed, etc.! This right cannot be denied

%. -oting by mail (#ec. F3! -oting by mail or other similar means may be authoriCed by the by"laws of non"stock corporations with the approval of, and under such conditions which may be prescribed by, the #E'

7o such provision for corporations, cannot be allowed

stock

E. Transferability of interest membership (#ec. 34!

or

)embership in a non"stock corporation and all rights arising therefrom are personal and non" transferable, unless the articles of incorporation or the by"laws

Transferable #hares of stock may be transferred by: &. Endorsement by the owner or his attorney"in"fact or other person legally authoriCed to make the transfer 5. 2elivery of the certificate or certificates $. To be binding against third persons, transfer of shares should be recorded in the books of the corporation.

HLP2009-3B
otherwise provide.

Page 111

F. Termination of membership )embership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by"laws. Termination of membership shall have the effect of e0tinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by" laws.

Transfer of shares E0ercise of appraisal right

Board of 2irectors

3. ,overning board (#ec. 35! Board of Trustees 7ot less than but not more than &

(i! number ;nless otherwise provided in the A8* or the by"laws, the B8T may be more than fifteen (& ! in number as may be fi0ed in their articles of incorporation or by"laws

(ii! term The term of office of one"third (&?$! of their number shall e0pire every year@ and subse/uent elections of trustees comprising one"third (&?$! of the board of trustees shall be held annually and trustees so elected shall have a term of three ($! years.

Board of 2irectors or Trustees are elected from among the holders of stocks, or where there is no stock, from among the members of the corporation who shall hold office for & year and until their successors are elected and /ualified.

HLP2009-3B
Trustees thereafter elected to fill vacancies occurring before the e0piration of a particular term shall hold office only for the une0pired period.

Page 112

&4. election of officers (#ec. 35! 7o person shall be elected as trustee unless he is a member of the corporation. ;nless otherwise provided in the articles of incorporation or the by" laws, officers of a non"stock corporation may be directly elected by the members. 8fficers elected by members

*mmediately after their election, the directors of a corporation must formally organiCe the election of: a president, who shall be a director@ a treasurer who may or may not be a director@ a secretary who shall be a resident and citiCen of the 1hilippines, and such other officers as may be provided for in the By"laws 8fficers elected by board

)eetings of directors or trustees of corporations may be held anywhere in or outside of the 1hilippines, unless the by"laws provide otherwise. )eetings of stockholders shall be held at the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation

&&. place of meetings (#ec. 3$! The by"laws may provide that the members 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 located That the place of meeting shall be within the 1hilippines

B. Dist-i%3ti n

f assets in 'ase

f #iss l3ti n (#ec. 3(!

All debts of the corporation must be paid, or ade/uately provided for. All assets held under condition of being returned in case of dissolution should be returned. All assets held sub:ect to specific use (e.g., for charitable, charitable, educational, scientific, etc.! must be transferred to other corporations,

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societies, or organiCations having the same purpose as the corporation dissolved. All other assets not included in the above, if any, shall be distributed to the members in accordance with the stipulations in the articles of incorporation or the by"laws. Any other remaining assets may then be distributed to such persons, societies, organiCations or corporation, profit or non"profit, as may be specified in the plan of distribution. f #ist-i%3ti n f assets (#ection 3 !

C. Plan

A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non"stock corporation in the process of dissolution in the following manner: o The board of trustees shall, by ma:ority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. o Britten notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this 'ode for the giving of notice of meetings to members. o #uch plan of distribution shall be adopted upon approval of at least two"thirds (5?$! of the members having voting rights present or represented by pro0y at such meeting.

CLOS0 CORPORATIONS A. W"at a-e t"e -e<3i-e4ents ' -$ -ati nsB (#ec. 3%! f t"e f -4ati n f t"e 'l se

A close corporation is one whose articles of incorporation provide that: o All the corporationIs issued stock of all classes, e0clusive of treasury shares, shall be held of record by not more than a specified number of persons, not e0ceeding twenty (54!@ o All the issued stock of all classes shall be sub:ect to one or more specified restrictions on transfer permitted by this Title@ and o The corporation shall not list in any stock e0change or make any public offering of any of its stock of any class.

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A corporation shall not be deemed a close corporation when at least two" thirds (5?$! of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. The provisions of this 'ode shall apply e0cept insofar as this Title otherwise provides.

San Juan Structural and Steel Fabricatiors vs. CA )otorich entered into agreement with #an Luan for the transfer of a parcel of +and to latter. #an Luan already paid downpayment Bhen #an Luan was ready to pay the balance, )otorich refused to sell )otorich contend that 7enita ,ruenberg9s, treasurer of )otorich, signature is not sufficient to bind )otorich, and that the signature of Aeynaldo ,ruenberg, president of )otorich is re/uired 7enita ,ruenberg is the spouse of Aeynaldo ,ruenberg and both owns 33.F%%= of the shares of stock of the corporation )otorich is not a close corporation o The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding their separate personalities o A narrow distribution of ownership does not of itself make a close corporation o There are e0ceptional cases where an action by a director who is singly is the controlling stockholder may be considered as a binding corporate act and a board action is a mere formality. .owever, 7enita is not the sole controlling stockholder. -9aniAe# as 'l se# ' -$ -ati nsB (#ec. 3%!

B. W"at entities 4ay n t %e

Any corporation may be incorporated as a close corporation, e0cept: o )ining o 8il companies o #tock e0changes o Banks o *nsurance companies o 1ublic utilities o Educational institutions o 'orporations declared to be vested with public interest in accordance with the provisions of this 'ode.

C. Distin93is" 'l se ' -$ -ati ns f- 4 -e93la- ' -$ -ati ns

'+8#E '8A18AAT*87# #T8'> '8A18AAT*87#

&. )anagement ? Board Authority

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Page 115

There can be 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 The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. #o long as this provision continues in effect: &. 7o meeting of stockholders need be called to elect directors 5. ;nless the conte0t clearly re/uires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this 'ode $. The stockholders of the corporation shall be sub:ect to all liabilities of directors.

There are no classification of board of directors

'orporate 1owers devolved upon board of directors whose powers are e0ecuted by officers. 'annot provide that it be managed by stockholders

Board of directors must be elected in a stockholders meeting #tockholders of a corporation are separate and distinct from directors

8fficers must be elected by the Board of 2irectors

The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. They will act only after discussion and deliberation of matters before them. 'ontracts entered into without a formal board resolution does not bind the corporation e0cept when ratified or when ma:ority of the board has knowledge of the contract and the contract benefited the corporation.

5. )eetings ;nless the by"laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: &. Before or after such action is taken, written consent thereto is signed by all the directors@ or

HLP2009-3B
5. All the stockholders have actual or implied knowledge of the action and make no prompt ob:ection thereto in writing@ or $. The directors are accustomed to take informal action with the e0press or implied ac/uiescence of all the stockholders@ or (. All the directors have e0press or implied knowledge of the action in /uestion and none of them makes prompt ob:ection thereto in writing. *f a directorIs meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written ob:ection with the secretary of the corporation after having knowledge thereof.

Page 116
Absence of a prompt ob:ection in writing does not ratify acts done by directors without a valid meeting. There must be e0press or implied ratification. E0press ratification may consist of a Board Aesolution to that effect *mplied ratification may consist of acceptance of benefits from said unauthoriCed act while having knowledge of said act 6ailure to give notice would render a meeting voidable. Attendance to a meeting despite want of notice will be deemed implied waiver All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (#ec &!

$. -oting ? Vuorum The A8* may provide for a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock.

7o share may be deprived of voting rights, e0cept 1referred or Aedeemable shares, unless otherwise provided by the 'ode There shall always be a class?series of shares which have a '8)1+ETE -8T*7, A*,.T# EA'. #.AAE #.A++ BE EV;A+ *7 A++ AE#1E'T# T8 E-EA< 8T.EA #.AAE, e0cept as otherwise provided in the A8*

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6or Board of directors, the by"laws or A8* can provide for a greater ma:ority in /uorum 6or stockholders, the A8* can provide for a different percentage in /uorum

The A8* may provide for a greater /uorum or voting re/uirements in meetings of stockholders or directors than those provided in this 'ode.

(. 1re"emptive Aight The pre"emptive right of stockholders in close corporations shall e0tend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. +imitations on the e0ercise of pre" emptive right:

a. #uch pre"emptive right shall not e0tend to shares to be issued in compliance with laws re/uiring stock offerings or minimum stock ownership by the public@ b. 7ot e0tend to shares to be issued in good faith with the approval of the stockholders representing two"thirds (5?$! of the outstanding capital stock, in e0change for property needed for corporate purposes or in payment of a previously contracted debt c. #hall not take effect if denied in the Articles of *ncorporation or an amendement thereto.

. Buy"back of #hares Aestrictions on transfer of shares shall not be more onerous than granting the e0isting stockholders or the corporation the option to purchase the shares of the transferring stockholder with such

#tockholders may re/uire the corporation to buy"back their shares under the following circumstances only (Appraisal right!:

HLP2009-3B
reasonable terms, conditions or period stated therein. *f upon the e0piration of said period, the e0isting stockholders or the corporation fails to e0ercise this option to purchase, the transferring stockholder may sell his shares to any person

Page 118
a. *n case any amendment to the articles of incorporation which has the effect of: changing or restricting the rights of any stockholder or class of shares, or authoriCing preferences in any respect superior to those of outstanding shares of any class, or e0tending or shortening the term of corporate e0istence b. *n case of sale, lease, e0change, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the 'ode@ and c. *n case of merger or consolidation d. E0tension or shortening of the term of the corporation (#ection $E! e. 2iversion of funds of corporation from primary purpose to secondary purpose (#ection (&! 7ote: this is not in #ec. F&. The corporation may buy"back shares of stockholders sub:ect to the following limitations (Treasury shares!: a. There must be unrestricted retained earnings b. )ust be for a legitimate purpose

%. Transferability Aestrictions on the right to transfer shares must appear in the A* and in the by"laws as well as in the certificate of stock otherwise the same shall not be binding on any purchaser thereof in good faith

Aestrictions on the right to transfer not allowed

E. Bithdrawal Aight Any stockholder of a close corporation may, for any reason,

HLP2009-3B
compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities e0clusive of capital stock Any stockholder of a close corporation may, by written petition to the #E', compel the dissolution of such corporation whenever: &. Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly pre:udicial to the corporation or any stockholder, or 5. 'orporate assets are misapplied or wasted. being

Page 119

#tockholders may re/uire the corporation to buy"back their shares at fair value when the 'orporation has unrestricted Aetained Earnings:

a. *n case any amendment to the articles of incorporation which has the effect of: changing or restricting the rights of any stockholder or class of shares, or authoriCing preferences in any respect superior to those of outstanding shares of any class, or e0tending or shortening the term of corporate e0istence b. *n case of sale, lease, e0change, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the 'ode@ and c. *n case of merger or consolidation d. E0tension or shortening of the term of the corporation (#ection $E! e. 2iversion of funds of corporation from primary purpose to secondary purpose (#ection (&! 7ote: this is not in #ec. F&.

D. Dea#l '.s &. 'eadloc+s, 2efined: The directors or stockholders are so divided respecting the management of the corporationIs business and affairs The votes re/uired for any corporate action cannot be obtained The conse/uence is that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally

5. Aesolution of deadlocks The #E', upon written petition by any stockholder, shall have the power to arbitrate the dispute.

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*n the e0ercise of such power, the 'ommission shall have authority to make such order as it deems appropriate, including an order: o 'ancelling or altering any provision contained in the articles of incorporation, by"laws, or any stockholderIs agreement@ o 'ancelling, altering or en:oining any resolution or act of the corporation or its board of directors, stockholders, or officers@ o 2irecting or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons part to the action@ o Ae/uiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders@ o Appointing a provisional director@ o 2issolving the corporation@ or o ,ranting such other relief as the circumstances may warrant.

$. 1rovisional 2irector An impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further /ualifications, if any, may be determined by the 'ommission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the 'ommission or by all the stockholders. .is compensation shall be determined by agreement between him and the corporation sub:ect to approval of the 'ommission, which may fi0 his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. f -est-i'ti ns n t-ansfef s"a-es (#ection 3F!

0. >ali#ity

Aestrictions on the right to transfer shares must appear in the: o Articles of incorporation o By"laws o 'ertificate of stock 8T.EAB*#E, the same shall not be binding on any purchaser in good faith. #aid restrictions shall not be more onerous than granting the e0isting stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. *f upon the e0piration of said period, the e0isting stockholders or the corporation fails to e0ercise the option to purchase, the transferring stockholder may sell his shares to any third person.

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F. 0ffe'ts f iss3an'e - t-ansfe' n#iti ns (#ection 33! f st '. in %-ea'"

Page 121
f <3alifyin9

A person is conclusively presumed to have notice of the fact of ineligibility to be a stockholder: o *f stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and o *f the certificate for such stock conspicuously shows the /ualifications of the persons entitled to be holders of record thereof A person to whom stock is issued or transferred is conclusively presumed to have notice of these facts: o *f the articles of incorporation of a close corporation states the number of persons, not e0ceeding twenty (54!, who are entitled to be holders of record of its stock, and o *f the certificate for such stock conspicuously states such number, and o *f the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons. *f a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has ac/uired stock in violation of the restriction, if such ac/uisition violates the restriction. Bhenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either o That he is a person not eligible to be a holder of stock of the corporation, or o That transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or o That the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. The provisions of subsection ((! shall not be applicable if the transfer of stock, though contrary to subsections (&!, (5! or ($!, has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. The term PtransferP, as used in this section, is not limited to a transfer for value. 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, e0press or implied.

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@. A9-ee4ents %y st '." l#e-s (#ection &44! &.

Page 122

5.

$.

(.

Agreements by and among stockholders: E0ecuted before the formation and organiCation of a close corporation, #igned by all stockholders #hall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, To the e0tent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, e0cept those re/uired by this Title to be embodied in said articles of incorporation. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in e0ercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 7o provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: 1rovided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this 'ode on directors. To the e0tent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. #aid stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably ade/uate liability insurance. f a-ti'les f in' -$ -ati n (#ection &4$!

,. A4en#4ent

Any amendment to the articles of incorporation which seeks to delete or remove any provision re/uired by this Title to be contained in the articles of incorporation or to reduce a /uorum or voting re/uirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two"thirds (5?$! of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.

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DISSOL=TION A. W"at a-e t"e 1a-i 3s 4et" #s &&E! &. -oluntary Ae/uirements where no creditors are affected (#ec. &&F! o 2issolution may be effected by ma:ority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two"thirds (5?$! of the outstanding capital stock or of at least two"thirds (5?$! of the members. o )eeting to be held upon call of the directors or trustees after publication of the notice of time, place and ob:ect of the meeting for three ($! 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 in the 1hilippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty ($4! days prior to said meeting. o A copy of the resolution authoriCing the dissolution shall be certified by a ma:ority of the board of directors or trustees and countersigned by the secretary of the corporation. The #ecurities and E0change 'ommission shall thereupon issue the certificate of dissolution. Ae/uirements where 'reditors are affected (#ec. &&3! o 1etition for dissolution shall be filed with the #ecurities and E0change 'ommission. o The petition shall be signed by a ma:ority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two"thirds (5?$! of the outstanding capital stock or by at least two"thirds (5?$! of the members at a meeting of its stockholders or members called for that purpose. o *f the petition is sufficient in form and substance, the 'ommission shall, by an order reciting the purpose of the petition, fi0 a date on or before which ob:ections thereto may be filed by any person, which date shall not be less than thirty ($4! days nor more than si0ty (%4! days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three ($! consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be f #iss l1in9 ' -$ -ati nsB (#ection

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no such newspaper, then in a newspaper of general circulation in the 1hilippines, and a similar copy shall be posted for three ($! consecutive weeks in three ($! public places in such municipality or city. ;pon five ( ! dayIs notice, given after the date on which the right to file ob:ections as fi0ed in the order has e0pired, the 'ommission shall proceed to hear the petition and try any issue made by the ob:ections filed@ and if no such ob:ection is sufficient, and the material allegations of the petition are true, it shall render :udgment dissolving the corporation and directing such disposition of its assets as :ustice re/uires, and may appoint a receiver to collect such assets and pay the debts of the corporation

5. *nvoluntary #ec. 5 12 345"A o 6raud in procuring its certificate of registration o #erious misrepresentation as to what the corporation can or is doing to the great pre:udice of or damage to the general public o Aefusal to comply or defiance of any lawful order of the 'ommission restraining commission of acts which would amount to a grave violation of its franchise o 'ontinuous inoperation for a period of at least five years o 6ailure to file by"laws within the re/uired period o 6ailure to file re/uired reports in appropriate forms as determined by the 'ommission within the prescribed period #ec. &(( B1 &%F o -iolation by the corporation of any provision of the 'orporation 'ode #ec. &4( B1 &%F o *n case of a deadlock in a close corporation, and the #E' deems it proper to order the dissolution of the corporation as the only practical solution to the dispute Vuo warranto proceedings, #ec. 5, Aule %% A8' o Bhen it has offended against a provision of an Act for its creation and renewal o Bhen it has forfeited its privileges and franchises by nonuser o Bhen it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchise o Bhen it has misused a right, privilege, or franchise conferred upon it by law or when it has e0ercised a right, privilege or franchise in contravention of law

$. 6ailure to organiCe and commence business within two years from incorporation 6ailure to formally organiCe and commence the transaction of its business or construction of its works within two years

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Transacting business D implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed o 6ormally organiCe includes not only the adoption of the by"laws but also the establishment of the body which will administer the affairs of the corporation and e0ercise its powers 'ommenced transaction of its business but subse/uently becomes continuously inoperative for a period of at least fie years

(. E0piration of the term #horten corporate term " by vote of 5?$ of the outstanding shares or 5?$ of the members, the articles may be amended to shorten the term of the corporation
Nati nal A%a'a 1 P -e. 6: 7ational Abaca 'orp sued Apolonia 1ore to recover money advanced for the purchase of hemp for the account of the corporation for which she failed to account therefor. 1ore in defense, contends that she made an accounting of the advances received by her. T' held her accountable and ordered to her to pay the corporation. 1ore moved to dismiss on the ground that the corporation had no legal capacity to sue, it having been abolished by E8 $E5. 'orporation contends that the E8 also stipulates that it shall continue as a body corporate for $ years from date of effectivity of the E8, for the purpose of defending and prosecuting suits and enabling the Board of +i/uidators to settle and close all its affairs. T' ordered corporation to amend the complaint by including the Board of +i/uidators as co" party plaintiff, otherwise case shall be dismissed. The corporation fails to submit amended complaint, and the T' dismisses case. 'orporation in seeking reconsideration, said that it was not able to submit the amended complaint on time because of the negligence of the filing clerk, )s 8campo, and that it was lost despite diligent efforts to look for it. T' denies motion. *: B?n an action, commenced within $ years after the abolition of the corporation, may be continued by the same after e0piration of the period. 78 B?m the T' was correct in dismissing motion. 78. should have granted the motionK .: ,A: pending actions by or against a corporation are abated upon the e0piration of the period allowed by law for li/uidation. The old corpo law contains no provision authoriCing a corporation after $ years from e0piration of its lifetime, to continue in its corporate name actions instituted by it within a period of $ years. *t provides that it will continue as a body corporate for $ years after the time when it would have been dissolved, for purposes of prosecuting and defending suit by or against it. 2uring the time which the corporation, through its officers, may conduct the li/uidation of assets and sue and be sued as a corporation is limited to $ years from the time period of dissolution commences, but that there is no time limit within which trustees must complete a li/uidation placed in their hands. The conveyance to the trustees must be made within the $ year period. *t may be found impossible to complete the work of li/uidation within the $ year period or to reduce dispute claims to :udgment. #uits by or against a corporate abate when it ceased to be an entity capable of suing or being sued@ but trustees to whom the corporate assets have been conveyed pursuant to the authority of the code may sue and be sued as such in all matters connected with the li/uidation. The effect of conveyance is to make the trustees legal owners of the property conveyed, sub:ect to the beneficial interest therein of creditors and #.s. The complete loss of Abaca9s corporate e0istence after the e0piration of $ year period is what impelled the creation of the Board of +i/uidators, to continue the management of pending matters.

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The winding up and turning assets of corporation into cash for distribution A li/uidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings 6or how long may the li/uidation of a corporation be undertakenQ o Every corporation whose charter e0pires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate e0istence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three ($! years after the time when it would have been so dissolved o .owever, in case the corporate assets are conveyed to a trustee or a receiver appointed by the #E', the three year limitation will not apply o Although the three year period may have e0pired, it does not necessarily follow that a creditor who was unable to collect his claim before three years would lose is rights. *t is still possible for him to sue the trustee, if there be one, or if the circumstances so warrant, to follow the assets in the hands of the stockholders who nay have received the same as li/uidating dividends Bhat could and should be done during the period of li/uidationQ o 6or the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. o E0cept by decrease of capital stock and as otherwise allowed by this 'ode, no corporation shall distribute any of its assets or property e0cept upon lawful dissolution and after payment of all its debts and liabilities. Bhat happens if an asset cannot be distributed to the person entitled to itQ o ;pon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Bho may undertake the li/uidation of a corporateQ o At any time during said three ($! years, the corporation is authoriCed and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. 6rom and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

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by the corpo itself through the board of directors D the board of directors serve as trustees conveyance of all corporate assets to trustees who will take charge of the li/uidation li/uidation by a receiver who may have been appointed by the #E' upon its decreeing the dissolution of the corporation. $"year period does not apply because the corporation is substituted by the receiver. .owever, the mere appointment of a receiver, without anything more does not result in the dissolution of the corporation nor bar it from the e0istence of its corporate rights

C"ina Ban.in9 C -$ -ati n 1. ?i'"elin D C . 6: ,eorge 896arrel M 'ie *nc is a domestic corporation acting as agent and representative of the ) )ichelin M 'ie, a foreign corporation engaged in the sale and distribution of )ichelin tires. )ichelin decided to discontinue their business relations, and it was discovered that 8 6arrel failed to account for an amount representing the price of tires sold by the latter. )ichelin claims the money was disposed by 8 6arrel for its own use and benefit and without the authority or consent of )ichelin. ,aston 896arrel (the person! and #ancheC e0ecuted a mortgage on the house of 896arrel and shares owned by both to guarantee payment of the amount to the )ichelin, but left a balance which the latter seeks to recover. The board of 896arrel filed a petition for its dissolution and sought the appointment of ,aston as receiver and li/uidator, which was granted by T'. )ichelin filed its claim against 896arrel 'orp with a prayer that its claim be allowed as a preferred one against the latter. T' grants motion of )ichelin. 7obody e0cept )ichelin and ,aston was notified of the order. 'hina Bank intervened and moved that )ichelin9s claim be allowed as an ordinary one under the *nsolvency +aw and sought the nullification of the T' orders. .: 'laims against a corporation in the hands of a receiver should not be approved and paid without some formal and regular proceeding after a reasonable opportunity is given to all parties in interest. The #' held that the provisions of the *nsolvency +aw should operate. There is no reason for the corporation to resort to the court for a decree of voluntary dissolution. *f the corporation was under such a financial condition as alleged, and did not desire to continue doing business, there is no necessity for :udicial intervention in the winding up of affairs coupled with the appointment for a receiver to deal with creditors as though they were creditors of an insolvent corporation. ;nder the old corpo law, with respect to decrees of dissolution upon voluntary application, the court may appoint receivers to collect and take charge of the assets. *t is permissive and not mandatory, because in cases of voluntary dissolution there is no occasion for the appointment of a receiver e0cept under special circumstances. #uch discretion on the part of the court to appoint must be e0ercised with caution. *T does not empower the court to hear and pass upon the claims of creditors of the corporation at first hand. *n such cases, the receiver does not act as a receiver of an insolvent corporation. #ince li/uidation consists of collecting all that is due the corporation, all claims must be presented for allowance to the receiver or trustees during winding up, within $ years as provided in 'orpo +aw. The rulings of the receiver are sub:ect to :udicial review by the court which appointed him. The normal method is for directors?officers to have charge of the winding up, though there is the alternative method of assigning property of the corporation to trustees. The law authoriCing voluntary dissolutions are generally held to apply only to dissolutions brought about by the #.s themselves. 'hina Bank9s motion was filed &$ months after the decree of dissolution was entered, thus the motion was flied on time to have its claim reviewed by the court. The appointment of ,aston as the receiver, who was also the principal promoter of the corporation and at one time the ma:ority #., president, and ,), lends itself to serious suspicion. .is administration of the business left much to be desired and that he alone ought to be blamed for the shortage

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claimed by )ichelin, but to save himself he made the corporation shoulder the burden of obligations in e0change for a simulated conveyance of his house and shares to the corporation. 8nce delin/uent, ,aston resorted to a :udicial proceeding of voluntary dissolution in an attempt to settle )ichelin9 claim and to free himself from any liability, and allowed the claim to be a preferred claim without informing or notifying interested parties, such as 'hina Bank, which also had a claim. )ichelin9s claim cannot be allowed as a preferred claim, because the merchandise was no longer in the corporation9s possession. The rubber tires consigned were to be sold on order, and the claim for the advance seems to be in the nature of a current account between the two companies more than anything else. Re$3%li' 1 ?a-s4an De1t C . 6: )arsman is a lumber company. An investigation was conducted and certain ta0es due from logs produced from its timber concession granted by the government. '*A demanded payment representing three assessments made on forest charges, deficiency sales ta0 and other surcharges and penalties. 'ounsel for the corporation re/uested for reinvestigation, but was denied unless the legal re/uirements for such a re/uest were complied with and payment of Z of total assessments were made, and to furnish a bond to guarantee payment of the balance. The corporation repeated failed to comply with the conditions set by the '*A, which was constrained to make e0tra:udicial demand for the ta0 liabilities. )arsman was then e0tra:udicially dissolved. B*A files a complaint for its demands after more than $ years following the corporation9s dissolution, and the T' sentenced the corporation to pay the amount demanded by '*A. .: T' did not err in holding that the period to /uestion the ta0 assessments had already e0pired. By its own omission, the corporation made it possible for the B*A to act on its own )A. )ere filing of a motion does not suspend the running of the period for collection of the ta0, which implies that any assessment made by the B*A is supposed to be final and e0ecutory as to the ta0payer concerned. *: w?n present action is barred by prescription, in light of the fact that the corporation law allows corporations to continue only for $ years after its dissolution, for the purpose of presenting or defending suits by or against it, and to settle its affairs. no .: #tress given by )arsman on the e0tinction of corporate personality by virtue of its e0tra" :udicial dissolution is misplaced. The assessments against the corporation were made before its dissolution and not later than % months after dissolution. Thus the government became the creditor of the corporation before the completion of its dissolution. Burgess the li/uidator became in law the trustee of all its assets for the benefit of all person interested, including the government. *t is immaterial that the present action was filed after e0piration of the $ year period, because the assessment definitely established the government as a creditor of the corporation for whom the li/uidator is supposed to hold corporate assets. 'ode provides for a $"year period for continuation of the corporate e0istence for purposes of li/uidation But there is nothing in the provision which bars an action for recovery of debts of the corporation against the li/uidator himself, after the lapse of the $"year period

Tan Ti n9 Bi 1 CIR. 6: Tan Tiong Bio et al are incorporators and directors (some are officers J1resident and treasurer! of the 'entral #yndicate. The company realiCed a net profit of close to 1$44>, and sale of goods was the only transaction undertaken by it. B*A sues the Tan Tiong et al for deficiency sales ta0es and surcharges on surplus goods purchased by the corporation from the 6oreign +i/uidation 'ommission. 'orporation was dissolved, and Tan Tiong and company substituted themselves as parties, thereby becoming successors"in"interests in the corporate assets after li/uidation. T' rules ifo B*A, and Tan Tiong et al appeals, claiming that they cannot be held liable for ta0 liability there being no law authoriCing the government to proceed against #.s of a defunct corporation as transferees of the corporate assets upon li/uidation. *f they were liable, it is only to the e0tent of the benefits derived by them, and that the action is barred by prescription due to the $"year limit in the corpo +aw. *: B?n the sales ta0 can be enforced against the corporation9s successors"in"interest, even if corporation has been dissolved by e0piration of corporate e0istence. ""<E#

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.: Tan Tiong, as substitute parties"in"interest, cannot now be heard to complain that they were being held liable for the ta0 due from the corporation whose representation they assumed and whose assets are distributed to them. The creditor of a dissolved corporation may follow its assets once they passed into the hands of a #.. The dissolution of a corporation does not e0tinguish debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund, into the hands of the #.s. The hands of government cannot collect ta0es from a defunct corporation, it loses thereby none of its rights to assess ta0es due, and to collect the ta0es due from the corporation from persons who by reason of transactions with the corporation, hold property against which the te0 may be enforced. 'ourt ruled that the net profit remained intact and was distributed among the #.s immediately after sale of surplus. Tan Tiong et al are thus the beneficiaries of the defunct corporation and should be held liable to pay the ta0es, but only in proportion to their respective shares in the distribution of assets. Even after the $ year period of li/uidation, corporate creditors can still pursue their claims against corporate assets against the officers or #.s who have taken over the properties of the corporation #' held that the #tate cannot insist on making ta0 assessments against a corporation that no longer e0ists and then turn around and oppose the appeal /uestioning the legality of the assessment precisely on the same ground that the corporation is non"e0istent The remedy of corporate creditors after the $"year period is to race where the corporate assets have gone, wherever they rested, be he a #. or a non"#.. 'ause of action is to file an action against that person who has control over the corporate assets.

D. 0ffe'ts

f Diss l3ti n; win#in9 3$ an# li<3i#ati n:

loss of :uridical personality o corporation loses its :uridical personality and can no longer lawfully continue its business e0cept for the purpose of winding up o cannot even be a de facto corporation, hence sub:ect to collateral attack o cannot enter into new contracts which would have the effect of continuing the business e0ecutory contracts o 7o right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subse/uent dissolution of said corporation or by any subse/uent amendment or repeal of this 'ode or of any part thereof. (#ec &( ! o The prevailing view is that e0ecutory contracts are not e0tinguished. .owever, some authorities make an e0ception of contracts for personal services such as employment contracts of officers and employees where the dissolution is involuntary or the result of merger or consolidation in which case the contracts are deemed terminated. distribution of assets after payment of debts o A corporation cannot distribute any of its assets or property e0cept upon lawful dissolution and only after payment of all its debts and liabilities, after which the remaining assets must be distributed to the stockholders in proportion to their interest in the corporation.

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E0ceptions: decrease in c?s resulting in a surplus which can then be distributed to stockholders provided no creditors are pre:udiced as otherwise allowed by the code: Appraisal right 2eadlock in a close corporation #. of a close corporation may compel corporation to buy his shares at fair value 'orporation repurchases shares for any legitimate corporate purpose 'orporation validly distributes dividend +i/uidating dividends D share of #. in assets upon li/uidation

Clemente vs. CA 1laintiffs sought to be declared owners of a parcel of land owned by #ociedad 1opular 'alambena, a #ociedad Anonima. 1laintiffs are stockholders of the latter corporation .owever, there was no proof that ta0es were paid by the #ociedad and neither were there efforts e0erted by the latter to consolidate title over the property. 7o e0planation was offered as to how and when the property came into the possession of the defendants 1laintiffs were not able to come up with any evidence to substantiate their claim of ownership of the assets. *f #ociedad has long been defunct, plaintiffs should have taken appropriate measures in a proper forum for a peremptory settlement of its affairs The termination of the life of a :uridical entity does not by itself cause the e0tinction or diminution of the right and liabilities of such entity nor those of its owners and creditors. *f the three year e0tended life has e0pired without a trustee or receiver having been e0pressly designated by he corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as GTrusteesH by legal implication to compete the corporate li/uidation. #till in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the #E', which has primary and sufficiently broad :urisdiction in matters of this nature, for working out a final settlement of the corporate concerns.

Reburiano v CA and Pepsi cola Bottling Company Aeburiano was ordered to pay 1epsi a sum of money 1ursuant to said :udgment, a writ of e0ecution was issued by Trial 'ourt

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1rior to the promulgation of the decision, 1epsi amended its Articles of *ncorporation shortening the term of its e0istence Bhen the trial was conducted, decision rendered, and writ of e0ecution issued, 1epsi was no longer in e0istence A dissolved and non"e0isting corporation could still be represented by a lawyer o # &55 'orpo code D GEvery corporation whose charter e0pires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate e0istence for other purposes is terminated in any other manner shall nevertheless be continued as a body corporate for $ years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets, but not for the purpose of continuing the business for which it was established.H o At any time during the $ years, corpo is empowered to convey its properties to trustees o Trustees may commence a suit which can proceed to final :udgment even beyond the three"year period. 7o reason can be conceived why a suit already commenced by the corporation itself during its e0istence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation should not be accorded similar treatment allowed D to proceed to final :udgment and e0ecution thereof

FOR0I@N CORPORATION A. F -ei9n ' -$ -ati n (#ection &5$! 6oreign corporation is one formed, organiCed or e0isting under any laws other than those of the 1hilippines and whose laws allow 6ilipino citiCens and corporations to do business in its own country or state. f %tainin9 a li'ense t # %3siness :

B. Ne'essity

The reason for the license is to sub:ect the foreign corporation doing business in the 1hilippines to the :urisdiction of the courts, otherwise a foreign corporation illegally doing business here may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the :urisdiction of the local courts.

C. MD in9 %3sinessN (#ec. $(d! AA E4(5! #oliciting orders

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#ervice contracts 8pening offices, whether called liason offices or branches Appointing representatives or distributors domiciled in the 1hilippines or who in any calendar year stay in the country for a period or periods totaling &F4 days or more 1articipating in the management, supervision or control of any domestic business, firm, entity or corporation in the 1hilippines Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that e0tent, performance normally incident to , and in progressive prosecution of, commercial gain or of the purpose and ob:ect of the business organiCation *t shall not include: o )ere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business and?or the e0ercise of such rights as such investor o .aving a nominee director or officer to represent its interests in such corporations o Appointing a representative or distributor domiciled in the 1hilippines which transacts business in its own name and for its own account f a li'ense

2. Re<3i-e4ents f - t"e iss3an'e

&. 2ocumentary re/uirements (#ec. &5 ! A foreign corporation applying for a license to transact business in the 1hilippines shall submit to the #E': o 'opy of its articles of incorporation and by"laws, certified in accordance with law o Their translation to an official language of the 1hilippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: o The date and term of incorporation@ o The address, including the street number, of the principal office of the corporation in the country or state of incorporation@ o The name and address of its resident agent authoriCed to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation@ o The place in the 1hilippines where the corporation intends to operate@ o The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the 1hilippines: 1rovided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency@ o The names and addresses of the present directors and officers of the corporation@ o A statement of its authoriCed capital stock and the aggregate number of shares which the corporation has authority to issue, itemiCed by

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classes, par value of shares, shares without par value, and series, if any@ o A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemiCed by classes, par value of shares, shares without par value, and series, if any@ o A statement of the amount actually paid in@ and o #uch additional information as may be necessary or appropriate in order to enable the #ecurities and E0change 'ommission to determine whether such corporation is entitled to a license to transact business in the 1hilippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly e0ecuted certificate under oath by the authoriCed official or officials of the :urisdiction of its incorporation, attesting to the fact that: o The laws of the country or state of the applicant allow 6ilipino citiCens and corporations to do business therein o The applicant is an e0isting corporation in good standing. *f such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application shall likewise be accompanied by a statement under oath of the president or any other person authoriCed by the corporation, showing to the satisfaction of the #E' and other governmental agency in the proper cases that the: o Applicant is solvent and in sound financial condition, and o #etting forth the assets and liabilities of the corporation as of the date not e0ceeding one (&! year immediately prior to the filing of the application. 6oreign banking, financial and insurance corporations shall, in addition to the above re/uirements, comply with the provisions of e0isting laws applicable to them. *n the case of all other foreign corporations, no application for license to transact business in the 1hilippines shall be accepted by the #E' without previous authority from the appropriate government agency, whenever re/uired by law. 2eposit re/uirements (#ec. &5%!

5.

;pon issuance of the license, such foreign corporation may commence to transact business in the 1hilippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this 'ode or other special laws. Bithin si0ty (%4! days after the issuance of the license to transact business in the 1hilippines, the license, e0cept foreign banking or insurance corporation, shall deposit with the #E' for the benefit of present and

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future creditors of the licensee in the 1hilippines, securities satisfactory to the #E', consisting of : o Bonds or other evidence of indebtedness of the ,overnment of the 1hilippines, its political subdivisions and instrumentalities, or of government"owned or controlled corporations and entities, o #hares of stock in Pregistered enterprisesP as this term is defined in Aepublic Act 7o. &F%, o #hares of stock in domestic corporations registered in the stock e0change, or o #hares of stock in domestic insurance companies and banks, or o Any combination of these kinds of securities, Bith an actual market value of at least one hundred thousand (1&44,444.! pesos@ 1rovided, however, That within si0 (%! months after each fiscal year of the licensee, the #E' shall re/uire the licensee to deposit additional securities e/uivalent in actual market value to two (5=! percent of the amount by which the licenseeIs gross income for that fiscal year e0ceeds five million (1 ,444,444.44! pesos. The #E' shall also re/uire deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (&4=! percent of their actual market value at the time they were deposited. The #E' may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (&4=! percent of the actual market value of the securities at the time they were deposited. The #E' may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. #uch licensee shall be entitled to collect the interest or dividends on the securities deposited. *n the event the licensee ceases to do business in the 1hilippines, the securities deposited as aforesaid shall be returned, upon the licenseeIs application therefor and upon proof to the satisfaction of the #E' that the licensee has no liability to 1hilippine residents, including the ,overnment of the Aepublic of the 1hilippines.

$. Appointment of resident agent (#ec. &5F! A resident agent may be either an: o *ndividual residing in the 1hilippines of good moral character and of sound financial standing o 2omestic corporation lawfully transacting business in the 1hilippines: The #E' shall re/uire as a condition precedent to the issuance of the license to transact business in the 1hilippines by any foreign corporation that such corporation file with the #E' a written power of attorney:

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2esignating some person who must be a resident of the 1hilippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and o 'onsenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authoriCed officers of the foreign corporation at its home office. Any such foreign corporation shall likewise e0ecute and file with the #E' an agreement or stipulation, e0ecuted by the proper authorities of said corporation, in form and substance as follows: o PThe (name of foreign corporation! does hereby stipulate and agree, in consideration of its being granted by the #ecurities and E0change 'ommission a license to transact business in the 1hilippines, that if at any time said corporation shall cease to transact business in the 1hilippines, or shall be without any resident agent in the 1hilippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the 1hilippines, service of any summons or other legal process may be made upon the #E' and that such service shall have the same force and effect as if made upon the duly"authoriCed officers of the corporation at its home office.P Bhenever such service of summons or other process shall be made upon the #E', the 'ommission shall, within ten (&4! days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the 'ommission shall be necessary part of and shall complete such service. All e0penses incurred by the 'ommission for such service shall be paid in advance by the party at whose instance the service is made. *n case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the #E' of the new address.

(. #ummary: Ae/uisites for the *ssuance of +icense The #E' will issue a license to the foreign corporation to do business in the 1hilippines, provided the following conditions are met: o Appointment of a Aesident Agent: Either a 6ilipino or domestic corporation@ and 1ower of Attorney to #E' to receive process )ust prove that the foreign corporationIs country grants reciprocal rights to 6ilipinos and 1hilippine corporation. Establish an office in the 1hilippines Bring in its assets ;ndertaking that 6ilipino creditors will be preferred in the event of insolvency 7otice of si0 (%! months should there be desire to terminate operations

o o o o o

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o o

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6ranchise and patents must remain in the 1hilippine, if this is possible )ust file a bond of 1&44,444 which may be in the following form: surety bond government securities securities of political subdivisions shares of stock of registered enterprises with the #E' shares of stock of any corporation being sold at the stock e0change 1rovided, that within si0 (%! months after each fiscal year, the #E' shall re/uire the deposit of additional securities e/uivalent to 5= of the amount in e0cess of 1 44,444 of the gross income. N#ec. &5 , &5%, 'orporation 'odeO t-ansa't

0. W"at laws a-e a$$li'a%le t f -ei9n ' -$ -ati ns li'ense# t %3siness in t"e P"ili$$inesB ( #ec. &53!

Any foreign corporation lawfully doing business in the 1hilippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, EU'E1T such only as provide for the: o 'reation, formation, organiCation or dissolution of corporations o Those which fi0 the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. f # in9 %3siness in t"e P"ili$$ines

F. W"at a-e t"e ' nse<3en'e wit" 3t a li'enseB (#ec. &$$!

7o foreign corporation transacting business in the 1hilippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the 1hilippines@ #uch corporation may be sued or proceeded against before 1hilippine courts or administrative tribunals on any valid cause of action recogniCed under 1hilippine laws. #hall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency in the 1hilippines@ but such corporation may be sued or proceeded against before 1hilippine courts or administrative tribunals. *n addition, #ec. &$( makes it a ground for revocation of license when a foreign corporation transacts business in the 1hilippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the 1hilippines. #tatus of 'ontracts entered into without the re/uisite license o The failure to obtain a license by a foreign corporation doing business in the 1hilippines does not affect the validity of contracts entered into by such foreign corporation, but merely removes its legal standing to sue in local tribunals. .owever, the defect may be cured by

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subse/uent registration by the foreign corporation to obtain the necessary license to do business in the 1hilippines. N.ome *nsurance 'o. v. Eastern #hipping +ines, &5$ #'AA (5( (&3F$!O o Although the law does not declare as void or invalid the contracts entered into by a foreign corporation with a local corporation without the former first securing a license or certificate to do business in the 1hilippines, the parties in this case cannot obtain relief on the contracts entered into because they are charged with the knowledge of the e0isting law at the time they entered into such contract and at the time it is to be operative. NTop"Beld )fg. v. E'E2, #.A., &$F #'AA &&F (&3F !O o .owever, in the case of )errill +ynch 6utures, *nc. v. 'A, 5&& #'AA F5( (&335!, the #' held that although the foreign corporation has engaged in business in the 1hilippines without a license, the dismissal of the suit would not be proper on the ground that if the local investors knew that the foreign corporation had no license to do business, then they are estopped from using the lack of license to avoid their obligations. +egal standing of foreign corporations to sue on their corporate names, trade names, and trademarks o A foreign corporation although not doing business in the 1hilippines has a personality to sue to oppose the registration of a trademark when it is shown that its products using such trademark are being imported and sold in the 1hilippines, pursuant to the terms of AA &%%. N,eneral ,arments v. 2irector of 1atents, (& #'AA 4 (&3E&!O o A foreign corporation has a right to maintain an action in 1hilippine courts even if it is not licensed to do business and is not actually doing business on its own therein to protect its corporate and trade names, since it is a property right in rem, which it may assert to protect against all the world, in any of the courts of the world""even in :urisdiction where it does not transact business"":ust the same as it may protect its tangible property, against trespass or conversion. o This is consonance with the 'onvention of the ;nion of 1aris for the 1rotection of *ndustrial 1roperty to which the 1hils. is a party. Article F thereof provides, PA trade name shall be protected in all the countries of the ;nion without the obligation of filing or registration, whether or not it forms part of the trademark.P The mandate is contained in AA &%%, or the Trademark +aw. N'onverse Aubber 'orp. v. ;niversal Aubber 1roducts, &(E #'AA & ( (&3FE!O e8istin9 f -ei9n ' -$ -ati ns (#ection &53!

@. A$$li'ati n t

Every foreign corporation which on the date of the effectivity of this 'ode is authoriCed to do business in the 1hilippines under a license issued to it, shall continue to have such authority under the terms and condition of its license, sub:ect to the provisions of this 'ode and other special laws.

HLP2009-3B
,. A4en#4ents t a-ti'les ' -$ -ati ns (#ection &$4! f in' -$ -ati n - %y-laws

Page 138
f f -ei9n

Bithin si0ty (%4! days after the amendment becomes effective, file with the #E', and in the proper cases with the appropriate government agency, a 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 made, duly certified by the authoriCed official or officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authoriCed to transact business in the 1hilippines.

I.

A4en#e# li'ense (#ection &$&! A foreign corporation authoriCed to transact business in the 1hilippines shall obtain an amended license in the event it : o 'hanges its corporate name, or o 2esires to pursue in the 1hilippines other or additional purposes By submitting an application therefor to the #E', favorably endorsed by the appropriate government agency in the proper cases.

J.

?e-9e- - ' ns li#ati n in1 l1in9 a f -ei9n ' -$ -ati n li'ense# in t"e P"ili$$ines (#ection &$5! 8ne or more foreign corporations authoriCed to transact business in the 1hilippines may merge or consolidate with any domestic corporation or corporations if : o #uch is permitted under 1hilippine laws and by the law of its incorporation o The re/uirements on merger or consolidation as provided in this 'ode are followed Bhenever a foreign corporation authoriCed to transact business in the 1hilippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within si0ty (%4! days after such merger or consolidation becomes effective, file with the #E', and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected 1rovided, however, that if the absorbed corporation is the foreign corporation doing business in the 1hilippines, the latter shall at the same time file a petition for withdrawal of its license.

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E. Re1 'ati n f li'ense (#ection &$(!

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Bithout pre:udice to other grounds provided by special laws, the license of a foreign corporation to transact business in the 1hilippines may be revoked or suspended by the #E' upon any of the following grounds: o 6ailure to file its annual report or pay any fees as re/uired by this 'ode@ o 6ailure to appoint and maintain a resident agent in the 1hilippines as re/uired by this Title@ o 6ailure, after change of its resident agent or of his address, to submit to the #ecurities and E0change 'ommission a statement of such change as re/uired by this Title@ o 6ailure to submit to the #ecurities and E0change 'ommission an authenticated copy of any amendment to its articles of incorporation or by"laws or of any articles of merger or consolidation within the time prescribed by this Title@ o A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title@ o 6ailure to pay any and all ta0es, imposts, assessments or penalties, if any, lawfully due to the 1hilippine ,overnment or any of its agencies or political subdivisions@ o Transacting business in the 1hilippines outside of the purpose or purposes for which such corporation is authoriCed under its license@ o Transacting business in the 1hilippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the 1hilippines@ or o Any other ground as would render it unfit to transact business in the 1hilippines. (n! f 'e-tifi'ate f -e1 'ati n (#ection &$ !

L. Iss3an'e

;pon the revocation of any such license to transact business in the 1hilippines, the #ecurities and E0change 'ommission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The #ecurities and E0change 'ommission shall also mail to the corporation at its registered office in the 1hilippines a notice of such revocation accompanied by a copy of the certificate of revocation.

?. Wit"#-awal %y a f -ei9n ' -$ -ati n (#ection &$%! *f a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for withdrawal, and must meet the following re/uirements: o All claims accrued in the 1hilippines must be settled

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o All ta0es must be paid 1etition must be published once a week for three ($! consecutive weeks. N#ec. &$%, 'orporation 'odeO

Le C"e4ise La' ste 1 Fe-nan#eA. 6: +a 'hemise +acoste is a 6rench corporation and not doing business in the A1, and is also the actual owner of the trademarks +acoste and 'rocodile 2evice. .emandas M 'o secured a registration of the trademarks in its name from the 1hil 1atent 8ffice of the trademarks owned by +e 'hemise. .emandas then assigned all its rights title and interest in the trademark to ,obindram .emandas. +e 'hemise filed its own application for registration of the trademarks 'rocodile 2evice and +acoste, and the 1atent 8ffice approved the former was but re:ected the latter. +e 'hemise then filed a letter" complaint with the 7B* alleging acts of unfair competition committed by .emandas and re/uesting their apprehension and prosecution. The 7B* secured search warrants, but .emandas files a )TV the warrant alleging that his trademarks is different from +e 'hemise. #earch warrants were recalled and items seiCed returned to .emandas. +e 'hemise /uestions the /uashal. *: B?n petitioner has no legal capacity to sue because it is not doing business in the 1hilippines and is not licensed to do so, and that it failed to allege certain facts in its petition relative to its capacity to sue. .: *n +eviton case, which is relied on by .emandas, it was ruled that it is not enough for a foreign corporation to merely allege that it is a foreign corporation. 'ompliance with the re/uirements under the law or statute from which it seeks relief and upon which the grounds of the illegal act are alleged, is necessary. *t is therefore necessary for the foreign corporation to comply with these re/uirements or aver why it should be e0empted from them. The foreign corporation may have the right to sue before A1 courts, but our rules on pleadings re/uire that the /ualifying circumstances necessary for the assertion of that right be affirmatively pleaded. #ince the present case involves a criminal offense, the +eviton case is inapplicable. +e 'hemise may still sue even if it failed to allege material facts. A foreign corporation not doing business needs no license to sue before A1 courts for infringement of trademark and unfair competition. A foreign corporation favorable known in the 1hils through the use of its products bearing its corporate name has a legal right to maintain action in the 1hilippines to restrain the formation in B6 of a corporation bearing the same name as the foreign corporation@ the sole purpose of its suit is to protect its reputation, corporate name, goodwill whenever the same has established themselves. A corporate and trade name are property rights, rights in rem, which the owner may assert and protect against the whole world, in any courts of the worldJ even in :urisdictions where it does not transact business. #ince it is the trademark and not the mark that is to be protected, a trademark acknowledges no territorial boundaries or municipalities or states or nations, but e0tends to every market where the trader9s goods have become known and identified. The letter"complaint that preceded the petition was filed with the 7B*. *f prosecution would follow after the 1* then the information shall be in the name of the 1eople of the A1 and no longer the petitioner which is only an aggrieved party, since a criminal act is an act against the #tate. +e 'hemise capacity to sue, would then be of no significance. The )entholatum case relied upon by .emandas is also not on all fours with the present case. The foreign corporation in )entholatum is in fact doingbusiness in the A1 but without the re/uisite license. *n the present case, +e 'hemise is a foreign corporation not doing business in the A1. *t has an e0clusive distributor, Austans 'ommercial, which is an independent entity which buys and sells the products of +e 'hemise, and is in other words not a mere agent or conduit of +e 'hemise. B8* rules also support a finding that +e 'hemise is not doing business. Austans is a middleman acting and transacting business in its own name and account. *n upholding the rights of +e 'hemise, #' held that we are recogniCing our duties and rights of foreign states to which the 1hilippines and 6rance are parties. Be are simply interpreting and enforcing a solemn international commitment of the 1hilippines embodied in a multilateral treaty, the 1aris 'onvention for the 1rotection of *ndustrial 1roperty to which we are a party. The convention has e0traterritorial application, and is essentially a compact between the member countries to accord to member"countries9 citiCens the same rights comparable to

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those accorded their own citiCens by domestic law. The underlying principle is that foreign nationals should be given the same treatment in each of the member"countries as that country makes available to its own citiCens. *t is not premised upon the idea that the trademark and related laws shall be given e0tra"territorial application, but on e0actly the converse that each nation9s law shall have only territorial application. A treaty or convention is not a mere moral obligation to be enforced but creates a legally binding obligation on the parties founded on the generally accepted principles of international law of pacta sunt servanda, which has been adopted as the law of the law. A9ilent Te'"n l 9ies Sin9a$ -e 1. Inte9-ate# Sili' n Te'"n l 9y P"ils. 6: 1etitioner Agilent Technologies #ingapore (1te.!, +td. (GAgilentH! is a foreign corporation, which, by its own admission, is not licensed to do business in the 1hilippines. Aespondent *ntegrated #ilicon Technology 1hilippines 'orporation (G*ntegrated #iliconH! is a private domestic corporation, &44= foreign owned, which is engaged in the business of manufacturing and assembling electronics components. A "year -alue Added Assembly #ervices Agreement (G-AA#AH!, was entered into on April 5, &33% between *ntegrated #ilicon and the .ewlett"1ackard #ingapore (1te.! +td., #ingapore 'omponents 8peration (G.1"#ingaporeH!. ;nder the terms of the -AA#A, *ntegrated #ilicon was to locally manufacture and assemble fiber optics for e0port to .1" #ingapore. .1"#ingapore, for its part, was to consign raw materials to *ntegrated #ilicon@ transport machinery to the plant of *ntegrated #ilicon@ and pay *ntegrated #ilicon the purchase price of the finished products. .1"#ingapore assigned all its rights and obligations in the -AA#A to Agilent. *ntegrated #ilicon sues Agilent and its officers for specific performance, alleging that Agilent breached the parties9 oral agreement to e0tend the -AA#A. *ntegrated #ilicon thus prayed that defendant be ordered to e0ecute a written e0tension of the -AA#A for a period of five years as earlier assured and promised. Agilent then filed a separate complaint for specific performance against *ntegrated #ilicon, Teoh >ang #eng, Teoh >iang ,ong, Anthony 'hoo, Loanne >ate ). dela 'ruC, Lean >ay ). dela 'ruC and Aolando T. 7acilla, and prayed for the immediate return and delivery to plaintiff its e/uipment, machineries and the materials to be used for fiberoptic components which were left in the plant of *ntegrated #ilicon. T' denied )T2 of #ilicon. 'A reverses. *ntegrated #ilicon et al argue that since Agilent is an unlicensed foreign corporation doing business in the 1hilippines, it lacks the legal capacity to file suit, assailing various acts of Agilent, purportedly in the nature of Gdoing businessH in the 1hilippines. .: A foreign corporation without a license is not ipso facto incapacitated from bringing an action in 1hilippine courts. A license is necessary only if a foreign corporation is GtransactingH or Gdoing businessH in the country. The 'orporation 'ode provides: #ec. &$$. 2oing business without a license. J 7o foreign corporation transacting business in the 1hilippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the 1hilippines@ but such corporation may be sued or proceeded against before 1hilippine courts or administrative tribunals on any valid cause of action recogniCed under 1hilippine laws. The aforementioned provision prevents an unlicensed foreign corporation Gdoing businessH in the 1hilippines from accessing our courts. *n a number of cases, however, we have held that an unlicensed foreign corporation doing business in the 1hilippines may bring suit in 1hilippine courts against a 1hilippine citiCen or entity who had contracted with and benefited from said corporation. #uch a suit is premised on the doctrine of estoppel. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. This doctrine of estoppel to deny corporate e0istence and capacity applies to foreign as well as domestic corporations. The application of this principle prevents a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract. The principles regarding the right of a foreign corporation to bring suit in 1hilippine courts may thus be condensed in four statements: (&! if a foreign corporation does business in the 1hilippines without a license, it cannot sue before the 1hilippine courts@

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(5! if a foreign corporation is not doing business in the 1hilippines, it needs no license to sue before 1hilippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction@ ($! if a foreign corporation does business in the 1hilippines without a license, a 1hilippine citiCen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation9s corporate personality in a suit brought before 1hilippine courts@ and ((! if a foreign corporation does business in the 1hilippines with the re/uired license, it can sue before 1hilippine courts on any transaction. *n )entholatum, the 'ourt discoursed on the two general tests to determine whether or not a foreign corporation can be considered as Gdoing businessH in the 1hilippines. The first of these is the substance test, thus: The true test Nfor doing businessO, however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was organiCed or whether it has substantially retired from it and turned it over to another. The second test is the continuity test, e0pressed thus: The term Ndoing businessO implies a continuity of commercial dealings and arrangements, and contemplates, to that e0tent, the performance of acts or works or the e0ercise of some of the functions normally incident to, and in the progressive prosecution of, the purpose and ob:ect of its organiCation. Although each case must be :udged in light of its attendant circumstances, :urisprudence has evolved several guiding principles for the application of these tests. 6or instance, considering that it transacted with its 1hilippine counterpart for seven years, engaging in futures contracts, this 'ourt concluded that the foreign corporation in :errill <ynch *utures6 )nc. %. Court of 1ppeals and Spouses <ara, was doing business in the 1hilippines. *n Top( 9eld :anufacturing %. ECE'6 )-T)6 et al. both involved the +icense and Technical Agreement and 2istributor Agreement of foreign corporations with their respective local counterparts that were the primary bases for the 'ourt9s ruling that the foreign corporations were doing business in the 1hilippines. *n particular, the 'ourt cited the highly restrictive nature of certain provisions in the agreements involved, such thatK the 1hilippine entity is reduced to a mere e0tension or instrument of the foreign corporation. The case law definition has evolved into a statutory definition, having been adopted with some /ualifications in various pieces of legislation. The 6oreign *nvestments Act of &33& (the G6*AH@ Aepublic Act 7o. E4(5, as amended!, #ec $ (d! defines Gdoing businessH as those which Ginclude soliciting orders, service contracts, opening offices, whether called GliaisonH offices or branches@ appointing representatives or distributors domiciled in the 1hilippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (&F4! days or more@ participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the 1hilippines@ and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that e0tent the performance of acts or works, or the e0ercise of some of the functions normally incident to, and in the progressive prosecution of, commercial gain or of the purpose and ob:ect of the business organiCation.H An analysis of the relevant case law, in con:unction with #ection & of the *mplementing Aules and Aegulations of the 6*A (as amended by Aepublic Act 7o. F&E3!, would demonstrate that the acts enumerated in the -AA#A do not constitute Gdoing businessH in the 1hilippines. The *AA of the 6*A (as amended by Aepublic Act 7o. F&E3! provides that the following shall not be deemed Gdoing businessH: a. )ere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and?or the e0ercise of rights as such investor@ b. .aving a nominee director or officer to represent its interest in such corporation@ c. Appointing a representative or distributor domiciled in the 1hilippines which transacts business in the representative9s or distributor9s own name and account@ d. The publication of a general advertisement through any print or broadcast media@ e. )aintaining a stock of goods in the 1hilippines solely for the purpose of having the same processed by another entity in the 1hilippines@

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f. 'onsignment by a foreign entity of e/uipment with a local company to be used in the processing of products for e0port@ g. 'ollecting information in the 1hilippines@ and h. 1erforming services au0iliary to an e0isting isolated contract of sale which are not on a continuing basis, such as installing in the 1hilippines machinery it has manufactured or e0ported to the 1hilippines, servicing the same, training domestic workers to operate it, and similar incidental services. By and large, to constitute Gdoing businessH, the activity to be undertaken in the 1hilippines is one that is for profit"making. By the clear terms of the -AA#A, Agilent9s activities in the 1hilippines were confined to (&! maintaining a stock of goods in the 1hilippines solely for the purpose of having the same processed by *ntegrated #ilicon@ and (5! consignment of e/uipment with *ntegrated #ilicon to be used in the processing of products for e0port. As such, we hold that, based on the evidence presented thus far, Agilent cannot be deemed to be Gdoing businessH in the 1hilippines. Aespondents9 contention that Agilent lacks the legal capacity to file suit is therefore devoid of merit. As a foreign corporation not doing business in the 1hilippines, it needed no license before it can sue before our courts. ?e--ill Lyn'" F3t3-es 1 CA. 6: )errill +ynch 6utures, *nc. a non"resident foreign corporation not doing business in the 1hilippines, sued the #pouses 1edro ). +ara and Elisa ,. +ara for the recovery of a debt and interest thereon. )errill +ynch is a Pfutures commission merchantP duly licensed to act as such in the futures markets and e0changes in the ;nited #tates, and essentially functioning as a brokerK (e0ecuting! orders to buy and sell futures contracts received from its customers on ;.#. futures e0changes. *t also defined a Pfutures contractP as a Pcontractual commitment to buy and sell a standardiCed /uantity of a particular item at a specified future settlement date and at a price agreed upon, with the purchase or sale being e0ecuted on a regulated futures e0change.P *t entered into a 6utures 'ustomer Agreement with the defendant spouses, in virtue of which it agreed to act as the latterIs broker for the purchase and sale of futures contracts in the ;.#. and that pursuant to the contract, orders to buy and sell futures contracts were transmitted to )+ 6;T;AE# by the +ara #pouses Pthrough the facilities of )errill +ynch 1hilippines, *nc., a 1hilippine corporation and a company servicing plaintiffs customers. +ater, the +aras would reaffirm their lack of awareness that )errill +ynch 1hilippines, *nc. (formerly registered as )errill +ynch, 1ierce, 6enner M #mith 1hilippines, *nc.! did not have a license, claiming that they learned of this only from in/uiries with the #ecurities and E0change 'ommission which elicited the information that it had denied said corporationIs application to operate as a commodity futures trading advisor. +ara #pouses actively traded in futures contracts, including Pstock inde0 futuresP for four years or so, i.e., from &3F$ to 8ctober, &3FE. A loss amounting to ;#Y&%4,E(3.%3 was incurred in respect of three ($! transactions involving Pinde0 futures,P and after setting this off against an amount of ;#YE ,3&$.(5 then owing by )+ 6;T;AE# to the +ara #pouses, said spouses became indebted to )+ 6;T;AE# for the ensuing balance of ;#YF(,F$%.5E. +ara #pouses however refused to pay this balance, Palleging that the transactions were null and void because )errill +ynch 1hilippines, *nc., the 1hilippine company servicing accounts of plaintiffK had no license to operate as a Icommodity and?or financial futures broker. +ara files a )T2, and T' sustains the motion. 'A affirms, holding that the Trial 'ourt had seen Pthrough the charade in the representation of )+1* and the plaintiff that )+1* is only a trading advisor and in fact it is a conduit in the plaintiffIs business transactions in the 1hilippines,H citing the ruling in: ?ent" lat34 1 ?an9ali4an. *: B?n (a! )+ 6;T;AE# is prohibited from suing in 1hilippine 'ourts because doing business in the country without a license, and that (b! it is not a real party in interest since the +ara #pouses had not been doing business with it, but with another corporation, )errill +ynch, 1ierce, 6enner M #mith, *nc. .: The ground that the plaintiff has no legal capacity to sue J may be understood in two senses: one, that the plaintiff is prohibited or otherwise incapacitated by law to institute suit in 1hilippine 'ourts@ or two, although not otherwise incapacitated in the sense :ust stated, that it is not a real party in interest. 7ow, the +ara #pouses contend that )+ 6utures has no capacity to sue them because the transactions sub:ect of the complaint were had by them, not with the plaintiff )+ 6;T;AE#, but with )errill +ynch 1ierce 6enner M #mith, *nc.

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The facts on record ade/uately establish that )+ 6;T;AE#, operating in the ;nited #tates, had indeed done business with the +ara #pouses in the 1hilippines over several years, had done so at all times through )errill +ynch 1hilippines, *nc. ()+1*!, a corporation organiCed in this country, and had e0ecuted all these transactions without )+ 6;T;AE# being licensed to so transact business here, and without )+1* being authoriCed to operate as a commodity futures trading advisor. The +aras did transact business with )+ 6;T;AE# through its agent corporation organiCed in the 1hilippines, it being unnecessary to determine whether this domestic firm was )+1* ()errill +ynch 1hilippines, *nc.! or )errill +ynch 1ierce 6enner M #mith ()+1*Is alleged predecessor!. The fact is that )+ 6;T;AE# did deal with futures contracts in e0changes in the ;nited #tates in behalf and for the account of the +ara #pouses, and that on several occasions the latter received account documents and money in connection with those transactions. *: B?7 )+ 6;T;AE# may sue in 1hilippine 'ourts to establish and enforce its rights against said spouses, in light of the undeniable fact that it had transacted business in this country without being licensed to do so. B?7 the +ara #pouses are now estopped to impugn )+ 6;T;AE#I capacity to sue them in the courts of the forum. .: The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the Pdoctrine of estoppelH to deny corporate e0istence applies to foreign as well as to domestic corporations@ Pone who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate e0istence and capacity.P The principle Pwill be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract where such person has acted as agent for the corporation and has violated his fiduciary obligations as such, and where the statute does not provide that the contract shall be void, but merely fi0es a special penalty for violation of the statuteK P There would seem to be no /uestion that the +aras received benefits generated by their business relations with )+ 6;T;AE#. Those business relations, according to the +aras themselves, spanned a period of seven (E! years@ and they evidently found those relations to be of such profitability as warranted their maintaining them for that not insignificant period of time@ otherwise, it is reasonably certain that they would have terminated their dealings with )+ 6;T;AE# much, much earlier. *n fact, even as regards their last transaction, in which the +aras allegedly suffered a loss in the sum of ;#Y&%4,E(3.%3, the +aras nonetheless still received some monetary advantage, for )+ 6;T;AE# credited them with the amount of ;#YE ,3&$.(5 then due to them, thus reducing their debt to ;#YF(,F$%.5E. ,iven these facts, and assuming that the +ara #pouses were aware from the outset that )+ 6;T;AE# had no license to do business in this country and )+1*, no authority to act as broker for it, it would appear /uite ine/uitable for the +aras to evade payment of an otherwise legitimate indebtedness due and owing to )+ 6;T;AE# upon the plea that it should not have done business in this country in the first place, or that its agent in this country, )+1*, had no license either to operate as a Pcommodity and?or financial futures broker.P J Estoppel doctrine: if local parties knew that the foreign entity does not have a license, yet it is doing business, and they still transacted with themJestopped from invoking lack of licenseS J -illanueva: )errill +ynch lacks an element of estoppelJ action?representation by the local which induces the foreign to believe that he would be entitled to reliefK the simple act of entering into a contract with a foreign entity does not of itself give rise to estoppel.