Generally they do not need to be

registered.

CORPORATION LAW
Corporation is one of the types of
business organizations. It is also the
most
important
in
economic
development.

Corporations
-

INTRODUCTION
Sole Proprietorship
-

1. The articles of incorporation

expressly
authorized
the
corporation
to
enter
into
contracts of partnership;

One man form of business entity,

personally answers all liabilities, but
enjoys all the profits with the exclusion
of others

Limited shareholders responsibility

Paid subscription in full, you are no

longer liable

2. The agreement or articles of

partnership must provide that all
the partners will manage the
partnership; and
3. The articles of partnership must
stipulate that all the partners are
and shall be jointly and severally
liable for all obligations of the
partnership.

Partnership
-

Based on mutual trust and confidence

Joint venture
-

one time grouping of persons whether

they be natural or juridical
does not entail continuity because
after the undertaking is completed it is
already the end
particular partnership and joint venture
would be similar, but there is already a
decision of the Supreme Court
declaring them as different

when they do not register, it does not

exist

Foreign corporations enters into an

agreement
with
a
domestic
corporation, it must be registered.

They may enter into joint venture,

but generally they cannot enter into
a partnership, but there are
exceptions allowed by the SEC: the
3 exceptions must go hand in hand

Definition and Attributes

4 Attributes of a Corporation
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties
expressly authorized by law or
incident to its existence.
Doctrine of limited capacity
-

Only such powers as are expressly

granted to it by law and by its
articles of incorporation including
others which are incidental to such
conferred powers, those reasonably
1

necessary to accomplish its purpose

and those which may be incidental to
its existence

(10) Acts and actions referred to in

Articles 21, 26, 27, 28, 29, 30, 32,
34, and 35.

Can do things as the law asks or

allows it to do

If it does anything beyond, it shall be

considered as ULTRA VIRES

The parents of the female seduced,

abducted, raped, or abused, referred
to in No. 3 of this article, may also
recover moral damages.
The
spouse,
descendants,
ascendants, and brothers and
sisters may bring the action
mentioned in No. 9 of this article, in
the order named.

General rule: Moral damages cannot

be granted to corporations
Exception: Filipinas Broadcasting
Network Inc. vs. Ago Med
-

Advantages:

In cases of slander, libel and other

forms of defamation (should not qualify
because the code does not qualify
whether natural or juridical) Art. 2219
of the civil code:

1. Capacity to act as a single unit

2. Limited shareholder's liability
3. Continuity of existence
4. Feasibility of greater undertaking
5. Transferability of shares
6. Centralized Management
7.Standardized
method
of
organization, management, and
finance.

Art. 2219. Moral damages may

be recovered in the following and
analogous cases:
(1) A criminal offense resulting in
physical injuries;
(2) Quasi-delicts
injuries;

causing

physical

No. 2 may also be a disadvantage

No. 5 may also be a disadvantage

Disadvantages:

(3) Seduction, abduction, rape, or

other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or
arrest;
(6) Illegal search;
(7) Libel, slander or any other form of
defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;

1. Formal proceeding (such as

board of meetings) are required;
2. Business transactions limited to
the State unless authorized by
foreign State;
3. Credit is limited in view of
shareholder's limited liability;
4. Unity of incompatible and
conflicting elements in view of
transferability of shares;
5. Minority shareholders have
practically no say in the conduct of
corporate affairs;
2

6. In large scale enterprises,

stockholders' voting rights may
become
merely
fictitious
and
theoretical because of disinterested
in management, wide-scale ownership
and inaccessible place of meeting;
7. "Double taxation" may be imposed
on corporate income;
8. Corporation are subject to many
legal controls and restrictions.

- primarily exist for purposes other than for

profit, it does not follow that they cannot
make profits as an incident to their
operations.
- profits obtained cannot be distributed as
dividends but are used merely for the
furtherance of their purpose or purposes.
Stock (Section 51)
Two (2) requisites must be complied with,

A corporation is a person, therefore

protected by the due process clause
and equal protection clause of the
Constitution

1. a capital stock divided into

shares, and
2. authorized to distribute dividends
or allotments as surplus profits to its
stockholders on the basis of the
shares held by each of them.

CLASSIFICATION OF CORPORATIONS
Section 3 Stock and non-stock
-

Importance of knowing, determining

what provisions of the code or the law
may be applicable
Section 3. Classes of corporations. Corporations formed or organized
under this Code may be stock or nonstock corporations. Corporations
which have capital stock divided
into shares and are authorized to
distribute to the holders of such
shares dividends or allotments of
the surplus profits on the basis of
the
shares
held
are
stock
corporations. All other corporations are
non-stock corporations. (3a)

Non-stock- (title 10)

Non-stock corporation - of those where no
part of their income is distributable as
dividends to its members, trustees or officers
subject to provisions on dissolution.

Stockholders must generally cast

their votes in the meeting; section 4
governed primarily by the law
creating them
Section 4. Corporations created by
special
laws
or
charters.
Corporations created by special
laws or charters shall be governed
primarily by the provisions of the
special law or charter creating them
or applicable to them, supplemented
by the provisions of this Code,
insofar as they are applicable. (n)
Section 3
-

The two (2) requisites must always

concur

1. That they have a capital stock

divided into shares; and,
2. That they are authorized to distribute
dividends or allotments as surplus
profits to its stockholders on the
3

basis of the shares held by each of

them.

Close corporation
-

There is exclusivity of shares of

stock

Section 96-105

Section 4
-

Created by a special law, they have

their own character

Restrictions to transfer shares

They are not immune from suit unless

provided by the law of their creation

Only those
shares

Primarily governed by the law creating

them

Article must provide that there will

be no public offering

Their subsidiaries are entirely different

or independent from that of the other

Open corporation

indicated

can

Close corporation

openly admit investors

example: stock exchange

There is no exemption it is absolute

Domestic/ Foreign

Public corporation
-

Political or governmental purposes

Those formed or organized for the

government or a portion of the State or
any of its political subdivision and
which have for their purpose the
general good and welfare

Immediate benefit, aim or advantage

of private individuals

Those formed for some

purpose, benefit, aim or end

private

Distinction: public for governmental

purpose

Corporation Sole
-

Test
-

Incorporation test

If incorporated under the laws of the

Philippines it is a domestic
corporation

ME Gray vs. CA

Private Corporation

own

Exemption to the rule because it is

composed only of one person
An incorporator may also be a juridical
person

Parent or Holding/ subsidiaries and

affiliates

Affiliates- no majority vote

SMC 12%

HERSHEY

CBP

CBPl 12%

12%
Affiliate is subject to common control by the
12 % owners
De jure
4

shares because it can be issued

less than par

cannot be attached by the state even

in a quo warranto proceeding

De facto
-

exists
by
compliance

Attached directly only by the state in a

quo warranto proceeding

virtue

of

A corporation commences only upon

issuance of the certificate, prior
thereto it has no being and cannot
transact business. Promoters cannot
act for a projected corporation

Metro Manila - paid up capital

requirement is 10 M

Non- stock- mere mention of the

operating capital

Mention the authorized capital

Restrictions

Mandatory in close

Not mandatory in ordinary

Non-stock

If value is not more than 100,000

colorable

Corporation by estoppel
-

So defectively formed, but still

considered corporation, but only in
relation to those who cannot deny their
existence section 20 and 21

FORMATION AND ORGANIZATION

3 stages
1. Creation
2. Re-organization
reorganization

or

quasi-

3. Dissolution/winding-up
Purpose clause
-

Defining the scope of authority of the

corporate enterprise or undertaking.
Both confirmed and limited

4 limitations of purpose clause

1. Lawful
2. Specific or stated concisely
3. More than one, the primary and
secondary must be specified
4. Lawfully combined
-

Provision that states, cannot be issued

less than par, exception is treasury

A corporation cannot use any other

name unless it has been amended
Section 19
-

If confusingly similar it will not be

allowed to be registered

Verification slip from the records

officer
Section 19. Commencement
of corporate existence. - A private
corporation formed or organized
under this Code commences to have
corporate existence and juridical
personality
and
is
deemed
incorporated from the date the
Securities
and
Exchange
Commission issues a certificate of
incorporation under its official seal;
and thereupon the incorporators,
5

stockholders/members
and
their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is extended
or the corporation is sooner dissolved
in accordance with law. (n)
-

Words corporation or inc. either in full

or abbreviated form must be included
Section 18. Corporate name. No corporate name may be allowed by
the
Securities
and
Exchange
Commission if the proposed name is
identical or deceptively or confusingly
similar to that of any existing
corporation or to any other name
already protected by law or is patently
deceptive, confusing or contrary to
existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the
amended name. (n)

Doctrine of secondary meaning

-

A word or phrase originally incapable

of exclusive appropriation [usually
generic] with reference to an article in
the market, because of geographically
or
otherwise
descriptive,
might
nevertheless have been used so long
and so exclusively by one producer
with reference to his article that, in that
trade and to that branch of the
purchasing public, the word or phrase
has become to mean that the article
was his product.

2 requisites must be proven

-

that the complainant corporation

acquired a prior right over the use of
such corporate name

identical, deceptively or confusingly,

patently deceptive

Principal Office
-

statement
required

city and municipality not

province must be specified

principal
office

necessary because it will establish

the residence of corporations

venue of actions for or against the

corporations

venue of meetings

section 51 meetings may only be

within the boundaries of the city
where the principal office

non-stock may be held anywhere in

the Philippines, if provided in its bylaws

where summons may be served

registration of chattel mortgage must

be registered in the register of deeds
where the principal office is located

Section 18
-

Lyceum of the Philippines case, the

additional geographical name does not
make it confusingly similar

actual confusion is not necessaryPhilips case it is enough that there

is probable confusion

of

principal

office

NOT

office

is

only

operations

Clavecilla Radio System vs. Antillon

-

action not upon a written contract

6

city where the defendant resides

May a corporation organized by

incorporators consisting solely of
foreigners

Yes, there is no nationality

requirement only residence, as long
as majority are residents of the Phil

Term of existence
-

corporate term required

determining what point in time the

juridical personality will cease to exist

enter into contract only when it has

juridical personality

once it ceases to exist, it no longer has

personality

exist for another 3 years only for

purposes of liquidation

Dissolution - it is automatic

Define incorporators <sec.5>

-

Those person mentioned in the

articles as originally forming the
corporation and who are signatories
of the articles of incorporation.

Must
be
signatories
incorporators

General rule: Not earlier than 5 years

Exception: unless there are justifiable

reasons

May it be extended after expiration?

-

Alhambra cigar vs. SEC once it ceases

to exist it has no vested politic, exist
only for a period of 3 years only for
liquidation and for that purpose only

Corporators in a stock
corporation are called stockholders
or shareholders. Corporators in a
non-stock corporation are called
members. (4a)

How many incorporators should there

be?
-

5-15

May a corporation be an incorporator?

be

Section 5. Corporators and

incorporators, stockholders and
members. - Corporators are those
who
compose
a
corporation,
whether as stockholders or as
members. Incorporators are those
stockholders or members mentioned
in the articles of incorporation as
originally forming and composing the
corporation and who are signatories
thereof.

When should extension be made?

-

to

Define corporators <sec.5>

-

All persons who compose the

corporation at any given time and
need not be among those who
execute the articles of incorporation
at the start of its formation and
organization.

How about minors?

Originally or subsequently

Section 5 provides:

General rule: only natural persons

Exception:
cooperatives
and
corporation primarily organized to hold
equities in rural banks

NO, because they must be of legal age

Corporators
in
a
stock
corporation are called stockholders or
shareholders. Corporators in a nonstock corporation are called members.
(4a)
May a corporation be a corporator?
-

YES. There is nothing to prevent a

corporation from being a stockholder

Incorporator must subscribe to 1 share

There are those that are exclusively

reserved to Filipinos

An incorporator maybe a corporator as

long as he is a stockholder

section 6
Section 6. Classification of
shares. - The shares of stock of stock
corporations may be divided into
classes or series of shares, or both,
any of which classes or series of
shares may have such rights,
privileges or restrictions as may be
stated in the articles of incorporation:
Provided, That no share may be
deprived of voting rights except those
classified and issued as "preferred" or
"redeemable" shares, unless otherwise
provided in this Code: Provided,
further, That there shall always be a
class or series of shares which have
complete voting rights. Any or all of the
shares or series of shares may have a
par value or have no par value as may
be provided for in the articles of
incorporation: Provided, however, That
banks, trust companies, insurance
companies, public utilities, and building
and loan associations shall not be
permitted to issue no-par value shares
of stock.
Preferred shares of stock
issued by any corporation may be

given preference in the distribution

of the assets of the corporation in
case of liquidation and in the
distribution of dividends, or such
other preferences as may be stated
in the articles of incorporation which
are not violative of the provisions of
this Code: Provided, That preferred
shares of stock may be issued only
with a stated par value. The board of
directors, where authorized in the
articles of incorporation, may fix the
terms and conditions of preferred
shares of stock or any series
thereof: Provided, That such terms
and conditions shall be effective
upon the filing of a certificate thereof
with the Securities and Exchange
Commission.
Shares of capital stock issued
without par value shall be deemed
fully paid and non-assessable and
the holder of such shares shall not
be liable to the corporation or to its
creditors
in
respect
thereto:
Provided; That shares without par
value may not be issued for a
consideration less than the value of
five (P5.00) pesos per share:
Provided, further, That the entire
consideration received by the
corporation for its no-par value
shares shall be treated as capital
and shall not be available for
distribution as dividends.
A
corporation
may,
furthermore, classify its shares for
the purpose of insuring compliance
with
constitutional
or
legal
requirements.
Except as otherwise provided
in the articles of incorporation and
stated in the certificate of stock,
each share shall be equal in all
respects to every other share.
8

Where
the
articles
of
incorporation provide for non-voting
shares in the cases allowed by this
Code, the holders of such shares shall
nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock;

3. The by-laws of a corporation may

provide for additional qualifications
and disqualifications of its members
of the board of directors or trustees.
However it may not do away with the
minimum disqualifications lay down
by the Code.
Qualifications of the governing board

7. Investment of corporate funds in

another corporation or business in
accordance with this Code; and

Section 23. The board of

directors or trustees. - Unless
otherwise provided in this Code, the
corporate powers of all corporations
formed under this Code shall be
exercised, all business conducted
and all property of such corporations
controlled and held by the board of
directors or trustees to be elected
from among the holders of stocks, or
where there is no stock, from among
the members of the corporation, who
shall hold office for one (1) year until
their successors are elected and
qualified. (28a)

Except as provided in the

immediately preceding paragraph, the
vote necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights. (5a)
How many directors should there be?

2. In close corporations where all the

stockholders are considered as
members of the board of directors
thereby effectively allowing twenty
members in the board.

6. Merger or consolidation of the

corporation with another corporation or
other corporations;

8. Dissolution of the corporation.

1. Educational corporations registered

as non stock corporation whose
number of trustees, though not less
than five and not more than [15]
should be divisible by five [5],
meaning they must have either five,
ten, or fifteen trustees and no other;

General rule: Not less than 5 not more

than 15
Exceptions:

Requires mere residency <sec. 23>

Every director must own at

least one (1) share of the capital
stock of the corporation of which he
is a director, which share shall stand
in his name on the books of the
9

corporation. Any director who ceases

to be the owner of at least one (1)
share of the capital stock of the
corporation of which he is a director
shall thereby cease to be a director.
Trustees of non-stock corporations
must be members thereof. A majority
of the directors or trustees of all
corporations organized under this
Code must be residents of the
Philippines.

Section 27 and 23 minimum

disqualifications and qualifications
Lee vs. CA
-

By laws may provide for additional

Govt vs. El hogar

Gokongwei vs. SMC

Filipino,

Capital structure

May a domestic corporation have a

governing board consisting solely of
foreigners?

Foundation- minimum paid-up capital 3M

Amount of shares subscribed

YES, section 23 majority of them must

be residents of the Philippines, no
nationality requirement

Anti-dummy act <sec.2-A>

-

If the business undertaking or activity

is only partially nationalized, aliens can
be elected as such directors, [unless
the law provides otherwise] but their
number shall only be in proportion to
their equity or participation in the
capital stock of the corporation.

Disqualifications <sec.27>
-

The disqualifications provided for is

absolute and may not be done away
with. Corporate by-laws may, however,
provide for additional qualifications and
disqualifications.
Section 27. Disqualification of
directors, trustees or officers. - No
person convicted by final judgment of
an
offense
punishable
by
imprisonment for a period exceeding
six (6) years, or a violation of this Code
committed within five (5) years prior to
the date of his election or appointment,
shall qualify as a director, trustee or
officer of any corporation. (n)

Authorized capital 1 M No. of shares 1M

shares par value 1.00

50 K

50 K

B
C

250K

D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M
it is the maximum amount it cannot issue
more unless amended
Maximum shares it can issue is 1M shares
unless amended
How much
subscribed?
-

shares

should

be

Must be at least 25% of the

authorized capital stock

Paid- up must be at least 25%minimum

Section 13

10

Total subscription compliance with

minimum 25% total

Any combination would comply with

the minimum required by section 30
Section 30. Compensation of
directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, That any
such compensation other than per
diems may be granted to directors by
the
vote
of
the
stockholders
representing at least a majority of the
outstanding capital stock at a regular
or special stockholders' meeting. In no
case
shall
the
total
yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of
the corporation during the preceding
year. (n)

Minimum for a domestic corporation?

-

For regulation and control of the

issuance of sale of corporate
securities for the protection of
purchasers and stockholders.

As a management control device.

To
comply
with
statutory
requirements
particularly
those
which provide for certain limitations
on foreign ownership and shares like
overseas employment agencies
requiring to own at least 75% of the
shares of stock thereof.

To
better
insure
return
on
investment which can be affected
through the issuance of redeemable
shares or preferred shares, i.e.,
granting
the
holders
thereof,
preference as to dividends and/or
distribution of assets in case of
liquidation; and,

For flexibility in price, particularly, no

par shares may be issued or sold
from time to time at different price
depending on the net worth of the
company since they do not purport
to represent an actual of fixed value.

In no case shall the paid- up capital be

less than 5k

Is there a minimum authorized capital

imposed by the code?
-

If there is minimum paid-up logically

there should also be a minimum
capital =5000

Section 6
-

Each shall be equal in all respects to

every other share

Minimum paid-up capital for a

financing company metro manila 10 M
if located in MM

Preferred shares
-

Specific preference

Shares of stock

Dividends or during liquidation

Purpose of classification

No par

To specify and define the rights and

privileges of the stockholders;

Can sell it with the network of the

corporation
11

 Distinction between the subscribed

and outstanding stocks?
-

Voting and dividend rights, it refers to

the outstanding capital stocks

Only outstanding stocks are allowed to

vote and receive dividends

Actually the same

Treasury shares

It
may
include
such
other
preferences not inconsistent with the
Code. This is so because Section 6
of the said law allows a stock
corporation to issue preferred
shares subject only to the limitations
imposed therein which are:

a. They can be issued only with sated

par value; and,
b. The preferences must be stated in
the articles of incorporation and in
the certificate of stock, otherwise,
each share shall be, in all respect,
equal to every other share.
Participating

are also subscribed shares

while they remain in the treasury, no

voting and dividend rights

may be reissued by the corporation

once
reissued
they
outstanding stocks again

carry the right to vote

Preferred shares
-

grants the holder preference

preference as to dividends

preference as to distribution of the

remaining assets upon dissolution or

both

Must be stated because the

presumption is that it is participating

Cumulative
-

become

Common shares
-

YOU
MUST
STATE
THE
PREFERENCE BECAUSE IF NOT
THEY ARE PRESUMED TO BE
EQUAL

Section 137
Section
137.
Outstanding
capital stock defined. - The term
"outstanding capital stock", as used in
this Code, means the total shares of
stock
issued
under
binding
subscription
agreements
to
subscribers or stockholders, whether
or not fully or partially paid, except
treasury shares. (n)

Irrespective of whether or not they

where earned

Preferred
-

May be denied

Unless denied they are still entitled

What if hindi i-declare kahit na may

dividends rights for the previous
years? May they be denied dividend
rights because they are non holders
of non-cumulative? NOTE: YOU
CANNOT
COMPEL
THE
CORPORATION TO DECLARE
DIVIDENDS UNLESS IT EXCEEDS
100 % PAID UP CAPITAL SEC. 43
12

Section 43. Power to declare

dividends. - The board of directors of a
stock
corporation
may
declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)

Mandatory if earned

Earned cumulative or dividend credit

type

Stock
corporations
are
prohibited from retaining surplus profits
in excess of one hundred (100%)
percent of their paid-in capital stock,
except: (1) when justified by definite
corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation
is
prohibited
under
any
loan
agreement with any financial institution
or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet
been secured; or (3) when it can be
clearly shown that such retention is
necessary
under
special
circumstances
obtaining
in
the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)

without stated par value

once fully paid no longer liable

It depends because there are three

types of non-cumulative preferred
shares

Discretionary dividend type

Compare cumulative share from

non-cumulative, earned cumulative
or dividend credit type
-

Cumulative share whether or not

earned

Non-cumulative earned cumulative

or dividend credit type- only if
earned

Par
-

stated par value; shall not be issued

less than par

No par

Corporations cannot use its capitals

in declaring dividends; not all can
issue no par value section 6
Voting
-

entitled to vote at any motion

brought up in writing

Non-voting
-

not entitled to vote

What types of shares may be denied

of the right to vote?
-

Preferred and redeemable shares

Is it correct to state that common

shares can never be denied the right
to vote?
13

Only preferred and redeemable shares

are denied unless provided in this
code

Generally
a
corporation
can
reacquire its own shares if it has
unrestricted retained earnings

PWEDENG
MA-DENY
YUNG
COMMON SHARES, KASI YUNG
FOUNDERS
SHARES
MERON
SILANG EXCLUSIVE RIGHTS NA
SILA LANG ANG MERON, SO
PWEDE SILANG BUMOTO WITH
REGARDS TO SOMETHING NA
HINDI NA SAKOP NG COMMON
SHARE RIGHTS

Exception: redeemable shares may

be
reacquired
irrespective
of
retained earnings

Example: founders shares- may be

given certain rights and privileges
Even common shares may be denied
the right to vote of founders shares
issued <sec.7>
Section 7. Founders' shares. Founders' shares classified as such in
the articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for a
limited period not to exceed five (5)
years subject to the approval of the
Securities and Exchange Commission.
The five-year period shall commence
from the date of the aforesaid approval
by the Securities and Exchange
Commission. (n)

Do you include non-voting shares in

passing a valid corporate act?
-

Even non-voting shares are entitled to

vote under section 6

Redeemable shares
-

Discretionary/optional

Obligatory or mandatory

Treasury shares
-

They are treasury while in the

treasury account of the corporation

May they be
corporation?
-

reissued

by

the

YES

If they are reissued will they be

denied the right to vote?
-

Once reissued they shall become

outstanding stocks again and
purchasers shall be entitled to all the
rights and privileges as the other
holders have

Section 57 treasury shares have no

voting and dividend rights. Why not?
Section 57. Voting right for
treasury shares. - Treasury shares
shall have no voting right as long as
such shares remain in the Treasury.
(n)
-

Answer: commissioner vs. manning

page 62 first par.
Although authorities may
differ on the exact legal and
accounting status of so-called
treasury shares, they are more or
less in agreement that treasury
shares are stocks issued and fully
paid for and reacquired by the
corporation either by purchase,
14

donation, forfeiture or other means.

Treasury shares are therefore issued
shares but being in the treasury they
do not have the status of outstanding
shares. Consequently, although a
treasury share, not having been retired
by the corporation re-acquiring it, may
be re-issued or sold again, such
shares, as long as it is held by the
corporation as a treasury share,
participates neither in dividends,
because dividends cannot be declared
by the corporation to itself, nor in
meetings of the corporation as voting
stock, for otherwise equal distribution
of voting powers among stockholders
will be effectively lost and the directors
will be able to perpetrate their control
of the corporation, though it still
represents a paid for interest in the
property of the corporation. The
foregoing essential features of a
treasury stocks are lacking in the
questioned shares.
In this case, and under the
terms of the trust agreement, the
shares
of
stock
of
Reese
participated in dividends which the
trustee received and the said shares
were voted upon by the trustee in all
corporation meetings. They were not,
therefore, treasury shares.
When the law speaks of outstanding
rights it does not include treasury
shares

They are actually

corporation

Once
re-issued
they
outstanding stocks again

assets

of

The corporation may cancel them; in

effect there will be a reduction in the
outstanding capital stocks

The code does not require ordinary

corporations
to
provide
for
restrictions, but it does not likewise
prohibit restrictions

Example: right of first refusal

The restriction must be contained in

the articles of incorporation

If provided in by-laws but not in the

articles of incorporation then it will
not be binding

Restrictions and preferences are

mandatorily required in close
corporations

If it does not provide restrictions it is

not a close corporation

Specified
corporations

If not one of those specified you are

not included because there is
exclusivity in close corporations

Should also be in the by-laws not

only in the articles of incorporation

persons-

close

No transfer clause
Execution clause
Acknowledgment
Treasurer affidavit part of the articles
of incorporation

Treasury shares may be reissued

-

the

become

Section
23-27
minimum
qualifications, but there may be
additional
15

 Grounds for disapproval

-

Only substantial and not strict is

required

May the SEC

registration?
-

of banks, banking and quasi-banking

institutions, building and loan
associations, trust companies and
other
financial
intermediaries,
insurance companies, public utilities,
educational institutions, and other
corporations governed by special
laws shall be accepted or approved
by
the
Commission
unless
accompanied
by
a
favorable
recommendation of the appropriate
government agency to the effect that
such articles or amendment is in
accordance with law. (n)

refuse

or

reject

<Section 17>
Section 17. Grounds when
articles of incorporation or amendment
may be rejected or disapproved. - The
Securities and Exchange Commission
may reject the articles of incorporation
or disapprove any amendment thereto
if the same is not in compliance with
the requirements of this Code:
Provided, That the Commission shall
give the incorporators a reasonable
time within which to correct or modify
the objectionable portions of the
articles or amendment. The following
are grounds for such rejection or
disapproval:
1. That the articles of incorporation or
any amendment thereto is not
substantially in accordance with the
form prescribed herein;
2. That the purpose or purposes of the
corporation
are
patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulations;
3. That the Treasurer's Affidavit
concerning the amount of capital stock
subscribed and/or paid is false;
4. That the percentage of ownership of
the capital stock to be owned by
citizens of the Philippines has not been
complied with as required by existing
laws or the Constitution.
No articles of incorporation or
amendment to articles of incorporation

But the grounds in section 17 are

not exclusive

When
will
the
commence to exist?
-

corporation

Section 19
Section 19. Commencement
of corporate existence. - A private
corporation formed or organized
under this Code commences to have
corporate existence and juridical
personality
and
is
deemed
incorporated from the date the
Securities
and
Exchange
Commission issues a certificate of
incorporation under its official seal;
and thereupon the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is
extended or the corporation is
sooner dissolved in accordance with
law. (n)

A corporation de jure can come into

existence only upon the issuance of
the certificate of registration by the
SEC? TRUE OR FALSE?
16

TRUE

EXCEPTION: CORPORATION SOLE

<sec. 112>
Section 112. Submission of the
articles of incorporation. - The articles
of incorporation must be verified,
before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest,
minister, rabbi or presiding elder, as
the case may be, and accompanied by
a copy of the commission, certificate of
election or letter of appointment of
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, duly
certified to be correct by any notary
public.
From and after the filing with the
Securities and Exchange Commission
of the said articles of incorporation,
verified by affidavit or affirmation, and
accompanied by the documents
mentioned in the preceding paragraph,
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of
the religious denomination, sect or
church theretofore administered or
managed by him as such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in
trust by him as a corporation sole, for
the use, purpose, behalf and sole
benefit of his religious denomination,
sect or church, including hospitals,
schools, colleges, orphan asylums,
parsonages and cemeteries thereof.
(n)

CORPORATION SOLE- upon filing of

the verified articles of incorporation,
once filed it is vested with a judicial
capacity

General rule section 19

Vested with judicial capacity upon

issuance of the certificate by the
SEC
o However it is not accurate
according to atty. Ladia
because there are those that
can issue for example
cooperatives- BUREAU OF
COOPERATIVES
which
register, home insurance
guaranty corporation- HOME
OWNERS

Cagayan Fishing vs. Sandika

-

Corporations are created by law

Commence to exist upon issuance

by the CONCERNED government
corporation or agency

Prior there to it has no being

The transfer of the property was not

valid, it likewise did not have the
right to transfer

De jure
-

Strict or substantial compliance

De facto
-

4 requisites must go hand in hand

take out anyone of them there can
be no de facto corporation

1. There is a valid statute under which

the corporation could have been
created as a de jure corporation.
2. An attempt, in good faith, to form a
corporation
according
to
the
requirements of law, which goes far
enough to amount to a colorable
compliance with the law;
17

3. A user of corporate powers, the

transaction of business in some way
as if it were a corporation; and,

4. Good faith in claiming to be and doing

business as a corporation.

Hall vs. Piccio

Are the rights and obligations between

officers and directors of a de jure and
de facto the same?
-

Missing link is good faith

The certificate was not yet issued by

the SEC, the members knew and
therefore they were not acting in
good faith, therefore anybody can
question its existence

YES. Governed by the same law, rules

and regulations

Only important in determining, is for

the purpose of applying the rules with
regards to the direct and collateral
attack
The existence of a de jure cannot be
questioned even by the State, either
directly or indirectly

Number 4 requirement, good faith in

claiming to be and doing business
as a corporation

Corporation by estoppel
-

So defectively formed so that they

are not to be considered a de jure or
de facto

General partners- liable even

beyond his promise even his
personal properties are prone to
attachment

Existence of a de facto can be

questioned only by the State directly in
a quo warranto proceeding only

Lozano vs. Delos Santos

Municipality of Malabang vs. Benito

Founded on principle of equity

Exercise corporate powers

Enters with business with 3rd parties

When there is no 3rd persons

involved and the problem arises
between there members, therefore
they themselves know that there is
no corporation by estoppel

What is the missing link so as to

consider it a de facto? A law, because
the executive order is unconditional

An unconditional act affords no rights,

creates no office

Legal contemplation it was never

passed at all

It can therefore be questioned by any

person

If the certificate of registration has not

been issued, may a corporation de
facto exist?
-

NO!

Albert vs. University

-

1965 case, no section 21 yet

Applied where the rules governing

agency

A person purporting in behalf of a

non existing corporation
18

Section 21, you arrive at the same

decision

Chiang Kai Siek vs. CA

-

SC based its decision from

provision of the education act

It cannot immune itself by virtue of its

non compliance with the law

How come Kahn was made liable?

Doctrine of incorporation

Applies only if that person is trying to

escape from a contract where he is
benefited

In this case petitioner is not trying to

escape liability, but rather the one
claiming from the contract

the

Assuming there was no law?

-

YES, it may still be sued as a school

for the past 32 years the school
represented itself as possessed of
juridical personality

Would this
corporation?

apply

to

YES, it may apply

Georg Grotjahn vs. Isnami

foreign

rd

General rule: a 3 party transacting

with a non existent corporation shall be
estopped to deny
Asia banking vs. standard products
-

General rule: absence of fraud a

person who has dealt with a non
incorporated corporation shall be
stopped to deny from actions in which
it had benefited
Exemptions: when there is fraud the
general rule shall not apply

A foreign corporation cannot gain

access to our courts unless they
attain a license to engage in
business in the Philippines but
applying corporation by estoppels,
the court allowed
Municipality of Malabang case
-

No law, hence may be questioned

by any person

An unconstitutional act is not a law, t

confers no rights, it imposes no
duties, it affords no protections, it
crates o office, it is in legal
contemplation, as inoperative as
though it had never been passes

Salvatierra vs. Garlitos

-

As a general rule a person who has

contracted it a corporation lacking
personality

Doctrine is not applicable where fraud

takes part in the transaction

Hall vs. Piccio

-

No good faith

Another exemption

Corporation by estoppel

International express travel and tours

vs. CA

Admission, conduct or agreement

Will not apply among members

themselves there must be a 3rd party

No fraud in this case

19

Cannot escape when benefited

General rule: you deal

corporation, as to estop it

Exceptions:
1.
fraudulently
misrepresents the third person may file
an action directly to those members, 2.
3rd party will not be estopped if he is
not trying to escape liability

with

2 possible remedies
-

Chiang kai siek case

Albert case

What would be the effect if the

corporation failed to commence
transaction?
-

You cannot issue investment

contracts without a secondary
franchise, kailangan primary muna
hindi pwede mauna secondary kasi
sa section 19 it does not exist until
issued with a certificate of
registration or incorporation
Corporate entity
-

Corporation exist separately and

independently from the stockholders

Stockholders cannot bring an action,

to bring back the properties of a
corporation

Corporation has no interest in the

individual properties of its members

Automatic

Operated but becomes subsequently

inoperative for 5 years only a ground
for suspension, proper notice and
hearing

Sulo ng Bayan vs. Araneta

Commencement

Caram vs. CA

Example realty company

CORPORATE CHARTER AND ITS

AMENDMENTS
What do you understand by the word
charter? Is it the same as articles of
incorporation?
-

Stockholders cannot be held liable

for the legitimate obligations of the
corporation, they exist separately
and independently from one another

Cruz vs. Dalisay

-

Corporate charter is broader

Franchise

Corporation cannot bring an action

for the recovery of the properties of
its members

Final judgment against a corporation

cannot
be
enforced
against
stockholders

Rustan Pulp vs. CA

Primary power granted by the state to

be and act as a corporation

Corporation exist separately and

independently

Secondary franchise is the right or

privilege that the corporation may
exercise

Corporation are juridical entities,

they
exist
only
in
legal
20

contemplation, can act only through its

authorized representatives
Soriano vs. CA
-

They are not personally liable

They where signed for and in behalf of

the corporation

Courts are concerned with reality

and not form

Mere
ownership
of
all
or
substantially all of the shares of
stock of a corporation is not, in itself,
insufficient ground for disregarding
the separate corporate personality.
And for the separate personality of
the corporation to be disregarded,
the wrong doing must be clearly and
convincingly established

Fraud must be proven by clear and

convincingly evidence amounting to
more than preponderance. It cannot
be justified by speculation and can
never be presumed. And only if it
sought to hold the stockholders
liable directly for corporate debt

Palay inc. vs. Clave

-

Liabilities incurred by the corporation

cannot
be
enforced
against
stockholders,
etc.,
even
if
stockholders, etc. happens to own a
substantial interest in the corporation,
mere ownership does not disregard
the corporate entity theory

Corporate entity for legal or legitimate

purposes only
Two or more corporations, one of them
will be treated as a mere alter-ego
You cannot pierce the veil of corporate
fiction when there are no facts
attendant in the case

Palacio vs. Fely

-

Piercing the veil of corporate fiction

Fely trans and the other corporation

is one and the same

Marvel bldg. vs. David

Corporate Entity Theory

-

The corporation is possessed with a

personality separate and distinct from
the
individual
stockholders
or
members and is not affected by the
personal
rights,
obligations
or
transactions of the latter

There must be facts before the court

will be justified in piercing the veil of
corporate fiction

Corporation was a mere extension

of the personality of the person

Instrumentality rule

Yutivo and sons vs. Court of Tax

Appeals

What
where
the
facts
or
circumstances arrived by the court
here?

Subscribed
capital
where
all
advanced by Yutivo, the board
where the same as Yutivo

Where one corporation is so organized

and controlled and its affairs are
conducted so that it is, in fact, a mere
instrumentality or adjunct of the other,
the fiction of the corporate entity of the
instrumentality may be disregarded

21

 Commissioner of Internal Revenue vs.

Norton and Harrison
-

Court applied the general rule

Mere substantial ownership does

not mean that it has a same
corporate entity

La Campana Coffee Factory, Inc. vs.

KKM
-

Two corporations managed by the

same family, workers were made
interchangeably

Emilio Cano vs. CIR

-

Sued in there official capacity

Reverse of Soriano vs. CA (signed in

their official capacity)

domination, not only of finances but

of policy and business practice in
respect to the transaction attacked
so that the corporate entity as to this
transaction had at the time no
separate mind, will or existence of
its own.
2. Such control must have been used
by the defendant to commit fraud or
wrong, to perpetuate the violation of
a statutory or other positive legal
duty or dishonest and unjust act in
contravention of plaintiffs legal
rights; and,
3. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of.
-

Tesco vs. WCC

-

The two corporations where located in

the same office

Claparols vs. CIR

-

Same as NAFLU and A.C. Ransom

Concept builders vs. NLRC

-

Instrumentality rule. What is the

instrumentality rule? where one
corporation is so organized and
controlled and its affairs are conducted
so that it is, in fact, a mere
instrumentality or adjunct of the other,
the fiction of the corporate entity of the
instrumentality may be disregarded.
Has no separate mind of its own. What
is the degree of control?

1. Control, not mere majority or complete

stock
control,
but
complete

The absence of one of the elements

prevents piercing the corporate
veil. In applying the instrumentality
or alter ego doctrine, the courts are
concerned with reality and not form,
with how the corporation operated
and the individual defendants
relationship to that operation.

There must facts and circumstances

before warrant piercing the veil of
corporate fiction
The control necessary does not
mean stock ownership
MCConnel vs. CA
-

were located in the same floor

while the mere ownership of all or

nearly all of the capital stock of a
corporation does not necessary
mean that it is a mere business
conduit of the stockholder, that
conclusion is amply justified where it
22

is shown, as in the case before us, that

the operations of the corporation were
so merged with the stockholders as to
be practically indistinguishable from
them. To hold the latter liable for the
corporations obligations is not to
ignore the corporations separate
entity, but merely to apple the
established principle that such entity
cannot be invoked or used for
purposes that could not have been
intended by the law that created that
separate personality.

Del Rosario vs. National Labor

Commission
-

The wrongdoing must be clearly

established

There must be facts to support

Payment of claims cannot thus be

presumed

Indophil Textile Mill vs. CALICA

-

How do you distinguish this ruling to

La Campana, having the same
issues:

La
campana,
one
payroll,
employees
were
made
interchangeable. Acrylic had its own
standards

Tan boon bee vs. Jarencio

-

Why would a drug company need a

printing machine

The property must be in pursuance of

a company business

Cease vs. CA
-

Alter-ego or the extension of the

person of forest ware does the court
pierced the veil of corporate fiction

As to not deprive the holders of their

successional rights

Mere ownership of all or substantially

all is not a justification of piercing the
veil of corporate fiction

PNB vs. Ritratto Group

-

Control test

Not mere
complete

Twin ace was only a subsequent

interested party

Assets and machineries

majority

Amendment of
incorporation

the

but

rather

articles

of

Fraud must be proven by clear and

convincing evidence cannot presume
or speculate, there must be facts and
circumstances

Fraud must be clear and convincing

evidence more than preponderance

Appraisal right

Section 81 to object on certain acts

and transactions

Remo Jr. vs. IAC

-

The resolution was not entered to

defraud anyone

Express power
corporation

granted

to

Section 16

Section 81. Instances of

appraisal right. - Any stockholder of
23

a corporation shall have the right to

dissent and demand payment of the
fair value of his shares in the following
instances:
1. In case any amendment to the
articles of incorporation has the effect
of changing or restricting the rights of
any stockholder or class of shares, or
of authorizing preferences in any
respect
superior
to
those
of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in the Code; and

1 & 2=absent
1&2=absent but gave their written
assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment

3. In case of merger or consolidation.

(n)
-

Right granted
instances

only

in

specified

Are non-voting shares included in amending

the articles of incorporation
1 100/s
ABC

XYZ-----

2 100/s
To
10 100/s
=1M/S
be the 2/3?

what would

Section 6 last paragraph

Voting shares are excluded except the
foregoing instances
1

Special amendments 37 & 38

shortening that would result to
dissolution require prior approval by
the SEC
Section 37. Power to extend
or shorten corporate term. - A
private corporation may extend or
shorten its term as stated in the
articles of incorporation when
approved by a majority vote of the
board of directors or trustees and
ratified at a meeting by the
stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds
(2/3) of the members in case of nonstock corporations. Written notice of
the proposed action and of the time
and place of the meeting shall be
addressed to each stockholder or
member at his place of residence as
shown on the books of the
corporation and deposited to the
addressee in the post office with
postage
prepaid,
or
served
personally: Provided, That in case of
24

extension of corporate term, any

dissenting stockholder may exercise
his appraisal right under the conditions
provided in this code. (n)
Section 38. Power to increase
or decrease capital stock; incur, create
or increase bonded indebtedness. - No
corporation shall increase or decrease
its capital stock or incur, create or
increase any bonded indebtedness
unless approved by a majority vote of
the board of directors and, at a
stockholder's meeting duly called for
the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor
the increase or diminution of the
capital stock, or the incurring, creating
or
increasing
of
any
bonded
indebtedness. Written notice of the
proposed increase or diminution of the
capital stock or of the incurring,
creating, or increasing of any bonded
indebtedness and of the time and
place of the stockholder's meeting at
which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered,
must
be
addressed
to
each
stockholder at his place of residence
as shown on the books of the
corporation and deposited to the
addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must
be signed by a majority of the directors
of the corporation and countersigned
by the chairman and the secretary of
the stockholders' meeting, setting
forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;

(3) If an increase of the capital

stock, the amount of capital stock or
number of shares of no-par stock
thereof actually subscribed, the
names, nationalities and residences
of the persons subscribing, the
amount of capital stock or number of
no-par stock subscribed by each,
and the amount paid by each on his
subscription in cash or property, or
the amount of capital stock or
number of shares of no-par stock
allotted to each stock-holder if such
increase is for the purpose of
making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the
meeting;
(6) The amount of stock represented
at the meeting; and
(7) The vote authorizing the increase
or diminution of the capital stock, or
the incurring, creating or increasing
of any bonded indebtedness.
Any increase or decrease in
the capital stock or the incurring,
creating or increasing of any bonded
indebtedness shall require prior
approval of the Securities and
Exchange Commission.
One
of
the
duplicate
certificates shall be kept on file in
the office of the corporation and the
other shall be filed with the
Securities
and
Exchange
Commission and attached to the
original articles of incorporation.
From and after approval by the
Securities
and
Exchange
Commission and the issuance by
25

the Commission of its certificate of

filing, the capital stock shall stand
increased or decreased and the
incurring, creating or increasing of any
bonded indebtedness authorized, as
the certificate of filing may declare:
Provided, That the Securities and
Exchange Commission shall not
accept for filing any certificate of
increase of capital stock unless
accompanied by the sworn statement
of the treasurer of the corporation
lawfully holding office at the time of the
filing of the certificate, showing that at
least twenty-five (25%) percent of such
increased capital stock has been
subscribed and that at least twenty-five
(25%) percent of the amount
subscribed has been paid either in
actual cash to the corporation or that
there has been transferred to the
corporation property the valuation of
which is equal to twenty-five (25%)
percent of the subscription: Provided,
further, That no decrease of the capital
stock shall be approved by the
Commission if its effect shall prejudice
the rights of corporate creditors.

When do amendments become valid

and effective?

Non-stock corporations may

incur or create bonded indebtedness,
or increase the same, with the
approval by a majority vote of the
board of trustees and of at least twothirds (2/3) of the members in a
meeting duly called for the purpose.

Names of the incorporators and

The incorporating
trustees,

The name of the treasurer originally

or first elected by the subscribers or
members to act as such until his
successor has been duly elected
and qualified,

The number of shares and amount

originally subscribed and paid out of
the original authorized capital stock
of the corporation,

The date and place of execution of

the articles of incorporation,

Bonds issued by a corporation

shall be registered with the Securities
and Exchange Commission, which
shall have the authority to determine
the sufficiency of the terms thereof.
(17a)
The vote must be cast at the meeting
called for that purpose
Written assent would not suffice

Only upon the approval of the SEC

TRUE OR FALSE?

FALSE because it can be valid upon

the date of filing if not acted upon
within 6 months without fault
attributable to the corporation

Why is it retroactive?
What provision may be amended,
altered or repealed
Can you change name, address for
example she married or changed
address?
-

NO. you cannot change that

Fait accompli, are beyond the

powers
or
authority
of
the
corporation to change, alter or
modify. These would include the
following:

directors

or

26

The signatories and acknowledgment

thereof.

All other provisions or matters stated

or contained in the articles are subject
to amendment.

Any corporation may be

incorporated as a close corporation,
except mining or oil companies,
stock exchanges, banks, insurance
companies,
public
utilities,
educational
institutions
and
corporations declared to be vested
with public interest in accordance
with the provisions of this Code.

Founders or signatories hindi pwede

palitan

The provisions of this Title

shall
primarily
govern
close
corporations: Provided, That the
provisions of other Titles of this
Code shall apply suppletorily except
insofar as this Title otherwise
provides.

Names, nationalities- you cannot

Capital- right granted by law to all
corporation
Paid up capital- NO
Restriction and transfer of shares in
ordinary stock corporations
-

You can, but close corporation cannot

Section 96, otherwise it will not be a

close corporation
Section 96. Definition and
applicability of Title. - A close
corporation, within the meaning of this
Code, is one whose articles of
incorporation provide that: (1) All the
corporation's issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified number of persons,
not exceeding twenty (20); (2) all the
issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by
this Title; and (3) The corporation shall
not list in any stock exchange or make
any public offering of any of its stock of
any
class.
Notwithstanding
the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting stock
or voting rights is owned or controlled
by another corporation which is not a
close corporation within the meaning
of this Code.

Transfer clause, executor clause,

acknowledgment, treasury affidavitNO
Philippine First Insurance case
-

Mere change in the name of a

corporation or by merely complying
with the law is general amendment

It does not change its personality. It

is the same person in a different
name. the charter is the same

Amendment of a corporate term

-

Extending the same can never be

made 7 years prior? TRUE or
FALSE

FALSE.
It can be if there are
justifiable
reasons
for
earlier
extension as may be determined by
the SEC

Can you extend the corporate term if

it has already expired?
-

Once the term expires without an

amendment having happen it
27

ceases to exist as a body politic. It is

dissolved automatically on the day it
expires.
Alhambra cigar and PNB case
Instances when the SEC allowed
extension whose term has already
expired
-

All of them involved are institutions of

learning, it was the case in order to
avoid confusion that would arise later
on.

BOARD OF DIRECTORS/TRUSTEES
Section 23
Section 23. The board of
directors or trustees. - Unless
otherwise provided in this Code, the
corporate powers of all corporations
formed under this Code shall be
exercised, all business conducted and
all property of such corporations
controlled and held by the board of
directors or trustees to be elected from
among the holders of stocks, or where
there is no stock, from among the
members of the corporation, who shall
hold office for one (1) year until their
successors are elected and qualified.
(28a)
Every director must own at least
one (1) share of the capital stock of the
corporation of which he is a director,
which share shall stand in his name on
the books of the corporation. Any
director who ceases to be the owner of
at least one (1) share of the capital
stock of the corporation of which he is
a director shall thereby cease to be a
director.
Trustees
of
non-stock
corporations must be members
thereof. A majority of the directors or
trustees of all corporations organized

under this Code must be residents

of the Philippines.
-

Controlled by the board of directors

Authority are however restricted to

the day to day

Stockholders may have all the profit

but will turn over the management to
the governing board

But unless the law provides the

power may be delegated

General rule
-

Corporations must sit and act as a

body

Will be bound by corporate officers if

they acted within the 5 classification
page 150

Ramirez vs. Orientalist co.

-

What was the position of Fernandez

in this case? TREASURER

Why did the court rule that actions of

Fernandez bound the corporation
when he is not even a board of
director?
if a man is found acting for a
corporation with the external indicia
of authority, any person not having
notice of want of authority, may
usually
rely
upon
those
appearances; and if it be found that
the directors had permitted the
agent to exercise that authority and
thereby held him out as a person
competent to bind the corporation,
or had acquiesced in a contract and
retained the benefit supposed to
have been conferred by it, the
28

corporation
will
be
bound,
notwithstanding the actual authority
may never have been granted.
-

Contracts must be made by the

director and not the stockholders

By-laws may provide additional

qualifications and disqualifications

To qualify as a director he must own

at least 1 share

Should the stockholder be the

equitable or beneficial owner in
order to qualify as a director?

Actions of the stockholders in such

matters is only advisory and not in any
way binding in the corporation

Barreto vs. La previsora Filipina

-

Everything emanates from the board of

directors

Lee vs. CA

Stockholders action is merely advisory

except
their approval or vote is
necessary to prove a valid corporate
act

As long as you are listed in the

books as owner of one share

Under the old law he must be the

beneficial owner and legal owner
thereof but in the new law it is not
required as long as it stands in his
name he is qualifies

Qualifications:
-

No citizenship requirement, at least

majority must be residents

Can have a governing

consisting solely of foreigners

But we have to take into consideration

partly nationalized industries and other
laws which prohibits or limits foreign
ownership

board

Anti-dummy act

Utilization development of natural

resources 60% must be owned by
Filipino citizens, therefore they only
own 40%---10 members they can only
have 4 seats, but not entirely correct
because the law may provide
otherwise; educational institutions
restricted to Filipinos, but there are
exceptions when created by religious
and charitable institutions.

NO, it is not necessary, as long as

you are listed in the books as owner
of one share

1 A-100t/S B (own in the trust of X) is B

qualified to be a director?
2
3-10
2 transferring there voting rights in favor
of VT
Other rights will accrue in favor of them, but
not the voting rights
voting rights must be recorder in the books
of the corporation that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares
and PNB-IFL now will be able to be
nominated
Gen. Rule:
29

Term of one year who will serve as

such until there successors are elected
and qualified

3-200k
4-100k

Exception:

5-100k

6-100k

Non-stock corporation can serve for a

term of 3 years
Educational non-stock- term of the
governing board can be 5 years

May this term exceed one year?

7-50k
8-40k
9-5k
10-5k

Yes, they may serve in a hold over

capacity until their successors have
been duly elected and qualified

Detective and protective bureau vs.

Cloribel

=1MS
1&2 is absent, 3&4 ayaw tumakbo and
hindi nagvote 6-10, tumakbo and
ninominate nila yung sarili nila and cast all
their shares on themselves

In the by-laws, managing director must

be elected from among themselves

Who wins? Or who gets elected?

Must be duly elected and qualified

How are the directors elected?

No vote requirement, the one who

gets the most number of votes gets
elected, section24.

1-100T/S

What is cumulative voting?

2-100T/S

Process of multiplying the number of

shares to the number of director to
be elected

Matter
of
right
granted
to
stockholders in a stock corporation

3-100T/S
to 10=1M/S
Do you include the vote of 1 & 2 to
have a quorum to have a valid
meeting?
-

NO, quorum requirements is 401,000

Quorum requirement is 501k

Holders of non-voting shares are only entitled
to vote in last par. Of section 6
1-200k

1 to 5 has 200k/s and members of the

same family- majority 800k they have 4M
votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
Cumulative to allow the minority to
have a rightful representation in the
board

2-200k
30

 Is it allowed
corporation?

in

non-stock

Not generally available

Section 89 unless the articles or bylaws allow cumulative voting

Section 89. Right to vote. The right of the members of any class
or classes to vote may be limited,
broadened or denied to the extent
specified in the articles of incorporation
or the by-laws. Unless so limited,
broadened or denied, each member,
regardless of class, shall be entitled to
one vote.
Unless otherwise provided in
the articles of incorporation or the bylaws, a member may vote by proxy in
accordance with the provisions of this
Code. (n)
Voting by mail or other similar
means by members of non-stock
corporations may be authorized by the
by-laws of non-stock corporations with
the approval of, and under such
conditions which may be prescribed
by, the Securities and Exchange
Commission.

Other corporate officers other than the

governing board section 25
Section
25.
Corporate
officers, quorum. - Immediately after
their election, the directors of a
corporation must formally organize by
the election of a president, who shall
be a director, a treasurer who may or
may not be a director, a secretary who
shall be a resident and citizen of the
Philippines, and such other officers as
may be provided for in the by-laws.
Any two (2) or more positions may be
held concurrently by the same person,
except that no one shall act as

president and secretary or as

president and treasurer at the same
time.
The directors or trustees and
officers to be elected shall perform
the duties enjoined on them by law
and the by-laws of the corporation.
Unless the articles of incorporation
or the by-laws provide for a greater
majority, a majority of the number of
directors or trustees as fixed in the
articles of incorporation shall
constitute a quorum for the
transaction of corporate business,
and every decision of at least a
majority of the directors or trustees
present at a meeting at which there
is a quorum shall be valid as a
corporate act, except for the election
of officers which shall require the
vote of a majority of all the members
of the board.
Directors or trustees cannot
attend or vote by proxy at board
meetings. (33a)
Is the president required to be a
stockholder? YES
The chairman
person

may

be

another

The president may also be another

person
Prohibited is president to be
secretary or treasurer at the same
time
Board of director must sit and act as
a body to arrive at a corporate act
What would constitute a quorum if 5
then 3 must be present

31

 May the vote of 2 members past a 5

man governing board pass a valid
corporate act?

Only bind the corporation to the

extent of authority confined to him or
virtue of customs, usage and policy

Must pass first the controller and

counsel

YES. Voting requirement is majority of

directors present at which there where
a quorum

1
1 and
requirement

present=valid

voting

What if the notice requirement is not

complied with?
Lopez Realty vs. Fotencha

1 and 2 voted yes

3 voted no

Notice
requirement
must
be
complied with hence it should have
been with force and effect, but
according to the SC, it may be
ratified expressly if there is a
subsequent meeting called for that
purpose

Impliedly through acts

Asuncion was aware

corporations obligation

There was implied ratification or she

was estopped

4
5
Is it absolute?
-

NO, except in the election because it

requires the majority of all the
members of the board
If by-laws or articles provide a higher
voting requirement

of

the

Artificial beings must act through its

members and act as a body to have a
valid corporate act

Pua Casim & Co. vs. W. Neumark

and Co.

Exception:

Considered 3 circumstanced

Delegation

Expressly conferred

Check which was the proceed of the

loan which was endorsed and
deposit in the corporate account

Where the officer or agent is clothed

with actual or apparent authority

W. Neumark as president and also

stockholder

Otherwise it
corporation

Yu Chuck vs. Kong Li Po

will

not

bind

the

Yao Ka Sin Trading case already

asked in the bar

General manager usually has the

power to hire but the SC said the
contract must be reasonable

32

has been permitted by the directors

to manage its business.

The contract here is so onerous that it

would throw the corporation into
insolvency

In the case at bar, the

practice of the corporation has been
to allow its general manager to
negotiate and execute contracts in
its copra trading activities for and in
NACOCOs behalf without prior
board approval. If the by-laws were
to be literally followed, the board
should give its stamp of prior
approval on all corporate contracts.
But that Board itself, by its acts and
through acquiescence, practically
laid aside the by-law requirement of
prior approval.

Francisco vs. GSIS

-

GSIS cannot evade the binding effect

of the telegram

Only 15 months later that the

corporation said there was a mistake

The silence coupled with the

unconditional acceptance of the other
subsequent remittances is binding to
the corporation

Board of Liquidators vs. Kalaw

Settled jurisprudence has it
that where similar acts have been
approved by the directors as a matter
of general practice, custom and policy,
the general manager may bind the
company without formal authorization
of the board of directors. In varying
language, existence of such authority
is established, by proof of the course
of business, the usages and practices
of the company and by the knowledge
which the board of directors has, or
must be presumed to have, of acts and
doings of its subordinates in and about
the affairs of the corporation. So also,
xx authority to act for and bind a
corporation may be presumed from
acts of recognition in other instances
where the power was in fact
exercised. xx Thus, when, in the
usual course of business of a
corporation, an officer has been
allowed in his official capacity to
manage its affairs, his authority to
represent the corporation may be
implied from the manner in which he

Kalaw signed alone and said

contracts were submitted to the
board
of
directors
after
its
consummation and not before

Buenaseda vs. Bowen

-

Express ratification is made through

a formal board action

Implied ratification is through:

silence
or
acquiescence,
acceptance benefits and lastly
recognition or adoption

An
unauthorized
act
may
nevertheless be binding either by
express or implied by estoppels

By virtue of silence the board had

impliedly accepted the act

By recognition or adoption

By virtue of payment of obligations

arising therefore- Lopez realty

33

May directors or trustees be disqualified to

act as such?
-

YES, crime, etc. disqualifications in

book

Possess or dispossess any of the

qualifications or disqualifications ,
cease to hold at least one share

May directors be ousted from office?

-

At least 2/3 of members representing

outstanding capital stock. Again notice
requirement must be complied with
1-200

1-5 same family

2-200
3-200
4-100
5-100

electing

6-100

6 to 10 not related

7-50
8-40
9-5
10-5
director

outstanding

Meetings called by the president or the

secretary
ordered by the president
It depends if the removal is without
cause they cannot do so because
removal without cause shall not
deprive the minority stockholders or
members of the right of representative
If with cause they can even if it will
prejudice the rights of the minority,
provided
of
course
additional

requirements by-laws and articles of

incorporation
Who will fill up the vacancy created
due to the ouster of a member of the
board of directors <section 29>
Section 29. Vacancies in
the office of director or trustee. Any vacancy occurring in the board
of directors or trustees other than by
removal by the stockholders or
members or by expiration of term,
may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a
quorum; otherwise, said vacancies
must be filled by the stockholders in
a regular or special meeting called
for that purpose. A director or
trustee so elected to fill a vacancy
shall be elected only or the
unexpired term of his predecessor in
office.
Any
directorship
or
trusteeship to be filled by reason of
an increase in the number of
directors or trustees shall be filled
only by an election at a regular or at
a special meeting of stockholders or
members duly called for the
purpose, or in the same meeting
authorizing the increase of directors
or trustees if so stated in the notice
of the meeting. (n)
Other than by removal or expiration
of term they do not have the power
When will the vacancies be filled
up?
Is notice required, to
vacancies due to removal?

fill

up

What if the vacancy is due to an

increase, can it be filled up in the
34

same meeting where in the number is

increased?

1. there is a provision in the by-laws to

that effect

Election due to removal-in the same

meeting notice is not required

2. When the stockholders, by a

majority vote of the outstanding
capital stock grant the same; and,

Election due to increase in number- it

must be so stated in the meeting
Section 30
Section 30.Compensation of
directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, That any
such compensation other than per
diems may be granted to directors by
the
vote
of
the
stockholders
representing at least a majority of the
outstanding capital stock at a regular
or special stockholders' meeting. In no
case
shall
the
total
yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of
the corporation during the preceding
year. (n)

3. If the director renders extra-ordinary

or unsual service
Central Cooperative Exchange vs.
Tibe
-

By-laws may allow, stockholders

may also allow such

What do you understand by the

phrase as such directors
Western Institute vs. Salas
-

Compensation was granted without

by-laws authority

Prohibition is not a sweeping rule

Members of the board may receive

when they receive in a special
capacity

Mere act of the board will suffice

Generally not entitled to receive

compensation because they render it
gratuitously

Is the 10% ceiling applicable to other

officers?

Unless the by-laws allows

NO. the phrase as such director

was used twice <Section 30>

Stockholders may also grant pursuant

to a majority vote

The SC ruled that the 10% ceiling

will not likewise apply if they acted in
a capacity other than as such
directors

Must not exceed net income of 10%

tax of the preceding year

Acting in special capacity

In, sum directors

compensation when

may

Government vs. El Hogar

receive

Judicial intervention is not proper

35

The appropriates remedy is to those

who can make or unmake the by-laws

Llamado vs. CA
-

The corporate entity theory cannot

be used as a defense to escape
liability in violation of B.P. 22

Where the check is drawn by a

corporation the persons who signed
the check shall be liable.

Liability of corporate officers

-

Obligations incurred by those acting

for and in behalf of the corporations
are not theres BUT there are
exceptions even if they are acting for
and in behalf of the corporation

Tramat vs. CA
-

General rule was applied in the case

Ong acted as officers and acted within

the scope of his authority

Court laid down 4 instances when

even if acting within the scope of his
authority he is held solidarily liable

1. He 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;

Uichico vs. NLRC

-

3 fold duty of directors

-

obedient

diligent

loyal

Business judgment rule

-

Questions
of
policy
and
management are left solely to the
honest decision of the board of
directors and the courts are without
authority to substitute its judgment
as against the former. The directors
are the business managers of the
corporation and as long as they act
in good faith, its actuations are not
subject
to
judicial
review.
Montelibano vs. Bacolod Murcia
Milling

questions of policy and management

are left solely to the board of
directors

BOD, business manager of the

corporation and as long as they act

2. He consents to the issuance of

watered stocks or who, having
knowledge thereof, does not forthwith
file with the corporate secretary his
written objection thereto;
3. He agrees to hold himself personally
and
solidarily
liable
with
the
corporation;
4. He is made, by a specific provision of
law, to personally answer for his
corporate action.
-

Watered stocks- issued, fully paid up

when in fact they have not been fully
paid or promised as such

Labor case corporate directors and

officers are solidarily liable with the
corporation for the termination of
employment of corporate employee
done with malice and bad faith

36

in good faith, its actuations are not

subject to judicial review
-

account for profits if he attempts to

acquire or acquires any interest
adverse to the corporation in respect
to any matter reposed in him in
confidence as to which equity
imposes a disability upon him to
deal in his own behalf is not subject
to ratification by the stockholders.
Whereas, in section 34 if a director
acquires for himself a business
opportunity which should belong to
the corporation, he is bound to
account for such profits unless his
act is ratified by the stockholders
owning ore representing at least 2/3
of the outstanding capital stock.

They are not insurer of the property of

the company, they were guarantors
that the enterprise undertaken by the
corporation shall be successful

Montelibano vs. Bacolod Murcia

Milling Co.
-

Directors are not liable due

imprudence or honest error
judgment

Duty of loyalty of corporate directors

31,32,33,34

31,32,33- specific instances when

corporate officers may violate loyalty

If reposed in him in confidence, not

subject to ratification

32,33 self-dealing and interlocking

director

If the acquisition is merely that of a

business opportunity which has not
been reposed in him in confidence,
the same may be subject to
ratification by the stockholders.

to
of

Corporate opportunity doctrine

-

It places a director of a corporation in

the position of a fiduciary and prohibits
him
form
seizing
a
business
opportunity and/or developing it at the
expense and with the facilities of the
corporation. He cannot appropriate to
himself a business opportunity which
in fairness should belong to the
corporation.

Last paragraph of section 31 and the

provision of section 34 make reference
to recovery of forbidden profits
Distinction between section 31 and 34
relative to the ratification by the
stockholders
-

The second paragraph of section 31

which makes a director liable to

Director x co.
A-REALTY
B
C

Z owns property and is

going abroad never to
Return, he wants to
sell for 25M the fair
market value is 30M

D
E
E goes to Z and offers to pay the property
for 26 M and later he sells it for 30M
making 4M profit, one of the stockholders
learned and complains that he should
37

submit the profits. E said that he will move for

ratification of his actuation. Can it be ratified?
-

It can be ratified he merely acquired a

business owning to the corporation

It would be different if it was entrusted

in his confidence

1. That the presence of such director

or trustee in the board meeting in
which the contract was approved
was not necessary to constitute a
quorum for such meeting;

Another scenario:

2. That the vote of such director or

trustee was not necessary for the
approval of the contract;

Had A not attended the meeting he would

not have known of the sale it is then a matter
reposed in him in confidence

3. That the contract is fair

reasonable
under
circumstances; and

A corporation cannot reaquire its share

if it has no restricted unretained
earnings
Strong vs. Rapide
-

What duty did he violate?

He violated his duty of loyalty

The law would be impotent if the sale

were not invalidated

Self-dealing director and interlocking

director

What is a self-dealing director?

-

Director of a corporation dealing or

transacting
business
with
his
corporation

4. That in case of an officer, the

contract has been previously
authorized by the board of directors.
When do they become voidable?
-

May the contracts of a self-dealing director be

valid per se.
-

YES. If all the 4 conditions are present

they will be valid per se

When any of the two requisites are

absent it is voidable, but subject to
ratification by 2/3 of the outstanding
capital stock or 2/3 of the member

Requisites for ratification (subject to

ratification by the stockholders
holding or representing at least 2/3
of the outstanding capital stock or
2/3 of the members.)
-

it must be at a meeting called for the

purpose

full disclosure of the adverse interest

of the director concerned must be
made

the contract is fair and reasonable

under the circumstances

Are the contracts and dealing of a selfdealing director valid?

General rule: voidable

and
the

Problem if self-dealing director

involved owns all or substantially all
of the shares of stock of the
corporation thereby making it easily
possible to have the contract ratified
38

last sentence of section 32 should be

made to apply by determining the
reasonableness and fairness of the
contract

Prime White Cement vs. IAC

-

a director of a corporation owes a

position in trust

in case of conflict between himself

and that of the corporation, he
cannot sacrifice the interest of the
corporation to his own advantage

as a director he should have acted

in a manner as not to unduly
prejudice the corporation

1. That the presence of such director

or trustee in the board meeting in
which the contract was approved was
not necessary to constitute a quorum
for such meeting;

he cannot be allowed to enrich

himself

2. That the vote of such director or

trustee was not necessary for the
approval of the contract;

Mead vs. Mccullogh

Section
32.
Dealings
of
directors, trustees or officers with the
corporation. - A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all the following
conditions are present:

May corporate directors purchase

the corporate property?

3. That the contract is fair and

reasonable under the circumstances;
and
4. That in case of an officer, the
contract
has
been
previously
authorized by the board of directors.
Where any of the first two
conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee, such
contract may be ratified by the vote of
the stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds
(2/3) of the members in a meeting
called for the purpose: Provided, That
full disclosure of the adverse interest
of the directors or trustees involved is
made at such meeting: Provided,
however, That the contract is fair and
reasonable under the circumstances.
(n)

interlocking director- a director of

one corporation who deals and
transacts business with another
corporation who is himself a director

A- director of X company also a director

of Y corporation
BCDE Both companies enter into a contract
and A sits, is the contract valid?
-

Yes on the ground of fraud or if it is

unfair

May be subject to the provision of

section 32

39

Section 32 contract may become

voidable, hence it may also be ratified

X Co.

Y Co.

A owe 20%

A owe 20%

Is it generally valid or voidable? VALID

25%

25% VALID

15%

25% VOIDABLE SUBJECT TO

section 32

More than 20 substantial

BOD mismanages corporate officers.
Who may file a suit?
-

General rule: BOD which can institute

a case because it has all the powers.
To allow stockholders to file would
violate the doctrine of corporate entity
and may result to multiplicity of suits
Stockholders
cannot
therefore
generally file a case EXCEPT of
course in a DERIVATIVE SUIT

Derivative suit
-

An action based on injury to the

corporation-to enforce a corporate
right- wherein the corporation itself is
joined as a necessary party, and
recovery is in favor of and for the
corporation.
Remedy
granted
by
law
to
stockholders to institute a case to
remedy a wrong done directly to the
corporation and indirectly to the
stockholders, if the board refuses to do
so. Otherwise if not they would be left
without any recourse

Available suits

Individual or Personal
-

Wrong done against his person as a

stockholder

Class suit
-

Filed
by
a
stockholder
in
representation of other stockholders

A wrong or redress
derivative suit in nature

done,

Intra-corporate remedies
-

Demand to the BOD to institute such

action

Negated by the BOD

The one who instituted must be a

stockholder at the date when the act
was done, must have been a
stockholder by that time

Demand will not be required if the

majority of the BOD are the ones
guilty of the wrong charged
The corporation must be made a
party in the case whatever side will
not matter because under Philippine
law misjoinder is not a ground for
dismissal
Non-joinder is a ground for dismissal
Any benefit should inure to the
corporation
Stockholder bringing the action is
entitled to reimbursement such as
attorneys fee ONLY IF the case is
SUCCESSFUL to avoid harassment
suit to their management
Pascual vs. Orozco
40

By virtue of the fact that he is a

stockholder, may maintain a derivative
suit

It is not the corporate interest to

shield one from criminal prosecution
which is personal interest

Depend on how, when and what

reason

Perez is not suing in his behalf, but

in behalf of the corporation

Seeking for the years 1898 all the way

1907

Western Institute vs. Salas

Only became a stockholder in 1903

He can sue only in 1903 forward

because he must be a stockholder

The right of action is personal in

nature. He became a stockholder only
in 1902

Derivative suit
-

By a stockholder to address a wrong

done against the corporation and the
stockholder indirectly

Essential requisite must have been a

stockholder from the time the act
complained of took place

Cannot institute an action from the

years he was still not a stockholder

Everett vs. Asia Banking

-

Stockholders
cannot
ordinarily
commence suit in equity and such is in
the hands of its BOD however there
are exceptions when the BOD will not
sue since they are themselves
principals to the fraud.

Republic vs. Cuaderno

-

The facts constitute sufficient cause of

action

Assuming it was filed in the proper

forum would there argument that it is
a derivative suit prosper? NO. it is
people of the Philippines vs.
individual director, it must be stated
in the complaint that it is being
instituted as a derivative suit and for
and in behalf of the corporation

Granting arguendo, that this is a

derivative suit, the same is still
outrightly dismissible for having
been wrongfully filed in the regular
court devoid of any jurisdiction to
entertain the complaint. The case
should have been filed with the SEC
which
exercises
original
and
exclusive jurisdiction over derivative
suits, they being intra-corporate
disputes, per Section 5 (b) of P.D.
902-A

San Miguel vs. Khan

-

Was a demand made? NO

It is not necessary because he

objected in the board meeting, but
still it was adopted therefore it was
useless

Chase vs. Buencamino

-

Argument that he should be in

estoppels since he filed in the U.S.

41

Assuming the case prospered in the

U.S. would not estoppels apply as
against him? NO for estoppels to step
in it must be a case by the corporation

Reyes vs. Tan

-

Corporate director are guilty of breach

of trust

A stockholder may institute an action

to remedy a wrong done

Fraud in the conduct of corporate

affairs

Gamboa vs. Victoriano

-

Is derivative suit appropriate in this

case

They are not vindicatory damage done

to the corporation, but rather they
where vindicating damage against him

Violation of their rights as individuals,

hence derivative suit is not the remedy

Evangelista vs. Santos

-

Derivative suit is not proper

Claim is not for the benefit of the

corporation, but rather his individual
benefit

From the cases above cited, these are

the requirements and the procedures
that must be followed in order that a
derivative suit may prosper
1. That the party bringing the suit should
be a stockholder as of the time the act
or transaction complained of took
place, or whose shares have evolved
upon him since by operation of law.
This rule, however, does not apply if
such act or transaction continues and

is injurious to the stockholder or

affect him specifically in some other
way.
The number of his hares is
immaterial since he is not suing in
his own behalf or for the protection
or vindication of his own right, or the
redress of a wrong done against
him, individually, but in behalf and
for the benefit of the corporation.
2. He has tried to exhaust intracorporate remedies, he has made a
demand on the board of directors for
the appropriate relief but the latter
had failed or refused to heed his
plea. Demand, however, is not
required if the company is under the
complete control of the directors
who are the very ones to be sued (or
where it becomes obvious that a
demand upon them would have
been futile and useless) since the
law does not require a litigant to
perform useless acts;
3. The stockholder bringing the suit
must allege in his complaint that he
is suing on a derivative cause of
action on behalf of the corporation
and all other stockholders similarly
situated, otherwise, the case is
dismissible. This is because the
cause of action actually devolves on
the corporation and not to a
particular stockholder.
4. The corporation should be made a
party, either as party-plaintiff or
defendant, in order to make the
courts judgment binding upon it,
and thus, bar future litigation of the
same issues. On what side the
42

approval of any action for which

shareholders' approval is also
required; (2) the filing of vacancies
in the board; (3) the amendment or
repeal of by-laws or the adoption of
new by-laws; (4) the amendment or
repeal of any resolution of the board
which by its express terms is not so
amendable or repealable; and (5) a
distribution of cash dividends to the
shareholders.

corporation appears loses importance

when it is considered that it lay within
the power of the court to direct the
making of amendment of the pleading,
by adding or dropping parties, as may
be required in the interest of justice.
Misjoinder of parties is not a ground to
dismiss action; and,
5. Any benefit or damages recovered
shall pertain to the corporation. This is
so because in all instances, derivative
suit is instituted for and in behalf of the
corporation and not for the protection
or vindication of a right or rights of a
particular stockholder, otherwise, the
aggrieved stockholder should institute,
instead, an individual or personal suit
to vindicate his personal or individual
right. Or, for that matter, representative
or class suit for all other stockholders
whose rights are similarly situated,
injured or violated, personally or
individually.
Executive committee
-

Not allowed under the OLD law

How may executive committee created

and constituted?
-

Section 35
Section
35.
Executive
committee. - The by-laws of a
corporation may create an executive
committee, composed of not less than
three members of the board, to be
appointed by the board. Said
committee may act, by majority vote of
all its members, on such specific
matters within the competence of the
board, as may be delegated to it in the
by-laws or on a majority vote of the
board, except with respect to: (1)

Said committee may act and bind

the corporation by the majority vote
of all its members except with
respect to those matters provided for
in sec. 35 these are:

1. Approval of any action for which

shareholders approval is also
required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or
the adoption of new by-laws;
4. Amendment or repeal of any
resolution of the board which by its
express terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the
shareholders.
May the board alone create an
executive committee without any
authority provided for the by-laws?
-

NO board of directors must sit and

act as a body to have a valid
transaction

May a non-member of the board of

directors be a member of the
executive committee?

43

NO, all of them must be members of

the board of directors

BOD cannot act by proxy it would be

abdication of powers

Purpose clauses necessary because it

confers and also limits the actual
authority of the corporation
CORPORATE POWERS AND AUTHORITY
Corporate authority may be classified
into three classes namely:
1. Those expressly granted or authorized
by law inclusive of the corporate
charter or articles of incorporation;
2. Those impliedly granted as are
essential or reasonably necessary to
the carrying out of the express powers;
3. Those that
existence.

are

incidental

to

its

Section 36 to 45- POWER GRANTED

BY LAW
Section 36. Corporate powers and
capacity. - Every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate
name;
2. Of succession by its corporate name
for the period of time stated in the
articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of
incorporation in accordance with the
provisions of this Code;

5. To adopt by-laws, not contrary to

law, morals, or public policy, and to
amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to
issue or sell stocks to subscribers
and to sell stocks to subscribers and
to sell treasury stocks in accordance
with the provisions of this Code; and
to admit members to the corporation
if it be a non-stock corporation;
7. To purchase, receive, take or
grant, hold, convey, sell, lease,
pledge, mortgage and otherwise
deal with such real and personal
property, including securities and
bonds of other corporations, as the
transaction of the lawful business of
the corporation may reasonably and
necessarily require, subject to the
limitations prescribed by law and the
Constitution;
8. To enter into merger or
consolidation with other corporations
as provided in this Code;
9. To make reasonable donations,
including those for the public welfare
or for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation,
domestic or foreign, shall give
donations in aid of any political party
or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement,
and other plans for the benefit of its
directors, trustees, officers and
employees; and
11. To exercise such other powers
as may be essential or necessary to
carry out its purpose or purposes as
stated
in
the
articles
of
incorporation. (13a)
44

Section 37. Power to extend or

shorten corporate term. - A private
corporation may extend or shorten its term as
stated in the articles of incorporation when
approved by a majority vote of the board of
directors or trustees and ratified at a meeting
by the stockholders representing at least twothirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in
case of non-stock corporations. Written notice
of the proposed action and of the time and
place of the meeting shall be addressed to
each stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right
under the conditions provided in this code. (n)
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. - No
corporation shall increase or decrease its
capital stock or incur, create or increase any
bonded indebtedness unless approved by a
majority vote of the board of directors and, at
a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the capital
stock or of the incurring, creating, or
increasing of any bonded indebtedness and
of the time and place of the stockholder's
meeting at which the proposed increase or
diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is
to be considered, must be addressed to each
stockholder at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, or served personally.

and countersigned by the chairman and the

secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital
stock, the amount of capital stock or
number of shares of no-par stock
thereof actually subscribed, the
names, nationalities and residences
of the persons subscribing, the
amount of capital stock or number of
no-par stock subscribed by each,
and the amount paid by each on his
subscription in cash or property, or
the amount of capital stock or
number of shares of no-par stock
allotted to each stock-holder if such
increase is for the purpose of
making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the
meeting;
(6) The amount of stock represented
at the meeting; and
(7) The vote authorizing the increase
or diminution of the capital stock, or
the incurring, creating or increasing
of any bonded indebtedness.
Any increase or decrease in the capital
stock or the incurring, creating or
increasing of any bonded indebtedness
shall require prior approval of the Securities
and Exchange Commission.

A certificate in duplicate must be signed by a

majority of the directors of the corporation
45

One of the duplicate certificates shall be kept

on file in the office of the corporation and the
other shall be filed with the Securities and
Exchange Commission and attached to the
original articles of incorporation. From and
after approval by the Securities and
Exchange Commission and the issuance by
the Commission of its certificate of filing, the
capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for
filing any certificate of increase of capital
stock unless accompanied by the sworn
statement of the treasurer of the corporation
lawfully holding office at the time of the filing
of the certificate, showing that at least twentyfive (25%) percent of such increased capital
stock has been subscribed and that at least
twenty-five (25%) percent of the amount
subscribed has been paid either in actual
cash to the corporation or that there has been
transferred to the corporation property the
valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided,
further, That no decrease of the capital stock
shall be approved by the Commission if its
effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same,
with the approval by a majority vote of the
board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called
for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
(17a)
Section 39. Power to deny preemptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of

shares of any class, in proportion to their

respective shareholdings, unless such right
is denied by the articles of incorporation or
an amendment thereto: Provided, That
such pre-emptive right shall not extend to
shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public; or to shares
to be issued in good faith with the approval
of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously
contracted debt.
Section 40. Sale or other disposition
of assets. - Subject to the provisions of
existing laws on illegal combinations and
monopolies, a corporation may, by a
majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or
substantially all of its property and assets,
including its goodwill, upon such terms and
conditions and for such consideration,
which may be money, stocks, bonds or
other instruments for the payment of
money or other property or consideration,
as its board of directors or trustees may
deem expedient, when authorized by the
vote of the stockholders representing at
least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock
corporation, by the vote of at least to twothirds (2/3) of the members, in a
stockholder's or member's meeting duly
called for the purpose. Written notice of the
proposed action and of the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code.

46

A sale or other disposition shall be deemed to

cover substantially all the corporate property
and assets if thereby the corporation would
be rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated.
After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease,
exchange, mortgage, pledge or other
disposition of property and assets, subject to
the rights of third parties under any contract
relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict
the power of any corporation, without the
authorization by the stockholders or
members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its
property and assets if the same is necessary
in the usual and regular course of business of
said corporation or if the proceeds of the sale
or other disposition of such property and
assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no
members with voting rights, the vote of at
least a majority of the trustees in office will be
sufficient authorization for the corporation to
enter into any transaction authorized by this
section.
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own shares
for a legitimate corporate purpose or
purposes, including but not limited to the
following cases: Provided, That the
corporation
has
unrestricted
retained
earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out of
stock dividends;

2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
(a)
Section 42. Power to invest
corporate funds in another corporation or
business or for any other purpose. Subject to the provisions of this Code, a
private corporation may invest its funds in
any other corporation or business or for
any purpose other than the primary
purpose for which it was organized when
approved by a majority of the board of
directors or trustees and ratified by the
stockholders representing at least twothirds (2/3) of the outstanding capital stock,
or by at least two thirds (2/3) of the
members in the case of non-stock
corporations, at a stockholder's or
member's meeting duly called for the
purpose. Written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval of
the stockholders or members shall not be
necessary. (17 1/2a)
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare dividends
out of the unrestricted retained earnings
which shall be payable in cash, in property,
47

or in stock to all stockholders on the basis of

outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder until
his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be
issued without the approval of stockholders
representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or
special meeting duly called for the purpose.
(16a)

corporation; or (2) where a majority of the

members of the board of directors of the
managing corporation also constitute a
majority of the members of the board of
directors of the managed corporation, then
the management contract must be
approved by the stockholders of the
managed corporation owning at least twothirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least twothirds (2/3) of the members in the case of a
non-stock corporation. No management
contract shall be entered into for a period
longer than five years for any one term.

Stock corporations are prohibited from

retaining surplus profits in excess of one
hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of directors;
or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown
that such retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special
reserve for probable contingencies. (n)

The provisions of the next preceding

paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all of
the business of another corporation,
whether such contracts are called service
contracts,
operating
agreements
or
otherwise: Provided, however, That such
service contracts or operating agreements
which
relate
to
the
exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations. (n)

Section 44. Power to enter into

management contract. - No corporation shall
conclude a management contract with
another corporation unless such contract
shall have been approved by the board of
directors and by stockholders owning at least
the majority of the outstanding capital stock,
or by at least a majority of the members in the
case of a non-stock corporation, of both the
managing and the managed corporation, at a
meeting duly called for the purpose:
Provided, That (1) where a stockholder or
stockholders representing the same interest
of both the managing and the managed
corporations own or control more than onethird (1/3) of the total outstanding capital
stock entitled to vote of the managing

Section 45. Ultra vires acts of

corporations. - No corporation under this
Code shall possess or exercise any
corporate powers except those conferred
by this Code or by its articles of
incorporation and except such as are
necessary or incidental to the exercise of
the powers so conferred. (n)
Section 36
Where should the corporation be
sued?
-

principal office is important because

it establishes the residence of the
corporation and determining service
of summons, venue of action
48

xxx the then section 13 of

this Rule allowed service
upon a defendant corporation
to be made on the president,
manager, secretary, cashier,
agent or any of its directors.
The aforesaid terms were
obviously ambiguous and
susceptible of broad and
sometimes
illogical
interpretations, especially the
word
agent
of
the
corporation. The Filoil case,
involving the litigation lawyer
of the corporation who
precisely
appeared
to
challenge the validity of
service of summons but
whose very appearance for
that purpose was seized upon
to validate the defective
service, is an illustration of
the need for this revised
section with limited scope and
specific terminology. Thus the
absurd result in the Filoil case
necessitated the amendment
permitting service only on the
in-house counsel of the
corporation who is in effect an
employee of the corporation,
as distinguished from an
independent practitioner.

it can be sued in the city or

municipality where its principal office is
found

Principal office is also important for

venue of meetings
Non-stock corporation may provide in
its by-laws that the venue of meeting
be anywhere in the Philippines
Upon whom service of summons be
made?
-

Section 11. Service upon domestic

private juridical entity- when the
defendant is a corporation, partnership
or association organized under the
laws of the Philippines with a juridical
personality, service may be made
upon the president, managing partner,
general manager, corporate secretary,
treasurer, or in house counsel.

Delta motor vs. Mangosing

-

strict compliance is necessary

should be served to those named in

the statute

secretary of a dept are not those

included in the statute

E.B. Villarosa vs. Benito

-

decision En Banc repeals all other

pronouncement

o notes: additional knowledge

section 13 Rule 14 was repealed

the old rules was ambiguous and

broad and at all time illogical

special appearance enter for that

particular appearance you are not
the counsel in the case

would apply only if it does not

involve
an
intra-corporate
controversy (controversy between
and among the stockholders)

the particular revision under Section

11 of Rule 14 was explained by retired
Supreme Court Justice Florenz
Regalado, thus:

49

upon any of the statutory officers or

officers fixed in the by-laws any
secretary, any of the directors; any
managers in the by-laws

Govt vs. El Hogar

-

As the lawful transaction of its

business may reasonably represent

Seal

Director of Lands vs. CA

Exception to
constitution

Alienable public land

Converts the property to a private

land automatically once converted it
can now be registered

merely ministerial or permissive

Power to amend
-

section 16

special 37,38,120

Power to adopt by-laws

-

section 46-48

Power to issue or sell stocks and to

admit members
-

stock of stockholders and provision

governing non-stock

Power to acquire or alienate real or

personal property
-

is there any limitation? YES

Two specific limitation

1. Section 36, as lawful transactions of

business of the corporation may
reasonably and necessarily require
2. Constitution and law
Luneta vs. A.D. Santos
-

Importance of the purpose clause

It confers and determine the limits the actual

authority of the corporation.

the

rule

in

the

Power to make donation

-

Limitation Section 36 par.9

Provided, That no corporation, domestic or

foreign shall give donations in aid of any
political party or candidate or for purposes
of partisan political activity.
-

These are circumstances, however,

under which a donation by a
corporation may be to its benefit as
a means of increasing its business
or promoting patronage. Thus,
paragraph 9 of section 36 expressly
authorizes a corporation to make
donations. The only limitations
imposed are the following:

1. The donation must be reasonable;

2. It must be for public welfare, or for
hospital,
charitable,
scientific,
cultural or similar purpose; and,

Cannot have the power to acquire

3. It shall not be in aid of political party

or candidate, or for purposes of
partisan political activity.

Cannot engage in land transportation

Power to establish pension

Doctrine of limited capacity

50

Include any act to promote and

improve the convenience, welfare and
benefit of the employees or offices

Republic vs. Acoje

-

While as a rule an ultra-vires act is one

committed outside the object for which
a corporation is created as defined by
law, there are however certain
corporate acts that may be performed
outside of the scope of the powers
expressly conferred if they are
necessary to promote the interest
or welfare of the corporation. Thus,
it has been held that although not
expressly authorized to do so a
corporation may become a surety
where the particular transaction is
reasonably necessary or proper to
the conduct of its business, and
here it is undisputed that the
establishment local post office is a
reasonable and proper adjunct to the
conduct of the business of appellant
company. Indeed, such post office is a
vital improvement in the living
condition of its employees and
laborers who came to settle in its
mining camp which is far removed
from the postal facilities or means of
communication accorded to people
living in a city or municipality.

Power to exercise such other

powers essential or necessary to
carry out its purpose (implied
power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the
corporation;

4. Acts in part or wholly to protect or

aid employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs.
P.S.C.
-

Examined
the
articles
of
incorporation to arrive at its decision

National Power vs. Vera

-

For purpose
NAPOCOR

The court must decide whether or

not a logical and necessary relation
exists between the act questioned
and
the
corporate
purpose
expressed in the NPC charter

Importance
registration

of

prohibiting

of

Residence

Venue

Place of meetings

Place or
mortgage

PLACE

registration

of

the

of

chattel

Powers vs. Marshall

Power to extend its terms
-

Once its term expires, already

dissolved automatically, thus can no
longer ask for extension

After dissolution, it has 3 years to

windup

What are the modes of increasing

capital stock?

3. Embarking in a different business;

51

1. Increasing the par value of the existing

number of shares without increasing
the number of shares;

1. To reduce or wipe out existing deficit

where no creditors would thereby be
affected;

2. Increasing the number of existing

shares without increasing the par
value thereof; and,

2. When the capital is more than what

is necessary to procreate the
business or reduction of capital
surplus; or,

3. Increasing the number of existing

shares and at the same time
increasing the par value of the shares.
Why a corporation increases it
capital stock?

3. To write down the value of its fixed

assets to reflect there present actual
value in case where there is a
decline in the value of the fixed
assets of the corporation.

Examples: Php 10M capital for

grocery business, mayor didnt want
to issue license/permit because
mayor has 3 other grocery stores,
only allowed sari-sari store permit,
reduce capital for sari-sari so that
the money will not sleep in bank

Example: car rental agencies-Php

10M capital for 20 taxis, after some
time each taxi is only 250K,
nagmura ang taxi, to reduce capital
is to show actual assets

Generate funds, business expansion,

or payment of liabilities, purposes of
acquiring other business. (example: to
buy cars for the officers, purpose of
acquiring other business, expansion,
other valid reasons)

How do you decrease capital stock

and why a corporation decreases?
-

Reduce or wipeout existing deficit

where no creditors would thereby be
effected

When capital is more than necessary

to procreate the business or reduction
of capital surplus

To write down the value of its fixed

assets to reflect those present and
actual

o NOTE: any increase or decrease of

capital stock requires approval of
government agency like SEC it can
never take place unless SEC approves
the same
Relevance of decrease of capital?

Limitation imposed by law

-

Decrease shall not in any way affect

the rights of the creditors

Philippine
Rivera
-

Trust

Company

vs.

Without the appraisal of SEC, a

decrease in capital stocks has no
effect

TRUST FUND DOCTRINE:

-

Subscription to capital stock of a

corporation constitute a fund to
which the creditors have a right to
look upon for satisfaction of their
52

claims and that the assignee in

insolvency can maintain an action
upon any unpaid stock subscription in
order to realize assets for the payment
of its debts.

subscribe to all issues or disposition

of shares of any class, in proportion
to their respective stockholdings,
subject only to the limitations
imposed under section 39 of the
Code.

Madrigal vs. Zamora

-

Decrease in capital has a subterfuge

to evade payment

Thus not valid and effective

Must not prejudice creditors which

includes the employees

Pre-emptive
granted?
-

Bond
-

Commonly
understood
as
an
obligation of a state, its subdivision or
a private corporation, represented by a
certificate or an instrument for the
principal and by detachable coupons
for the payment of interests. In its
simplest term, it is one where an
obligor obliges himself to pay a certain
sum of money to another at a day
named.
There are different kinds of bond but
before they may be issued or floated
by the corporation, the same must be
registered and approved by the SEC
subject to the rules and regulations
that may be adopted by that agency.
The procedure and requirements set
forth in section 38 is the same as in
increasing or decreasing the capital
stock except that the certificate does
not have to state the matters required
in sub-section 2 & 3 thereof.

Pre-emptive rights
-

A right granted by law to all existing

stockholders of a stock corporation to

Internationally granted
rights,

why

it

is

In
order
that
the
existing
stockholders may maintain their
proportionate right as not to dilute
their right

Power to deny pre-emptive rights

Section 39. Power to deny
pre-emptive
right.
All
stockholders of a stock corporation
shall enjoy pre-emptive right to
subscribe to all issues or disposition
of shares of any class, in proportion
to their respective shareholdings,
unless such right is denied by the
articles of incorporation or an
amendment thereto: Provided, That
such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings
or
minimum
stock
ownership by the public; or to shares
to be issued in good faith with the
approval
of
the
stockholders
representing two-thirds (2/3) of the
outstanding
capital
stock,
in
exchange for property needed for
corporate purposes or in payment of
a previously contracted debt.
May it be denied? How?
-

Yes, if provided by articles of

incorporation or by an amendment

53

However,
pre-emptive
rights
is
unavailable to shares in trading in
stock
exchange
otherwise
stockholders must waive first their right
before they may sell such.

the proposed issuance or disposition

of shares
When is it unavailable?
-

Exceptions
1. When the shares to be issued is in
compliance with laws requiring
stock offerings or minimum stock
ownership by the public
2. Shares to be issued in good faith
with
the
approval
of
the
stockholders representing 2/3 of
the outstanding capital stock either

In shares traded openly in stock

exchange/market

Is
it
applicable
corporations?
-

to

close

See section 96, close corporations

must provide it first on its articles of
incorporation, that its articles does
not really deny such pre-emptive
rights.

Section 102, will not apply to

close corporations

a. In exchange for property

needed for corporate purpose
or,

The right of pre-emptive rights is absolute

in close corporations

b. In payment of a previously
contracted debt

All issues or depositing shares of any

class form part of ACS

The exceptions, however will not apply

to stockholders of a close corporation
by virtue of a subsequent and specific
provision of the Code which provides
that the pre-emptive right of a
stockholder in a close corporation shall
extend to all stock to be issued,
including reissuance of treasury
shares, whether for money, property or
personal services or in payment of a
corporate debt, unless the articles of
incorporation provide otherwise, if not
entirely absolute, in that it extends to
all issuance and disposition of shares

Certain
instances
when
a
stockholder may nevertheless be
unable to exercise this right:

Such right of pre-emption may be lost

by waiver of the stockholder, expressly
or impliedly by his inability or failure to
exercise it after having been notified of

Issued for public ownership

Issued in good faith, with approval of

2/3 of outstanding capital stock
either a) in exchange for property
needed or b) for payment of a
previously contracted debt

Preemptive
rights
of
stockholders in ordinary stock
corporations may be denied
if the shares are to be issued in
compliance with laws requiring stock
offering or minimum stock ownership
by the pubic

54

In exchange for property needed for

corporate purposes

In payment of previously contracted

debts

This rule, however, does not apply

in a close corporation as the preemptive rights of the stockholders
thereof is broadened to include all
issues without exceptions unless,
of course, denied or limited by the
articles of incorporations. Section
102 provides:
Section
102.
Pre-emptive
right in close corporations. - The
pre-emptive right of stockholders in
close corporations shall extend to all
stock to be issued, including
reissuance of treasury shares, whether
for money, property or personal
services, or in payment of corporate
debts, unless the articles of
incorporation provide otherwise.
Denial will not apply to a close
corporation, ABSOLUTE
-

section 96 - Definition and Applicability

of Close Corporation.

May a stock holder in a close

corporation insist in the exercise of
his pre-emptive rights?
-

Does it include those originally

unsubscribed?
NO. Benito vs. SEC

old

unissued

Pre-emptive rights is applicable

only to new issued shares and not
to the old unissued shares because
it is presumed that the original
subscribers is deemed to have taken
his shares knowing that they form a
definite proportionate part of the
whole number of authorized shares

When the shares, left unsubscribed

are re-offered, he cannot therefore
claim. DILUTION OF INTEREST

Will the acquiring purchaser be

liable for debts of the former
corporation?
-

Generally no, corporate entity theory

because there may be instances
when purchasing corporation may
be held liable

May a corporation acquire its own

shares?
-

Yes

Is there any restriction provided

for by law in reacquiring its own
shares?
-

Yes, section 102

What type or shares are covered by

pre-emptive rights?

respect to the
shares? No.

Yes, it must have been unrestricted

retained earnings appearing in the
books of corporation

A corporation can never acquire

its own shares if it has no
unrestricted retained earnings
-

False, exception close corporation

and redeemable shares

Will the stockholders be able to

exercise their pre-emptive right with
55

EXAMPLE:
ACS

2M

SUBSCRIBED

1M

PAID UP

1M

1 100K
2 100K
TO
10 100K
If 1-5 became 200K each, may 6-10
demand the exercise their preemptive right?
-

If a corporation sells substantially

all of it assets and properties, will
the buyer assume liability?
-

NO, EXCEPT

1) Express or implied agreement to the

purchase

YES

May
1-5
subscribe
to
the
unsubscribed capital stock to the
exclusion of 6-10?
-

1)
RESOLUTION
2)
AUTHORIZATION
3)
RATIFICATION
4)
PRIOR
WRITTEN
NOTICE
5)
SALE
SUBJECT TO PROVISIONS OF
EXITING LAWS 6) DISSENTING
STOCKHOLDERS
HAVE
THE
RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT

If a corporation makes 2M unrestricted

retained earnings, it is the shares and
not the number of persons that matters

2) Where the transaction amounts to

consolidation or merger of the
corporations
3) When purchasing corporation is
merely a continuation of the selling
corporation

May 6-10 complain for a dilution of

their interest?

4) Where the transaction is entered

into fraudulently in order to escape
liability for such debt

YES, its an internationally recognized

right because it includes all issues
and disposition of shares of any class
and all kinds of shares new or old

Legitimate
purpose:
for
a
corporation to reacquire its own
shares

If the remaining unsubscribed shares

are issued, its an issuance of any
class

May a corporation sell/dispose all or

substantially all of its corporate
assets and liabilities?
-

YES

Limitation:
it
must
have
surplus/unrestricted
retained
earnings

Exception: may redeem irrespective

of unrestricted retained earnings

1) Exercise of stockholders right to

compel close corporation to
purchase his shares

56

2) Where corporation has sufficient

assets in its books to cover its debts
and liabilities exclusive of capital stock
ACS

1M

SUBSRIBED 1M
PAID-UP

1M

ASSETS

500K

1M PROFITS
-

500K LIABILITIES

____________________
500K RESERVES
IN
A
CLOSE CORPORATION IT CAN USE THIS
TO REACQUIRE ISSUED STOCKS
X REALTY CORPORATION
THE ONLY PROPERTY OF THE
CORPORATION
BOARD OF DIRECTORS DECIDED
TO SELL IT
Will it need the approval of the
stockholders?
-

NO, if the same is necessary in the

usual and regular course of business
of said corporation or if the proceeds
of the sale or other disposition of such
property and assets be appropriated
for the conduct of its remaining
business
If X is a manufacturing company, then
it can sell its only property upon
approval of the stockholders because
it will render itself capable of
continuing its business, BUT if the
proceeds will be used to purchase a
better one for the continuance of its

business, then it does not need the

approval of the stockholders
Conditions for the valid exercise
of this power are the following
1. Resolution by the majority vote of
the board of directors/trustees
2. Authorization from the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
the members;
3. The ratification of the stockholders
or members must be made at a
meeting duly called for that purpose
4. Prior written notice of the proposed
action and of the time and place of
meeting must be made addressed to
all stockholders of record, either by
mail or personal service;
5. The sale of the assets shall be
subject to the provisions of existing
laws on illegal combinations and
monopolies
6. Any dissenting stockholder shall
have the option to exercise his
appraisal right
IDP vs. CA
-

Consent of the members was not

secured

Edward Nell Co. vs. Pacific Farms

-

Generally where one corporation

sells or otherwise transfers all of its
assets to another corporation, the
latter is not liable for the debts and
liabilities of the transferor, except:

57

1. Where the purchaser expressly or

impliedly agrees to assume such
debts;
2. Where the transaction amounts to
a consolidation or merger of the
corporations;
3. Where the purchasing corporation
is merely a continuation of the
selling corporation;
4. Where the transaction is entered
into fraudulently in order to escape
liability for such debts.
Power to acquire own shares

Creditors of a corporation have the

right to assume that so long as there
are outstanding debts and liabilities,
the board of directors will not use
the assets of the corporation to
purchase its own stock, and that it
will not declare dividends to
stockholders when the corporation is
insolvent.

Power to invest funds <sec.42>

Section 41. Power to acquire

own shares. - A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate purpose or purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional
arising out of stock dividends;

Steinberg vs. Velasco

- For as long as there are debts and
liabilities, a corporation may not
reacquire its shares (subject to
exceptions)

shares

2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of
this Code. (a)
The corporation must at all times
have
unrestricted
retained
earnings to exercise this corporate
power

Section 42. Power to invest

corporate funds in another
corporation or business or for
any other purpose. - Subject to the
provisions of this Code, a private
corporation may invest its funds in
any other corporation or business or
for any purpose other than the
primary purpose for which it was
organized when approved by a
majority of the board of directors or
trustees and ratified by the
stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock, or by at least two
thirds (2/3) of the members in the
case of non-stock corporations, at a
stockholder's or member's meeting
duly called for the purpose. Written
notice of the proposed investment
and the time and place of the
meeting shall be addressed to each
stockholder or member at his place
of residence as shown on the books
of the corporation and deposited to
the addressee in the post office with
postage
prepaid,
or
served
personally: Provided, That any
dissenting stockholder shall have
appraisal right as provided in this
58

Code: Provided, however, That where

the investment by the corporation is
reasonably necessary to accomplish
its primary purpose as stated in the
articles of incorporation, the approval
of the stockholders or members shall
not be necessary. (17 1/2a)
-

For any other purpose other than the

primary
purpose,
stockholders
consent or approval is necessary

Thus, if its for the secondary purpose,

it is necessary

If its in connection with the primary

purpose, only board resolution is
necessary

There is a substantial and not

remote connection between the
sugar
bags
and
the
sugar
manufacture, thus stockholders
approval is not necessary for validity

A private corporation, in order to

accomplish its purpose as stated in
its articles of incorporation, and
imposed by the Corporation Law,
has the power to acquire, hold,
mortgage, pledge, or dispose of
shares bonds, securities and other
evidences of indebtedness of any
domestic or foreign corporation.
Such an act, if done in pursuance of
the corporate purpose, does not
need
the
approval
of
the
stockholders; but when the purchase
of shares of another corporation is
done solely for investment and not
to accomplish the purpose of its
incorporation, the vote of approval of
the stockholders is necessary.

Requirements and steps to be

followed for a valid investment of
corporate funds are:
1. Resolution by the majority of the board
of directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations;

Gokongwei vs. SEC

-

Investments made by SMC is

necessarily connected with its
primary purpose and this was
ratified in a meeting

Submission of previous action is a

sound corporate practice

3. The ratification must be made at a

meeting duly called for that purpose;
4. Prior written notice of the proposed
investment and the time and place of
the meeting shall be made, addressed
to each stockholder or member by mail
or by personal service, and;
5. Any dissenting stockholder shall have
the option to exercise his appraisal
right
Dela rama vs. Ma-ao Sugar

Redeemable shares
Closed corporation (see section
105)
-

For any reason, compel the value of

shares withdrawal shares provided
corporation has sufficient funds to
cover its debts and liabilities

59

dividends out of the unrestricted

retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends
due on delinquent stock shall first be
applied to the unpaid balance on the
subscription
plus
costs
and
expenses, while stock dividends
shall be withheld from the delinquent
stockholder
until
his
unpaid
subscription is fully paid: Provided,
further, That no stock dividend shall
be issued without the approval of
stockholders representing not less
than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)

Section 105. Withdrawal of

stockholder or dissolution of
corporation. - In addition and without
prejudice to other rights and remedies
available to a stockholder under this
Title, any stockholder of a close
corporation may, for any reason,
compel the said corporation to
purchase his shares at their fair value,
which shall not be less than their par
or issued value, when the corporation
has sufficient assets in its books to
cover its debts and liabilities exclusive
of capital stock: Provided, That any
stockholder of a close corporation
may, by written petition to the
Securities and Exchange Commission,
compel the dissolution of such
corporation whenever any of acts of
the directors, officers or those in
control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation
or any stockholder, or whenever
corporate assets are being misapplied
or wasted.
If shares
happens?

are

reacquired,

Stock
corporations
are
prohibited from retaining surplus
profits in excess of one hundred
(100%) percent of their paid-in
capital stock, except: (1) when
justified by definite corporate
expansion projects or programs
approved by the board of directors;
or (2) when the corporation is
prohibited
under
any
loan
agreement with any financial
institution or creditor, whether local
or foreign, from declaring dividends
without its/his consent, and such
consent has not yet been secured;
or (3) when it can be clearly shown
that such retention is necessary
under
special
circumstances
obtaining in the corporation, such as
when there is need for special
reserve for probable contingencies.
(n)

what

It becomes treasury shares

Stockholders consent/ approval is not

necessary and mere board action is
sufficient if in accordance with primary
purpose

The logical relation of act done and

primary purpose of corporation and
between the board of directors to
undertake submission of acts is a
sound corporate practice

Dividends
Section 43. Power to declare
dividends. - The board of directors of
a stock corporation may declare

What are dividends?

-

Corporate profits set aside, declared

and ordered by the Board of
60

Directors to
stockholders.

be

paid

to

the

What are property dividends?

-

Those paid in property surplus

No, they do not make surplus, bonds,

etc.

Where
from?
-

should

dividends

come

No, because in property 2/3 is not

required

What is the effect of declaration

of dividends with regards to the
assets of a company?
-

As compared to stock dividends, the

declaration of cash or property
dividends have the effect of reducing
corporate assets to the extent of
dividends declared.

Neither would stock dividends

increase the proportionate interest of
the stockholders of the corporation
although it will have the effect of
increasing the subscribed and paidup capital of the corporation. It gives
the stockholders nothing in the way
of distribution of assets but merely
divides his existing shares into
smaller units.

Earnings belong to the corporation

until declared or given

Stock dividends are declared as stocks

coming from corporation

Who declares dividends to be

declared? Do stockholders have
any say?
-

The corporation may increase its

capital

Z co. 1M to X Co. is 2/3 of X Co.

Stockholders reacquired?

Like tables and chairs? Can tables

and chairs make surplus profits?
-

Board of Directors, if stock approval of

2/3 outstanding capital stock

ACS-1M
SUB-1M
P.U.-1M
1M-U.R.E. (surplus profits of the corporation)
1-100k
2-100k
To
10-100k

Revocation

1M

Board decides to declare 1M, how

much will each receive? May the
board declare stock dividend
-

NO. that would be over issuance of

shares,
violation
of
securities
regulation code
It must have a free portion

No revocation of dividend may be

has unless it has not been officially
communicated to the stockholders
or is in the form of stock dividends
which is revocable at any time prior
to distribution.

Stock dividends- no reduction,

you capitalize your restricted
retained earnings, what is issued
is a piece of paper. The restricted
61

1. 1M-U.R.E. (is it true there is no way

to compel?)

earnings remain in the corporation

Cash
and
propertycorporate assets

reduces

2. 2M-U.R.E.
May they be compelled to declare
dividends

Stock dividends increase corporate

assets? No, it will only have the effect
of increasing the subscribed and paidup capital of the corporation
Will there be a corresponding
increase in their proportionate
interest?
-

REMAINS THE SAME

Mandatory if earned, the board may

be compelled to declare dividends

if exceeds 100% of the paid-up

capital the boards may be compelled

ACS 2M

1M

Exception: when stock dividends will result

in a fractional share

SUB 1M

ACS-2M
1-100K 200 (10%)
*VOTING AND DIVIDEND RIGHTS
STILL THE SAME

1-100K

50K PU

2-100K

50K

SUB-1M

10%

TO

10-100K

10-100K

PU-1M

TO

ACS 2M
SUB 1M
PU

1M

1M

RE

100K

100K

TO
10

100K

1M
May they be compelled?
-

NO. You cannot declare if it does not

come from unrestricted retained
earnings.

PU

U.R.E.

800K

1M
Will 1 and 2 receive full amount of
dividends?
-

YES. They are entitled however if

they are declared delinquent, the
amount due them shall first be
applied to his delinquency plus
expenses.

Delinquency occurs, you are

called to pay, but you failed to
pay. In case of stock dividend, the
delinquent stock holder will not
be entitled thereto until he has
paid his subscription in full.
Are non-stockholders entitled to
receive dividends?
62

No, tock dividends are civil fruits of the

original investment, and to the owners
of the shares belong the civil fruits.

The power to declare it if paid-up

capital is not maintained or is
impaired

How did the court decide dividends

in the case of Neilsen

Trust fund must be kept intact for the

protection of creditors who have the
right to rely on such subscription and
the
paid-up
capital
for
the
satisfaction of their claims

Cannot
accumulate
unreasonably

Basis is the paid-up capital

Entitled to dividends

Irrespective
of
subscription is full

Illegally declared

Declare dividend with the belief that

it formed part of the U.R.E., but yun
pala sa capital

Stock dividends cannot be issued to a

person who is not a stockholder in
payment of services rendered.

Whether cash, property or stock, only

stockholders may receive dividends.
Dividends are fruits of investments.
They come from the U.R.E. or surplus
profits of the corporation.

ACS 2M

1M

SUB 1M
JULY 31

JULY 24 DECLARATION

PU

U.R.E.

1M
1 100K
100T JULY 26-Y (NEW
ONE WAS DECLARED TO Y)
JULY 30- 100K
2

TO HAVE THE TRANSFER RECORDED

10 100K
1M
Insofar as 1 and Y who has a better
right? Already declared, but not yet
paid?
-

Right to receive vest upon declaration.

Who ever owns at the time of
declaration owns the dividends

Unless there is a stipulation to the

contrary

TRUST FUND DOCTRINE

surplus

whether

the

Directors are not liable, unless

sec31 acted in bad faith or gross
negligence in the conduct of
corporate affairs
Directors even if acting in behalf of
the corporation, may still be held
solidarily liable
Power to enter into management
contract
-

New provision
Section 44. Power to enter
into management contract. - No
corporation
shall
conclude
a
management contract with another
corporation unless such contract
shall have been approved by the
board
of
directors
and
by
stockholders owning at least the
63

majority of the outstanding capital

stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and
the managed corporation, at a meeting
duly called for the purpose: Provided,
That (1) where a stockholder or
stockholders representing the same
interest of both the managing and the
managed corporations own or control
more than one-third (1/3) of the total
outstanding capital stock entitled to
vote of the managing corporation; or
(2) where a majority of the members of
the board of directors of the managing
corporation also constitute a majority
of the members of the board of
directors of the managed corporation,
then the management contract must
be approved by the stockholders of the
managed corporation owning at least
two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at
least two-thirds (2/3) of the members
in the case of a non-stock corporation.
No management contract shall be
entered into for a period longer than
five years for any one term.
The provisions of the next
preceding paragraph shall apply to any
contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts,
operating agreements or otherwise:
Provided, however, That such service
contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization
of natural resources may be entered
into for such periods as may be
provided by the pertinent laws or
regulations. (n)
The requirement for
management
contract
follows:

a valid
are
as

1. Resolution of the board of directors

2. Approval by the stockholders
holding or representing a majority of
the outstanding capital stock or
majority of the members in case of
non-stock corporation of both the
managing
and
the
managed
corporation
3. The approval of the stockholders or
members must be made at the
meeting called for that purpose
4. The contract shall not be for a period
longer than 5 years for any one
term, except those which relate to
exploration,
development
or
utilization of natural resources which
may be entered into for such periods
as may be provided by pertinent
laws and regulations
Every corporate act emanates
from the BOARD
Is the voting requirements of a
majority stockholder ABSOLUTE?
-

Not only a majority but 2/3 of the

outstanding capital stock or 2/3 of
the members in a non-stock
corporation would be required for
the approval of a management
contract in the following instances:

1. Where
the
stockholders
representing the same interest of
both the managing and managed
corporation own or control more
than 1/3 of the total outstanding
capital stock of the managing
corporation; and
2. Where a majority of the members of
the board of directors of the
managing
corporation
also
constitute a majority of the directors
of the managed corporation
64

3. Where the contract would constitute

the management or operation of all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts.
If it will not constitute the management
of all or substantially all of the
business of another corporation the
first paragraph of section 44 will apply
and not that of the second, that is, only
the vote of the stockholders holding or
representing at least a majority of the
outstanding capital stock or majority of
the members in the case of non-stock
corporation will be required.

2. On the rights of the stockholders

-

How long?
-

Not longer than 5 years for any one

term

Exception: exploration, development or

utilization of natural resources

What is an
contract?
-

ultra-vires

act

or

Doctrine
of
limited
capacity.
Corporation can do such acts and
things as it is allowed to do

Acts beyond it will be ultra vires,

allowing a collateral attack

If not illegal per se merely voidable.

Can be ratified expressly or impliedly
or even stopped as equitable grounds

Ultra-vires acts which are not illegal

per se may become binding and
enforceable either by satisfaction,
estoppels or equitable grounds

Consequences of ultra-vires acts?

1. On the corporation itself

The proper forum, in accordance

with the provisions of PD 902-A, as
amended and R.A. No. 8799 may
suspend or revoke, after proper
notice and hearing, the franchise or
certificate of registration of the
corporation
for
serious
misrepresentation as to what the
corporation can do or is doing to the
great damage or prejudice of the
general public

A stockholder may bring either an

individual or derivative suit to enjoin
a threatened ultra-vires act or
contract. If the act or contract has
already been performed, a derivative
suit for damages against the
directors may be filed, but their
liability will depend on whether they
acted in good faith and with
reasonable diligence in entering into
the contract.

3. On the immediate parties

-

The courts have not agreed as to

the legal effect of a corporate
contract outside of its authorized
business but Ballatine gives the
following summary of the doctrines
evolved:
a. If the contract is fully executed
on both sides, the contract is
effective and the courts will no
interfere to deprive either party of
what has been acquired under it
b. If the contract is executory on
both sides, as a rule, neither
party can maintain an action for
its non-performance
65

c. Where the contract is executor on

one side only, and has been fully
performed on the other, the courts
differ as to whether an action will lie
on the contract against the party
who has received benefits of
performance under it. Majority of
the courts, however, hold that the
party who has received benefits
from the performance is estopped
to set up that the contract is ultravires to defeat an action on the
contract. This is more in conformity
with the doctrine that no person
shall be allowed to enrich himself at
the expense of another

Non-stock corporations cannot make

profits and distribute profits to its
shareholders

Ultra-vires because Japanese war

notes is a non-stock corporation

Crisologo-Jose vs. CA (ALWAYS

ASKED BY DEAN SUNDIANG)
-

The negotiable instruments law

which holds an accommodation
party liable on the instrument to a
holder for value, although such
holder at the time of taking the
instrument knew him to be only an
accommodation party, does not
include nor apply to corporations
which are accommodation parties.
This is because the issue or
indorsement of negotiable paper by
a corporation without consideration
and for the accommodation of
another is ultra-vires

Corporate officers may guarantee or

endorse an accommodation only if
specifically authorized

Privano vs. Dela Rama

-

Court looked into the purpose clause

The purpose clause empowers and

limits

Articles likewise provide that it may

deal with any of its money

deal broad enough to cover the

donation it is not then ultra-vires

Not illegal per se hence (law of

agency) excess powers are subject to
ratification

Ratified by passing the resolution in

question

Section 36 paragraph 11
Section 10
Section 14 and 15

Carlos vs. Mindoro sugar Co.

Corporate powers depend on the

agreement of the stockholders
rather than any director

PTC- trust company as such, it also

has implied powers as to make them
more attractable

Not ultra-vires in pursuance of its

legitimate business

Japanese war notes vs. SEC

It may sell and it may guarantee,

contract not necessarily illegal, it will
in the absence of proof to the
contrary presumed within its power.
Corporations are presumed to
contract with in its powers- CARLOS
CASE
66

Purpose clause may be stretched to

cover PLDT internet. It may be within
its business.
May it sell computers? NO! other line
of business. Its trading!

BY-LAWS

Empowered by SEC

Merely a ground, there must be

proper notice and hearing

Not affect the status of the

corporation as a juridical person

Subject the corporation to a fine, as

may be issued by the SEC

By-Laws
-

Rule adopted by the corporation for its

internal governance

Is
the
adoption
mandatory?

When
do
effective?

by-laws

become

by-laws

Until and unless the SEC gives it

stamped of approval

When should the by-laws be

adopted or filed? Can it not be
adopted earlier?

Suspension of any government

agency. The permission must first
be secured- section 46

Elements of a valid by-law

of

After incorporation- within 1 month

(emanates from the BOARD)
Prior-more convenient (signed by the
incorporators)

Who will sign the adoption clause?

-

1. It must not be contrary to law, public

policy or morals;
2. It must not be inconsistent with the
articles of incorporation;

Majority of the stockholders or

members attested to by the corporate
secretary

3. It must be general and uniform in its

effect or applicable to all alike or
those similarly situated;

What happens if the corporation

fails to adopt the by-laws from the
tie provided by the law? Would
there be an automatic revocation or
suspension?

4. It must not impair obligations and

contracts or vested rights; and

5. It must be reasonable.
-

Proper notice and hearing, must first

be complied with

Must not be inconsistent with

existing laws. Not be inconsistent
with articles of incorporation

Loyola grand villas vs. CA

By-laws

Not the SEC, but the HIGC

Must not always imperative

Filing of by-laws mandatory

None filing would not affect the

status of the corporation, Loyola
grand villas case

67

The word
imperative

must

is

not

always

Section 48 allows a corporation to

amend it by-laws

Stockholders
are
conlusively
presumed to know the provisions of
the by-laws

Section 47 of the code, the by-laws

may provide for the qualification and
disqualification

It cannot be said Gokongwei has a

vested rights

Prevent directors from taking

advantage of position to promote his
individual interest to the damage of
others

How about 3rd persons?

-

NO. unless there is actual knowledge

of the same they are not presumed to
know of the provisions of the by-laws

Fleischer vs. Botika Nolasco

-

Shares of
properties

personal

The validity or reasonableness of a

by-laws is a question of law

Shares of stock may transfer to whom

ever he wishes

The by-laws is contrary to law

Subject to the limitations that

reasonableness of a by-law is a
mere matter of judgment

Rule of the majority and not the

tyranny of the minority

stock

are

Articles of incorporation
-

May provide reasonable restriction

By-laws merely internal laws

Articles is the contract between and

among the parties and corporation

Govt vs. El Hogar

-

Did the court categorically ruled here

that the provision in the 5th cause of
action is valid?

Rules governing equity, considering

the fact that there was always lack of
quorum

Section 29 BOD if still constituting a

quorum may fill up a vacancy other
than by removal, etc.

Gokongwei vs. SEC

May the by-laws be amended

altered or appealed?
-

YES. HOW? Two modes

1. By a majority vote of the directors or

trustees and the majority vote of the
outstanding
capital
stock
or
members in a non-stock corporation,
at a regular or special meeting
called for that purpose;
2. By the board of directors alone when
delegated by 2/3 of the outstanding
capital stock or 2/3 of the members
in a non-stock corporation.
-

This delegated power, however, is

considered revoked whenever a
majority of the outstanding capital
stock or members shall so vote at a
regular or special meeting.
68

 If it is to be amended what is the

proceeding?
-

Exchange
Commission
of
a
certification that the same are not
inconsistent with this Code. (22a
and 23a)

Section 48 2nd paragraph provides:

Section 48. Amendments to
by-laws. - The board of directors or
trustees, by a majority vote thereof,
and the owners of at least a majority of
the outstanding capital stock, or at
least a majority of the members of a
non-stock corporation, at a regular or
special meeting duly called for the
purpose, may amend or repeal any bylaws or adopt new by-laws. The
owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds
(2/3) of the members in a non-stock
corporation may delegate to the board
of directors or trustees the power to
amend or repeal any by-laws or adopt
new by-laws: Provided, That any
power delegated to the board of
directors or trustees to amend or
repeal any by-laws or adopt new bylaws shall be considered as revoked
whenever stockholders owning or
representing a majority of the
outstanding capital stock or a majority
of the members in non-stock
corporations, shall so vote at a regular
or special meeting.
Whenever any amendment or
new by-laws are adopted, such
amendment or new by-laws shall be
attached to the original by-laws in the
office of the corporation, and a copy
thereof, duly certified under oath by
the corporate secretary and a majority
of the directors or trustees, shall be
filed with the Securities and Exchange
Commission the same to be attached
to the original articles of incorporation
and original by-laws.
The amended or new by-laws
shall only be effective upon the
issuance by the Securities and

Baretto vs. La Previsora

-

Any corporate act emanates from

the board

Directors themselves cannot amend

the by-laws if they were not granted
the same

Section 48
The power granted is not subject
to revocation T or F?
-

FALSE

If the by-laws are amended when

will they become valid?
-

Upon issuance of the SEC that they

are not inconsistent

What if the SEC failed to act

within 10 months without fault
attributable to the corporation?
T or F any amendment of the bylaws will never become valid until
it gives its stamp of approval
even after 1 year
-

TRUE. Articles of incorporation and

by-laws are different

MEETINGS
Meetings
-

Meetings of stockholders
1.
Date fixed in the by-laws or by-law

Meetings of director or trustees

Meetings are regular and special

69

Meetings of stockholders

Notice requirement is the by-laws is

a mandatory requirement

Improperly served, any action will be

invalidated at the objection of any
stockholder or member

What is regular and what is special?

When are regular meetings of the
stockholders held?
-

Fixed date provided by the by-laws

Must be held in the proper place

What if there is no date?

Where should it be held?

April

Why april?
-

Point in time the audited financial

statement have been prepared

What if in the date specified in the

by-laws or by the law itself the
meeting was not convened, for
instance lack of quorum or force
majeure?
-

It may be postponed on a reasonable

date

May the by-laws of a corporation

provide that meetings be held
anywhere in the Philippines?
-

Notice requirement?
-

Regular- 2 weeks prior notice

Special- 1 week

May the notice requirement be

lessened?
-

By-laws may provide a longer or a

shorter duration

What if the notice requirement is

not complied with?
What happened to any act passed in
a meeting when notice requirement
was not required with?
-

Voidable, subject to ratification

Board of directors vs. Tan

Apparent
from
the
foregoing
provision is that meetings of
stockholders must, at all times, be
held in the city or municipality where
the principal office of the corporation
is located and, as far as practicable,
in the principal office of the
corporation.

While there is no provision

authorizing a stock corporation to
hold stockholders meetings outside
of the City of Municipality where the
principal office is located, the law
allows a non-stock corporation to
provide in its by-laws any place of
members meeting provided that
proper notice is sent to all members
indicating the date, time and place of
the meeting which shall be within the
Philippines.

T or F the by-laws of a stock

corporation may validly provide
that meetings shall be held
anywhere in the Philippines?
-

FALSE.
Non-stock corporations
lang pwede provided nakalagay sa
by-laws and provided proper notice
is given
70

 Corporation can do only such

things as the law allows it to do,
DOCTRINE OF LIMITED CAPACITY
San Miguel office located in Ortigas
Center. May stockholders meeting
be held in PICC center?
-

YES. Metro Manila, one single city

Must be called by the proper party

Who calls?
-

President until and unless there is a

provision , secretary on order of the
president

What if there is nobody who can

call?
-

The petitioner,
petition the court

stockholder

may

What if there is a person who can

call, but he fails or neglects to call
the meeting? May a stockholder
petition to authorize a meeting?
-

Ponce case only applies when there is

NO person authorized to call the
meeting. If there is a person, but
neglects his duty. Ponce will not apply.

Writ of injunction may never be

issued ex parte
Is there any exception?
-

Section 28 only instance

Section 28. Removal of
directors or trustees. - Any director
or trustee of a corporation may be
removed from office by a vote of the
stockholders holding or representing at
least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a

non-stock corporation, by a vote of

at least two-thirds (2/3) of the
members entitled to vote: Provided,
That such removal shall take place
either at a regular meeting of the
corporation or at a special meeting
called for the purpose, and in either
case, after previous notice to
stockholders or members of the
corporation of the intention to
propose such removal at the
meeting. A special meeting of the
stockholders or members of a
corporation for the purpose of
removal of directors or trustees, or
any of them, must be called by the
secretary on order of the president
or on the written demand of the
stockholders representing or holding
at least a majority of the outstanding
capital stock, or, if it be a non-stock
corporation, on the written demand
of a majority of the members entitled
to vote. Should the secretary fail or
refuse to call the special meeting
upon such demand or fail or refuse
to give the notice, or if there is no
secretary, the call for the meeting
may be addressed directly to the
stockholders or members by any
stockholder or member of the
corporation signing the demand.
Notice of the time and place of such
meeting, as well as of the intention
to propose such removal, must be
given by publication or by written
notice prescribed in this Code.
Removal may be with or without
cause: Provided, That removal
without cause may not be used to
deprive minority stockholders or
members
of
the
right
of
representation to which they may be
entitled under Section 24 of this
Code. (n)
Cases of removal or ouster of a
director
71

 Mandamus would be appropriate

remedy if there is a person authorized
but refuses

Section 51, any meeting shall be

valid provided all the stockholders
are present or duly represented and
provided it is within the power of the
corporation. 3RD paragraph of 324

If the voting requirement is met, any

resolution passed in the meeting,
even if improperly held or called will
be valid if all the stockholders or
members are present or duly
represented thereat. The last
paragraph of section 51 is clear on
the matter when it provides:

Quorum and voting requirement

-

Majority stockholders
constitute a quorum

or

members

Is the presence of the majority

owners of the outstanding capital
stock ABSOLUTE to have a
quorum?
-

NO. when the code requires a higher

quorum it must also be equivalent to
the vote required

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.

Do you include non-voting shares in

arriving at the voting requirement to
have a valid corporate act?
-

It depends.

Section 6 last par. If it falls within the

penultimate par. Of section 6

Five requisites of a valid meeting

1. It must be held on the date fixed in the
by-laws or in accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must
be met
Date not complied with, notice,
place, not complied with and the
person who called not authorized,
what happens to any resolution
called?

Directors/trustees meeting
Regular (monthly)
(anytime)

and

special

May that be restricted (within or

outside the Phil)
-

YES. unless the by-laws provide

otherwise.

Is there any notice requirement?

-

YES. 1 day unless

provided by the by-laws

otherwise

72

 What happens if notice is not

complied with?
-

meeting. Presence at the

meeting waives the want of
notice. Moreover, it has been
ruled that the meeting of the
directors without a formal call
first being had, and notice
thereof given to the members,
did not operate to invalidate it
or to render the proceedings
which were taken at it void,
for every member of the
board were present, and their
joint action had completely
bound the corporation as if
the meeting has been called
with due formality, and
everyone of the directors had
received proper notice.

If the notice requirement is not

complied with the meeting is illegal
and will not bind the corporation
except when subsequently ratified or in
the case of a close corporation where
the act of any one director may bind
the corporation even without a meeting
under the special provision of Section
101 of the Code.

Can notice be waived? <sec.53>

Section 53. Regular and
special meetings of directors or
trustees. - Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly,
unless the by-laws provide otherwise.
Special meetings of the board
of directors or trustees may be held at
any time upon the call of the president
or as provided in the by-laws.
Meetings of directors or trustees
of corporations may be held anywhere
in or outside of the Philippines, unless
the by-laws provide otherwise. Notice
of regular or special meetings stating
the date, time and place of the meeting
must be sent to every director or
trustee at least one (1) day prior to the
scheduled meeting, unless otherwise
provided by the by-laws. A director or
trustee may waive this requirement,
either expressly or impliedly. (n)
-

YES. Expressly and impliedly

SEC ruling
A special meeting is valid
without notice where the
directors are all present or
where they consent to the

What is the quorum and voting

requirement in the directors
meeting?
-

Majority of the members of the

board
of
directors
(entire
membership)

Vote required to pass a valid

corporate act?
-

Majority of those present at which

there is a quorum (3 present, vote of
2 sufficient)

Exception, majority of all the

members of the board in case of
election of corporate officers, unless
the articles provide for a greater
quorum or voting requirement

Should the director or trustees be

physically present?
-

General rule, must sit and act as a

body to have a valid corporate act
73

 Five man member board, a meeting

was called today, should the
physical presence or warm bodies
requires to constitute a quorum?
-

NO. it is not required. Teleconference

or video conference is allowed, Ecommerce law

Membership subject to laws

Stockholder not yet

May the articles of incorporation

deny?
May the by-laws validly provide
that proxy voting is not allowed?
-

NO

Only non-stock may be denied

proxy voting (may be broaden,
limited or denied)

May director vote by proxy?

Proxy voting is a matter of right

granted by law

Requirements of a valid proxy?

NO

If A is a director and a meeting is

called for the purpose of electing a
new set of BOD can A vote by
proxy?
-

Section 58. Proxies. Stockholders and members may

vote in person or by proxy in all
meetings
of
stockholders
or
members. Proxies shall in writing,
signed by the stockholder or
member and filed before the
scheduled
meeting
with
the
corporate
secretary.
Unless
otherwise provided in the proxy, it
shall be valid only for the meeting for
which it is intended. No proxy shall
be valid and effective for a period
longer than five (5) years at any one
time. (n)

YES. Because it is a stockholders

meeting

If directors meeting, cannot vote by

proxy
Stockholders right to vote
-

Inherent in stock ownership

However this right is not always

inherent, because it may be denied:
1. Redeemable and preferred shares,
however if founders shares are
issued others may be denied the
right to vote.

Section 58

How long may a proxy exist?

-

Maximum of 5 years

2. May be denied by the articles of

incorporation or contracts

Valid for the meeting in which it is

intended

When not denied they may do so in

person or by proxy

Is proxy revocable?

May the right to vote by proxy be

denied?

Generally revocable, unless coupled

with interest

Revocation
74

A proxy, like agency in general is

revocable unless coupled with an
interest and revocation need not be
made by formal notice in writing.
Revocation may be expressed to the
proxy
holder,
to
the
election
committee, by a subsequent proxy to
another or by sale of the shares. Thus
it may be revoke orally by conduct
such that appearing and asserting the
right to vote at a meeting by the
registered owner of the shares revokes
a proxy previously given.

Must be submitted to a validation

committee

What is the effect of a voting trust

agreement relative to the rights?
-

Lee vs. CA must pass these criteria

1. That the voting rights of the stock

are separated from the other
attributes of ownership;
2. That the voting rights granted are
intended to be irrevocable for a
definite period of time; and,
3. That the principal purpose of the
grant of voting rights is to acquire
voting control of the corporation.

By-laws of non-stock corporations

may deny proxy voting

During the duration of the trust

they are irrevocable unless there
is a violation either by fraud

What is voting trust agreement?

Requisites

One created by an agreement

between a group of stockholders of a
corporation and a trustee, or a group
of identical agreements between
individual stockholders and a common
trustee, whereby it is provided that for
a term o years or for a period
contingent upon a certain event, or
until the agreement is terminated,
control over the stock owned by such
stockholders, shall be lodged in the
trustee, either with or without
reservation to the owners or persons
designated by them the power to direct
how such control shall be issued.
It is a devise of binding stockholders to
vote as a unit and thus assuring a
desirable stability and continuity in
management in situations where it is
needed.

Section 59
Section 59. Voting trusts. One or more stockholders of a stock
corporation may create a voting trust
for the purpose of conferring upon a
trustee or trustees the right to vote
and other rights pertaining to the
shares for a period not exceeding
five (5) years at any time: Provided,
That in the case of a voting trust
specifically required as a condition in
a loan agreement, said voting trust
may be for a period exceeding five
(5) years but shall automatically
expire upon full payment of the loan.
A voting trust agreement must be in
writing and notarized, and shall
specify the terms and conditions
thereof. A certified copy of such
agreement shall be filed with the
corporation and with the Securities
and
Exchange
Commission;
otherwise, said agreement is
ineffective and unenforceable. The
certificate or certificates of stock
75

covered by the voting trust agreement

shall be cancelled and new ones shall
be issued in the name of the trustee or
trustees stating that they are issued
pursuant to said agreement. In the
books of the corporation, it shall be
noted that the transfer in the name of
the trustee or trustees is made
pursuant
to
said
voting
trust
agreement.
The trustee or trustees shall
execute and deliver to the transferors
voting trust certificates, which shall be
transferable in the same manner and
with the same effect as certificates of
stock.
The voting trust agreement filed
with the corporation shall be subject to
examination by any stockholder of the
corporation in the same manner as
any other corporate book or record:
Provided, That both the transferor and
the trustee or trustees may exercise
the right of inspection of all corporate
books and records in accordance with
the provisions of this Code.

the certificates of stock in the name

of the trustee or trustees shall
thereby be deemed cancelled and
new certificates of stock shall be
reissued in the name of the
transferors.
The voting trustee or trustees
may vote by proxy unless the
agreement provides otherwise. (36a)
Does it need to be notarized?
-

Only
legal
transferred

Unless expressly renewed, all

rights granted in a voting trust
agreement shall automatically expire
at the end of the agreed period, and
the voting trust certificates as well as

ownership

is

Being still the beneficial owner

they may transfer these rights
Is the right granted to a voting
trust agreement absolute? (to
inspect)
-

NO.

The voting trust agreement filed with

the corporation shall be subject to
examination by any stockholder of
the corporation in the same manner
as any other corporate book or
record. Provided, that both the
transfer and the trustee or trustees
may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of
this Code.

Any other stockholder may

transfer his shares to the same trustee
or trustees upon the terms and
conditions stated in the voting trust
agreement, and thereupon shall be
bound by all the provisions of said
agreement.
No voting trust agreement shall
be entered into for the purpose of
circumventing
the
law
against
monopolies and illegal combinations in
restraint of trade or used for purposes
of fraud.

Yes, otherwise it is ineffective and

unenforceable

Legal title is transferred to the

voting trustee
May the voting trustee vote by
proxy?
-

Yes, legal owner may vote by proxy

76

 May the proxy holder vote by

proxy?

So that they can vote a certain set of

directors

NO, (AGENT) an agent can have no

other agent unless specifically allowed
by the principal

They will be more secured

Stockholder executing as a proxy,

is he qualified to be voted as a
director?

Enters into an agreement

Pull all their shares to cast one vote

Covered
contracts

By pulling their votes they can

decline the resolution passed by the
board

Why is he qualified to act as a

director if the stockholder executes
as a director?
-

The beneficial owner of the shares in a

voting trust is disqualified to be a
director in a voting trust whereas in a
proxy, the owner of the shares may be
elected as such since legal title thereof
remains with him
YES he remains to be the owner

Voting pull agreement

by

rules

governing

END OF MIDTERMS

STOCKS AND STOCKHOLDERS

3 modes

Is the stockholder executing in a

voting trust agreement, is he
qualified to act as a director?

1. By a contract of subscription with the

corporation;

2. By purchase of treasury shares from

the corporation; and,

NO. ceases to be stockholder of

record, no longer the legal owner of
shares

May the corporation enforce the

voting trust agreements executed
by its stockholders?
-

NO. NIDC vs. AQUINO

Not a privy to the contract

Rights liabilities of a stockholder are

there in their individual capacitycorporate entity theory

Voting trust agreements

-

Normally executed in favor of banking

and financial institutions

3. By purchase or acquisition of shares

from existing stockholders.
Section 60 subscription
-

Any contract

Whether existing or still to be formed

Section 60. Subscription contract.

- Any contract for the acquisition of
unissued
stock
in
an
existing
corporation or a corporation still to be
formed shall be deemed a subscription
within the meaning of this Title,
notwithstanding the fact that the parties
refer to it as a purchase or some other
contract. (n)
77

 Under the old law the 4th mode is

PURCHASE
Purchase
-

Reciprocal in nature

Purchaser can neither require the

issuance
X Co. Inc.

P
Authorized capital
500

1M

SUBSCRIBED

Corporation paid 100T/S therefore

the corporation reacquired the
shares again, what are they called?
-

Treasury shares

Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY
FIRE, IS HE STILL LIABLE TO PAY THE
UNPAID PORTION?
IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A
STOCKHOLDER ONLY IF PAID IN
FULL IS HE LIABLE?
-

NO, because that was a purchase

500 UNISSUED STOCKS (AS LONG AS

GALING DITO)

First example galing sa unissued

stock

Z wants to acquire 100K

2nd example galling sa treasury

shares hindi sa unissued share

Entered in June 50% shall be down payment

remainder December 08
o he will not be considered a stockholder
unless he has paid in full
August 08 property is ravaged by fire all are
turned into shares
Is Z liable to pay the balance of his
acquisitions?
-

YES, no matter how the party refer to

it, it is considered subscription

Once you subscribe, you become a

stockholder which is entitled to all the
liabilities of a stockholder

NO such thing as purchase of

unissued stocks
A subscription contract can be
conditional provided there is nothing
in the charter or statute prohibiting it
and not against public order, law,
etc.
Must it be in writing?
-

5M should it be in writing to be valid

and binding as a subscription?
-

Z- subscribed to 100T/S of XCo.

Amount he paid 50k
Z did not pay on the date called and was
declared a delinquent share

NO, it may be oral

NO, statutes of frauds only applies

to SALES

Trillana vs. Quezon College

-

Counter proposal, therefore there

was a need for an acceptance
78

Shares of stock shall not be

issued in exchange for promissory
notes or future service.

Facultative because it is in his own

free will, it is void

What may be used as a consideration

and how much should be the
consideration?
-

The same considerations

provided for in this section, insofar
as they may be applicable, may be
used for the issuance of bonds by
the corporation.

Section 62 provides:
Section 62. Consideration for
stocks. - Stocks shall not be issued for
a consideration less than the par or
issued price thereof. Consideration for
the issuance of stock may be any or a
combination of any two or more of the
following:

The issued price of no-par

value shares may be fixed in the
articles of incorporation or by the
board of directors pursuant to
authority conferred upon it by the
articles of incorporation or the bylaws, or in the absence thereof, by
the stockholders representing at
least a majority of the outstanding
capital stock at a meeting duly called
for the purpose. (5 and 16)

1. Actual cash paid to the corporation;

2. Property, tangible or intangible,
actually received by the corporation
and necessary or convenient for its
use and lawful purposes at a fair
valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services
actually rendered to the corporation;
4. Previously incurred indebtedness of
the corporation;
5.
Amounts
transferred
from
unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for
stocks in the event of reclassification
or conversion.
Where the consideration is
other than actual cash, or consists of
intangible property such as patents of
copyrights, the valuation thereof shall
initially be determined by the
incorporators or the board of directors,
subject to approval by the Securities
and Exchange Commission.

Amounts
transferred
from
unrestricted retained earnings to
stated capital what does it mean?
-

Stock dividends will in effect

capitalize the unrestricted retained
earnings

After 5 years the founders shares

may be converted into common
shares or other kinds of shares
May shares of stocks be issued
without consideration? Why?
-

NO, two reasons by the SC,

discriminatory
against
other
stockholders and second unlawful, it
prejudices the right of the creditors
Trust Fund Doctrine

If issued without a consideration

-

Section 65, they will be considered

as watered stocks
79

Section 65. Liability of directors

for watered stocks. - Any director or
officer of a corporation consenting to
the issuance of stocks for a
consideration less than its par or
issued value or for a consideration in
any form other than cash, valued in
excess of its fair value, or who, having
knowledge thereof, does not forthwith
express his objection in writing and file
the same with the corporate secretary,
shall be solidarily, liable with the
stockholder
concerned
to
the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of the
stock and the par or issued value of
the same. (n)
-

Subscribers may be compelled to pay

the value

Issuance of a certificate of stock is

another thing

corresponding liability that attach

thereunder.
Thus,
the
Code
provides:
Section 72. Rights of unpaid
shares. - Holders of subscribed
shares not fully paid which are not
delinquent shall have all the rights of
a stockholder. (n)
Is the issuance of a certificate of
stock necessary to consider the
subscriber a stockholder?
-

NO, shall be considered

stockholder
even
without
certificate of stock

a
a

Instances when he may not be able

to exercise his rights as such
stockholder
-

Declared delinquent

What are the requisites for the

issuance of a valid certificate of stock?

When he exercises his appraisal

right

1. It must be signed by the president or

vice-president and countersigned by
the secretary or assistant secretary;

Are
certificate
transferrable?

2. It must be sealed with the corporate

seal; and the entire value thereof
(together with interest or expenses, if
any) should have been paid.
While it appears, that a subscriber to
shares of stock cannot be entitled to
the issuance of a certificate of stock
until the full amount of his subscription
together with interest and expenses (in
case of delinquent shares) if any is
due, has been paid, a subscriber to
shares of stock, even if not yet fully
paid, is entitled to exercise all the
rights of a stockholder and the

of

stocks

YES

Are certificate of stocks considered

negotiable?
-

Quasi-negotiable

Why are they considered quasinegotiable when it may be

transferred through endorsement
and delivery?
100t/s

001

10/s

Abc co.

80

B stole and forged the signature

C is purchaser in good faith and for value will
C acquire title

Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not
regarded as negotiable in the same sense
that a bill or note is negotiable, even if it is
endorsed in blank. Thus, while it may be
transferred by endorsement coupled with
delivery thereof, and therefore merely quasinegotiable, it is nonetheless non-negotiable
in that the transferees takes it without
prejudice to all the rights and defenses which
the true and lawful owner may have except in
so far as the principles governing estoppels
may apply.
He acquired it by virtue of a forged
instrument; no matter how innocent the
purchaser is because it is subject to all the
rights and defenses
What if A endorsed it?
-

He is estopped, unless there are other

available defenses

Transfer is required to be recorded in

the books of the corporation, however
even if not recorded, it will be valid
between the parties. Non-registration
will not however, affect the validity

thereof at least in so far as the

contracting parties are concerned.
Section 63. Certificate of
stock and transfer of shares. - The
capital stock of stock corporations
shall be divided into shares for
which certificates signed by the
president
or
vice
president,
countersigned by the secretary or
assistant secretary, and sealed with
the seal of the corporation shall be
issued in accordance with the bylaws. Shares of stock so issued are
personal property and may be
transferred by delivery of the
certificate or certificates indorsed by
the owner or his attorney-in-fact or
other person legally authorized to
make the transfer. No transfer,
however, shall be valid, except as
between the parties, until the
transfer is recorded in the books of
the corporation showing the names
of the parties to the transaction, the
date of the transfer, the number of
the certificate or certificates and the
number of shares transferred.
No shares of stock against
which the corporation holds any
unpaid claim shall be transferable in
the books of the corporation. (35)
Until registration is accomplished,
the transfer, though valid between
the parties, cannot be effective as
against the corporation. Thus the,
unrecorded transfer cannot enjoy
the status of a stockholder; he
cannot vote nor be voted for, and he
will not be entitled to dividends. The
corporation will be protected when it
pays dividend to the registered
owner despite a previous transfer of
which it had no knowledge. The
purpose of registration therefore is
81

twofold: to enable the transferee to

exercise all the rights of a stockholder
and to inform the corporation of any
change in shares ownership so that it
can ascertain the persons entitled to
the rights and subject to the liabilities
of a stockholder.
Thus, it was also ruled by the
High Court in Nautica Canning
Corp. vs. Yumul that A transfer
of shares not recorded in the
stock and transfer book of the
corporation is non-existent in so
far as the corporation is
concerned. This is so because
the corporation looks only
through its books for the
purpose of determining who its
stockholders are.
Registration
following:

is

necessary

for

the

1. To enable the corporation to know who

its stockholders are;
2. To enable the transferee to exercise
his rights a s stockholders;
3. To
afford
the
corporation
an
opportunity to object or refuse
registration of the transfer in case
allowed by law;
4. To avoid fictitious
transfers; and,

and fraudulent

5. To protect creditors who have the right

to look upon stockholders, in case of
no-payment or watered shares, for the
satisfaction of their claims.
Duty of the secretary is ministerial,
hence mandamus will lie if the
secretary refuses to record the

transfer, but he cannot be compelled

when the transferees title to the said
shares has no prima facie validity or
uncertain
Transfer- absolute and unconditional
transfer to warrant registration in the
books of the corporation in order to
bind the latter and other third
persons.
Other restrictions on the right to
transfer shares would include:
1. It is not valid, except as between the
parties, until recorded in the books
of the corporation;
2. Shares of stock against which the
corporation holds any unpaid claim
shall not be transferable in the
books of the corporation; unpaid
claims, refer to claims arising from
unpaid subscription and not to any
indebtedness which a stockholder
may owe the corporation such as
monthly dues;
3. Restrictions required to be indicated
in the articles of incorporation, bylaws and stock certificates of a close
corporation;
4. Restrictions imposed by special law,
such as the Public Service Act
requiring the approval of the
government agency concerned if it
will vest unto the transferee 40% of
the capital of the public service
company;
5. Sale to aliens in violation of
maximum ownership of shares
under the Nationalization Laws;

82

6. Those
covered
by
agreement of the parties.

reasonable

Violation of
Central Bank

nationalization

law-

Monserat vs. Ceron

Lambert vs. Fox

Does it include mortgage?

NO, it is not an absolute transfer

Valid , may be reasonably regulated,

restricted by agreement of parties

Will not affect the transfer through

mortgage

Reasonable
parties

Absolute and unconditional transfer

Reasonable as to length of time

Only the transfer or absolute

conveyance of the ownership of the
title to a share need be entered and
noted upon the books of the
corporation in order that such transfer
may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title
is not a complete and absolute
alienation of the dominion and
ownership thereof, its entry and
notation upon the books of the
corporation is not necessary requisite
to its validity

Chua guan vs. Magsasaka

-

Was the mortgage valid and effective

as against subsequent third parties

Register of deeds where the

corporation resides and if different in
the register of deeds of owners
domicile

Unson vs. Dinamito

-

All transferred not register will not have

a valid force and effect

Right to transfer may be regulated

May not be unreasonably restricted

agreement

by

the

Padgett vs. Babcock

-

Any attempt to restrain transfer

SC, in the absence of a valid lien

upon its shares

Valid
restrictions
applicable

Any restriction on a stockholders

right to dispose of his shares must
be construed strictly; and any
attempt to restrain a transfer of
shares is regarded as being in
restraint of trade, in the absence of a
valid lien upon its shares, and
except to the extent that valid
restrictive
regulations
and
agreements
exist
and
are
applicable. Subject only to such
restrictions, a stockholder cannot be
controlled in or restrained from
exercising his right to transfer by the
corporation or its officers or by other
stockholders, even though the sale
is to a competitor of the company, or
to an insolvent person, or even
though a controlling interest is sold
to one purchaser.

Certificate
transferrable

of

shares

stocks

are

are

83

By endorsement and delivery of the

stock certificate to the transferee

Mandamus may issue if petition has

a clear legal right

In order to be valid, must be registered

in the books. If not, will only be binding
among parties

Never issued in doubtful cases

Petitioner failed to establish a clear

legal right and alleged ownership is
without merit

Did not acquire ownership by virtue

of the contract of pledge

In a contract of pledge there must be

foreclosure

How may shares

transferred?
-

of

stock

be

Endorsement of stock certificate by

owner or attorney-in-fact with delivery

Embassy farms vs. CA

-

Must be endorsed by owner or

attorney-in-fact coupled with delivery

In the case there was no attempt to

foreclose

Endorsed not delivered

Proper mode and manner must be

complied with

Petitioner must have a prima facie

right

Nava vs. Peers Marketing

Razon vs. IAC

-

Delivered not endorsed

Reverse of Embassy Farms

Endorsement alone is not sufficient nor

delivery without endorsement is not
allowed

Endorsement
mandatory

plus

delivery

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

No stock certificate was issued.

Without stock certificate, which is
the evidence of ownership of
corporate stock, the assignment of
corporate shares is effective only
between the parties to the
transaction

is

Is there any other mode of transferring

stock?
-

Notarized deed

Deed of assignment

Rural bank of Salinas vs. CA

-

If denied or refused without good

cause, mandamus will lie

Tay vs. CA

Exception to the general rule

Rural Bank of Lipa vs. CA
-

By notarized deed

Certificate of stocks already issued

must be coupled with delivery,
exception (TAN vs. SEC)
84

 Stock certificate has already been

issued it must be coupled with the
delivery
After certificate of stock is issued, may
it be effectively transferred even
without endorsement or delivery of the
stock certificate?
-

is

not

Tan vs. SEC (FULL KNOWLEDGE,

HE IS ESTOPPED)

Why is he, not considered as the

owner of shares? When it has been
said that when endorsed by the
owner it is considered as strict
certificate? Because certificate of
stocks are non-negotiable

Although a stock-certificate is
sometimes regarded as quasinegotiable, in the sense that it may
be transferred by endorsement,
coupled with delivery, it is well
settled that the instrument is nonnegotiable, because the holder
thereof takes it without prejudice to
such rights or defenses as the
registered owner or creditor may
have under the law, except insofar
as such rights or defenses are
subject to the limitations imposes by
the principles governing estoppels.

Persons sought to be stockholder is

officer and has custody of the book
(estopped)

Certificate of stock must be endorsed

by owner or attorney-in-fact coupled
with delivery

Exceptions
-

Section 63 uses the word may

Showing that there may be other

modes of transferring shares

Is there a time frame or fixed period as

when transfer can be made?
-

NO, (WON vs. WACK WACK)

Won vs. Wack Wack

-

Valid between contracting parties even

if not recorded in corporation books

Right accrues only if refused

Statute of limitations does not apply in

registration of shares of stock

Transferees pays it without prejudice

to all the rights and defenses as the
true and lawful owner may have
under the law except insofar as such
rights and defenses are subject to
the limitations imposed by the
principles governing estoppels

Delos Santos vs. Republic

General Rule for valid transfer

-

Must determined from the time of

refusal

Why are they non-negotiable when

they may be transferred?

Person sought to be a stockholder is

an officer and has custody

Endorsement and delivery

necessary (TAN vs. SEC)

Unauthorized
certificates
100/s

issuance

of

stock

100
XYZCo

85

100 pesos per share

Stolen by B and forged the signature of A
B sells to C will C acquire title? NO

ENDORSEMENT FORM
C armed with the endorsement form
certificate, sold to D (innocent
purchaser for value), will D acquire
title?
- NO, subject to such rights and
defenses as the true and lawful owner
may have
What if C now goes to the corporation
and presents the form?
- Then the corporation shall cancel the old
certificate and issues a new one, now
in the name of C, now registered in the
name of C, will C acquire title?
A found out what happened and goes
to the corporation who has a better title
C or A?
- A, A cannot be deprived of his right by
virtue of an unauthorized transfer
Corporation can compel C to deliver
the new stock certificate because he
made a representation that the
certificate where good.
Armed with the new certificate issued
to C, C delivers to D a purchaser in
good faith and for value will D acquire
title?

- D will acquire title took the shares not

by virtue of a forged or unauthorized
transfer, but on the reliance that the
stock certificate is valid and owned
by C
Stock certificate now in possession
of D. A knew of what happened and
went to the corporation and
complains. Who will have a better
title?
- the corporation may be compelled to
recognize both, A as stockholder
(non-negotiable) D, reliance that the
stock certificate is valid and existing
and owned by C
Forged transfers
-

If the corporation should issue a new

certificate in pursuance of a forged
transfer, the corporation incurs no
liability to the person in whose favor
it is issued and it may demand its
return
for
cancellation.
The
corporation in such case has been
guilty of no misrepresentation. On
the other hand, it is the duty of the
purchaser to determine that the
indorsement of the owner is
genuine. However, if the new
certificate issued to the purchaser
comes into the hands of a bona fide
purchaser for value, the corporation
will be stopped from denying validity
thereof, since by issuing such new
certificate it represents that the
person named therein is a
stockholder of the corporation. The
corporation is thus forced to
recognize both the original certificate
and new certificate-the original,
because the true owner could not be
86

deprived of his title by a forged

transfer, and the new, because of its
representation that the person named
therein is the owner of shares in the
corporation. But if the recognition of
both stockholders would result in an
over issue of shares, then only the
original and true owner can be
recognized as a stockholder. The bona
fide purchaser of the new certificate
will however have a right of damages
against
the
corporation.
The
corporation, in turn, would have a right
of action against the person who made
false representations and in whose
favor it issued a new certificate. The
true owner of the shares which were
wrongfully transferred would of course
have a right to compel the corporation
to issue him a certificate in lieu of the
original one which was wrongfully
cancelled.
Authorized capital stock 1M shares
All are subscribed who will the
corporation recognize as rightful owner
A or D? if both will be recognized there
will be over issuance
- only A citing citizens national bank vs.
state (but if recognition of both
stockholders would result in an over
issue of shares, then only the original
and true owner can be recognized as a
stockholder)

- D will have a cause of action against

the corporation for the value of his
acquisition
cost
inclusive
of
damages, attorneys fees and cost
of suit
D sues the corporation for the value
of his acquisition cost, inclusive of
damages, attorneys fees and cost
of suit. What may the corporation
do?
- NO defense, no valid defense,
because it was represented to other
parties that the certificate of stocks
is valid, subsisting, etc.
2nd situation, what cause of action
may
the
corporation
have?
Remedy?
- Third party complaint against C, but
what if he is a purchaser for value?
4th party claim against B
When may certificate of stocks be
issued?
-

Section 64 provides:
Section 64. Issuance of stock
certificates. - No certificate of stock
shall be issued to a subscriber until
the full amount of his subscription
together with interest and expenses
(in case of delinquent shares), if any
is due, has been paid. (37)

- by virtue of the doctrine of nonnegotiability of certificate of stocks

A certificate of stock cannot be

issued unless he fully paid the
amount subscribed

The true and lawful owner will never

be deprived of his rights

Subscription to the capital stocks of

the corporation are indivisible

What happens to D?

Clear mandate of section 148 of the

code is that the ruling of the court in
87

Baltazar vs. Lingayen Gulf, no longer

holds true
Section 148. Applicability to
existing corporations. - All corporations
lawfully existing and doing business in
the Philippines on the date of the
effectivity of this Code and heretofore
authorized, licensed or registered by
the
Securities
and
Exchange
Commission, shall be deemed to have
been authorized, licensed or registered
under the provisions of this Code,
subject to the terms and conditions of
its license, and shall be governed by
the provisions hereof: Provided, That if
any such corporation is affected by the
new requirements of this Code, said
corporation shall, unless otherwise
herein provided, be given a period of
not more than two (2) years from the
effectivity of this Code within which to
comply with the same. (n)
Subscription to shares of stocks are
indivisible
Also apparent is that once a subscriber
has paid his subscription in full, he
becomes entitled to be issued a stock
certificate and in the event that the
corporation refuses to do so, the
stockholder my institute a case for
mandamus with damages. Thus, it has
been said that the duty of the
corporate officers to issue stock
certificates to those entitled thereto is
a ministerial duty enforceable by
mandamus.
Fua Cun vs. Summers and China
Banking Corp.
-

The court erred in holding the plaintiff

as the owner of 250 shares of stock;
the plaintiffs rights consist in equity in
500 shares and upon payment of the

unpaid portion of the subscription

price he becomes entitled to the
issuance of certificate for said 500
shares in his favor.
-

No certificate of stock until the full

amount has been paid.

Watered stock
-

One which is issued by the

corporation as fully paid-up shares,
when in fact the whole amount of the
value thereof has not been paid.

Basis is par value and not the fair

market value

Section 62 states that stocks shall

not be issued for a consideration
less than par or issued price thereof,
while section 13 states that in no
case shall be paid-up capital be less
than five thousand [P5000] pesos.
If issued below par, issued value
considered as water
How may watered stocks be issued?
1. For a monetary consideration less
than its par or issued value;
2. For a consideration in property,
tangible or intangible, valued in
excess of its fair market value;
3. Gratuitously or under an agreement
that nothing shall be paid at all; or
4. In the guise of stock dividends when
there are no surplus profits of the
corporation.
Why is stock watering illegal?
1. The corporation is deprived of its
capital thereby hurting its business
88

prospects, financial
responsibility;

capability

and

2. Stockholders
who
paid
their
subscriptions in full, or promised to pay
the same, are injured and prejudiced
by the reduction of their proportionate
interest in the corporation; and,
3. Present and future creditors are
deprived of the corporate assets for
the protection of their interest.
-

Corporation is prejudiced

Stockholders, dilution of interest

Creditors are prejudiced, virtue of right

to look upon corporations properties
for the satisfaction of their claims

What is the effect of issuance of

watered stocks
1. As to the corporation - when a
corporation is guilty of ultra-vires or
illegal acts which constitute an injury to
or fraud upon the public, or which will
tend to injure or defraud the public, the
State may institute a quo-warranto
proceeding to forfeit its charter for the
misuse or abuse of its franchise.
2. As between the corporation and the
subscriber- The subscription is void.
Such being the case, the subscriber is
liable to pay the full par or issued value
thereof, to render it valid and effective.
3. As to the consenting stockholders They are stopped from raising any
objection thereto;
4. As to dissenting stockholders - In view
of the dilution of their proportionate
interest in the corporation, they may
compel the payment of the water in

the stock solidarily against the

responsible and consenting directors
and officers inclusive of the holder of
the watered stocks;
5. As to creditors - They may enforce
payment of the difference in the
price, or the water in the stock,
solidarily against the responsible
directors/officers
and
the
stockholders concerned; and
6. As against transferees of the
watered stock His right is the
same as that of his transferor. If,
however, a certificate of stock has
been issued and duly indorsed to a
bona
fide
purchaser,
without
knowledge, actual or constructive,
the latter cannot be held liable, at
least as against the corporation,
since he took the shares on reliance
of the misrepresentation made by
the corporation that the stock
certificate is valid and subsisting.
This is because a corporation is
prohibited from issuing certificates of
stock until the full value of the
subscriptions have been paid and
could not, therefore, deny the
validity of the stock certificate it
issued as against a purchaser in
good faith. Thus, Ballentine states
that whether there is any liability on
the part of the transferee of watered
stock is made to depend upon
whether he acquired the same
without notice, either as purchaser
or donee. If he had knowledge
thereof, he is subject to the same
liability as his transferor.
What is the nature of the liability of
the corporate directors consenting to
89

the issuance of watered stocks and the

extent of their liabilities?
-

Solidarily liable with the holder of the

watered stocks to the extent of the
water from said shares of stocks

Will all the directors be liable? What if

you objected will you also be liable?
-

If you do not issue a written objection,

you are still liable

Even passive directors may be liable

Those having knowledge thereof, but

did not interpose their objection shall
be liable

Section 65 provides:
Section 65. Liability of directors
for watered stocks. - Any director or
officer of a corporation consenting to
the issuance of stocks for a
consideration less than its par or
issued value or for a consideration in
any form other than cash, valued in
excess of its fair value, or who, having
knowledge thereof, does not forthwith
express his objection in writing and file
the same with the corporate secretary,
shall be solidarily, liable with the
stockholder
concerned
to
the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of the
stock and the par or issued value of
the same. (n)

ACS-100M 100M/S
VALUE-1.00
SUBSCRIBED-50M
FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M

D
E
There is a denial of pre-emptive rights
and directors A,B,C,D,E decided to
issue
the
remaining
50M
and
subscribed for 10M each at 2 per share.
Is there stock watering if the fair
market value is 12.00?
-

No stock watering

The basis is the par value

The shares where in fact paid more

than the par value indicated in the
articles of incorporation

3 days later they sold their 10M share

for P11.00 each, therefore making a
profit.
Can you question there actuations?
What would be the cause of action?
-

It may be questioned.

Duty of loyalty or fiduciary duty as

such directors

They cannot advance their own

motives to the damage prejudice of
the
corporation
which
they
represents and stockholders as a
whole instead of it being sold
outside

500M would have gone to the

coffers of the corporation, 500M
should be there for the protection of
creditors

PAR

A
90

They are placed

relationship

Sila lang ba ang kikita, pano naman

yung corporation, opportunity na yun
para kumita

in

fiduciary

When are unpaid subscriptions due

and payable?
-

Section 67. Payment of balance of

subscription. - Subject to the
provisions
of
the
contract
of
subscription, the board of directors of
any stock corporation may at any time
declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same
or such percentage thereof, in either
case with accrued interest, if any, as it
may deem necessary.
Payment of any unpaid subscription or
any percentage thereof, together with
the interest accrued, if any, shall be
made on the date specified in the
contract of subscription or on the date
stated in the call made by the board.
Failure to pay on such date shall
render the entire balance due and
payable
and
shall
make
the
stockholder liable for interest at the
legal rate on such balance, unless a
different rate of interest is provided in
the by-laws, computed from such date
until full payment. If within thirty (30)
days from the said date no payment is
made, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale
as hereinafter provided, unless the
board of directors orders otherwise.
(38)

Remedies of the corporation to enforce

payment of unpaid subscription

1. By board action in accordance with

the procedure laid down in sections
67 to 69 of the code
2. By a collection case in court as
provided for in section 70
Are subscribers of shares of stocks
not fully paid, liable to pay interest?
-

General rule is they are not liable to

pay interest because the code says
unless requires in the by-laws
Aside from the mandate of the law
that subscribers to shares of stock
must pay the full value of their
subscription, they may likewise be
required to pay interest on all unpaid
subscriptions if so imposed in the
contract or in the corporate by-laws
at such rate as may be indicated
thereat or the legal rate if not so
fixed. Unless so required or
provided, however, subscribers to
shares of stock, not fully paid, are
not liable to pay interest on their
unpaid subscriptions. The code thus
provides:
Section 66. Interest on
unpaid subscriptions. - Subscribers
for stock shall pay to the corporation
interest on all unpaid subscriptions
from the date of subscription, if so
required by, and at the rate of
interest fixed in the by-laws. If no
rate of interest is fixed in the bylaws, such rate shall be deemed to
be the legal rate. (37)

Until a call is made, they are not due

and payable, but still subject to the
provisions of the contracts
Procedures in case of sale of
delinquent stocks
Section 68. Delinquency sale. - The board
of directors may, by resolution, order the
sale of delinquent stock and shall
specifically state the amount due on each
91

subscription plus all accrued interest, and the

date, time and place of the sale which shall
not be less than thirty (30) days nor more
than sixty (60) days from the date the stocks
become delinquent.
Notice of said sale, with a copy
of the resolution, shall be sent to every
delinquent
stockholder
either
personally or by registered mail. The
same shall furthermore be published
once a week for two (2) consecutive
weeks in a newspaper of general
circulation in the province or city where
the principal office of the corporation is
located.
Unless
the
delinquent
stockholder pays to the corporation, on
or before the date specified for the
sale of the delinquent stock, the
balance due on his subscription, plus
accrued
interest,
costs
of
advertisement and expenses of sale,
or unless the board of directors
otherwise orders, said delinquent stock
shall be sold at public auction to such
bidder who shall offer to pay the full
amount of the balance on the
subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share. The stock so purchased shall
be transferred to such purchaser in the
books of the corporation and a
certificate for such stock shall be
issued in his favor. The remaining
shares, if any, shall be credited in
favor of the delinquent stockholder
who shall likewise be entitled to the
issuance of a certificate of stock
covering such shares.
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the
subscription together with accrued
interest, costs of advertisement and

expenses of sale, for the smallest

number of shares or fraction of a
share, the corporation may, subject
to the provisions of this Code, bid for
the same, and the total amount due
shall be credited as paid in full in the
books of the corporation. Title to all
the shares of stock covered by the
subscription shall be vested in the
corporation as treasury shares and
may be disposed of by said
corporation in accordance with the
provisions of this Code. (39a-46a)
Who is the winning bidder in a
delinquency sale?
-

Bidder who shall offer to pay the full

amount of the balance on the
subscription together with accrued
interest, cost of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share.
X Co. has 1M authorized capital
stock
500 thousand is already subscribed
A subscribed to 100 thousand
shares, 50 thousand is already paid
leaving 50 thousand unpaid
The corporation is at a loss of 250
thousand, the board decides to
make a call for the payment of the
unpaid subscriptions, however A
could not paid, hence declared
delinquent and decides to sell his
share at a public auction
55 thousand is to be paid, remaining
balance plus cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
92

1. To eliminate fractional shares

arising out of stock dividends;

Y-55K FOR 99,500 shares

Z-55K FOR 99,000 shares (winning
bidder)

2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during said
sale; and

Assume there is no bidder, may the

corporation bid?
-

NO. It cannot bid because the law

says, subject to the provisions of this
CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the
subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share, the corporation may, subject to
the provisions of this Code, bid for
the same, and the total amount due
shall be credited as paid in full in the
books of the corporation. Title to all the
shares of stock covered by the
subscription shall be vested in the
corporation as treasury shares and
may be disposed of by said
corporation in accordance with the
provisions of this Code. (39a-46a)

There was no unrestricted retained

earnings in the example given
therefore the corporation cannot bid ,
section 41, it states that:
Section 41. Power to acquire
own shares. - A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate purpose or purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the
shares to be purchased or acquired:

3. To pay dissenting or withdrawing

stockholders entitled to payment for
their shares under the provisions of
this Code. (a)
What if the shares of A were sold
without
compliance
of
the
requirements? May A question the
sale?
-

The law prescribes two conditions

before an action to recover
delinquent stocks irregularly sold
may be allowed. These are:

1. The party seeking to maintain such

action first pays or tenders to the
party holding the stock the sum for
which the same was sold, with
interest from the date of the sale at
the legal rate; and,
2. The action shall be commenced by
the filing of a complaint within six
months from the date of the sale.
-

The reason for such is the stability of

transactions of the shares of stock

Suppose in the example, since there

are
no
unrestricted
retained
earnings, hence the corporation
cannot bid, is the corporation left
without any recourse?
Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall
prevent the corporation from collecting by
action in a court of proper jurisdiction the
amount due on any unpaid subscription,
93

with accrued interest, costs and expenses.

(49a)
Velasco vs. Poizat
-

The subscriber is as much bound to

pay the amount of the share
subscribed by him as he would be to
pay any other debt, and the right of the
company to demand payment is no
less incontestable.
Two available remedies: the first and
most special remedy given by the
statute consist in permitting the
corporation to put up the unpaid stock
and dispose of it for the account of the
delinquent subscriber. The other
remedy is by action in court.

Call or if there is a stipulation in

contract
If no call and no stipulation in
contract then it will not be
demandable or payable at all

Lumanlan vs. Cura

-

Trust Fund Doctrine- subscription to

the capital of a corporation
constitute a fund to which the
creditors have a right to look for
satisfaction of their claims and that
the assignee in insolvency can
maintain an action upon any unpaid
stock subscription in order to realize
assets for the payment of its debts.

PNB vs. Bitulak

De Silva vs. Aboitiz and Co.
-

Discretionary on the part of the board

of directors to do whatever is provided
in the said article relative to the
application of the part of the 70
percent of the profit distributable in
equal parts on the payment of the
shares subscribed to and fully paid

Where it not for the promise, the

defendants
would
have
not
subscribed

Trust Fund Doctrine, it is established

doctrine that subscriptions to the
capital of a corporation constitute a
fund to which creditors have a right
to look for satisfaction of their claims
and that the assignee in insolvency
can maintain an action upon any
unpaid stock subscription in order to
realize assets for the payment of its
debts.

A corporation has no power to

release an original subscriber to its
capital stock from the obligation of
paying for his shares, without a
valuable consideration for such
release; and as against creditors a
reduction of the capital stock can
take place only in the manner and
under the conditions prescribed by
the statute or the charter or the
articles of incorporation.

Lingayen Gulf vs. Baltazar

-

Exception: pursuant to a bona fide

compromise or to set off a debt due
from the corporation, a release
supported by consideration, will be
effectual
as
against
dissenting
stockholders and subsequent and
existing creditors. A release which
might originally have been held invalid
may be sustained after a considerable
lapse of time

Apocada vs. NLRC

-

Set-off is without any legal basis

It was premature
Unpaid subscriptions will become due
and payable only upon certain
instance

Edward Keller and Co. vs. COB

94

May the stockholder be held liable for

the debts of the corporation? YES. To
the extent of their unpaid subscription

not fully paid which are not

delinquent shall have all the rights of
a stockholder. (n)

As to the liability of the stockholders, it

is settled that a stockholder is
personally liable for the financial
obligations of a corporation to the
extent of his unpaid subscriptions

May the rules governing delinquency

sale
apply
to
a
non-stock
corporation? Are there unpaid
shares in a non-stock corporation?

Is there a prescriptive period wherein a

demand for unpaid subscription should
be made?
-

Never became due and payable until

there is a call made
Prescription will not run until and
unless there is demand
Prescription should be determined
from the time demand has been made
and not from the time of subscription

If declared delinquent, what would be

the effect as to the owner of said
shares?
Section 71. Effect of delinquency. - No
delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless he pays the amount due on
his subscription with accrued interest, and the
costs and expenses of advertisement, if any.
(50a)
-

NO. Garcia vs. Suarez case

Garcia vs. Suarez

-

However if the shares are not

delinquent, subscribers to the capital
of a corporation, though not fully paid,
are entitled to all the rights of a
stockholder, according to section 72
Section 72. Rights of unpaid
shares. - Holders of subscribed shares

Rules governing stock corporations,

when applicable, also applies to a
non-stock corporation
There are delinquent shareholders
also in a non-stock corporation.
Example is membership dues

A corporation paid 50% of

subscription and was later on
declared delinquent when he could
not pay upon call; A is also a
director of the corporation. Will A,
upon declaration of delinquency ,
still be able to exercise his right as a
director?
-

Yes, he loses all his right as a

stockholder except his right to
receive dividends
He remains to be a director, only
qualification to be a director is he
must own at least 1 share and since
it still stands in his name pending
the sale, he remains to be and act
as a director
Even if there is sale, he may still be
director because the winning bidder
may not bid or pay for all the shares
or there might be remaining shares,
which would be credited in favor of
the delinquent stockholder
Section 43 provides:
Section 43. Power to declare
dividends. - The board of directors of
a stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
95

of outstanding stock held by them:

Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock
corporations
are
prohibited from retaining surplus profits
in excess of one hundred (100%)
percent of their paid-in capital stock,
except: (1) when justified by definite
corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation
is
prohibited
under
any
loan
agreement with any financial institution
or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet
been secured; or (3) when it can be
clearly shown that such retention is
necessary
under
special
circumstances
obtaining
in
the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
When a certificate of stock is loss or
destroyed, what must be done by the
owner thereof?
Section 73. Lost or destroyed certificates. The following procedure shall be followed for
the issuance by a corporation of new
certificates of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of a
certificate of stock in a corporation or

his legal representative shall file with

the corporation an affidavit in
triplicate setting forth, if possible, the
circumstances as to how the
certificate was lost, stolen or
destroyed, the number of shares
represented by such certificate, the
serial number of the certificate and
the name of the corporation which
issued the same. He shall also
submit such other information and
evidence which he may deem
necessary;
2. After verifying the affidavit
and other information and evidence
with the books of the corporation,
said corporation shall publish a
notice in a newspaper of general
circulation published in the place
where the corporation has its
principal office, once a week for
three (3) consecutive weeks at the
expense of the registered owner of
the certificate of stock which has
been lost, stolen or destroyed. The
notice shall state the name of said
corporation, the name of the
registered owner and the serial
number of said certificate, and the
number of shares represented by
such certificate, and that after the
expiration of one (1) year from the
date of the last publication, if no
contest has been presented to said
corporation regarding said certificate
of stock, the right to make such
contest shall be barred and said
corporation shall cancel in its books
the certificate of stock which has
been lost, stolen or destroyed and
issue in lieu thereof new certificate
of stock, unless the registered owner
files a bond or other security in lieu
thereof as may be required, effective
for a period of one (1) year, for such
amount and in such form and with
such sureties as may be satisfactory
to the board of directors, in which
96

case a new certificate may be issued

even before the expiration of the one
(1) year period provided herein:
Provided, That if a contest has been
presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock
which has been lost, stolen or
destroyed, the issuance of the new
certificate of stock in lieu thereof shall
be suspended until the final decision
by the court regarding the ownership
of said certificate of stock which has
been lost, stolen or destroyed.

Yes it can be, the code states that:

unless the registered owner
files a bond or other security in lieu
thereof as may be required, effective
for a period of one (1) year, for such
amount and in such form and with
such sureties as may be satisfactory
to the board of directors, in which
case a new certificate may be
issued even before the expiration
of the one (1) year period
provided herein: Provided, That if a
contest has been presented to said
corporation or if an action is pending
in court regarding the ownership of
said certificate of stock which has
been lost, stolen or destroyed, the
issuance of the new certificate of
stock in lieu thereof shall be
suspended until the final decision by
the court regarding the ownership of
said certificate of stock which has
been lost, stolen or destroyed.

Except in case of fraud, bad

faith, or negligence on the part of the
corporation and its officers, no action
may
be
brought
against
any
corporation which shall have issued
certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the
procedure above-described. (R.A.
201a)
The rationale of the above-quoted law
is to avoid duplication of certificates of
stock and the avoidance of fictitious
and fraudulent transfers.

May corporate officers be held liable

for the unauthorized issuance?

When will the replacement certificate

be issued?

Except in case of fraud, bad

faith, or negligence on the part of the
corporation and its officers, no
action may be brought against any
corporation which shall have issued
certificate of stock in lieu of those
lost, stolen or destroyed pursuant to
the procedure above-described.
(R.A. 201a)

The code provides that:

after the expiration of one (1)
year from the date of the last
publication, if no contest has been
presented
to
said
corporation
regarding said certificate of stock, the
right to make such contest shall be
barred and said corporation shall
cancel in its books the certificate of
stock which has been lost, stolen or
destroyed and issue in lieu thereof
new certificate of stock,

Could it be issued earlier than 1 year?

YES, the code provides that:

Assuming the last paragraph is not

there; would it be not the same, that
they should be held liable due to
fraud, bad faith or negligence?
-

YES. Section 31 provides that:

Section 31. Liability of
directors, trustees or officers. 97

Directors or trustees who willfully and

knowingly vote for or assent to patently
unlawful acts of the corporation or who
are guilty of gross negligence or bad
faith in directing the affairs of the
corporation or acquire any personal or
pecuniary interest in conflict with their
duty as such directors or trustees shall
be liable jointly and severally for all
damages resulting there from suffered
by the corporation, its stockholders or
members and other persons.
When a director, trustee or
officer attempts to acquire or acquires,
in violation of his duty, any interest
adverse to the corporation in respect
of any matter which has been reposed
in him in confidence, as to which
equity imposes a disability upon him to
deal in his own 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. (n)
Certificate of stock was lost, the owner
transfers his shares by way of a
notarized deed will it be valid?
-

He cannot do so, if a certificate of

stock is issued by a corporation, a
mere notarized deed will not suffice
Deed of assignment was not sufficient
since there was no endorsement
(Rural Bank of Lipa vs. CA)

Rights and liabilities of stockholders

-

RIGHTS

1. Participation in the management of the

corporate affairs by exercising their
right to vote and be voted upon either
personally or by proxy as provided for
under sections 50 and 58 of the code;
2. To enter into a voting trust agreement
subject to the procedure, requirements

and limitations imposed under

section 50;
3. To receive dividends and to compel
their declaration if warranted under
section 43;
4. To transfer shares of stock subject
only to reasonable restrictions such
as options and preferences as may
be allowed by law inclusive of the
right of the transferee to compel the
registration of the transfer in the
books of the corporation as provided
for in section 63;
5. To be issued a certificate of stock for
fully paid-up shares in accordance
with 64;
6. To exercise pre-emptive rights as
provided for in section 39;
7. To exercise their appraisal right in
accordance with the provision of
section 81 and in those instance
allowed by law such as section 42
and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock
unlawfully sold for delinquency as
may be allowed under section 69;
10. To inspect the books of the
corporation subject only to the
limitations imposed by section 73;
11. To be furnished by the most recent
financial
statement
of
the
corporation as by section 75;
12. To be issued a new stock certificate
in lieu of the lost or destroyed one
subject to the procedure laid down in
section 73;
13. To have the corporation dissolved
under section 118 to 121, and
section 105 in a close corporation;
14. To participate in the distribution of
the assets of the corporation upon
dissolution under section 122;
15. In the case of a close corporation, to
petition the SEC to arbitrate in the
event of a deadlock as allowed
under section 104; and,
16. Also in the case of a close
corporation, to withdraw therefrom,
98

for my reason, and compel the

corporation to purchase his shares as
provided for under section 105.

99

LIABILITIES
1. To pay to the corporation the balance
of his unpaid subscriptions subject to
the provision of section 67 to 70;
2. To pay interest on his unpaid
subscription if required by the by-laws
or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the
unpaid portion of his subscription
under the TRUST FUND DOCTRINE;
4. To answer the water in his stocks as
provided for in section 65;
5. To be liable, as general partners, for
all debts, liabilities and damages of a
determinable
corporation
as
envisioned
under
section
21
(corporation by estoppel); and,
6. To be personally liable for torts, in the
event that a stockholder in a close
corporation actively participates in the
management of the corporate affairs.
CORPORATE BOOKS AND RECORDS
What are these books and records that
are required to be kept?
Section 74. Books to be kept; stock transfer
agent. - Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in
detail the time and place of holding the
meeting, how authorized, the notice given,
whether the meeting was regular or
special, if special its object, those present
and absent, and every act done or ordered
done at the meeting. Upon the demand of
any director, trustee, stockholder or
member, the time when any director,
trustee, stockholder or member entered or
left the meeting must be noted in the
minutes; and on a similar demand, the
yeas and nays must be taken on any
motion or proposition, and a record

thereof carefully made. The protest of

any director, trustee, stockholder or
member on any action or proposed
action must be recorded in full on his
demand.
The records of all business
transactions of the corporation and
the minutes of any meetings shall be
open to inspection by any director,
trustee, stockholder or member of
the corporation at reasonable hours
on business days and he may
demand, in writing, for a copy of
excerpts from said records or
minutes, at his expense.
Any officer or agent of the
corporation who shall refuse to allow
any director, trustees, stockholder or
member of the corporation to
examine and copy excerpts from its
records or minutes, in accordance
with the provisions of this Code,
shall be liable to such director,
trustee, stockholder or member for
damages, and in addition, shall be
guilty of an offense which shall be
punishable under Section 144 of this
Code: Provided, That if such refusal
is made pursuant to a resolution or
order of the board of directors or
trustees, the liability under this
section for such action shall be
imposed upon the directors or
trustees who voted for such refusal:
and Provided, further, That it shall
be a defense to any action under
this section that the person
demanding to examine and copy
excerpts from the corporation's
records and minutes has improperly
used any information secured
through any prior examination of the
records or minutes of such
corporation or of any other
corporation, or was not acting in
good faith or for a legitimate purpose
in making his demand.
100

Stock corporations must also

keep a book to be known as the "stock
and transfer book", in which must be
kept a record of all stocks in the
names
of
the
stockholders
alphabetically
arranged;
the
installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment; a statement of every
alienation, sale or transfer of stock
made, the date thereof, and by and to
whom made; and such other entries as
the by-laws may prescribe. The stock
and transfer book shall be kept in the
principal office of the corporation or in
the office of its stock transfer agent
and shall be open for inspection by
any director or stockholder of the
corporation at reasonable hours on
business days.
No stock transfer agent or one
engaged principally in the business of
registering transfers of stocks in behalf
of a stock corporation shall be allowed
to operate in the Philippines unless he
secures a license from the Securities
and Exchange Commission and pays
a fee as may be fixed by the
Commission, which shall be renewable
annually: Provided, That a stock
corporation is not precluded from
performing or making transfer of its
own stocks, in which case all the rules
and regulations imposed on stock
transfer agents, except the payment of
a license fee herein provided, shall be
applicable. (51a and 32a; P.B. No.
268.)
To summarize:
1. Records of all business transactions
which include, among others, journals,
ledger, contracts, vouchers and
receipts, financial statements and
other books of accounts, income tax
returns, and voting trust agreements

which must be kept and carefully

preserved at its principal office;
2. Minutes
of
all
meetings
of
stockholders or members and of the
directors or trustees setting forth in
detail the date, time, and place of
meeting, how authorized, the notice
given whether the same be regular
or special, and if special, the
purpose thereof shall be specified,
those present and absent, and every
act done or ordered done there at
which ,must likewise be kept at the
principal office of the corporation;
and,
3. Stock and transfer book showing the
names of the stockholders, the
amount paid or unpaid on all stocks
for which subscription has been
made, a statement of every
alienation, sale or transfer of stock
made, if any the date thereof, and by
whom and to whom made which
must also be kept at the principal
office of the corporation or in the
office of its stock transfer agent.
These corporate books and records,
inclusive of all business transactions
and minutes of meetings, are
subject to inspection by any of the
directors, trustees, stockholders or
members of the corporation at
reasonable hours on business days
and a copy of excerpts of said
records may be demanded. In fact,
in so far as financial statement is
concerned,
the
Code
clearly
provides:
Section 75. Right to financial
statements. - Within ten (10) days
from receipt of a written request of
any stockholder or member, the
corporation shall furnish to him its
most recent financial statement,
which shall include a balance sheet
as of the end of the last taxable year
and a profit or loss statement for
101

said taxable year, showing in

reasonable detail its assets and
liabilities and the result of its
operations.
At the regular meeting of stockholders
or members, the board of directors or
trustees shall present to such
stockholders or members a financial
report of the operations of the
corporation for the preceding year,
which
shall
include
financial
statements, duly signed and certified
by an independent certified public
accountant.

this section that the person

demanding to examine and copy
excerpts from the corporation's
records
and
minutes
has
improperly used any information
secured
through
any
prior
examination of the records or
minutes of such corporation or of
any other corporation, or was not
acting in good faith or for a
legitimate purpose in making his
demand.
What is the stock and transfer?
Where should stock and transfer be
kept? Can it be kept elsewhere?

However, if the paid-up capital of the

corporation is less than P50,000.00,
the financial statements may be
certified under oath by the treasurer or
any responsible officer of the
corporation. (n)

Stock corporations must also

keep a book to be known as the
"stock and transfer book", in which
must be kept a record of all
stocks in the names of the
stockholders
alphabetically
arranged; the installments paid
and unpaid on all stock for which
subscription has been made, and
the date of payment of any
installment; a statement of every
alienation, sale or transfer of
stock made, the date thereof, and
by and to whom made; and such
other entries as the by-laws may
prescribe. The stock and transfer
book shall be kept in the principal
office of the corporation or in the
office of its stock transfer agent
and shall be open for inspection by
any director or stockholder of the
corporation at reasonable hours on
business days.

May books and records be examined?

Who may examine? Can they copy
them? In whose expense?
-

Yes, according to the code:

The records of all business
transactions of the corporation and
the minutes of any meetings shall
be open to inspection by any
director, trustee, stockholder or
member of the corporation at
reasonable hours on business days
and he may demand, in writing, for
a copy of excerpts from said
records or minutes, at his expense.

Is there any defense available that

could be raised? By the corporate
officers to justify the refusal?
-

Stock and transfer agent

-

Yes, the code provides that:

and Provided, further, That it
shall be a defense to any action under

Records every movement

Person who monitors movement by
the minutes or by the hours
Non-stock corporation- stock and
transfer books
Club share- membership
102

 Are stockholders entitled to financial

statements?

Why is this right of inspection

granted to a stockholder?

Yes, they are entitled to a copy, the

code provides that:
Section 75. Right to financial
statements. - Within ten (10) days from
receipt of a written request of any
stockholder
or
member,
the
corporation shall furnish to him its
most recent financial statement, which
shall include a balance sheet as of the
end of the last taxable year and a profit
or loss statement for said taxable year,
showing in reasonable detail its assets
and liabilities and the result of its
operations.

The right of the shareholders

to ascertain how the affairs of
his company are being
conducted by its directors and
officers is founded by his
beneficial interest through
ownership of shares and the
necessity of self-protection.
Managers
of
some
corporations
deliberately
keep the shareholders in
ignorance
or
under
misapprehension as to the
true condition of its affairs.
Business prudence demands
that the investor keep a
watchful
eye
on
the
management
and
the
condition of the business.
Those in charge of the
company may be guilty of
gross
incompetence
or
dishonesty for years and
escape
liability
if
the
shareholders cannot inspect
the records and obtain
information.

At the regular meeting of

stockholders or members, the board of
directors or trustees shall present to
such stockholders or members a
financial report of the operations of the
corporation for the preceding year,
which
shall
include
financial
statements, duly signed and certified
by an independent certified public
accountant.
However, if the paid-up capital
of the corporation is less than
P50,000.00, the financial statements
may be certified under oath by the
treasurer or any responsible officer of
the corporation. (n)
-

Audited financial statement filed in the

SEC, 120 days from the end of the
final year, or must be filed on or before
April of each year
Must be stamp received by the BIR

Is there any distinction of the right of

inspection of a stockholder and that
of a director?
-

Those in the stock exchange

-

Disclosure of any matter that have to

do with increasing and decreasing
If not kulong violation of securities
and regulation act

The basis of the right of the

stockholder to inspect the books and
records of the corporation for a
proper purpose is to protect his
interest as a stockholder. Thus, it
has been said that:

Yes, as compared to a stockholder

or member, the right of a director or
trustee to inspect and examine
corporate books and records is
considered absolute and unqualified
and without regard to motive. This is
because a director supervises,
103

directs and manages corporate

business and it is necessary that he be
equipped with all the information and
data with regard to the affairs of the
company in order that he may manage
and direct its operations intelligently
and according to his best judgment in
the interest of all the stockholders he
represents. Thus, while stockholders
and members are entitled to inspect
and examine the books and records as
provided in sections 74 and 75 they
may not gain access to highly sensitive
and confidential information. In the
case of directors. it is not denied that
they have such access. This would
include, among others,
a. Marketing strategies and pricing
structure;
b. Budget
for
expansion
and
diversification;
c. Research and development;
d. Sources of funding, availability of
personnel, proposals of mergers or
tie-ups with other firms
May this right be exercised, other than
by the stockholders themselves?
-

Yes, while the right is founded on

stock ownership thus personal in
nature it may be made by the
stockholders agent or representative
since it may be unavailing in many
instances

What if the right of the stockholder to

inspect is denied? What is his
remedy?
1. Mandamus
2. Damages
either
against
the
corporation or responsible officer who
refused the inspection
3. Criminal complaint for violation of his
right to inspect and copy excerpts of all
business transactions and minutes of
meeting. Section 74 provides that Any

officer or agent of the corporation

who shall refuse to allow any
director, trustees, stockholder or
member of the corporation to
examine and copy excerpts from its
records or minutes, in accordance
with the provisions of this Code,
shall be liable to such director,
trustee, stockholder or member for
damages, and in addition, shall be
guilty of an offense which shall be
punishable under Section 144 of this
Code. The latter provision imposes a
penalty of a fine of not less than
P1,000 but not more than P10,000
or an imprisonment for not less than
30 days but not more than 5 years,
or both, at the discretion of the court.
If the refusal is pursuant to a
resolution or order of the board, the
liability shall be imposed upon the
directors or trustees who voted for
such refusal.
Defense
of
the
corporate officer

responsible

1. That the person demanding has

improperly used any information
secured
through
any
prior
examination of the records or
minutes of such corporation or of
any other corporation;
2. That he was not acting in good faith
or for a legitimate purpose in making
his demand;
3. The right is limited or restricted by
special law or the law of it creation.
W.G.
Philpotts
Manufacturing Co.
-

vs.

Philippine

The right of inspection given to a

stockholder can be exercised either
by himself or by any proper
representative or attorney-in-fact,
and either with or without the
attendance of the stockholder
104

The right may be regarded as

personal, in the sense that only a
stockholder may enjoy it; but the
inspection and examination may be
made by another. Otherwise it would
be unavailing in many instances.
o Note: Usually hires an auditor or
accountant to safeguard his
interest

been written up and approved by the

directors.
May a stockholder of a holding
company inspect the books and
records of a subsidiary?
-

Pardo vs. Hercules Lumber Co.

-

The law is clear, it may be exercised

during reasonable hours on any
business days, the by-laws cannot
deny this right all together
The general right given by the statute
may not be lawfully abridged to the
extent attempted in this resolution. It
may be admitted that the officials in
charge of a corporation may deny
inspection when sought at unusual
hours or under other improper
conditions; but neither the executive
officers nor the board of directors have
the power to deprive a stockholder of
the right altogether.
The corporation, or its responsible
directors and officers cannot unduly
restrict this right of inspection and may
not arbitrarily set a few days of the
year within which the stockholder may
make the inspection.
A by-law unduly restricting the right of
inspection is undoubtedly invalid

Vegaruth vs. Isabela Sugar Co.

-

Directors of a corporation have the

unqualified right to inspect the books
and records of the corporation at all
reasonable hours.
We do not conceive, however, that a
director or stockholder has any
absolute right to secure certified
copies of the minutes of the
corporation until these minutes have

It depends
The right of the stockholders to
examine corporate books extends to
wholly-owned subsidiary which is
completely under the control and
management of the parent company
where he is such a stockholder. But
if the two entities (subsidiary and
parent) are legally being operated as
separate and distinct entities, there
is no such right of inspection on the
part of the stockholder of the parent
company.
AYALAHOLDING
COMPANY/PARENT COMPANY
SUBSIDIARIES:
BPI/GLOBE/AYALA
LAND
wholly-owned subsidiary)

(not

o HOLD ATLEAST 50 +1 shares in

order to be a PARENT
COMPANY
A, is a stockholder of Ayala, does he
have a right to inspect the records of
its subsidiaries?
-

If wholly owned pwede, but its

subsidiaries are not wholly owned
kaya hindi pwede

Gokongwei vs. SEC

-

San Miguel corporation owns all of

the shares of stock of San Miguel
International
It is wholly-owned
It would be in accord with equity,
good faith and fair dealing to
construe the statutory right of
105

petitioner as stockholder to inspect the

books and records of such whollyowned subsidiary which are in
respondent corporations possession
and control

nor shall any information relative to

the funds in its custody, its current
accounts or deposits belonging to
private individuals, corporations or
other entities except by order of a
Court of Competent Jurisdiction,
hence inspection sought to by the
petitioner is violative of the
provisions of its charter and is even
subject to penal sanctions

If being operated as separate and

distinct corporations, there is no such
right
Telecommunicationsspecial
franchise, it is a legislative grant
Gonzales vs. PNB
-

Provisions of the old law was

unqualified,
when
it
granted
stockholders the right to inspect
However, whole seemingly enlarging
the right of inspection, the new code
has prescribed limitations to the same.
It is now expressly required as a
condition for such examination that the
one requesting it must not have been
guilty of using improperly any
information secured through a prior
examination and that the person
asking for such examination must be
acting in good faith and for a legitimate
purpose in making his demand
Admittedly, he sought to be a
stockholder in order to pry into
transactions entered into by the
respondent bank even before he
became a stockholder. His obvious
purpose was to arm himself with
materials he can use against the
respondent bank for acts done by the
latter when the petitioner was a total
stranger to the same.
Bank was created by a special law, it
has its own charter and primarily
governed by the law creating them
The bank is only subject to the
inspection of the Central Bank and any
information pertaining to the bank is
confidential and shall not be revealed
to any person other than the President
of the Philippines, the Secretary of
Finance and the Board of Directors,

Assuming you are a stockholder of

PNB, and then it was privatized,
may you already have the right to
inspect?
-

No, unless its charter has been

altered or repealed it is still subject
to the same law

3 stages in the life of a corporation

-

Formation or birth
We now discuss the union of the
corporation
The last would be its death or
dissolution

MERGER AND CONSOLIDATION

Merger and consolidation
-

In corporate parlance it is called

spin-off
Almost a year ago San Miguel
separated its brewery business
San Miguel Corporation is now a full
time holding company; it can later on
absorb the company
Corporations are granted by the
code to merge or consolidate
most common type of corporate
recognition
not the same in every case
but most common in the weal
financial or insolvent condition, aim
is to bring it back to its financial
capability
also a method of recapitalization
106

o purchase and sale of corporate

assets is another form of corporate
reorganization
How do you value the assets of the
merging corporation, do you consider
goodwill?
First secure favorably recommendation
of government agency
Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein
above required, shall be submitted to the
Securities and Exchange Commission in
quadruplicate for its approval: Provided,
That in the case of merger or
consolidation of banks or banking
institutions,
building
and
loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate
government agency shall first be
obtained. If the Commission is satisfied that
the merger or consolidation of the
corporations concerned is not inconsistent
with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or
consolidation shall be effective.

Merger
-

A transfers all assets, properties,

rights, obligations, liabilities to B
B issues shares of stocks
exchange of the transfer

in

A is then
SURVIVES

dissolved

and

o Parties to a merger are called

constituent corporation
Consolidation
-

If, upon investigation, the

Securities and Exchange Commission
has reason to believe that the
proposed merger or consolidation is
contrary to or inconsistent with the
provisions of this Code or existing
laws, it shall set a hearing to give the
corporations
concerned
the
opportunity to be heard. Written notice
of the date, time and place of hearing
shall be given to each constituent
corporation at least two (2) weeks
before said hearing. The Commission
shall thereafter proceed as provided in
this Code. (n)

A union effected by absorbing one

or more existing corporations by
another
which
survives
and
continues the combined business
It is the uniting of two or more
corporations by the transfer of
property to one of them which
continue in existence, the other or
the others being dissolved and
merged therein.

The uniting or amalgamation of two

or more existing corporations to form
a new corporation
In merger there is a surviving
corporation,
the
others
are
dissolved, while in consolidation, all
constituent are dissolved and a new
one organized
A

C
Like all other corporate acts, it
emanates from the board
1. The board of directors or trustees of
each constituent corporations shall
107

2.

3.

4.

5.

6.

approve a plan of merger or

consolidation setting forth the matters
required in section 76;
Approval of the plan by the
stockholders representing 2/3 of the
outstanding capital stock or 2/3 of
the
member
in
non-stock
corporations of each of such
corporations at separate corporate
meetings called for the purpose;
Prior notice of such meeting, with a
copy or summary of the plan of
merger or consolidation shall be
given to all stockholders or members
at least two (2) weeks prior to the
scheduled meeting, either personally
or registered mail stating the purpose
thereof;
Execution of the articles of merger or
consolidation by each constituent
corporations to be signed by the
president or vice-president and
certified by the corporate secretary
or assistant secretary setting forth
the matters required in section 78;
Submission of the articles of
merger
or
consolidation
in
quadruplicate to the SEC subject to
the requirement of section 79 that if it
involve corporations under the direct
supervision of any other government
agency or governed by special laws
the favorable recommendation of the
government agency concerned shall
first be secured and;
Issuance of the certificate of merger
or consolidation by the SEC at which
time the merger or consolidation shall
be effective. If the plan, however, is
believed to be contrary to law, the SEC
shall set a hearing to give the
corporations concerned an opportunity
to be heard upon proper notice and
thereafter, the Commission shall
proceed as provided in the Code.

Although merger and consolidation is

an express power granted to

corporation, it is subject to
limitations, as maybe proscribed by
law
What would be the effect of merger
or consolidation? <sec. 80>
1. There will only be a single
corporation. In case of merger, the
surviving
corporation
or
the
consolidated corporation in case of
consolidation;
2. The termination of the corporate
existence
of
the
constituent
corporations, except that of the
surviving
corporation
or
the
consolidated corporation;
3. The surviving corporation or the
consolidated
corporation
will
possess all the rights, privileges,
immunities and powers and shall be
subject to all the duties and liabilities
of a corporation organized under the
Code;
4. The surviving or consolidated
corporation shall possess all the
rights, privileges, immunities and
franchises
of
the
constituent
corporations, and all property and all
receivables
due,
including
subscriptions to shares and other
choses in action, and every other
interest of, or belonging to or due to
the constituent corporations shall be
deemed transferred to and vested in
such surviving or consolidated
corporation without further act and
deed; and,
5. The rights of creditors or any lien on
the property of the constituent
corporations shall not be impaired
by the merger or consolidation.
Is there a liquidation process in case
of merger or consolidation?
-

None, there is nothing to distribute

Associated Bank vs. CA

108

By virtue of a specific provision in the

merger agreement
Although the subject promissory note
names CBTC as the payee, the
reference to CBTC in the note shall be
construed, under the very provision of
the merger agreement, as a reference
to petitioner bank, as if such reference
(was a) direct reference to the latter for
all intents and purposes
Section 80 par. 4 states:
The
surviving
or
the
consolidated
corporation
shall
thereupon and thereafter possess all
the rights, privileges, immunities and
franchises of each of the constituent
corporations; and all property, real or
personal, and all receivables due on
whatever
account,
including
subscriptions to shares and other
choses in action, and all and every
other interest of, or belonging to, or
due to each constituent corporation,
shall be deemed transferred to and
vested
in
such
surviving
or
consolidated
corporation
without
further act or deed; and

Without further acts, meaning it is

automatic

When do merger and consolidation

become effective? What if the SEC
fails to act on it without fault
attributable
to
the
corporation
involved?
-

It will never become valid until and

unless the SEC gives its stamp of
approval
It will be up to the constituent
corporation to follow it up
It will never take effect until the SEC
gives its approval and issues the
articles of merger

o Granted 3 years to wing up

unless there is a trustee to wing
up its affairs
Could there be liquidators and
winding up with respect to the
corporation in consolidation and
merger?
-

No, there is none

No assets properties or rights to
collect, they are transferred
No debts and liabilities to pay
because they become the liabilities
of the surviving corporations
No properties transferred because
they will be the properties of the
surviving corporations
o Hardest part is the financial act,
regarding how many shares
would be issued, probability of
collection and the like
o In merger and consolidation,
there is due diligence and an
economist is usually hired

APPRAISAL RIGHT
Define appraisal
-

Right to withdraw from the

corporation and demand payment of
the fair value of his shares after
dissenting from certain corporate
acts involving fundamental changes
in corporate structure <sec. 81>

What property? When may this right

be exercises?
-

Section 81 provides:
Section 81. Instances of
appraisal right. - Any stockholder of
a corporation shall have the right to
dissent and demand payment of the
fair value of his shares in the
following instances:
109

1. In case any amendment to the

articles of incorporation has the effect
of changing or restricting the rights of
any stockholder or class of shares, or
of authorizing preferences in any
respect
superior
to
those
of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation.
(n)
May it be exercised by a stockholder
who dissents to the act of a business
other than a primary purpose?

Section 82. How right is

exercised. - The appraisal right may
be exercised by any stockholder
who shall have voted against the
proposed corporate action, by
making a written demand on the
corporation within thirty (30) days
after the date on which the vote was
taken for payment of the fair value of
his shares: Provided, That failure to
make the demand within such period
shall be deemed a waiver of the
appraisal right. If the proposed
corporate action is implemented or
affected, the corporation shall pay to
such stockholder, upon surrender of
the certificate or certificates of stock
representing his shares, the fair
value thereof as of the day prior to
the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of such
corporate action.

X Co. inc
Principal office is in Quezon city, it was
changed to Paranaque
A objects and makes a written
demand. May he exercise his right of
appraisal?
-

It is not available in all amendments of

the corporation
It must be changing or restricting the
rights of any stockholder

What if the principal office is changed

from QC to TAWI-TAWI, will it change
or affect the rights of A?
-

To some it may change or restrict the

rights to others it may not

How is the right exercised?

-

According to section 82 of the code:

If within a period of sixty (60)

days from the date the corporate
action was approved by the
stockholders,
the
withdrawing
stockholder and the corporation
cannot agree on the fair value of the
shares, it shall be determined and
appraised by three (3) disinterested
persons, one of whom shall be
named by the stockholder, another
by the corporation, and the third by
the two thus chosen. The findings of
the majority of the appraisers shall
be final, and their award shall be
paid by the corporation within thirty
(30) days after such award is made:
Provided, That no payment shall be
made to any dissenting stockholder
unless
the
corporation
has
unrestricted retained earnings in its
books to cover such payment: and
Provided,
further,
That
upon
payment by the corporation of the
agreed or awarded price, the
110

stockholder shall forthwith transfer his

shares to the corporation. (n)
X Co.
Principal Office- QC, it was changed to
Manila
A objects and makes a written demand
for payment of fair value of shares.
Can he make a demand of payment of
shares?
True or False, no stockholder in a
stock corporation can ever demand if
the principal office is amended,
changing it from QC to Manila
-

False, a stockholder in a close

corporation may for any reason
compel the close corporation that he
be paid the fair value of his shares
Can he exercise his appraisal rights in
the first place? He hasnt even paid his
subscription in full.

May a stockholder who hasnt paid his

subscription in full exercise his
appraisal rights?
-

Yes, he can exercise his appraisal

rights, by reconciling the provisions of
section 72, section 82 and section 86
Section 72. Rights of unpaid
shares. - Holders of subscribed shares
not fully paid which are not delinquent
shall have all the rights of a
stockholder. (n)
Section 82. How right is
exercised. - The appraisal right may be
exercised by any stockholder who
shall have voted against the proposed
corporate action, by making a written
demand on the corporation within thirty
(30) days after the date on which the
vote was taken for payment of the fair

value of his shares: Provided, That

failure to make the demand within
such period shall be deemed a
waiver of the appraisal right. If the
proposed
corporate
action
is
implemented or affected, the
corporation shall pay to such
stockholder, upon surrender of
the certificate or certificates of
stock representing his shares, the
fair value thereof as of the day prior
to the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of such
corporate action.
If within a period of sixty (60)
days from the date the corporate
action was approved by the
stockholders,
the
withdrawing
stockholder and the corporation
cannot agree on the fair value of the
shares, it shall be determined and
appraised by three (3) disinterested
persons, one of whom shall be
named by the stockholder, another
by the corporation, and the third by
the two thus chosen. The findings of
the majority of the appraisers shall
be final, and their award shall be
paid by the corporation within thirty
(30) days after such award is made:
Provided, That no payment shall be
made to any dissenting stockholder
unless
the
corporation
has
unrestricted retained earnings in its
books to cover such payment: and
Provided,
further,
That
upon
payment by the corporation of the
agreed or awarded price, the
stockholder shall forthwith transfer
his shares to the corporation. (n)
Section 86. Notation on
certificates; rights of transferee. Within
ten
(10)
days
after
demanding payment for his shares,
a dissenting stockholder shall submit
the certificates of stock representing
111

his shares to the corporation for

notation thereon that such shares are
dissenting shares. His failure to do so
shall, at the option of the
corporation, terminate his rights
under this Title. If shares represented
by the certificates bearing such
notation are transferred, and the
certificates consequently cancelled,
the rights of the transferor as a
dissenting stockholder under this Title
shall cease and the transferee shall
have all the rights of a regular
stockholder;
and
all
dividend
distributions
which
would
have
accrued on such shares shall be paid
to the transferee. (n)
-

Notation is not mandatory, it is even

discretionary because the code
provides at the option of the
corporation because it never issued
one for that matter since the
subscriptions are not yet fully paid

May the corporation be compelled to

pay the interest of A
300 T, 150T, 150T and 0 unrestricted
retained earnings
No stockholder may be able to compel
the corporation to pay the value of his
shares if the corporation has no
unrestricted retained earnings
-

False, a stockholder of a close

corporation may for any reason,
provided only that the corporation has
sufficient assets to cover its debts and
liabilities
o General rule: there should be
unrestricted retained earnings
o Exception: section 105 close
corporation

1. The stockholder must have voted

against the proposed corporate
action in any of the instances
allowed by law for the exercise of
the right of appraisal;
2. The written demand for payment
must be made by the dissenting
stockholder within thirty (30) days
after the date on which the vote was
taken thereon. Failure to make the
demand within the said period shall
be deemed a waiver on the part of
the stockholder concerned to
exercise his appraisal right;
3. Surrender of the certificate of stock
by the dissenting stockholder for
notation in the corporate books and
the payment by the corporation of
the fair market value of the said
shares as of the day prior to the date
on which the vote was taken. If the
stockholder and the corporation
cannot agree on the fair market
value thereof, the same shall be
determined in accordance with the
provision of paragraph 2 of section
82;
4. The fair value of the shares of the
dissenting stockholder must be paid
by the corporation only if it has
unrestricted retained earnings in its
books to cover such payment. If the
corporation has no unrestricted
retained earnings, the dissenting
stockholder may not, therefore, be
able to effectively exercise his
appraisal rights;
5. Upon payment of the shares by the
corporation,
the
dissenting
stockholder shall transfer his shares
to the corporation.
What would be the
stockholder exercises
rights? What happens
and dividend rights if
his appraisal rights?

effect if the
his appraisal
to his voting
he exercises

The procedure and requirements for

the valid exercise of this rights are:
112

It will be suspended, with a limitation of

30 days, as provided for by section 83
of the code:
Section 83. Effect of demand
and termination of right. - From the
time of demand for payment of the fair
value of a stockholder's shares until
either the abandonment of the
corporate action involved or the
purchase of the said shares by the
corporation, all rights accruing to
such shares, including voting and
dividend rights, shall be suspended
in accordance with the provisions
of this Code, except the right of
such
stockholder
to
receive
payment of the fair value thereof:
Provided, That if the dissenting
stockholder is not paid the value of
his shares within 30 days after the
award, his voting and dividend
rights
shall
immediately
be
restored. (n)

How do you compare the rights of a

stockholder,
declared
delinquent
compared to a dissenting stockholder
exercising his appraisal rights
What if a stockholder exercising his
appraisal rights is also a director, will
he also lose his rights as a
stockholder?
-

The shares remain to stand in his

name until he is paid, unless there is a
stipulation in the by-laws

When may the right to be paid the

value of his shares cease? Can he
withdraw his right of appraisal?
-

Yes, he may withdraw, but there must

be consent by the corporation as
provided for by section 83 of the code:

Section 84. When right to

payment ceases. - No demand for
payment under this Title may be
withdrawn unless the corporation
consents thereto. If, however, such
demand for payment is withdrawn
with the consent of the corporation,
or if the proposed corporate action is
abandoned or rescinded by the
corporation or disapproved by the
Securities
and
Exchange
Commission where such approval is
necessary, or if the Securities and
Exchange Commission determines
that such stockholder is not entitled
to the appraisal right, then the right
of said stockholder to be paid the
fair value of his shares shall cease,
his status as a stockholder shall
thereupon be restored, and all
dividend distributions which would
have accrued on his shares shall be
paid to him. (n)
Instances when the right of a
dissenting stockholder to be paid the
fair value of his shares ceases.
1. When he withdraws his demand for
payment and the corporation
consents thereto;
2. When the proposed action is
abandoned or rescinded by the
corporation;
3. When the proposed action is
disapproved by the SEC where such
approval is necessary;
4. When the SEC determines that he is
not entitled to exercise his appraisal
right;
5. When he fails to submit the stock
certificate within ten (10) days from
demand to the corporation for
notation that such shares are
dissenting shares; and,
6. If the shares are transferred and the
certificate subsequently cancelled.
Who bears the cost of appraisal?
113

a. The
price
offered
by
the
corporation is lower than the fair
value of the shares of the
dissenting
stockholder
as
determined by the appraisers;
b. Where an action is filed by the
dissenting stockholder to recover
such fair value and the refusal of
the stockholder to receive payment
is found by the court to be justified.
-

stockholder; and all dividend

distributions which would have
accrued on such shares shall be
paid to the transferee. (n)

It depends
The corporation bears the cost if

Dissenting stockholder will be liable for

the cost and expenses of appraisal
when
a. When the price offered by the
corporation is approximately the
same as the fair value ascertained
by the appraisers;
b. Where the action filed by the
dissenting stockholder and his
refusal to accept payment is found
by the court to be unjustified.

NON-STOCK CORPORATIONS
What is a non-stock corporation?
-

What provision of the code will

govern non-stock corporations?
Would the provision governing stock
corporations also apply to non-stock
corporations?
-

Yes, 2nd par. Of section 87 provides:

The provisions governing
stock corporation, when pertinent,
shall be applicable to non-stock
corporations, except as may be
covered by specific provisions of this
Title. (n)

The dissenting stockholder may also

sell, transfer or assign his shares
Section 86. Notation on
certificates; rights of transferee. Within ten (10) days after demanding
payment for his shares, a dissenting
stockholder
shall
submit
the
certificates of stock representing his
shares to the corporation for notation
thereon that such shares are
dissenting shares. His failure to do so
shall, at the option of the corporation,
terminate his rights under this Title. If
shares
represented
by
the
certificates bearing such notation
are transferred, and the certificates
consequently cancelled, the rights
of the transferor as a dissenting
stockholder under this Title shall
cease and the transferee shall have
all the rights of a regular

A non-stock corporation is one

where no part of its income is
distributable as dividends to its
members, trustees, or officers,
subject to the provisions of this code
on dissolution

How is the right to vote exercised in

a non-stock corporation compared to
a stock corporation
May a member in a non-stock
corporation vote cumulatively?
-

General rule is NO

May it be granted or allowed by the

by-laws?
-

Yes

May the right to cumulative voting be

denied in a stock corporation?
114

No, Doctrine of Limited Capacity

May members in a
corporation vote by proxy?

non-stock

How is the governing board

constituted
in
a
non-stock
corporation? How many members?
-

Yes, section 89 provides that:

Unless otherwise provided in
the articles of incorporation or the bylaws, a member may vote by proxy in
accordance with the provisions of this
Code. (n)

May the right to vote by proxy be

validly denied in a stock corporation?
-

No, it is a matter of right in a stock

corporation

May member of
a non-stock
corporation cast their vote by text?
-

Yes, subject to the approval and terms

and conditions of the SEC <sec. 89>
Voting by mail or other similar
means by members of non-stock
corporations may be authorized by the
by-laws of non-stock corporations with
the approval of, and under such
conditions which may be prescribed
by, the Securities and Exchange
Commission.

How about in stock?

-

Voting by mail or other similar means

may also be authorized and allowed by
the by-laws of non-stock corporations.
Generally, in stock corporations, the
vote must be cast at a duly constituted
meeting. The only exception, in case
of the latter, is in the matter of general
amendment of the articles of
incorporation where the written assent
of the stockholder may be sufficient.

It may exceed 15 in a non-stock

corporation unless the AOI or bylaws provide otherwise, as provided
for by section 92 of the code:
Section 92. Election and
term of trustees. - Unless otherwise
provided
in
the
articles
of
incorporation or the by-laws, the
board of trustees of non-stock
corporations, which may be more
than fifteen (15) in number as may
be fixed in their articles of
incorporation or by-laws, shall, as
soon as organized, so classify
themselves that the term of office of
one-third (1/3) of their number shall
expire every year; and subsequent
elections of trustees comprising onethird (1/3) of the board of trustees
shall be held annually and trustees
so elected shall have a term of three
(3) years. Trustees thereafter
elected to fill vacancies occurring
before the expiration of a particular
term shall hold office only for the
unexpired period.
No person shall be elected as
trustee unless he is a member of the
corporation.
Unless otherwise provided in
the articles of incorporation or the
by-laws, officers of a non-stock
corporation may be directly elected
by the members. (n)

Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of
the Philippines; and,
3. Other qualifications as may be
provided for in the by-laws.
115

 Governing board in a non-stock

-

Any
directorship
or
trusteeship to be filled by reason of
an increase in the number of
directors or trustees shall be filled
only by an election at a regular or at
a special meeting of stockholders or
members duly called for the
purpose, or in the same meeting
authorizing the increase of directors
or trustees if so stated in the notice
of the meeting. (n)

Board of Trustees, however section

138 provides that:
Section 138. Designation of
governing boards. - The provisions of
specific provisions of this Code to the
contrary notwithstanding, non-stock
or
special
corporations may,
through
their
articles
of
incorporation or their by-laws,
designate their governing boards by
any name other than as board of
trustees. (n)

Section 30. Compensation of

directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, That any
such compensation other than per
diems may be granted to directors
by the vote of the stockholders
representing at least a majority of
the outstanding capital stock at a
regular or special stockholders'
meeting. In no case shall the total
yearly compensation of directors, as
such directors, exceed ten (10%)
percent of the net income before
income tax of the corporation during
the preceding year. (n)

Disqualifications
-

Section 27 also applies to a non-stock

corporation, same holds true to the
manner of removal <sec. 29 ad 30>
Section 27. Disqualification of
directors, trustees or officers. - No
person convicted by final judgment of
an
offense
punishable
by
imprisonment for a period exceeding
six (6) years, or a violation of this Code
committed within five (5) years prior to
the date of his election or appointment,
shall qualify as a director, trustee or
officer of any corporation. (n)
Section 29. Vacancies in the
office of director or trustee. - Any
vacancy occurring in the board of
directors or trustees other than by
removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be
filled by the stockholders in a regular
or special meeting called for that
purpose. A director or trustee so
elected to fill a vacancy shall be
elected only or the unexpired term of
his predecessor in office.

Who elects the other officers?

-

Directly by the general members

unless the by-laws or articles
provide otherwise. <sec.92>
Unless otherwise provided in
the articles of incorporation or the
by-laws, officers of a non-stock
corporation may be directly elected
by the members. (n)

In stock corporations who elect

officers?
-

Directors
116

 The provision that stock corporations

cannot validly provide that members
cannot be voted by stockholders is
only a general rule because there is an
exception section 97 of the code states
that:
The articles of incorporation
of a close corporation may provide
that the business of the corporation
shall
be
managed
by
the
stockholders of the corporation
rather than by a board of directors.
So long as this provision continues in
effect:

How is a membership requirement in

a non-stock corporation
A holds a membership certificate
B goes to the corporation and
compels the corporation to record
the transfer in his name
-

1. No meeting of stockholders need be

called to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors for the purpose of applying
the provisions of this Code; and
3. The stockholders of the corporation
shall be subject to all liabilities of
directors.

Section
36.
Corporate
powers and capacity. - Every
corporation incorporated under this
Code has the power and capacity:

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.
Nature of membership is nontransferrable and personal in nature
unless the articles of incorporation or
by-laws provide otherwise
Section 90. Non-transferability
of membership. - Membership in a
non-stock corporation and all rights
arising there from are personal and
non-transferable, unless the articles of
incorporation or the by-laws otherwise
provide. (n)

Membership
in
non-stock
corporations may be acquired by
complying with the provisions of its
rules prescribed in the by-laws. This
is in consonance with the express
power granted by law under section
36, paragraph 6 of the code,
authorizing them to admit members
thereof and that authority carries
with it the power to prescribe rules
on membership. It has thus been
stated that in the absence of charter
or statutory restrictions, non-stock
corporations may determine who
shall be admitted to membership
and how they shall be admitted.

6. In case of stock corporations, to

issue or sell stocks to subscribers
and to sell stocks to subscribers and
to sell treasury stocks in accordance
with the provisions of this Code; and
to admit members to the corporation
if it be a non-stock corporation;
-

They can provide the manner in

which to admit depending on their
own rules

The power or authority to terminate

members in non-stock corporations
is said to be inherent but strict
compliance with the manner and
procedure laid down in the by-laws
must be observed, otherwise it may
117

render the expulsion ineffective and

invalid.
Section 91. Termination of
membership. - Membership shall be
terminated in the manner and for the
causes provided in the articles of
incorporation
or
the
by-laws.
Termination of membership shall have
the effect of extinguishing all rights of a
member in the corporation or in its
property, unless otherwise provided in
the articles of incorporation or the bylaws. (n)
Power is inherent and may
exercised in certain situations:

If the conduct of the member comes

within any of this cases, it is a ground
for valid expulsion although it may not
be expressly made so by the by-laws
Chinese YMCA vs. Ching

Courts will not generally interfere on

matters involving the internal affairs
of an unincorporated association
such as election contest unless the
acts complained of are arbitrary,
oppressive, fraudulent, violative of
civil rights and the like

General rule is that the courts will

not interfere with the internal affairs
of an unincorporated association so
as to settle disputes between the
members, or questions of policy,
discipline, or internal government, so
long as the government of the
society is fairly and honestly
administered in conformity with its
by-laws and the law of the land, and
no property or civil rights are
involved.

Exceptions are the following:

be

1. When an offense is committed

which, although it has no
immediate relation to a members
duty as such, it is so infamous as to
render him unfit for society of
honest men, which is indictable at
common law;
2. When the offense is a violation of
his duty as member of the
corporation; and,
3. When the offense is of a mixed
nature, being both against his duty
as a member of the corporation,
and also indictable at common law.

Lions Club International vs. CA

Right of the corporation to choose who

the members are, cannot be inquired
or intervened by the court
The
appealed
decision
thus
contravened the establish principle
that the courts cannot strip a member
of a non-stock corporation of his
membership therein without cause.

a. Where law and justice so require,

and the proceedings of the
association are subject to judicial
review where there is fraud,
oppression, or bad faith, or
where the action complained of
is capricious, arbitrary, or
unjustly discriminatory
b. To grant relief in case property or
civil rights are invaded, although
it has also been held that the
involvement of property rights
does not necessarily authorize
judicial intervention, in the
absence of arbitrariness, fraud or
collusion.
c. Are violative of the laws of the
society, or the law of the land, as
by depriving the person of due
process of law
d. There is lack of jurisdiction on
the
part
of
the
tribunal
conducting the proceedings,
where the organization exceeds
118

its
powers,
or
where
the
proceedings are otherwise illegal
Corporations, stock and non-stock,
may be dissolved in accordance and
pursuant to the provisions of Sections
118 to 121 of the Corporation Code
and the pertinent provisions of P.D.
902-A, as amended. If such be the
case, the assets of the corporation are
to be distributed in accordance with
law and established jurisprudence.
If a non-stock corporation is dissolved
how will its properties be distributed?
Section
94.
Rules
of
distribution. - In case dissolution of
a
non-stock
corporation
in
accordance with the provisions of
this Code, its assets shall be
applied and distributed as follows:
1. All liabilities and obligations of
the corporation shall be paid,
satisfied and discharged, or
adequate provision shall be made
therefore;
2. Assets held by the corporation
upon a condition requiring return,
transfer or conveyance, and which
condition occurs by reason of the
dissolution, shall be returned,
transferred
or
conveyed
in
accordance
with
such
requirements;
3. Assets received and held by the
corporation subject to limitations
permitting their use only for
charitable, religious, benevolent,
educational or similar purposes, but
not held upon a condition requiring
return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities

in the Philippines substantially

similar to those of the dissolving
corporation according to a plan
of distribution adopted pursuant
to this Chapter;
4. Assets other than those
mentioned in the preceding
paragraphs, if any, shall be
distributed in accordance with
the provisions of the articles of
incorporation or the by-laws, to
the extent that the articles of
incorporation or the by-laws,
determine the distributive rights
of members, or any class or
classes of members, or provide
for distribution; and
5. In any other case, assets may
be distributed to such persons,
societies,
organizations
or
corporations, whether or not
organized for profit, as may be
specified in a plan of distribution
adopted
pursuant
to
this
Chapter. (n)
Non-stock corporations with 4Billion
funds, may it be distributed for and
among its members?
Section 94 number 3 provides:
3. Assets received and held
by the corporation subject to
limitations permitting their use only
for charitable, religious, benevolent,
educational or similar purposes, but
not held upon a condition requiring
return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities
in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
119

distribution adopted pursuant to this

Chapter;
-

transfer permitted by this Title;

and (3) The corporation shall not
list in any stock exchange or
make any public offering of any of
its
stock
of
any
class.
Notwithstanding the foregoing, a
corporation shall not be deemed a
close corporation when at least twothirds (2/3) of its voting stock or
voting rights is owned or controlled
by another corporation which is not
a close corporation within the
meaning of this Code.

If there is no distributive agreement

then they may do so through a plan of
distribution under section 95
Section 95. Plan of distribution
of assets. - A plan providing for the
distribution of assets, not inconsistent
with the provisions of this Title, may be
adopted by a non-stock corporation in
the process of dissolution in the
following manner:
The board of trustees shall, by
majority vote, adopt a resolution
recommending a plan of distribution
and directing the submission thereof to
a vote at a regular or special meeting
of members having voting rights.
Written notice setting forth the
proposed plan of distribution or a
summary thereof and the date, time
and place of such meeting shall be
given to each member entitled to vote,
within the time and in the manner
provided in this Code for the giving of
notice of meetings to members. Such
plan of distribution shall be adopted
upon approval of at least two-thirds
(2/3) of the members having voting
rights present or represented by proxy
at such meeting. (n)

CLOSE CORPORATIONS
Section 96. Definition and applicability
of Title. - A close corporation, within
the meaning of this Code, is one
whose articles of incorporation provide
that: (1) All the corporation's issued
stock of all classes, exclusive of
treasury shares, shall be held of
record by not more than a specified
number of persons, not exceeding
twenty (20); (2) all the issued stock
of all classes shall be subject to one
or more specified restrictions on

Between and among themselves,

they feel and act alike
Not more than 20 stockholders
Specified persons, if you are not
specified, you cannot be a
stockholder
All the issued stocks of all classes is
subject to restrictions
Shall not be listed in the stock
exchange not publicly offered
3 qualifying conditions must be
contained in the articles of
incorporation, to be considered as a
close corporation, if not, it will not be
considered as such and will be
governed by the general provisions
of the code
Even if 100 % is owned by one
person it will not be considered a
close corporation without the 3
qualifying provisions
Identity of stockholders, specified
persons
Active management either as
directors or partners in management
Combination of the corporation and
partnership type of business

May any type of corporation, be

organized
as
such
close
corporation?
-

No, the 3 qualifying conditions must

be present
120

 What if 2/3 of the outstanding capital

stock is owned by another corporation
which is also a close corporation, will it
be a close corporation?
-

No, it will only be a closed corporation

if 2/3 of the voting stocks of a close
corporation is also owned by a close
corporation. It must be voting stocks

Even if another corporation owns or

controls 2/3 of the voting stocks of a
close corporation, the latter may still
be considered as such close
corporation if the corporation owning
or controlling the shares is also a close
corporation.
Notwithstanding the foregoing,
a corporation shall not be deemed a
close corporation when at least twothirds (2/3) of its voting stock or voting
rights is owned or controlled by
another corporation which is not a
close corporation within the meaning
of this Code.

What kind of corporations cannot be a

close corporation?
1.
2.
3.
4.
5.
6.

Mining or oil companies,

Stock exchange
Banks and insurance companies,
Public utilities
Educational institutions
Corporations vested with public
interest

Classification of directors
-

Ordinary stock- no such right

Close corporation-yes there is such a
right

Section 97 is a permissive provision

Section
97.
Articles
incorporation. - The articles

of
of

incorporation of a close corporation

may provide:
1. For a classification of shares or
rights and the qualifications for
owning or holding the same and
restrictions on their transfers as may
be stated therein, subject to the
provisions of the following section;
2. For a classification of directors
into one or more classes, each of
whom may be voted for and elected
solely by a particular class of stock;
and
3. For a greater quorum or voting
requirements
in
meetings
of
stockholders or directors than those
provided in this Code.
After classification what then?
-

After classification, qualification and

then restriction as provided for under
the 3 qualifying conditions in section
96

Cumulative voting is restricted in

close corporations if will be elected
solely by a particular class
In a close corporation, the articles of
incorporation may provide for a
greater
quorum
and
voting
requirement in meetings of both
stockholders or directors to increase
the veto power of minority
stockholders, unlike in a stock
corporation wherein only directors
meetings may provide for greater
quorum
requirement
and
in
stockholders meeting which may not
be altered or increased, as provide
for in section 25, following the
doctrine of limited capacity
The articles of a close corporation
may likewise provide that the
121

business of the corporation shall be

managed by the stockholders rather
than by the board of directors.
However the same must contain the
continuing provisions required in
paragraph 2 of section 97, that is:

Yes, any third person, section 98

provides:
Section 98. Validity of
restrictions on transfer of shares. Restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as
well as in the certificate of stock;
otherwise, the same shall not be
binding on any purchaser thereof in
good faith. Said restrictions shall not
be more onerous than granting the
existing
stockholders
or
the
corporation the option to purchase
the shares of the transferring
stockholder with such reasonable
terms, conditions or period stated
therein. If upon the expiration of
said
period,
the
existing
stockholders or the corporation
fails to exercise the option to
purchase,
the
transferring
stockholder may sell his shares
to any third person.

1. No meeting of stockholders need

be called to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors; and;
3. The stockholders of the corporation
shall be subject to all liabilities of
directors.
Liability of stockholders acting as
directors in a close corporation are
more extensive since they are
personally liable for corporate torts
unless the corporation has obtained a
reasonable
adequate
liability
insurance, unlike a ordinary stock
corporation, wherein directors thereof
are only liable for corporate torts only if
they have been negligent or acted
fraudulently in the performance of their
functions.

o ordinary stock corporations

are liable only if acted in Bad
faith, fraud or negligence in
performance of duty

Restrictions
-

In ordinary stock corporations, the

restrictions must appear in the articles
of incorporation as well as the
certificate of stocks
In a close corporation, the restrictions
must appear in the articles of
incorporation, the by-laws and the
certificate of stocks. Otherwise, the
same shall not be binding on any
purchaser thereof in good faith

What if the stockholders do not want to

exercise their right or option to
purchase may it be sold to any
person?

What if there are already 20

stockholders and they want to add 2
more, may it compel?
-

In ordinary stock corporations, they

may compel by mandamus
In close corporations, may not be
compelled to admit because it
breaches the qualifying conditions

Since they cannot be compelled,

may they admit?
-

Yes, provided all the stockholders

consented or instead of consenting
they decide to amend their articles
of incorporation
122

Exchange Commission, compel the

dissolution of such corporation
whenever any of acts of the
directors, officers or those in control
of the corporation is illegal, or
fraudulent,
or
dishonest,
or
oppressive or unfairly prejudicial to
the corporation or any stockholder,
or whenever corporate assets are
being misapplied or wasted.

Will have to amend the articles of

incorporation to accommodate other
purchasers of share
Will cease to be a close corporation if
it amends and becomes in excess of
20
o Unless all the stockholders
consent they may

What if the other stockholders object to

register? What will be the remedy of
the transferee?

Agreements may also be entered in

a close corporation <sec.100>

His remedy is rescission. The effect of

rescission is mutual restitution

How about the stockholder, what is his

recourse?
-

He may compel the close corporation

to purchase his shares at their fair
value for any reason, provided the
corporation has sufficient assets in its
books to cover the debts and liabilities
exclusive of capital
In a close corporation, there is a
withdrawing stockholder, unlike in an
ordinary stockholder where there is
none, they may only do so in the
exercise of appraisal rights
Section 105. Withdrawal of
stockholder
or
dissolution
of
corporation. - In addition and without
prejudice to other rights and remedies
available to a stockholder under this
Title, any stockholder of a close
corporation may, for any reason,
compel the said corporation to
purchase his shares at their fair
value, which shall not be less than
their par or issued value, when the
corporation has sufficient assets in
its books to cover its debts and
liabilities exclusive of capital stock:
Provided, That any stockholder of a
close corporation may, by written
petition to the Securities and

They can even agree to be partners

in management
Pre-incorporation
Manner in which the business of the
corporation shall be managed

Board resolution
-

Ordinary stock corporations- sit and

act as a body at a duly constituted
meeting, they may do so by virtue of
the E-Commerce Act through
teleconference or video conference

Exception to the rule: other officers

may be directly appointed and hired
by the stockholders
Close corporations may validly act
even without a meeting provided the
conditions are obtained
Section 101. When board
meeting
is
unnecessary
or
improperly held. - Unless the bylaws provide otherwise, any action
by the directors of a close
corporation without a meeting shall
nevertheless be deemed valid if:
1. Before or after such action is
taken, written consent thereto is
signed by all the directors; or
2. All the stockholders have actual
or implied knowledge of the action
123

and make no prompt objection thereto

in writing; or
3. The directors are accustomed to
take informal action with the express
or implied acquiescence of all the
stockholders; or
4. All the directors have express or
implied knowledge of the action in
question and none of them makes
prompt objection thereto in writing.
Pre-emptive rights in
corporation is absolute

close

Section 102. Pre-emptive right

in close corporations. - The preemptive right of stockholders in close
corporations shall extend to all stock to
be issued, including reissuance of
treasury shares, whether for money,
property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide
otherwise.
Why is it said to be absolute?
-

Because there is no public offering in a

close corporation, otherwise it will not
be considered as close

In a close corporation the pre-emptive

rights is broadened to include all
issues without exception unless denied
or limited by the articles of
incorporation
Section 39 is the governing provision
concerning rights of the stockholder in
an ordinary stock corporation and it
may be denied. If it is not denied a
stockholder can exercise his preemptive rights for all issues of shares
whether money, property or previously
incurred indebtedness.

Section 39. Power to deny

pre-emptive right. - All stockholders
of a stock corporation shall enjoy
pre-emptive right to subscribe to all
issues or disposition of shares of
any class, in proportion to their
respective shareholdings, unless
such right is denied by the articles of
incorporation or an amendment
thereto: Provided, That such preemptive right shall not extend to
shares to be issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the
public; or to shares to be issued in
good faith with the approval of the
stockholders representing two-thirds
(2/3) of the outstanding capital
stock, in exchange for property
needed for corporate purposes or in
payment of a previously contracted
debt.
Are treasury shares covered in the
exercise of pre-emptive rights in
ordinary stock corporations?
As regards amendments
Section 103. Amendment of
articles of incorporation. - Any
amendment to the articles of
incorporation which seeks to delete
or remove any provision required by
this Title to be contained in the
articles of incorporation or to reduce
a quorum or voting requirement
stated
in
said
articles
of
incorporation shall not be valid or
effective unless approved by the
affirmative vote of at least two-thirds
(2/3) of the outstanding capital
stock, whether with or without voting
rights, or 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
124

provisions, at a meeting duly called for

the purpose.

A provisional director shall be

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 qualifications, if any,
may be determined by the
Commission. 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 Commission or by all the
stockholders. His compensation
shall be determined by agreement
between him and the corporation
subject
to
approval
of
the
Commission, which may fix his
compensation in the absence of
agreement or in the event of
disagreement
between
the
provisional
director
and
the
corporation.

What happens if there is a deadlock?

-

Section 104 provides for a remedy

Section 104. Deadlocks. Notwithstanding any contrary provision
in the articles of incorporation or bylaws or agreement of stockholders of a
close corporation, if the directors or
stockholders are so divided respecting
the management of the corporation's
business and affairs that the votes
required for any corporate action
cannot be obtained, with the
consequence that the business and
affairs of the corporation can no longer
be conducted to the advantage of the
stockholders generally, the Securities
and Exchange Commission, upon
written petition by any stockholder,
shall have the power to arbitrate the
dispute. In the exercise of such power,
the Commission shall have authority to
make such order as it deems
appropriate, including an order: (1)
canceling or altering any provision
contained
in
the
articles
of
incorporation,
by-laws,
or
any
stockholder's
agreement;
(2)
canceling, altering or enjoining any
resolution or act of the corporation or
its board of directors, stockholders, or
officers; (3) directing or prohibiting any
act of the corporation or its board of
directors, stockholders, officers, or
other persons party to the action; (4)
requiring 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;
(5)
appointing
a
provisional director; (6) dissolving the
corporation; or (7) granting such other
relief as the circumstances may
warrant.

Powers of the SEC in intra-corporate

concerns has been transferred to
the proper commercial courts
Prohibit, even if acting in good faith
Provisional director appointed by the
court
Requiring the purchase, irrespective
of unrestricted retained earnings
The provision of the law abovequoted gives the SEC a very wide
discretion in respect to management
of a close corporation in the event of
a deadlock. It may:
1. Cancel or alter any provision in
the articles of incorporation, bylaws
or
any
stockholders
agreement
2. Cancel, alter or enjoin any
resolution or other act of the
125

3.

4.

5.
6.
7.

corporation or its board of directors,

stockholders or officers
Prohibit any act of the corporation
or
its
board
of
directors,
stockholders or officers or other
persons party to the action;
Requiring the purchase of the par
value of the shares of any
stockholders,
either
by
the
corporation
regardless
of
availability of unrestricted earnings,
or by the other shareholders,
Appointment of a provisional
director
Dissolving the corporation; or
Other relief as the circumstances
may warrant.

Section 105
-

Dishonesty is a ground for dissolution

of a close corporation
Even one stockholder may petition for
dissolution
o when there is a relief available,
dissolution would not be
available
in
an
ordinary
corporation

CLOSE
CORPORATIO
N
1.
The
number
of
stockholders
cannot
exceed 20
2.
To
the
extent that all
stockholders
can
be
deemed
directors, the
number
of
directors can
effectively be
more than 15
3.
Shares

ORDINARY
STOCK
CORPORATION
No limitation as to
number
of
shareholder

Maximum number
of directors is 15

Generally

no

of stock are
subject
to
specified
restrictions
4.
Shares
of stock are
prohibited
from
being
listed in the
stock
exchange or
offered
for
sale to the
public
5.
Stockhol
ders may take
an active part
in corporate
management
by
vesting
management
to them rather
than a Board
of Director
6.
Those
active
in
management
are personally
liable
for
corporate
torts unless
the
corporation
has obtained
an adequate
liability
insurance
7.
Directors
can validly act
even without
a meeting
8.
Agreeme
nts between
stockholders
regarding the
operations of
the business
can validly be

restriction
on
transfer of shares

No prohibition

Management
is
lodged
in
the
Board of Directors

Directors are liable

for torts only if they
have
acted
negligently
or
fraudulently

Directors must, as
a rule, act as a
body at a duly
constituted
meeting
Not
valid
and
binding
since
stockholders
agreement cannot
limit the discretion
of the Board to
manage corporate
126

made
9.
To
the
extent
that
directors may
be classified
into one or
more classes
and to be
voted solely
by a particular
class of stock,
cumulative
voting may, in
effect,
be
restricted
10.
The
articles
of
incorporation
may provide
that
all
officers shall
be elected or
appointed by
the
stockholders
11.
It
may
provide
for
greater
quorum and
voting
requirements
in meetings of
stockholders
and directors

12.
Restricti
on on transfer
of
shares
should
be
indicated
in
the articles of
incorporation,
by-laws and
stock
certificates

affairs
Ordinarily, no such
classification and
no restrictions on
cumulative voting

Officers
are
elected by the
Board of Directors

Although
the
articles
of
incorporation
or
by-laws
may
provide for greater
quorum and voting
requirements
in
directors meeting
under section 25,
those
for
stockholders
meeting
cannot
generally
be
altered
Valid and binding if
indicated in the
articles
of
incorporation and
stock certificates

13.
Preemptive rights
of
stockholders
is broader as
it include all
issues without
exception
14.
A
stockholder
may withdraw
and compel
the
corporation to
purchase his
shares for any
reason
with
the limitation
only that the
corporation
has sufficient
assets
to
cover
its
liabilities
exclusive of
capital stock
15.
The
proper forum
may interfere
in
the
management
of a close
corporation in
case
of
deadlocks
under Section
104, even of
the
directors/stoc
kholders are
acting in good
faith
16.
Any
stockholder
may petition
the SEC for
corporate
dissolution on
grounds

Pre-emptive rights
may be denied as
provided for in
section 39

Unless he sells his

shares,
a
stockholder cannot
get
back
his
investment
nor
compel
the
corporation to buy
his shares except
in the exercise of
his appraisal right

Courts
cannot
interfere
I
the
business judgment
of
the
directors/stockhold
ers
BUSINESS
JUDGMENT
RULE

Dissolution may be
had only on the
grounds provided
by the provisions
of the Code on
dissolution
and
P.D. 902-A, as
127

among
amended
others,
provides for in
section 105
Manuel Dulay Enterprises vs. CA
-

What was the position of Manuel Dulay

here? President, General Manager
and Treasurer
Cannot act both as president and
treasurer at the same time
Since it is a close corporation owned
by the family of Manuel Dulay, save
and except the secretary, it should be
governed by Title XII
Petitioner is classified as a close
corporation and consequently a board
resolution authorizing the sale or
mortgage of the subject property is not
necessary to bind the corporation for
the action of its president. At any rate,
a corporate action taken at a board
meeting without proper call or notice in
a close corporation is deemed ratified
by the absent director unless the latter
promptly files his written objection with
the secretary of the corporation after
having knowledge of the meeting
which, in this case, petitioner Virgilio
Dulay failed to do.
Virgilio Dulay is a signatory witness, he
knows very well about the deed of
absolute sale, he is estopped

corporation has obtained reasonably

adequate liability insurance.
Family
corporations
is
not
automatically a close corporation the
3 qualifying conditions must be
present.
SPECIAL CORPORATIONS
2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
2.2 Religious Societies
What provision governs educational
corporations?
Section 106. Incorporation. Educational corporations shall be
governed by special laws and by the
general provisions of this Code. (n)
-

Naguiat vs. NLRC

-

Section 100 par. 5. To the extent 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. Said
stockholders shall be personally liable
for corporate torts unless the

Special laws like they Education Act

of the Philippines
These institutions of learning, once
recognized by the government as
such are mandated by law to be
incorporated within ninety (90) days
under the provisions of the
Corporation
Code
and
must,
perforce,
comply
with
the
requirements and procedure laid
down there under. Their failure to so
will not immune the educational
institution from suit as a corporation.
(Chiang Kai Siek Case)
Favorable
recommendation
of
government agency involved

Two
types
corporations
-

of

educational

Certificate of completion in the

academic field
Vocational and technical ones
128

o Recommendation of DECS if
certificate of completion in the
academic field
How is the governing board of an
educational institution instituted?
-

Non-stock- multiples of 5 only

(example: 5,10,15)
Stock- can be anywhere between 5 to
15

Can they consist of 7 or 9 members?

-

Yes, if stock

Can they be incorporated also as nonstock?

-

Yes
B.P. 232 allows the organization of an
educational institution that is stock
corporation, only if they do not issue a
certificate of completion in the
academic field

Qualifications and disqualifications of

the membership in the board of an
educational corporation
-

Educational corporations are governed

by
special
laws
and
general
provisions, hence if there is no
provision in the special law, you go
back to section 25 and 27 of the
general provisions
Stock- must be a stockholder
Non-stock- must be a member
By-laws may provide for additional
qualifications and disqualifications
Section 25. Corporate officers,
quorum. - Immediately after their
election, the directors of a corporation
must formally organize by the election
of a president, who shall be a director,
a treasurer who may or may not be a
director, a secretary who shall be a
resident and citizen of the Philippines,

and such other officers as may be

provided for in the by-laws. Any two
(2) or more positions may be held
concurrently by the same person,
except that no one shall act as
president and secretary or as
president and treasurer at the same
time.
The directors or trustees and
officers to be elected shall perform
the duties enjoined on them by law
and the by-laws of the corporation.
Unless the articles of incorporation
or the by-laws provide for a greater
majority, a majority of the number of
directors or trustees as fixed in the
articles of incorporation shall
constitute a quorum for the
transaction of corporate business,
and every decision of at least a
majority of the directors or trustees
present at a meeting at which there
is a quorum shall be valid as a
corporate act, except for the election
of officers which shall require the
vote of a majority of all the members
of the board.
Directors or trustees cannot attend
or vote by proxy at board meetings.
(33a)
Section 27. Disqualification of
directors, trustees or officers. - No person
convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of
this Code committed within five (5) years
prior to the date of his election or
appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
Article 14 section 4 par. 2 of the
Constitutions
Educational institutions, other
than those established by religious
groups and mission boards, shall be
129

owned solely by citizens of the

Philippines
or
corporations
or
associations at least sixty per centum
of the capital of which is owned by
such citizens. The Congress may,
however, require increased Filipino
equity participation in all educational
institutions.
The
control
and
administration
of
educational
institutions shall be vested in citizens
of
the
Philippines.
No educational institution shall be
established exclusively for aliens and
no group of aliens shall comprise more
than one-third of the enrollment in any
school. The provisions of this sub
section shall not apply to schools
established for foreign diplomatic
personnel and their dependents and,
unless otherwise provided by law, for
other foreign temporary residents.

Management is left solely to citizens of

the Philippines
Board of Directors manages the
corporate affairs, foreigners cannot
therefore be elected in the board
Exceptions are, mission boards and
religious orders, which may have a
governing
board
consisting
of
foreigners

What are these religious corporations

spoken off?

Consists of one person only and his

successor in some particular station,
who are incorporated by law in order
to give them some legal capacities
and advantages, particularly that of
perpetuity, which in their natural
persons they could not have had

General rule, 5 to 15 natural

persons(except cooperatives and
corporations primarily organized to
hold equities in rural banks and may
rightfully
become
incorporators
thereof)
Exception, corporation sole, consist
of only one person

No, not any person can form a

corporation sole, section 110
provides:
Section 110. Corporation
sole. - For the purpose of
administering and managing, as
trustee, the affairs, property and
temporalities of any religious
denomination, sect or church, a
corporation sole may be formed by
the chief archbishop, bishop, priest,
minister, rabbi or other presiding
elder of such religious denomination,
sect or church. (154a)

Can serve a term of 5 years. If that be

the case, 1/5 of their number shall
expire every year

Yes, the articles of incorporation may

provide that it be 1 year only

religious

May any person form or organize a

corporation sole?

Non-stock or stock, can they serve for

a 1 year term only?
-

and

May a corporation be organized by

less than 5 natural persons?

Term of office of governing board in an

educational institutions
-

sole

What is a corporation sole?

Corporation
societies

Is it required to file the articles of

incorporation in the SEC?
-

Yes
130

 What should be contained in the

articles of incorporation?
-

Section 111 and section 112 provides

for the contents and procedures
Section
111.
Articles
of
incorporation. - In order to become a
corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder of any religious
denomination, sect or church must file
with the Securities and Exchange
Commission articles of incorporation
setting forth the following:
1. That he is the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder of his religious
denomination, sect or church and that
he desires to become a corporation
sole;
2. That the rules, regulations and
discipline
of
his
religious
denomination, sect or church are not
inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder, he is charged with the
administration of the temporalities and
the management of the affairs, estate
and properties of his religious
denomination, sect or church within his
territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi of presiding elder is required to
be filled, according to the rules,
regulations or discipline of the religious
denomination, sect or church to which
he belongs; and

5. The place where the principal

office of the corporation sole is to be
established and located, which place
must be within the Philippines.
The articles of incorporation
may include any other provision not
contrary to law for the regulation of
the affairs of the corporation. (n)
Section 112. Submission of
the articles of incorporation. - The
articles of incorporation must be
verified, before filing, by affidavit or
affirmation of the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder, as the case may be,
and accompanied by a copy of the
commission, certificate of election or
letter of appointment of such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder, duly
certified to be correct by any notary
public.
From and after the filing with
the Securities and Exchange
Commission of the said articles of
incorporation, verified by affidavit or
affirmation, and accompanied by the
documents
mentioned
in
the
preceding paragraph, such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties
of the religious denomination, sect
or church theretofore administered
or managed by him as such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held
in trust by him as a corporation sole,
for the use, purpose, behalf and sole
benefit of his religious denomination,
sect or church, including hospitals,
schools, colleges, orphan asylums,
parsonages and cemeteries thereof.
(n)
131

 Is it required to indicate its terms of

execution? Why not?
-

educational purposes, and may

receive bequests or gifts for such
purposes. Such corporation may sell
or mortgage real property held by it
by obtaining an order for that
purpose from the Court of First
Instance of the province where the
property is situated upon proof made
to the satisfaction of the court that
notice of the application for leave to
sell or mortgage has been given by
publication or otherwise in such
manner and for such time as said
court may have directed, and that it
is to the interest of the corporation
that leave to sell or mortgage should
be granted. The application for leave
to sell or mortgage must be made by
petition, duly verified, by the chief
archbishop, bishop, priest, minister,
rabbi or presiding elder acting as
corporation sole, and may be
opposed by any member of the
religious denomination, sect or
church
represented
by
the
corporation sole: Provided, That in
cases where the rules, regulations
and discipline of the religious
denomination, sect or church,
religious society or order concerned
represented by such corporation
sole regulate the method of
acquiring, holding, selling and
mortgaging real estate and personal
property, such rules, regulations and
discipline shall control, and the
intervention of the courts shall not
be necessary. (159a)

Not required because they are

supposed to exist in perpetuity
However, it does not mean that it shall
continue to exist forever, it merely
means that it has the capacity of
continuous
existence
during
a
particular period until dissolved in
accordance with law

When
will
it
acquire
judicial
personality? How do you compare this
to other types of corporation?
-

After the filing the verified articles of

incorporation
along
with
the
documents required in Section 112
with the SEC, immediately becomes
endowed with corporate personality,
this serves as an exception to the rule
that a corporation acquires juridical
personality only upon the issuance of a
certificate of incorporation by the said
government agency.
Upon filing of verified articles of
incorporation with the SEC, will not
require the approval of SEC

A corporation sole is possessed with

the same power, rights and privileges,
to own, acquire and hold or convey
properties like any other corporation?
True or False
-

False, they have the same power

rights and privileges, but when it
comes to alienation and acquisition, it
must possess a court order, however
when there is a regulated method, a
court order may be dispensed with
<sec. 113>
Section 113. Acquisition and
alienation
of
property.
Any
corporation sole may purchase and
hold real estate and personal property
for its church, charitable, benevolent or

Since a corporation sole is consists

only of one person, will the
registration of the property in the
name of the corporation sole vest
unto the head thereof the ownership
of the property?
-

No, it will not vest unto the head, the

head is acting merely as a guardian
132

 Roman Catholic Apostolic Adm. Of

Davao, inc. vs. Land Reg. Comm, et
al.
-

Act only as a guardian

Ownership
devolves
upon
the
congregation or religious denomination
A corporation consists of one person
only and his successors (who will
always be one at a time, in some
particular
station),
who
are
incorporated by law in order to give
them some legal capacities and
advantages,
particularly that
of
perpetuity, which in their natural
persons they could not have had
Roman Catholic Church has no
nationality and that the framers of the
Constitution, as will be hereunder
explained, did not have in mind the
religious corporations sole when they
provided that 60 percent of the capital
thereof be owned by Filipino citizens.

Director of Lands vs. CA

-

Alienable public land is converted into

private land when the same has been
openly, continuously and exclusively in
possession of the property as concept
of an owner for 30 years, automatically
that is

Republic of the Philippines vs. IAC

Section 114. Filling of

vacancies. - The successors in
office of any chief archbishop,
bishop, priest, minister, rabbi or
presiding elder in a corporation sole
shall become the corporation sole
on their accession to office and shall
be permitted to transact business as
such on the filing with the Securities
and Exchange Commission of a
copy of their commission, certificate
of election, or letters of appointment,
duly certified by any notary public.
During any vacancy in the
office of chief archbishop, bishop,
priest, minister, rabbi or presiding
elder of any religious denomination,
sect or church incorporated as a
corporation sole, the person or
persons authorized and empowered
by the rules, regulations or discipline
of the religious denomination, sect
or church represented by the
corporation sole to administer the
temporalities and manage the
affairs, estate and properties of the
corporation sole during the vacancy
shall exercise all the powers and
authority of the corporation sole
during such vacancy. (158a)
If a corporation exists in equity may
it not be dissolved?

Determination of the character of the

land should be in mind
If they still form part of public domain
they cannot be owned, but if they are
converted into private land, the
constitutional prohibition will not apply

Section 115. Dissolution. - A

corporation sole may be dissolved
and its affairs settled voluntarily by
submitting to the Securities and
Exchange Commission a verified
declaration of dissolution.

If there is vacancy who will fill up the

same? What if there is none, what
must the successor do?

The declaration of dissolution shall

set forth:

1. The name of the corporation;

-

According to section 114:

2. The reason for dissolution and
winding up;
133

3. The authorization for the dissolution

of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation.

Is it also required to file its articles of

incorporation to the SEC?
-

Upon
approval
of
such
declaration of dissolution by the
Securities and Exchange Commission,
the corporation shall cease to carry on
its operations except for the purpose of
winding up its affairs. (n)
-

While section 115 of the code provides

for the process and procedure for the
dissolution of a corporate sole, there is
nothing in the law itself which would
prohibit it from amending its articles of
incorporation
It is believed that authorization for the
dissolution by the particular religious
denomination, sect or church, as
required in sub-paragraph 3 of section
115 would still be necessary in the
case of amending the articles of
incorporation to affect dissolution.
o Expiration of a corporate term
will not apply to a religious
corporation

May a corporation sole be dissolved by

judicial decree?
-

General rule: No, because a

corporation sole, is by its very nature
ecclesiastical and religious (doctrine of
separation of church and state)
Exception: police power of the state, if
its purpose is being carried out and is
instead being used for illegal purpose,
it may be so dissolved

What are religious societies?

Under common law, a religious

society is a body of persons
associated together for the purpose
of maintaining religious worship.

No <sec. 116> may

What should be contained in the

articles of incorporation?
-

Section 116 provides:

Section
116.
Religious
societies. - Any religious society or
religious order, or any diocese,
synod, or district organization of any
religious denomination, sect or
church, unless forbidden by the
constitution, rules, regulations, or
discipline
of
the
religious
denomination, sect or church of
which it is a part, or by competent
authority, may, upon written consent
and/or by an affirmative vote at a
meeting called for the purpose of at
least two-thirds (2/3) of its
membership, incorporate for the
administration of its temporalities or
for the management of its affairs,
properties and estate by filing with
the Securities and Exchange
Commission,
articles
of
incorporation verified by the affidavit
of the presiding elder, secretary, or
clerk or other member of such
religious society or religious order,
or diocese, synod, or district
organization
of
the
religious
denomination, sect or church,
setting forth the following:
1. That the religious society or
religious order, or diocese, synod, or
district organization is a religious
organization
of
a
religious
denomination, sect or church;
134

2. That at least two-thirds (2/3) of its

membership have given their written
consent or have voted to incorporate,
at a duly convened meeting of the
body;

3. That the incorporation of the

religious society or religious order, or
diocese, synod, or district organization
desiring to incorporate is not forbidden
by competent authority or by the
constitution, rules, regulations or
discipline
of
the
religious
denomination, sect, or church of which
it forms a part;
4. That the religious society
religious order, or diocese, synod,
district
organization
desires
incorporate for the administration of
affairs, properties and estate;

or
or
to
its

5. The place where the principal office

of the corporation is to be established
and located, which place must be
within the Philippines; and
6. The names, nationalities, and
residences of the trustees elected by
the religious society or religious order,
or the diocese, synod, or district
organization to serve for the first year
or such other period as may be
prescribed by the laws of the religious
society or religious order, or of the
diocese, synod, or district organization,
the board of trustees to be not less
than five (5) nor more than fifteen (15).
(160a)
Is it required to indicate its term of
existence?
-

Likewise to exist in perpetuity, the law

does not require to indicate its term of
existence

When
will
personality?

it

acquire

juridical

Only a corporation sole may come

into existence without SEC approval,
section 19 will thus govern, Vested
with judicial capacity upon issuance
of the certificate by the SEC
o However it is not accurate
according to atty. Ladia
because there are those that
can issue for example
cooperatives- BUREAU OF
COOPERATIVES
which
register, home insurance
guaranty corporation- HOME
OWNERS

How may religious societies be

dissolved?
-

Go to the general rules governing

dissolution, because the rules under
special corporations do not provide
for such rule

DISSOLUTION
What is dissolution?
-

Extinguishment of the corporate

franchise and the termination of
corporate existence

3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary
franchise (voluntary dissolution);
3. By revocation of its corporate
franchise (involuntary dissolution)
Philippine National Bank vs. CFI
-

When the period of corporate life

expires, the corporation ceases to
be a body corporate for purposes of
continuing the business for which it
is
organized.
But
it
shall
nevertheless be continued as a body
135

corporate for three years after the time

when it would have be dissolved, for
the purpose of prosecuting and
defending suits by or against it and for
enabling it gradually to settle and close
its affairs to dispose of and convey its
property and to divide its assets. There
is no need for the institution of a
proceeding for quo warranto to
determine the time and date of the
dissolution of a corporation because
the period of corporate existence is
provided
in
the
articles
of
incorporation. When such period
expires and without any extension
having been made pursuant to law, the
corporation is dissolved automatically
insofar as the continuation of its
business is concerned.
The rights of the lessor and the lessee
over the improvements which the latter
constructed on the leased premises
are governed by Article 1678 of the
Civil Code. The provision gives the
lessee the right to remove the
improvements if the lessor chooses
not to pay one half of the value
thereof. However, in the case at bar
the law will not apply because the
parties herein have stipulated in the
contract their own terms and
conditions
concerning
the
improvements before the termination
of the lease. Petitioner PNB as
assignee of PBM succeeded to the
obligation of the latter under the
contract of lease. It could not possess
rights more than what PBM had as
lessee under the contract. Hence,
petitioner was duly bound to remove
the
improvements
before
the
expiration of the period of lease. Its
failure to do so when the lease was
terminated was tantamount to a waiver
of its rights and interest over the
improvements on the leased premise.
o 3 modes of
dissolution, 3
modes of voluntary dissolution

and 3 modes of liquidation

and
winding
upFREQUENTLY ASKED IN
THE FINALS
What are the 3 modes of voluntary
dissolution?
1. Voluntary dissolution where no
creditors are affected; <sec.118>
2. Voluntary
dissolution
where
creditors are affected; <sec. 119>
3. Shortening of corporate term. <sec.
120>
Voluntary dissolution where no
creditors are affected <sec.118>
-

The
formal
and
procedural
requirements necessary are the
following:

1. Majority vote of the board of

directors or trustees;
2. Sending
of
notice
of
each
stockholders or member either by
registered mail or personal delivery
at least thirty (30) days prior to the
meeting (scheduled by the board for
the purpose of submitting the board
action to dissolve the corporation for
approval of the stockholder or
members.);
3. Publication of the notice of time,
place and subject of the meeting for
three (3) consecutive weeks in a
newspaper published in the place
where the principal office of said
corporation is located or in a
newspaper of general circulation in
the Philippines;
4. Resolution
adopted
by
the
affirmative vote of the stockholders
owning at least 2/3 of the
outstanding capital stock or 2/3 of
the members at the meeting duly
called for the purpose;
5. A copy of the resolution authorizing
the dissolution must be certified by a
136

majority of the board of directors or

trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution
by the SEC.

3.

Should this be strictly complied with?

-

Yes, compliance with the requirements

and formalities prescribed above is
mandatory such that failure to comply
therewith will have no effect on the
legal existence of the corporation.

4.

Will dissolution be effective and valid

by a mere resolution of the BOD and
stockholders?
-

No, a mere resolution by the

stockholders or the BOD of a
corporation to dissolve the same does
not affect the dissolution but that some
other steps, administrative or judicial is
necessary. (Daguhoy Enterprises vs.
Ponce)
Since it is the State which grants its
right to exist, it is only through the
State which can allow the termination
of its existence; without consent of the
State, it will not be dissolved.

5.

6.

7.

Voluntary dissolution where creditors

are affected <sec.119>
-

By virtue of a petition, when there are

creditors affected
The following formalities would thus be
required:

1. Affirmative vote of the stockholders

representing at least 2/3 of the
outstanding capital stock or at least 2/3
of the members at a meeting duly
called for that purpose;
2. Petition for dissolution shall be filed
with the SEC signed by a majority of
its board of directors or trustees or
other officers having the management
of its affairs, verified by the president

or secretary or one of its directors or

trustees, setting forth all claims and
demands against it.
Issuance of an order by the SEC
reciting the purpose of the petition
and fixing the date on or before
which objections thereto may be
filed by any person, which date shall
not be less than thirty days nor more
than sixty days after entry of the
order.
Before such date, a copy of the
order must be published once a
week for three (3) consecutive
weeks in a newspaper of general
circulation published in the city or
municipality where the principal
office is situated or in a newspaper
of general circulation in the
Philippines.
Posting of the same order for three
(3) consecutive weeks in three (3)
public places in such city or
municipality.
Upon five (5) days notice, given
after the date on which the right to
file objections has expired, the SEC
shall hear the petition and try any
issue made by the objections filed.
Judgment dissolving the corporation
and directing of its assets as justice
requires and the appointment of a
receiver (if necessary in its
discretion) to collect such assets
and pay the debts of the corporation.
o The foregoing are also
mandatory requirements

Is the appointment of a receiver

mandatory?
-

No, it is merely permissive or

discretionary on the part of the court.
The code uses the word may; the
law intended to let the shareholders
have the control of the assets of the
corporation upon dissolution and
winding up.
137

Section 121. Involuntary

dissolution. - A corporation may be
dissolved by the Securities and
Exchange Commission upon filing of
a verified complaint and after proper
notice and hearing on the grounds
provided by existing laws, rules and
regulations. (n)

The directors may also undertake

liquidation and winding up of its
corporate affairs, and sound business
judgment, on how they will wind up

Dissolution by shortening of corporate

term <sec.120>
-

Will be valid upon approval of the

SEC, unlike general amendments,
which will be deemed approved if not
acted upon by the SEC within 6
months from the date of filing for a
cause
not
attributable
to
the
corporation.
Shortening of the corporate term
partakes the nature of an amendment
of the articles of incorporation. Section
16 under general amendments allows
written assent section 37 mandates
that the vote must be cast at a duly
constituted meeting.
Section 120. Dissolution by
shortening corporate term. - A
voluntary dissolution may be effected
by
amending
the
articles
of
incorporation to shorten the corporate
term pursuant to the provisions of this
Code. A copy of the amended articles
of incorporation shall be submitted to
the
Securities
and
Exchange
Commission in accordance with this
Code. Upon approval of the amended
articles of incorporation of the
expiration of the shortened term, as
the case may be, the corporation shall
be deemed dissolved without any
further proceedings, subject to the
provisions of this Code on liquidation.
(n)
o Intra-corporatecommercial courts

Another
way
corporation is
dissolution

special

of
dissolving
a
through involuntary

Dissolution is tantamount to the

imposition of death penalty
Instead of dissolving the corporation,
courts normally enjoin the further
commission of the questioned act
The relief of dissolution will be
awarded only where no other
remedy is available and it will not be
allowed where the rights of the
stockholders can be, or are,
protected in some other way
(Republic vs. Bisaya Land Trans.
Co. Inc.)

What are the grounds for involuntary

dissolution?
-

It is commenced through a verified

complaint or motu proprio by the
proper courts
Section 6 of PD 902-A provides for
the
grounds
for
involuntary
dissolution as follows:

1. Fraud in procuring its certificate of

registration;
2. Serious misrepresentation as to
what the corporation can do or is
doing to the great prejudice of or
damage to the general public;
3. Refusal to comply or defiance of any
lawful order of the Commission
restraining commission of acts which
would amount to a grave violation of
its franchise;
4. Continuous inoperation for a period
of at least five (5) years;
5. Failure to file by-laws within the
required period;
138

6. Failure to file required reports in

appropriate forms as determined by
the Commission within the prescribed
period.
-

Other grounds are provided for in the

corporation code itself: among them
are:

1. Violation of any provision of the Code

under section 144;
2. In case of deadlock in a close
corporation as provided for in section
105;
3. In a close corporation, any acts of
directors, officers or those in control of
the corporation which is illegal or
fraudulent or dishonest or oppressive
or unfairly prejudicial to the corporation
or any stockholder or whenever
corporate assets are being misapplied
or wasted under section 105.
-

Mere dishonesty is also a ground in a

close corporation
Other grounds can be found in other
special laws like the Securities
Regulation Code and the General
Banking Act as well as the Insurance
Code.

Government
Estate
-

vs.

Philippine

Government vs. El Hogar

-

Sugar

It is necessary in order to secure

judicial foreclosure of respondents
charter to show a mis-user of its
franchise justifying such a forfeiture
Object is to protect the public, and not
to redress private grievances, the misuser must be such as to work or
threaten a substantial injury to the
public, or such as to amount to a
violation of the fundamental condition
of the contract by which the franchise
was granted and thus defeat the
purpose of the grant
Courts proceed with extreme caution
which has for their object the forfeiture

of corporate franchise, and forfeiture

will not be allowed, except under
express limitation, or for plain abuse
of power by which the corporation
fails to fulfill the design and purpose
of its organization. But when the
abuse or violation constitutes or
threatens a substantial injury to the
public or such as to amount to a
violation
of
the
fundamental
conditions of its charter, or its
conduct
is
characterized
by
obduracy or pertinacity in contempt
of law, dissolution will be granted
Did
the
court
dissolve
the
corporation? No, it did not, it granted
the corporation 6 months to cease
and desist the performance of the
questioned act otherwise it will be
dissolved

3 causes of action, the first is that

the corporation violated the law by
holding on the property beyond that
provide for by law, the second is that
the corporation undertook the
management f petitioners belonging
to delinquent shareholders of the
association, and lastly that the bylaw provision, which empowers the
BD to cancel shares and to return to
the owners thereof the balance
returning from the liquidation

Compare to Philippine Sugar Estate,

wherein the court ruled conditional
dissolution. Why decree conditional
dissolution in one and not in the
other case?
-

Because
in
El
Hogar
the
government was at fault, the
government wasnt able to issue the
certificate of title on time
When the case was instituted, El
Hogar was already able to dispose
the properties in question, in
139

Philippine Sugar Estate it was still the

holding the properties in order to
enrich itself at the expense of the
taxpayers
Republic vs. Security
Acceptance Corp. et al.
-

Credit

and

The corporation here is a lending

institution and not a banking institution
Defendant corporation violated the law
because before a corporation may
engage into a banking activity it must
first obtain a secondary franchise from
the Central Bank
Defendant
corporation
threatens
substantial injury to the general public,
dissolution is warrant
If there is a bank run kawawa naman
yung depositors

Republic
vs.
Bisaya
Transportation Co. Inc
-

Financing
Corporation
Philippines vs. Teodoro

Land

The relief of dissolution will be

awarded only where no other remedy
is available and it will not be allowed
where the rights of the stockholders
can be, or are, protected in some other
way
Misuse and misapplication of the funds
and assets of the respondent were
committed particularly by the corporate
officers, where they can instead be
held personally liable
Since there is another remedy
available dissolution is not warranted

of

the

Minority stockholders may not ask

for the dissolution of a corporation in
private suits and that such actions
should
be
brought
by
the
Government through its legal
officers, except in cases where the
intervention of the State, for one
reason or another, cannot be
obtained, as when the State is not
interested because the complaint
is strictly a matter between the
stockholders and does not
involve, in the opinion of the legal
officer of the Government, any of
the acts or omissions warranting
quo warranto proceeding , in
which minority stockholders are
entitled to have such dissolution.
It should be exercised if necessary
in order not to entirely ignore and
disregard the rights of said minority
stockholders, especially when said
minority stockholders are unable to
obtain redress and protection of their
rights within the corporation itself.
Stockholders should not be left
without recourse

Present set up
-

Any stockholder or member of a

corporation
can
institute
a
dissolution proceeding against his
own corporation before the proper
forum
Special Commercial Courts, shall
hear and decide intra-corporate
disputes

Assuming
the
above
stated
corporation is a close corporation,
would the court decree otherwise?

May a corporation ask for dissolution

of the corporation when there is no
prejudice to the general public?

Yes, because in a close corporation,

mere dishonesty is a ground for the
dissolution
Can even be dissolved by petition of
only one stockholder on the grounds
stated in the code < sec. 105>

Yes, in a close corporation, a

petition for the dissolution of the
corporation may be instituted by any
140

one individual shareholder on the

ground, even by mere dishonesty
Effects of dissolution
-

The dissolution of a corporation not

only terminates its primary franchise to
be a corporation, but generally
prevents it from further exercising
other or secondary franchises which
have been conferred to its. It
terminates its power to enter into
contracts or t o continue the business
as a going concern.
Based on this general rule, the
Supreme Court held that a corporation,
whose corporate life expired, cannot
lawfully pursue the business for which
it was organized. It cannot apply for a
new certificate or a secondary
franchise for it is incapable of receiving
a grant. Neither can it enforce a
contract executed prior its dissolution
for the purpose of continuing the
business of its organization.
In general the rights and liabilities of
the corporation are not extinguished by
its dissolution.
Section 145. Amendment or
repeal. - No right or remedy in favor of
or against any corporation, its
stockholders, members, directors,
trustees, or officers, nor any liability
incurred by any such corporation,
stockholders, members, directors,
trustees, or officers, shall be removed
or impaired either by the subsequent
dissolution of said corporation or by
any subsequent amendment or repeal
of this Code or of any part thereof. (n)

Buenaflor vs. Camarines Sur Industry

Corp.

Cebu Port Labor Union vs. State

Marine Co
-

From that time on Camarines Sur was

plying in an activity that was illegal
A corporation where the corporate life
has expired it cannot lawfully pursue

Even a cursory reading of the

provision would convey the idea
clearly manifested in the limitation
but not for the purpose of
continuing the business for which it
was established, that the 3-year
period allowed by the law is only for
the purpose of winding up its affairs.

Gonzales vs.
Administration
-

the business for which it was

organized.
the Supreme Court held that a
corporation, whose corporate life
expired, cannot lawfully pursue the
business for which it was organized.
It cannot apply for a new certificate
or a secondary franchise for it is
incapable of receiving a grant.
Awarding it to Camarines Sur is
tantamount to a medal for its illegal
acts
It cannot apply for a new certificate
or a secondary franchise for it is
incapable of receiving a grant. It was
not even a corporation de facto. And
then, there is no application
subscribed by the new corporation
And yet as stated, the new
corporation has not filed any
application for certificate of public
convenience in Sabang, and has not
published such application.

Sugar

Regulatory

Instead of applying the corporation

code, the court applied the
constitutional provision
Cannot be read as permitting to
destroy the substantive rights
Such would collide with the nonimpairment of contracts clause of
the constitution
Complainants will have the right to
follow the assets of the corporation
141

in the hands of SRA or any other

agency for that matter
After dissolution what next?
-

Liquidation and winding up should

follow

What is the definition of liquidation and

winding up?
-

Collection of all corporate assets, the

payments of all its debts and
settlement of its obligations and the
ultimate distribution of the corporate
assets, if any of it remains, to all
stockholders in accordance with their
proportionate stockholdings in the
corporation or in accordance with their
respective contracts of subscription.

Preference upon liquidation

-

If there are preferred shares, the

preference granted to such should be
complied with
Preferred shares may give the holder
thereof, preference only in the
dividends but also in the distribution of
corporate assets upon liquidation or
termination of the corporate existence.
If such is the intent, the contract of
subscription must so indicate lest they
are placed on equal footing with
common shareholders
Preference may be participating or
non-participating

Dissolved corporations are granted a

period of 3 years to liquidate
Section
122.
Corporate
liquidation. - Every corporation whose
charter expires by its own limitation or
is annulled by forfeiture or otherwise,
or whose corporate existence for other
purposes is terminated in any other
manner,
shall
nevertheless
be
continued as a body corporate for

three (3) years after the time when it

would have been so dissolved, for
the purpose of prosecuting and
defending suits by or against it and
enabling it to settle and close its
affairs, to dispose of and convey its
property and to distribute its assets,
but not for the purpose of continuing
the business for which it was
established.
At any time during said three
(3) years, the corporation is
authorized and empowered to
convey all of its property to trustees
for the benefit of stockholders,
members, creditors, and other
persons in interest. From and after
any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
members, creditors and others in
interest, all interest which the
corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial
interest
in
the
stockholders,
members, creditors or other persons
in interest.
Upon the winding up of the
corporate
affairs,
any
asset
distributable to any creditor or
stockholder or member who is
unknown or cannot be found shall
be escheated to the city or
municipality where such assets are
located.
Except by decrease of capital
stock and as otherwise allowed by
this Code, no corporation shall
distribute any of its assets or
property
except
upon
lawful
dissolution and after payment of all
its debts and liabilities. (77a, 89a,
16a)

142

 However the 3 year period is not

absolute
Liquidation may be undertaken in
either of the 3 ways
1. By the corporation itself through the
BOD
-

Usual method or procedure of

liquidating a corporation and although
there is no law authorizing it, neither is
there anything that prohibits the BOD
from undertaking the same
If this method is resorted to, the board
will only have a period of 3 years to
finish its task of liquidation
Claims for or against the corporate
entity not filed within the period will
become unenforceable as there exist
no corporate entity against which they
can be enforced
Actions pending for or against the
corporation when the 3 year period
expires, are abated since after the
period, the corporation ceases for all
intents and purposes and is no longer
capable of suing or being sued

o Mere appointment of a
receiver without anything
more does imply in the
dissolution of a corporation
National Abaca other Fibers Co. vs.
Pore
-

the

The corporation may opt to convey all

corporate assets to a trustees who will
take charge of liquidation
If this method is used, the three year
period limitation imposed by section
122 will not apply provided the
designation of the trustee is made
within that period

2. By a trustee
corporation
-

appointed

by

3. By appointment of a receiver
-

A receiver may be appointed by the

proper forum on petition or motu
proprio upon the dissolution of the
corporation
The appointment of a receiver is,
however, permissive rather than
mandatory and the law tends to

recognize that in cases of voluntary

dissolution there is no occasion for
the appointment of a receiver except
under special circumstances and
upon proper showing
If a receiver is appointed, the 3 year
period fixed by law within which to
complete the task of liquidation will
not likewise apply because the
dissolved corporation is substituted
by the receiver who may sue or be
sued even after that period

Actions pending for or against the

corporation when the 3 year period
expires, are abated since after that
period, the corporation ceases for all
intents and purposes and is no
longer capable of suing or being
sued
May be continued by the trustee
provided done within the 3 year
period
Should the corporation, therefore,
finds it difficult to finish its
liquidation, it may, at any time during
the three year period, convey all its
assets and receivables to a trustee
to prosecute and defend suits by or
against the corporation begun
before the expiration of said period
The effect of the conveyance is to
make the trustees the legal owners
of the property conveyed, subject to
the beneficial interest therein of
creditors and stockholders

Sumera vs. Valencia

-

Thus it was held that when a

corporation is dissolved and the
143

liquidation of the assets is placed in

the hands of receiver or assignee, the
period of 3 years prescribed by law is
not applicable and the assignee may
institute all actions leading to the
liquidation of the corporation even after
the expiration of 3 years.
If the corporation carries out the
liquidation of its assets through its own
officers and continues and defends the
actions brought by or against it, its
existence shall terminate at the end of
three years from the time of
dissolution; but if a receiver or
assignee is appointed, with or without
a transfer of its properties within 3
years, the legal interest passes to the
assignee, the beneficial interest
remaining
in
the
members,
stockholders, creditors and other
interested persons and said assignee
may bring an action, prosecute that
which has already been commenced
for the benefit of the corporation, or
defend the latter against any other
action already instituted or which may
be instituted even outside of the period
of three years fixed for the offices of
the corporation.

dissolution is more for the protection

of its creditors and stockholders.
Debtors like the petitioners herein
may not take advantage of the
failure of the corporation to transfer
its assets to a trustee, assuming it
has any to transfer which petitioner
has failed to show, in the first place.
To sustain petitioners contention
would be to allow them to enrich
themselves at the expense of
another, which all enlightened legal
systems condemn.
The counsel who prosecuted and
defended the interest of the
corporation may be considered as a
trustee at least with respect to the
matter in litigation only

May a corporation that is already

dissolved, transfer and assign its
assets and properties to a new
corporation which will continue the
business of the dissolved one?
-

Yes, provided all the stockholders

gave their consent (Chung Ka Bio
vs. IAC)

Board of Liquidators vs. Kalaw

Republic vs. Marsman Development

Company & Chung Ka Bio vs. IAC

If there is a trustee, assignee or

liquidator, it can continue prosecuting
suit even beyond the 3 year period
fixed by law because he becomes the
legal owner of the rights, assets and
properties conveyed to him

Gelano vs. CA
-

Trustee as used in the corporation

statute must be understood in its
general concept which could include
the counsel to whom was entrusted in
the instant case, the prosecution of the
suit filed by the corporation. The
purpose in the transfer of the assets of
the corporation to a trustee upon its

During the three year period granted

to a corporation to liquidate or wind
up its affairs, the BOD is not
normally permitted to undertake any
activity outside the usual liquidation
of the corporation. There is,
however, nothing to prevent the
stockholders from conveying their
respective shareholdings toward the
creation of a new corporation to
continue the business of the old.
This is because winding up is the
sole activity of the dissolved
corporation that does not intend to
incorporate a new. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
144

transfer the assets of the dissolved

corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Republic vs. Marsman Development
Company)
Winding up is the sole activity of a
dissolved corporation that does not
intend to incorporate anew. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
transfer the assets of the dissolved
corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Chung Ka Bio vs. IAC)

wrong, opinion is further

discussed after the Clemente
Case
Clemente vs. CA
-

What happens to the remaining assets

and properties of the dissolved
corporation if liquidation and winding
up as provided in section 122 is not
complied with, as a result of which the
3 year period has elapsed
-

If the three year extended life has

expired without a trustee or receiver
having been expressly designated by
the corporation within that period, the
board of directors o trustees itself,
following the rationale of the Supreme
Courts decision in Gelano vs. CA may
be permitted to do so continue as
trustees by legal implication to
complete the liquidation. Still in the
absence of a BOD or BOT, those
having any pecuniary interest in the
assets, including not only the
shareholders but likewise the creditors
of the corporation, acting for and in its
behalf,
might
make
proper
representations with the SEC, which
has primary and sufficiently broad
jurisdiction in matters of this nature, for
working out a final settlement of the
corporate concerns (Clemente vs. CA)

o the
ruling
is
wrong
according to atty. Ladia
According to atty Ladia: What
happens to a corporation that is
already dissolved, that has not been
able to appoint a trustee with in the
3 year period?
-

o According to atty. Ladia the

ruling of the Supreme Court in
the case of Clemente vs. CA is

Who
owns
the
properties?
SOCIEDAD ANONIMA
The termination of the life of a
juridical entity does not by itself
cause the extinction or diminution of
the rights and liabilities of such entity
or those of its owners and creditors.
If the three year extended life has
expired without a trustee or receiver
having been expressly designated
by the corporation within that period,
the board of directors o trustees
itself, following the rationale of the
Supreme Courts decision in Gelano
vs. CA may be permitted to do so
continue as trustees by legal
implication
to
complete
the
liquidation. Still in the absence of a
BOD or BOT, those having any
pecuniary interest in the assets,
including not only the shareholders
but likewise the creditors of the
corporation, acting for and in its
behalf,
might
make
proper
representations with the SEC, which
has primary and sufficiently broad
jurisdiction in matters of this nature,
for working out a final settlement of
the corporate concerns

a corporation dissolved which failed

to exercise its rights granted in
section 122 after the 3 year period
has elapsed, ceases to exist for all
145

intents and purposes, it can no longer

sue or be sued
according to 122 of the code, the
property
should
be
escheated,
accordingly:
Section
122.
Corporate
liquidation. - Every corporation whose
charter expires by its own limitation or
is annulled by forfeiture or otherwise,
or whose corporate existence for other
purposes is terminated in any other
manner,
shall
nevertheless
be
continued as a body corporate for
three (3) years after the time when it
would have been so dissolved, for the
purpose of prosecuting and defending
suits by or against it and enabling it to
settle and close its affairs, to dispose
of and convey its property and to
distribute its assets, but not for the
purpose of continuing the business for
which it was established.
At any time during said three (3)
years, the corporation is authorized
and empowered to convey all of its
property to trustees for the benefit of
stockholders, members, creditors, and
other persons in interest. From and
after any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
members, creditors and others in
interest, all interest which the
corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial interest
in
the
stockholders,
members,
creditors or other persons in interest.
Upon the winding up of the
corporate
affairs,
any
asset
distributable to any creditor or
stockholder or member who is
unknown or cannot be found shall
be escheated to the city or
municipality where such assets are
located.

Except by decrease of capital

stock and as otherwise allowed by
this Code, no corporation shall
distribute any of its assets or
property
except
upon
lawful
dissolution and after payment of all
its debts and liabilities. (77a, 89a,
16a)
FOREIGN CORPORATIONS
Definition
-

Section 123. Definition and rights of

foreign corporations. - For the
purposes of this Code, a foreign
corporation is one formed, organized
or existing under any laws other
than those of the Philippines and
whose laws allow Filipino citizens
and corporations to do business in
its own country or state. It shall have
the right to transact business in the
Philippines after it shall have
obtained a license to transact
business in this country in
accordance with this Code and a
certificate of authority from the
appropriate government agency. (n)

What if the law of the state of the

foreign corporation does not allow
Filipino citizens to do business in
their country?
-

The phrase and whose laws allow

Filipino citizens and corporations to
do business in its own country or
state is not, however, an accurate
inclusion in the definition as ay
corporation registered or organized
under the laws of another state is
necessarily a foreign corporation
whether or not the state of its
incorporation allow Filipino citizens
or corporations to do business in
that forum.
The said phrase was inserted by the
framers of the law only as a
146

condition precedent to the grant of a

license of a foreign corporation to do
business in the Philippines.
Composed of 100% Americans;
organized under the laws other than
the Philippines
-

The test is the incorporation test

General rule: the place of its
incorporation irrespective of the
nationality
Exception: control test would apply in
determining the corporate nationality,
i.e., the citizenship of the controlling
stockholders determines the nationality
of the corporation

If a foreign corporation wants to

transact business in the Philippines,
what must it do?
-

Obtain a license

3. The name and address of its

resident agent authorized to accept
summons and process in all legal
proceedings and, pending the
establishment of a local office, all
notices affecting the corporation;
4. The place in the Philippines
where the corporation intends to
operate;
5. The specific purpose or purposes
which the corporation intends to
pursue in the transaction of its
business
in
the
Philippines:
Provided, That said purpose or
purposes are those specifically
stated in the certificate of authority
issued
by
the
appropriate
government agency;
6. The names and addresses of the
present directors and officers of the
corporation;

How may it do so?

-

According to sec. 125:

Section 125. Application for a
license. - A foreign corporation
applying for a license to transact
business in the Philippines shall
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their
translation to an official language of
the Philippines, if necessary. The
application shall be under oath and,
unless already stated in its articles of
incorporation, shall specifically set
forth the following:
1. The date and term of incorporation;
2. The address, including the street
number, of the principal office of the
corporation in the country or state of
incorporation;

7. A statement of its authorized

capital stock and the aggregate
number of shares which the
corporation has authority to issue,
itemized by classes, par value of
shares, shares without par value,
and series, if any;
8. A statement of its outstanding
capital stock and the aggregate
number of shares which the
corporation has issued, itemized by
classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount
actually paid in; and
10. Such additional information as
may be necessary or appropriate in
order to enable the Securities and
Exchange Commission to determine
whether such corporation is entitled
to a license to transact business in
147

the Philippines, and to determine and

assess the fees payable.

Is there any deposit or security

requirement?

Attached to the application for

license shall be a duly executed
certificate under oath by the authorized
official or officials of the jurisdiction of
its incorporation, attesting to the fact
that the laws of the country or state of
the applicant allow Filipino citizens and
corporations to do business therein,
and that the applicant is an existing
corporation in good standing. If such
certificate is in a foreign language, a
translation thereof in English under
oath of the translator shall be attached
thereto.

The application for a license to

transact business in the Philippines
shall likewise be accompanied by a
statement under oath of the president
or any other person authorized by the
corporation, showing to the satisfaction
of the Securities and Exchange
Commission and other governmental
agency in the proper cases that the
applicant is solvent and in sound
financial condition, and setting forth
the assets and liabilities of the
corporation as of the date not
exceeding one (1) year immediately
prior to the filing of the application.
Foreign banking, financial and
insurance corporations shall, in
addition to the above requirements,
comply with the provisions of existing
laws applicable to them. In the case of
all other foreign corporations, no
application for license to transact
business in the Philippines shall be
accepted by the Securities and
Exchange
Commission
without
previous authority from the appropriate
government
agency,
whenever
required by law. (68a)

Yes, within 60 days after the

issuance of the license, a foreign
corporation, except those engaged
in foreign banking or insurance, shall
deposit with the SEC, for the benefit
of creditors, securities consisting of
bonds or other evidence of
indebtedness of the Philippine
government
or
its
political
subdivision, or of government owned
or controlled corporation, shares of
stock in registered enterprises as
this term is defined in R.A. 5186,
shares of stock in domestic
insurance companies and banks or
any combination thereof with an
actual market value of 100,000
Additional
securities
may
be
required by the SEC if the actual
market value of the securities on
deposit has decreased by at least
10%. Section 126 of the code
provides:
Section 126. Issuance of a
license. - If the Securities and
Exchange Commission is satisfied
that the applicant has complied with
all the requirements of this Code
and other special laws, rules and
regulations, the Commission shall
issue a license to the applicant to
transact business in the Philippines
for the purpose or purposes
specified in such license. Upon
issuance of the license, such foreign
corporation may commence to
transact business in the Philippines
and continue to do so for as long as
it retains its authority to act as a
corporation under the laws of the
country or state of its incorporation,
unless such license is sooner
surrendered, revoked, suspended or
annulled in accordance with this
Code or other special laws.
148

Within sixty (60) days after the

issuance of the license to transact
business in the Philippines, the
license, except foreign banking or
insurance corporation, shall deposit
with the Securities and Exchange
Commission for the benefit of present
and future creditors of the licensee in
the Philippines, securities satisfactory
to the Securities and Exchange
Commission, consisting of bonds or
other evidence of indebtedness of the
Government of the Philippines, its
political
subdivisions
and
instrumentalities, or of governmentowned or controlled corporations and
entities, shares of stock in "registered
enterprises" as this term is defined in
Republic Act No. 5186, shares of stock
in domestic corporations registered in
the stock exchange, or shares of stock
in domestic insurance companies and
banks, or any combination of these
kinds of securities, with an actual
market value of at least one hundred
thousand
(P100,000.)
pesos;
Provided, however, That within six (6)
months after each fiscal year of the
licensee, the Securities and Exchange
Commission shall require the licensee
to
deposit
additional
securities
equivalent in actual market value to
two (2%) percent of the amount by
which the licensee's gross income for
that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities
and Exchange Commission shall also
require deposit of additional securities
if the actual market value of the
securities on deposit has decreased by
at least ten (10%) percent of their
actual market value at the time they
were deposited. The Securities and
Exchange Commission may at its
discretion release part of the additional
securities deposited with it if the gross
income of the licensee has decreased,
or if the actual market value of the total
securities on deposit has increased, by

more than ten (10%) percent of the

actual market value of the securities
at the time they were deposited. The
Securities
and
Exchange
Commission may, from time to time,
allow the licensee to substitute other
securities for those already on
deposit as long as the licensee is
solvent. Such licensee shall be
entitled to collect the interest or
dividends
on
the
securities
deposited. In the event the licensee
ceases to do business in the
Philippines, the securities deposited
as aforesaid shall be returned, upon
the licensee's application therefor
and upon proof to the satisfaction of
the Securities and Exchange
Commission that the licensee has
no liability to Philippine residents,
including the Government of the
Republic of the Philippines. (n)
Other than section 125 and 126.
What other requirements are set
under Philippine Law before a
foreign corporation may transact
business in the Philippines
-

Yes. A Resident agent is required.

As a condition precedent to the
grant of a license to do or transact
business in the Philippines, the
foreign corporation is required to
designate its resident agent on
whom summons and other legal
processes may be served in all
actions or legal proceedings against
such corporation
Section 128 provides:
Section 128. Resident agent;
service of process. - The Securities
and Exchange Commission shall
require as a condition precedent to
the issuance of the license to
transact business in the Philippines
by any foreign corporation that such
corporation file with the Securities
149

and Exchange Commission a written

power of attorney designating some
person who must be a resident of the
Philippines, on whom any summons
and other legal processes may be
served in all actions or other legal
proceedings against such corporation,
and consenting that service upon such
resident agent shall be admitted and
held as valid as if served upon the duly
authorized officers of the foreign
corporation at its home office. Any
such foreign corporation shall likewise
execute and file with the Securities
and
Exchange
Commission
an
agreement or stipulation, executed by
the proper authorities of said
corporation, in form and substance as
follows:

such summons or other legal

process to the corporation at its
home or principal office. The
sending of such copy by the
Commission shall be necessary part
of and shall complete such service.
All expenses incurred by the
Commission for such service shall
be paid in advance by the party at
whose instance the service is made.
In case of a change of
address of the resident agent, it
shall be his or its duty to
immediately notify in writing the
Securities
and
Exchange
Commission of the new address.
(72a; and n)
-

"The
(name
of
foreign
corporation) does hereby stipulate and
agree, in consideration of its being
granted by the Securities and
Exchange Commission a license to
transact business in the Philippines,
that if at any time said corporation
shall cease to transact business in the
Philippines, or shall be without any
resident agent in the Philippines on
whom any summons or other legal
processes may be served, then in any
action or proceeding arising out of any
business or transaction which occurred
in the Philippines, service of any
summons or other legal process may
be made upon the Securities and
Exchange Commission and that such
service shall have the same force and
effect as if made upon the dulyauthorized officers of the corporation
at its home office."
Whenever such service of
summons or other process shall be
made upon the Securities and
Exchange
Commission,
the
Commission shall, within ten (10) days
thereafter, transmit by mail a copy of

The necessity of the appointment of

a resident agent is only for the
purpose of receiving summons and
other legal processes in any legal
action or proceeding against the
foreign corporation

Who may be appointed as a resident

agent?
-

Section 127 provides that:

Section 127. Who may be a
resident agent. - A resident agent
may be either an individual residing
in the Philippines or a domestic
corporation
lawfully
transacting
business
in
the
Philippines:
Provided, That in the case of an
individual, he must be of good moral
character and of sound financial
standing. (n)

May a partnership be appointed as a

resident agent?
-

Yes, domestic corporation taken in

its general sense not legal sense

150

 If there is a resident agent appointed.

May summons be served to any
officers of the corporation?
-

No, if there is a resident agent, the

designation is exclusive and service
must be made only to the resident
agent or else the service is without
force and effect unless made to him
Thus, while the law allows service
upon the SEC or any of its officers or
agents within the Philippines
The two modes may become effective
only if the foreign corporation failed or
neglected to designate such a person
or an agent
Summons must be made only to
resident agent except when there is no
resident agent appointed
Where such foreign corporation
actually doing business here has not
applied for a license to do and has not
designated an agent to receive
summons, then service of summons
on it will be made pursuant to the
provisions of the rules of court. If such
foreign corporation has a license to do
business, then summons to it will be
served on the agent designated by it
for the purpose, or otherwise in
accordance with the Corporation Law
(General Corporation of the Philippines
vs. Union Insurance Soc. Of Canton
Ltd.)

If the foreign corporation conducts

business in the Philippines without the
license requirement. What is the
effect?
-

Section 133 provides:

Section 133. Doing business
without a license. - No foreign
corporation transacting business in the
Philippines without a license, or its
successors or assigns, shall be
permitted to maintain or intervene in
any action, suit or proceeding in any

court or administrative agency of the

Philippines; but such corporation
may be sued or proceeded against
before
Philippine
courts
or
administrative tribunals on any valid
cause of action recognized under
Philippine laws. (69a)
-

if they do so, the responsible officers

may be subjected to the penal
sanctions provided for in section 144
of the code, which may either be fine
or imprisonment

What if it is not doing business

without a license?
-

If it is not transacting business in the

Philippines, even without a license, it
can sue before the Philippine Courts

The general rule is that it is not the

lack of required license but doing
business without a license which
bars a foreign corporation form
access to our courts.
Exception:
1. Foreign corporations can sue
before the Philippine Courts if the
act or transaction involved is an
isolated transaction or the
corporation is not seeking to
enforce any legal or contractual
rights arising from, or growing
out of, any business which it has
transacted in the Philippines
2. Neither is a license required
before a foreign corporation may
sue before the forum if the
purpose of the suit is to protect
its trademark, trade name,
corporate name, reputation or
goodwill;
3. Or where it is based on a
violation of the Revised Penal
Code;
151

4. Or merely defending a suit filed

against it
5. Or where a party is stopped to
challenge the personality of the
corporation by entering into a
contract with it.
Rules laid down by the SC
A. As
to
whether
or not it
can sue
A
foreign
corporation
transacting or
doing business
in
the
Philippines with
a license can
sue
before
Philippine
Courts
Subject
to
certain
exceptions, a
foreign
corporation
doing business
in the country
without
a
license cannot
sue
in
Philippine
Courts
If it is not
transacting
business in the
Philippines,
even without a
license, it can
sue before the
Philippine
Courts
A foreign
business in
sued?

B. As
to
whether
or not it
can
be
sued
A
foreign
corporation
transacting
business in the
Philippines with
the
requisite
license can be
sued
in
the
Philippine Courts

If it is not transacting business in the

country it cannot be sued for lack of
jurisdiction

Is there any sanction that can be

enforced to foreign corporations
which are doing business without
the required license?
-

Penal sanctions under section 144

Any violation of the code is subject
to such penal sanctions

What
would
business?
-

A
foreign
corporation
transacting
business in the
Philippines
without a license
can be sued in
Philippine Courts

constitute

doing

The true test, however, seems to be

whether the foreign corporation is
continuing the body or substance of
the business or enterprise for which
it was organized or whether it has
substantially retired from it and
turned it over to another. The term
implies a continuity of commercial
dealings and arrangements, and
contemplates, to that extent, the
performance of acts or works or the
exercise of some of the functions
normally incident to, and in
progressive prosecution of, the
purpose
and
object
of
its
organization (Mentholatum Co. Inc.
vs. Mangaliman)

Mentholatum vs. Mangaliman

if it is not doing
business in the
Philippines,
it
cannot be sued
in
Philippine
Courts for lack of
jurisdiction

corporation not doing

the Philippines, may it be

The true test, however, seems to be

whether the foreign corporation is
continuing the body or substance of
the business or enterprise for which
it was organized or whether it has
substantially retired from it and
turned it over to another. The term
implies a continuity of commercial
dealings and arrangements, and
contemplates, to that extent, the
performance of acts or works or the
exercise of some of the functions
normally incident to, and in
152

progressive prosecution of, the

purpose and object of its organization
Whatever transaction the PhilippineAmerican Drug Co. had executed in
view of the law, the Mentholatum Co.
did it itself. And the Mentholatum Co.
being a foreign corporation doing
business in the Philippines without the
license required by section 68 of the
Corporation Law, it may not prosecute
this action for violation of trade mark
and unfair competition

in the local courts. It was never the

purpose of the Legislature to
exclude a foreign corporation which
happens to obtain an isolated order
for business from the Philippines,
from securing redress in the
Philippine courts
The Swedish East Asia Co., Ltd. Vs.
Manila Port Service
-

Why is foreign corporations barred

access from our courts if they do
business without a license?
-

Marshall-Wells Co. vs. Henry W. Elser

and Co.

Marshall-Wells Co. vs. Henry W. Elser

and Co.
-

The object of the statute was to

subject the foreign corporation doing
business in the Philippines to the
jurisdiction of its courts. The object of
the statute was not to prevent the
foreign corporation from performing
single acts, but to prevent it from
acquiring a domicile for the purpose of
business without taking the steps
necessary to render it amenable to suit
in local courts.

Bulakhidas vs. Navarro

-

It is settled that if a foreign corporation

is not engaged in business in the
Philippines, it may not be denied the
right to file an action in Philippine
courts for isolated transactions
The object of section 68 and 69 of the
Corporation law was not to prevent the
foreign corporation from performing
single acts, but to prevent it from
acquiring a domicile for the purpose of
business without taking the steps
necessary to render it amenable to suit

It must stated that the section is not

applicable to a foreign corporation
performing single acts or isolated
transactions. There is nothing to
show that the petitioner has been in
the
Philippines
engaged
in
continuing business or enterprise for
which it was organized, when the
sixteen bundles were erroneously
discharged in manila, for it to be
considered as transacting business
in the Philippines. The fact is that
the bundles, the value of which is
sought to be recovered, were landed
not as a result of a business
transaction, isolated or otherwise,
but due to a mistaken belief that
they were part of the shipment of
forty similar bundles consigned to
persons or entities in the Philippines,
there is no justification therefore, for
invoking the section

There were 3 contracts entered into,

how come they were still not
considered as doing business?
(Antam Consolidted, Inc. vs. CA)
-

Every case shall be judged in the

light of its peculiar circumstances,
where a single act or transaction
however, is not merely incidental or
casual but indicates the foreign
corporations intention to do other
business in the Philippines, said
single act or transaction constitutes
doing or engaging in or
153

transacting
business
in
the
Philippines
In the case at bar, the transaction
entered into by the respondent with the
petitioners are not a series of
commercial dealings which signify an
intent on the part of the respondent to
do business in the Philippines but
constitute an isolated one which does
not fall under the category of doing
business.
The records show that the only reason
why the respondent entered into the
second and third transactions with the
petitioner was because it wanted to
recover the loss it sustained from the
failure of the petitioners to deliver the
crude coconut oil under the first
transaction and in order to give the
latter a chance to make good on their
obligation. From these facts alone, it
can be deducted that in reality there
was only one agreement between the
petitioners and the respondent.
The
three
seemingly
different
transactions were entered into by the
parties only in an effort to fulfill the
basic agreement and in no way
indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which will
categorize it as a foreign corporation
doing business in the Philippines
3 contracts, but according to the court
was not doing business in the
Philippines

If a corporation appoints a distributor

or
a
representative,
will
it
necessarily imply doing business in
the country?
-

Far East Intl import vs. Nankai Kogyo

Co. Ltd.
-

Only one contract , but according to

the Supreme Court was doing
business in the Philippines
Every case shall be judged in the light
of its peculiar circumstances, where a
single act or transaction however, is
not merely incidental or casual but
indicates the foreign corporations
intention to do other business in the

Philippines, said single act or

transaction constitutes doing or
engaging in or transacting
business in the Philippines
In the instant case, the testimony of
Atty. Pablo Ocampo, that appellant
was doing business in the
Philippines corroborated by no less
than Nabuo Toshida, one of
appellants officers, that he was sent
to the Philippines to look into the
operation
of
mines,
thereby
revealing the defendants desire to
continue engaging in business here,
after receiving the shipment of the
scrap iron under consideration,
making the Philippines a base
thereof.
In such a case, the single act of
transaction is not merely incidental
or casual, but is of such character as
distinctly to indicate a purpose on
the part of the operations for the
conduct of a part of corporations
ordinary business

If the foreign corporation maintained

an independent status during the
existence of the disputed contract.
Appointment of a distributor or
representative in the Philippines,
unless it has an independent status
(transacts and does business in its
own name and for its account and
not of the foreign corporation)
if that be the case the mere
appointment of a distributor will not
constitute doing business

How do you know if it has an

independent status?
-

Communications
Design vs. CA

Materials

and
154

 Communications Materials and Design

vs. CA
-

A perusal of the agreements between

petitioner ASPAC and the respondents
show that there are provisions which
are highly restrictive in nature, such as
to reduce petitioner ASPAC to a mere
extension or instrument of the private
respondents
ITEC was doing business without a
license, however ASPAC is estopped
by entering into the Representative
Agreement with ITEC, petitioner is
charge with knowledge that ITEC was
not licensed to engage in business
activities in the country, and is thus
stopped from raising in defense such
incapacity of ITEC, having chosen to
ignore or even presumptively take
advantage of the same
In top-weld we ruled that a foreign
corporation may be exempted from the
license requirements in order to
institute an action in our courts if its
representative
in
the
country
maintained an independent status
during the existence of the disputed
contract. Petitioner is deemed to have
acceded
to
such
independent
character when it entered into the
Representative Agreement with ITEC

Western Equipment and Supply Co.

vs. Reyes
-

The company is not here seeking to

enforce any legal or contract rights
arising from, or growing out of any
business which it has transacted in the
Philippine Islands. The sole purpose of
the action is to protect its reputation,
its corporate name, its goodwill,
whenever that reputation, corporate
name or goodwill have through the
natural development of its trade,
established themselves
And it contends that its rights to the
use of its corporate and trade name, is

a property right, a right in rem, which

may assert and protect against all
the world, in any of the courts of the
world even in jurisdictions where it
does not transact business just the
same as it may protect its tangible
property, real or personal, against
trespass, or conversion
Since it is the trade and not the mark
that is to be protected a trademark
acknowledges
no
territorial
boundaries or municipalities or
states or nations, but extends to
every market where the traders
goods have become known and
identified by the use of the mark

General Garments Corporation vs.

Director of Patents
-

A foreign corporation which has

never done business in the
Philippine Islands and which is
unlicensed and unregistered to do
business here, but is widely and
favorably known in the Islands
through the use therein of its
products bearing its corporate and
trade name has a legal right to
maintain an action in the Islands
Mentholatum
case
was
subsequently
derogated
when
Congress, purposely to counteract
the effects of said case, enacted
R.A. 638, inserting Section 21-A in
the Trademark Law, which allows a
foreign corporation or juristic person
to bring an action in Philippine
Courts for infringement of a mark or
trade-name, for unfair competition,
or false designation of origin and
false description, whether or not it
has been licensed to do business in
the Philippines under Act Numbered
Fourteen hundred and fifty-nine, as
amended, otherwise known as
Corporation Law, at the time it
brings complaint.
155

 Puma
Sporschufabriken
Rudolf
Dassler, K.G. vs. IAC and MIL-ORO
MFG. Corp.

Assuming
Rustans
had
no
independent status would the SC
grant Lacoste access to our courts?

Treaties for part of the law of the land

Quoting the Paris Convention and the
case of Vanity Fair Mills Inc. vs. T.
Eaton Co. this court further said:

By the same token, the

petitioner should be given the
same
treatment
in
the
Philippines
as
we
make
available to our own citizens.
We are obliged to assure to
nationals of countries of the
Union an effective protection
against unfair competition on
the same way that they are
obligated to similarly protect
Filipino Citizen and firms
-

The ruling in the aforecited case is in

consonance with the Convention of the
Union of Paris for the protection of
Industrial Property to which the
Philippines became a party. Article 8
thereof provides that a trade name
shall be protected in all the countries
of the Union without the obligation of
filing or registration, whether or not it
forms part of the trademark

Le Chemiste Lacoste vs. Fernandez

-

The French company may gain access

to our courts, in the first place it was
not doing business in the Philippines
The marketing of its products in the
Philippines is done through an
exclusive
distributor,
Rustan
Commercial Corporation. The latter is
an independent entity which buys and
then markets not only products of the
petitioner but also many other products
bearing equally well-known and
established trademarks and tradenames

Even if Lacoste did business in the

Philippines it can bring action
because the case involves a
violation of our penal code
Such was a violation of article 189 of
the RPC, if prosecution follows after
the completion of the preliminary
investigation being conducted by the
Special Prosecutor the information
shall be in the name of the People of
the Philippines and no longer the
petitioner which is only an aggrieved
party since a criminal offense is
essentially an act against the State.
It is the latter which is principally the
injured party although there is a
private right violated
The records show that the goodwill
and reputation of the petitioners
products bearing the trademark
Lacoste date back even before 1964
when Lacoste clothing apparels
were forst marketed in the
Philippines. To allow Hemandas to
continue using the trademark
Lacoste for the simple reason that
he was the first registrant in the
Supplemental
Register
of
a
trademark used in international
commerce and not belonging to him
is to render nugatory the very
essence of the law on trademarks
and trade names

Atlantic Mutual Insurance Co. vs.

Cebu Stevedoring Co.
-

The law denies to a foreign

corporation the right to maintain suit
unless it has previously complied
with a certain requirement, then
such compliance, or the fact that the
suing corporation is exempt there
from,
becomes
a
necessary
averment in the complaint
156

These are matters peculiarly within the

knowledge of appellants alone, and it
would be unfair to impose upon
appellee the burden of asserting and
proving the contrary. It is enough that
foreign corporations are allowed by
law to seek redress in our courts under
certain conditions: the interpretation of
the law should not go so far as to
include, in effect, an inference than
those conditions have been met from
the mere fact that the party suing is a
foreign corporation

Section 129. Law applicable.

- Any foreign corporation lawfully
doing business in the Philippines
shall be bound by all laws, rules and
regulations applicable to domestic
corporations of the same class,
except such only as provide for the
creation, formation, organization or
dissolution of corporations or those
which fix the relations, liabilities,
responsibilities,
or
duties
of
stockholders, members, or officers
of corporations to each other or to
the corporation. (73a)

Olympia Business Machines Co. vs. E.

Razon
-

How do you distinguish this case with

Atlantic?
In Atlantic it dismissed the case, while
in Olympia it did not

Time Inc. vs. Reyes

-

We fail to see how these doctrines can

be a propos in the case at bar, since
the petitioner is not maintaining any
suit but is merely defending one
against itself; it did not file any
complaint but only a corollary
defensive petition to prohibit the lower
court from further proceeding with a
suit that it had no jurisdiction to
entertain

Will the pre-emptive rights of a

foreign corporation be governed by
the same section of the code? Is the
pre-emptive rights of a stockholder
in a domestic corporation same as
the pre-emptive of a stockholder of a
foreign corporation.
-

No

M.E. Grey
Company

What law govern foreign corporation

doing and transacting business in the
Philippines with a license

Laws of the Republic of the Philippines

save and except that would normally
be those matters which concern its
formation, organization or dissolution,
or those fixing the relationship,
liabilities, responsibilities, or duties of
the stockholders, members or officers
of the foreign corporation or their
relations to each other.

In effect, intra-corporate or internal

matters not affecting creditors or the
public in general are governed not
by Philippine laws but the law under
which the foreign corporation was
formed or organized

vs.

Insular

Lumber

PNB vs. Gonzales, will this apply to

a foreign corporation? How do you
distinguish this case from a
Philippine law?
Since it concerns the rights of
stockholders it is the law of New
York that should govern

Is the license to do business of a

foreign corporation subject to
suspension or revocation? What are
the grounds?
-

Section 134 provides:

157

Section 134. Revocation of

license. - Without prejudice to other
grounds provided by special laws, the
license of a foreign corporation to
transact business in the Philippines
may be revoked or suspended by the
Securities and Exchange Commission
upon any of the following grounds:

and in behalf of any foreign

corporation or entity not duly
licensed to do business in the
Philippines; or

1. Failure to file its annual report or

pay any fees as required by this Code;

SEC does not have the sole

authority to suspend or revoke the
license of a foreign corporation
doing business in the Philippines,
other government agencies like the
Central Bank , the Insurance
Commission may also do so within
their respective dominion, despite
the provision of section 134
If the SEC believes that revocation
is warranted, section 135 provides
that:

2. Failure to appoint and maintain a

resident agent in the Philippines as
required by this Title;
3. Failure, after change of its resident
agent or of his address, to submit to
the
Securities
and
Exchange
Commission a statement of such
change as required by this Title;

9. Any other ground as would render

it unfit to transact business in the
Philippines. (n)

Section 135. Issuance of

certificate of revocation. - Upon the
revocation of any such license to
transact business in the Philippines,
the Securities and Exchange
Commission
shall
issue
a
corresponding
certificate
of
revocation, furnishing a copy thereof
to the appropriate government
agency in the proper cases.

4. Failure to submit to the Securities

and
Exchange
Commission
an
authenticated copy of any amendment
to its articles of incorporation or bylaws or of any articles of merger or
consolidation
within
the
time
prescribed by this Title;
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title;
6. Failure to pay any
imposts, assessments
any, lawfully due to
Government or any of
political subdivisions;

The Securities and Exchange

Commission shall also mail to the
corporation at its registered office in
the Philippines a notice of such
revocation accompanied by a copy
of the certificate of revocation. (n)

and all taxes,

or penalties, if
the Philippine
its agencies or

7. Transacting business in the

Philippines outside of the purpose or
purposes for which such corporation is
authorized under its license;
8. Transacting business in the
Philippines as agent of or acting for

Voluntary withdrawal of license

-

All 3 conditions must be complied

with
Section 136. Withdrawal
foreign corporations. - Subject
existing laws and regulations,
foreign corporation licensed

of
to
a
to
158

transact business in the Philippines

may be allowed to withdraw from the
Philippines by filing a petition for
withdrawal of license. No certificate of
withdrawal shall be issued by the
Securities and Exchange Commission
unless all the following requirements
are met;
1. All claims which have accrued in the
Philippines
have
been
paid,
compromised or settled;
2. All taxes, imposts, assessments,
and penalties, if any, lawfully due to
the Philippine Government or any of its
agencies or political subdivisions have
been paid; and

jurisdiction is conferred by law; 1

Special Commercial Court per
region
except
MAKATI
and
QUEZON CITY which has two
Devices or Schemes
-

Pyramid
scheme
(misrepresentation)-Special
Commercial Courts

Syndicated estafa- not bailable

Alleje case
-

Falls squarely under sec. 5 (a)

Special Commercial Courts

Allegation
corporate
officers
employing schemes in diverting

Not only detrimental to corporation,

but general membership

Fraud must
particularity

Abad vs. CFI of Pangasinan

P.D. 902-A was amended by R.A.

8799
or
the
SECURITIES
REGULATION CODE in the year 2000

Fraud must be stated with

particularity otherwise it may be filed
to any court

The jurisdiction of SEC for cases

falling under section 5 thereof was
transferred to the courts of general
jurisdiction designated by the SC, they
were called special commercial courts,
the only exceptions were revocation of
corporate franchise and calling of
elections

Intra-corporate

3. The petition for withdrawal of license

has been published once a week for
three (3) consecutive weeks in a
newspaper of general circulation in the
Philippines.

P.D. 902-A

However
the
SEC
retained
receivership or suspension payments
within June 20,2000
Jurisdiction of special commercial
courts are exclusive and original,

be

stated

with

Exclusive and original jurisdiction of

special commercial courts

Sole criteria is there must be an

intra-corporate relationship

Pertaining to a controversy (speaks

also of intra-partnership controversy,
that partnership must be registered
with the SEC)

Rule now

159

1. Necessarily be an
relationship; and,

intra-corporate

benefits as well as moral and

exemplary damages and attorneys
fees in his complaint will not operate
to prevent the SEC from exercising
its jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the
NLRC just because of that

2. The controversy must arise out of said

relationship
Intra-corporate relationship alone will
not suffice to put it in the ambit of
special commercial courts and courts
of general jurisdiction may take
cognizance
Case of a transferee of shares of stock
to compel the corporation to recognize
him as a stockholder

Tabang vs. NLRC

Jurisdiction lies originally and

exclusively to special commercial
courts and not in the NLRC

SEC has jurisdiction over cases of

removal from employment of
corporate officers

The relationship of a person to a

corporation, whether as officer or as
agent
or
employee
or
not
determined by the nature of the
servides performed, but by the
incidents of the relationship on they
actually exist

Corporate officers dismissal is

always a corporate act or intracorporate controversy

Midland construction vs. Movilla

NLRC will be possessed of

jurisdiction exception will not apply
to mere recovery

How can it be intra-corporate when he

is not yet fully paid
-

When the transferee has done all he

can be required to do to render the
transfer effectual and the corporation
refuses to register the transfer, the
requirement of the registration is
waived and the transferee is
considered technically a stockholder
who may sue to enforce the right to
have the transfer registered

Florendo vs. rivera, Embassy Farms

-

The transferor withheld the delivery,

they are not yet prima facie; it will not
be considered intra-corporate

Controversies in
(asked in the bar)
-

the

appointment

Cases involving election, appointment

and removal

In Andaya the court said that a

corporate officer elected or appointed
by the BOD is always a corporate act
-

The fact that petitioner sought

payment of his back wages, other

Main consideration
-

Asserts his right to the office or

questions the propriety or validity of
his ouster or removal, it will be the
special commercial courts and not
the NLRC

Securities Regulation Code

160

Transferred jurisdiction of the SEC to

Special Commercial Courts

Suspension of payment, appointment

of management receivership

court to be given time to the

payment of liability by postponing
the payment
-

What is the reason for suspension of

all claims?
-

The reason for suspending actions for

claims against the corporation is not
really to enable the management
committee or the rehabilitation receiver
to substitute the defendant in any
pending action against it before any
court, tribunal or body. The real
justification
is
to
enable
the
management
committee
or
rehabilitation receiver to effectively
exercise his powers free from any
Judicial or extra-judicial interference
that might unduly hinder or prevent the
rescue of the debtor company. To
allow such other actions to continue
would only add to the burden of the
management
committee
pr
rehabilitation receiver, whose time,
effort and resources would be wasted
in defending claims against the
corporation instead of being directed
towards
restructuring
and
rehabilitation.(PAL vs. Spouses Sadic
and Kurangking)
To enable the receiver to effectively
exercise his or her power free form
any judicial or extra-judicial that may
disturb

3 types of suspension of payments

1. Simple suspension of payments
-

where deferment of payment of claims

against a distress company; ask the

When it has sufficient assets and

liabilities but forces the impossibility
of meeting them when they
respectively fall due

2. Suspension of receiver with

management committee with
rehabilitation play or suspension
payments accompanied by
proposal for rehabilitation (with
without rehabilitation)

a
a
of
a
or

corporation has sufficient assets to

cover its liabilities, but sees the
possibility; is or without rehabilitation
plans; normally would attach the
rehabilitation plan

For
purpose
development

of

economic

3. Suspension of payments when the

corporation has no sufficient assets
to its liabilities
May it still be revived?
-

Yes, it may still be revived

How can a corporation with more

liabilities than assets continue its
operations profitably?
-

Even if the distressed company has

no sufficient assets and liabilities it
can go for suspension

It asked for a management

committee without a receiver plan
(Victorius Milling case)

Convert their claims into equity

161

Their liability was almost wiped out

they became stockholders instead of
creditors
After 5 years those who converted sold
it back to the corporation, thereby
making profits

Amendment is for the economic

development of the country

of payments, such petition are

beyond the competence of the SEC
What happens if
suspension order?

there

is

Explain the key phrase quality is

equity
-

All creditors stand on equal footing,

secure or unsecure, holding or lien
or without a lien, no creditor may
enforce his lien while rehabilitation is
going (Alemar case)

No preference shall be given

RCBC vs. IAC

Effect of suspension- you cannot

foreclose

Decided
on
reconsideration

What are claims?

It court 7
authentication

What if walang amendment, e mas

maraming liabilities kesa assets
Suspension order- all actions for
claims against the corporation are
accordingly suspended at whatever
stage the proceedings maybe

Debts or demands of pecuniary nature.

Assertion of a right to have money
paid
Claims against the corporation shall be
suspended, assertion of a right to have
money paid; it must present a
monetary
claim,
liquidated
or
unliquidated

Nullification of corporations does not

present a monetary claim of pecuniary
nature

Union vs. CA

It does not allow a mere individual to

file the petition which is limited to
corporations
partnership
or
associations.

Where no authority is granted to hear

petitions of individuals for suspension

motion

years

to

for

decide

Rule of the thumb

-

Automatic suspension even if not

decreed in the decision itself

Once lifted the preferred creditors

will regain their preference

Appointment
committee

of

management

Take
over
the
management
committee
of
the
distressed
corporation

Extraordinary and drastic remedy

Without any remedy

What
is
controversy?
-

an

intra-corporate

Section 5(B)
162

wastage or destruction of assets or

other properties of a corporation and
paralysis of its business operations,
the mere apprehension of future
misconduct based upon prior
mismanagement will not authorize
the appointment of a management
committee

Sole criteria is whether there exists an

intra-corporate dispute is that if there is
an intra-corporate relationship

Why is there suspension of all actions

against claims when a receiver is
appointed?

To enable the management committee

to exercise its powers
Sy Chim vs. Sy Siy Ho (before a
management committee may be opt by
a court)

Section 5 and 6(D) governed by

separate rules; interim rules and
intra-corporate controversy
Venue of actions

2 requisites for a valid appointment of

management committee

Rules of court- where the parties are

residing

1. Imminent danger of dissipation, loss,

wastage or destruction of assets or
other corporate properties

Intra-corporate- no matter where the

parties are residing it will be in the
city or municipality where the
principal office is located

2. Paralysis of business operations, the

mere
apprehension
of
future
misconduct
based
upon
prior
management

Rehabilitation proceedings venue

-

In rem

Acquired upon publication without

furnishing the creditors a copy of the
petition and attachments thereof

A creditor may now file the

suspension proceedings; provides
that creditors owns at least 25%

Save and except in the case of a close

corporation in case of deadlock
management committee is allowed to
take over right away

Jacinto case

2nd par of page 676

2 requisites where present

Wala ng mapautang, there was a

paralyzation

Sy Chim

Did not appoint

committee

In the absence of a strong showing of

an imminent danger of dissipation, loss

Intra-corporate- rule 1 section 6

Service of summons- rule 2 section
5
a

management

Summons may be made to anyone

In case of intra-corporate dispute,

elections, fraud, etc; if they are
governed by interim rules of
procedure
on
intra-corporate
controversies
163

 Venue

Investment contracts

Special commercial courts where

principal office is located/established
(section 5 rule 1)

Matters of payment/suspension must

be filed in the city/ municipality where
corporation is located

Under old rule, creditors have no right

to institute an action for receivership;
now creditors, if they sold 20% they
can institute an action for receivership
Section 5
-

Service of summons may be made by

fax/e-mail

E.B. Villarosa vs. Benito

Will apply only if it is not an intracorporate controversy

If the controversy arose out of an intracorporate dispute rules on interim rules

of
procedure
of
intra-corporate
controversies shall govern
Rule 4 section 17- immunity from suit
Rehabilitation receiver shall not
subject to any action, claim or demand
in connection with any act done
omitted by him in good faith in the
exercise of his functions and powers
herein conferred
Claim
-

Right to payment, whether or not it is

reduced to judgment, liquidated or
unliquidated, fixed or contingent,
matured or unmatured, disputed or
undisputed, legal or equitable and
secured or unsecured

A contract, transaction or scheme

whereby a person invests his money
in a common enterprise and is led to
expect profits primarily from the
effects of others

The management committee and

rehabilitation
receiver
are
empowered to:
1. Take custody and control of all
assets of the corporation
2. Evaluate assets and
earnings
operations
corporation

liabilities,
of
the

3. Determine the best way to protect

the investors and creditors
4. Study, review evaluate the feasibility
of
continuing
operation
and
structures
5. Submit recommendations to the
RTC regarding rehabilitation plan
6. Rehabilitate the corporation if
determined to be feasible by the
RTC
7. Report to the RTC
corporation is dissolved

until

the

THE SECURITIES REGULATION CODE

(RA8799)
- Also known as the Blue Sky Law since it
was enacted to protect the public from
unscrupulous
promoters
who
stake
business which have no basis and sell
shares and interest therein to investors,
who are then left holding certificates
representing nothing more than a claim to a
square of the blue sky.
164

-SEC. 2. Declaration of State Policy. The

State shall establish a socially conscious, free
market that regulates itself, encourage the
widest participation of ownership in
enterprises, enhance the democratization of
wealth, promote the development of the
capital market, protect investors, ensure full
and fair disclosure about securities, minimize
if not totally eliminate insider trading and
other fraudulent or manipulative devices and
practices which create distortions in the free
market.
BROKER - person who buys and sells
securities for the account of others.
DEALER - person who buys and sells
securities for his/her own account in the
ordinary course of business.
NOTE: No person shall engage
in the business of buying or selling
securities in the Philippines as a
broker or dealer, or act as a
salesman, or an associated person
of any broker or dealer unless
registered as such with the
Commission. (Sec 28)
SECURITES - shares, participation or
interests in a corporation or in a commercial
enterprise or profit-making venture and
evidenced by a certificate, contract,
instrument, whether written or electronic in
character. It includes:
CODE: COFDIPS
a) Certificates
of
assignments,
certificates of participation, trust
certificates, voting trust certificates or
similar instruments;
b) Other instruments as may in the future
be determined by the Commission;
c) Fractional undivided interests in oil,
gas or other mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certificates of
deposit for a future subscription;

f) Proprietary or non proprietary

membership
certificates
incorporations; and
g) Shares of stock, bonds, debentures,
notes, evidences of indebtedness,
asset-backed securities;
GR: Securities shall not be sold or offered
for sale or distribution within the PH,
without a registration statement filed with
and approved by SEC. Prior to such sale,
information on the securities, in such form
and with such substance as the
Commission may prescribe, shall be made
available to each prospective purchaser.
(Sec 8)
EXCEPT: Exempt Securities under Sec 9
a)
Any security issued or
guaranteed by the Government of
the PH, or by any political
subdivision or agency thereof, or by
any person controlled or supervised
by, and acting as an instrumentality
of said Government.
b)
Any security issued or
guaranteed by the government of
any country with diplomatic relations
with the PH, or by any state,
province or political subdivision
thereof on the basis of reciprocity:
Provided, that the SEC may require
compliance with the form and
content
of
disclosures
the
Commission may prescribe.
c)
Certificates issued by a
receiver or by a trustee in
bankruptcy duly approved by the
proper adjudicatory body.
d)
Any security or its derivatives
the sale or transfer of which, by law,
is under the supervision and
regulation of the Office of the
Insurance Commission, Housing and
Land Use Regulatory Board, or the
Bureau of Internal Revenue.
e)
Any security issued by a bank
except its own shares of stock.
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AND Exempt Transactions under Sec 10

a)
A judicial sale, or sale by an
executor, administrator, guardian or
receiver or trustee in insolvency or
bankruptcy.
b)
By or for the account of a
pledge holder, or mortgagee or any
other similar lien holder selling or
offering for sale or delivery in the
ordinary course of business and not for
the purpose of avoiding the provisions
of this Code, to liquidate a bona fide
debt, a security pledged in good faith
as security for such debt.
c)
An isolated transaction in which
any security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owners account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transactions of a like
character by such owner, or on his
account by such representative and
such owner or representative not being
the underwriter of such security.
d)
Distribution by a corporation,
actively engaged in the business
authorized by its AOI, of securities to
its stockholders or other security
holders as a stock dividend or other
distribution out of surplus.
e)
Sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly in connection with
the sale of such capital stock.
f)
Issuance of bonds or notes
secured by mortgage upon real estate
or tangible personal property, where
the entire mortgage together with all
the bonds or notes secured thereby
are sold to a single purchaser at a
single sale.
g)
Issue and delivery of any
security in exchange for any other
security of the same issuer pursuant to
a right of conversion entitling the

holder of the security surrendered in

exchange to make such conversion:
Provided, That the security so
surrendered has been registered
under this Code or was, when sold,
exempt from the provisions of this
Code, and that the security issued
and delivered in exchange, if sold at
the conversion price, would at the
time of such conversion fall within
the class of securities entitled to
registration under this Code. Upon
such conversion the par value of the
security
surrendered
in
such
exchange shall be deemed the price
at which the securities issued and
delivered in such exchange are sold.
h)
Brokers
transactions,
executed upon customers orders,
on any registered Exchange or other
trading market.
i)
Subscriptions for shares of
the capital stock of a corporation
prior to the incorporation thereof or
in pursuance of an increase in its
authorized capital stock under the
Corporation Code, when no expense
is incurred, or no commission,
compensation or remuneration is
paid or given in connection with the
sale or disposition of such securities,
and only when the purpose for
soliciting, giving or taking of such
subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation
which
should
be
subscribed before it can be
registered and duly incorporated, or
its authorized capital increased.
j)
The exchange of securities by
the issuer with its existing security
holders exclusively, where no
commission or other remuneration is
paid or given directly or indirectly for
soliciting such exchange.
k)
The sale of securities by an
issuer to fewer than twenty (20)
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persons in the Philippines during any

twelve-month period.
l)
The sale of securities to any
number of the following qualified
buyers: (i) Bank; (ii) Registered
investment
house;
(iii)insurance
company; (iv) Pension fund or
retirement plan maintained by the
Government of the Philippines or any
political
subdivision
thereof
or
managed by a bank or other persons
authorized by the Bangko Sentral to
engage in trust functions; (v)
investment company or; (vi) Such
other person as the Commission may
by rule determine as qualified buyers,
on the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in financial
and business matters, or amount of
assets under management.
PROTECTION
INTEREST

OF

SHAREHOLDERS

1.
Tender Offers (Sec 19)
2.
Proxy solicitation (Sec 20)
3.
Internal record keeping
accounting (Sec 22)

and

TENDER OFFER A publicly announced

intention acting alone or in concert with others
to acquire equity securities of a company.
(2002 Bar Exams)
Instances when Tender Offer is Required
1.
When the person intends to
acquire 15% or more of the equity
share of a public company pursuant to
an agreement made between or
among the person and one or more
sellers;
2.
When the person intends to
acquire 30% or more of the equity
share of a public company within a
period of 12 months;
3.
When the person intends to
acquire shares that would result in an

ownership of more than 50% of the

equity shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or
acquires the proxy for at least ten per
centum (10%) or such percentage as the
Commission may prescribe of the
outstanding share of the issuer, shall
submit a report identifying the beneficial
owner within ten (10) days after such
acquisition, for its own account or
customer, to the issuer of the security, to
the Exchange where the security is traded
and to the Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND
OTHER MARKET MANIPULATIONS
1.
Wash Sale (Sec 24.1(a)(i)) any
transaction in a security which involves no
change in the beneficial ownership thereof.
2.
Matched Order (Sec 24.1(a)(ii))
order or orders for the purchase or sale of
security with the knowledge that a
simultaneous
order
or
orders
of
substantially the same size, time and price
for the sale or purchase of such security
has, or will be entered by or for the same or
different parties.
Note: Wash sale and matched
orders become illegal when they are
used as a means to create false
appearance of active trading in the
security concerned.
3.
Marking the close placing the
purchase order, at or near the close of the
trading period. The price that was closed
will then be the price that will be posted on
the following trading day.
4.
Painting the tape involves a
series of transactions that are reported
publicly to give the impression of an activity
in a security.
5.
Squeezing the float the part of an
outstanding security intentionally held by
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dealers or other persons with a view of

reselling them later for profit.
6.
Hype and dump Act employed by a
person or group of persons of purchasing the
outstanding capital stock of a dormant public
shell company for a nominal amount and
merge it with their privately held company.
They would then gain control of the majority
stocks of the merged entity. Stock certificates
are often re-issued in the name of the merged
entity to relatives and associates who act as
nominees of the person or persons employing
the device. They would then look for a
broker-dealer who would be willing to make a
hype of the securities. The broker-dealer
then generates volume and advance bid
price. When the market reaches a high price,
they would dump their shareholdings and
bail out.
7.
Boiler Room Operations involves
an intensive selling campaign through
numerous salesmen by telephone or through
direct mail offerings for securities of either a
certain type or from a specific issuer.
Investors are induced to purchase through
hard-sell based on unfounded predictions and
mailing of misleading market letters.
Note: Marking the close, Painting the
tape, Squeezing the float, Hype and
dump, Boiler Room Operations
become unlawful if it is effected to
either raise the price or induce the
purchase of a security or of a
controlling, controlled, or commonly
controlled company by others or to
depress the price to induce the sale of
a security, whether of the same or of a
different class, of the same issuer or of
a controlling, controlled company or
common controlled company by others
or to create active trading to induce the
purchase through said devices or
schemes.
8.
Circulating
or
Disseminating
Information circulating an information that
any of the security listed in the exchange will
or is likely to rise or fall because of

manipulative market operations of any one

or more persons conducted for the purpose
of raising or depressing the price of the
security and thus inducing the purchase of
such security.
9.
Making False or Misleading
Statements with respect to any material
fact which he knew or had reasonable
ground to believe was so false or
misleading for the purpose of inducing the
purchase or sale of such security.
10.
Pegging or Fixing Or Stabilizing
the price of security effected either alone or
with others through any series of
transactions for the purchase or sale
thereof, if done for such purpose.
11.
Short sale selling of security
which the vendor does not own unless
done in accordance with the rules and
regulations of the SEC.
12.
Insider Trading the act of an
insider to buy or sell security of the issuer
while in possession of material information
with respect to such security that is not
generally made known to the public unless
(a) The insider proves that the information
was not gained from such relationship; or
(b) If the other party selling to or buying
from the insider (or his agent) is identified,
the insider proves: (i) that he disclosed the
information to the other party, or (ii) that he
had reason to believe that the other party
otherwise is also in possession of the
information.
Note:
When
is
information
material non-public? - if: (a) It
has not been generally disclosed to
the public and would likely affect the
market price of the security after
being disseminated to the public and
the lapse of a reasonable time for
the market to absorb the information;
or (b) would be considered by a
reasonable person important under
the circumstances in determining his
course of action whether to buy, sell
or hold a security.
168

Note: Who is an insider? - Insider

means: (a) the issuer; (b) a director or
officer (or person performing similar
functions) of, or a person controlling
the issuer; (c) a person whose
relationship or former relationship to
the issuer gives or gave him access to
material information about the issuer or
the security that is not generally
available to the public; (d) a
government employee, or director, or
officer of an exchange, clearing
agency
and/or
self-regulatory
organization who has access to
material information about an issuer or
a security that is not generally
available to the public; or (e) a person
who learns such information by a
communication from any of the
foregoing insiders.

stated price on any given time during the

stated period.

Call a transferrable option to buy a

specified number of share at a stated price

Straddle a combination of put and

call.

INDEPENDENT DIRECTOR
Person other than an officer or
employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which would
interfere with the exercise of independent
judgment in carrying out the responsibilities of
a director.

DAMAGES
All suits to recover damages shall be
brought before the Regional Trial Court,
which shall have exclusive jurisdiction to
hear and decide such suits. The Court is
authorized to award damages in an amount
not exceeding triple the amount of the
transaction plus actual damages.

Corporations
which
require
an
Independent Director
1.
An exchange; or
2.
Any corporation with a class of equity
securities listed for trading on an Exchange or
with assets in excess of P50M and having
200 or more holders, at least 200 of which are
holding at least 100 shares of a class of its
equity securities or which has sold a class of
equity securities to the public pursuant to an
effective registration statement shall have at
least two (2) independent directors or such
independent directors shall constitute at least
20% of the members of such board,
whichever is the lesser.

NOTES

If there are goods involved in the

multimarket, it is beyond the jurisdiction of
SEC (Ex First Quadrant)

Criminal charge for violation of SRC

is a specialized dispute, hence it must be
first referred with SEC (Baviera vs.
Paglinawan G.R. No. 168380
Feb
8, 2007)

T3 Rule in trading of Securities

Trading day + 3 more days you must
comply with your obligations.

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

OPTION TRADING

Put a transferrable option or offer to

deliver a given number of shares of stock at a
169