Corporation Notes

1
CORPORATION LAW
1. The articles of incorporation

expressly
authorized
the
corporation
to
enter
into
contracts of partnership;
Corporation is one of the types of

business organizations. It is also the
most
important
in
economic
development.
2. The agreement or articles of

partnership must provide that all
the partners will manage the
partnership; and
INTRODUCTION
Sole proprietorship
-
One man form of business entity,

personally answers all liabilities, but
enjoys all the profits with the
exclusion of others
Limited shareholders responsibility
Paid subscription in full, you are no

longer liable
Based on
confidence
mutual
trust
and
Joint venture
-
one time grouping of persons

whether they be natural or juridical
does not entail continuity because

after the undertaking is completed it
is already the end
particular partnership and joint

venture would be similar, but there
is already a decision of the Supreme
Court declaring them as different
when they do not register, it does

not exist
Foreign corporations enters into an

agreement
with
a
domestic
corporation, it must be registered.
Generally they do not need to be
registered.
Corporations
-
DEFINITION AND ATTRIBUTES

4 attributes of a corporation
1. Artificial being
Partnership
-
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.
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
Notes on Corporation Law

Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
2. Created by operation of law

3. Right of succession
4. Powers, attributes and properties
expressly authorized by law or
incident to its existence.
Doctrine of limited capacity
-
Only such powers as are expressly

granted to it by law and by its
articles of incorporation including
others which are incidental to such
conferred powers, those reasonably
necessary to accomplish its purpose
and those which may be incidental
to its existence
Can do things as the law asks or

allows it to do
If it does anything beyond, it shall be

considered as ULTRA VIRES
General rule: Moral damages

cannot be granted to corporations
Exception: Filipinas Broadcasting
Network Inc. vs. Ago Med
-
In cases of slander, libel and other

forms of defamation (should not
qualify because the code does not
qualify whether natural or juridical)

Art. 2219 of the civil code:
Section 3 Stock and non-stock

-
Art. 2219. Moral damages

may be recovered in the following
and analogous cases:
Section 3. Classes of
corporations. - Corporations formed
or organized under this Code may
be stock or non-stock corporations.
Corporations which have capital
stock divided into shares and are
authorized to distribute to the
holders of such shares dividends or
allotments of the surplus profits on
the basis of the shares held are
stock
corporations.
All
other
corporations
are
non-stock
corporations. (3a)
(1) A criminal offense resulting in

physical injuries;
(2) Quasi-delicts causing physical
injuries;
(3) Seduction, abduction, rape, or
other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or
arrest;
(6) Illegal search;
Importance of knowing, determining

what provisions of the code or the
law may be applicable
Non-stock- title 10
Stock- section 51
(7) Libel, slander or any other form

of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
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)
(10) Acts and actions referred to in

Articles 21, 26, 27, 28, 29, 30, 32,
34, and 35.
The parents of the female seduced,
abducted,
raped,
or
abused,
referred to in No. 3 of this article,
may also recover moral damages.
The
spouse,
descendants,
ascendants, and brothers and
sisters may bring the action
mentioned in No. 9 of this article, in
the order named.
Advantages (SEE LADIA BOOK)
-
No. 2 may also be a disadvantage
No. 5 may also be a disadvantage
A corporation is a person, therefore

protected by the due process clause
and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
Section 3
-
The two requisites must always

concur
1. That they have a capital stock

divided into shares; and,
2. That they are authorized to
distribute dividends or allotments as
surplus profits to its stockholders on
the basis of the shares held by each
of them.
Section 4
-
Created by a special law, they have

their own character
They are not immune from suit

unless provided by the law of their
creation
Open corporation
-
openly admit investors
Primarily governed
creating them
example: stock exchange
by
the
law
Domestic/ Foreign
Their subsidiaries are entirely

different or independent from that of
the other
Close corporation
-
Incorporation test
If incorporated under the laws of the

Philippines it is a domestic
corporation
ME Gray vs. CA
Parent or Holding/ subsidiaries and

affiliates
Affiliates- no majority vote
There is no exemption it is absolute
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
Private Corporation
-
Test
Immediate
benefit,
aim
advantage of private individuals
or
SMC 12%
HERSHEY CBP
12%
12%
Those formed for some private

purpose, benefit, aim or end
Distinction: public for governmental

purpose
Affiliate is subject to common control by the

12 % owners
De jure
-
Corporation Sole
-
Exemption to the rule because it is

composed only of one person
An incorporator may also be a
juridical person
There is exclusivity of shares of

stock
Section 96-105
Restrictions to transfer shares
Only those
shares
indicated
can
own
Article must provide that there will

be no public offering

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
Close corporation
-
CBPl
virtue
of
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
If confusingly similar it will not be

allowed to be registered
Verification slip from the records

officer
Purpose clause
-
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)
Defining the scope of authority of

the
corporate
enterprise
pr
undertaking. Both confirmed and
limited
4 limitations of purpose clause

1. Lawful
2. Specific or stated concisely
3. More than one, the primary and
secondary must be specified
4. Lawfully combined
-
Provision that states, cannot be

issued less than par, exception is
treasury shares because it can be
issued less than par
A corporation commences only upon

issuance of the certificate, prior
thereto it has no being and cannot
transact
business.
Promoters
cannot
act
for
a
projected
corporation
Metro Manila- paid
requirement is 10 M
up
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)
capital
Non- stock- mere mention of the

operating capital
Mention the authorized capital
Restrictions
-
Mandatory in close
Not mandatory in ordinary
Words corporation or inc. either in

full or abbreviated form must be
included
Doctrine of secondary meaning
Non-stock
-
If value is not more than 100,000
A corporation cannot use any other

name unless it has been amended
Section 19
A word or phrase originally

incapable of exclusive appropriation
[usually generic] with reference to
an article in the market, because of
geographically
or
otherwise
descriptive, might nevertheless have
been used so long and so

exclusively by one producer with
reference to his article that, in that
trade and to that branch of the
purchasing public, the word or
phrase has become to mean that
the article was his product.
Section 18
-
Clavecilla Radio System vs. Antillon
action not upon a written contract
city where the defendant resides
term of existence
-
corporate term required
actual confusion is not necessaryPhilips case it is enough that there

is probable confusion
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
that the complainant corporation

acquired a prior right over the use of
such corporate name
identical, deceptively or confusingly,
patently deceptive
principal office
-
registration of chattel mortgage

must be registered in the register of
deeds where the principal office is
located
Lyceum of the Philippines case, the

additional geographical name does
not make it confusingly similar
2 requisites must be proven

-
statement
required
of
principal
office
city and municipality not

province must be specified
principal
office
office
NOT
is
General rule: Not earlier than 5

years
Exception:
unless
justifiable reasons
only
operations
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

When should extension be made?
there
are
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
Article 5 How many incorporators

should there be?
-
5-15
May
a
corporation
incorporator?
-
be
General rule: only natural persons
an
Exception:
cooperatives
and
corporation primarily organized to
hold equities in rural banks
Corporators in a stock
corporation are called stockholders
or shareholders. Corporators in a
non-stock corporation are called
members. (4a)
How about minors?

-
NO, because they must be of legal

age
May a corporation organized by

incorporators consisting solely of
foreigners
-
Yes, there is no nationality

requirement only residence, as long
as majority are residents of the Phil
Define incorporators <sec.5>

-
Those person mentioned in the

articles as originally forming the
corporation and who are signatories
of the articles of incorporation.
Must
be
signatories
incorporators
to
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.
Corporators in a stock
corporation are called stockholders
or shareholders. Corporators in a
non-stock corporation are called
members. (4a)
Define corporators <sec.5>
-
All persons who compose the

corporation at any given time and
need not be among those who
execute the articles of incorporation
at the start of its formation and
organization.
Originally or subsequently
Section 5 provides:

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 nonassessable and the holder of such
shares shall not be liable to the
corporation or to its creditors in
respect thereto: Provided; That
shares without par value may not be
issued for a consideration less than
the value of five (P5.00) pesos per
share: Provided, further, That the
entire consideration received by the
corporation for its no-par value
shares shall be treated as capital
and shall not be available for
distribution as dividends.
A
corporation
may,
furthermore, classify its shares for
the purpose of insuring compliance
with
constitutional
or
legal
requirements.
Except as otherwise provided
in the articles of incorporation and
stated in the certificate of stock,
each share shall be equal in all
respects to every other share.
Where
the
articles
of
incorporation provide for non-voting
shares in the cases allowed by this
Code, the holders of such shares
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;
6. Merger or consolidation of the
corporation with another corporation
or other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the
immediately preceding paragraph,
the vote necessary to approve a
particular corporate act as provided
in this Code shall be deemed to
refer only to stocks with voting
rights. (5a)
How many directors should there
be?
-
General rule: Not less than 5 not

more than 15
Exceptions:
1. Educational corporations registered

as non stock corporation whose
number of trustees, though not less
than five and not more than [15]
should be divisible by five [5],
meaning they must have either five,
ten, or fifteen trustees and no other;
2. In close corporations where all the
stockholders are considered as
members of the board of directors
thereby effectively allowing twenty
members in the board.
3. The by-laws of a corporation may
provide for additional qualifications
and disqualifications of its members
of the board of directors or trustees.
However it may not do away with
the minimum disqualifications lay

down by the Code.
Qualifications
board
-
of
the
governing
or participation in the capital stock of

the corporation.
Disqualifications <sec.27>
-
Requires mere residency <sec. 23>

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

governing board consisting solely of
foreigners?
-
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

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)
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
Foundation- minimum paid-up capital 3M
Authorized capital 1 M
shares 1M shares
1.00
No.
of
par value
Amount of shares subscribed

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
Shares of stock
Purpose of classification
-
To specify and define the rights and

privileges of the stockholders;
For regulation and control of the

issuance of sale of corporate
securities for the protection of
purchasers and stockholders.
Section 30
As a management control device.
Total subscription compliance with

minimum 25% total
Any combination would comply with

the minimum required by section 30
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.
Must be at least 25% of the

authorized capital stock
Paid- up must be at least 25%minimum
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
corporation?
-
domestic
In no case shall the paid- up capital

be less than 5k
Is there a minimum authorized

capital imposed by the code?
-
If there is minimum paid-up logically

there should also be a minimum
capital =5000
Minimum paid-up capital for a

financing company metro manila 10
M if located in MM
Section 6
-
Each shall be equal in all respects

to every other share
Preferred shares
-
Specific preference
Dividends or during liquidation
No par
-
Can sell it with the network of the

corporation
Distinction between the subscribed

and outstanding stocks?
10
Section 137
shares subject only to the limitations

imposed therein which are:
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)
-
Voting and dividend rights, it refers

to the outstanding capital stocks
Only outstanding stocks are allowed

to vote and receive dividends
Actually the same
a. They can be issued only with sated

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

presumption is that it is participating
Cumulative
-
Treasury shares
Irrespective of whether or not they

where earned
are also subscribed shares
Preferred
while they remain in the treasury, no

voting and dividend rights
May be denied
may be reissued by the corporation
Unless denied they are still entitled
once
reissued
they
outstanding stocks again
become
common shares
-
carry the right to vote
preferred shares
-
grants the holder preference
preference as to dividends
preference as to distribution of the

remaining assets upon dissolution
or
both
YOU
MUST
STATE
THE
PREFERENCE BECAUSE IF NOT
THEY ARE PRESUMED TO BE
EQUAL
It
may
include
such
other
preferences not inconsistent with
the Code. This is so because
Section 6 of the said law allows a
stock corporation to issue preferred

What if hindi i-declare kahit na may

dividends rights for the previous
years? May they be denied dividend
rights because they are non holders
of non-cumulative? NOTE: YOU
CANNOT
COMPEL
THE
CORPORATION TO DECLARE
DIVIDENDS UNLESS IT EXCEEDS
100 % PAID UP CAPITAL SEC. 43
Section 43. Power to declare
dividends. - The board of directors
of a stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the
basis of outstanding stock held by
them: Provided, That any cash
dividends 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
11
representing not less than two-thirds

(2/3) of the outstanding capital stock
at a regular or special meeting duly
called for the purpose. (16a)
Stock
corporations
are
prohibited from retaining surplus
profits in excess of one hundred
(100%) percent of their paid-in
capital stock, except: (1) when
justified by definite corporate
expansion projects or programs
approved by the board of directors;
or (2) when the corporation is
prohibited
under
any
loan
agreement with any financial
institution or creditor, whether local
or foreign, from declaring dividends
without its/his consent, and such
consent has not yet been secured;
or (3) when it can be clearly shown
that such retention is necessary
under
special
circumstances
obtaining in the corporation, such as
when there is need for special
reserve for probable contingencies.
(n)
-
It depends because there are three

types of non-cumulative preferred
shares
Discretionary dividend type
Mandatory if earned
Earned cumulative or dividend credit

type
Compare cumulative share from

non-cumulative, earned cumulative
or dividend credit type
-
Cumulative share whether or not

earned
Non-cumulative earned cumulative

or dividend credit type- only if
earned
Par
-
stated par value; shall not be issued

less than par
No par
-
without stated par value

once fully paid no longer liable
Corporations cannot use its capitals

in declaring dividends; not all can
issue no par value section 6
Voting
-
entitled to vote at any motion

brought up in writing
Non-voting
-
not entitled to vote
What types of shares may be

denied of the right to vote?
-
Preferred and redeemable shares
Is it correct to state that common

shares can never be denied the
right to vote?
-
Only preferred and redeemable

shares are denied unless provided
in this code
PWEDENG
MA-DENY
YUNG
COMMON SHARES, KASI YUNG
FOUNDERS SHARES MERON
SILANG EXCLUSIVE RIGHTS NA
SILA LANG ANG MERON, SO
PWEDE SILANG BUMOTO WITH
REGARDS TO SOMETHING NA
HINDI NA SAKOP NG COMMON
SHARE RIGHTS
Example: founders shares- may be

given certain rights and privileges
Even common shares may be

denied the right to vote of founders
shares issued <sec.7>
Section 7. Founders' shares.
- Founders' shares classified as
such in the articles of incorporation
may be given certain rights and
privileges not enjoyed by the owners
of other stocks, provided that where
the exclusive right to vote and be
voted for in the election of directors
is granted, it must be for a limited
period not to exceed five (5) years
subject to the approval of the
Securities
and
Exchange
12
Commission. The five-year period

shall commence from the date of the
aforesaid approval by the Securities
and Exchange Commission. (n)
Although authorities may

differ on the exact legal and
accounting status of so-called
treasury shares, they are more or
less in agreement that treasury
shares are stocks issued and fully
paid for and reacquired by the
corporation either by purchase,
donation, forfeiture or other means.
Treasury shares are therefore
issued shares but being in the
treasury they do not have the status
of
outstanding
shares.
Consequently, although a treasury
share, not having been retired by
the corporation re-acquiring it, may
be re-issued or sold again, such
shares, as long as it is held by the
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.
Do you include non-voting shares in

passing a valid corporate act?
-
Even non-voting shares are entitled

to vote under section 6
Redeemable shares
-
Discretionary/optional
Obligatory or mandatory
Generally
a
corporation
can
reacquire its own shares if it has
unrestricted retained earnings
Exception: redeemable shares may
be reacquired irrespective of
retained earnings
Treasury shares
-
They are treasury while in the

treasury account of the corporation
May they be
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
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.
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.

When the law speaks of outstanding

rights it does not include treasury
shares
Treasury shares may be reissued
-
They are actually assets of the

corporation
13
Once re-issued they

outstanding stocks again
The corporation may cancel them; in

effect there will be a reduction in the
outstanding capital stocks
become
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
persons-
close
Should also be in the by-laws not

only in the articles of incorporation
No transfer clause
Acknowledgment
of
the
Section
23-27
minimum
qualifications, but there may be
additional
Grounds for disapproval
-
Only substantial and not strict is

required

<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.
Execution clause
Treasurer affidavit part

articles of incorporation
May the SEC refuse or reject

registration?
No articles of incorporation or
amendment
to
articles
of
incorporation of banks, banking and
quasi-banking institutions, building
and
loan
associations,
trust
companies and other financial
intermediaries,
insurance
companies,
public
utilities,
educational institutions, and other
corporations governed by special
laws shall be accepted or approved
by
the
Commission
unless
accompanied
by
a
favorable
14
recommendation of the appropriate

government agency to the effect that
such articles or amendment is in
-
But the grounds in section 17 are

not exclusive
When
will
the
commence to exist?
-
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
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
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
General rule section 19

-
A corporation de jure can come into

existence only upon the issuance of
the certificate of registration by the
SEC? TRUE OR FALSE?
-
TRUE
EXCEPTION:
SOLE <sec. 112>

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
CORPORATION
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
rabbi or presiding elder, duly
certified to be correct by any notary
public.
CORPORATION SOLE- upon filing

of
the
verified
articles
of
incorporation, once filed it is vested
with a judicial capacity
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
15
The transfer of the property was not

valid, it likewise did not have the
right to transfer
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
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.
If the certificate of registration has

not been issued, may a corporation
de facto exist?
-
NO!
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;
Number 4 requirement, good faith in

claiming to be and doing business
as a corporation
Hall vs. Piccio
3. A user of corporate powers, the

transaction of business in some way
as if it were a corporation; and,
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
4. Good faith in claiming to be and

doing business as a corporation.
Are the rights and obligations
between officers and directors of a
de jure and de facto the same?
-
So defectively formed so that they

are not to be considered a de jure or
de facto
Only important in determining, is for

the purpose of applying the rules
with regards to the direct and
collateral attack
General partners- liable even

beyond his promise even his
personal properties are prone to
attachment
The existence of a de jure cannot be

questioned even by the State, either
directly or indirectly
Lozano vs. Delos Santos
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
YES. Governed by the same law,

rules and regulations
Existence of a de facto can be

questioned only by the State directly
in a quo warranto proceeding only
Municipality of Malabang vs. Benito
What is the missing link so as to

consider it a de facto? A law,

16
Albert vs. University
No fraud in this case
1965 case, no section 21 yet
How come Kahn was made liable?
Applied where the rules governing

agency
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
A person purporting in behalf of a

non existing corporation
Section 21, you arrive at the same

decision
Chiang Kai Siek vs. CA
SC based its decision from the

provision of the education act
It cannot immune itself by virtue of

its non compliance with the law
Assuming there was no law?

-
YES, it may still be sued as a school

for the past 32 years the school
represented itself as possessed of
juridical personality
General rule: a 3rd party transacting

with a non existent corporation shall
be estopped to deny
Asia banking vs. standard products
General rule: absence of fraud a

person who has dealt with a non
incorporated corporation shall be
stopped to deny from actions in
which it had benefited
Exemptions: when there is fraud the

general rule shall not apply
Salvatierra vs. Garlitos
As a general rule a person who has

contracted it a corporation lacking
personality
Doctrine is not applicable where

fraud takes part in the transaction
International
tours vs. CA
express

apply
to
YES, it may apply
Georg Grotjahn vs. Isnami
foreign
A foreign corporation cannot gain

access to our courts unless they
attain a license to engage in
business in the Philippines but
applying corporation by estoppels,
the court allowed
Municipality of Malabang case
-
No law, hence may be questioned

by any person
An unconstitutional act is not a law, t

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

-
No good faith
Another exemption
Would this
corporation?
travel
and
Admission, conduct or agreement
Will not apply among members

themselves there must be a 3rd party
Cannot escape when benefited
General rule: you deal with a

corporation, as to estop it
17
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
2 possible remedies
-
Chiang kai siek case
Albert case
What would be the effect if the

corporation failed to commence
transaction?
-
Automatic
Operated
but
becomes
subsequently inoperative for 5 years
only a ground for suspension,
proper notice and hearing
Commencement
-
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
Sulo ng Bayan vs. Araneta
Corporation cannot bring an action

for the recovery of the properties of
its members
Caram vs. CA
Stockholders cannot be held liable

for the legitimate obligations of the
corporation, they exist separately
and independently from one another
Cruz vs. Dalisay
Final judgment against a corporation

cannot
be
enforced
against
stockholders
Rustan Pulp vs. CA
Corporation exist separately and

independently
Corporation are juridical entities,

they
exist
only
in
legal
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
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
Example realty company
CORPORATE CHARTER
AMENDMENTS
AND
ITS
What do you understand by the

word charter? Is it the same as
articles of incorporation?
-
Corporate charter is broader
Franchise
-
Primary power granted by the state

to be and act as a corporation
Secondary franchise is the right or

privilege that the corporation may
exercise
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
18
or
Fely trans and the other corporation

is one and the same
Two or more corporations, one of

them will be treated as a mere alterego
Marvel bldg. vs. David
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
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
Commissioner of Internal Revenue

vs. Norton and Harrison
Corporate entity for

legitimate purposes only
legal
You cannot pierce the veil of

corporate fiction when there are no
facts attendant in the case
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
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
Court applied the general rule
Mere substantial ownership does

not mean that it has a same
corporate entity
Courts are concerned with reality

and not form
La Campana Coffee Factory, Inc. vs.

KKM
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
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)
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
Tesco vs. WCC
The two corporations where located

in the same office
Claparols vs. CIR
Same as NAFLU and A.C. Ransom
Palacio vs. Fely
Concept builders vs. NLRC
Piercing the veil of corporate fiction

19
were located in the same floor
while the mere ownership of all or

nearly all of the capital stock of a
corporation does not necessary
mean that it is a mere business
conduit of the stockholder, that
conclusion is amply justified where it
is shown, as in the case before us,
that
the
operations
of
the
corporation were so merged with the
stockholders as to be practically
indistinguishable from them. To hold
the latter liable for the corporations
obligations is not to ignore the
corporations separate entity, but
merely to apple the established
principle that such entity cannot be
invoked or used for purposes that
could not have been intended by the
law that created that separate
personality.
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,
Tan boon bee vs. Jarencio
Why would a drug company need a

printing machine
The property must be in pursuance

of a company business
3. The aforesaid control and breach of

duty must proximately cause the
injury or unjust loss complained of.
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
Instrumentality rule. What is the

instrumentality rule? where one
corporation is so organized and
controlled and its affairs are
conducted so that it is, in fact, a
mere instrumentality or adjunct of
the other, the fiction of the corporate
entity of the instrumentality may be
disregarded.
Has no separate mind of its own.
What is the degree of control?
1. Control, not mere majority or

complete
stock
control,
but
complete domination, not only of
finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity
as to this transaction had at the time
no separate mind, will or existence
of its own.
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
Fraud must be proven by clear and

convincing
evidence
cannot
presume or speculate, there must
be facts and circumstances
The control necessary does not

mean stock ownership
Fraud must be clear and convincing

evidence more than preponderance
MCConnel vs. CA

Remo Jr. vs. IAC
20
The resolution was not entered to

defraud anyone
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
PNB vs. Ritratto Group
Control test
Not mere
complete
majority
but
rather
Twin ace was only a subsequent

interested party
Assets and machineries
Express power
corporation
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
consolidation. (n)
-
merger
or
Right granted only in specified

instances
Are non-voting shares included

amending the articles of incorporation
1
100/s
XYZ-----ABC
100/s
in
To
Amendment of
incorporation
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;
the
articles
granted
to
=1M/S
would be the 2/3?
what
of
Section 6 last paragraph
Voting shares are excluded except the

foregoing instances
Section 16
-
Appraisal right
Section 81 to object on certain acts

and transactions
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:

10 100/s
1 & 2=absent
1&2=absent but gave their written
assent
21
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
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
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
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
stock, or the incurring, creating or
22
increasing
of
indebtedness.
any
bonded
members in a meeting duly called

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

meeting called for that purpose
Written assent would not suffice
When do amendments
valid and effective?
become
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

powers
or
authority
of
corporation to change, alter
modify. These would include
following:
the
the
or
the
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
directors
or
23
the original authorized capital stock

of the corporation,
-
The date and place of execution of

the articles of incorporation,
The
signatories
acknowledgment thereof.
All other provisions or matters

stated or contained in the articles
are subject to amendment.
Founders or
pwede palitan
signatories
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.
and
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.
hindi
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
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
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.

Amendment of a corporate term

-
Extending the same can never be

made 7 years prior? TRUE or
FALSE
FALSE.
It can be if there are
justifiable
reasons
for
earlier
extension as may be determined by
the SEC
Can you extend the corporate term

if it has already expired?
-
Once the term expires without an

amendment having happen it
ceases to exist as a body politic. It is
dissolved automatically on the day it
expires.
Alhambra cigar and PNB case
24
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
corporation
will
be
bound,
notwithstanding the actual authority
may never have been granted.
Contracts must be made by the

director and not the stockholders
Actions of the stockholders in such

matters is only advisory and not in
any way binding in the corporation
Barreto vs. La previsora Filipina
Everything emanates from the board

of directors
Stockholders action is merely

advisory except their approval or
vote is necessary to prove a valid
corporate act
Qualifications:
25
No citizenship requirement, at least

majority must be residents
2 transferring there voting rights in favor

of VT
Can have a governing board

consisting solely of foreigners
Other rights will accrue in favor of them,

but not the voting rights
But we have to take into

consideration partly nationalized
industries and other laws which
prohibits or limits foreign ownership
voting rights must be recorder in the books

of the corporation that it is transferred
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.
PNB-IFL- wholly owned subsidiary of PNB

PNB will assign to PNB-IFL nominal shares
and PNB-IFL now will be able to be
nominated
Gen. Rule:
-
Term of one year who will serve as

such until there successors are
elected and qualified
Exception:
-
Non-stock corporation can serve for

a term of 3 years
Educational non-stock- term of the
governing board can be 5 years
By-laws may provide additional

qualifications and disqualifications
To qualify as a director he must own

at least 1 share
May this term exceed one year?
Should the stockholder be the

equitable or beneficial owner in
order to qualify as a director?
-
NO, it is not necessary, as long as

you are listed in the books as owner
of one share
Lee vs. CA
As long as you are listed in the

books as owner of one share
Under the old law he must be the

beneficial owner and legal owner
thereof but in the new law it is not
required as long as it stands in his
name he is qualifies
1 A-100t/S B (own in the trust of X) is B

qualified to be a director?
2
3-10
Yes, they may serve in a hold over

capacity until their successors have
been duly elected and qualified
Detective and protective bureau vs.

Cloribel
In the by-laws, managing director

must be elected from among
themselves
Must be duly elected and qualified
How are the directors elected?

1-100T/S
2-100T/S
3-100T/S
to 10=1M/S
Do you include the vote of 1 & 2 to
have a quorum to have a valid
meeting?
26
NO, quorum
401,000
requirements
is
Is it allowed
corporation?
in
non-stock
Quorum requirement is 501k
Not generally available
Holders of non-voting shares are only

entitled to vote in last par. Of section 6
Section 89 unless the articles or bylaws allow cumulative voting
1-200k
2-200k
3-200k
4-100k
5-100k
6-100k
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
by-laws, a member may vote by
proxy in accordance with the
provisions of this Code. (n)
7-50k
8-40k
9-5k
10-5k
=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
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.
Who wins? Or who gets elected?

-
No vote requirement, the one who

gets the most number of votes gets
elected, section24.
What is cumulative voting?

-
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
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
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
27
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 may be another
person
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
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
Artificial beings must act through its

members and act as a body to have
a valid corporate act
Exception:
-
Delegation
Expressly conferred
Where the officer or agent is clothed

with actual or apparent authority
Otherwise it
corporation
will
not
bind
the
Yao ka sin trading case already

asked in the bar
-
Only bind the corporation to the

extent of authority confined to him or
virtue of customs, usage and policy
Must pass first the controller and

counsel
What if the notice requirement is not

complied with?
Lopez realty vs. Fotencha
1
1 and 2 present=valid
voting requirement
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
1 and 2 voted yes
3 voted no
Asuncion was aware

corporations obligation
There was implied ratification or she

was estopped
May the vote of 2 members past a 5

man governing board pass a valid
corporate act?
-
YES. Voting requirement is majority

of directors present at which there
where a quorum
4
of
the
28
Pua casim vs. Neumark and Co.
Considered 3 circumstanced
Check which was the proceed of the

loan which was endorsed and
deposit in the corporate account
Neumark as president and also

stockholder
Yu chuck vs. Kong Li Po
General manager usually has the

power to hire but the SC said the
contract must be reasonable
The contract here is so onerous that

it would throw the corporation into
insolvency
Francisco vs. GSIS
GSIS cannot evade the binding

effect of the telegram
Only 15 months later that the

corporation said there was a
mistake
The silence coupled with the

unconditional acceptance of the
other subsequent remittances is
binding to the corporation
Board of liquidators vs. Kalaw

Settled jurisprudence has it
that where similar acts have been
approved by the directors as a
matter of general practice, custom
and policy, the general manager
may bind the company without
formal authorization of the board of
directors. In varying language,
existence of such authority is
established, by proof of the course
of business, the usages and
practices of the company and by the
knowledge which the board of
directors has, or must be presumed
to have, of acts and doings of its
subordinates in and about the affairs
of the corporation. So also, xx
authority to act for and bind a

corporation may be presumed from

acts of recognition in other
instances where the power was in
fact exercised. xx Thus, when, in
the usual course of business of a
corporation, an officer has been
allowed in his official capacity to
manage its affairs, his authority to
represent the corporation may be
implied from the manner in which he
has been permitted by the directors
to manage its business.
In the case at bar, the
practice of the corporation has been
to allow its general manager to
negotiate and execute contracts in
its copra trading activities for and in
NACOCOs behalf without prior
board approval. If the by-laws were
to be literally followed, the board
should give its stamp of prior
approval on all corporate contracts.
But that Board itself, by its acts and
through acquiescence, practically
laid aside the by-law requirement of
prior approval.
-
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
29
May directors or trustees

disqualified to act as such?
-
be
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
family
1-5 same
2-200
3-200
4-100
5-100
electing
6-100
not related
6 to 10
7-50
8-40
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
9-5
10-5
outstanding director
Meetings called by the president or
the secretary ordered by the
president
It depends if the removal is without
cause they cannot do so because
removal without cause shall not
deprive the minority stockholders or
members
of
the
right
of
representative
If with cause they can even if it will
prejudice the rights of the minority,
provided of course additional
requirements by-laws and articles of
incorporation
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
same meeting where in the number
is increased?
Election due to removal-in the same
meeting notice is not required
Election due to increase in numberit must be so stated in the meeting
Section 30
30

such
directors,
except
for
however,
That
any
such
vote
of
the
stockholders
-
Generally not entitled to receive

compensation because they render
it gratuitously
Unless the by-laws allows
Stockholders may also

pursuant to a majority vote
Must not exceed net income of 10%

tax of the preceding year
Acting in special capacity
In, sum directors

compensation when
may
grant
2. When the stockholders, by a

majority vote of the outstanding
capital stock grant the same; and,
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
Is the 10% ceiling applicable to

other officers?
-
NO. the phrase as such director

was used twice <Section 30>
The SC ruled that the 10% ceiling

will not likewise apply if they acted
in a capacity other than as such
directors
Government vs. El Hogar
Judicial intervention is not proper
The appropriates remedy is to those

who can make or unmake the bylaws
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
receive
1. there is a provision in the by-laws to

that effect
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;
31
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.
subject
to
judicial
review.
Montelibano vs. Bacolod Murcia
Milling
-
questions
of
policy
and
management are left solely to the
board of directors
BOD, business manager of the

corporation and as long as they act
in good faith, its actuations are not
subject to judicial review
They are not insurer of the property

of the company, they were
guarantors that the enterprise
undertaken by the corporation shall
be successful
Watered stocks- issued, fully paid

up when in fact they have not been
fully paid or promised as such
Llamado vs. CA
The corporate entity theory cannot

be used as a defense to escape
liability in violation of B.P. 22
Montelibano vs. Bacolod Murcia

Milling Co.
Where the check is drawn by a

corporation the persons who signed
the check shall be liable.
Directors are not liable due to

imprudence or honest error of
judgment
Duty of loyalty of corporate directors
31,32,33,34
31,32,33- specific instances when

corporate officers may violate loyalty
32,33 self-dealing and interlocking

director
Uichico vs. NLRC
Labor case corporate directors and

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

-
obedient
diligent
loyal
Business judgment rule

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

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
32
Distinction between section 31 and

34 relative to the ratification by the
stockholders
It can be ratified he merely acquired

a
business
owning
to
the
corporation
It would be different if it was

entrusted in his confidence
The second paragraph of section 31

which makes a director liable to
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.
If reposed in him in confidence, not

subject to ratification
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.
Director x co.
Another scenario:
Had A not attended the meeting he
would not have known of the sale it is then
a matter reposed in him in confidence
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
A-REALTY
Are the contracts and dealing of a

self0dealing director valid?
General rule: voidable
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
submit the profits. E said that he will move
for ratification of his actuation. Can it be
ratified?
May the contracts of a self-dealing

director be valid per se.
-
YES. If all the 4 conditions are

present they will be valid per se
1. That the presence of such director

or trustee in the board meeting in
which the contract was approved
was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
33
3. That the contract is fair

reasonable
under
circumstances; and
and
the
constitute
meeting;
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
full disclosure of the adverse

interest of the director concerned
must be made
the contract is fair and reasonable

under the circumstances
Problem if self-dealing director

involved owns all or substantially all
of the shares of stock of the
corporation thereby making it easily
possible to have the contract ratified
-
last sentence of section 32 should

be made to apply by determining the
reasonableness and fairness of the
contract
Section 32. Dealings of
directors, trustees or officers with
the corporation. - A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all the following
conditions are present:
1. That the presence of such
director or trustee in the board
meeting in which the contract was
approved was not necessary to

such
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)
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
for
3. That the contract is fair and

reasonable
under
the
circumstances; and
When do they become voidable?
quorum
2. That the vote of such director or

trustee was not necessary for the
approval of the contract;
4. That in case of an officer, the

contract has been previously
authorized by the board of directors.
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
he cannot be allowed to enrich

himself
May corporate directors purchase

the corporate property?
Mead vs. Mccullogh
interlocking director- a director of

one corporation who deals and
34
transacts business with another

corporation who is himself a director
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
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
Section 32 contract may become

voidable, hence it may also be
ratified
X Co.
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
Y Co.
A owe 20%
A owe 20%
25%
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
25% VALID
15%
VOIDABLE
SUBJECT
TO
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

Intra-corporate remedies
Is it generally valid or voidable? VALID
25%
section 32
done,
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
dismissal
is
ground
for
35
Any benefit should inure to the

corporation
Stockholder bringing the action is
entitled to reimbursement such as
attorneys fee ONLY IF the case is
SUCCESSFUL to avoid harassment
suit to their management
Pascual vs. Orozco
By virtue of the fact that he is a

stockholder,
may
maintain
a
derivative suit
Depend on how, when and what

reason
Seeking for the years 1898 all the

way 1907
Only became a stockholder in 1903
He can sue only in 1903 forward

because he must be a stockholder
The right of action is personal in

nature. He became a stockholder
only in 1902
It is not the corporate interest to

shield one from criminal prosecution
which is personal interest
Perez is not suing in his behalf, but

in behalf of the corporation
Western institute vs. Salas
Assuming it was filed in the proper

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

derivative suit, the same is still
outrightly dismissible for having
been wrongfully filed in the regular
court devoid of any jurisdiction to
entertain the complaint. The case
should have been filed with the SEC
which
exercises
original
and
exclusive jurisdiction over derivative
suits, they being intra-corporate
disputes, per Section 5 (b) of P.D.
902-A
San Miguel vs. Khan
Was a demand made? NO
It is not necessary because he

objected in the board meeting, but
still it was adopted therefore it was
useless
Chase vs. Buencamino
Argument that he should be in

estoppels since he filed in the U.S.
Assuming the case prospered in the

U.S. would not estoppels apply as
against him? NO for estoppels to
step in it must be a case by the
corporation
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
Reyes vs. tan
The facts constitute sufficient cause

of action
Corporate director are guilty of

breach of trust

36
A stockholder may institute

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
an
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
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
37
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?
-
5. Distribution of cash dividends to the

shareholders.
May the board alone create an
executive committee without any
authority provided for the by-laws?
-
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) 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.
express terms is not so amenable or

repealable; and,
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:
NO board of directors must sit and

act as a body to have a valid
transaction
May a non-member of the board of

directors be a member of the
executive committee?
-
NO, all of them must be members of

the board of directors
BOD cannot act by proxy it would be

abdication of powers
Purpose
clauses
necessary
because it confers and also limits
the
actual
authority
of
the
corporation
CORPORATE
AUTHORITY
POWERS
AND
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;
1. Approval of any action for which

shareholders approval is also
required
3. Those that are incidental to its

existence.
2. The filing of vacancies in the board;
Section 36 to 45GRANTED BY LAW
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
POWER
Section 36. Corporate powers and

capacity. - Every corporation incorporated
under this Code has the power and
capacity:
38
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)
Section 37. Power to extend or
shorten corporate term. - A private
corporation may extend or shorten its term
as stated in the articles of incorporation
when approved by a majority vote of the
board of directors or trustees and ratified at
a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3)
of the members in case of non-stock
corporations. Written notice of the
proposed action and of the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation
and
deposited
to
the
addressee in the post office with postage
prepaid, or served personally: Provided,
That in case of extension of corporate
term, any dissenting stockholder may
exercise his appraisal right under the
conditions provided in this code. (n)
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. - No
corporation shall increase or decrease its
capital stock or incur, create or increase
any bonded indebtedness unless approved
by a majority vote of the board of directors
and, at a stockholder's meeting duly called
for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the
increase or diminution of the capital stock,
or the incurring, creating or increasing of
any bonded indebtedness. Written notice of
the proposed increase or diminution of the
capital stock or of the incurring, creating, or
increasing of any bonded indebtedness
and of the time and place of the
stockholder's meeting at which the
proposed increase or diminution of the
capital stock or the incurring or increasing
of any bonded indebtedness is to be
considered, must be addressed to each
stockholder at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by
a majority of the directors of the
39
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
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
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
stock, or the incurring, creating or
increasing
of
any
bonded
indebtedness.
Any increase or decrease in the capital
stock or the incurring, creating or
increasing of any bonded indebtedness
shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be
kept on file in the office of the corporation
and the other shall be filed with the
Securities and Exchange Commission and
attached to the original articles of
incorporation. From and after approval by
the Securities and Exchange Commission
and the issuance by the Commission of its
certificate of filing, the capital stock shall
stand increased or decreased and the
incurring, creating or increasing of any

bonded indebtedness authorized, as the
certificate of filing may declare: Provided,
That the Securities and Exchange
Commission shall not accept for filing any
certificate of increase of capital stock
unless accompanied by the sworn
statement of the treasurer of the
corporation lawfully holding office at the
time of the filing of the certificate, showing
that at least twenty-five (25%) percent of
such increased capital stock has been
subscribed and that at least twenty-five
(25%) percent of the amount subscribed
has been paid either in actual cash to the
corporation or that there has been
transferred to the corporation property the
valuation of which is equal to twenty-five
(25%) percent of the subscription:
Provided, further, That no decrease of the
capital stock shall be approved by the
Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the
same, with the approval by a majority vote
of the board of trustees and of at least twothirds (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
40
combinations
and
monopolies,
a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for
such consideration, which may be money,
stocks, bonds or other instruments for the
payment of money or other property or
consideration, as its board of directors or
trustees may deem expedient, when
authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of
non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in
a stockholder's or member's meeting duly
called for the purpose. Written notice of the
proposed action and of the time and place
of the meeting shall be addressed to each
corporation
and
deposited
to
the
That any dissenting stockholder may
exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed
to cover substantially all the corporate
property and assets if thereby the
corporation would be rendered incapable
of
continuing
the
business
or
accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other
disposition of property and assets, subject
to the rights of third parties under any
contract relating thereto, without further
action or approval by the stockholders or
members.
Nothing in this section is intended to
restrict the power of any corporation,
without
the
authorization
by
the
stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if
the same is necessary in the usual and
regular course of business of said
corporation or if the proceeds of the sale or
other disposition of such property and
assets be appropriated for the conduct of

its remaining business.
In non-stock corporations where there are
no members with voting rights, the vote of
at least a majority of the trustees in office
will be sufficient authorization for the
corporation to enter into any transaction
authorized by this section.
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own
shares for a legitimate corporate purpose
or purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out
of stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
sold during said sale; and
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
corporation
and
deposited
to
the
That any dissenting stockholder shall have
41
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)
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
approval of stockholders representing not
less than two-thirds (2/3) of the outstanding
capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
any financial institution or creditor, whether
local or foreign, from declaring dividends
without its/his consent, and such consent
has not yet been secured; or (3) when it
can be clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for
probable contingencies. (n)
Section 44. Power to enter into
management contract. - No corporation
shall conclude a management contract with
another corporation unless such contract
shall have been approved by the board of
directors and by stockholders owning at
least the majority of the outstanding capital
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly
called for the purpose: Provided, That (1)
where a stockholder or stockholders

representing the same interest of both the
managing and the managed corporations
own or control more than one-third (1/3) of
the total outstanding capital stock entitled
to vote of the managing corporation; or (2)
where a majority of the members of the
board of directors of the managing
corporation also constitute a majority of the
members of the board of directors of the
managed
corporation,
then
the
management contract must be approved
by the stockholders of the managed
corporation owning at least two-thirds (2/3)
of the total outstanding capital stock
entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a nonstock corporation. No
management
contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all of
the business of another corporation,
whether such contracts are called service
contracts,
operating
agreements
or
otherwise: Provided, however, That such
service contracts or operating agreements
which
relate
to
the
exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations. (n)
Section 45. Ultra vires acts of
corporations. - No corporation under this
Code shall possess or exercise any
corporate powers except those conferred
by this Code or by its articles of
incorporation and except such as are
necessary or incidental to the exercise of
the powers so conferred. (n)
Section 36
Where should the corporation be
sued?
-
principal office is important because

it establishes the residence of the
corporation and determining service
of summons, venue of action
it can be sued in the city or

municipality where its principal office
is found
42
Principal office is also important for

venue of meetings
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.
Non-stock corporation may provide

in its by-laws that the venue of
meeting be anywhere in the
Philippines
Upon whom service of summons be
made?
-
Section 11. Service upon domestic

private juridical entity- when the
defendant
is
a
corporation,
partnership or association organized
under the laws of the Philippines
with a juridical personality, service
may be made upon the president,
managing partner, general manager,
corporate secretary, treasurer, or in
house counsel.
Delta motor vs. Mangosing
strict compliance is necessary
should be served to those named in

the statute
secretary of a dept are not those

included in the statute
E.B. Villarosa vs. Benito
decision En Banc repeals all other

pronouncement
section 13 Rule 14 was repealed
the old rules was ambiguous and

broad and at all time illogical
the particular revision under Section

11 of Rule 14 was explained by
retired Supreme Court Justice
Florenz Regalado, thus:
xxx the then section 13 of
this Rule allowed service
upon a defendant corporation
to be made on the president,
manager, secretary, cashier,
agent or any of its directors.
The aforesaid terms were
obviously ambiguous and
o notes: additional knowledge

-
special appearance enter for that

particular appearance you are not
the counsel in the case
would apply only if it does not

involve
an
intra-corporate
controversy (controversy between
and among the stockholders)
upon any of the statutory officers or

officers fixed in the by-laws any
secretary, any of the directors; any
managers in the by-laws
Seal
-
merely ministerial or permissive
Power to amend
-
section 16
special 37,38,120
Power to adopt by-laws
43
section 46-48
authorizes a corporation to make

donations. The only limitations
imposed are the following:
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
1. The donation must be reasonable;

2. It must be for public welfare, or for
hospital,
charitable,
scientific,
cultural or similar purpose; and,
3. It shall not be in aid of political party
or candidate, or for purposes of
partisan political activity.
Power to establish pension
-
Include any act to promote and

improve the convenience, welfare
and benefit of the employees or
offices
Republic vs. Acoje
While as a rule an ultra-vires act is

one committed outside the object
for which a corporation is created as
defined by law, there are however
certain corporate acts that may be
performed outside of the scope of
the powers expressly conferred if
they are necessary to promote the
interest
or
welfare
of
the
corporation. Thus, it has been held
that
although
not
expressly
authorized to do so a corporation
may become a surety where the
particular transaction is reasonably
necessary or proper to the conduct
of its business, and here it is
undisputed that the establishment
local post office is a reasonable and
proper adjunct to the conduct of the
business of appellant company.
Indeed, such post office is a vital
improvement in the living condition
of its employees and laborers who
came to settle in its mining camp
which is far removed from the postal
facilities
or
means
of
communication accorded to people
living in a city or municipality.
2. Constitution and law
Luneta vs. A.D. Santos
Importance of the purpose clause
Cannot have the power to acquire
Cannot
engage
transportation
Doctrine of limited capacity
Govt vs. El Hogar
As the lawful transaction of its

business may reasonably represent
Director of Lands vs. CA
Exception to
constitution
Alienable public land
Converts the property to a private

land automatically once converted it
can now be registered
the
in
rule
land
in
the
Power to make donation

-
Limitation section 36 par.9
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

44
Power to exercise such other

powers essential or necessary to
carry out its purpose (implied power)
1. Increasing the par value of the

existing number of shares without
increasing the number of shares;
1. Acts in the
business;
2. Increasing the number of existing

shares without increasing the par
value thereof; and,
usual
course
of
2. Acts to protect debts owing to the

corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or
aid employees; and,
3. Increasing the number of existing

shares and at the same time
increasing the par value of the
shares.
5. Acts to increase business
Why a corporation increases it

capital stock?
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
of
prohibiting
the
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
Importance of PLACE of registration

-
Residence
Venue
Place of meetings
Place or
mortgage
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)
Power to extend its terms
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?
registration
of
chattel
Once its term expires, already

dissolved automatically, thus can no
longer ask for extension
After dissolution, it has 3 years to
windup
What are the modes of increasing

capital stock?
1. To reduce or wipe out existing deficit

where no creditors would thereby be
affected;
2. When the capital is more than what
is necessary to procreate the
business or reduction of capital
surplus; or,
45
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
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 subsection 2 & 3 thereof.
Example: car rental agencies-Php

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

-
Decrease shall not in any way affect

the rights of the creditors
Philippine Trust Company vs. Rivera

-
Without the appraisal of SEC, a

decrease in capital stocks has no
effect
Pre-emptive rights
-
A right granted by law to all existing

stockholders of a stock corporation
to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective
stockholdings, subject only to the
limitations imposed under section 39
of the Code.
Internationally granted
TRUST FUND DOCTRINE:

-
Subscription to capital stock of a

corporation constitute a fund to
which the creditors have a right to
look upon for satisfaction of their
claims and that the assignee in
insolvency can maintain an action
upon any unpaid stock subscription
in order to realize assets for the
payment of its debts.
Madrigal vs. Zamora
Decrease
in
capital
has
subterfuge to evade payment
Thus not valid and effective
Must not prejudice creditors which

includes the employees
Bond
Pre-emptive
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
46
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.
May it be denied? How?
-
Yes, if provided by articles of

incorporation or by an amendment
However, pre-emptive rights is

unavailable to shares in trading in
stock
exchange
otherwise
stockholders must waive first their
right before they may sell such.
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
-
When is it unavailable?
-
2. Shares to be issued in good faith

with the approval of the
stockholders representing 2/3 of
the outstanding capital stock
either
a. In exchange for property
needed for corporate purpose
or,
b. In payment of a previously
contracted debt
-
The exceptions, however will not

apply to stockholders of a close
corporation
by
virtue
of
a
subsequent and specific provision of
the Code which provides that the
pre-emptive right of a stockholder
in a close corporation shall extend
to all stock to be issued, including

In shares traded openly in stock

exchange/market
Is
it
applicable
corporations?
-
Exceptions
1. When the shares to be issued is
in compliance with laws requiring
stock offerings or minimum stock
ownership by the public
Such right of pre-emption may be

lost by waiver of the stockholder,
expressly or impliedly by his inability
or failure to exercise it after having
been notified of the proposed
issuance or disposition of shares
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
The right of pre-emptive rights is
absolute in close corporations
All issues or depositing shares of any
class form part of ACS
Certain
instances
when
a
stockholder may nevertheless be
unable to exercise this right:
-
Issued for public ownership
Issued in good faith, with approval

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

in ordinary stock corporations may
be denied
47
if the shares are to be issued in

compliance with laws requiring stock
offering
or
minimum
stock
ownership by the pubic
In exchange for property needed for

corporate purposes
In payment of previously contracted

debts
This rule, however, does not apply

in a close corporation as the 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
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
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
Will the stockholders be able to

exercise their pre-emptive right with
respect to the old unissued shares?
-
Pre-emptive rights is applicable only

to new issued shares and not to the

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, 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
-
Yes, section 102
What type or shares are covered by

pre-emptive rights?
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
False, exception close corporation

and redeemable shares
EXAMPLE:
ACS
2M
SUBSCRIBED
PAID UP
1M
1M
100K
100K
TO
10 100K
48
If 1-5 became 200K each, may 6-10

demand the exercise their preemptive right?
2) Where the transaction amounts to

consolidation or merger of the
corporations
3) When purchasing corporation is

merely a continuation of the selling
corporation
YES
May
1-5
subscribe
to
the
unsubscribed capital stock to the
exclusion of 6-10?
-
If a corporation makes 2M
unrestricted retained earnings, it is
the shares and not the number of
persons that matters
May 6-10 complain for a dilution of

their interest?
-
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
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?
4) Where the transaction is entered

into fraudulently in order to escape
liability for such debt
Legitimate
purpose:
for
a
corporation to reacquire its own
shares
-
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
2) Where corporation has sufficient
assets in its books to cover its debts
and liabilities exclusive of capital
stock
YES
ACS
1M
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
SUBSRIBED 1M
PAID-UP
1M
ASSETS
500K
1M PROFITS
-
500K LIABILITIES
____________________
If a corporation sells substantially all

of it assets and properties, will the
buyer assume liability?
500K RESERVES
IN
A
CLOSE CORPORATION IT CAN USE
THIS TO REACQUIRE ISSUED STOCKS
X REALTY CORPORATION
NO, EXCEPT
1) Express or implied agreement to the

purchase

THE
ONLY
PROPERTY OF
THE
CORPORATIO
N
49
Will it need
stockholders?
-
the
BOARD
OF
DIRECTORS
DECIDED TO
SELL IT
approval
of
the
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:
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
corporation
is
continuation of
corporation;
purchasing
merely
a
the selling
4. Where the transaction is entered

into fraudulently in order to
escape liability for such debts.
Power to acquire own shares
Section 41. Power to acquire
own shares. - A stock corporation
shall have the power to purchase or
acquire its own shares for a
legitimate corporate purpose or
purposes, including but not limited
to the following cases: Provided,
That
the
corporation
has
unrestricted retained earnings in its
books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares
arising out of stock dividends;
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during said
sale; and
stockholders entitled to payment for
50
their shares under the provisions of

this Code. (a)
The corporation must at all times
have
unrestricted
retained
earnings to exercise this corporate
power
Steinberg vs. Velasco
-
For as long as there are debts and

liabilities, a corporation may not
reacquire its shares (subject to
exceptions)
Creditors of a corporation have the
right to assume that so long as there
are outstanding debts and liabilities,
the board of directors will not use
the assets of the corporation to
purchase its own stock, and that it
will not declare dividends to
stockholders when the corporation
is insolvent.
Power to invest funds <sec.42>

Section 42. Power to invest
corporate
funds
in
another
corporation or business or for any
other purpose. - Subject to the
provisions of this Code, a private
corporation may invest its funds in
any other corporation or business or
for any purpose other than the
primary purpose for which it was
organized when approved by a
majority of the board of directors or
trustees and ratified by the
stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock, or by at least two
thirds (2/3) of the members in the
case of non-stock corporations, at a
stockholder's or member's meeting
duly called for the purpose. Written
notice of the proposed investment
and the time and place of the
meeting shall be addressed to each
stockholder or member at his place
of residence as shown on the books
of the corporation and deposited to
the addressee in the post office with
postage
prepaid,
or
served
personally: Provided, That any
dissenting stockholder shall have
appraisal right as provided in this
Code: Provided, however, That
where the investment by the

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

the primary purpose, stockholders
consent or approval is necessary
Thus, if its for the secondary

purpose, it is necessary
If its in connection with the primary

purpose, only board resolution is
necessary
Requirements and steps to be

followed for a valid investment of
corporate funds are:
1. Resolution by the majority of the
board of directors or trustees;
2. Ratification by the stockholders
the members in case of non-stock
corporations;
3. The ratification must be made at a
meeting duly called for that purpose;
4. Prior written notice of the proposed
investment and the time and place
of the meeting shall be made,
addressed to each stockholder or
member by mail or by personal
service, and;
5. Any dissenting stockholder shall
have the option to exercise his
appraisal right
Dela rama vs. Ma-ao Sugar
There is a substantial and not

remote connection between the
sugar bags and
the
sugar
manufacture, thus stockholders
approval is not necessary for validity
A private corporation, in order to

accomplish its purpose as stated in
51
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.
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,
what
It becomes treasury shares
Stockholders consent/ approval is

not necessary and mere board
action is sufficient if in accordance
with primary purpose
Gokongwei vs. SEC
Investments made by SMC is

necessarily connected with its
primary purpose and this was
ratified in a meeting
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
Submission of previous action is a

sound corporate practice
Dividends
Redeemable shares
Closed
105)
-
corporation
(see section
For any reason, compel the value of

shares withdrawal shares provided
corporation has sufficient funds to
cover its debts and liabilities
Section 105. Withdrawal of
stockholder
or
dissolution
of
corporation. - In addition and without
prejudice to other rights and
remedies available to a stockholder
under this Title, any stockholder of a
close corporation may, for any
reason, compel the said corporation
to purchase his shares at their fair
value, which shall not be less than
their par or issued value, when the
corporation has sufficient assets in
its books to cover its debts and
liabilities exclusive of capital stock:
Provided, That any stockholder of a
close corporation may, by written
petition to the Securities and


approval
of
stockholders
Stock
corporations
are
52

prohibited
under
any
loan
under
special
circumstances
(n)
What are dividends?
-
Corporate profits set aside, declared

and ordered by the Board of
Directors to be paid to the
stockholders.
What are property dividends?

-
Those paid in property surplus
10-100k
1M
Board decides to declare 1M, how
much will each receive? May the
board declare stock dividend
-
NO. that would be over issuance of

shares, violation of securities
regulation code
It must have a free portion
The corporation may increase its

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

Stockholders reacquired?
-
What is the effect of declaration of

dividends with regards to the assets
of a company?
-
As compared to stock dividends, the

declaration of cash or property
dividends have the effect of
reducing corporate assets to the
extent of dividends declared.
Neither would stock dividends

increase the proportionate interest
of
the
stockholders
of
the
corporation although it will have the
effect of increasing the subscribed
and
paid-up
capital
of
the
corporation.
It
gives
the
stockholders nothing in the way of
distribution of assets but merely
divides his existing shares into
smaller units.
Like tables and chairs? Can tables

and chairs make surplus profits?
-
No, they do not make surplus,

bonds, etc.
Where
from?
-
should
dividends
come
Stock dividends are declared as

stocks coming from corporation
Who declares dividends to be

declared? Do stockholders have any
say?
-
Board of Directors, if stock approval

of 2/3 outstanding capital stock
ACS-1M
SUB-1M
P.U.-1M
1M-U.R.E. (surplus profits of the
corporation)
1-100k
2-100k
To
No, because in property 2/3 is not

required
Earnings belong to the corporation

until declared or given
Revocation
-
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
53
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 earnings
remain in the corporation
Cash
and
propertycorporate assets
1. 1M-U.R.E. (is it true there is no way

to compel?)
2. 2M-U.R.E.
May they be compelled to declare
dividends
reduces
Stock dividends increase corporate

assets? No, it will only have the
effect of increasing the subscribed
and
paid-up
capital
of
the
corporation
Mandatory if earned, the board may

be compelled to declare dividends
if exceeds 100% of the paid-up

capital the boards may be
compelled
Will there be a corresponding

increase in their proportionate
interest?
ACS 2M
REMAINS THE SAME
PU
Exception: when stock dividends will

result in a fractional share
1-100K
50K PU
2-100K
50K
TO
SUB-1M
10%
1M
PU-1M
TO
10-100K
ACS 2M
1M
1M
RE
100K
100K
TO
100K
U.R.E.
800K
10-100K
Will 1 and 2 receive full amount of

dividends?
-
SUB 1M
PU
1M
SUB 1M
ACS-2M
1-100K 200 (10%)
*VOTING AND DIVIDEND RIGHTS
STILL THE SAME
10
NO. You cannot declare if it does

not come from unrestricted retained
earnings.
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
receive dividends?
1M
May they be compelled?

to
No, tock dividends are civil fruits of

the original investment, and to the
54
owners of the shares belong the civil

fruits.
How did the court decide dividends
in the case of Neilsen
-
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
DECLARATION
JULY
JULY 31
PU
Cannot
accumulate
unreasonably
24
100K
100T JULY 26Y(NEW ONE WAS DECLARED
TO Y) JULY 30- 100K
2
TO
TO
HAVE
TRANSFER RECORDED
THE
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

-
The power to declare it if paid-up

capital is not maintained or is
impaired
Trust fund must be kept intact for

the protection of creditors who have

surplus
Basis is the paid-up capital

Entitled to dividends
Irrespective
of
subscription is full
whether
the
Illegally declared
-
U.R.E.
1M
1
the right to rely on such subscription

and the paid-up capital for the
satisfaction of their claims
Declare dividend with the belief that

it formed part of the U.R.E., but yun
pala sa capital
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
majority of the outstanding capital
stock, or by at least a majority of the
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
55
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
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

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
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
majority of the members in the case
of non-stock corporation will be
required.
How long?
-
Not longer than 5 years for any one

term
Exception: exploration, development

or utilization of natural resources
56
What is
contract?
-
an
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
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
Ultra-vires acts which are not illegal

per se may become binding and
enforceable either by satisfaction,
estoppels or equitable grounds
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 ultra-vires
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
Consequences of ultra-vires acts?

1. On the corporation itself
-
The proper forum, in accordance

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

into
the
purpose
57
Carlos vs. Mindoro sugar Co.
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
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!
Japanese war notes vs. SEC
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
Section 36 paragraph 11
contract with in its powers- CARLOS

CASE
BY-LAWS
By-Laws
-
Rule adopted by the corporation for

its internal governance
Is the
adoption
mandatory?
of
by-laws
When should the by-laws be

adopted or filed? Can it not be
adopted earlier?
-
After incorporation- within 1 month

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

the incorporators)
Who will sign the adoption clause?

-
Majority of the stockholders or

members attested to by the
corporate secretary
What happens if the corporation

fails to adopt the by-laws from the
tie provided by the law? Would there
be an automatic revocation or
suspension?
-
Proper notice and hearing, must first

be complied with
Section 14 and 15
Loyola grand villas vs. CA
Corporate powers depend on the

agreement of the stockholders
rather than any director
Not the SEC, but the HIGC
Must not always imperative
Filing of by-laws mandatory
Empowered by SEC
Merely a ground, there must be

proper notice and hearing
Section 10
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

58
Not affect the status of the

corporation as a juridical person
Shares of
properties
Subject the corporation to a fine, as

may be issued by the SEC
Shares of stock may transfer to

whom ever he wishes
When do by-laws become effective?
The by-laws is contrary to law
Articles of incorporation
Until and unless the SEC gives it

stamped of approval
stock
are
personal
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 5 th
cause of action is valid?
3. It must be general and uniform in its

effect or applicable to all alike or
those similarly situated;
Rules governing equity, considering

the fact that there was always lack
of quorum
4. It must not impair obligations and

contracts or vested rights; and
Section 29 BOD if still constituting a

quorum may fill up a vacancy other
than by removal, etc.
Gokongwei vs. SEC
Section 48 allows a corporation to

amend it by-laws
None filing would not affect the

status of the corporation, Loyola
grand villas case
Section 47 of the code, the by-laws

may provide for the qualification and
disqualification
The word must is not always

imperative
It cannot be said Gokongwei has a

vested rights
Stockholders
are
conlusively
presumed to know the provisions of
the by-laws
Prevent directors from taking

advantage of position to promote his
individual interest to the damage of
others
The validity or reasonableness of a

by-laws is a question of 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
Suspension of any government

agency. The permission must first
be secured- section 46
Elements of a valid by-law

1. It must not be contrary to law, public
policy or morals;
2. It must not be inconsistent with the
articles of incorporation;
5. It must be reasonable.
-
Must not be inconsistent with

existing laws. Not be inconsistent
with articles of incorporation
By-laws
-
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

59
May the by-laws be

altered or appealed?
-
amended
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.
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
the members in a non-stock
corporation.
-
This delegated power, however, is

considered revoked whenever a
majority of the outstanding capital
stock or members shall so vote at a
regular or special meeting.
If it is to be amended what is the

proceeding?
-
The amended or new by-laws

shall only be effective upon the
issuance by the Securities and
Exchange
Commission
of
a
certification that the same are not
inconsistent with this Code. (22a
and 23a)
Baretto vs. La Previsora
Any corporate act emanates from

the board
Directors themselves cannot amend

the by-laws if they were not granted
the same
Section 48 2nd paragraph provides:

Section 48. Amendments to
by-laws. - The board of directors or
trustees, by a majority vote thereof,
and the owners of at least a majority
of the outstanding capital stock, or
at least a majority of the members of
a non-stock corporation, at a regular
or special meeting duly called for
the purpose, may amend or repeal
any by-laws or adopt new by-laws.
The owners of two-thirds (2/3) of the
outstanding capital stock or twothirds (2/3) of the members in a nonstock corporation may delegate to
the board of directors or trustees the
power to amend or repeal any bylaws or adopt new by-laws:
Provided, That any power delegated
to the board of directors or trustees
to amend or repeal any by-laws or
adopt new by-laws shall be
considered as revoked whenever
stockholders owning or representing
a majority of the outstanding capital
stock or a majority of the members
in non-stock corporations, shall so
vote at a regular or special meeting.

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
60
Meetings
-
Meetings of stockholders
1.
Date fixed in the by-laws or by-law
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
Meetings of director or trustees
Meetings are regular and special
Must be held in the proper place
Meetings of stockholders
Where should it be held?
What is regular and what is special?
When are regular meetings of the

stockholders held?
-
Fixed date provided by the by-laws
What if there is no date?

-
April
Why april?
-
Point in time the audited financial

statement have been prepared
May the by-laws of a corporation

provide that meetings be held
anywhere in the Philippines?
-
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
reasonable date
on
Notice requirement?
-
Regular- 2 weeks prior notice
Special- 1 week
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.
May the notice requirement be

lessened?
T or F the by-laws of a stock

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

FALSE.
Non-stock corporations
lang pwede provided nakalagay sa
by-laws and provided proper notice
is given
Corporation can do only such things

as the law allows it to do,
DOCTRINE
OF
LIMITED
CAPACITY
61
San Miguel office located in Ortigas

Center. May stockholders meeting
be held in PICC center?
-
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)
YES. Metro Manila, one single city
Must be called by the proper party

Who calls?
-
President until and unless there is a

provision , secretary on order of the
president
What if there is nobody who can

call?
-
The petitioner, stockholder

petition the court
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

Cases of removal or ouster of a

director
Mandamus would be appropriate
remedy if there is a person
authorized but refuses
Quorum and voting requirement
-
Majority stockholders or members

constitute a quorum
Is the presence of the majority

owners of the outstanding capital
stock ABSOLUTE to have a
quorum?
-
NO. when the code requires a

higher quorum it must also be
equivalent to the vote required
62
Do you include non-voting shares in

arriving at the voting requirement to
have a valid corporate act?
corporation are present or

duly represented at the
meeting.
It depends.
Directors/trustees meeting
Section 6 last par. If it falls within the

penultimate par. Of section 6
Regular (monthly)
(anytime)
Five requisites of a valid meeting

1. It must be held on the date fixed in
the by-laws or in accordance with
law
and
special
May that be restricted (within or

outside the Phil)
-
YES. unless the by-laws provide

otherwise.
2. Prior notice must be given
Is there any notice requirement?
3. It must be held at he proper place
4. It must be called by the proper party

5. Quorum and voting requirements
must be met
Date not complied with, notice,
place, not complied with and the
person who called not authorized,
what happens to any resolution
called?
-
Section 51, any meeting shall be

valid provided all the stockholders
are present or duly represented and
provided it is within the power of the
corporation. 3RD paragraph of 324
If the voting requirement is met, any
resolution passed in the meeting,
even if improperly held or called will
be valid if all the stockholders or
members are present or duly
represented thereat. The last
paragraph of section 51 is clear on
the matter when it provides:
all proceedings had and any
business transacted at any
meeting of the stockholders
or members, if within the
powers or authority of the
corporation, shall be valid
even if the meeting be
improperly held or called,
provided all the stockholders
or
members
of
the

YES. 1 day unless

provided by the by-laws
otherwise
What happens if notice is not

complied with?
-
If the notice requirement is not

complied with the meeting is illegal
and will not bind the corporation
except when subsequently ratified
or in the case of a close corporation
where the act of any one director
may bind the corporation even
without a meeting under the special
provision of Section 101 of the
Code.
Can notice be waived? <sec.53>

Section 53. Regular and
special meetings of directors or
trustees. - Regular meetings of the
board of directors or trustees of
every corporation shall be held
monthly, unless the by-laws provide
otherwise.
Special meetings of the
board of directors or trustees may
be held at any time upon the call of
the president or as provided in the
by-laws.
Meetings of directors or
trustees of corporations may be held
anywhere in or outside of the
Philippines, unless the by-laws
provide otherwise. Notice of regular
or special meetings stating the date,
time and place of the meeting must
63
be sent to every director or trustee

at least one (1) day prior to the
scheduled
meeting,
unless
otherwise provided by the by-laws. A
director or trustee may waive this
requirement, either expressly or
impliedly. (n)
-
YES. Expressly and impliedly
SEC ruling
A special meeting is valid
without notice where the
directors are all present or
where they consent to the
meeting. Presence at the
meeting waives the want of
notice. Moreover, it has been
ruled that the meeting of the
directors without a formal call
first being had, and notice
thereof
given
to
the
members, did not operate to
invalidate it or to render the
proceedings
which
were
taken at it void, for every
member of the board were
present, and their joint action
had completely bound the
corporation as if the meeting
has been called with due
formality, and everyone of the
directors had received proper
notice.
What is the quorum and voting

requirement
in
the
directors
meeting?
-
Should the director or trustees be

physically present?
-
Exception, majority of all the

members of the board in case of
election of corporate officers, unless

NO.
it
is
not
required.
Teleconference or video conference
is allowed, E- commerce law
Membership subject to laws

Stockholder not yet
May director vote by proxy?
-
NO
If A is a director and a meeting is

called for the purpose of electing a
new set of BOD can A vote by
proxy?
-
YES. Because it is a stockholders

meeting
If directors meeting, cannot vote by

proxy
Stockholders right to vote
-
Inherent in stock ownership
However this right is not always

inherent, because it may be denied:
1. Redeemable
and
preferred
shares, however if founders
shares are issued others may be
denied the right to vote.
to pass a valid
Majority of those present at which

there is a quorum (3 present, vote of
2 sufficient)
General rule, must sit and act as a

body to have a valid corporate act
Five man member board, a meeting

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

board
of
directors
(entire
membership)
Vote required
corporate act?
-
the articles provide for a greater

quorum or voting requirement
2. May be denied by the articles of

incorporation or contracts
-
When not denied they may do so in

person or by proxy
May the right to vote by proxy be

denied?
64
May the articles of incorporation

deny?
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.
May the by-laws validly provide that

proxy voting is not allowed?
-
NO
Only non-stock may be denied

proxy voting (may be broaden,
limited or denied)
Proxy voting is a matter of right
granted by law
Requirements of a valid proxy?
-
Section 58
Section 58. Proxies. Stockholders and members may
vote in person or by proxy in all
meetings
of
stockholders
or
members. Proxies shall in writing,
signed by the stockholder or
member and filed before the
scheduled
meeting
with
the
corporate
secretary.
Unless
otherwise provided in the proxy, it
shall be valid only for the meeting
for which it is intended. No proxy
shall be valid and effective for a
period longer than five (5) years at
any one time. (n)
Must be submitted to a validation

committee
By-laws of non-stock corporations
may deny proxy voting
What is voting trust agreement?
-
One created by an agreement

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

to vote as a unit and thus assuring a
desirable stability and continuity in
management in situations where it is
needed.
How long may a proxy exist?

-
Maximum of 5 years
Valid for the meeting in which it is

intended
Is proxy revocable?
-
Generally revocable, unless coupled

with interest
Revocation
-
A proxy, like agency in general is

revocable unless coupled with an
interest and revocation need not be
made by formal notice in writing.
Revocation may be expressed to
the proxy holder, to the election
committee, by a subsequent proxy

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,
65
3. That the principal purpose of the

grant of voting rights is to acquire
voting control of the corporation.
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.
During the duration of the trust they

are irrevocable unless there is a
violation either by fraud
Requisites
-
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.
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 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

No voting trust agreement

shall be entered into for the purpose
of circumventing the law against
monopolies and illegal combinations
in restraint of trade or used for
purposes of fraud.
Unless expressly renewed,
all rights granted in a voting trust
agreement
shall
automatically
expire at the end of the agreed
period, and the voting trust
certificates as well as the certificates
of stock in the name of the trustee
or trustees shall thereby be deemed
cancelled and new certificates of
stock shall be reissued in the name
of the transferors.
The voting trustee or trustees
may vote by proxy unless the
agreement
provides
otherwise.
(36a)
Does it need to be notarized?
-
Yes, otherwise it is ineffective and

unenforceable
Only legal ownership is transferred

Being still the beneficial owner they
may transfer these rights
Is the right granted to a voting trust
agreement absolute? (to inspect)
-
NO.
The voting trust agreement filed with

the corporation shall be subject to
66
examination by any stockholder of

the corporation in the same manner
as any other corporate book or
record. Provided, that both the
transfer and the trustee or trustees
may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of
this Code.
Legal title is transferred to the voting
trustee
May the voting trustee vote by
proxy?
-
Yes, legal owner may vote by proxy
May the proxy holder vote by proxy?

-
NO, (AGENT) an agent can have no

other agent unless specifically
allowed by the principal
Stockholder executing as a proxy, is

he qualified to be voted as a
director?
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
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
So that they can vote a certain set

of directors
They will be more secured
Voting pull agreement

-
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
by
rules
governing
END OF MIDTERMS
STOCKS AND STOCKHOLDERS

3 modes
1. By a contract of subscription with
the corporation;
2. By purchase of treasury shares from
the corporation; and,
3. By purchase or acquisition of shares
from existing stockholders.
Is the stockholder executing in a

voting trust agreement, is he
qualified to act as a director?
Section 60 subscription
-
Any contract
Whether existing or still to be

formed
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

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
67
refer to it as a purchase or some other

contract. (n)
Under the old law the 4
PURCHASE
th
mode is
Purchase
-
Reciprocal in nature
Purchaser can neither require the

issuance
Xco. Inc.
P
Authorized capital
500
1M
SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS

GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down
payment remainder December 08
o he will not be considered a
stockholder unless he has paid in
full
August 08 property is ravaged by fire all
are turned into shares
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
First example galing sa unissued

stock
2nd example galling sa treasury

shares hindi sa unissued share
NO such thing as purchase of

unissued stocks
A subscription contract can be
conditional provided there is nothing
in the charter or statute prohibiting it
and not against public order, law,
etc.
Must it be in writing?
-
NO, it may be oral
5M should it be in writing to be valid

and binding as a subscription?
Is Z liable to pay the balance of his

acquisitions?
NO, statutes of frauds only applies

to SALES
YES, no matter how the party refer

to it, it is considered subscription
Trillana vs. Quezon College
Once you subscribe, you become a

stockholder which is entitled to all
the liabilities of a stockholder
Counter proposal, therefore there

was a need for an acceptance
Facultative because it is in his own

free will, it is void
Z- subscribed to 100T/S of XCo.

Amount he paid 50k
Z did not pay on the date called and was
declared a delinquent share
Corporation paid 100T/S therefore
the corporation reacquired the
shares again, what are they called?
What may be used as a

consideration and how much should
be the consideration?
-
Section 62 provides:
Section 62. Consideration
for stocks. - Stocks shall not be
issued for a consideration less than
68
the par or issued price thereof.

Consideration for the issuance of
stock may be any or a combination
of any two or more of the following:
1. Actual cash
corporation;
paid
to
the
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;
capital stock at a meeting duly

called for the purpose. (5 and 16)
Amounts
transferred
from
unrestricted retained earnings to
stated capital what does it mean?
-
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?
-
5.
Amounts
transferred
from
unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged
for stocks in the event of
reclassification or conversion.
Section 65, they will be considered

as watered stocks
Section 65. Liability of
directors for watered stocks. - Any
director or officer of a corporation
consenting to the issuance of stocks
for a consideration less than its par
or issued value or for a
consideration in any form other than
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)
Shares of stock shall not be

issued in exchange for promissory
notes or future service.
The same considerations
provided for in this section, insofar
as they may be applicable, may be
used for the issuance of bonds by
the corporation.

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
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.
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
Stock dividends will in effect

capitalize the unrestricted retained
earnings
Subscribers may be compelled to

pay the value
Issuance of a certificate of stock is

another thing
69
What are the requisites for the

issuance of a valid certificate of
stock?
1. It must be signed by the president or
vice-president and countersigned by
the secretary or assistant secretary;
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 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
When he exercises his appraisal

right
Are
certificate
transferrable?
-
YES

of
stocks
Are certificate of stocks considered

negotiable?
-
Quasi-negotiable
Why are they considered quasinegotiable when it may be

transferred through endorsement
and delivery?
100t/s
10/s
001
Abc co.
B stole and forged the signature

C is purchaser in good faith and for value
will C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not
regarded as negotiable in the same sense
that a bill or note is negotiable, even if it is
endorsed in blank. Thus, while it may be
transferred by endorsement coupled with
delivery thereof, and therefore merely
quasi-negotiable, it is nonetheless nonnegotiable 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
70
Transfer is required to be recorded

in the books of the corporation,
however even if not recorded, it will
be valid between the parties. Nonregistration 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
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 is necessary for the
following:
1. To enable the corporation to know
who its stockholders are;
2. To enable the transferee to exercise
his rights a s stockholders;
3. To afford the corporation an
opportunity to object or refuse
registration of the transfer in case
allowed by law;
4. To avoid fictitious and fraudulent
transfers; and,
5. To protect creditors who have the
right to look upon stockholders, in
case of no-payment or watered
shares, for the satisfaction of their
claims.
Duty of the secretary is ministerial,
hence mandamus will lie if the
secretary refuses to record the
transfer, but he cannot be compelled
when the transferees title to the
said shares has no prima facie
validity or uncertain
71
Transfer- absolute and unconditional

transfer to warrant registration in the
books of the corporation in order to
bind the latter and other third
persons.
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
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;
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
3. Restrictions required to be indicated

in the articles of incorporation, bylaws and stock certificates of a close
corporation;
Unson vs. Dinamito
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;
Right to transfer may be regulated
Lambert vs. Fox
5. Sale to aliens in violation of

maximum ownership of shares
under the Nationalization Laws;
Valid , may be reasonably regulated,

restricted by agreement of parties
Reasonable
parties
Reasonable as to length of time
Padgett vs. Babcock
Any attempt to restrain transfer
SC, in the absence of a valid lien

upon its shares
Valid
restrictions
applicable
6. Those covered by reasonable

agreement of the parties.
Monserat vs. Ceron
Does it include mortgage?
NO, it is not an absolute transfer
Will not affect the transfer through

mortgage
Absolute and unconditional transfer
Only the transfer or absolute

conveyance of the ownership of the

All transferred not register will not

have a valid force and effect
May not be unreasonably restricted

Violation of
Central Bank
nationalization
agreement
by
shares
law-
the
are
72
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
stocks
are
By endorsement and delivery of the

stock certificate to the transferee
In order to be valid, must be

registered in the books. If not, will
only be binding among parties
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
Endorsed not delivered
Proper mode and manner must be

complied with
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
is
mode
of
Is there any other

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
Mandamus may issue if petition has

a clear legal right
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
In the case there was no attempt to

foreclose
Petitioner must have a prima facie

right
Nava vs. Peers Marketing
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
73
between the
transaction
parties
to
the
Valid between contracting parties

even if not recorded in corporation
books
Right accrues only if refused
Statute of limitations does not apply

in registration of shares of stock
Must determined from the time of

refusal
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)
Stock certificate has already been

issued it must be coupled with the
delivery
Why are they non-negotiable when

they may be transferred?
-
Transferees
pays
it
without
prejudice to all the rights and
defenses as the true and lawful
owner may have under the law
except insofar as such rights and
defenses are subject to the
limitations imposed by the principles
governing estoppels
De los Santos vs. Republic
Why is he, not considered as the

owner of shares? When it has been
said that when endorsed by the
owner it is considered as strict
certificate? Because certificate of
stocks are non-negotiable
Although a stock-certificate is
sometimes regarded as 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.
After certificate of stock is issued,

may it be effectively transferred
even without endorsement or
delivery of the stock certificate?
-
Person sought to be a stockholder is

an officer and has custody
Endorsement and delivery is not

necessary (TAN vs. SEC)
Tan vs. SEC (FULL KNOWLEDGE,

HE IS ESTOPPED)
Persons sought to be stockholder is

officer and has custody of the book
(estopped)
General Rule for valid transfer

-
Certificate of stock must be

endorsed by owner or attorney-infact 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
Unauthorized
certificates
issuance
100/s
100
XYZCo

of
stock
74
100 pesos per share

Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
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
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
Forged transfers
-
If the corporation should issue a

new certificate in pursuance of a
forged transfer, the corporation
incurs no liability to the person in
whose favor it is issued and it may
demand its return for cancellation.
The corporation in such case has
been guilty of no misrepresentation.
On the other hand, it is the duty of
the purchaser to determine that the
indorsement of the owner is
genuine. However, if the new
certificate issued to the purchaser
comes into the hands of a bona fide
purchaser for value, the corporation
will be stopped from denying validity
thereof, since by issuing such new
certificate it represents that the
person named therein is a
stockholder of the corporation. The
corporation is thus forced to
recognize
both
the
original
certificate and new certificate-the
original, because the true owner
could not be deprived of his title by
a forged transfer, and the new,
because of its representation that
the person named therein is the
owner of shares in the corporation.
But if the 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
75
a right of action against the person

who made false representations and
in whose favor it issued a new
certificate. The true owner of the
shares which were wrongfully
transferred would of course have a
right to compel the corporation to
issue him a certificate in lieu of the
original one which was wrongfully
cancelled.
Authorized capital stock 1M shares
All are subscribed who will the
corporation recognize as rightful
owner A or D? if both will be
recognized there will be over
issuance
- only A citing citizens national bank vs.
state (but if recognition of both
stockholders would result in an over
issue of shares, then only the
original and true owner can be
recognized as a stockholder)
-
by virtue of the doctrine of nonnegotiability of certificate of stocks
The true and lawful owner will never

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

what if he is a purchaser for value?
4th party claim against B
When may certificate of stocks be
issued?
-
Section 64. Issuance of
stock certificates. - No certificate of
stock shall be issued to a subscriber
until the full amount of his
subscription together with interest
and expenses (in case of delinquent
shares), if any is due, has been
paid. (37)
A certificate of stock cannot be

issued unless he fully paid the
amount subscribed
Subscription to the capital stocks of
the corporation are indivisible
Clear mandate of section 148 of the
code is that the ruling of the court in
Baltazar vs. Lingayen Gulf, no
longer holds true
Section 148. Applicability to
existing
corporations.
All
corporations lawfully existing and
doing business in the Philippines on
the date of the effectivity of this
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
76
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.
2. For a consideration in property,

tangible or intangible, valued in
excess of its fair market value;
3. Gratuitously or under an agreement
that nothing shall be paid at all; or
4. In the guise of stock dividends when
there are no surplus profits of the
corporation.
Why is stock watering illegal?
1. The corporation is deprived of its
capital thereby hurting its business
prospects, financial capability and
responsibility;
2. Stockholders
who
paid
their
subscriptions in full, or promised to
pay the same, are injured and
prejudiced by the reduction of their
proportionate
interest
in
the
corporation; and,
3. Present and future creditors are
deprived of the corporate assets for
the protection of their interest.
Watered stock
Corporation is prejudiced
Stockholders, dilution of interest
Creditors are prejudiced, virtue of

right to look upon corporations
properties for the satisfaction of their
claims
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
issued?
watered
stocks
be
1. For a monetary consideration less

than its par or issued value;
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 quowarranto 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
77
value thereof, to render it valid and

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

the corporate directors consenting
to the issuance of watered stocks
and the extent of their liabilities?
-
Solidarily liable with the holder of

the watered stocks to the extent of
the water from said shares of stocks
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
directors for watered stocks. - Any
director or officer of a corporation
consenting to the issuance of stocks
for a consideration less than its par
or issued value or for a
consideration in any form other than
cash, valued in excess of its fair
value, or who, having knowledge
thereof, does not forthwith express
his objection in writing and file the
same with the corporate secretary,
shall be solidarily, liable with the
stockholder concerned to the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of
the stock and the par or issued
value of the same. (n)
ACS-100M 100M/S
PAR VALUE-1.00
SUBSCRIBED-50M
FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A
B
C
78
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.
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
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)
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
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?
They are placed in a fiduciary

relationship
Sila lang ba ang kikita, pano naman

yung corporation, opportunity na
yun para kumita
When are unpaid subscriptions due

and payable?
-
Section 67. Payment of balance of

subscription. - Subject to the
provisions of the contract of

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
79
provided, however, subscribers to

shares of stock, not fully paid, are
not liable to pay interest on their
unpaid subscriptions. The code thus
provides:
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.
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)
Should there be no bidder at

the public auction who offers to pay
the full amount of the balance on the
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)
Until a call is made, they are not due

and payable, but still subject to the
provisions of the contracts
Procedures in case of sale of
delinquent stocks
-
Section 68. Delinquency sale. - The

board of directors may, by
resolution, order the sale of
delinquent
stock
and
shall
specifically state the amount due on
each subscription plus all accrued
interest, and the date, time and
place of the sale which shall not be
less than thirty (30) days nor more
than sixty (60) days from the date
the stocks become delinquent.
Notice of said sale, with a
copy of the resolution, shall be sent
to every delinquent stockholder
either personally or by registered
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

Who is the winning bidder in a

delinquency sale?
-
Bidder who shall offer to pay the full

amount of the balance on the
interest, cost of advertisement and
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
80
could not paid, hence declared

delinquent and decides to sell his
share at a public auction
That
the
corporation
has
unrestricted retained earnings in
its books to cover the shares to be
purchased or acquired:
55 thousand is to be paid, remaining

balance plus cost and expenses
1. To eliminate fractional shares

arising out of stock dividends;
BIDDERS:
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during said
sale; and
X-55K FOR 99,900 shares

Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning
bidder)

stockholders entitled to payment for
their shares under the provisions of
this Code. (a)
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
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,

What if the shares of A were sold

without
compliance
of
the
requirements? May A question the
sale?
-
The law prescribes two conditions

before an action to recover
delinquent stocks irregularly sold
may be allowed. These are:
1. The party seeking to maintain such

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

of transactions of the shares of
stock
Suppose in the example, since there

are
no
unrestricted
retained
earnings, hence the corporation
cannot bid, is the corporation left
without any recourse?
-
Section 70. Court action to recover

unpaid subscription. - Nothing in this
Code shall prevent the corporation
from collecting by action in a court
of proper jurisdiction the amount
due on any unpaid subscription, with
accrued
interest,
costs
and
expenses. (49a)
81
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.
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
creditors have a right to look for

satisfaction of their claims and that
the assignee in insolvency can
maintain an action upon any unpaid
stock subscription in order to realize
assets for the payment of its debts.
PNB vs. Bitulak
Where it not for the promise, the

defendants
would
have
not
subscribed
Trust Fund Doctrine, it is established
doctrine that subscriptions to the
capital of a corporation constitute a
fund to which creditors have a right
to look for satisfaction of their claims
and that the assignee in insolvency
can maintain an action upon any
unpaid stock subscription in order to
realize assets for the payment of its
debts.
A corporation has no power to
release an original subscriber to its
capital stock from the obligation of
paying for his shares, without a
valuable consideration for such
release; and as against creditors a
reduction of the capital stock can
take place only in the manner and
under the conditions prescribed by
the statute or the charter or the
articles of incorporation.
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
Edward Keller and Co. vs. COB
Apocada vs. NLRC
Set-off is without any legal basis

It was premature
Unpaid subscriptions will become
due and payable only upon certain
instance
Call or if there is a stipulation in
contract
If no call and no stipulation in
contract then it will not be
demandable or payable at all
May the stockholder be held liable

for the debts of the corporation?
YES. To the extent of their unpaid
subscription
As to the liability of the stockholders,
it is settled that a stockholder is
personally liable for the financial
obligations of a corporation to the
extent of his unpaid subscriptions
Is there a prescriptive period

wherein a demand for unpaid
subscription should be made?
Lumanlan vs. Cura
Trust Fund Doctrine- subscription to

the capital of a corporation
constitute a fund to which the

NO. Garcia vs. Suarez case
Garcia vs. Suarez
Never became due and payable

until there is a call made
Prescription will not run until and
unless there is demand
82
Prescription should be determined

from the time demand has been
made and not from the time of
subscription
If declared delinquent, what would

be the effect as to the owner of said
shares?
-
Section 71. Effect of delinquency. No delinquent stock shall be voted

for or be entitled to vote or to
representation at any stockholder's
meeting, nor shall the holder thereof
be entitled to any of the rights of a
stockholder except the right to
dividends in accordance with the
provisions of this Code, until and
unless he pays the amount due on
his subscription with accrued
interest, and the costs and
expenses of advertisement, if any.
(50a)
However if the shares are not
delinquent, subscribers to the
capital of a corporation, though not
fully paid, are entitled to all the
rights of a stockholder, according to
section 72
delinquent shall have all the rights of
a stockholder. (n)
May
the
rules
governing
delinquency sale apply to a nonstock corporation? Are there unpaid
shares in a non-stock corporation?
-
Rules governing stock corporations,

when applicable, also applies to a
non-stock corporation
There are delinquent shareholders
also in a non-stock corporation.
Example is membership dues
A corporation paid 50% of

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

Yes, he loses all his right as a

stockholder except his right to
receive dividends
He remains to be a director, only
qualification to be a director is he
must own at least 1 share and since
it still stands in his name pending
the sale, he remains to be and act
as a director
Even if there is sale, he may still be
director because the winning bidder
may not bid or pay for all the shares
or there might be remaining shares,
which would be credited in favor of
the delinquent stockholder
approval
of
stockholders
Stock
corporations
are
prohibited
under
any
loan
under
special
circumstances
83

(n)
the certificate of stock which has

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

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.
When
will
the
certificate be issued?
-
replacement
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,
84
Could it be issued earlier than 1

year?
-
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.
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
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
been lost, stolen or destroyed.
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?
-
May corporate officers be held liable

for the unauthorized issuance?
-
YES, the code provides that:

Except in case of fraud, bad
faith, or negligence on the part of
the corporation and its officers, no
action may be brought against any
corporation which shall have issued
certificate of stock in lieu of those
lost, stolen or destroyed pursuant to
the procedure above-described.
(R.A. 201a)
Assuming the last paragraph is not

there; would it be not the same, that
they should be held liable due to
fraud, bad faith or negligence?
-
YES. Section 31 provides that:

directors, trustees or officers. Directors or trustees who willfully
and knowingly vote for or assent to
patently unlawful acts of the
corporation or who are guilty of
gross negligence or bad faith in
directing
the
affairs
of
the

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
85
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,
for my reason, and compel the
corporation to purchase his shares
as provided for under section 105.

86
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 bylaws 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
member of the corporation at
reasonable hours on business days
and he may demand, in writing, for a
copy of excerpts from said records
or minutes, at his expense.
Any officer or agent of the
corporation who shall refuse to allow
any director, trustees, stockholder or
member of the corporation to
examine and copy excerpts from its
records or minutes, in accordance
with the provisions of this Code,
shall be liable to such director,
trustee, stockholder or member for
damages, and in addition, shall be
guilty of an offense which shall be
punishable under Section 144 of this
Code: Provided, That if such refusal
is made pursuant to a resolution or
order of the board of directors or
trustees, the liability under this
section for such action shall be
imposed upon the directors or
trustees who voted for such refusal:
and Provided, further, That it shall
be a defense to any action under
this section that the person
demanding to examine and copy
excerpts from the corporation's
records and minutes has improperly
used any information secured
through any prior examination of the
records or minutes of such
corporation or of any other
corporation, or was not acting in
good faith or for a legitimate
purpose in making his demand.
Stock corporations must also
keep a book to be known as the
"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
87
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 bylaws may prescribe. The stock and
transfer book shall be kept in the
principal office of the corporation or
in the office of its stock transfer
agent and shall be open for
inspection by any director or
stockholder of the corporation at
reasonable hours on business days.
No stock transfer agent or
one engaged principally in the
business of registering transfers of
stocks in behalf of a stock
corporation shall be allowed to
operate in the Philippines unless he
secures a license from the
Securities
and
Exchange
Commission and pays a fee as may
be fixed by the Commission, which
shall be renewable annually:
Provided, That a stock corporation is
not precluded from performing or
making transfer of its own stocks, in
which case all the rules and
regulations imposed on stock
transfer agents, except the payment
of a license fee herein provided,
shall be applicable. (51a and 32a;
P.B. No. 268.)
To summarize:
1. Records of all business transactions
which include, among others,
journals, ledger, contracts, vouchers
and receipts, financial statements
and other books of accounts,
income tax returns, and voting trust
agreements which must be kept and
carefully preserved at its principal
office;
2. Minutes of all
meetings of
stockholders or members and of the
directors or trustees setting forth in
detail the date, time, and place of
meeting, how authorized, the notice
given whether the same be regular
or special, and if special, the
purpose thereof shall be specified,
those present and absent, and
every act done or ordered done
there at which ,must likewise be
kept at the principal office of the

corporation; and,
3. Stock and transfer book showing the
names of the stockholders, the
amount paid or unpaid on all stocks
for which subscription has been
made, a statement of every
alienation, sale or transfer of stock
made, if any the date thereof, and
by whom and to whom made which
must also be kept at the principal
office of the corporation or in the
office of its stock transfer agent.
These corporate books and records,
inclusive of all business transactions
and minutes of meetings, are
subject to inspection by any of the
directors, trustees, stockholders or
members of the corporation at
reasonable hours on business days
and a copy of excerpts of said
records may be demanded. In fact,
in so far as financial statement is
concerned,
the
Code
clearly
provides:
Section 75. Right to financial
statements. - Within ten (10) days
from receipt of a written request of
any stockholder or member, the
corporation shall furnish to him its
most recent financial statement,
which shall include a balance sheet
as of the end of the last taxable year
and a profit or loss statement for
said taxable year, showing in
reasonable detail its assets and
liabilities and the result of its
operations.
At
the
regular
meeting
of
stockholders or members, the board
of directors or trustees shall present
to such stockholders or members a
financial report of the operations of
the corporation for the preceding
year, which shall include financial
statements,
duly
signed
and
certified by an independent certified
public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00,
the financial statements may be
certified under oath by the treasurer
or any responsible officer of the
corporation. (n)
88
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?
-
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.
Yes, the code provides that:

and Provided, further, That it
shall be a defense to any action
under this section that the person
demanding to examine and copy
excerpts from the corporation's
records
and
minutes
has
improperly used any information
secured
through
any
prior
examination of the records or
minutes of such corporation or of
any other corporation, or was not
acting in good faith or for a
legitimate purpose in making his
demand.
What is the stock and transfer?

Where should stock and transfer be
kept? Can it be kept elsewhere?
Stock corporations must also
keep a book to be known as the
"stock and transfer book", in which
must be kept a record of all
stocks in the names of the
stockholders
alphabetically
arranged; the installments paid
and unpaid on all stock for which
subscription has been made, and
the date of payment of any
installment; a statement of every
alienation, sale or transfer of
stock made, the date thereof, and
Stock and transfer agent

-
Records every movement

Person who monitors movement by
the minutes or by the hours
Non-stock corporation- stock and
transfer books
Club share- membership
Are stockholders entitled to financial

statements?
-
Yes, they are entitled to a copy, the

code provides that:
Section 75. Right to financial
statements. - Within ten (10) days
from receipt of a written request of
any stockholder or member, the
corporation shall furnish to him its
most recent financial statement,
which shall include a balance sheet
as of the end of the last taxable year
and a profit or loss statement for
said taxable year, showing in
reasonable detail its assets and
liabilities and the result of its
operations.
At the regular meeting of
stockholders or members, the board
of directors or trustees shall present
to such stockholders or members a
financial report of the operations of
the corporation for the preceding
year, which shall include financial
statements,
duly
signed
and
certified by an independent certified
public accountant.
However, if the paid-up
capital of the corporation is less
than P50,000.00, the financial
statements may be certified under
oath by the treasurer or any
responsible
officer
of
the
corporation. (n)
89
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
trustee to inspect and examine

corporate books and records is
considered absolute and unqualified
and without regard to motive. This is
because a director supervises,
directs and manages corporate
business and it is necessary that he
be equipped with all the information
and data with regard to the affairs of
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,
Those in the stock exchange

-
Disclosure of any matter that have

to
do
with
increasing
and
decreasing
If not kulong violation of securities
and regulation act
Why is this right of inspection

granted to a stockholder?
-
The basis of the right of the

stockholder to inspect the books
and records of the corporation for a
proper purpose is to protect his
interest as a stockholder. Thus, it
has been said that:
The right of the shareholders
to ascertain how the affairs of
his company are being
conducted by its directors
and officers is founded by his
beneficial interest through
ownership of shares and the
necessity of self-protection.
Managers
of
some
corporations
deliberately
keep the shareholders in
ignorance
or
under
misapprehension as to the
true condition of its affairs.
Business prudence demands
that the investor keep a
watchful
eye
on
the
management
and
the
condition of the business.
Those in charge of the
company may be guilty of
gross
incompetence
or
dishonesty for years and
escape
liability
if
the
shareholders cannot inspect
the records and obtain
information.
Is there any distinction of the right of

inspection of a stockholder and that
of a director?
-
Yes, as compared to a stockholder

or member, the right of a director or

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
90
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
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
W.G.
Philpotts
vs.
Manufacturing Co.
The right of inspection given to a

stockholder can be exercised either
by himself or by any proper
representative or attorney-in-fact,
and either with or without the
attendance of the stockholder
The right may be regarded as
personal, in the sense that only a
stockholder may enjoy it; but the
inspection and examination may be
made by another. Otherwise it would
be unavailing in many instances.
The law is clear, it may be exercised

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

unqualified right to inspect the
books
and
records
of
the
corporation at all reasonable hours.
We do not conceive, however, that a
director or stockholder has any
absolute right to secure certified
copies of the minutes of the
corporation until these minutes have
been written up and approved by
the directors.
Philippine
o Note: Usually hires an auditor or

accountant to safeguard his
interest
Pardo vs. Hercules Lumber Co.
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.
May a stockholder of a holding

company inspect the books and
records of a subsidiary?
-
It depends
The right of the stockholders to
examine corporate books extends to
wholly-owned subsidiary which is
completely under the control and
management of the parent company
where he is such a stockholder. But
if the two entities (subsidiary and
parent) are legally being operated
as separate and distinct entities,
there is no such right of inspection
91
on the part of the stockholder of the

parent company.
AYALAHOLDING
COMPANY/PARENT COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA
LAND (not wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in
order to be a PARENT
COMPANY
A, is a stockholder of Ayala, does he
have a right to inspect the records of
its subsidiaries?
-
If wholly owned pwede, but its

subsidiaries are not wholly owned
kaya hindi pwede
Gokongwei vs. SEC
San Miguel corporation owns all of

the shares of stock of San Miguel
International
It is wholly-owned
It would be in accord with equity,
good faith and fair dealing to
construe the statutory right of
petitioner as stockholder to inspect
the books and records of such
wholly-owned subsidiary which are
in
respondent
corporations
possession and control
If being operated as separate and

distinct corporations, there is no
such right
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,
nor shall
any
information relative to the funds in
its custody, its current accounts or
deposits belonging to private
individuals, corporations or other
entities except by order of a Court of
Competent
Jurisdiction,
hence
inspection sought to by the
petitioner is violative of the
provisions of its charter and is even
subject to penal sanctions
Assuming you are a stockholder of

PNB, and then it was privatized,
may you already have the right to
inspect?
-
No, unless its charter has been

altered or repealed it is still subject
to the same law
3 stages in the life of a corporation

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

Merger and consolidation
-
In corporate parlance it is called

spin-off
92
Almost a year ago San Miguel

separated its brewery business
San Miguel Corporation is now a full
time holding company; it can later
on absorb the company
Corporations are granted by the
code to merge or consolidate
most common type of corporate
recognition
not the same in every case
but most common in the weal
financial or insolvent condition, aim
is to bring it back to its financial
capability
also a method of recapitalization
o purchase and sale of corporate
assets is another form of
corporate reorganization
How do you value the assets of the

merging
corporation,
do
you
consider goodwill?
First
secure
favorably
recommendation of government
agency
-
Section 79. Effectivity of

merger or consolidation. - The
articles
of
merger
or
of
consolidation, signed and certified
as herein above required, shall be
submitted to the Securities and
Exchange
Commission
in
quadruplicate for its approval:
Provided, That in the case of
merger or consolidation of banks
or banking institutions, building
and loan associations, trust
companies,
insurance
companies,
public
utilities,
educational institutions and other
special corporations governed by
special laws, the favorable
recommendation
of
the
appropriate government agency
shall first be obtained. If the
Commission is satisfied that the
merger or consolidation of the
corporations concerned is not
inconsistent with the provisions of
this Code and existing laws, it shall
issue a certificate of merger or of
consolidation, at which time the
merger or consolidation shall be
effective.
If, upon investigation, the

Securities
and
Exchange
Commission has reason to believe
that the proposed merger or
consolidation is contrary to or
inconsistent with the provisions of
this Code or existing laws, it shall
set a hearing to give the
corporations
concerned
the
opportunity to be heard. Written
notice of the date, time and place of
hearing shall be given to each
constituent corporation at least two
(2) weeks before said hearing. The
Commission
shall
thereafter
proceed as provided in this Code.
(n)
Merger
-
A 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
-
A
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
B
93
C
Like all other corporate acts, it
emanates from the board
1. The board of directors or trustees of
each constituent corporations shall
approve a plan of merger or
consolidation setting forth the
matters required in section 76;
2. Approval of the plan by the
stockholders representing 2/3 of
2/3 of the member in non-stock
corporations of each of such
corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a
copy or summary of the plan of
merger or consolidation shall be
given to all stockholders or
members at least two (2) weeks
prior to the scheduled meeting,
either personally or registered
mail stating the purpose thereof;
4. Execution of the articles of merger
or consolidation by each constituent
corporations to be signed by the
president or vice-president and
certified
by
the
corporate
secretary or assistant secretary
setting forth the matters required
in section 78;
5. Submission of the articles of
merger or consolidation in
quadruplicate to the SEC subject
to the requirement of section 79 that
if it involve corporations under the
direct supervision of any other
government agency or governed by
special
laws
the
favorable
recommendation of the government
agency concerned shall first be
secured and;
6. Issuance of the certificate of
merger or consolidation by the
SEC at which time the merger or
consolidation shall be effective. If
the plan, however, is believed to be
contrary to law, the SEC shall set a
hearing to give the corporations
concerned an opportunity to be
heard upon proper notice and
thereafter, the Commission shall
proceed as provided in the Code.
Although merger and consolidation

is an express power granted to
corporation, it is subject to
limitations, as maybe proscribed by
law
What would be the effect of merger
or consolidation? <sec. 80>
1. There will only be a single
corporation. In case of merger, the
surviving
corporation
or
the
consolidated corporation in case of
consolidation;
2. The termination of the corporate
existence
of
the
constituent
corporations, except that of the
surviving
corporation
or
the
consolidated corporation;
3. The surviving corporation or the
consolidated
corporation
will
possess all the rights, privileges,
immunities and powers and shall be
subject to all the duties and liabilities
of a corporation organized under the
Code;
4. The surviving or consolidated
corporation shall possess all the
rights, privileges, immunities and
franchises
of
the
constituent
corporations, and all property and all
receivables
due,
including
subscriptions to shares and other
choses in action, and every other
interest of, or belonging to or due to
the constituent corporations shall be
deemed transferred to and vested in
such surviving or consolidated
corporation without further act and
deed; and,
5. The rights of creditors or any lien on
the property of the constituent
corporations shall not be impaired
by the merger or consolidation.
Is there a liquidation process in case
of merger or consolidation?
-
None, there is nothing to distribute
Associated Bank vs. CA
By virtue of a specific provision in

the merger agreement
Although the subject promissory
note names CBTC as the payee, the
reference to CBTC in the note shall
be construed, under the very
provision of the merger agreement,
94
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. Instances of
appraisal right. - Any stockholder of
a corporation shall have the right to
dissent and demand payment of the
fair value of his shares in the
following instances:
1. In case any amendment to the
articles of incorporation has the
effect of changing or restricting the
rights of any stockholder or class of
shares,
or
of
authorizing
preferences in any respect superior
to those of outstanding shares of
any class, or of extending or
shortening the term of corporate
existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all
of the corporate property and assets
as provided in the Code; and
3.
In
case
of
consolidation. (n)
merger
or
May it be exercised by a stockholder

who dissents to the act of a
95
business other
purpose?
than
primary
What if the principal office is

changed from QC to TAWI-TAWI,
will it change or affect the rights of
A?
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
books to cover such payment: and
Provided,
further,
That
upon
payment by the corporation of the
agreed or awarded price, the
stockholder shall forthwith transfer
his shares to the corporation. (n)
X Co.
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
To some it may change or restrict

the rights to others it may not
Principal Office- QC, it was changed

to Manila
How is the right exercised?

-
A objects and makes a written

demand for payment of fair value of
shares. Can he make a demand of
payment of shares?
According to section 82 of the code:

Section 82. How right is
exercised. - The appraisal right may
be exercised by any stockholder
who shall have voted against the
proposed corporate action, by
making a written demand on the
corporation within thirty (30) days
after the date on which the vote was
taken for payment of the fair value
of his shares: Provided, That failure
to make the demand within such
period shall be deemed a waiver of
the appraisal right. If the proposed
corporate action is implemented or
affected, the corporation shall pay to
such stockholder, upon surrender of
the certificate or certificates of stock
representing his shares, the fair
value thereof as of the day prior to
the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of such
corporate action.
If within a period of sixty (60)
days from the date the corporate
action was approved by the
stockholders,
the
withdrawing
stockholder and the corporation

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
96
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
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
books to cover such payment: and
Provided,
further,
That
upon
payment by the corporation of the
agreed or awarded price, the
stockholder shall forthwith transfer
his shares to the corporation. (n)
Section 86. Notation on
certificates; rights of transferee. Within
ten
(10)
days
after
demanding payment for his shares,
a dissenting stockholder shall

submit the certificates of stock
representing his shares to the
corporation for notation thereon that
such shares are dissenting shares.
His failure to do so shall, at the
option
of
the
corporation,
terminate his rights under this Title.
If shares represented by the
certificates bearing such notation
are transferred, and the certificates
consequently cancelled, the rights of
the transferor as a dissenting
stockholder under this Title shall
cease and the transferee shall have
all the rights of a regular
stockholder; and all dividend
distributions which would have
accrued on such shares shall be
paid to the transferee. (n)
-
Notation is not mandatory, it is even

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

pay the interest of A
300 T, 150T, 150T and
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
o Exception: section 105 close
corporation
The procedure and requirements for

the valid exercise of this rights are:
1. The stockholder must have voted
against the proposed corporate
action in any of the instances
97
2.
3.
4.
5.
allowed by law for the exercise of

the right of appraisal;
The written demand for payment
must be made by the dissenting
stockholder within thirty (30) days
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;
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;
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;
Upon payment of the shares by the
corporation,
the
dissenting
stockholder shall transfer his shares
to the corporation.
What would be the effect if the

stockholder exercises his appraisal
rights? What happens to his voting
and dividend rights if he exercises
his appraisal rights?
-
It will be suspended, with a limitation

of 30 days, as provided for by
section 83 of the code:
Section 83. Effect of demand
and termination of right. - From the
time of demand for payment of the
fair value of a stockholder's shares
until either the abandonment of the
corporate action involved or the
purchase of the said shares by the
corporation, all rights accruing to
such shares, including voting and

dividend
rights,
shall
be
suspended in accordance with
the provisions of this Code,
except
the
right
of
such
stockholder to receive payment
of the fair value
thereof:
Provided, That if the dissenting
stockholder is not paid the value
of his shares within 30 days after
the award, his voting and
dividend rights shall immediately
be restored. (n)
How do you compare the rights of a
stockholder, declared delinquent
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
98
have accrued on his shares shall be

paid to him. (n)
The dissenting stockholder may also

sell, transfer or assign his shares
Instances when the right of a

dissenting stockholder to be paid
the fair value of his shares ceases.
Section 86. Notation on

certificates; rights of transferee. Within
ten
(10)
days
after
demanding payment for his shares,
a dissenting stockholder shall
submit the certificates of stock
representing his shares to the
corporation for notation thereon that
such shares are dissenting shares.
His failure to do so shall, at the
option of the corporation, terminate
his rights under this Title. If shares
represented by the certificates
bearing
such
notation
are
transferred, and the certificates
consequently
cancelled,
the
rights of the transferor as a
dissenting stockholder under this
Title shall cease and the
transferee shall have all the rights
of a regular stockholder; and all
dividend
distributions
which
would have accrued on such
shares shall be paid to the
transferee. (n)
1. When he withdraws his demand for

payment and the corporation
consents thereto;
2. When the proposed action is
abandoned or rescinded by the
corporation;
3. When the proposed action is
disapproved by the SEC where such
approval is necessary;
4. When the SEC determines that he is
not entitled to exercise his appraisal
right;
5. When he fails to submit the stock
certificate within ten (10) days from
demand to the corporation for
notation that such shares are
dissenting shares; and,
6. If the shares are transferred and the
certificate subsequently cancelled.
Who bears the cost of appraisal?
-
It depends
The corporation bears the cost if
a. The price offered by the
corporation is lower than the fair
value of the shares of the
dissenting
stockholder
as
determined by the appraisers;
b. Where an action is filed by the
dissenting stockholder to recover
such fair value and the refusal of
the stockholder to receive
payment is found by the court to
be justified.
Dissenting stockholder will be liable

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

NON-STOCK CORPORATIONS
What is a non-stock corporation?
-
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
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)
How is the right to vote exercised in

a non-stock corporation compared
to a stock corporation
99
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?
-
No, Doctrine of Limited Capacity
May members in a non-stock

corporation vote by proxy?
-
Yes, section 89 provides that:

by-laws, 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 nonstock
corporations
may
be
authorized by the by-laws of nonstock corporations with the approval
of, and under such conditions which
may be prescribed by, the Securities
and Exchange Commission.
How about in stock?

-
is in the matter of general

amendment of the articles of
incorporation where the written
assent of the stockholder may be
sufficient.
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,

How is the governing board

constituted
in
a
non-stock
corporation? How many members?
-
It may exceed 15 in a non-stock

corporation unless the AOI or 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
one-third (1/3) of the board of
trustees shall be held annually and
trustees so elected shall have a
term of three (3) years. Trustees
thereafter elected to fill vacancies
occurring before the expiration of a
particular term shall hold office only
for the unexpired period.
No person shall be elected as
trustee unless he is a member of the
corporation.
by-laws, officers of a non-stock
corporation may be directly elected
by the members. (n)
Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of
the Philippines; and,
3. Other qualifications as may be
provided for in the by-laws.
Governing board in a non-stock
100
Board of Trustees, however section

138 provides that:
purpose, or in the same meeting

authorizing the increase of directors
or trustees if so stated in the notice
of the meeting. (n)
Section 138. Designation of

governing boards. - The provisions
of specific provisions of this Code to
the contrary notwithstanding, nonstock 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)

such
directors,
except
for
however,
That
any
such
vote
of
the
stockholders
Disqualifications
-
Section 27 also applies to a nonstock 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
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.
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

Who elects the other officers?

-
Directly by the general members

unless the by-laws or articles
provide otherwise. <sec.92>
by-laws, officers of a non-stock
corporation may be directly elected
by the members. (n)
In stock corporations who elect

officers?
-
Directors
The
provision
that
stock
corporations cannot validly provide
that members cannot be voted by
stockholders is only a general rule
because there is an exception
section 97 of the code states that:
The
articles
of
incorporation
of
a
close
corporation may provide that the
business of the corporation shall be
managed by the stockholders of
the corporation rather than by a
board of directors. So long as this
provision continues in effect:
101
1. No meeting of stockholders need

be called to elect directors;
or statutory restrictions, non-stock

corporations may determine who
shall be admitted to membership
and how they shall be admitted.
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
Section
36.
Corporate
powers and capacity. - Every
corporation incorporated under this
Code has the power and capacity:
3. The stockholders of the

corporation shall be subject to all
liabilities of directors.
The
articles
of
incorporation may likewise provide
that all officers or employees or
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.
Nontransferability of membership. Membership
in
a
non-stock
corporation and all rights arising
there from are personal and nontransferable, unless the articles of
incorporation
or
the
by-laws
otherwise provide. (n)
How is a membership requirement
in a non-stock corporation
A holds a membership certificate
6. In case of stock corporations, to

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

which to admit depending on their
own rules
The power or authority to terminate

members in non-stock corporations
is said to be inherent but strict
compliance with the manner and
procedure laid down in the by-laws
must be observed, otherwise it may
render the expulsion ineffective and
invalid.
Section 91. Termination of
membership. - Membership shall be
terminated in the manner and for the
causes provided in the articles of
incorporation
or the
by-laws.
Termination of membership shall
have the effect of extinguishing all
rights of a member in the
corporation or in its property, unless
otherwise provided in the articles of
incorporation or the by-laws. (n)
B goes to the corporation and

compels the corporation to record
the transfer in his name
Power is inherent and may be

exercised in certain situations:
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
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

102
duty as a member of the

corporation, and also indictable
at common law.
If the conduct of the member comes
within any of this cases, it is a
ground for valid expulsion although
it may not be expressly made so by
the by-laws
Chinese YMCA vs. Ching
Right of the corporation to choose

who the members are, cannot be
inquired or intervened by the court
The
appealed
decision
thus
contravened the establish principle
that the courts cannot strip a
member of a non-stock corporation
of his membership therein without
cause.
Lions Club International vs. CA
Courts will not generally interfere on

matters involving the internal affairs
of an unincorporated association
such as election contest unless the
acts complained of are arbitrary,
oppressive, fraudulent, violative of
civil rights and the like
General rule is that the courts will
not interfere with the internal affairs
of an unincorporated association so
as to settle disputes between the
members, or questions of policy,
discipline, or internal government,
so long as the government of the
society is fairly and honestly
administered in conformity with its
by-laws and the law of the land, and
no property or civil rights are
involved.
Exceptions are the following:
a. Where law and justice so

require, and the proceedings of
the association are subject to
judicial review where there is
fraud, oppression, or bad faith,
or where the action complained
of is capricious, arbitrary, or
unjustly discriminatory
b. To grant relief in case property or
civil rights are invaded, although
it has also been held that the
involvement of property rights
does not necessarily authorize
judicial intervention, in the

absence of arbitrariness, fraud or
collusion.
c. Are violative of the laws of the
society, or the law of the land, as
by depriving the person of due
process of law
d. There is lack of jurisdiction on
the
part
of
the
tribunal
conducting the proceedings,
where the organization exceeds
its powers, or where the
proceedings are otherwise illegal
Corporations, stock and non-stock,
may be dissolved in accordance and
pursuant to the provisions of
Sections 118 to 121 of the
Corporation Code and the pertinent
provisions of P.D. 902-A, as
amended. If such be the case, the
assets of the corporation are to be
distributed in accordance with law
and established jurisprudence.
If a non-stock corporation is
dissolved how will its properties be
distributed?
Section
94.
Rules
of
distribution. - In case dissolution
of a non-stock corporation in
accordance with the provisions
of this Code, its assets shall be
applied and distributed as
follows:
1. All liabilities and obligations of
the corporation shall be paid,
satisfied and discharged, or
adequate provision shall be
made therefore;
2. Assets held by the corporation
upon a condition requiring return,
transfer or conveyance, and
which condition occurs by
reason 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,
103
transfer or conveyance by
reason of the dissolution, shall
be transferred or conveyed to
one or more corporations,
societies
or
organizations
engaged in activities in the
Philippines substantially similar
to those of the dissolving
corporation according to a plan
of distribution adopted pursuant
to this Chapter;
4. Assets other than those
mentioned in the preceding
paragraphs, if any, shall be
distributed in accordance with
the provisions of the articles of
incorporation or the by-laws, to
the extent that the articles of
incorporation or the by-laws,
determine the distributive rights
of members, or any class or
classes of members, or provide
for distribution; and
5. In any other case, assets may
be distributed to such persons,
societies,
organizations
or
corporations, whether or not
organized for profit, as may be
specified in a plan of distribution
adopted
pursuant
to
this
Chapter. (n)
Non-stock corporations with 4Billion
funds, may it be distributed for and
among its members?
- Section 94 number 3 provides:
3. Assets received and held
by the corporation subject to
limitations permitting their use only
for charitable, religious, benevolent,
educational or similar purposes, but
not held upon a condition requiring
return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities
in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
distribution adopted pursuant to this
Chapter;

If there is no distributive agreement

then they may do so through a plan
of distribution under section 95
Section
95.
Plan
of
distribution of assets. - A plan
providing for the distribution of
assets, not inconsistent with the
provisions of this Title, may be
adopted by a non-stock corporation
in the process of dissolution in the
following manner:
The board of trustees shall,
by majority vote, adopt a resolution
recommending a plan of distribution
and directing the submission thereof
to a vote at a regular or special
meeting of members having voting
rights. Written notice setting forth
the proposed plan of distribution or
a summary thereof and the date,
time and place of such meeting shall
be given to each member entitled to
vote, within the time and in the
manner provided in this Code for the
giving of notice of meetings to
members. Such plan of distribution
shall be adopted upon approval of at
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
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
104
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.
-
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
or controlling the shares is also a

close corporation.
Notwithstanding
the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting
stock or voting rights is owned or
controlled by another corporation
which is not a close corporation
within the meaning of this Code.
What kind of corporations cannot be
a close corporation?
1.
2.
3.
4.
5.
6.
Classification of directors
-
Section 97. Articles of

incorporation. - The articles of
incorporation of a close corporation
may provide:
1. For a classification of shares or
rights and the qualifications for
owning or holding the same and
restrictions on their transfers as may
be stated therein, subject to the
provisions of the following section;
No, the 3 qualifying conditions must

be present
What if 2/3 of the outstanding capital

stock is owned by another
corporation which is also a close
corporation, will it be a close
corporation?
-
No, it will only be a closed

corporation if 2/3 of the voting
stocks of a close corporation is also
owned by a close corporation. It
must be voting stocks
Even if another corporation owns or
controls 2/3 of the voting stocks of a
close corporation, the latter may still
be considered as such close
corporation if the corporation owning

Ordinary stock- no such right

Close corporation-yes there is such
a right
Section 97 is a permissive provision
May any type of corporation, be

organized
as
such
close
corporation?
-
Mining or oil companies,

Stock exchange
Banks and insurance companies,
Public utilities
Educational institutions
Corporations vested with public
interest
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
105
under the 3 qualifying conditions in

section 96
Cumulative voting is restricted in
close corporations if will be elected
solely by a particular class
In a close corporation, the articles of
incorporation may provide for a
greater
quorum
and
voting
requirement in meetings of both
stockholders or directors to increase
the veto power of minority
stockholders, unlike in a stock
corporation wherein only directors
meetings may provide for greater
quorum
requirement
and
in
stockholders meeting which may not
be altered or increased, as provide
for in section 25, following the
doctrine of limited capacity
The articles of a close corporation
may likewise provide that the
business of the corporation shall be
managed by the stockholders rather
than by the board of directors.
However the same must contain the
continuing provisions required in
paragraph 2 of section 97, that is:
What if the stockholders do not want

to exercise their right or option to
purchase may it be sold to any
person?
-
In ordinary stock corporations, the

restrictions must appear in the
articles of incorporation as well as
the certificate of stocks

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.
Restrictions
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
o ordinary stock corporations

are liable only if acted in Bad
faith, fraud or negligence in
performance of duty
What if there are already 20
stockholders and they want to add 2
more, may it compel?
-
In ordinary stock corporations, they

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

may they admit?
106
Yes, provided all the stockholders

consented or instead of consenting
they decide to amend their articles
of incorporation
Will have to amend the articles of
incorporation to accommodate other
purchasers of share
Will cease to be a close corporation
if it amends and becomes in excess
of 20
o Unless all the stockholders
consent they may
What if the other stockholders object

to register? What will be the remedy
of the transferee?
-
His remedy is rescission. The effect

of rescission is mutual restitution
How about the stockholder, what is

his recourse?
-
He
may
compel
the
close
corporation to purchase his shares
at their fair value for any reason,
provided the corporation has
sufficient assets in its books to cover
the debts and liabilities exclusive of
capital
In a close corporation, there is a
withdrawing stockholder, unlike in
an ordinary stockholder where there
is none, they may only do so in the
exercise of appraisal rights
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
the corporation or any stockholder,
being misapplied or wasted.
Agreements may also be entered in
a close corporation <sec.100>
-
They can even agree to be partners

in management
Pre-incorporation
Manner in which the business of the
corporation shall be managed
Board resolution
-
Ordinary stock corporations- sit and

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

may be directly appointed and hired
by the stockholders
Close corporations may validly act
even without a meeting provided the
conditions are obtained
Section 101. When board
meeting
is
unnecessary
or
improperly held. - Unless the 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
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.
107
Pre-emptive rights in
corporation is absolute
close
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
personal services, or in payment of
corporate debts, unless the articles
of incorporation provide otherwise.
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
stock, whether with or without voting
rights, or of such greater proportion
of shares as may be specifically
provided
in
the
articles
of
incorporation for amending, deleting
or removing any of the aforesaid
provisions, at a meeting duly called
for the purpose.
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 preemptive rights is broadened to

include all issues without exception
unless denied or limited by the
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 pre-emptive 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
stock, in exchange for property
needed for corporate purposes or in
payment of a previously contracted
debt.
What happens
deadlock?
-
if
there
is
Section 104 provides for a remedy

Section 104. Deadlocks. Notwithstanding
any
contrary
provision
in
the
articles
of
incorporation
or
by-laws
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)
cancelling or altering any provision
contained in the articles of
108
incorporation, by-laws, or any

stockholder's
agreement;
(2)
cancelling, 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.
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.
-
Powers of the SEC in intracorporate 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
corporation or its board of
directors, stockholders or officers
3. Prohibit
any
act
of
the
corporation or its board of
directors, stockholders or officers
or other persons party to the
action;
4. 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,
5. Appointment of a provisional
director
6. Dissolving the corporation; or
7. 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
CORPORATION
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
ORDINARY STOCK
CORPORATION
No limitation as to
number
of
shareholder
Maximum number of
directors is 15
109
3.
Shares
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.
Stockholders
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.
Agreements
between
stockholders
regarding
the
operations of the
business
can
validly be made
Generally
no
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
affairs
Ordinarily, no such
classification and no
restrictions
on
cumulative voting
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 Officers are elected
of
incorporation by the Board of
may provide that Directors
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.
Restriction on
transfer of shares
should
be
indicated in the
articles
of
incorporation, bylaws and stock
certificates
13.
Pre-emptive
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/stockhold
ers are acting in
good faith
16.
Any
stockholder may
petition the SEC
for
corporate
dissolution
on
grounds
among
others,
provides
for in section 105
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
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/stockholder
s
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
amended
110
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
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)
-
Two
types
corporations
-
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
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
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
of
educational
Certificate of completion in the

academic field
Vocational and technical ones
o Recommendation of DECS if
certificate of completion in
the academic field
How is the governing board of an

educational institution instituted?
-
Non-stock- multiples of 5 only

(example: 5,10,15)
Stock- can be anywhere between 5
to 15
Can they
members?
-
consist
of
or
Yes, if stock
Can they be incorporated also as

non-stock?
-
Yes
B.P. 232 allows the organization of
an educational institution that is
111
stock corporation, only if they do not

issue a certificate of completion in
the academic field
Directors or trustees cannot attend

or vote by proxy at board meetings.
(33a)
Qualifications and disqualifications

of the membership in the board of
an educational corporation
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
appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
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
Article 14 section 4 par. 2 of the

Constitutions
Educational institutions, other
than those established by religious
groups and mission boards, shall be
owned solely by citizens of the
Philippines or corporations or
associations at least sixty per
centum of the capital of which is
owned by such citizens. The
Congress may, however, require
increased
Filipino
equity
participation in all educational
institutions.
The
control
and
administration
of
educational
institutions shall be vested in
citizens of the Philippines.
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.

No educational institution shall be

established exclusively for aliens
and no group of aliens shall
comprise more than one-third of the
enrollment in any school. The
provisions of this sub section shall
not apply to schools established for
foreign diplomatic personnel and
their dependents and, unless
otherwise provided by law, for other
foreign temporary residents.
-
Management is left solely to citizens

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

an educational institutions
112
Can serve a term of 5 years. If that

be the case, 1/5 of their number
shall expire every year
Non-stock or stock, can they serve

for a 1 year term only?
-
Yes, the articles of incorporation

may provide that it be 1 year only
What
are
these
corporations spoken off?
-
Corporation
societies
sole
and
religious
religious
What is a corporation sole?

-
Consists of one person only and his

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

less than 5 natural persons?
-
General rule, 5 to 15 natural

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

corporation sole?
-
No, not any person can form a

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

Is it required to file the articles of

incorporation in the SEC?
-
Yes
What should be contained in the

-
Section 111
provides for
procedures
and section
the contents
112
and
Section 111. Articles of

incorporation. - In order to become a
corporation
sole,
the
chief
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,
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,
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
rabbi of presiding elder is required
to be filled, according to the rules,
regulations or discipline of the
church to which he belongs; and
5. The place where the principal
office of the corporation sole is to be
113
established and located, which

place must be within the Philippines.
during a particular period until

dissolved in accordance with law
The articles of incorporation

may include any other provision not
contrary to law for the regulation of
the affairs of the corporation. (n)
When will it acquire judicial

personality? How do you compare
this to other types of corporation?
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,
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
rabbi or presiding elder, duly
certified to be correct by any notary
public.
From and after the filing with
Commission of the said articles of
incorporation, verified by affidavit or
affirmation, and accompanied by the
documents mentioned
in
the
preceding paragraph, such chief
rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties
or church theretofore administered
or managed by him as such chief
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
including
hospitals,
schools,
colleges,
orphan
asylums,
parsonages and cemeteries thereof.
(n)
Is it required to indicate its terms of
execution? Why not?
-
Not required because they are

supposed to exist in perpetuity
However, it does not mean that it
shall continue to exist forever, it
merely means that it has the
capacity of continuous existence

After the filing the verified articles of

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

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

rights and privileges, but when it
comes to alienation and acquisition,
it must possess a court order,
however when there is a regulated
method, a court order may be
dispensed with <sec. 113>
Section 113. Acquisition and
alienation of property. - Any
corporation sole may purchase and
hold real estate and personal
property for its church, charitable,
benevolent or educational purposes,
and may receive bequests or gifts
for such purposes. Such corporation
may sell or mortgage real property
held by it by obtaining an order for
that purpose from the Court of First
Instance of the province where the
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
114
application for leave to sell or

mortgage must be made by petition,
duly
verified,
by
the
chief
rabbi or presiding elder acting as
corporation sole, and may be
opposed by any member of the
church
represented
by
the
corporation sole: Provided, That in
cases where the rules, regulations
and discipline of the religious
religious society or order concerned
represented by such corporation
sole regulate the method of
acquiring, holding, selling and
mortgaging real estate and personal
property, such rules, regulations and
discipline shall control, and the
intervention of the courts shall not
be necessary. (159a)
Since a corporation sole is consists
only of one person, will the
registration of the property in the
name of the corporation sole vest
unto the head thereof the ownership
of the property?
-
No, it will not vest unto the head, the

head is acting merely as a guardian
Roman Catholic Apostolic Adm. Of

Davao, inc. vs. Land Reg. Comm, et
al.
Act only as a guardian

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

Director of Lands vs. CA
Alienable public land is converted

into private land when the same has
been openly, continuously and
exclusively in possession of the
property as concept of an owner for
30 years, automatically that is
Republic of the Philippines vs. IAC
Determination of the character of

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

same? What if there is none, what
must the successor do?
-
According to section 114:

Section 114. Filling of
vacancies. - The successors in
office of any chief archbishop,
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
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)
115
If a corporation exists in equity may

it not be dissolved?
Section 115. Dissolution. - A
corporation sole may be dissolved
and its affairs settled voluntarily by
submitting to the Securities and
Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall
set forth:
1. The name of the corporation;
What are religious societies?

-
2. The reason for dissolution and

winding up;
3. The authorization for the
dissolution of the corporation by the
particular religious denomination,
sect or church;
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation.
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
Under common law, a religious

society is a body of persons
associated together for the purpose
of maintaining religious worship.
Is it also required to file its articles of

incorporation to the SEC?
-
No <sec. 116> may
What should be contained in the

-
o Expiration of a corporate term

will not apply to a religious
corporation
Section
116.
Religious
societies. - Any religious society or
religious order, or any diocese,
synod, or district organization of any
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
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
setting forth the following:
May a corporation sole be dissolved

by judicial decree?
1. That the religious society or

religious order, or diocese, synod, or
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
church, as required in subparagraph 3 of section 115 would
still be necessary in the case of
amending
the
articles
of
incorporation to affect dissolution.

116
district organization is a religious

organization
of
a
religious
denomination, sect or church;
upon issuance of the certificate by

the SEC
o However it is not accurate
because there are those that
can issue for example
cooperatives- BUREAU OF
COOPERATIVES
which
register, home insurance
guaranty corporation- HOME
OWNERS
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
its affairs, properties and estate;
or
or
to
of
5. The place where the principal

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

law does not require to indicate its
term of existence
When will it acquire juridical

personality?
- Only a corporation sole may come
into
existence
without
SEC
approval, section 19 will thus
govern, Vested with judicial capacity
How may religious societies be

dissolved?
-
Go to the general rules governing

dissolution, because the rules under
special corporations do not provide
for such rule
DISSOLUTION
What is dissolution?
-
Extinguishment of the corporate

franchise and the termination of
corporate existence
3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary
franchise (voluntary dissolution);
3. By revocation of its corporate
franchise (involuntary dissolution)
Philippine National Bank vs. CFI
When the period of corporate life

expires, the corporation ceases to
be a body corporate for purposes of
continuing the business for which it
is
organized.
But
it
shall
nevertheless be continued as a
body corporate for three years after
the time when it would have be
dissolved, for the purpose of
prosecuting and defending suits by
or against it and for enabling it
gradually to settle and close its
affairs to dispose of and convey its
property and to divide its assets.
There is no need for the institution
of a proceeding for quo warranto to
determine the time and date of the
dissolution of a corporation because
117
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
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
the members at the meeting duly
called for the purpose;
5. A copy of the resolution authorizing
the dissolution must be certified by a
majority of the board of directors or
trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of
dissolution by the SEC.
Should this be strictly complied
with?
-
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:
Yes,
compliance
with
the
requirements
and
formalities
prescribed above is mandatory such
that failure to comply therewith will
have no effect on the legal existence
of the corporation.
Will dissolution be effective and

valid by a mere resolution of the
BOD and stockholders?
-
No, a mere resolution by the

stockholders or the BOD of a
corporation to dissolve the same
does not affect the dissolution but
that
some
other
steps,
administrative
or
judicial
is
118
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.
7. Judgment dissolving the corporation

and directing of its assets as justice
requires and the appointment of a
receiver (if necessary in its
discretion) to collect such assets
and pay the debts of the
corporation.
o The foregoing are also
mandatory requirements
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

outstanding capital stock or at least
2/3 of the members at a meeting
duly called for that purpose;
2. Petition for dissolution shall be filed
with the SEC signed by a majority of
its board of directors or trustees or
other
officers
having
the
management of its affairs, verified
by the president or secretary or one
of its directors or trustees, setting
forth all claims and demands
against it.
3. Issuance of an order by the SEC
reciting the purpose of the petition
and fixing the date on or before
which objections thereto may be
filed by any person, which date shall
not be less than thirty days nor more
than sixty days after entry of the
order.
4. Before such date, a copy of the
order must be published once a
week for three (3) consecutive
weeks in a newspaper of general
circulation published in the city or
municipality where the principal
office is situated or in a newspaper
of general circulation in the
Philippines.
5. Posting of the same order for three
(3) consecutive weeks in three (3)
public places in such city or
municipality.
6. Upon five (5) days notice, given
after the date on which the right to
file objections has expired, the SEC
shall hear the petition and try any
issue made by the objections filed.
Is the appointment of a receiver

mandatory?
-
No, it is merely permissive or

discretionary on the part of the
court. The code uses the word
may; the law intended to let the
shareholders have the control of the
assets of the corporation upon
dissolution and winding up.
The directors may also undertake
liquidation and winding up of its
corporate
affairs,
and
sound
business judgment, on how they will
wind up
Dissolution
by
shortening
corporate term <sec.120>
-
of
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
Commission in accordance with this
Code. Upon approval of the
119
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
special
Another way of dissolving a

corporation is through involuntary
dissolution
Section 121. Involuntary
dissolution. - A corporation may be
dissolved by the Securities and
Exchange Commission upon filing of
a verified complaint and after proper
notice and hearing on the grounds
provided by existing laws, rules and
regulations. (n)
-
Dissolution is tantamount to the

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

dissolution?
-
It is commenced through a verified

complaint or motu proprio by the
proper courts
Section 6 of PD 902-A provides for
the
grounds
for
involuntary
dissolution as follows:
1. Fraud in procuring its certificate of

registration;
2. Serious misrepresentation as to
what the corporation can do or is
doing to the great prejudice of or
damage to the general public;
3. Refusal to comply or defiance of any
lawful order of the Commission
restraining commission of acts
which would amount to a grave

violation of its franchise;
4. Continuous inoperation for a period
of at least five (5) years;
5. Failure to file by-laws within the
required period;
6. Failure to file required reports in
appropriate forms as determined by
the
Commission
within
the
prescribed period.
-
Other grounds are provided for in

the corporation code itself: among
them are:
1. Violation of any provision of the

Code under section 144;
2. In case of deadlock in a close
corporation as provided for in
section 105;
3. In a close corporation, any acts of
directors, officers or those in control
of the corporation which is illegal or
fraudulent
or
dishonest
or
the corporation or any stockholder
being misapplied or wasted under
section 105.
-
Mere dishonesty is also a ground in

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

Estate
It is necessary in order to secure

judicial foreclosure of respondents
charter to show a mis-user of its
franchise justifying such a forfeiture
Object is to protect the public, and
not to redress private grievances,
the mis-user must be such as to
work or threaten a substantial injury
to the public, or such as to amount
to a violation of the fundamental
condition of the contract by which
the franchise was granted and thus
defeat the purpose of the grant
Courts proceed with extreme
caution which has for their object
the forfeiture of corporate franchise,
and forfeiture will not be allowed,
120
except under express limitation, or

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

the corporation violated the law by
holding on the property beyond that
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
Philippine Sugar Estate it was still
the holding the properties in order to
enrich itself at the expense of the
taxpayers
Republic vs. Security Credit and
Acceptance Corp. et al.

The corporation here is a lending

institution and not a banking
institution
Defendant corporation violated the
law because before a corporation
may engage into a banking activity it
must first obtain a secondary
franchise from the Central Bank
Defendant corporation threatens
substantial injury to the general
public, dissolution is warrant
If there is a bank run kawawa
naman yung depositors
Republic
vs.
Bisaya
Transportation Co. Inc
The relief of dissolution will be

awarded only where no other
remedy is available and it will not be
allowed where the rights of the
stockholders can be, or are,
protected in some other way
Misuse and misapplication of the
funds and assets of the respondent
were committed particularly by the
corporate officers, where they can
instead be held personally liable
Since there is another remedy
available
dissolution
is
not
warranted
Land
Assuming
the
above
stated
corporation is a close corporation,
would the court decree otherwise?
-
Yes, because in a close corporation,

mere dishonesty is a ground for the
dissolution
Can even be dissolved by petition of
only one stockholder
on the
grounds stated in the code < sec.
105>
Financing Corporation
Philippines vs. Teodoro
Minority stockholders may not ask

for the dissolution of a corporation in
private suits and that such actions
should
be
brought
by
the
Government through its legal
officers, except in cases where the
intervention of the State, for one
reason or another, cannot be
obtained, as when the State is not
interested because the complaint
is strictly a matter between the
of
the
121
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
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)
Present set up
-
Any stockholder or member of a

corporation
can
institute
a
dissolution proceeding against his
own corporation before the proper
forum
Special Commercial Courts, shall
hear and decide intra-corporate
disputes
May
a
corporation
ask
for
dissolution of the corporation when
there is no prejudice to the general
public?
-
Buenaflor vs.
Industry Corp.
From that time on Camarines Sur

was plying in an activity that was
illegal
A corporation where the corporate
life has expired it cannot lawfully
pursue the business for which it was
organized.
the Supreme Court held that a
corporation, whose corporate life
expired, cannot lawfully pursue the
business for which it was organized.
It cannot apply for a new certificate
or a secondary franchise for it is
incapable of receiving a grant.
Awarding it to Camarines Sur is
tantamount to a medal for its illegal
acts
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.
Yes, in a close corporation, a

petition for the dissolution of the
corporation may be instituted by any
one individual shareholder on the
ground, even by mere dishonesty
Effects of dissolution
The dissolution of a corporation not
only terminates its primary franchise
to be a corporation, but generally
prevents it from further exercising
other or secondary franchises which
have been conferred to its. It
terminates its power to enter into
contracts or t o continue the
business as a going concern.
Based on this general rule, the
Supreme Court held that a
corporation, whose corporate life
expired, cannot lawfully pursue the
business for which it was organized.
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.
Camarines
Sur
Cebu Port Labor Union vs. State

Marine Co
122
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
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
in the hands of SRA or any other
agency for that matter
Sugar
Regulatory
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
123
this Code, no corporation shall

distribute any of its assets or
property
except
upon
lawful
dissolution and after payment of all
its debts and liabilities. (77a, 89a,
16a)
However the 3 year period is not

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

liquidating
a corporation
and
although there is no law authorizing
it, neither is there anything that
prohibits the BOD from undertaking
the same
If this method is resorted to, the
board will only have a period of 3
years to finish its task of liquidation
Claims for or against the corporate
entity not filed within the period will
become unenforceable as there
exist no corporate entity against
which they can be enforced
Actions pending for or against the
corporation when the 3 year period
expires, are abated since after the
period, the corporation ceases for all
intents and purposes and is no
longer capable of suing or being
sued
o Mere appointment of a
receiver without anything
more does imply in the
dissolution of a corporation
National Abaca other Fibers Co. vs.

Pore
Actions pending for or against the

corporation when the 3 year period
expires, are abated since after that
period, the corporation ceases for all
intents and purposes and is no
longer capable of suing or being
sued
May be continued by the trustee
provided done within the 3 year
period
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
2. By a trustee appointed by the

corporation
-
The corporation may opt to convey

all corporate assets to a trustees
who will take charge of liquidation
If this method is used, the three year
period limitation imposed by section
122 will not apply provided the
designation of the trustee is made
within that period
3. By appointment of a receiver
-
A receiver may be appointed by the

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

recognize that in cases of voluntary

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

corporation is dissolved and the
liquidation of the assets is placed in
the hands of receiver or assignee,
the period of 3 years prescribed by
law is not applicable and the
assignee may institute all actions
leading to the liquidation of the
corporation even after the expiration
of 3 years.
124
If the corporation carries out the

liquidation of its assets through its
own officers and continues and
defends the actions brought by or
against it, its existence shall
terminate at the end of three years
from the time of dissolution; but if a
receiver or assignee is appointed,
with or without a transfer of its
properties within 3 years, the legal
interest passes to the assignee, the
beneficial interest remaining in the
members, stockholders, creditors
and other interested persons and
said assignee may bring an action,
prosecute that which has already
been commenced for the benefit of
the corporation, or defend the latter
against any other action already
instituted or which may be instituted
even outside of the period of three
years fixed for the offices of the
corporation.
Board of Liquidators vs. Kalaw
If there is a trustee, assignee or

liquidator,
it
can
continue
prosecuting suit even beyond the 3
year period fixed by law because he
becomes the legal owner of the
rights,
assets
and
properties
conveyed to him
Gelano vs. CA
Trustee as used in the corporation

statute must be understood in its
general concept which could include
the counsel to whom was entrusted
in the instant case, the prosecution
of the suit filed by the corporation.
The purpose in the transfer of the
assets of the corporation to a
trustee upon its dissolution is more
for the protection of its creditors and
stockholders. Debtors like the
petitioners herein may not take
advantage of the failure of the
corporation to transfer its assets to a
trustee, assuming it has any to
transfer which petitioner has failed
to show, in the first place. To sustain
petitioners contention would be to
allow them to enrich themselves at
the expense of another, which all
enlightened legal systems condemn.

The counsel who prosecuted and

defended the interest of the
corporation may be considered as a
trustee at least with respect to the
matter in litigation only
May a corporation that is already

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

gave their consent (Chung Ka Bio
vs. IAC)
Republic vs. Marsman Development

Company & Chung Ka Bio vs. IAC
During the three year period granted

to a corporation to liquidate or wind
up its affairs, the BOD is not
normally permitted to undertake any
activity outside the usual liquidation
of the corporation. There is,
however, nothing to prevent the
stockholders from conveying their
respective shareholdings toward the
creation of a new corporation to
continue the business of the old.
This is because winding up is the
sole activity of the dissolved
corporation that does not intend to
incorporate a new. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
transfer the assets of the dissolved
corporation to the new corporation
intended to be created as long as
the stockholders have given their
consent (Republic vs. Marsman
Development Company)
Winding up is the sole activity of a
dissolved corporation that does not
intend to incorporate anew. If it
does, however, it is not unlawful for
the old board of directors to
negotiate and transfer the assets of
the dissolved corporation to the new
corporation intended to be created
as long as the stockholders have
given their consent (Chung Ka Bio
vs. IAC)
What happens to the remaining

assets and properties of the
dissolved corporation if liquidation
and winding up as provided in
125
section 122 is not complied with, as

a result of which the 3 year period
has elapsed
-
If the three year extended life has

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

but likewise the creditors of the

corporation, acting for and in its
behalf,
might
make
proper
representations with the SEC, which
has primary and sufficiently broad
jurisdiction in matters of this nature,
for working out a final settlement of
the corporate concerns
o the
ruling
is
wrong
According to atty Ladia: What
happens to a corporation that is
already dissolved, that has not been
able to appoint a trustee with in the
3 year period?
-
a corporation dissolved which failed

to exercise its rights granted in
section 122 after the 3 year period
has elapsed, ceases to exist for all
intents and purposes, it can no
longer sue or be sued
according to 122 of the code, the
property should be escheated,
accordingly:
Section
122.
Corporate
liquidation. - Every corporation
whose charter expires by its own
limitation or is annulled by forfeiture
or otherwise, or whose corporate
existence for other purposes is
terminated in any other manner,
shall nevertheless be continued as a
body corporate for three (3) years
after the time when it would have
been so dissolved, for the purpose
of prosecuting and defending suits
by or against it and enabling it to
settle and close its affairs, to
dispose of and convey its property
and to distribute its assets, but not
for the purpose of continuing the
business
for
which
it
was
established.
At any time during said three
(3) years, the corporation is
authorized and empowered to
convey all of its property to trustees
for the benefit of stockholders,
members, creditors, and other
persons in interest. From and after
any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
126
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
corporation registered or organized

under the laws of another state is
necessarily a foreign corporation
whether or not the state of its
incorporation allow Filipino citizens
or corporations to do business in
that forum.
The said phrase was inserted by the
framers of the law only as a
condition precedent to the grant of a
license of a foreign corporation to do
business in the Philippines.
Composed of 100% Americans;

organized under the laws other than
the Philippines
-
The test is the incorporation test

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

transact business in the Philippines,
what must it do?
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

Obtain a license
How may it do so?

-
According to sec. 125:

Section 125. Application for
a license. - A foreign corporation
applying for a license to transact
business in the Philippines shall
submit to the Securities and
Exchange Commission a copy of its
articles of incorporation and bylaws, 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
incorporation;
and
term
of
2. The address, including the street

number, of the principal office of the
127
corporation in the country or state of

incorporation;
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.
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;
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.
5. The specific purpose or purposes

which the corporation intends to
pursue in the transaction of its
business
in
the
Philippines:
Provided, That said purpose or
purposes are those specifically
stated in the certificate of authority
issued
by
the
appropriate
government agency;
6. The names and addresses of the
present directors and officers of the
corporation;
7. A statement of its authorized
capital stock and the aggregate
number of shares which the
corporation has authority to issue,
itemized by classes, par value of
shares, shares without par value,
and series, if any;
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)
8. A statement of its outstanding

capital stock and the aggregate
number of shares which the
corporation has issued, itemized by
classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount
actually paid in; and
10. Such additional information as
may be necessary or appropriate in
order to enable the Securities and
Exchange Commission to determine
whether such corporation is entitled
to a license to transact business in
the Philippines, and to determine
and assess the fees payable.
Attached to the application
for license shall be a duly executed
certificate under oath by the
authorized official or officials of the
Is there any deposit or security

requirement?
-
Yes, within 60 days after the

issuance of the license, a foreign
corporation, except those engaged
in foreign banking or insurance,
shall deposit with the SEC, for the
benefit of creditors, securities
consisting of bonds or other
evidence of indebtedness of the
Philippine government or its political
subdivision, or of government
owned or controlled corporation,
128
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
for the purpose or purposes
specified in such license. Upon
issuance of the license, such foreign
corporation may commence to
and continue to do so for as long as
it retains its authority to act as a
corporation under the laws of the
country or state of its incorporation,
unless such license is sooner
surrendered, revoked, suspended or
annulled in accordance with this
Code or other special laws.
Within sixty (60) days after
the issuance of the license to
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
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
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
129
foreign corporation may transact

business in the Philippines
-
Philippines, service of any summons

or other legal process may be made
upon the Securities and Exchange
Commission and that such service
shall have the same force and effect
as if made upon the duly-authorized
officers of the corporation at its
home office."
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. Resident agent;
service of process. - The Securities
and Exchange Commission shall
require as a condition precedent to
the issuance of the license to
by any foreign corporation that such
corporation file with the Securities
and Exchange Commission a
written
power
of
attorney
designating some person who must
be a resident of the Philippines, on
whom any summons and other legal
processes may be served in all
actions or other legal proceedings
against such corporation, and
consenting that service upon such
resident agent shall be admitted and
held as valid as if served upon the
duly authorized officers of the
foreign corporation at its home
office. Any such foreign corporation
shall likewise execute and file with
Commission an agreement or
stipulation, executed by the proper
authorities of said corporation, in
form and substance as follows:
"The (name of foreign
corporation) does hereby stipulate
and agree, in consideration of its
being granted by the Securities and
Exchange Commission a license to
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

Whenever such service of

summons or other process shall be
made upon the Securities and
Exchange
Commission,
the
Commission shall, within ten (10)
days thereafter, transmit by mail a
copy of such summons or other
legal process to the corporation at
its home or principal office. The
sending of such copy by the
Commission shall be necessary part
of and shall complete such service.
All expenses incurred by the
Commission for such service shall
be paid in advance by the party at
whose instance the service is made.
In case of a change of
address of the resident agent, it
shall be his or its duty to
immediately notify in writing the
Securities
and
Exchange
Commission of the new address.
(72a; and n)
-
The necessity of the appointment of

a resident agent is only for the
purpose of receiving summons and
other legal processes in any legal
action or proceeding against the
foreign corporation
Who may be
resident agent?
-
appointed
as
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)
130
May a partnership be appointed as

a resident agent?
-
Yes, domestic corporation taken in

its general sense not legal sense
If there is a resident agent

appointed. May summons be served
to any officers of the corporation?
-
No, if there is a resident agent, the

designation is exclusive and service
must be made only to the resident
agent or else the service is without
force and effect unless made to him
Thus, while the law allows service
upon the SEC or any of its officers
or agents within the Philippines
The two modes may become
effective only if the foreign
corporation failed or neglected to
designate such a person or an
agent
Summons must be made only to
resident agent except when there is
no resident agent appointed
Where such foreign corporation
actually doing business here has not
applied for a license to do and has
not designated an agent to receive
summons, then service of summons
on it will be made pursuant to the
provisions of the rules of court. If
such foreign corporation has a
license to do business, then
summons to it will be served on the
agent designated by it for the
purpose, or otherwise in accordance
with the Corporation Law (General
Corporation of the Philippines vs.
Union Insurance Soc. Of Canton
Ltd.)
If the foreign corporation conducts

business in the Philippines without
the license requirement. What is the
effect?
-
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)

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

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;
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
B. As
whether
to
or
131
not it can
sue
A
foreign
corporation
transacting
or
doing business in
the
Philippines
with a license can
sue
before
Philippine Courts
not it can be
sued
A
foreign
corporation
transacting
business in the
Philippines
with
the
requisite
license can be
sued
in
the
Philippine Courts
A
foreign
corporation
transacting
business in the
Philippines without
a license can be
sued in Philippine
Courts
if it is not doing
business in the
Philippines,
it
cannot be sued in
Philippine Courts
for
lack
of
jurisdiction
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 corporation not doing
business in the Philippines, may it
be sued?
-
Penal sanctions under section 144

Any violation of the code is subject
to such penal sanctions
Mentholatum vs. Mangaliman
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
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
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.
doing
Marshall-Wells Co. vs. Henry W.

Elser and Co.
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
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.
What
would
business?
-
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?
-
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)
constitute

132
Bulakhidas vs. Navarro
It is settled that if a foreign

corporation is not engaged in
business in the Philippines, it may
not be denied the right to file an
action in Philippine courts for
isolated transactions
The object of section 68 and 69 of
the Corporation law was not to
prevent the foreign corporation from
performing single acts, but to
prevent it from acquiring a domicile
for the purpose of business without
taking the steps necessary to render
it amenable to suit in the local
courts. It was never the purpose of
the Legislature to exclude a foreign
corporation which happens to obtain
an isolated order for business from
the Philippines, from securing
redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs.

Manila Port Service
It must stated that the section is not

applicable to a foreign corporation
performing single acts or isolated
transactions. There is nothing to
show that the petitioner has been in
the
Philippines
engaged
in
continuing business or enterprise for
which it was organized, when the
sixteen bundles were erroneously
discharged in manila, for it to be
considered as transacting business
in the Philippines. The fact is that
the bundles, the value of which is
sought to be recovered, were
landed not as a result of a business
transaction, isolated or otherwise,
but due to a mistaken belief that
they were part of the shipment of
forty similar bundles consigned to
persons
or
entities
in
the
Philippines, there is no justification
therefore, for invoking the section
There were 3 contracts entered into,

how come they were still not
considered as doing business?
(Antam Consolidted, Inc. vs. CA)
-
Every case shall be judged in the

light of its peculiar circumstances,
where a single act or transaction
however, is not merely incidental or

casual but indicates the foreign

corporations intention to do other
business in the Philippines, said
single act or transaction constitutes
doing or engaging in or
transacting
business
in
the
Philippines
In the case at bar, the transaction
entered into by the respondent with
the petitioners are not a series of
commercial dealings which signify
an intent on the part of the
respondent to do business in the
Philippines but constitute an isolated
one which does not fall under the
category of doing business.
The records show that the only
reason why the respondent entered
into
the
second
and
third
transactions with the petitioner was
because it wanted to recover the
loss it sustained from the failure of
the petitioners to deliver the crude
coconut
oil
under
the
first
transaction and in order to give the
latter a chance to make good on
their obligation. From these facts
alone, it can be deducted that in
reality there
was
only one
agreement between the petitioners
and the respondent.
The three seemingly different
transactions were entered into by
the parties only in an effort to fulfill
the basic agreement and in no way
indicate an intent on the part of the
respondent to engage in a continuity
of transactions with petitioners
which will categorize it as a foreign
corporation doing business in the
Philippines
3 contracts, but according to the
court was not doing business in the
Philippines
Far East Intl import vs. Nankai

Kogyo Co. Ltd.
Only one contract , but according to

the Supreme Court was doing
business in the Philippines
Every case shall be judged in the
light of its peculiar circumstances,
where a single act or transaction
however, is not merely incidental or
casual but indicates the foreign
corporations intention to do other
business in the Philippines, said
133
single act or transaction constitutes

doing or engaging in or
transacting
business
in
the
Philippines
In the instant case, the testimony of
Atty. Pablo Ocampo, that appellant
was doing business in the
Philippines corroborated by no less
than Nabuo Toshida, one of
appellants officers, that he was sent
to the Philippines to look into the
operation
of
mines,
thereby
revealing the defendants desire to
continue engaging in business here,
after receiving the shipment of the
scrap iron under consideration,
making the Philippines a base
thereof.
In such a case, the single act of
transaction is not merely incidental
or casual, but is of such character
as distinctly to indicate a purpose on
the part of the operations for the
conduct of a part of corporations
ordinary business
If a corporation appoints a
distributor or a representative, will it
necessarily imply doing business in
the country?
-
If the foreign corporation maintained

an independent status during the
existence of the disputed contract.
Appointment of a distributor or
representative in the Philippines,
unless it has an independent status
(transacts and does business in its
own name and for its account and
not of the foreign corporation)
if that be the case the mere
appointment of a distributor will not
constitute doing business
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
How do you know if it has an

independent status?
-
Communications
Design vs. CA
Materials
and
Communications
Design vs. CA
Materials
and
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
134
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.
Puma Sporschufabriken Rudolf

Dassler, K.G. vs. IAC and MIL-ORO
MFG. Corp.
obligated to similarly protect

Filipino Citizen and firms
-
The ruling in the aforecited case is

in consonance with the Convention
of the Union of Paris for the
protection of Industrial Property to
which the Philippines became a
party. Article 8 thereof provides that
a trade name shall be protected in
all the countries of the Union without
the obligation of filing or registration,
whether or not it forms part of the
trademark
Le Chemiste Lacoste vs. Fernandez
The French company may gain

access to our courts, in the first
place it was not doing business in
the Philippines
The marketing of its products in the
Philippines is done through an
exclusive
distributor,
Rustan
Commercial Corporation. The latter
is an independent entity which buys
and then markets not only products
of the petitioner but also many other
products bearing equally well-known
and established trademarks and
trade-names
Assuming
Rustans
had
no
independent status would the SC
grant Lacoste access to our courts?
-
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

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
135
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
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
proceeding with a suit that it had no

jurisdiction to entertain
What law govern foreign corporation
doing and transacting business in
the Philippines with a license
-
Laws of the Republic of the

Philippines save and except that
would normally be those matters
which
concern
its
formation,
organization or dissolution, or those
fixing the relationship, liabilities,
responsibilities, or duties of the
stockholders, members or officers of
the foreign corporation or their
relations to each other.
In effect, intra-corporate or internal
matters not affecting creditors or the
public in general are governed not
by Philippine laws but the law under
which the foreign corporation was
formed or organized
Section 129. Law applicable.
- Any foreign corporation lawfully
doing business in the Philippines
shall be bound by all laws, rules and
regulations applicable to domestic
corporations of the same class,
except such only as provide for the
creation, formation, organization or
dissolution of corporations or those
which fix the relations, liabilities,
responsibilities,
or
duties
of
stockholders, members, or officers
of corporations to each other or to
the corporation. (73a)
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
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.
Time Inc. vs. Reyes
No
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
M.E. Grey
Company
PNB vs. Gonzales, will this apply to

a foreign corporation? How do you
distinguish this case from a
Philippine law?

vs.
Insular
Lumber
136
Since it concerns the rights of

stockholders it is the law of New
York that should govern
7. Transacting business in the

Philippines outside of the purpose or
purposes for which such corporation
is authorized under its license;
Is the license to do business of a

foreign corporation subject to
suspension or revocation? What are
the grounds?
-
8. Transacting business in the

Philippines as agent of or acting for
and in behalf of any foreign
corporation or entity not duly
licensed to do business in the
Philippines; or

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:
1. Failure to file its annual report or
pay any fees as required by this
Code;
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title;
9. Any other ground as would render

it unfit to transact business in the
Philippines. (n)
SEC does not have the sole
authority to suspend or revoke the
license of a foreign corporation
doing business in the Philippines,
other government agencies like the
Central Bank , the Insurance
Commission may also do so within
their respective dominion, despite
the provision of section 134
If the SEC believes that revocation
is warranted, section 135 provides
that:
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;
Section 135. Issuance of

certificate of revocation. - Upon the
revocation of any such license to
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 by-laws or of any
articles of merger or consolidation
within the time prescribed by this
Title;
5. A misrepresentation of any
material matter in any application,
report, affidavit or other document
submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes,
imposts, assessments or penalties,
if any, lawfully due to the Philippine
Government or any of its agencies
or political subdivisions;

The Securities and Exchange

Commission shall also mail to the
corporation at its registered office in
the Philippines a notice of such
revocation accompanied by a copy
of the certificate of revocation. (n)
Voluntary withdrawal of license
-
All 3 conditions must be complied

with
foreign corporations. - Subject to
existing laws and regulations, a
foreign corporation licensed to
may be allowed to withdraw from
137
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;
Pyramid
scheme
(misrepresentation)-Special
Commercial Courts
Syndicated estafa- not bailable
Alleje case
-
Falls squarely under sec. 5 (a)

Special Commercial Courts
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
Allegation
corporate
officers
employing schemes in diverting
Not only detrimental to corporation,

but general membership
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.
Fraud must
particularity
Abad vs. CFI of Pangasinan
Fraud must be stated with

particularity otherwise it may be filed
to any court
P.D. 902-A
P.D. 902-A was amended by R.A.
8799
or
the
SECURITIES
REGULATION CODE in the year
2000
The jurisdiction of SEC for cases
falling under section 5 thereof was
transferred to the courts of general
jurisdiction designated by the SC,
they were called special commercial
courts, the only exceptions were
revocation of corporate franchise
and calling of elections
However
the
SEC
retained
receivership
or
suspension
payments within June 20,2000
Jurisdiction of special commercial
courts are exclusive and original,
jurisdiction is conferred by law; 1
Special Commercial Court per
region
except
MAKATI
and
QUEZON CITY which has two
Devices or Schemes

be
stated
with
Intra-corporate
-
Exclusive and original jurisdiction of

special commercial courts
Sole criteria is there must be an

intra-corporate relationship
Pertaining to a controversy (speaks

also of intra-partnership controversy,
that partnership must be registered
with the SEC)
Rule now
1. Necessarily be an intra-corporate
relationship; and,
2. The controversy must arise out of
said relationship
Intra-corporate relationship alone
will not suffice to put it in the ambit
of 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
138
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
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
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
Controversies in the appointment

(asked in the bar)
Securities Regulation Code
election,
Transferred jurisdiction of the SEC

to Special Commercial Courts
In Andaya the court said that a

corporate
officer
elected
or
appointed by the BOD is always a
corporate act
Suspension
appointment
receivership
Cases
involving
appointment and removal
The fact that petitioner sought

payment of his back wages, other
benefits as well as moral and
exemplary damages and attorneys
fees in his complaint will not operate
to prevent the SEC from exercising
its jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the
NLRC just because of that
Tabang vs. NLRC
Jurisdiction lies originally and

exclusively to special commercial
courts and not in the NLRC
SEC has jurisdiction over cases of

removal from employment of
corporate officers
The relationship of a person to a

corporation, whether as officer or as
agent
or
employee
or
not
determined by the nature of the

of
of
payment,
management
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
139
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
Convert their claims into equity

-
Their liability was almost wiped out

they became stockholders instead
of creditors
After 5 years those who converted

sold it back to the corporation,
thereby making profits
1. Simple suspension of payments

-
where deferment of payment of

claims against a distress company;
ask the court to be given time to the
payment of liability by postponing
the payment
Amendment is for the economic

development of the country
When it has sufficient assets and

liabilities but forces the impossibility
of meeting them when they
respectively fall due
Suspension order- all actions for

claims against the corporation are
accordingly suspended at whatever
stage the proceedings maybe
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
May it still be revived?
Effect of suspension- you cannot

foreclose
What are claims?
-
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 of payments, such
Yes, it may still be revived
How can a corporation with more

liabilities than assets continue its
operations profitably?
-
What if walang amendment, e mas

maraming liabilities kesa assets
economic
3. Suspension of payments when the

corporation has no sufficient assets
to its liabilities
It asked for a management

committee without a receiver plan
(Victorius Milling case)
Even if the distressed company has

no sufficient assets and liabilities it
can go for suspension

140
To
enable
the
management
committee to exercise its powers
Explain the key phrase quality is

equity
Sy Chim vs. Sy Siy Ho (before a

management committee may be opt
by a court)
2 requisites for a valid appointment

of management committee
petition are beyond the competence

of the SEC
What happens if
suspension order?
there
is
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
Decided
on
reconsideration
It court 7
authentication
motion
years
to
for
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)
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?
2. Paralysis of business operations,

the mere apprehension of future
misconduct based upon prior
management
-
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 a management

committee
In the absence of a strong showing

of
an
imminent
danger
of
dissipation,
loss
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
decide
Rule of the thumb

-
1. Imminent danger of dissipation,

loss, wastage or destruction of
assets or other corporate properties
Section 5 and 6(D) governed by

separate rules; interim rules and
intra-corporate controversy
Venue of actions
141
Rules of court- where the parties are

residing
Intra-corporate- no matter where the

parties are residing it will be in the
city or municipality where the
principal office is located
If the controversy arose out of an

intra-corporate dispute rules on
interim rules of procedure of intracorporate controversies shall govern
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%
Intra-corporate- rule 1 section 6
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
-
Service of summons- rule 2 section

5
-
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
Venue
-
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
Right to payment, whether or not it

is reduced to judgment, liquidated or
unliquidated, fixed or contingent,
matured or unmatured, disputed or
undisputed, legal or equitable and
secured or unsecured
Investment contracts
-
A contract, transaction or scheme

whereby a person invests his money
in a common enterprise and is led to
expect profits primarily from the
effects of others
The management committee and

rehabilitation
receiver
are
empowered to:
1. Take custody and control of all
assets of the corporation
2. Evaluate assets and
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
142
6. Rehabilitate the corporation if

determined to be feasible by the
RTC
b)
7. Report to the RTC

corporation is dissolved
c)
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.
-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)
SECURITIES - 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
d)
e)
f)
g)
certificates, voting trust certificates

or similar instruments;
Other instruments as may in the
future be determined by the
Commission;
Fractional undivided interests in oil,
gas or other mineral rights;
Derivatives like option and warrants;
Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certificates of
deposit for a future subscription;
Proprietary or non proprietary
membership
certificates
incorporations; and
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.
143
e)
Any security issued by a bank
except its own shares of stock.
AND Exempt Transactions under Sec 10
a)
A judicial sale, or sale by an
executor, administrator, guardian or
receiver or trustee in insolvency or
bankruptcy.
b)
By or for the account of a
pledge holder, or mortgagee or any
other similar lien holder selling or
offering for sale or delivery in the
ordinary course of business and not
for the purpose of avoiding the
provisions of this Code, to liquidate
a bona fide debt, a security pledged
in good faith as security for such
debt.
c)
An isolated transaction in
which any security is sold, offered
for sale, subscription or delivery by
the owner thereof, or by his
representative for the owners
account, such sale or offer for sale,
subscription or delivery not being
made in the course of repeated and
successive transactions of a like
character by such owner, or on his
account by such representative and
such owner or representative not
being the underwriter of such
security.
d)
Distribution by a corporation,
actively engaged in the business
authorized by its AOI, of securities to
its stockholders or other security
holders as a stock dividend or other
distribution out of surplus.
e)
Sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly in connection
with the sale of such capital stock.
f)
Issuance of bonds or notes
secured by mortgage upon real
estate or tangible personal property,
where the entire mortgage together
with all the bonds or notes secured
thereby are sold to a single
purchaser at a single sale.
g)
Issue and delivery of any
security in exchange for any other
security of the same issuer pursuant
to a right of conversion entitling the
holder of the security surrendered in
exchange to make such conversion:
Provided, That the security so
surrendered has been registered
under this Code or was, when sold,

exempt from the provisions of this
Code, and that the security issued
and delivered in exchange, if sold at
the conversion price, would at the
time of such conversion fall within
the class of securities entitled to
registration under this Code. Upon
such conversion the par value of the
security
surrendered
in
such
exchange shall be deemed the price
at which the securities issued and
delivered in such exchange are sold.
h)
Brokers
transactions,
executed upon customers orders,
on any registered Exchange or other
trading market.
i)
Subscriptions for shares of
the capital stock of a corporation
prior to the incorporation thereof or
in pursuance of an increase in its
authorized capital stock under the
Corporation Code, when no expense
is incurred, or no commission,
compensation or remuneration is
paid or given in connection with the
sale or disposition of such securities,
and only when the purpose for
soliciting, giving or taking of such
subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation
which
should
be
subscribed before it can be
registered and duly incorporated, or
its authorized capital increased.
j)
The exchange of securities by
the issuer with its existing security
holders exclusively, where no
commission or other remuneration is
paid or given directly or indirectly for
soliciting such exchange.
k)
The sale of securities by an
issuer to fewer than twenty (20)
persons in the Philippines during
any twelve-month period.
l)
The sale of securities to any
number of the following qualified
buyers: (i) Bank; (ii) Registered
investment house; (iii)insurance
company; (iv) Pension fund or
retirement plan maintained by the
Government of the Philippines or
any political subdivision thereof or
managed by a bank or other
persons authorized by the Bangko
Sentral to engage in trust functions;
(v) investment company or; (vi) Such
other person as the Commission
144
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
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.
SHAREHOLDERS
1.
Tender Offers (Sec 19)
2.
Proxy solicitation (Sec 20)
3.
Internal record keeping and
accounting (Sec 22)
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.
FRAUDULENT TRANSACTIONS AND

OTHER MARKET MANIPULATIONS
3.
Marking the close placing the
purchase order, at or near the close of the
trading period. The price that was closed
will then be the price that will be posted on
the following trading day.
4.
Painting the tape involves a
series of transactions that are reported
publicly to give the impression of an activity
in a security.
5.
Squeezing the float the part of an
outstanding security intentionally held by
dealers or other persons with a view of
reselling them later for profit.
6.
Hype and dump Act employed by
a person or group of persons of purchasing
the outstanding capital stock of a dormant
public shell company for a nominal amount
and merge it with their privately held
company. They would then gain control of
the majority stocks of the merged entity.
Stock certificates are often re-issued in the
name of the merged entity to relatives and
associates who act as nominees of the
person or persons employing the device.
They would then look for a broker-dealer
who would be willing to make a hype of
the securities.
The broker-dealer then
generates volume and advance bid price.
When the market reaches a high price,
they 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.
1.
Wash Sale (Sec 24.1(a)(i)) any
transaction in a security which involves no
change in the beneficial ownership thereof.
Note: Marking the close, Painting

the tape, Squeezing the float, Hype
and dump, Boiler Room Operations
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.
acquire 30% or more of the equity
share of a public company within a
period of 12 months;
3.
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)

145
become unlawful if it is effected to

either raise the price or induce the
purchase of a security or of a
controlling, controlled, or commonly
controlled company by others or to
depress the price to induce the sale
of a security, whether of the same or
of a different class, of the same
issuer or of a controlling, controlled
company or common controlled
company by others or to create
active trading to induce the
purchase through said devices or
schemes.
8.
Circulating
or
Disseminating
Information circulating an information
that any of the security listed in the
exchange will or is likely to rise or fall
because of manipulative market operations
of any one or more persons conducted for
the purpose of raising or depressing the
price of the security and thus inducing the
purchase of such security.
9.
Making False or Misleading
Statements with respect to any material
fact which he knew or had reasonable
ground to believe was so false or
misleading for the purpose of inducing the
purchase or sale of such security.
10.
Pegging or Fixing Or Stabilizing
the price of security effected either alone or
with others through any series of
transactions for the purchase or sale
thereof, if done for such purpose.
11.
Short sale selling of security
which the vendor does not own unless
done in accordance with the rules and
regulations of the SEC.
12.
Insider Trading the act of an
insider to buy or sell security of the issuer
while in possession of material information
with respect to such security that is not
generally made known to the public unless
(a) The insider proves that the information
was not gained from such relationship; or
(b) If the other party selling to or buying
from the insider (or his agent) is identified,
the insider proves: (i) that he disclosed the
information to the other party, or (ii) that he
had reason to believe that the other party
otherwise is also in possession of the
information.
Note:
When
is
information
material non-public? - if: (a) It
has not been generally disclosed to
the public and would likely affect the
market price of the security after
being disseminated to the public

and the lapse of a reasonable time
for the market to absorb the
information; or (b) would be
considered by a reasonable person
important under the circumstances
in determining his course of action
whether to buy, sell or hold a
security.
Note: Who is an insider? Insider means: (a) the issuer; (b) a
director or officer (or person
performing similar functions) of, or a
person controlling the issuer; (c) a
person whose relationship or former
relationship to the issuer gives or
gave him access to material
information about the issuer or the
security that is not generally
available to the public; (d) a
government employee, or director,
or officer of an exchange, clearing
agency
and/or
self-regulatory
organization who has access to
material information about an issuer
or a security that is not generally
available to the public; or (e) a
person who learns such information
by a communication from any of the
foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or
employee of the corporation, its parent or
subsidiaries, or any other individual having
a relationship with the corporation, which
would interfere with the exercise of
independent judgment in carrying out the
responsibilities of a director.
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.
OPTION TRADING
146
Put a transferrable option or offer

to deliver a given number of shares of
stock at a stated price on any given time
during the stated period.
Call a transferrable option to buy a

specified number of share at a stated price
Straddle a combination of put and

call.
SETTLEMENT OFFERS
At any time, during an investigation
or proceeding under this Code, parties
being investigated and/or charged may
propose in writing an offer of settlement
with the Commission. The Commission
may only agree to a settlement offer based
on its findings that such settlement is in the
public interest. Any agreement to settle
shall have no legal effect until publicly
disclosed. Such decision may be made
without a determination of guilt on the part
of the person making the offer.
DAMAGES
All suits to recover damages shall be
brought before the Regional Trial Court,
which shall have exclusive jurisdiction to
hear and decide such suits. The Court is
authorized to award damages in an amount
not exceeding triple the amount of the
transaction plus actual damages.
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.


Corporation Notes

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Corporation Notes

Diunggah oleh

Hak Cipta:

Format Tersedia

1

1. The articles of incorporation

Corporation is one of the types of

2. The agreement or articles of

One man form of business entity,

Limited shareholders responsibility

Paid subscription in full, you are no

one time grouping of persons

does not entail continuity because

particular partnership and joint

when they do not register, it does

Foreign corporations enters into an

DEFINITION AND ATTRIBUTES

3. The articles of partnership must

They may enter into joint venture,

Notes on Corporation Law

2. Created by operation of law

Only such powers as are expressly

Can do things as the law asks or

If it does anything beyond, it shall be

General rule: Moral damages

In cases of slander, libel and other

qualify whether natural or juridical)

Section 3 Stock and non-stock

Art. 2219. Moral damages

(1) A criminal offense resulting in

Importance of knowing, determining

(7) Libel, slander or any other form

Stockholders must generally cast

(10) Acts and actions referred to in

No. 2 may also be a disadvantage

No. 5 may also be a disadvantage

A corporation is a person, therefore

The two requisites must always

1. That they have a capital stock

Created by a special law, they have

They are not immune from suit

openly admit investors

example: stock exchange

Their subsidiaries are entirely

If incorporated under the laws of the

Parent or Holding/ subsidiaries and

Affiliates- no majority vote

There is no exemption it is absolute

Political or governmental purposes

Those formed or organized for the

Those formed for some private

Distinction: public for governmental

Affiliate is subject to common control by the

Exemption to the rule because it is

There is exclusivity of shares of

Restrictions to transfer shares

Article must provide that there will

Notes on Corporation Law

cannot be attached by the state

Attached directly only by the state in

So defectively formed, but still

FORMATION AND ORGANIZATION

If confusingly similar it will not be

Verification slip from the records

Section 19. Commencement

Defining the scope of authority of

4 limitations of purpose clause

Provision that states, cannot be