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Treated as private corporations not as public

Definition Test to Determine Whether a Corporation is Government
An artificial being created by operation of law, having the Owned or Controlled or Private in Nature:
right of succession and the powers, attributes and properties Is it created by its own charter for the exercise of a public
expressly authorized by law or incident to its existence. (Sec. function, or by incorporation under the general corporation
2) law?

Attributes of a Corporation d. Quasi-Public Corporations

i. An Artificial Being (Capacity to Contract and A cross between private corporations and public
Transact Business) corporations.
A corporation exists by fiction of law. Hence, it can Usually cover school districts, water districts and
act only through its directors, officers, and the like (Villanueva, p. 75).
ii. Created by Operation of Law (Creature of the a. Domestic
Law) One formed, organized, or existing under the laws of the
Mere consent of the parties is not sufficient. The Philippines.
State must give its consent either through a special b. Foreign
law (in case of government corporations) or a One formed, organized or existing under any law other than
general law (i.e., Corporation Code in case of those of the Philippines
private corporations). - Whose laws allow Filipino citizens and corporations to
do business in its own country or State (principle of
iii. Has the Right of Succession (Strong Juridical reciprocity).
Personality) - Licensed by SEC to do business in the Philippines after
A corporation has the capacity for continuous securing a certificate of authority from the Board of
existence despite changes in Investments and after complying with the conditions for
stockholders/members or by any transfer of shares issuance of license on application forms, structural
by a stockholder to a 3rd person. organizations and capitalization.

iv. Has the Powers, Attributes, and Properties AS TO GOVERNING LAW:

Expressly Authorized by Law or Incident to Its a. Public Special Laws and Local Government Code
Existence (A Creature of Limited Powers) b. Private Corporation Code
As a mere creature of law, it can exercise only such c. Quasi-Public Corporations seems to be a cross
powers as the law may choose to grant it, either between private corporations and public corporations.
expressly or impliedly.
Corporate Fiction: A corporation has a personality separate a. De Jure Corporation
and distinct from the persons composing it. (Art. 44-47 of A corporation organized in accordance with the
the Civil Code; PNB vs. Andrada Electric Engineering Co., requirements of law.
381 SCRA 244 (2002). Every corporation is deemed de jure until proven
IN RELATION TO STATE: b. De Facto Corporation (Sec. 20)
a. Public Corporations - A corporation claiming in good faith to be a
Formed or organized for the government of the corporation under the Corporation Code.
portion of the state (e.g., barangay, municipality, - Corporation where there exists a flaw in its
city, and province). incorporation, it falls short of the requirements of
Created for political purposes connected with the law.
public good in the administration of the civil - It is the result of an attempt to incorporate under
government. an existing law coupled with the exercise of
Note: Ownership of the government of the majority of corporate powers.
the shares of a corporation does not qualify such entity - Under the Sec. 66 of the Rules of Court, inquiry
as a public corporation (National Coal Co., vs. CIR, 46 must be done by the Solicitor General in a quo
Phil 583, 1924). warranto proceeding - the main issue is the right to
exist as a corporation.
b. Private by private persons alone or with the State.
- A de facto corporation will incur the same
A corporation is created by operation of law under obligation, have the same powers and rights as a de
the Corporation Code.
jure corporation.
Mainly governed by the Corporation Code. Elements:
A government-owned or controlled corporation 1. A valid law under which incorporated;
when organized under the Corporation Code is still 2. Attempt in good faith to incorporate of
a private corporation. But being a government- colorable compliance;
owned or controlled corporation makes it liable 3. Assumption of corporate powers; and
for laws and provisions applicable to the 4. Issuance of certificate of incorporation.
Government of its entities and subject to the (Arnold Hall vs. Piccio, 86 Phil 634, 1950)
control of the Government (Cervantes vs. Auditor A corporation which has failed to file its by-laws within the
General, 91 Phil 359, 1952). prescribed period does not ipso facto lose its powers as such
(Sawadjaan vs. CA, 459 SCRA 516, 2004).
c. On GOCCs
i. Created under a special law or charter
- Not organized for profit.
- Profit obtained as incident to operation had to be
used for the furtherance of the purpose/s for which
the corporation was organized.
DE JURE DE FACTO - The governing body is usually the Board of Trustees.
Created in strict or Actually exists for all
substantial conformity with practical purposes as a AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL:
the statutory requirements corporation but which has a. Holding Company one that controls another as a
for incorporation no legal right to corporate subsidiary or affiliate by the power to elect its
existence as against the management; one which holds in other companies for
State the purpose of control rather than for mere investment.
Right to exist cannot be Right to exercise powers b. Affiliate Company one that is subject to common
successfully attacked even in cannot be inquired into control to a mother or holding company and operated as
a direct proceeding by the collaterally in any private part of a system.
State suit. But such inquiry may c. Parent and Subsidiary Companies when a
be made by the State in a corporation has a controlling financial interest in one or
proper court proceeding. more corporations, the one having in control is known
as the parent company and the others are known as
subsidiary companies.
c. Corporation by Estoppel
- A subsidiary of a specified person is an
- All persons who assume to act as a corporation
affiliate controlled by such person, directly or
knowing it to be without authority to do so shall be
indirectly, though one or more intermediaries.
liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof.
- Where a group of persons misrepresent themselves AS TO FUNCTIONS:
as a corporation (ostensible corporation), they are a. Public government of a portion of the State; and
subsequently estopped from claiming lack of b. Private - usually for profit-making functions.
corporate life in order to avoid liability.
- A third party who assumes an obligation to an AS TO PURPOSE OF INCORPORATION:
ostensible corporation cannot resist performance a. Municipal Corporation
by alleging the ostensible corporations lack of b. Religious Corporation
c. Educational Corporation
d. Charitable, Scientific or Vocational Corporation
e. Business Corporation
Existence in Law Yes None AS TO NUMBER OF MEMBERS:
Dealings among Not required Required a. Aggregate a corporation which consists of many
parties on a persons united to form a body politic and corporate
corporate basis (Quimson, p. 156)
Effect of lack of Could be a Not a corporation b. Corporation Sole may be formed by the chief
requisites corporation by in any shape or archbishop, bishop, minister, rabbi, or other presiding
estoppel form elder of any religious denomination, sect or church.
- Purpose: formed for the purpose of
d. Corporation by Prescription administering and managing, as trustee, the
- The Roman Catholic Church is a corporation by affairs, properties, and temporalities of any
prescription, with acknowledged juridical personality religious denomination to which the holder of
inasmuch as it is an institution which antedated by the office belongs and also to transmit the
almost a thousand years any other personality in same to his successor in office (Sec. 110).
Europe (Barlin vs. Ramirez, 7 Phil. 41, 1906). Director of Land vs. IAC, 146 SCRA 509 (1986) held that a
corporation sole has no nationality, overturned the previous
AS TO EXISTENCE OF STOCKS: doctrine (Republic vs. Villanueva, 114 SCRA 875 [1982]
a. Stock Corporation and Republic vs. Iglesia ni Cristo, 127 SCRA 687 [1984]
- One which has a capital stock divided into shares and that a corporation sole is disqualified to acquire or hold
is authorized to distribute to the holders such alienable lands of the public domain, because of the
shares, dividends or allotments of the surplus profits constitutional prohibition qualifying only individuals to
(i.e., retained earnings on the basis of the shares held acquire land of the public domain and the provision under
(Sec. 3) the Public Land Act which applied only to Filipino citizens or
- It is organized for profit. natural persons. {Republic vs. Iglesia ni Cristo, 127 SCRA
- The governing body is usually the Board of Directors 687 (1984); Republic vs. IAC, 168 SCRA 165 (1988)}.
(except in certain instances, e.g. close corporations)
- Even if there is a statement of capital stock, the OTHER CLASSIFICATION:
corporation is still NOT a stock corporation if a. Close Corporation the issued stock of all classes shall
dividends are not supposed to be declared, that is, be held of record by not more than twenty persons; shall
there is no distribution of retained earnings (CIR vs. not list in any stock exchange or make any public
Club Filipino de Cebu, 1962). offering any of its stocks.
- Any corporation may be incorporated as a
b. Non-Stock Corporation (See Sec. 87-88) close corporation, except mining or oil
- A corporation where no part of its income is companies, stock exchanges, banks, insurance
distributable as dividends to members, trustees or companies, public utilities, educational
officers. institutions and corporations declared to be
- Corporation that does not issue stocks and does not vested with public interest (Sec. 96).
distribute dividends to their members.
b. Eleemosynary Corporation one organized for determined to be the ultimate Filipino ownership of the
charitable purposes. subsidiary corporation (SEC Opinion re: Silahis)

C. NATIONALITY OF CORPORATIONS Ex. MV Corporation and AC Corporation have equal

Serves as a legal basis for subjecting the enterprise or its interest in XYZ Corporation. MV Corporation is 60%
activities to the laws, the economic and fiscal powers, and owned by Filipinos while AC Corporation is 50% owned
various social and financial policies of the state to which it is by Filipinos. By the grandfather rule, MV Corporation
supposed to belong. would have a 30% Filipino interest in XYZ Company
(60% 0f 50%), while AC Corporation would have a 25%
Tests: Filipino interest in XYZ Company (50% of 50%). Hence,
1. Place of Incorporation the total Filipino interest is only 55%.
- Principal doctrine on the test of the nationality
of a corporate identity in the Philippines Note: the application of the test is limited to the issues
- A corporation is a national of the country of investment. Only when the corporation is less than
under whose laws has been organized and 60% owned shall the grandfather rule be applied.
A corporation shall be considered a Filipino corporation 1. Doctrine of Separate Juridical Personality
if the Filipino ownership of its capital stock is at least A corporation has personality separate and distinct
60%, and where the 60-40 Filipino-Alien equity from that of its stockholders and members and is not
ownership is NOT in doubt (SEC opinion dated 6 affected by the personal rights, obligations, and
November 1989; DOJ Opinion No. 18, s. 1989). transactions of the latter.
Therefore, its shareholdings in another corporation The property of the corporation is not the property of its
shall be considered to be Filipino nationality when stockholders or members and may not be sold by them
computing the percentage of Filipino equity of the without express authorization from the Board of
second corporation (SEC Opinion dated 23 November Directors (Woodchild Holdings, Inc. vs. Roxas
1993). Electric and Construction Co. 436 SCRA 235, 2004)
Stockholders have no claim on corporate property as
Control test is applied in the following: owners, but mere expectancy or inchoate right to the
Exploitation of natural resources Only Filipino same upon dissolution of the corporation after all
citizens or corporations whose capital stock are at corporate creditors have been paid. Such right is limited
least 60% owned by Filipinos can qualify to exploit only to their equity interest (doctrine of limited liability).
natural resources. (Sec. 2, Art. XII, Conti.) Although a stockholders interest in the corporation may
Public Utilities xxx no franchise, certificate or be attached by his personal creditor, corporate property
any other form of authorization for the operation of cannot be used to satisfy his claim (Wise & Co. vs. Man
a public utility shall be granted except to citizens of Sun Lung, 1940)
the Philippines or corporations organized under a. Liability for Torts
the laws of the Philippines at least 60% of whose As a separate juridical personality, a corporation
capital is owned by such citizens. (Sec. 11, Art. XII, can be held liable for torts committed by its officers
Consti.) for corporate purpose (PNB vs. CA, 1978).
Mass Media Ownership of mass media shall be
limited to the citizens of the Philippines, or to
Corporate tort consists in the violation of a right
corporations, cooperatives, or associations, wholly-
given or the omission of a duty imposed by law; a
owned and managed by such citizens (100%
breach of legal duty.
Filipino management of the entity)[Sec 11, Art. XVI,
The failure of the corporate employer to comply
with the law-imposed duty under the Labor Code to
grant separation pay to employees in case of
Cable Industry CATV as a form of mass media
cessation of operations constitutes tort and its
which must, therefore, be owned and managed by
stockholder who was actively engaged in the
Filipino citizens, or corporations, cooperatives, or
associations, wholly-owned and managed by such management or operation of the business should be
citizens pursuant to the mandate of the personally liable. (Sergio F. Naguiat vs. NLRC, 269
Constitution. (DOJ Opinion No. 95, s. 1999) SCRA 564, 1997)
Advertising Industry xxx only Filipino citizens b. Liability for Crimes
or corporations or associations at least 70% of Since a corporation is a mere legal fiction, it cannot
whose capital is owned by such citizens is allowed be proceeded against criminally because it cannot
to engage in the advertising agency. (Sec 11, Art. commit a crime in which personal violence or
XVI, Constitution) malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act
3. Grandfather Rule amounting to a crime and never against the
It is a method of determining the nationality of a corporation itself (West Coast Life Insurance Co.
corporation which in turn is owned in part by another vs. Hurd [1914], Time Inc. vs. Reyes [1971]).
corporation by breaking down the equity structure of
the shareholder corporation. General Rule: Corporations cannot commit
It involves the computation of Filipino ownership of a felonies punishable under the RPC for it is
corporation in which another corporation of partly incapable of the requisite intent to commit these
Filipino and partly foreign equity owns capital stock. crimes. Also, crimes are personal in nature
The percentage of shares held by the second requiring personal performance of overt acts.
corporation in the first is multiplied by the latters own Finally, a corporation cannot be arrested and
Filipino equity, and the product of these percentages is imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment.
Exceptions: corporation is NOT sufficient to justify their being
If the crime is committed by a corporation, the treated as one entity.
directors, officers, employees or other officers Exception: The subsidiary is a mere
thereof responsible for the offense shall be charged instrumentality of the parent corporation.
and penalized for the crime, precisely because of
the nature of the crime and the penalty therefore. A Circumstances rendering subsidiary an
corporation cannot be arrested and imprisoned; instrumentality (PNB vs. Ritratto Group, 2001):
hence, cannot be penalized for a crime punishable i. The parent corporation owns all or most of
by imprisonment. However a corporation may be the capital of the subsidiary.
charged and prosecuted for a crime if the ii. The parent and subsidiary corporations
imposable penalty is fine (Ching vs. Secretary of have common directors and officers.
Justice, GR NO. 164317, February 6, 2006) iii. The parent company finances the
When express provisions of law are enacted iv. The parent company subscribed to all the
specifically providing that a corporation may be capital stock of the subsidiary or otherwise
proceeded against criminally, it is the responsible causes its incorporation.
officer who will be held personally liable for the v. The subsidiary has grossly inadequate
crimes committed by the corporation. (Sia vs. CA , capital.
GR No 111809, May 5, 1997) vi. The parent corporation pays the salaries
Under the Anti-Money Laundering Act, juridical and other expenses or losses of the
persons are also defined as offenders of criminal subsidiary.
acts. vii. The subsidiary has substantially no
c. Recovery of Moral Damages business except with the parent
General Rule: corporation or no assets except those
Moral damages cannot be awarded in favor of conveyed to or by the parent corporation.
corporations because they do not have feelings and viii. The papers of the parent corporation or in
mental state. They may not even claim moral the statements of its officers, is subsidiary
damages for besmirched reputation (NAPOCOR vs. described as a department or subdivision of
Philipp Brothers Oceanic, G.R. No. 126204. the parent corporation, or its business or
November 20, 2001). financial responsibility is referred to as
Exceptions: the parent corporations own.
A corporation can recover moral damages under ix. The parent corporation uses the property
Art. 2219 (7) if it was the victim of defamation of the subsidiary as its own.
(Filipinas Broadcasting Network vs. Ago x. The directors or executives of the
Medical and Educational Center 448 SCRA 413, subsidiary do not act independently in the
2005) interest of the subsidiary but take their
A corporation with a good reputation, if orders from the parent corporation.
besmirched, is allowed to recover moral damages xi. The formal and legal requirements of the
upon proof of existence of factual basis of damage subsidiary are not observed.
(actual injury) and its causal relation (Crystal vs.
2. Doctrine of Piercing the Corporate Veil 1. Promoter
Promoters are persons who, acting alone or with others,
This doctrine means that the court may disregard the
separate and distinct personality of the corporation take the initiative in founding and organizing the
business or enterprise of the issuer and receives
from its members or stockholders and treat the
consideration therefore (RA 8799, Securities Regulation
corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group
a. Liability of Promoter
especially when the corporate legal entity is used as a
General Rule: The promoter binds himself
cloak for fraud or illegality. (Kukan Internatl. Vs.
personally and assumes the responsibility of
Reyes, September 29, 2010).
looking to the proposed corporation for
It is merely an equitable remedy, and may be granted
only in cases when the corporate fiction is used to defeat
public convenience, justify a wrong, protect fraud
Any express or implied agreement to the contrary,
defend crime or where the corporation is a mere alter
or novation of the contract.
ego of business conduit of a person.
The court ruled in Caram Jr. vs. CA that the
a. Grounds for Application of Doctrine
investors who were not the moving spirit behind
i. If done to defraud the government of
the organization of the corporation, but who were
taxes due it.
merely convinced to invest in the proposed
ii. If done to evade payment of civil liability.
corporate venture on the basis of the feasibility
iii. If done by a corporation which is merely a
study undertaken, are NOT liable personally with
conduit or alter ego of another
the corporation for the cost of such feasibility study
(Caram Jr. vs. CA 151 SCRA 372, 1987).
iv. If done to evade compliance with
Exception to Exception: Where there
contractual obligations.
was a showing that the corporation was
v. If done to evade compliance with financial
fictitious and did not have a separate
obligation to its employees.
juridical personality, to justify the making
b. Test in Determining Applicability
the principal stockholders thereof,
General Rule: The mere fact that a corporation
responsible for its stockholders.
owns all or substantially all of the stocks of another
b. Liability of Corporation for Promoters
General Rule: A corporation is not bound by the There would be no denial of due process when a
contract. Since the corporation did not yet exist at corporation is sued and judgment is rendered against it
the time of the contract, it could not have an agent in its unregistered trade name, holding that a
who could legally bind it. corporation may be sued under the name by which it
Exceptions: A corporation may be bound by the makes itself known to its workers (Pison-Arceo
contract if it makes the contract its own by: Agricultural Development Corp. vs. NLRC 279 SCRA
Adoption of ratification of the entire contract after 312, 1997).
Acceptance of benefits under the contract with 4. Corporate Term
knowledge of the terms thereof. Not more than 50 years from date of incorporation
Performance of its obligation under the contract. subject to extension for periods not exceeding 50 years
2. Number and Qualifications of Incorporators per extension unless:
Incorporators are stockholders or members mentioned Sooner dissolved, or
in the articles originally forming and composing the Extended
corporation and who are signatories thereof. Extensions:
Natural persons Not earlier than 5 years prior to expiry
Of legal age Unless earlier extension is for justifiable
Must own or subscribe at least one share of stock of reasons as determined by SEC.
the corporation (Genuine interest) How to extend amend the AOI during the life of
5 to 15 incorporators who must sign the articles of the corporation before the expiry of its term.
incorporation (AOI) Any dissenting stockholder may exercise his
Majority of the incorporators must be residents of appraisal right (Sec. 37).
the Philippines 5. Minimum Capital Stock and Subscription
3. Corporate Name Limitations on Use of Corporate At the time of incorporation:
Name At least 25% of authorized capital stock as stated
Must not be identical or deceptively or confusingly in the AOI must be subscribed
similar to that of any existing corporation including At least 25% of the total subscription must be
internationally known foreign corporation though paid upon subscription, the balance to be payable
not used in the Philippines; on a date or dates fixed in the contract of
Any other name already protected by law; subscription without need of call, or in the absence
Name that is patently defective, confusing or of a fixed date or dates, upon call for payment by
contrary to existing laws, morals or public policy the BOD.
(Sec. 18). Call term used when the Board formally
Must include the word Corporation/Corp.or asks for payment of the balance of the
Incorporated/Inc. subscription or a part thereof.
No minimum authorized capital stock is required except
Change of Corporate Name if required by special laws (Sec. 12 and 13)
Requires amendment of the AOI: majority vote of the Minimum paid-up capital is not less than P5,000.
board and the vote or written assent of stockholders 6. Articles of Incorporation
holding 2/3 of the outstanding capital stock (Sec 16). a. Nature and Function of Articles
The AOI is a basic contract document in
Doctrines Pertaining to Corporate Name Corporation Law that defines the charter of the
A corporation may change its name by the amendment corporation. Section 14 of the Corporation Code
of AOI, but the same is not effective until approved by provides that the AOI do not become binding as the
the SEC (Philippine First Insurance Co. vs. Hartigan charter of the corporation unless they have ben filed
34 SCRA 252, 1970). with the SEC.

A change in the corporate name does not make a new b. Contents

corporation, and whether affected by a special act or i. Name of corporation;
under a general law, has no effect on the identity of the ii. Purpose/s, indicating the primary and
corporation, or on its property, rights, or liabilities. secondary purposes;
Consequently, the new corporation is still liable for the iii. Place of principal office;
debts and obligations of the old corporation (Republic iv. Term which shall not be more than 50 years;
Planters Bank vs. CA 216 SCRA 738, 1992). v. Names, citizenship and residences of
Similarity on corporate names between two vi. Number, names, citizenships and residences of
corporations would cause confusion to the public directors;
especially when the purposes stated in their charter are vii. If stock corporation, amount of authorized
also the same type of business (Universal Mills Corp. capital stock, number of shares;
vs. Universal Textile Mills Inc. 78 SCRA 62, 1977). viii. In par value stock corporations, the par value
of each share;
A corporation has no right to intervene in a suit using a ix. Number of shares and amounts of subscription
name other than its registered name; if a corporation of subscribers which shall not be less than
legally and truly wants to intervene, it should have used 25% of authorized capital stock;
its corporate name as the law requires and not another x. Amount paid by each subscriber on their
name which it had not registered (Laureano subscription, which shall not be less than 25%
Investment and Development Corp. vs. CA 272 SCRA of subscribed capital and shall not be less than
253, 1997). P5,000.00;
xi. Name of treasurer elected by subscribers; and
xii. If the corporation engages in a nationalized
industry, a statement that no transfer of stock vi. Certificate of authority from proper
will be allowed if it will reduce the stock government agency whenever appropriate like
ownership of Filipinos to a percentage below BSP for banks and Insurance Commission for
the required legal minimum. insurance corporation (Sundiang and Aquino).

c. Amendment Issuance of Certificate of Incorporation by SEC

Requirements: The SEC shall give the incorporators reasonable time to
i. A legitimate purpose for the amendment; correct or modify the objectionable portions of the
ii. by a majority vote of the board of directors or articles or amendments (Sec. 17).
iii. by a vote or written assent of the stockholders Grounds for Disapproving AOI:
representing at least two thirds (2/3) of the i. AOI does not substantially comply with the
outstanding capital stock, without prejudice to form prescribed
the appraisal right of dissenting stockholders ii. Purpose is patently unconstitutional, illegal,
in accordance with the provisions of the immoral, contrary to government rules and
Corporation Code; regulations
iv. by a vote or written assent of at least two iii. Treasurers Affidavit concerning the amount
thirds (2/3) of the members if it be a non-stock of capital subscribed and or paid is false
corporation. iv. Required percentage of ownership of Filipino
v. The original and amended articles, together, citizens has not been complied with.
shall contain all provisions required by law to Remedy in case of rejection of AOI petition
be set out in the articles of incorporation. Such for review in accordance with the Rules of
articles, as amended, shall be indicated by Court (Sec. 6, last par., PD 902-A).
underscoring the change or changes made, and Commencement of corporate existence and
a copy thereof duly certified under oath by the juridical personality upon issuance of
corporate secretary and a majority of the certificate of incorporation (Sec. 19)
directors or trustees stating the fact that the Revocation of certificate of incorporation if
said amendment or amendments have been the incorporators are guilty of fraud in
duly approved by the required vote of procuring the same after due notice and
stockholders or members, shall be submitted hearing (Sec. 6(i), PD 902-A).
to the Securities and Exchange Commission
(SEC).When the SEC is satisfied that the 8. Adoption of By-Laws (Sec. 46)
amendment should be allowed, the SEC will After Incorporation within one month after receipt of
issue a certificate indicating its approval. The official notice of the issuance of its certificate on
amendments shall take effect upon approval incorporation by the SEC.
by the SEC, or from the date of filing with the Before Incorporation approved and signed by all the
SEC if not acted upon within six (6) months incorporators and submitted to SEC together with AOI.
from the date of filing for a cause not
attributable to the corporation. a) Nature and Functions
By-laws are mere internal rules among
d. Non-amendable Items stockholders and cannot affect or prejudice third
i. Names of incorporators persons who deal with the corporation unless they
ii. Names of incorporating directors/trustees have knowledge of the same (China Banking
iii. Names of original subscribers to capital stock Corporation vs. CA, 1997).
and subscribed and paid- up capital
iv. Treasurer-in-trust elected by original Regulations, ordinances, rules or laws adopted by
subscribers an association or corporation or the like for its
v. Members who contributed to the initial capital internal governance, including rules for routine
of non-stock corporation matters such as calling meetings and the like (SMC
vi. Place and date of execution Vs. Mandaue Packing Products Plants Union-
vii. Witnesses and acknowledgments (De Leon, FFW, 467 SCRA 107, 2005).
b) Requisites of Valid By-Laws (Sec. 46)
7. Registration and Issuance of Certificate of i. Must be approved by the affirmative vote
Incorporation of the stockholders representing the
majority of the outstanding capital stock
Documents to be filed with the SEC: or majority of members (if filed prior to
i. Articles of Incorporation incorporation, approved and signed by all
ii. Treasurers affidavit certifying that 25% of the incorporators).
total authorized capital stock has been ii. Must be kept in the principal office of the
subscribed and at least 25% of such has been corporation; subject to inspection of
fully paid in cash or property stockholders or members during office
iii. Bank certificate showing the paid-up capital hours (Sec. 64).
iv. Letter authority authorizing the SEC to iii. It must be consistent with the Corporation
examine the bank deposit and other corporate Code, other pertinent laws and
books and records to determine the existence regulations.
of paid-up capital. iv. It must be consistent with the AOI.
v. Undertaking to change the corporate name in v. It must be reasonable and not arbitrary or
case there is another person or entity with oppressive.
same or similar name that was previously vi. It must not disturb vested rights, impair
registered. contracts or property rights of
stockholders or members or create personal property, including securities and bonds of other
obligations unknown to law. corporations;

c) Binding Effects While a corporation may appoint agents to negotiate for the
Only from the issuance of SEC certification that by- purchase of real property needed by the corporation, the final say
laws are not inconsistent with the Code. will have to be with the Board of Directors whose approval will
Cannot bind stockholders or corporation pending finalize the transaction. (Firme v. Bukal Enterprises, 414 SCRA
approval. 190)
As to the Corporation and its Components
- Binding not only upon the corporation but also on viii. To enter into merger or consolidation with other
its stockholders, members and those having corporations;
direction, management and control of its affairs. ix. To make reasonable donations, provided, that no corporation
They have the force of contract between shall give donations in aid of any political party or candidate
stockholders/members. or for purposes of partisan political activity;
As to Third Persons x. To establish pension, retirement, and other plans for the
- Not binding unless there is actual knowledge. benefit of its directors, trustees, officers and employees;
Third persons are not even bound to investigate the xi. To exercise other powers as may be essential or necessary to
content because they are not bound to know the by- carry out its purpose or purposes stated in the articles of
laws which are merely provisions for the incorporation.
government of a corporation and notice to them
will not be presumed (China Banking
Corporation vs. CA, 1997). 2. SPECIFIC POWERS

i. Power to Extend or Shorten Corporate Terms

d) Amendment or Revision (Sec. 48)
Majority vote of the members of the Board and Requirements:
majority vote of the owners of OCS or members, in - Majority vote of the Board of Directors or Trustees
a meeting duly called for the purpose; or - Ratification at a meeting by 2/3 of the outstanding
Delegation to the BOD of power to amend or repeal capital stock or members
by-laws by vote of stockholders representing 2/3 of An extension of corporate term allows a dissenting stockholder to
OCS or 2/3 of the members. exercise his appraisal right.
Such delegated power is considered revoked by
majority vote only of stockholders representing 2/3 ii. Power to Increase or Decrease Capital Stock or Incur,
of OCS or 2/3 of the members. Create, Increase Bonded Indebtedness

F. CORPORATE POWERS - Majority vote of the board of directors
- Favored by 2/3 of the outstanding capital stock
Ways to increase or decrease capital stock:
Every corporation has the power and capacity: i. By increasing/decreasing the number of shares
authorized to be issued without increasing/decreasing
i. To sue and be sued in its corporate name; the par value thereof;
ii. By increasing/decreasing the par value of each share
In the absence of a special authority from the Board of Directors without increasing/decreasing the number thereof;
to institute a derivative suit, the President or Managing Director iii. By increasing/decreasing both the number of shares
is disqualified by law to sue in her own name or on behalf of the authorized to be issued and the par value thereof.
corporation. The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the Board of A corporate bond is an obligation to pay a definite sum of money
Directors that exercises corporate powers and not in the at a future time at fixed rate of interest.
President. (Bitong v. CA, 292 SCRA 304)
A business corporation may borrow money whenever the
ii. Of succession by its corporate ; necessity of its business so requires and issue security or
customary evidence of debt such as notes, bonds or mortgages.
A corporation has a capacity of continuous existence irrespective This includes non-stock corporations as well.
of the death, withdrawal, insolvency, or incapacity of the
individual stockholders or members and regardless of the iii. Power to deny pre-emptive right
transfer of their interest or shares of stock.
Whenever the capital stock of a corporation is increased and new
iii. To adopt and use a corporate seal; shares of stock are issued, the new issue must be offered first to
the stockholders who are such at the time the increase was made
However, a corporation may exist without a seal. in proportion to their existing shareholdings and on equal terms
with other holders of the original stocks before subscriptions are
iv. To amend its articles of incorporation; received from the general public. This is called a Pre-emptive
v. To adopt by-laws, not contrary to law, morals, or public right .
policy, and to amend or repeal the same;
vi. In case of stock corporations, to issue or sell stocks to The pre-emptive right of stockholders of a stock corporation to
subscribers and to sell treasury stocks, or admit members to subscribe to all issues or disposition of shares of any class in
the corporation if it be non-stock corporation; proportion to their respective shareholdings may be denied by
vii. Purchase, receive, take or grant, hold, convey, sell, lease, the articles of incorporation.
pledge, mortgage and otherwise deal with such real and
EXCEPTIONS: Requirements:
i. Stocks issued in compliance with laws requiring - Majority vote of board of directors or trustees
stock offerings or minimum stock ownership by the - Ratification by the 2/3 stockholders representing the
public OSC or members. However, if the investment is
ii. Stocks issued in good faith with approval of reasonably necessary to accomplish the corporations
stockholders representing 2/3 of the OSC: primary purpose, the approval of the stockholders or
-In exchange for property needed for corporate purposes members shall not be necessary.
-in payment of a previously contracted debt.
Any dissenting stockholder may exercise his appraisal right.
iv. Power to Sell or Dispose All or Substantially All of the
Corporate Assets The other purposes for which the funds may be invested without
amending the articles of incorporation must be those enumerated
Requirements: in the articles of incorporation. In order to engage in any of its
- Majority vote of its board of directors secondary purposes, the corporation must comply with the above
- Authorization by 2/3 of stockholders of the OSC or requirement. A corporation is not allowed to engage in a
members. Provided, that in non-stock corporations, business distinct from those enumerated in the articles of
where there are no members with voting rights, the vote incorporation without amending the purpose clause of said
of at least a majority of the trustees will be sufficient for articles to include the desired business activity among its
authorization. secondary purpose. (De Leon, Corporation Code of the
- Authorization must be done at a stockholders or Philippines, 2010)
members meeting duly called for that purpose after
written notice. vii. Power to Declare Dividends

Any dissenting stockholder may exercise his appraisal rights. The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be
A sale or disposition shall be deemed to cover substantially payable in cash, in property, or in stock to all stockholders on the
all the corporate property and assets if thereby the basis of outstanding stock held by them;
corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was Provided, that any cash dividends due on delinquent stock shall
incorporated. first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from
If the corporation can sell, it can also abandon the the delinquent stock holder until his unpaid subscription is fully
transaction through the board without further action or paid; (Sec. 43)
approval by the stockholders or members but subject to
rights of third parties under any contract relating thereto. Requirement:
- Approval of stockholders representing not less than 2/3
v. Power to Acquire Its Own Shares of the OSC
- In a regular or special meeting duly called for its
A stock corporation shall have the power to purchase or purpose
acquire its own shares for a legitimate corporate purpose, - Existence of unrestricted retained earnings
provided that the corporation has unrestricted retained
earnings. It includes the following cases: A stock corporation is prohibited from retaining surplus
profit in excess of 100% of their paid-in capital stock, except:
i. To eliminate fractional shares arising out of stock - When justified by definite corporate expansion projects
dividends; or programs approved by the board of directors;
ii. To collect or compromise an indebtedness to the - When prohibited under any loan agreement with any
corporation, arising out of unpaid subscription, in a financial institution or creditor without their his/her
delinquency sale, and to purchase delinquent consent;
shares sold during said sale; - That such retention is necessary under special
iii. To pay dissenting or withdrawing stockholders circumstances obtaining in the corporation, such as
entitled to payment for their shares. (Sec. 41, when there is a need for special reserve for probable
Corporation Code) contingencies. (Sec. 43, par 2)

Conditions for the exercise of the power: Dividend, is that part or portion of the profits of a
i. The capital is not impaired; corporation set aside, declared and ordered by the directors
ii. For a legitimate and proper corporate purpose; to be paid ratably to the stockholders on demand or at a
iii. There is unrestricted retained earnings to purchase fixed time.
the same;
iv. The corporation acts in good faith without Stock Dividends, these dividends are payable in unissued
prejudicing the rights of creditors and additional shares of the corporation instead of cash or
stockholders; property out of the unrestricted retained earnings. These
v. The conditions of corporate affairs warrant it; are issued by a resolution of the board and approval of
(De Leon, Corporation Code of the Philippines, 2010) stockholders. It must also require to have unissued shares
for distribution to stockholders, otherwise, it must increase
vi. Power to Invest Corporate Funds in Another Corporation its capital stock to the extent of corporate earnings to be
or Business declared.

A private corporation may invest its funds in any other Cash Dividends, these are dividend payable in cash. These
corporation or business or for any purpose other than the can be declared by mere board resolution from unrestricted
primary purpose for which it was organized. retained earnings.
Property Dividends, these are dividends distributed to the performance, ratification, or estoppels, while the latter is
stockholders in the form of property, real or personal, such void and cannot be validated.
as warehouse receipts, or shares of stock of another
corporation. This is actually cash dividend since the When a contract or act is illegal per se, it is wholly void or
stockholder may sell the property received and realize cash. inexistent. But when a contract is not illegal per se but
These must be properties no longer intended to be used by merely beyond thepower of a corporation, the same is
the corporation for its business. However, no actual merely voidable and may be enforced by performance,
distribution of property dividend shall be made without ratification, or estoppels or on equitable ground.
approval by the Commission.
Consequences of Ultra Vires Acts
The participation of each stockholder in the earnings of the - If executor on both sides, it cannot be enforced by either
corporation is based on his total subscription and not on the party thereto.
amount paid by him in account thereof. Ex. A subscribes to - If fully performed on both sides, neither party can
1,000 shares of the par value P10.00 per share and has paid maintain an action to set aside the transaction or to
P5,000 on his subscription, he will participate in dividends recover what he has parted with.
on the basis of 1,000 shares, not 500 shares. (De Leon, - If performed on one side and the other has received
Corporation Code of the Philippines, 2010) benefits by reason of such performance, recovery is
permitted on the ground that it would be unjust to
Dividends are usually declared generally quarterly. But the sanction retention of benefits coupled with refusal to
directors may declare dividends in advance for succeeding perform (De Leon, 2010)
quarters when the business is in good shape and abundant

viii. Power to enter into Management Contract a. Stockholders

A management contract is one whereby the corporation Stockholders have residual power of fundamental corporate
undertakes to manage or operate all or substantially all of changes in the exercise of their right to vote.
the business of another corporation. A management
contracts must not be longer than 5 years for any one term. b. Board of Directors
However, service contracts which relate to the exploitation,
development, exploration or utilization of natural resources Generally, the Board of Directors alone exercises the powers of
may be entered into for such periods provided by law or the corporation. The board exercises their power through board
regulation. (De Leon, 2010) meetings.

Requirements: c. Officers
- Resolution of a quorum of the Board of
Directors/Trustees; and Corporate officers may exercise corporate powers via authority
- Ratified by a majority vote by the stockholders from:
representing the outstanding capital stock or members, 1. Law
as the case may be, in a meeting called for the purpose; 2. Corporate By-laws
- In both cases, such votes must be made by both the 3. Authorization from the board, either expressly or impliedly
managing and managed corporation. by habit, custom or acquiescence in the general course of
EXCEPT: That 2/3 votes shall be necessary if:
- Stockholder who represents the interest of both
corporations owns 1/3 of the outstanding capital stock 4. TRUST FUND DOCTRINE
of the managing corporation.
- Majority of the members of the Board of the managing The assets of a corporation of the corporation as represented by
corporation compose also majority of the members of its capital stock are trust funds to be maintained unimpaired
the board of the managed corporation. and to be used to pay corporate creditors in the sense that there
(Villanueva, Commercial Law Reviewer, 2009) can be no distribution of such assets among the stockholders
without provision being first made for the payment of the
corporate debts and that any such disposition of it is a fraud on
ix. Ultra Vires Acts the creditors of a corporation who extend credit on good faith of
its outstanding capital stock and, therefore, void. (Philippine
These are acts not within the express, implied, and incidental Trust Co. v. Rivera, 144 Phil 469)
powers of the corporation conferred by the Corporation Code or
its articles of incorporation. Under the trust fund doctrine, the capital stock, property and
other assets of a corporation are regarded as equity in trust for
There are three types of ultra vires acts: the payment of the corporate creditors. (CIR v. CA, 301 SCRA
1. Those outside the express, implied or incidental powers 152)
of the corporation;
2. Those which are effected by corporate representatives
who act without authority; G. BOARD OF DIRECTORS AND TRUSTEES
3. Those which are contrary to laws or public policy.
Applicability of Ultra Vires Acts
Unless otherwise provided in the Corporation Code, the
The term ultra vires is distinguished from an illegal act since corporate powers of all corporations shall be exercised, all
the former is merely voidable which may be enforced by 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 offense constituting a violation of the Code, 5 years prior to
no stock, from among the members of the corporations, who his election or appointment.
shall hold office for one (1) year and until their successors
are elected and qualified. (Sec. 23, Corporation Code) Every Director requires at least one share of stock to be
elected. If he transfers all his shares during his tenure, he
A corporations Board of Directors is understood to be that automatically ceases to be a director. This applies to a
body which: Director who transfers all his shares to a trustee under a
a. Exercises all powers provided for under the Corporation Voting Trust Agreement. (Lee v. CA, 205 SCRA 752)
b. Conducts all business of the corporation; and 4. ELECTIONS
c. Controls and holds all property of the corporation.
(Hornilla v. Salunat, 405 SCRA 220) In order for the election of the Directors or Trustees to take
place, the presence of a majority of the capital stock or
2. BUSINESS JUDGMENT RULE members, either personally or by written proxy is required.

The courts cannot undertake to control the discretion of the Elections must be held by secret ballot if requested by any
board of directors about administrative matters as to which voting stockholder or member, otherwise, it may be held in
they have legitimate power of action, and contracts intra any form.
vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such a. CUMULATIVE VOTING AND STRAIGHT VOTING
contracts are so unconscionable and oppressive as to amount
to a wanton destruction of the rights of the minority. Example: A owns 100 shares of stock in a corporation and 5
directors are to be elected. A is entitled to 500 votes (100
Exceptions: shares x 5 directors)
a. When otherwise provided by the Corporation Code
b. When the Directors or officers acted with fraud, gross Straight Voting - every stockholder may vote such number
negligence or in bad faith; and of shares for as many persons as there are directors to be
c. When directors or officers act against the corporation in elected. In this case, A may distribute equally 100 shares to
conflict of interest situation. each of the 5 directors without preference. The same rule
applies to elections of the board of trustees, whereby A has 1
3. Tenure, Qualifications and Disqualifications of vote for each trustee to be elected.
Directors or Trustees
Cumulative Voting for one Candidate a stockholder is
Tenure: Under section 23, the board of directors and allowed to concentrate his votes and give one candidate as
trustees shall hold office for one (1) year and until their many votes as the number of directors to be elected
successors are elected and qualified. As a general rule, the multiplied by the number of his shares shall equal. In this
directors or trustees of a corporation shall serve for a term case, A may vote all his 500 shares to a single director to be
as fixed in the by-laws. elected.

Hold-over: Upon failure of a quorum at any meeting of the Cumulative Voting by Distribution By this method, a
stockholders or members called for an election, the stockholder may cumulate his shares by multiplying also the
directorate naturally holds over and continues to function number of his shares by the number of directors to be
until another directorate is chosen and qualified. elected and distribute the same among as many candidates
as he shall see fit. Here, A may distribute his votes as he may
Qualifications: desire among the directors to be elected, i.e., 200 shares to
Stock Corporations: Director 1, 100 shares to director 2, and 200 shares to
a. Own at least one (1) share; director 3, giving no favorable vote to Directors 4 and 5.
b. Share of stock must be registered in his name;
c. Must continually own such share during his term; However, the Corporation Code states that the total number
otherwise he automatically ceases to be a director; of votes cast by a stockholder shall not exceed the number of
d. Majority must be residents of the Philippines; shares owned by him. Lastly, no delinquent stock shall vote
or be voted.
Non-stock Corporation:
a. He must be a member in good standing thereof; b. QUORUM
b. a majority of them must be residents of the Philippines;
A majority of the number of directors or trustees as fixed in
Only a natural person may be elected as directors or trustees. the articles of incorporation shall constitute a quorum for the
However, a corporation which owns shares of stocks or is a transaction of corporate business. Except, when it is
member in another corporation can designate by board otherwise provided in the articles of incorporation or the by-
resolution its officer or representative to sit in the latters laws that a greater majority is required. (Sec. 25, Corporation
board and thus qualifying him to be elected as director or Code)
trustee. (De Leon, 2010)
Note: There is a difference between requiring A majority
A trustee in a voting trust may be elected as director/trustee. vote of the directors or trustees and A vote of majority of
(Villanueva, 2009) the directors or trustees constituting a quorum. In the
former, you require a vote of majority plus one of all the
Disqualifications: directors. In contrast, the latter requires a majority plus one
No stockholder or member can be elected as director or vote of directors enough to constitute a quorum (majority).
trustee if he has been convicted by final judgment of an
offense carrying an imprisonment exceeding 6 years, or an
5. REMOVAL and by the by-laws of the corporation. Any director, trustee
or officer violating this duty is liable for ultra vires acts.
Any director or trustee of a corporation may be removed
from office: Duty of Diligence Directors or trustees who (1) willfully and
a. By a vote of the stockholders representing 2/3 of the knowingly vote for, or assent to patently unlawful acts of the
outstanding capital stock, or 2/3 vote of the members. corporation, (2) or who are guilty of gross negligence or bad
b. At a regular meeting of the corporation or at a special faith in directing the affairs of the corporation, shall be liable
meeting called for such purpose, jointly and severally for all the damages resulting therefrom
c. Previous notice to stockholders or members suffered by the corporation, its stockholders or members and
d. May be without just cause, except when it operates to other persons. (Sec. 31, Corporation Code)
deprive minority stockholders or members the right of
representation (requires just cause). Personal Liability of corporate director, trustee or officer
shall attach only when:
The board of directors has no power to remove one of its a. He affirms an unlawful act, or acts with bad faith or
members as director or trustee. gross negligence in directing its affairs, or for conflict of
interest resulting in damage to the corporation,
6. FILLING OF VACANCIES stockholders or other persons;
b. He consents to the issuance of watered stocks or does
Generally, if still constituting a quorum, at least a majority of not file with the secretary his written objection thereto;
the members are empowered to fill any vacancy occurring in c. He agrees to hold himself personally and solidarily
the board other than by removal by the stockholders or liable with the corporation;
members or by expiration of term. d. Law makes him personally liable for his corporate
action. (Tramat Mercantile v. Court of Appeals 238
Stockholders or members may fill the vacancy in the SCRA 14)
following cases:
a. Vacancy results from removal by the stockholders or Duty of Loyalty When a director, trustee or officer attempts
members, or the expiration of term; to acquire or acquires, in violation of his duty, any interest
b. Vacancy occurs other than by removal or expiration of adverse to the corporation with respect to any matter which
term, such as death, resignation, abandonment, or has been reposed in him in confidence, as to which equity
disqualification; provided that the remaining directors imposes a disability upon him to deal in his own behalf, he
do not constitute a quorum; shall be liable as a trustee for the corporation and must
c. When the board refers the matter to the stockholders; account for the profits which otherwise would have accrued
d. Increase in the number of the board; to the corporation. (Sec. 31, Corporation Code)

A director or trustee so elected to fill a vacancy shall only be This liability shall attach despite the fact that the director
for the unexpired term of his predecessor in office. risked his own funds in the venture. However, violation of
this duty may be ratified by a vote of the stockholders
7. COMPENSATION owning or representing at least 2/3 of the outstanding
capital stock. (Sec. 34, Corporation Code)
Generally, the by-laws of a corporation fixes the
compensation of the directors. However, if no compensation These two provisions are contained in the doctrine of
is provided for therein, then directors shall receive only corporate opportunity, which states that a corporate
reasonable per diems. Per diems are paid per attendance in director cannot take advantage for his personal benefit a
board meetings. business opportunity which has an inherent aptitude of
being integrated into the existing business of the
The amount of compensation may also be fixed in a corporation.
resolution of the stockholders by a majority vote
representing the outstanding capital stock. Notwithstanding, 9. RESPONSIBILITY FOR CRIMES
the stockholders cannot delegate to the board of directors
the authority to fix the amount of their own compensation. Since a corporation is a mere legal fiction, it cannot be held
liable for a crime committed by its officers, since it does not
Where the compensation is granted either in the by-laws or have the essential element of malice; in such case, the
by the vote of stockholders, the total yearly compensation of responsible officers would be criminally liable.
directors or trustees shall in no case exceed 10% of the net
income before income tax of the compensation during the The performance of the act is an obligation directly imposed
preceding year. by the law on the corporation. Since it is a responsible officer
or officers of the corporation who actually perform the act
8. FIDUCIARIES DUTIES AND LIABILITY RULES for the corporation, they must of necessity be the ones to
assume the criminal liability (People v. Tan Boon Kong, 54
A director is a fiduciary. Their powers are powers in trust. Phil 607)
He who is in such fiduciary position cannot serve himself
first and his cestuis second. He cannot manipulate the affairs
of his corporation to their detriment and in disregard of the 10. INSIDE INFORMATION
standards of common decency. He cannot by the
intervention of a corporate entity violate the ancient precept The fiduciary position of insiders, directors, and officers
against serving two masters. (De Leon, The Corporation prohibits them from using confidential information relating
Code of the Philippines, 2010) to the business of the corporation to benefit themselves or
any competitor corporation in which they may have a mere
Duty of Obedience The directors or trustees and officers to substantial interest.
be elected shall perform the duties enjoined on them by law
Since loss and prejudice to the corporation is not a Where majority of the members of the members of the board
requirement for liability, the corporation has a cause of the managing corporation also constitute a majority of the
of action as long as there is unfair use of inside information. members of the board of directors of the managed
corporation, the management contract must be approved by
It is inside information if it is not generally available to the stockholders of the MANAGED Corporation owning 2/3
others and is acquired because of the close relationship of of the total outstanding stock or members.
the director or officer of the corporation. (Sec. 3.8, 27
Securities Regulation Code) Illustration: If A, B, C, D, and E constitute the majority of the
members of the board of directors of X corporation and also
11. CONTRACTS of Y corporation, the bigger 2/3 vote by the stockholders of Y
corporation is necessary. This is a case of a contract between
a. By Self-Dealing Directors with the Corporation two corporations with interlocking directorates. (De Leon,
A contract of the corporation with one ore more of its
directors or trustees or officers is voidable, at the option of 16. EXECUTIVE COMMITTEE
such corporation, unless the following conditions are
present: The by-laws of a corporation may create an executive
committee composed of not less than three members of the
i. The presence of such director or trustee in the board board to be appointed by the Board. Said committee may act,
meeting in which the contract was approved is not necessary by majority vote of all its members, on such specific matters
to constitute a quorum for such meeting; within the competence of the board, as may be delegated to
ii. The vote of such director or trustee was not in the by-laws, or on a majority vote of the board.
necessary for the approval of the contract;
iii. That the contract is fair and reasonable under the The purpose of the Executive Committee is to take off part of
circumstances; the work from the Board during the periods when the Board
iv. (In the case of an officer) The contract with the does not meet.
officer has been previously authorized by the board
of directors. Matters they cannot act on:
a. Approval of any action for which shareholders approval
In the absence of the first two conditions, a ratification may is also required;
be made by a vote of the stockholders representing at least b. Filling of vacancies in the board;
2/3 of the outstanding capital stock or at least 2/3 vote of c. Amendment or repeal of any resolution of the Board
the members in a meeting called for the purpose. Full which by its express terms is not so amendable or
disclosure of the adverse interest of the directors or trustees repeatable;
must be made at such meeting. (Sec. 32, Corporation Code) d. Distribution of cash dividends.

b. Between Corporations with Inter-locking Directors 17. MEETINGS

General Rule: A contract between two or more corporations a. Regular or Special Meetings
having interlocking directors shall not be invalidated on that
ground alone. Regular meetings of directors or trustees are those held by the
Exceptions: (1) There is Fraud and (2) The contract is not board monthly, unless the by-laws provide otherwise.
fair and reasonable under the circumstances.
Special meetings of directors or trustees are those held by the
Rule when the directors interest is nominal in one board at any time upon the call of the president or as
corporation and substantial in the other: The provided in the by-laws.
requirements under Section 32, as stated above, must be
complied with to make the contract between the corporation These meetings maybe held anywhere in or outside the
and interlocking directors valid. Philippines, unless provided otherwise in the by-laws.
Notice must be sent to every director or trustee at least 1 day
Stockholdings exceeding 20% of the outstanding capital prior to the scheduled meeting.
stock shall be considered substantial for the purposes of
interlocking directors. b. Who Presides

The By-Laws may prohibit a director of a corporation from Section 54 provides, the president shall preside at all
serving at the same time a director of a competing meetings of the directors or trustees as well as of the
corporation. (Gokongwei, Jr. v. SEC, 89 SCRA 336) stockholders or members, unless the by-laws provide

c. Management Contracts The by-laws may provide that the chairman, instead of the
president, shall preside at board meetings. Where there is a
Previously tackled under Corporate Powers. vice-chairman provided in the by-laws, he presides in the
absence of the chairman.
A management contract cannot delegate entire supervision
and control over the officers and business of a corporation to Where the officer entitled to preside is not present at the
another as this will contravene the fundamental rule that the time of the meeting, a stockholder or member who takes the
corporate powers of all corporations shall be exercised by floor may temporarily preside at the meeting pending the
the board. The board cannot surrender its power and duty of selection of the presiding officer.
supervision and control for otherwise, it becomes a mere
instrumentality of the managing company.
c. Quorum
If the voting trust was a requirement for a loan agreement,
Under Sec. 52, Unless otherwise provided for in this Code or period may exceed 5 years but shall automatically expire upon
in the by-laws, a quorum shall consist of the stockholders full payment of the loan. (Sec. 59, Corporation Code).
representing a majority of the outstanding capital stock or a
majority of the members in the case of nonstick corporations. c. CASES WHEN STOCKHOLDERS ACTION IS REQUIRED
i. By a Majority Vote (of the outstanding capital stock and
d. Rule on Abstention entitled to vote)
Fixing of the issue value of no par value shares but the
When time comes for directors to vote on an issue, a director articles may fix the issue price or may authorize the Board
may vote "yes" or "no." If a director abstains from voting,
of Directors to fix said issue value (Sec. 62);
that means the director has not voted. An abstention is a
Adoption or amendments to the By-Laws (Sec. 48);
non-vote, a decision not to make a decision. When the chair
calls for a vote, abstentions are not called for, only the yeas Execution of Management Contracts, unless in case of
and nays. interlocking shareholders of more than one-third (1/3) in
the managing corporation or interlocking majority of
Whenever a director believes he/she has a conflict of directors in both managed and managing corporations
interest, the director should abstain from voting on the issue (Sec. 44);
and make sure his/her abstention is noted in the minutes. Revocation of delegation to the Board of Directors on
The other reason a director might abstain is that he/she the amendment of By-Laws (Sec. 48);
believes there was insufficient information for making a Calling a meeting to remove directors (Sec. 26); and
decision. Otherwise, directors should cast votes on all issues Payment of compensation for directors unless already
put before them. Failure to do so could be deemed a breach fixed in the By-Laws.
of their fiduciary duties.
ii. By a Two-Thirds Vote
H. STOCKHOLDERS AND MEMBERS Declaration of bond or stock dividends (Sec. 43);
1. RIGHTS OF A STOCKHOLDER OR MEMBERS Investment in other corporations or for purposes
Direct or indirect participation in management other than those provided in the Articles of
Voting Rights Incorporation (Sec. 42);
Right to remove directors Certain amendments to the Articles of Incorporation
Proprietary Rights (Sec. 16; Sec. 37);
Right to Inspect books and records Delegation to the Board of Directors to amend the By-
Right to be furnished with the most recent financial Laws (Sec. 48);
statements/reports Sale, lease, exchange, mortgage, pledge or other
Right to recover stocks unlawfully sold for delinquent disposition of all or substantially of the corporate
payment of subscription assets, but stockholders action is not required if
Right to file individual suit, representative suit and derivative corporations business is not substantially limited or if
suits. the proceeds are used to continue the remaining
business (Sec. 40);
a. Doctrine of Equality of Shares Removal of a director (Sec. 28);
Each share shall be EQUAL in ALL respects to every other Ratification of voidable contracts in certain cases
share, except as otherwise provided in the Articles of between a corporation and its director or trustee (Sec.
Incorporation and stated in the certificate of stock. 32);
Voluntary dissolution of the corporation (Sec.118);
2. PARTICIPATION IN MANAGEMENT Execution of management contracts in cases of
a. PROXY - Stockholders and members may vote in person or by interlocking stockholders or directors (Sec.44);
proxy in all meetings of stockholders or members. Increase or decrease of capital stock and creation or
- A written authorization given by one person to another so increase of bonded indebtedness (Sec. 38);
that the second person can act for the first. Extending or shortening corporate term (Sec. 37);
- A proxy is a special form of agency. The proxy holder is in Issuance of shares not subject to pre-emptive right
the eye of the law an agent and as such a fiduciary. (Sec. 39);
(Ballantine, p. 412)
iii. By Cumulative Voting Cumulative voting is allowed in the
Requirements for Validity: (Sec. 58)
election of directors or trustees (Sec. 24).
i. Unless otherwise provided in the proxy, it shall be valid
- A stockholder may vote such number of shares for as
only for the meeting which it was intended.
many persons as there are directors to be elected or he
ii. It shall be signed by the stockholder or member
may cumulate said shares and give one candidate as many
votes as the number of directors to be elected multiplied
iii. Proxies shall be in writing;
by the number of his shares shall equal, or he may
iv. It shall be filed before the scheduled meeting with the
distribute them on the same principle among as many
corporate secretary;
candidates as he shall see fit (Sec. 24).
v. No proxy shall be valid and effective for a period longer
than 5 years at any one time.
Provided that the total number of votes cast by him shall
not exceed the number of shares owned by him as shown
b. VOTING TRUST - An arrangement created by one or more
in the books of the corporation multiplied by the whole
stockholders for the purpose of conferring upon a trustee or
number of directors to be elected.
trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time.
The trustee can also be voted as director.
3. PROPRIETARY RIGHTS incident of ownership of the corporate property, whether this
The proprietary rights of shareholders consist principally in their ownership or interest is termed an equitable ownership, a
right to dividends and to liquidation of assets. beneficial ownership, or quasi-ownership. Such right is
predicated upon the necessity of self-protection. (Gokongwei
While a share of stock represents a proportionate or aliquot interest Jr. Vs. SEC, 1979).
in the property of the corporation, it however, does not vest the
owner thereof with any legal right or title to any of the assets, his d. PRE-EMPTIVE RIGHT
interest in the corporate property being equitable or beneficial in Right to subscribe to all issues or disposition of shares of any
nature. Shareholders are in no legal sense the owners of corporate class in proportion to his present stockholdings, the purpose
property, which is owned by the corporation as a distinct legal being to enable the shareholder to retain his proportionate
person. control in the corporation and to retain his equity in the
retained earnings, and also in the net assets in the event of
a. RIGHT TO DIVIDENDS dissolution.
Right to dividends vests upon lawful declaration by the Board of Sec. 39 has widened the coverage of pre-emptive right which
Directors. From that time, dividends become a debt owing to the now includes re-issuance of treasury shares because of the use
stockholder. No revocation can be made except if NOT yet of the words disposition of shares, which would cover the
announced or communicated to the stockholders. following instances:
Stock corporations are prohibited from retaining surplus profits in i. Increase in the Authorized Capital Stock;
the excess of 100% of their paid-in capital stock, ii. Opening for subscription the unissued portion of existing
EXCEPT: capital stock; and
i. When justified by definite corporate expansion projects or iii. Disposition of treasury shares.
programs approved by the board of directors;
ii. When the corporation is prohibited under any loan Pre-emptive right not available in the following instances:
agreement with any financial institution or creditor, whether i. Shares to be issued to comply with laws requiring stock
local or foreign, from declaring dividends without its/his offering or minimum stock ownership by the public;
consent, and such consent has not yet been secured; or ii. Shares issued in good faith in exchange for property
iii. When it can be clearly shown that such retention is necessary needed for corporate purposes;
under special circumstances obtaining in the corporation, iii. Shares issued in payment of previously contracted debts;
such as when there is a need for special reserve for probable iv. In case the right is denied in the articles of incorporation.
contingencies. (Sec. 39)

Forms of Dividends: Cash, Property or Stock. e. RIGHT TO VOTE

NOTE: Right to dividends vests upon declaration so whoever owns
the stock at such time also owns the dividends. Subsequent transfer A stockholder is given the right to participate in the corporate
of stock would not carry with it right to dividends UNLESS agreed affairs by giving him the right to attend meetings after due
upon by the parties. notice and the right to vote thereat in person or through a
proxy or trustee.
b. RIGHT OF APPRAISAL - Non-voting shares are not entitled to vote except as
Right to demand payment of the fair value of his shares, after provided for in the last paragraph of Sec. 6 of the
dissenting from a proposed corporate action involving a fundamental Corporation Code.
change in the corporation in the cases provided by law. - Preferred or redeemable shares may be deprived of the
When Right of Appraisal May be Exercised: right to vote.
i. Extend or shorten corporate term; - Fractional shares of stock cannot be voted.
ii. Restriction of rights or privileges of shares through the - Treasury shares have no voting rights as long as they
amendment of the articles of incorporation; remain in the treasury.
iii. Sale of all or substantially all corporate assets; - No delinquent stock shall be voted. (Sec. 71)
iv. Equity investment in non-primary purpose business enterprise; - A transferee of stock cannot vote if his transfer is not
v. Merger or consolidation registered in the stock and transfer book of the
NOTE: (a) All the above instances require the 2/3 votes of the
outstanding capital stock; f. RIGHT OF FIRST REFUSAL
(b) The appraisal right pertains only to stockholders who have Except in the case of close corporations where the right of first
actually dissented from the above-enumerated transactions. refusal is required to be a feature to be found in the articles of
incorporation, the right of first refusal can only arise in
c. RIGHT TO INSPECT Corporate Law by means of a contractual stipulation, or when it
Under Section 74 of the Corporation Code, the stockholder has a is provided in the articles of incorporation. The nature and
right to examine the books of the corporation. That it be done during purpose of by-laws would not allow rights of first refusal to be
business hours on a business day in the place where the corporation found in its provisions.
keeps all its records; the stockholders has not improperly used any
information he secured through any previous examination; demand 4. REMEDIAL RIGHTS
is made in good faith or for a legitimate purpose. a. Individual Suit A suit instituted by a shareholder for his own
behalf against the corporation.
If the director or officer unjustly refuses to allow stockholder to b. Representative Suit A suit filed by a shareholder in his behalf
inspect the corporate books, he can be held liable for damages and and in behalf likewise of other stockholders similarly situated and
for criminal offense punished under Sec. 144 of the Corporation with a common cause against the corporation (Pascual vs. Del Saz
Code. Orozco, 19 Phil. 82).

A stockholders right of inspection is based on his ownership of

the assets and property of the corporation. Therefore, it is an
c. Derivative Suit A suit filed in behalf of the corporation by its Failure to give notice would render a meeting VOIDABLE at the
shareholders (not creditors whose remedies are merely subsidiary such as instance of an absent stockholder, who was not notified of the
in accion subrogatoria or in accion pauliana) upon a cause of action meeting. (Board vs. Tan, 1959).
belonging to the corporation, but not duly pursued by it, against any
person or against the directors, officers and/or controlling shareholders b. WHO CALLS THE MEETINGS
of the corporation. If the suit is filed against a third person, the case is not i. The President, unless the by-laws provide otherwise. (Sec.
infra-corporated in nature. A derivative suit is a remedy designed by 54).
equity and has been the principal defense of the minority stockholders ii. The person or persons designated in the by-laws have the
against abuses by the majority. The real party-in-interest in a derivative authority to call stockholders or members meeting.
action is the corporation itself, not the shareholders who have actually iii. In the absence of such provision in the by-laws, the
instituted it. (Gilda Lim vs. Patricia Lim-Yu, 352 Scra 216) meeting may be called by a director or trustee or by an
officer entrusted with the management of the corporation
Requisites of a derivative suit unless otherwise provided by law.
i. Cause of action is in favor of the corporation, such as iv. Whenever for any cause there is no person authorized to
those arising from fraudulent conveyances, breach of call a meeting, SEC upon petition of a stockholder/member,
trust (but not error of judgment) on the part of the and on the showing of good cause therefore, may issue an
board of directors, ultra vires acts and similar others; order to petitioner to call a meeting by giving proper notice,
ii. There is refusal on the part of the corporation to sue with the petitioner presiding thereat until at least a majority
after the corporation is advised to take appropriate of stockholders/members present have chosen a presiding
remedies but the exhaustion of intra-corporate officer. (Sec. 50)
remedies may be dispensed with if that recourse would
be a futile exercise, such as when it is under the Pursuant to the powers granted to the SEC under Section 50
complete control of the defendants (Everest vs. Asia of the Corporation Code, and Section 6(f) of Pres. Decree
Banking Corporation, 49 Phil. 512). 902-A, the SEC has opined that when there is no person
iii. There would be injury to the corporation if the action is authorized in the by-laws to call a meeting or in the event
not taken; and the person authorized in the by-laws to call a meeting fails
iv. The action is brought by a shareholder or group of or refuses to call for a meeting, any interested stockholder
shareholders in the name of the corporation. may petition the SEC to authorize him to call a meeting, or
compel the officers of the corporation to call a meeting.
i. Liability to the corporation for unpaid subscription (Sec. 67- Under Section 52 of the Corporation Code, unless otherwise
70, CCP); provided for in the Code itself or in the by-laws, a quorum shall
ii. Liability to the corporation for interest on unpaid subscription consist of the stockholders representing a majority of the
if so required by the by-laws (Sec. 66); outstanding capital stock or a majority of the members in case
iii. Liability to the creditors of the corporation for unpaid of non-stock corporations.
subscription (Sec. 60);
iv. Liability for watered stock (Sec. 65); In those cases in which the law determines the number of
v. Liability for dividends unlawfully paid (Sec. 43); shareholders or members whose concurring votes are necessary
vi. Liability for failure to create corporation (Sec. 10). to make their action binding on the corporation, no less than
such number is necessary to constitute a quorum at a meeting
6. MEETINGS called to transact such business. In such cases, the by-laws may
a. REGULAR OR SPECIAL provide for a greater quorum.
In other cases, the by-laws may provide for the holding of
WHEN: meetings with the presence of any number of stockholders or
Regular meetings of stockholders or members shall be held members, even less than a majority, provided there are at least
annually on a date fixed in the by-laws, or if not so fixed, on any two. It is customary however, to provide in the by-laws that the
date in April of every year as determined by the board of presence of the registered holders of a majority of the
directors or trustees. (Sec. 50). outstanding shares is necessary to constitute a quorum, but
WHERE: that a smaller number may meet and adjourn to a later date,
Stock Corporations: City or municipality where the principal and that at such adjourned meeting, the shareholders attending
office of the corporation is located, or, if practicable, in the shall constitute a quorum.
principal office of the corporation; Provided, Metro Manila shall
be considered a city or municipality. (Sec. 51). The SEC has opined that where a corporation encounters
Exception: Such meeting shall be valid even if not held in the several unsuccessful attempts or if it would be impossible for
proper place when all the stockholders or members of the the corporation to get the required quorum of the
corporation are present or duly represented at the meeting. stockholders/members necessary to transact business, it may,
Failure to comply with the mandatory provisions of Section 51 pursuant to the provisions of Pres. Decree 902-A, petition the
would render the meeting illegal. SEC for the appointment of a management committee to
undertake the management thereof.
Regular Meeting written notice sent to tall stockholders or Where quorum is present at the start of a lawful meeting,
members at least (2) weeks prior to the meeting, unless a stockholders present cannot without justifiable cause break the
different period is required by the by-laws. quorum by walking out from said meeting so as to defeat the
Special Meeting written notice sent at least 1 week prior to validity of any act proposed and approved by the
the meeting, unless otherwise provided in the by-laws. majority.(Johnston vs. Johnston, 1965 CA decision)
Subject to waiver, expressly or impliedly.
d. MINUTES OF THE MEETINGS 3. Acquires shares from existing shareholders by sale or
any other contract.
Under Section 74 of the Corporation Code, the corporation
shall, at its principal office, keep and carefully preserve a record
of all minutes of all meetings of stockholders and members, in What are the kinds of subscription contracts?
which it shall be set forth in detail the time and place of holding 1. Pre-incorporation subscription
the meeting; the notice given; whether regular or special; if A subscription for shares of stock of a corporation still to
special, its object, those present and absent; and every act done be formed shall be irrevocable for a period of at least 6
or ordered done at the meeting. months from the date of subscription.
Upon the demand of any director, trustee, shareholder or a. All of the other subscribers consent to the
member, the time when any director, trustee, shareholder or revocation; or
member entered or left the meeting must be noted in the b. Incorporation of said corporation fails to
minutes; and on a similar demand, the yeas and nays must be materialize within said period or within a longer
taken on any motion or proposition, and a record thereof period as may be stipulated in the contract of
carefully made. The protest of any director, trustee, subscription.
shareholder or member or any action or proposed action must Provided:
be recorded in full on his demand. No pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the SEC.
Without the signature of the secretary of the meeting, alleged 2. Post-Incorporation Subscription
minutes taken at that meeting has no probative value nor Entered into after incorporation.
Subscription Agreement under Statute of Frauds
VI. The Corporation Code Subscription agreements are not covered by the Statute of Frauds,
I. Capital Structure and the corporation has a right to enforce and collect, and to adduce
Subscription Agreements: The Root to Stockholder Standing oral evidence upon oral subscription agreement, on the following
Any contract for the acquisition of unissued stock in an grounds:
existing corporation or a corporation still to be formed. It is 1. The special treatment accorded to subscription agreements
considered as such not withstanding the fact that the under Corporate Law requires that subscription agreements,
parties refer to it as purchase or some other contract (Sec. even when they have been entered into orally, should be
60, CCP) allowed to be proved and enforced by parol evidence, in order
Underpins the relationship between the stockholder and to fully protect corporate creditors under the trust fund
the corporation and therefore is a special contract in doctrine; and
Corporate Law. 2. Even if subscription agreements are covered by the Statute of
It is subscription to shares of stock that creates the legal Frauds, but by their nature which upon consent would make the
relationship between the stockholder and the corporation. subscriber a stockholder and owner of the covered shares,
It is subscription and not the payment of such subscription which would constitute partial execution, they are deemed to
that grants the stockholder the statutory common rights be exempted from the prohibition against the presenting of oral
granted to stockholders. evidence to prove and enforce them.
It is the issuance of shares by the corporation to a
subscriber pursuant to a subscription agreement that Consideration for Stocks
creates ownership over such shares in the person of the Since the capital stock of a corporation constitutes the area or basis
subscriber. upon which the trust fund doctrine operates, the law ensures that
It essentially constitutes a contract between the the consideration received (which becomes part of the assets of the
corporation and the subscriber covering unissued shares. corporation) would have proper value to support the capital stock.

Characteristics of Subscription Agreements What are valid considerations for subscription agreements?
There can be a subscription (and also issuance) only with 1. Cash;
reference to shares of stock which have never been issued by 2. Property;
the corporation (i.e. over unissued shares of the Authorized 3. Labor or services actually rendered to the
capital Stock) in the following cases: corporation;
The original issuance from Authorized Capital Stock at the 4. Prior corporate obligations;
time of the incorporation; 5. Amounts transferred from unrestricted retained
The opening, during the life of the corporation, of the earning to stated capital (in case of declaration of
portion of the original Authorized Capital Stock previously stock dividends);
unissued; or 6. Outstanding shares in exchange for stocks in the
The increase of Authorized Capital Stock achieved through event of reclassification or conversion.
a formal amendment of the articles of incorporation and Note: Promissory notes or future services are not valid
registration thereof with the SEC. considerations.
Rationale: It would convert the legal relationship into an
How does one become a shareholder in a corporation? ordinary mutuum or account receivable, and covered by the
A person becomes a shareholder the moment he: ordinary rules pertaining to contracts in general, which may
1. Enters into a subscription contract with an existing then be invoked to undermine the trust fund doctrine.
corporation (he is a stockholder upon acceptance of
the corporation of his offer to subscribe whether the Consideration as Cash or Property:
consideration is fully paid or not) It is not necessary for the subscription agreement to be valid
2. Purchase treasury shares from the corporation or that the same must be delivered at perfection, for a
subscription agreement is a consensual (not real) contract, section of the corporations financial statements
being a species of genus sale. (i.e. balance sheet).
Stockholders Equity represents the primary
Definition of actually...paid and actually received under claim of the stockholders to the results of the
Sec. 62, CCP: operations of the corporations business
It indicates that eventually the consideration must be paid and enterprise, which if run profitably (i.e. there are
cannot be given as a discount or amount to watered stock. accumulated retained earnings) tend to increase
the Assets of the corporation; and when run
Consideration Other Than Cash or Consists of Intangible unprofitable or at a loss (i.e. there is a deficit)
Properties such as Patents or Copyrights: tends to decrease the Assets of the corporation.
The valuation thereof shall initially be determined by the A share of stock represents a proportionate proprietary
incorporators or the Board of Directors, subject to final SEC claim by the holder thereof (stockholder) to the business
approval. enterprise pursued through the medium of a corporation.
Watered Stock
Issued Price or Par Value: Definition
Stocks shall not be issued for a consideration less than the par Shares issued as fully paid-up when in fact the
or issued price thereof. The issued price of no-par value shares consideration agreed to and accepted by the
may be fixed: directors of the corporation was something
In the articles of incorporation known to be much less than the par value or
By the board of Directors pursuant to authority conferred issued value of the shares.
upon it by the Articles of Incorporation or the by laws; or Stocks issued by a corporation for which it has in
In the absence thereof by the stockholders at a meeting fact intentionally or knowingly received or
duly called for the purpose representing at least a majority agreed to receive nothing at all from them or less
of the outstanding capital stock. than their par value either in money or in
property or in service.
Shares of Stock The water in the stock refers to the difference
Nature of Stock between the fair market value at the same time
Shares of stock in a corporation constitute intangible of the issuance of the stock (not at the time of
personal property of the stockholder, which he can discovery of the inadequate consideration or at
contract with as in any other form of property, like the time of demand for payment) and the par or
assignment by way of disposition, or pledge by way of issued value of said stock. Subsequent increase in
encumbrance. the value of the property used in paying the
Shares of stock, therefore, are properties and have intrinsic stock does not do away with the water in the
pecuniary value to the stockholders. stock. The existence of such water is
They do not, however, represent proprietary rights of determined at the time of the issuance of the
stockholders to the assets or properties of the corporation. stock.

Characteristics of stockholders interest in corporate contracts: Liability of Directors for Watered Stocks
1. It is indirect. Any director or officer of a corporation:
2. It is contingent. consenting to the issuance of stocks for a
3. It is remote. consideration less than its par or issued
4. It is conjectural. value or for a consideration in any form
5. It is consequential. other than cash, valued in excess of its fair
6. It is collateral. value, or
7. It is purely inchoate or in sheer expectancy of a right who, having knowledge thereof,
in the following after payment of the corporate debts does not forthwith express his objection in writing and file
and obligations: the same with the corporate secretary, shall be solidarily,
Management of the corporation liable with the stockholder concerned to the corporation
Share in the profits and assets thereof on the and its creditors for the difference between the fair value
dissolution. received at the time of issuance of the stock and the par or
Shares of stock, whether issued or unissued, do not issued value of the same (Sec. 65, Corporation Code).
constitute part of the Assets of the corporation as
reported in its financial statements (i.e. the balance Trust Fund Doctrine for Liability for Watered Stocks
sheets). The doctrine serves as basis for holding such
They do not constitute debts or liabilities of the stockholders and officers liable for watered stocks.
corporation; and they are not reported as components of Under which all corporate creditors would have legal
liabilities in the corporations financial statements (i.e. basis to recover against stockholders and guilty officers.
the balance sheet). The trust fund doctrine on watered stock prevails.
Shares of stock fall within that special category of It is established doctrine that subscriptions to the capital
intangible personal properties under the generic name of a corporation constitute a fund to which creditors
equity. have a right to look for satisfaction of their claims and
Rationale: All dealings pertaining to shares of that the assignee in insolvency can maintain an action
stock (e.g. authorized capital stock, outstanding upon any unpaid stock subscription in order to realize
capital stock, subscription receivables, paid up assets for the payment of its debts...A corporation has
capital stock and treasury shares) and all claims no power to release an original subscriber to its capital
that arise therefrom (e.g. retained earnings or stock from the obligation of paying for his shares,
deficit) are reported in the Stockholders Equity without a valuable consideration for such release; and as
against creditors a reduction of the capital stock and
take place only in the manner and under the conditions Reasons:
prescribed by the statute or the charter or the articles of The above-types of corporations deal with the public and
incorporation. Moreover, strict compliance with the most of them manage the savings of the people; thus, the
statutory regulations is necessary (Philippine Trust Cop. law seeks to protect the investing public by making sure
V. Rivera, 1923). that such corporations have sufficient funds in the form of
capital so that the public could determine the financial
Situs of the Shares of Stock viability of such corporations.
The actual situas of shares of stock is the domicile of the Three ways of Determining Value of No-Par Value
corporati on (Tayag vs. Benguet Consolidated Inc., 26 SCRA Shares:
242, 1968) By majority vote of the outstanding shares
(issued shares) in a meeting called for that
Classes of Shares of Stock purpose;
Common Shares By Board of Directors pursuant to authority
a. A stockholder, owner of at least one common conferred upon it by the articles of
share has the following rights: incorporation; or
Right to vote at meetings; By amendment of articles of incorporation (Sec.
Right to dividends; 62, Corporation Code).
Right to examine corporate books. Redeemable Shares
b. A common stock represents the residual Redeemable shares can only be issued when
ownership interest in the corporation. It is a expressly authorized by the articles of
basic class of stock ordinarily and usually issued incorporation.
without extraordinary rights or privileges and The terms and conditions affecting redeemable
entitles the shareholder to a pro rata division of shares are required to be provided for in the
profits. articles of incorporation and to be stated on the
certificates of stock.
Preferred Shares Founders Shares
a. May enjoy a right of preference in: These must be provided for in the articles of
i. Dividends; incorporation, which would be entitled to vote
ii. Voting (Particularly in election of directors); and be voted directors to the Board of Directors.
iii. Corporate property upon dissolution. But such privilege is good only for 5 years, which
b. Preferred stocks are those which entitle the period shall begin from the date of the approval
shareholder to some priority on dividends and thereof by SEC.
asset distribution. Treasury Stocks
c. Limitations: These are shares of stock which have been issued
i. Preferred shares can only be issued with par and fully paid for, but subsequently reacquired
value; by the issuing corporation by purchase,
ii. Preference must be: redemption, donation or through some other
Stated in the articles of incorporation; lawful means.
or Escrow Shares
May be fixed by the Board of Directors Shares that have been issued subject to a condition.
when authorized by articles of
incorporation, provided, such terms General Rule on Classification of Shares:
and conditions shall be effective upon The shares of stock in a corporation may be divided into classes
filing of a SEC certificate. or series of shares, or both, any of which classes or series of
shares, may have such rights, privileges or restrictions thus
Par Value Shares must be stated in the articles of incorporation in order to be
Their value is fixed in the articles of valid (Sec. 6, Corporation Code).
incorporation, which nominal value remains the
same regardless of the profitability of the Exceptions:
corporation. No share may be deprived of voting rights except
This gives rise to financial stability and is the those classified and issued as preferred or
reason why banks, trust corporations, insurance redeemable shares.
companies and building and loan associations There shall always be a class or series of shares which
must always be organized with par value shares. have complete voting rights.
Any or all of the shares or series of shares may have a
No Par Value Shares par value or have no par value as may be provided for
They have no assigned value, their value being in the articles of incorporation, except that banks,
dependent on the changes in the profits of the trust companies, insurance companies, public utilities,
corporation and the market value of the shares and building and loan associations shall not be
themselves at the time the shares are issued. permitted to issue no par value shares of stock.
Minimum consideration: 55.00. Note: There can be no privilege or restriction on any share other
The following cannot issue no par value shares: than what is provided for in the articles of incorporation (Sec. 6,
i. Banks; Corporation Code).
ii. Insurance companies;
iii. Trust companies; Payment of Balance of Subscription
iv. Building & Loan Associations; and Subject to the provisions of the contract of subscription, the
v. Public Utilities 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 Sale of Delinquent Shares
such percentage thereof, in either case with accrued interest, if
any, as it may deem necessary. Sections 67 to 70 give the two ways by which a corporation
can collect from the stockholders the balance of their
Payment of any unpaid subscription or any percentage thereof, subscriptions: extrajudicially or judicially.
together with the interest accrued, if any, shall be made on the
date specified in the contract of subscription or on the date Procedure of Delinquency Sale (EXTRAJUDICIAL
stated in the call made by the board. Failure to pay on such date REMEDY):
shall render the entire balance due and payable and shall make a. The Board of Directors must make a call by
the stockholder liable for interest at the legal rate on such resolution demanding the payment of the
balance, unless a different rate of interest is provided in the by- balance of the subscription. This is called the
laws, computed from such date until full payment. If within NOTICE OF CALL.
thirty (30) days from the said date no payment is made, all b. The NOTICE OF CALL shall be served on each
stocks covered by said subscription shall thereupon become stockholder either personally or by registered
delinquent and shall be subject to sale as hereinafter provided, mail (There is no need for publication).
unless the board of directors orders otherwise (Sec. 67, c. If the stockholders do not pay the amount due
Corporation Code). on the date designated in the notice, the Board
shall issue, by resolution, a NOTICE OF
May be through any of the following means: DELINQUENCY.
As specified in the subscription contract. d. NOTICE OF DELINQUENCY shall be served on the
The Board, through a resolution, may call for all or part of the non-paying subscriber either personally or by
unpaid subscriptions. registered mail PLUS
Failure to pay on a specified date, the entire balance which is i. Publication in a newspaper of general
due and payable. circulation in the province or city where the
Failure to pay within 30 days from the date the subscription principal office of the corporation is located.
becomes delinquent and is subject to sale. ii. PERIOD FOR PUBLICATION: Once a week for
two consecutive weeks.
Call by Board of Directors iii. CONTENTS OF THE NOTICE OF
3 meanings of the nature of the call: DELINQUENCY/NOTICE OF SALE:
a. It may mean the resolution of the Board of The amount due on each subscription
Directors for the payment of unpaid plus accrued interest.
subscriptions; The date, time and place of the sale.
b. Notification of such resolution made on the iv. Such notices are jurisdictional.
stockholders; or
c. The time when subscriptions become payable. e. In the public auction, the highest bidder is the
It is usually expressed in the form of a resolution one who is willing to pay the amount of the
adopted by the Board of Directors, specifying the: balance of the subscription for the least number
i. Proportion of the unpaid subscription which of shares.
it is desired to call in and the f. After the bidding, the corporation will give the
ii. Time or times when it is to be payables. highest bidder the certificate of stock in the
b. The entire amount of the unpaid subscription number of his bid while the remaining number, if
maybe called at once or it may be made payable any, will be issued a certificate of stock in favour
by instalments, at stated intervals, or by of the original subscriber as fully paid.
successive calls. g. On the other hand, if there are no bidders, then
When call not necessary: the corporation must bid for the whole number
a. A specific date of payment is specified in the of shares (regardless of how much the
subscription contract; stockholder has paid), which shall then pertain to
b. Failure to pay the unpaid subscription within the the corporation as fully-paid treasury stocks.
prescribed 30-day period from the date specified
in the subscription contract. Effect of Delinquency
c. If the corporation becomes insolvent, which On the holder:
makes the liability on the unpaid subscription a. It disqualifies the stockholder to be voted for or
due and demandable regardless of any be entitled to vote or to representation at any
stipulation to the contrary in the subscription stockholders meeting.
agreement. b. It disqualifies the stockholder to exercise any
rights of a stockholder except the right to
Notice Requirement dividends, until and unless he pays the amount
The Notice of Call shall be served on each stockholder due on his subscription with accrued interest and
either personally or by registered mail. the costs and expenses of advertisement, if any.
i. The CASH DIVIDEND DUE shall first be
The Notice of Call for unpaid subscribed stock must be applied to the unpaid balance.
published, except when the corporation is insolvent, in which ii. The STOCK DIVIDEND shall be withheld until
case, payment is immediately demandable (Lingayen Gulf the unpaid balance is fully paid.
Electric Power Co. v. Baltazar, 93 Phil. 404 (1953) c. The stockholder shall not be entitled to notice of
the regular or special meetings of the
d. The stockholders delinquent shares be included iv. By appropriate book-entries in the securities
in the determination of a quorum for accounts maintained by securities
shareholdings meetings. intermediaries;
Auction Sale and the Highest Bidder v. In the stock and transfer book held by the
PERIOD OF THE SALE: corporation or the stock transfer agent and
It shall not be less than 30 days nor more than 60 days such bookkeeping entries shall be binding
from the date the stocks become delinquent. on the parties to the transfer.
WHO IS THE HIGHEST BIDDER? b. A transfer made pursuant to the foregoing has
a. Who shall offer to pay the full amount of the the effect of the delivery of a security in bearer
balance on the subscription together with form or duly indorsed in blank representing the
accrued interest, costs of advertisement and quality or amount of security or right transferred
expenses of sale, for the smallest number of , including the unrestricted negotiability of that
shares or fraction of a share. security by reason of such delivery.
b. The stock so purchased shall be transferred to c. However, transfer of uncertificated shares shall
such purchaser in the books of the corporation only be valid, so far as the corporation is
and a certificate for such stock shall be issued in concerned, when a transfer is recorded in the
his favour. books of the corporation so as to show the
names of the parties to the transfer and the
Certificate of Stock number of shares transferred.
Nature of the Certificate
It is an instrument that is issued formally by the Negotiability
corporation, with the intention that the same Since certificates of stock are quasi-negotiable in
constitute the best evidence of the issuance of shares nature, the normal mode of dealing with such
of stock that are fully paid and no longer assessable. certificates is by the process of endorsement and
It is the evidence of a holders interest and status in a
corporation. It must be noted that endorsement and delivery of
certificates of stock may be for any of the three
It is a written instrument signed by the proper officer purposes:
of a corporation stating or acknowledging that the a. For sale or assignment of the shares;
person named in the document is the owner of a b. Pursuant to a trust or nominee arrangement; or
designated number of shares of its stock. c. By way of pledge or encumbrance of the shares.

It is prima facie evidence that the holder is a Endorsement is an essential ingredient in dealing with
shareholder of a corporation. certificates of stock, and generally cannot be
dispensed with.
Uncertificated Shares
Rule on Uncertificated Shares The delivery of the stock certificate duly endorsed by
Notwithstanding Section 63 of the Corporation Code, the owner is the operative act of transfer of shares
under Section 43.1 of the Securities Regulation Code, from the lawful owner to the new transferee.
a corporation whose shares of stock are registered
pursuant to the Code or listed on a stock exchange Registration of the transfer of the share in the stock
may: and transfer books is necessary to complete the
i. If so resolved by its Board of Directors and process of negotiation of the certificate of stocks.
agreed by a shareholder, issue shares to, or
record the transfer of some or all of its Requirements for Valid Transfer of Stocks
shares into the name of said shareholders, a. The certificate must be endorsed by the owner
investors or, securities intermediary in the or his attorney-in-fact or other persons legally
form of uncertificated securities; authorized to make the transfer;
ii. The use of uncertificated securities shall be b. There must be delivery of the stock certificate;
without prejudice to the rights of the and
securities intermediary subsequently to c. To be valid against third parties, the transfer
require the corporation to issue a certificate must be recorded in the books of the
in respect of any shares recorded in its corporation.
name; and
iii. If so provided in its articles of incorporation Issuance
and by-laws, issue all of the shares of a No certificate of stock shall be issued to a subscriber until
particular class in the form of uncertificated the full amount of his subscription together with interest
securities and subject to a condition that and expenses (in case of delinquent shares), if any is due,
investors may not require the corporation has been paid (Sec. 64, Corporation Code).
to issue a certificate in respect of any shares
recorded in their name. Full payment
A subscriber must first totally pay his subscription
Binding Effect on Shares Transactions before a certificate of stock covering shares
Under Section 43.3 of the Securities Regulation subscribed and paid for could be issued to him.
Code, transfers of securities, including Every stockholder has a right to have a proper
uncertificated securities may be validly made and certificate issued to him by the corporation upon
consummated in any of the following manner: demand, as soon as he has complied with the
conditions under Sec. 64 of the Corporation Code, thereof shall be suspended until the final decision by
which requires full payment of the subscription. the court.
The provisions under Section 64 of the Corporation NOTE: Except in cases of fraud, bad faith, or negligence on
Code actually operates as a legal basis on the part of the part of the corporation and its officers, no action may
the corporation, through its Board of Directors and be brought against any corporation which shall have issued
officers, to refuse any claim by a subscriber to issue certificates of stock in lieu of those lost, stolen or
certificate of stock covering the extent of shares that destroyed pursuant to the procedure above-described.
have been paid-up while leaving the remaining
balance unpaid. Stock and Transfer Book
The SEC has opined that a stockholder shall only be Under Section 74 of the Corporation Code, a stock
entitled to the issuance of his certificate of stock upon corporation must keep a book to be known as the stock
payment of the full amount of his subscription, and transfer book.
together with interest and expenses (in case of Contents
delinquent shares), if any is due: Section 64 of the a. All stocks in the names of the stockholders alphabetically
Corporation Code clearly provides that a subscription arranged;
is one, entire and indivisible whole contract. b. The instalment paid and unpaid on all stock for which
subscription has been made, and the date of payment of
Payment Pro-Rata any instalment;
The corporation is not prohibited from dividing the c. A statement of every alienation, sale or transfer of stock
subscription of a subscriber by considering portion thereof made; and
as fully paid and issuing a corresponding certificate over d. Such other entries as the by-laws may prescribe.
the paid-up shares. This option is ONLY granted to the Who May Make Valid Entries
corporation. Entries made on the stock and transfer book by any person
In the absence of provisions in the by-laws to the contrary, other than the CORPORATE SECRETARY, such as those
a corporation may apply payments made by subscribers on made by the President and Chairman, cannot be given any
account of their subscriptions either as: valid effect.
a. Full payment for the corresponding number of shares
the par value of which is covered by such payment; or It is the CORPORATE SECRETARYs duty and obligation to
b. Payment pro rata to each and all the entire number of register valid transfers of stock and if said corporate officer
shares subscribed for. refuses to comply, the transferor-stockholder may
The two alternatives cannot be availed of by the rightfully bring suit to compel performance.
corporation at the same time.
Once an alternative is chosen, it must be applied A stockholder who transfer shares of stock has no
uniformly to all stockholders similarly situated, and authority to effect their entries in the stock and transfer
therefore, it cannot be changed without the consent book of the corporation, even when the Corporate
of all stockholders who might be affected. Secretary happens to be at odds with such stockholder,
and even when such stockholder happens to be in
Lost or Destroyed Certificates possession of the book. The entries would be considered
a. The following procedure shall be followed for the issuance VOID.
by a corporation of new certificates of stock in lieu of hose
which have been lost, stolen or destroyed: Disposition and Encumbrance of Shares
a. The registered owner of certificates of stock or his Allowable Restrictions on the Sale of Shares
legal representative shall file with the corporation an The authority granted to a corporation to regulate the
affidavit setting forth, if possible: transfer of its stock does not empower the corporation to
i. The circumstances as to how the certificates restrict the right of a stockholder to transfer his shares, but
were lost, stolen or destroyed; merely authorizes the adoptions of regulations as to the
ii. The number of shares represented by each formalities and procedure to be followed in effecting
certificate, the serial numbers of the transfer.
iii. The name of the corporation which issued SEC has allowed reasonable restrictions on the transfer of
the same; shares in the articles of incorporation if the restrictions
iv. He shall submit such other information and comply with the provisions of Section 63 of the
evidence which he may deem necessary. Corporation Code, namely, that:
b. The corporation shall publish a notice in a newspaper i. The restriction must appear in the articles of
of general circulation published in the place where incorporation, by-laws and the certificate of stock,
the corporation has its principal office, once a week and
for 3 consecutive weeks at the expense of the ii. That said restrictions shall not be more onerous than
registered owner. granting the existing stockholders or the corporation
c. However, instead of waiting for one (1) year, the the option to purchase the shares of the transferring
registered owner may file a bond or other security, stockholder with such reasonable terms, conditions or
running for a period of one (1) year for a sum and in period stated therein.
such form and with such sureties as may be
satisfactory to the board of directors in which case a Sale of Partially Paid Shares
new certificate may be issued even before the No shares of stock against which the corporation holds any
expiration of the one (1) year period provided; unpaid claim shall be transferable in the books of the
d. Provided, That if there is a pending contest regarding corporation. A corporation may refuse to acknowledge and
the ownership of said certificates of stock the register a sale or assignment of shares which are not fully
issuance of the new certificates of stock in lieu
paid, and may continue to hold the original subscriber a. To enable the corporation to know at all times who
liable on the payment of the subscription. the actual stockholders are, because mutual rights
and obligations exist between the corporation and its
The term unpaid claims refers to any unpaid claims stockholders;
arising from unpaid subscription and not to any b. To afford to the corporation an opportunity to object
indebtedness which a subscriber or stockholder may owe or refuse its consent to the transfer in case it has any
the corporation arising from any other transactions. claim against the stock sought to be transferred, or
for any other valid reason; and
The lien created under Section 63 of the Corporation Code c. To avoid fictitious or fraudulent transfer.
can only cover unpaid subscriptions to the corporation,
and is without application to other obligations that a Involuntary Dealings with Shares
stockholder may have against the corporation. a. A mortgage or pledge of shares of stock that would
involve the outright assignment or delivery and
Sale of a Portion of Shares Not Fully Paid indorsement of the certificates of stock to the pledge
A stockholder cannot transfer part of his subscription in or mortgagee would constitute a valid mortgage even
view of the indivisible nature of a subscription contract. without registration with the register of deeds, but it
would always be subject to prior attachment or levy
Rationale: of the shares duly effected pursuant to the Rules of
i. It would be difficult to determine whether or not the Court by the judgment creditors of the registered
partial payments made should be applied as full stockholder;
payment for the corresponding number of shares b. Outside of physical transfer or delivery of the
which can only be covered by such payment as certificates of stock, a chattel mortgage over the
proportional payment to each and all of the entire shares of stock, whether or not covered certificates of
number of subscribed shares. stock, would be valid and binding on third parties only
ii. The difficulty in determining the unpaid balance to be if the mortgage was registered with the register of
assumed by each transferee. deeds or registers of deeds as the case may be, of the
province or city where the mortgagor has his domicile
Sale of All Shares Not Fully Paid and where the corporation has its principal place of
The entire subscription although not yet fully paid, may be business;
transferred to a single transferee, who although not yet c. A writ of attachment/execution against the shares of
fully paid, may be transferred to a single transferee, who stock of the judgment debtor would be valid and
as a result of the transfer must assume the unpaid balance. binding on the shares and against third parties, the
moment there is proper service of the writ to the
It is necessary, however, to secure the consent of the proper officer of the corporation pursuant to Section
corporation since the transfer of subscription rights and 7(d), Rule 57 of the Rules of Court.
obligations contemplates a novation of contract which d. In any of the three cases above, the pledge, mortgage,
under Article 1293 of the Civil Code cannot be made attachment or levy of the shares of stock would
without the consent of the creditor. thereupon be valid and binding on the entire world
upon their constitution or completion of process; no
The contract of sale or assignment between the original registration of the pledge, mortgage, attachment or
subscriber and his transferee, although binding between levy in the stock and transfer book of the corporation
them, cannot be forced upon the corporation, when it is required to make any of them either valid or
covers not fully paid shares. This principle is in consonance binding; and their registration in the stock and
with the principle in Contract Law that the substitution of transfer book would have no legal effect at all and
the party obligor can be made only with the express such registration does not produce the effect of
consent of the oblige, the corporation being considered notice to third parties;
the oblige in a subscription contract. e. As between two contending creditor, it would seem
that the first to have the writ served upon the proper
Sale of Fully Paid Shares officer of the corporation would be preferred;
The proper mode to deal with fully paid shares covered by f. As between contending pledge/mortgagee and an
certificates of stock would be endorsement of the attaching creditor, if the registration requirement for
certificates and their due delivery to the assignee. the pledge or mortgage happened first in point of
time prior to service of the writ to the proper
No transfer shall be valid except as between the parties corporate officer, the pledge or mortgage shall be
until the transfer is recorded in the books of the preferred; whereas, if the service of the writ to the
corporation showing the names of the parties to the proper court officer happened ahead of the
transaction, the date of the transfer, the number of the registration of the pledge or mortgage, then the
certificate or certificates and the number of shares attaching creditor would be preferred;
transferred. g. As between a pledge/mortgage duly constituted (even
when not registered in the stock and transfer book)
The failure to register a sale or transfer in the stock and and the buyer or assignee of the shares, if the pledge
transfer book of the corporation would render the sale or mortgage was constituted and registered ahead of
invalid and not binding to all persons, including attaching the registration of the sale or assignment in the stock
creditors of the seller. and transfer book (even when the sale or assignment
was perfected and consummated ahead of the pledge
The rationale for holding registration of a sale or or mortgage) the pledge or mortgage would still be
disposition of shares of stock valid only when registered in preferred because the registration of the sale or
the stock and transfer book of the corporation, thus: assignment in the stock and transfer book is a
necessary ingredient to make the sale or assignment c. Order shall be published once a week for three consecutive
binding on third parties, including the weeks in a newspaper published in the municipality or city
pledge/mortgagee; where the principal office of the corporation is situated; if none,
h. As between an attaching/levying creditor where there in a newspaper of general circulation in the Philippines, and a
has been proper service of the writ to the proper copy is to be posted for 3 consecutive weeks in 3 public places
corporate officer (even when not registered in the in such municipality or city;
stock and transfer book) and the buyer or assignee of d. After 5 days notice from expiry date, SEC shall hear the
the shares, if writ was properly served upon the petition and the objections thereto;
corporate officer ahead of the registration of the sale e. If lawful, it shall order the corporation dissolved, provide for
or assignment in the stock and transfer book (even the disposition of properties, and may appoint receiver.
when the sale or assignment was perfected and
consummated ahead of the service of the writ) the iii. By Shortening of Corporate Term
attachment/levy would still be preferred because the i. By the amendment of the articles of incorporation.
registration of the sale/assignment in the stock and ii. By vote of 2/3 of the outstanding shares or 2/3 of the
transfer book is a necessary ingredient to make the members, the articles may be amended to shorten the
sale or assignment binding on third parties, including corporate life.
on attaching/levying creditor. iii. SEC internal rules require the following:
Notice of the dissolution to be published in a
Dissolution and Liquidation newspaper of general circulation for 3 consecutive
Modes of Dissolution weeks;
Dissolution signifies the extinguishment of a corporations List of corporate creditors, with their consent to the
franchise and the termination of its corporate existence for shortening of corporate term;
business purpose. Submission by a majority stockholders/principal
officers an Undertaking to personally answer for
A de jure dissolution is one adjudged and determined by any outstanding corporate obligations of the
administrative or judicial sentence, or brought about by an act corporation; and
of the sovereign power, or which results from the expiration of Latest audited financial statements which must not
the charter period of corporate life. be earlier than the date of the stockholders
meeting approving amendment to the articles of
A de facto dissolution is one which takes place in substance and incorporation, and a BIR clearance on the tax
in fact when the corporation by reason of insolvency, cessation liabilities of the corporation.
of business, or suspension of all its operations, as the case may iv. Under Section 120 of the Corporation Code, it is only upon
be, goes into liquidation, still retaining its primary franchise to approval of the amended articles of incorporation by the SEC
be a corporation. This is actually a dissolution only of the that the corporation shall be deemed dissolved. This means
business enterprise, while leaving intact the juridical entity. that if the shortened term, as proposed in the amendment of
a. Voluntary the articles of incorporation, expires before the approval by
i. Where No Creditors Are Affected the SEC, the corporation will not be automatically dissolved
By an administrative application for dissolution filed with upon such expiration but only upon SEC approval of the
the SEC amendment. On the other hand, if the SEC give its approval
a. Majority vote of the Board by resolution; before such shortened term expires, the dissolution can take
b. Affirmative vote of 2/3 of the outstanding capital effect only upon the expiration of such shortened term (SEC
stock or 2/3 of the members, as the case may be: Opinion No. 06-20, 13 March 2006).
i. Provided: Notice of such meeting was b. Involuntary
published in the principal office; if none, A corporation may be dissolved by SEC upon filing of a
then in a newspaper of general circulation in verified complaint, after proper notice and hearing on
the Philippines, with notice sent to each grounds provided by existing laws, rules and regulations.
stockholder or member at least 30 days i. By expiration of Corporate Term
prior to the meeting; When the corporate life of the corporation as stated
c. Copy of the resolution certified by majority of directors in its articles of incorporationis allowed to expire,
or trustees and countersigned by secretary and filed with without extension, the corporation is deemed
SEC; dissolved by such expiration without need of further
d. SEC must issue certificate of dissolution. action on the part of the corporation or the State.
ii. Failure to Organize and Commence Business Within 2
ii. Where Creditors Are Affected Years from Incorporation
By a formal petition for dissolution filed with the SEC, If a corporation does not formally organize and
with due notice, and hearing to be duly conducted commence the transaction of its business or the
a. Formal petition with SEC construction of its works within two (2) years from the
Signed by majority of the directors/trustees or date of its incorporation, its corporate powers cease
officers having management of its affairs, verified and the corporation shall be deemed dissolved.
by president or secretary or one director/trustee; However, if a corporation has commenced the
Set forth all claims and demands against it; transaction of its business but subsequently becomes
Set forth that dissolution was resolved upon continuously inoperative for a period of at least five
affirmative vote of 2/3 of the outstanding capital (5) years, the same shall be a ground for the
stock or 2/3 of the members, as the case may be; suspension or revocation of its corporate franchise or
b. SEC shall issue an order reciting purpose of petition certificate of incorporation (Section 22, Corporation
and shall fix date before which objections may be Code).
filed, which shall not be less than 30 days nor more
than 60 days after the entry of order;
The term to organize when used in reference to a it and enabling it to settle and close its affairs, to dispose of and
corporation, involves the: convey its property and to distribute its assets, but not for the
i. Election of officers, purpose of continuing the business for which it was established
ii. Providing for the subscription and payment (Sec. 122, Corporation Code)
of the capital stock,
iii. The adoption of by-laws. And Conveyance to a Trustee within a 3-Year Period
iv. Such other steps as are necessary to endow At any time during said three (3) years, the corporation is
the legal entity with the capacity to transact authorized and empowered to convey all of its property to
the legitimate business for which it was trustees for the benefit of stockholders, members, creditors,
created. and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the
It referred to the term organization as relating to benefit of its stockholders, members, creditors and others in
the systematization and orderly arrangement of the interest, all interest which the corporation had in the property
internal and managerial affairs and organs of the terminates, the legal interest vests in the trustees, and the
corporation. beneficial interest in the stockholders, members, creditors or
other persons in interest (Sec. 122, Corporation Code)
The same SEC rules consider a corporation to have
commenced the transaction of its business when it By Management Committee or Rehabilitation Receiver
has performed preparatory acts geared towards the Upon five (5) day's notice, given after the date on which the
fulfilment of the purposes for which it was established right to file objections as fixed in the order has expired, the
such as but not limited to the following: Commission shall proceed to hear the petition and try any issue
made by the objections filed; and if no such objection is
a. Entering into contracts or negotiations for lease or sufficient, and the material allegations of the petition are true,
sale of properties to be used as business or factory it shall render judgment dissolving the corporation and directing
site; such disposition of its assets as justice requires, and may
b. Making plans for and construction of the factory; appoint a receiver to collect such assets and pay the debts of
c. Taking steps to expedite the construction of the the corporation (Sec. 119, Corporation Code)
companys working equipment.
Grounds for Appointment of Management Receiver
iii. Legislative Dissolution (see FRIAs discussion on a. Imminent danger of loss, wastage, dissipation or
Corporations Dissolution) destruction of assets; or
iv. Dissolution by the SEC on Grounds Under Existing b. Paralysation of business operations of the corporation
Laws that may be prejudicial to the interest of minority
a. Failure to organize and commence business within 2 stockholders, party-litigants or general public.
years from incorporation;
b. Continuously inoperative for 5 years; K. OTHER CORPORATIONS
c. Failure to file by-laws within 30 days from issue of 1. CLOSE CORPORATIONS
certificate of incorporation; A close corporation, within the meaning of this Code is one whose
d. Continuance of business not feasible as found by Articles of Incorporation provide: (REQUIREMENTS)
Management Committee or Rehabilitation Receiver; a. Number of stockholders not to exceed 20
e. Fraud in procuring Certificate of Registration; b. Restriction on the transfer of issued stocks (Restriction: right of
f. Serious Misrepresentation; and first refusal in favor of the stockholder or the corporation); and
g. Failure to file required reports. c. The stocks cannot be listed in the stock exchange nor should
they be publicly offered
Methods of Liquidation
The process by which all the assets of the corporation are converted Special Rule on Stock Ownership: not deemed a close corporation
into liquid assets (cash) in order to facilitate the payment of whenever 2/3 of the voting stocks or voting rights is owned or
obligations to creditors, and the remaining balance, if any, is to be controlled by another corporation which is not a close corporation
distributed to the stockholders or members.
NOTE: A dissolved corporation continues to be a body corporate for 1.The stockholders themselves can directly manage the corporation
3 years from the time it is dissolved for the purpose of liquidation or and perform the functions of directors without need of election:
winding up its corporate affairs. a. When they manage, stockholders are liable as directors;
b. There is no need to call a meeting to elect directors;
The termination of the life of a juridical entity does not by itself c. The stockholders are liable for tort.
cause the extinction or diminution of the rights and liabilities of such
entity nor those of its owners and creditors alike (see Sec. 145 of the 2. Despite the presence of the requisites, the corporation shall not
Corporation Code). be deemed a close corporation if at least 2/3 of the voting stocks or
voting rights belong to a corporation which is not a close
By the Corporation Itself corporation.
Through its board of directors/trustees
Every corporation whose charter expires by its own limitation or (a) Mining companies
is annulled by forfeiture or otherwise, or whose corporate (b) Oil companies
existence for other purposes is terminated in any other manner, (c) Stock exchange
shall nevertheless be continued as a body corporate for three (d) Banks
(3) years after the time when it would have been so dissolved, (e) Insurance companies
for the purpose of prosecuting and defending suits by or against (f) Public utilities
(g) Educational institutions specified provided in the AOI for amending, deleting or
(h) Other corporations declared to be vested with public interest removing any of the aforesaid provisions, at a meeting duly
called for such purpose.
1. The restrictions in the transfer of the stocks must appear: g. DEADLOCKS
(a) In the AOI if the stockholders split into camps, and there is a deadlock with
(b) In the By-Laws and the result that the business and affairs of the corporation can
(c) On the stock certificates. no longer be conducted to the advantage of the stockholders in
OTHERWISE: they shall not be binding on any purchaser thereof in general any stockholder can petition the SEC, which is
good faith. empowered to take the necessary steps to break the deadlock,
even by amending the AOI or By-laws and to the extent of
2. Restriction shall not be more onerous than granting the existing appointing a 3 party as a provisional director.
stockholders or the corporation the option to purchase the PROVISIONAL DIRECTOR
shares of the transferring stockholder with such terms, i. An impartial person who is neither a stockholder nor a creditor
conditions or period stated therein. of the corporation or of any subsidiary or affiliate of the
corporation and whose further qualifications, if any may be
1. If stock is issued or transferred to any person not entitled ii. Not a receiver of the corporation and does not have the title
and the certificate for such stock conspicuously shows the and powers of a custodian or receiver
qualifications of the persons entitled to be holders
conclusive presumption of notice of fact of ineligibility iii. Have all the rights and powers of a duly elected director of the
2. If AOI states the number of persons, not in excess of 20 corporation (right to notice, to vote) until such time as he shall
entitled to be holders of stock and if the certificate be removed by order of the Commission or by all stockholders.
conspicuously states such number, and if issuance or
transfer would cause stock to be held by more person to iv. Compensation determined by agreement between him and
whom such stock is issued or transferred is conclusively corporation subject to approval of SEC (SEC may fix in absence
presumed to have notice of this fact of agreement or in the event of disagreement)
3. If stock certificate conspicuously shows a restriction on So long as the close corporation has unrestricted profits, it can
transfer of stock- conclusive presumption of notice of the be compelled to buy out the stockholder
fact by transferee A stockholder may also petition the SEC to compel dissolution
The corporation may, at its option, refuse to register the transfer of whenever affairs are carried out for illegal, fraudulent or
stock in the name of the transferee. EXCEPT: dishonest, or unfairly prejudicial, or corporate assets are
(a) consented to by all stockholders, or misapplied
(b) if close corporation has amended AOI in accordance with this
This does not in any way impair any right of a transferee regarding a. Definition
any right to rescind the transaction or to recover under any -one organized for an eleemosynary purpose and where no
applicable warranty, express or implied. part of its income is distributable to its members, trustees,
officers, subject to the provisions on dissolution
d. WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD PROVIDED: that any profit which a non-stock corporation may
Unless By-Laws provide otherwise, VALID if: obtain as an incident to its operations shall whenever necessary
1. before or after such action is taken, written consent or proper, be used for the furtherance of the purpose/s for
thereto is signed by all the directors; or which it was organized.
2. all stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or POWER TO MAKE PROFITS AND ENGAGE IN BUSINESS
3. the directors are accustomed to take informal action with 1.Incidental Profits obtained from operations
the express or implied acquiescence of all the 2.Profits obtained from investment of accumulated funds it
stockholders; or may subscribe to the capital stock of a corporation or invest in
4. all the directors have express or implied knowledge of the commercial papers such as money instruments, but such power
action in question and none of them makes prompt must be included in its AOI in order that the investment may
objection thereto in writing not be considered ultra vires (must be necessary and incidental)
5. ratified by a director who failed to attend, unless promptly 3.Powers necessary in furtherance of purposes
files his written objection, if directors meeting is held
without proper cal or notice The mere realization of profits out of the
operations of a non-stock corporation does not
e. PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS extends to all automatically result in the loss of its exemption
stock to be issued, including reissuance of treasury shares, whether from income taxation as long as no part of its
for money or for property or personal services, or in payment of profit inures to the benefit of any stockholder or
corporate debts, unless AOI provides otherwise. individual. It is not earning of incidental profits
that make the entity non-stock, but the actual or
f. AMENDMENT OF AOI Any amendment to the AOI which seeks: legal authority to distribute such profits to the
(a) to delete or remove any provisions required by the Corporation officers or members. (Collector vs. University of
Code to be contained in the AOI; the Visayas, 1 SCRA 669)
(b) to reduce a quorum or voting requirement stated in said AOI;
shall not be valid or effective unless approved by at least 2/3 of b. PURPOSES
the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be 1. Charitable
2. Religious subject a foreign corporation doing business in the country
3. Educational to the jurisdiction of our courts, it must acquire a license
4. Professional from SEC and appoint an agent for service of process.
5. Cultural Without such license, it cannot institute a suit in the
6. Recreational Philippines. (European Resources vs. Ingenieuburo
7. Fraternal Birkhanh, 435 SCRA 246)
8. Literary
9. Scientific A foreign corporation has the right to transact business in the
10. Social Philippines after it has obtained a license to do business.
11. Civic Service
12. Or similar purposes, like trade, industry, agriculture and like d.SUABILITY OF FOREIGN CORPORATIONS
13. Any combination thereof SUMMARY OUTLINE
Doing Business in the May sue and can be sued in

Its assets shall be applied and distributed as follows:

1.All liabilities and obligations of the corporation Doing Business in the Cannot sue, but may be
Philippines, Without a sued in the Philippines
2.Assets held by corporation upon a condition requiring return, License
transfer or conveyance, and which condition occurs by reason of
the dissolution
Not doing Business in the May sue and May be sued
3.Assets received and held by the corporation subject to
Philippines, on Isolated
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
Doctrine of Doing Business (Sec.3(d) of Foreign Investments Act of
the dissolution shall be transferred or conveyed to 1 or more
corporations, societies or organizations engaged in activities in the
Philippines substantially similar
(a) Soliciting orders
(b) Service Contracts
4.Assets other than those mentioned in the preceding paragraphs,
(c) Opening offices, whether called liaison offices or branches
if any shall be distributed in accordance with the AOI or the By-
(d) Appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period/s totaling 180 days or more
5.Assets may be distributed to such persons, societies,
(e) Participating in the management, supervision or control of any
organizations, or corporations, whether organized for profit as
domestic business, firm, entity or corporation in the Philippines
may be specified in the plan of distribution
(f) Any other act/s that imply continuity of commercial dealings or
arrangements, and contemplate to that extent, performance
normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
-a corporation that is organized other than under the laws of
the Philippines, provided said foreign country allows Filipinos
PROVIDED: the phrase doing business shall not be deemed to include:
and Philippine corporations to do business there
(a) Mere investment as a shareholder by a foreign entity in
General Rule: FC can have no legal corporation or status
domestic corporations duly registered to do business and/or
beyond the bounds of the State or sovereignty by which it is
exercise of rights as such investor
created or incorporated
(b) Having a nominee director or officer to represent its interests in
such corporation and
(c) Appointing a representative or distributor domiciled in the
1) CONSENT DOCTRINE the FC may act in another State or
Philippines which transacts business in its own name and for its
country with the latters express or implied consent, however,
own account.
subject to conditions and restrictions it may impose
TRUE TEST: whether the FC is continuing a body or substance of
the business or enterprise for which it was organized or whether it
commercial dealings incident to prosecution of purpose and
has substantially retired from it and turned it over to another
object of the organization. Isolated, occasional or casual
transactions do not amount to engaging in business. But where
The term implies a 1) (existence of continuing intent) continuity of
the isolated act is not incidental/casual but indicates the FCs
commercial dealings and arrangements, and 2) (nature of the act
intention to do other business, said single act constitutes
or transaction) contemplates, to that extent, the performance of
engaging in business in the Philippines.
acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and
A corporation has legal status only within the state or
object of its organization. (Mentholatum Co., Inc. vs.
territory in which it was organized. For this reason, a
Mangaliman, 72 Phil. 524)
corporation organized in another country has no
personality to file suits in the Philippines. In order to
CONTRACT TEST: So long as the perfection and consummation of a isolated transactions rule, otherwise the court may choose to
series of transactions are done outside Philippine territory, the deny its right to sue
same would not constitute doing business in the Philippines, even
if the products themselves should be manufactured or processed e. INSTANCES WHEN FC ALLOWED TO SUE
in the Philippines by locals. The implication of this doctrine is that
if the salient points of a contract are not performed within (a) To protect Its corporate reputation, name and goodwill
Philippine territory, Philippine authorities would have no business (b) To enforce its right not arising out of a business transaction
subjecting the parties to local registration and licensing (c) To seek redress for an isolated business transaction
requirements. (Pacific Vegetable Oil Corp. vs. Singzon, 267 SCRA (d) The subject contracts provide that Phil. Courts will be venue to
567) controversies
(e) A license subsequently granted enables the FC to sue on
b. NECESSITY OF LICENSE TO DO BUSINESS contracts executed before the grant of the license
(f) Recovery of misdelivered property
i. To place them under the jurisdiction of the courts (g) Where unlicensed FC has a domestic corporation
ii. To place them in the same footing as a domestic corporation
iii. Protection for the public in dealing with said corporations Estoppel after contracting or accepting benefits with a FC, a
domestic firm or individual can no longer deny the formers
1.Issuance of License - FC shall have a right to transact business in capacity to sue
the Philippines; and to subject the FC doing business in the Wrongful assumption of Jurisdiction by a court
Philippines to the jurisdiction of the courts
Single or isolated acts, contracts, or transactions of foreign
OTHERWISE: a FC illegally doing business may refuse or neglect to corporations are not regarded as a doing or carrying on of
obtain the required license and may successfully, though unfairly, business. Typical examples of these are the making of a
plead such neglect or illegal act so as to avoid service and thereby single contract, sale, sale with the taking of a note and
impugn the jurisdiction of the local courts mortgage in the state to secure payment thereof,
purchase, or note, or the mere commission of a tort. In
SEC will issue a license to the FC to do business in the Philippines these instances, there is no purpose to do any other
provided the ff. conditions are met: business within the country. (MR. Holdings, Ltd. vs. Bajar,
GR No. 138104, April 11, 2002)
a) Appointment of a Resident Agent
i. Either a Filipino or domestic corporation and f. GROUNDS FOR REVOCATION OF LICENSE
ii. Power of attorney for SEC to receive process
b) Must prove that FCs country grants reciprocal rights to Filipinos (a) Failure to file annual reports required by Code
and Philippine corporation (b) Failure to appoint or maintain a resident agent
c) Establish an office in the Philippines (c) Failure to inform SEC of the change of resident agent or the
d) Bring in its assets latters change of address
e) In the event of insolvency undertaking that Filipino creditors (d) Failure to submit a copy of amended AOI or by-laws; or articles
will be preferred of merger or consolidation
f) Notice of 6 months should there be a desire to terminate (e) A misrepresentation in material matters in reports
operations (f) Failure to pay taxes, impost, assessments
g) Franchise and patents must remain belonging to the Philippines, (g) Engaged in business not authorized by SEC
if this is possible (h) Acting as a dummy of a FC not licensed to do business in the
h) Must file a bond of P100,000 which may be in the ff. form: Philippines
i. Surety bond (i) Any other ground as would render it unfit to transact business
ii. Government Securities in the Philippines
iii. Securities of political subdivisions
iv. Shares of stock of registered with SEC L. MERGERS AND CONSOLIDATIONS
v. Shares of stock of any corporation being sold at the
stock exchange MERGER is when a corporation absorbs the other and remains
in le the others are dissolved.
That within 6 months after each fiscal year, SEC shall require the
deposit of additional securities equivalent to 2% of the amount CONSOLIDATION is the union of two or more existing
in excess of P5,000,000 of the gross income corporations. A ration is created, and consolidating
corporations are extinguished.
a) an individual residing in the Philippines, of good moral character MERE ACQUISITION/TRANSFER (3 LEVELS)
and of sound financial standing, or
b) a domestic corporation lawfully transacting business in the 1.ASSET ONLY LEVEL. Purchase of raw assets of the enterprise.
Philippines. Transferee is NOT liable for the debts and liabilities of the
transferor corporation as there is no privity of contract between
ISOLATED TRANSACTIONS transferee and creditors except when there is fraud,
single or isolated acts, contracts, or transactions of FC are not assumption of liability, or take over of the assets of a dissolved
regarded as a doing or carrying on of business corporation.
a series of transactions which are occasional, incidental and
casual not of a character to indicate a purpose to engage in 2.BUSINESS ENTERPRISE LEVEL. Purchase of substantially all the
business assets of the corporation extending to its going concern:
the fact that a FC is not doing business in the Philippines must ability to do business and make money, goodwill, clientele,
be disclosed if it desires to sue in Philippine courts under the stock-in-trade, etc. the transferee is liable for the debts and
liabilities of the transferor. A free and harmless clause holding 6. Any claim, action or proceeding pending by or against any
the transferee free from the liabilities of the transferor is may be prosecuted by or against the surviving or consolidated
binding only between them and cannot prejudice creditors who corporation
are not parties thereto. 7. Neither the rights of creditors nor any lien upon the property
of any of each constituent corporation shall be impaired by such
3.EQUITY LEVEL. Purchaser takes control of the business by merger or consolidation.
purchasing the shareholdings. Purchasing corporation is still
protected by the limited liability feature but the same can be SPIN-OFF- has the opposite effect of merger or consolidation,
pierced. whereby a department, division or portions of the corporate
business enterprise is sold-off or assigned into a new
PROCEDURE OF MERGER OR CONSOLIDATION corporation that will arise by the process which may constitute
it into a subsidiary of the original corporation
1. The Boards of each corporation shall draw-up a plan of merger
or consolidation setting forth: LIMITATIONS
i. Names of corporations involved 1. Must be consistent with provisions of Corporation Code or
ii. Terms and mode of carrying it out existing laws
iii. Statement of changes, if any in the present articles of 2. Issuance of Certificate, not upon mere agreement of the
surviving corporation; or the articles of the new constituent corporations
corporation to be formed in case of consolidation 3. Claims of employees of the constituent corporation shall be
iv. Such other provisions with respect to the proposed merger respected
or consolidation as are deemed necessary or desirable 4. Power to merge or consolidate must be expressly granted by
2. Approval of plan Majority Vote of stockholders of each 5. Procedure must be followed
As specifically provided under Sec. 79 of Corporation Code,
3. Right of Appraisal of Dissenting Stockholders the merger (or consolidation) shall only be effective upon
4. Amendment of Plan of Merger or Consolidation majority vote the issuance of a certificate of merger (or consolidation) by
of Board and ratified by 2/3 of stockholders the SEC, subject to its prior determination that the merger
5. Articles of Merger or Consolidation (by each constituent) (or consolidation) is not inconsistent with the Code or
signed by the president or vice-president and certified by the existing laws. (Poliand Industrial Ltd. vs. NDC, 467 SCRA
secretary or assistant secretary setting forth: 500)

i. Plan of merger or consolidation

ii. As to stock corporations, the number of shares outstanding, or
in case of non-stock, the number of members; and
iii. As to each corporation, the number of shares or members
voting for or against such plan, respectively.

6. Requirements on Submission of Financial Statements serve as

basis of fixing the shares to be issued in favor of the merged
corporation vis--vis the net assets to be absorbed by the
surviving corporation as of a specific date
7. Approval by SEC signed and certified, submitted in


1. The constituent corporations shall become a single corporation.

2. The separate existence of the constituents shall cease except that

of the surviving corporation (in merger) or the consolidated
corporation (in consolidation)

3. The surviving or the consolidated corporation shall possess all the

rights, privileges, immunities, franchise of each of the constituent

4. All property, real or personal, and all receivables due on whatever

choses in action, and all the every other interest thereof, or
belonging to, or due to each constituent corporation, shall be taken
and deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed

5. The surviving or consolidated corporation shall be responsible and

liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if surviving or consolidated
corporation had itself incurred such liabilities or obligations