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1 Corporation Law for Atty.

Quimson by Jason Arteche

Harden vs Benguet Consolidated


Facts
The Benguet Consolidated Mining Co. was organized in 1903 according to Spanish law as a sociedad
anonima; while the Balatoc Mining Co. was organized in 1925, as a corporation according to the
Corporation Law. Both entities were organized to engage in mining gold in the Philippine Islands.

Balatoc’s properties didn’t have the means to conduct a profitable operation. Consequently, Balatoc
Mining in order to secure the capital necessary to develop its assets for mining, entered into a contract
with Benguet Consolidated. The principal features of which were that the Benguet Company was to
develop Balatoc's properties. In return, it was agreed that Benguet Company should receive from
Balatoc Company shares of a par value of P600,000.

The contract was successful, making Balatoc Company profitable. Harden, a Balatoc shareholder,
filed suit alleging it's illegal for Benguet Consolidated to own shares in Balatoc Mining as prohibited
under the Corporation law.

Issue
Whether or not a sociedad anonima organized under the Spanish Law is covered by the prohibition
under the Corporation law.

Held
Plaintiffs have no right of action against Benguet Consolidated. Question unanswered.

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine
Commission entered upon the enactment of a general law authorizing the creation of corporations in
the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our
Corporation Law. The evident purpose of the commission was to introduce the American corporation
into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad
anonima of the Spanish law would be obsolete. That statute is a sort of codification of American
corporate law.

Accordingly, the Corporation Law makes the sociedad anonima subject to the provisions of the
Corporation Law "so far as such provisions may be applicable", and giving to the sociedades
anonimas previously created in the Islands the option to continue business as such or to reform and
organize under the provisions of the Corporation Law.

Here, Harden has no right of action against Bengeut Consolidated as the latter committed no wrong
against the former. It’s the Government that has a right of action against Bengeut Consolidated
because a violation of the prohibition consists of a public wrong actionable by the Government only.

As a rule for sociedad anónima


As far as internal management is concerned: follow the Spanish provisions
As for relations to 3rd parties: follow the Corporation Code.

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2 Corporation Law for Atty. Quimson by Jason Arteche

Guanzon vs Register of Deeds


Facts
Five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets
of the corporation reciting, among other things, that by virtue of a resolution of the stockholders
dissolving the corporation, they have distributed among themselves in proportion to their
shareholdings, as liquidating dividends, the assets of said corporation, including real properties
located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied
registration. Petitioners filed suit against the denial.1

Issue
Whether or not the certificate merely involves a distribution of the corporation's assets or should be
considered a transfer or conveyance.

Held
Transfer or conveyance.

A corporation is a juridical person distinct from the members composing it. Properties registered in
the name of the corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property they do not represent property of the corporation. The
corporation has property of its own which consists chiefly of real estate. A share of stock only typifies
an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when
distributed according to law and equity, but its holder is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The
stockholder is not a co-owner or tenant in common of the corporate property.

The act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets
can’t be considered a partition of community property, but rather a transfer or conveyance of the title
of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the
distribution of the assets of the corporation, is to transfer their title from the corporation to the
stockholders in proportion to their shareholdings, — and this is in effect the purpose which they seek
to obtain from the Register of Deeds of Manila, — that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and
logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.

1
Petitioners simply wanted to avoid paying the registration fees and documentary stamps that they would incur
if the certificate is treated as a transfer or conveyance.

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3 Corporation Law for Atty. Quimson by Jason Arteche

Palacio vs Fely Transportation


Facts
Isabelo Calingasan employed Alfredo Carillo as his driver. Later, Alfredo, while driving the jeep, ran
over the child Mario Palacio of the herein plaintiff Gregorio Palacio. As a result, Mario sustained
injuries requiring his hospitalization for a certain period. Gregorio then filed a criminal case against
Alfredo.

Alfredo was convicted in the criminal case and ordered to indemnify Palacio. Isabelo was made
subsidiarily liable but after Alfredo’s conviction Isabelo formed Fely Transportation and sold his jeep
to the company.

Issue
Whether or not Fely Transportation can be held subsidiarily liable for Alfredo’s criminal conviction.

Held
Can be held subsidiary liable.

Plaintiffs contend that the defendant corporation should be made subsidiarily liable for damages in the
criminal case because the sale to it of the jeep in question, after the conviction of Alfred Carillo in the
Criminal Case, was merely an attempt on the part of Isabelo Calingasan, its president and general
manager, to evade his subsidiary civil liability.

The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely
Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan's
main purpose in forming the corporation was to evade his subsidiary civil liability resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the
incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and
his two daughters. This is one case where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to allow it to do so would be to
sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice.
Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep
strengthens the conviction that its formation was for the purpose above indicated.

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4 Corporation Law for Atty. Quimson by Jason Arteche

Pamplona Plantation Co. vs Tinghil


Facts
Pamplona Plantations Company, Inc. was organized to take over the operations of the coconut and
sugar plantation of Hacienda Pamplona. Later, Pamplona Plantation Leisure Corporation was
established to engage in the business of operating tourist resorts, hotels, and inns.

Afterwards, the Pamplona Plantation Labor Independent Union (PAPLIU) conducted an


organizational meeting wherein several respondents attended. Upon learning that some of the
respondents attended the said meeting, Jose Luis Bondoc, manager of Pamplona Plantation, did not
allow respondents to work anymore in the plantation. Respondents then filed a complaint before the
NLRC against Pamplona Plantations Leisure and Hacienda Pamplona. However, the NLRC dismissed
the complaint for failing to implead Pamplona Plantations, an indispensable party to the case.

Issue
Whether or not the case should be dismissed for failing to implead Pamplona Plantations Leisure
Corp. as an indispensable party.

Held
Case shouldn’t be dismissed.

For both the coconut plantation and the golf course, there is only one management that the laborers
deal with regarding their work. A portion of the plantation (also called Hacienda Pamplona) had
actually been converted into a golf course and other recreational facilities. The weekly payrolls issued
by petitioner-company bore the name “Pamplona Plantations Leisure Co., Inc. It is also a fact that
respondents all received their pay from the same person, Petitioner Bondoc -- the managing director
of the company. Since the workers were working for a firm known as Pamplona Plantations Leisure
Co., Inc., the reason they sued their employer through that name was natural and understandable.

True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure Corporation
appear to be separate corporate entities. But it is settled that this fiction of law cannot be invoked to
further an end subversive of justice.

The principle requiring the piercing of the corporate veil mandates courts to see through the protective
shroud that distinguishes one corporation from a seemingly separate one. The corporate mask may be
removed and the corporate veil pierced when a corporation is the mere alter ego of another. Where
badges of fraud exist, where public convenience is defeated, where a wrong is sought to be justified
thereby, or where a separate corporate identity is used to evade financial obligations to employees or
to third parties,the notion of separate legal entity should be set aside and the factual truth upheld.
When that happens, the corporate character is not necessarily abrogated. It continues for other
legitimate objectives. However, it may be pierced in any of the instances cited in order to promote
substantial justice.

In the present case, the corporations have basically the same incorporators and directors and are
headed by the same official. Both use only one office and one payroll and are under one management.
The workers were under the supervision and control of Petitioner Bondoc -- the common managing
director of both the petitioner-company and the leisure corporation. Thus, the attempt to make the two
corporations appear as two separate entities, insofar as the workers are concerned, should be viewed
as a devious but obvious means to defeat the ends of the law. Such a ploy should not be permitted to
cloud the truth and perpetrate an injustice.

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5 Corporation Law for Atty. Quimson by Jason Arteche

Jardine Davies vs JRB Realty


Facts
Respondent JRB Realty, Inc. built a building, named Blanco Center, on its parcel of land. An air
conditioning system was needed for the building. JRB Realty accepted a contract from Aircon and
Refrigeration Industries, Inc. (Aircon), for two (2) sets Fedders aircons. The Fedders were installed
but they couldn’t deliver the desired cooling temperature.

TempControl Systems, Inc. (a subsidiary of Aircon) undertook to maintain the units. Later, JRB
Realty learned that Maxim Industrial and Merchandising Corporation (Maxim) was the new and
exclusive licensee of Fedders aircons in the Philippines. JRB Realty requested that Maxim honor the
Aircon’s obligation, but the latter refused. JRB Realty then filed an action for specific performance
with damages against Aircon, Fedders Air Conditioning USA, Inc., Maxim and Jardine Davies,
Inc. Jardine Davies was impleaded as defendant because Aircon was its subsidiary.

Issue
Whether or not Jardine Davies is liable considering it wasn’t a party to the contract between JRB
Realty and Aircon.

Held
Jardine Davies isn’t liable.

A corporation is an artificial being invested by law with a personality separate and distinct from its
stockholders and from other corporations to which it may be connected. While a corporation is
allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in
case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for
fraud or illegality. This is the doctrine of piercing the veil of corporate fiction which applies only
when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime.

While it is true that Aircon is a subsidiary of Jardine Davies, it does not necessarily follow that
Aircon’s corporate legal existence can just be disregarded. A subsidiary has an independent and
separate juridical personality, distinct from that of its parent company; hence, any claim or suit
against the latter does not bind the former, and vice versa. In applying the doctrine, the following
requisites must be established:
1. Control, not merely majority or complete stock control;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest acts in contravention of
plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The records bear out that Aircon is a subsidiary of Jardine Davies only because the latter acquired
Aircon’s majority of capital stock. It doesn’t exercise complete control over Aircon; nowhere can it be
gathered that it manages the business affairs of Aircon. Jardine Davies, Inc. is primarily a financial
and trading company while Aircon is a manufacturing firm.

But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil
of corporate fiction applies only when such fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime. Here, there’s no evidence that Aircon was formed or utilized
with the intention of defrauding its creditors or evading its contracts and obligations. There was
nothing fraudulent in the acts of Aircon in this case.

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6 Corporation Law for Atty. Quimson by Jason Arteche

Collector of Internal Revenue vs Club Filipino


Facts
The "Club Filipino, Inc. de Cebu," (Club, for short), is corporation operating gymnasiums, bowling
alleys, and others. Neither in the articles or by-laws is there a provision relative to dividends and their
distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after
paying debts, shall be donated to a charitable Philippine Institution in Cebu

The Club owns and operates a club house, a bowling alley, a golf course, and a bar-restaurant catering
to its members and their guests. The bar-restaurant was a necessary incident to the operation of the
club and its golf-course. The club is operated mainly with funds derived from membership fees and
dues. Whatever profits it had were used to defray its overhead expenses and to improve its golf-
course.

Later, the Club declared stock dividends; but no actual cash dividends were distributed to the
stockholders. Afterwards, a BIR agent discovered that the Club has never paid percentage tax on the
gross receipts of its bar and restaurant causing the CIR to assess and demand taxes from it. The Club
wrote the Collector, requesting for the cancellation of the assessment. The request having been
denied, the Club filed the instant petition for review.

Issue
Whether or not Club Filipino is a stock corporation.

Held
Club Filipino isn’t a stock corporation.

The Club was organized to develop and cultivate sports of all class and denomination, for the
healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its
remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu;
that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash dividend
distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was
used to defray its overall overhead expenses and to improve its golf-course, it stands to reason that the
Club is not engaged in the business of an operator of bar and restaurant.

It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact
does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental
to the primary object of developing and cultivating sports for the healthful recreation and
entertainment of the stockholders and members.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit:
1. A capital stock divided into shares and
2. An authority to distribute to the holders of such shares, dividends or allotments of the surplus
profits on the basis of the shares held.

In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for
the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered
a stock corporation, within the contemplation of the corporation law.

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Gonzalez vs PNB
Facts
Previous to the present action, Gonzales instituted several cases in this Court questioning different
transactions entered into by PNB with other parties. In these cases, Gonzales’ personality to sue the
bank and question the letters of credit it had extended to 3rd parties was raised. Consequently, he
acquired one share of stock from PNB. Subsequent to his aforementioned acquisition of the share,
Gonzales, in his dual capacity as a taxpayer and stockholder, filed multiple cases involving PNB or
the members of its Board of Directors.

Later, Gonzales addressed a letter to the PNB President, requesting submission to look into PNB’s
records and books. PNB denied his request.

Issue
Whether or not Gonzales’ one-share in PNB grants him the right to inspect PNB’s records despite his
alleged improper motive.

Held
No right granted.

The Corporation Law now provides the right of inspection granted to a stockholder are the following:
the records must be kept at the principal office of the corporation; the inspection must be made on
business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the
refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and
criminal liabilities.

The new Code has prescribed limitations to the same. It is now expressly required as a condition for
such examination that the one requesting it must not have been guilty of using improperly any
information through a prior examination, and that the person asking for such examination must be
"acting in good faith and for a legitimate purpose in making his demand."

The circumstances under which he acquired one share of stock in PNB purposely to exercise the right
of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to
be a stockholder in order to pry into transactions entered into by PNB even before he became a
stockholder. His obvious purpose was to arm himself with materials that he can use against PNB for
acts done by the latter when Gonzales was a total stranger to the same. He could have been impelled
by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.

Further, PNB is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule,
by the Corporation Code of the Philippines. The provision of the new Corporation Code with respect
to the right of a stockholder to demand an inspection or examination of the books of the corporation
may not be reconciled with the PNB charter on confidentiality. It is not correct to claim, therefore,
that the right of inspection under the new Corporation Code may apply in a supplementary capacity to
the charter of PNB.

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Sunset View Condominium vs Campos


Facts
Sunset View Condominium Corporation is a condominium corporation in relation to the Sunset View
Condominium Project of which it’s Management Body holds title to all the common and limited
common areas.

The private respondent, Aguilar-Bernares Realty is the assignee of a unit, “Solana.” Sunset View
Condominium Corporation, filed for the collection of assessments levied on the unit against Aguilar-
Bernares Realty. In another case, Sunset filed for the collection of overdue accounts against the
private respondent Lim Siu Leng to whom was assigned a unit called “Alegria.”

The case was filed before the CFI but respondents are arguing the case should’ve been filed before the
SEC because the dispute is allegedly between a corporation and its shareholders.

Issue
Whether or not respondents are members or shareholders of the condominium corporation having
purchased condominium units but failing to fully pay the purchase price.

Held
Respondents aren’t members or shareholders.

Not every purchaser of a condominium unit is a shareholder of the condominium corporation. The
Condominium Act leaves to the Master Deed the determination of when the shareholding will be
transferred to the purchaser of a unit.

The Master Deed provides that the shareholding in the Condominium Corporation is inseparable from
the unit to which it is only an appurtenant and that only the owner of a unit is a shareholder in the
Condominium Corporation. Accordingly, the share of stock appurtenant to the unit will be transferred
to the purchaser of the unit only upon full payment of the purchase price at which time he will also
become the owner of the unit. Consequently, even under the contract, it is only the owner of a unit
who is a shareholder of the Condominium Corporation. Inasmuch as ownership is conveyed only
upon full payment of the purchase price, it necessarily follows that a purchaser of a unit who has not
paid the full purchase price thereof is not the owner of the unit and consequently is not a shareholder
of the Condominium Corporation.

Ownership of a unit is a condition sine qua non to being a shareholder in the condominium
corporation. Nobody can be a shareholder unless he is the owner of a unit and when he ceases to be
the owner, he also ceases automatically to be a shareholder.

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9 Corporation Law for Atty. Quimson by Jason Arteche

Castillo vs Balinghasay
Facts
Petitioners and the respondents are stockholders of MCPI, with the former holding Class “B” shares
and the latter owning Class “A” shares. The Articles of Incorporation was amended in 1992 to read:

Except when otherwise provided by law, only holders of Class “A” shares have the right to vote and
the right to be elected as directors or as corporate officers

Later, the shareholders of MCPI held their annual stockholders’ meeting and election for
directors. During the course of the proceedings, respondents, citing the Articles of Incorporation and
notwithstanding MCPI’s history, declared over the objections of herein petitioners, that no Class “B”
shareholder was qualified to run or be voted upon as a director. In the past, MCPI had seen holders of
Class “B” shares voted for and serve as members of the corporate board and some Class “B” share
owners were in fact nominated for election as board members. Nonetheless, respondents went on to
announce that the candidates holding Class “A” shares were the winners of all seats in the corporate
board. The petitioners protested, claiming that the prohibitions on Class “B” shares was null and void
as provided in the Corporation Code.

Issue
Whether or not holders of Class “B” shares of the MCPI can be deprived of the right to vote and be
voted for as directors in MCPI.

Held
Holders of Class B shares can’t be deprived of the right to vote and be voted for.

Under the Corporation Code, the requirements and restrictions on voting rights were explicitly
provided for, such that “no share may be deprived of voting rights except those classified and issued
as “preferred” or “redeemable” shares, unless otherwise provided in this Code” and that “there shall
always be a class or series of shares which have complete voting rights.” It necessarily follows that
unless Class “B” shares of MCPI stocks are clearly categorized to be “preferred” or “redeemable”
shares, the holders of said Class “B” shares may not be deprived of their voting rights.

Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show
that Class “B” shares were categorized as either “preferred” or “redeemable” shares. The only
possible conclusion is that Class “B” shares fall under neither category and thus, under the law, are
allowed to exercise voting rights.

One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to
the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived
of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by
the corporation, without his consent, through amending the charter, or the by-laws.

Neither do we find merit in respondents’ position that the Corporation Code cannot apply to MCPI
without running afoul of the non-impairment clause of the Bill of Rights. The Corporation Code
expressly provides that it shall apply to corporations in existence at the time of the effectivity of the
Code. Hence, the non-impairment clause is inapplicable in this instance.

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10 Corporation Law for Atty. Quimson by Jason Arteche

Alhambra Cigar vs SEC


Facts
Alhambra Cigar was duly incorporated under Philippine laws on 1912. By its corporate articles it was
to exist for fifty (50) years from incorporation. Its term of existence expired on 1962 and on that date,
it ceased transacting business, and entered into a state of liquidation.

On 1963 — within Alhambra's three-year statutory period for liquidation - Republic Act 3531 was
enacted into law; it empowered domestic private corporations to extend their corporate life beyond the
period fixed by the articles of incorporation for a term not to exceed fifty years in any one instance.
Previous to Republic Act 3531, the maximum non-extendible term of such corporations was fifty
years.

In 1963 Alhambra's board of directors resolved to amend its articles of incorporation to extend its
corporate life for an additional fifty years, or a total of 100 years from its incorporation. The board
approved the amendment and the amended articles filed with the SEC. The SEC denied the
amendment because Alhambra was already dissolved at the time RA 3531 was passed.

Issue
Whether or not a corporation can extend its life by amending its articles of incorporation effected
during the three-year statutory period for liquidation when its original term of existence had already
expired.

Held
Corporation can no longer extend its life.

From July 15 to October 28, 1963, when Alhambra made its attempt to extend its corporate existence,
its original term of fifty years had already expired (January 15, 1962); it was in the midst of the three-
year grace period statutorily fixed in Section 77 of the Corporation Law.

Republic Act 3531 allows all private corporations to extend their corporate existence. Thus
incorporated into the structure of Section 18 are the following:

... Provided, however, That should the amendment consist in extending the corporate life, the
extension shall not exceed fifty years in any one instance: Provided, further, That the original articles,
and amended articles together shall contain all provisions required by law to be set out in the articles
of incorporation:

Continuance of a "dissolved" corporation as a body corporate for 3 years has for its purpose the final
closure of its affairs, and no other; the corporation is specifically enjoined from "continuing the
business for which it was established". The liquidation of the corporation's affairs set forth in Section
77 became necessary precisely because its life had ended. For this reason alone, the corporate
existence and juridical personality of that corporation to do business may no longer be extended.

The privilege given to prolong corporate life under the amendment must be exercised before the
expiry of the term fixed in the articles of incorporation. RA 3531 requires the articles of incorporation
be amended but no corporation in a state of liquidation can act in any way, much less amend its
articles, "for the purpose of continuing the business for which it was established".

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Lanuza vs CA
Facts
The Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with 700 founders’ shares
and 76 common shares as its initial capital stock subscription reflected in the articles of
incorporation. However, respondents registered the company’s stock and transfer book for the first
time in 1978, recording 33 common shares as the only issued and outstanding shares of PMMSI.
Later, a special stockholders’ meeting was called with a quorum of 27 common shares, representing
more than 2/3 of the common shares issued and outstanding.

Afterwards, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the SEC
to register his property rights over 120 founders’ shares and 12 common shares owned by their
father. The SEC affirmed Acayan’s ownership over the shares and such shares were recorded in the
stock and transfer book. In 1992, a special stockholders’ meeting was held to elect a new set of
directors. Respondents thereafter filed a petition with the SEC questioning the validity of the 1992
stockholders’ meeting, alleging that the quorum for the said meeting shouldn’t be based on the 165
issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital
stock of 776 shares, as reflected in the Articles of Incorporation.

Issue
Whether or not the basis of a quorum for a stockholders’ meeting should be the outstanding capital
stock as indicated in the articles of incorporation or that contained in the company’s stock and transfer
book.

Held
As indicated in the articles of incorporation.

The articles of incorporation has been described as one that defines the charter of the corporation and
the contractual relationships between the State and the corporation, the stockholders and the State, and
between the corporation and its stockholders. When PMMSI was incorporated, the prevailing law was
Act No. 1459, otherwise known as “The Corporation Law” and a review of PMMSI’s articles of
incorporation shows that the corporation complied with the requirements laid down by Act No. 1459.

The contents of the articles of incorporation are binding, not only on the corporation, but also on its
shareholders. Here, the articles of incorporation indicate that at the time of incorporation the
corporation had 776 issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment thereof; a statement of every alienation, sale or
transfer of stock made, the date thereof and by and to whom made; and such other entries as may be
prescribed by law.2

A quorum should be based on the totality of the shares which have been subscribed and issued. The
stock and transfer book of PMMSI can’t be used as the sole basis for determining the quorum as it
doesn’t reflect the totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and outstanding as compared to that
listed in the stock and transfer book. One who is actually a stockholder cannot be denied his right to
vote by the corporation merely because the corporate officers failed to keep its records accurately.

2
The Articles of incorporation should contain the same number of shares in the stock and transfer book.

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12 Corporation Law for Atty. Quimson by Jason Arteche

Philippine First Co. vs Hartigan


Facts
Philippine First was originally organized as an insurance corporation under the name of 'The Yek
Tong Lin Fire and Marine Insurance Co., Ltd.' as reflected in the articles of incorporation. Later, the
articles were amended changing the corporation’s name to 'Philippine First Insurance Co., Inc.'.

The complaint alleges that Philippine First signed as co-maker together with Hartigan a promissory
note for P5,000.00 in favor of the China Banking Corporation. Philippine First agreed as co-maker
after entering into an indemnity agreement with Hartigan and 3rd persons in its favor. At the time,
Philippine First was still named ‘The Yek...’ China Banking Corporation then delivered to Hartigan
the sum that Hartigan failed to pay in full. Philippine First paid China Bank and now claims
reimbursement from Hartigan. However, Hartigan claims he isn’t liable to indemnify Philippine First
because he contracted with ‘The Yek...’ and not Philippine First.

Issue
Whether or not a Philippine corporation can change its name but still retain its original personality
and individuality as such.

Held
Can still retain its original personality and individuality.

Under the Corporation Law, the first thing required to be stated in the Articles of Incorporation of any
corporation is its name, but it is only one among many matters equally if not more important, that
must be stated therein. Importantly, there’s no prohibition therein against the change of name.

The general rule as to corporations is that each corporation shall have a name by which it is to sue and
be sued and do all legal acts. The name of a corporation in this respect designates the corporation in
the same manner as the name of an individual designates the person. Since an individual has the right
to change his name under certain conditions, there is no compelling reason why a corporation may not
enjoy the same right.

Further, what’s contrary to public policy is the use by one corporation of the name of another
corporation as its trade name. Such act gives rise to confusion, fraud, and evasion. Also, the change of
name of a corporation doesn’t result in its dissolution.

Lastly, the approval by the stockholders of the amendment of its articles of incorporation changing the
name "The Yek Tong Lin Fire & Marine Insurance Co., Ltd." to "Philippine First Insurance Co., Inc."
didn’t automatically change the name of said corporation on that date. To be effective, the articles as
amended should be approved by the proper officers within the corporation and filed with the SEC. It
is only from the time of such filing that such name change becomes effective.

Philippine First rightly acted in its old name when it entered into the indemnity agreement with
Hartigan; for only after filing the amended articles of incorporation with the SEC did Philippine First
legally acquire its new name; and it was perfectly right for it to file the present case in its new name.

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P.C. Javier & Sons Inc. vs CA


Facts
P.C. Javier and Sons Services, Inc., applied with First Summa Savings and Mortgage Bank, later on
renamed as PAIC Savings and Mortgage Bank for a loan secured by a mortgage. The loan was
approved and released to Javier & Sons. Javier & Sons defaulted in paying the loan with the Bank
causing the latter to foreclose the mortgage.

Javier & Sons filed suit to forestall the foreclosure.

Issue
Whether or not Javier & Sons should be first formally notified of the Bank’s change of name before
the former continues paying its obligation under the loan.

Held
No need to be notified.

The defense that Javier & Sons should first be formally notified of the change of corporate name of
First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., before they will
continue paying their loan obligations to respondent bank is without merit. There’s no such
requirement in the law or regulations. The formal notification is discretionary on the bank.

Further, there is evidence in the form of documents showing Javier & Sons was aware of First Summa
Savings and Mortgage Bank’s change of corporate name to PAIC Savings and Mortgage Bank,
Inc. Knowing fully well of such change, Javier & Sons has no valid reason not to pay because the
loans were applied with and obtained from First Summa Savings and Mortgage Bank.

First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and
the same bank to which Javier & Sons is indebted. A change in the corporate name doesn’t make a
new corporation, whether effected by a special act or under a general law. It has no effect on the
identity of the corporation, or on its property, rights, or liabilities. The corporation, upon such change
in its name, is in no sense a new corporation, or the successor of the original corporation. It’s the
same corporation with a different name, and its character is in no respect changed.

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Cagayan Fishing Development vs Sandiko


Facts
Manuel Tabora owns 4 parcels of land. Tabora took out a loan from PNB and Severina Buzon secured
by the 4 lands. Later, Tabora executed a public document by virtue of which the 4 parcels of land he
owned was sold to Cagayan Fishing, while still under incorporation.

Cagayan Fishing filed its articles of incorporation with the Bureau of Commerce and Industry in
1930. In 1931, the board of directors of said company adopted a resolution authorizing its president,
Jose Ventura, to sell the 4 parcels of lands in question to Teodoro Sandiko. The corresponding deed of
sales, promissory notes, and mortgage deeds were executed. However, Sandiko failed to pay the sum
causing Cagayan Fishing to file suit.

Issue
Whether or not Cagayan Fishing legally acquired the lands despite the sale being executed before
Cagayan Fishing was incorporated.

Held
Cagayan Fishing didn’t legally acquire the lands.

The transfer from Cagayan Fishing to Tabora was made on May 1930 and the actual incorporation of
said company was affected later on October 1930. Unquestionably, a duly organized corporation has
the power to purchase and hold real property and for this purpose may enter into such contracts as
may be necessary. But before a corporation may be lawfully organized, many things have to be done.
Among other things, the law requires the filing of articles of incorporation. Although there is a
presumption that all the requirements of law have been complied with, here it can’t be denied that
Cagayan Fishing wasn’t yet incorporated when it entered into a contract of sale. Not being in legal
existence then, it didn’t possess juridical capacity to enter into the contract.

The contract here was entered into not between Tabora and a non-existent corporation but between
the Tabora as owner of the 4 parcels of lands on the one hand and the same Tabora, his wife and
others, as mere promoters of a corporations on the other hand. A corporation, until organized, has no
life and therefore no faculties. This isn’t saying that under no circumstances may the corporation
ratify the acts of promoters of a corporation if and when subsequently organized. There are, of course,
exceptions but under the peculiar facts and circumstances of the present case we decline to extend the
doctrine of ratification that would result in the commission of injustice or fraud to the candid and
unwary.

It should be observed that Tabora was the registered owner of the 4 parcels of land, which he
succeeded in mortgaging to the Philippine National Bank. He later formed a corporation composed of
himself, his wife, and a few others. Both Tabora and His wife were directors and the latter was
treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. Sandiko always
regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of
Cagayan Fishing, intervened only to sign the contract in the corporation’s behalf. Even PNB always
treated Tabora as the owner of the same. When PNB threatened to foreclose its mortgages. Tabora
approached the defendant Sandiko and succeeded in making the latter, among other things, assume
the payment of Tabora's indebtedness to PNB. The promissory note was made payable to Cagayan
Fishing so that it may not attached by Tabora's creditors.

If Cagayan Fishing didn’t acquire the 4 parcels of land here involved, it follows that it did not possess
any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.

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Pilipinas Loan vs SEC


Facts
Respondent Filipinas Pawnshop, Inc. is a corporation whose articles of incorporation state that its
primary purpose is to extend loans at legal interest on the security of either personal properties or on
the security of real properties, and to finance installment sales of motor vehicles, home appliances and
other chattels. Meanwhile, Pilipinas Loan is a lending corporation and based on its articles of
incorporation, its primary purpose is to lend money on the security of real or personal property.

Filipinas filed a complaint against Pilipinas Loan with the SEC. The complaint alleged that (1)
Pilipinas, contrary to the restriction set by the Commission, has been operating and doing business as
a pawnbroker in the same neighborhood where Filipinas has had its own pawnshop for 30 years in
violation of its primary purpose and without the imprimatur of the Central Bank to engage in the
pawnshop business causing unjust and unfair competition with Filipinas and (2) Pilipinas bears
similarity in spelling and phonetics with the corporate name of Filipinas creating constant confusion
in the minds of the public and customers.

Pilipinas argues that only the Central Bank has jurisdiction, not the SEC, because involved is a PD
114 violation.

Issue
Whether or not the SEC or Central Bank has jurisdiction over the case.

Held
SEC.

When the thrust of a complaint is on the ultra vires act of a corporation, that the complained act of a
corporation is contrary to its declared corporate purposes, the SEC has jurisdiction to entertain the
complaint before it. The complaint alleged that the articles of incorporation of Pilipinas contained this
prohibition: “without, however, engaging in pawnbroking as defined in PD 114” and despite this
restriction, Pilipinas allegedly continued to actually operate as a pawnshop. The complaint thus treats
of a violation of Pilipinas’ primary franchise. Without question, the complaint filed by Filipinas
against Pilipinas called upon the SEC to exercise its adjudicatory and supervisory powers. By law, the
SEC has absolute jurisdiction, supervision and control over all corporations that are enfranchised to
act as corporate entities. A violation by a corporation of its franchise is properly within the
jurisdiction of the SEC.

A corporation, under the Corporation Code, has only such powers as are expressly granted to it by law
and by its articles of incorporation, those which may be incidental to such conferred powers, those
reasonably necessary to accomplish its purposes and those which may be incident to its existence.

Indispensable to determining if Pilipinas had violated its articles of incorporation, was an inquiry by
the SEC if Pilipinas was holding out itself to the public as a pawnshop. It must be stressed that the
determination of whether Pilipinas violated PD 114 was merely incidental to the regulatory powers of
the SEC, to see to it that a corporation does not go beyond the powers granted to it by its articles of
incorporation.

It’s the certificate of incorporation that gives juridical personality to a corporation and places it within
SEC jurisdiction.

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Hall vs. Piccio


Facts
Petitioners and respondents signed and acknowledged in Leyte, the Articles of incorporation of the
Far Eastern Lumber and Commercial Co., Inc., organized to engage in the general lumber business.
Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation. Immediately after the
execution of said articles of incorporation, the corporation proceeded to do business with the adoption
of by-laws and the election of its officers. Later, the articles of incorporation were filed with the SEC,
to have the corresponding certificate of incorporation issued.

Afterwards, pending action on the articles of incorporation by the aforesaid governmental office, the
respondents filed suit alleging that the Far Eastern Lumber and Commercial Co. was an unregistered
partnership; that they wished to have it dissolved because of bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial losses.

Issue
Whether or not the corporation here is a de facto corporation.

Held
Not a de facto corporation.

The personality of a corporation begins to exist only from the moment such certificate is issued — not
before. Here, all the parties are informed that the Securities and Exchange Commission has not, so far,
issued the corresponding certificate of incorporation. Nobody was led to believe anything to his
prejudice and damage

Next, there are least two reasons why the SEC doesn’t have jurisdiction. Not having obtained the
certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders —
may not probably claim "in good faith" to be a corporation. Second, this is not a suit in which the
corporation is a party. This is a litigation between stockholders of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in
a private suit for its dissolution between stockholders, without the intervention of the state.

Simply put, there was no Corporation formed at all and was simply a suit between persons forming a
corporation.

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Sawadjaan vs. CA
Facts
Sawadjaan is a loans analyst of the Philippine Amanah Bank (PAB). Later, Sawadjaan was assigned
to inspect the properties offered as collaterals by Compressed Air Machineries and Equipment
Corporation (CAMEC) for a credit line of P5 million. On the basis of his Inspection and Appraisal
Report, the PAB granted the loan application.

Later, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which
created the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP,
and the existing personnel of the PAB were to continue to discharge their functions unless discharged.
In the ensuing reorganization, Sawadjaan was among the personnel retained by the AIIBP.

When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP,
discovered that the collaterals offered were non-existent and/or already mortgaged beforehand to a
3rd person. AIIBP created an Investigating Committee to look into the CAMEC transaction, which
had cost the bank P6 million in losses. The Investigating Committee suspended Sawadjaan.

Issue
Whether or not the proceedings are null and void because AAIBP failed to file its by-laws within the
designated 60 days from effectivity of RA 6848.

Held
Proceedings aren’t null and void.

The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has
shareholders, corporate officers, a board of directors, assets, and personnel. The Office of the
Government Corporate Counsel, “the principal law office of government-owned corporations, one of
which is respondent bank”, in fact, here represents it. At the very least, by its failure to submit its by-
laws on time, the AIIBP may be considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to which such corporations may be a
party.

Moreover, a corporation that has failed to file its by-laws within the prescribed period does not ipso
facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations, details the procedures and remedies that may be availed of before an
order of revocation can be issued. There is no showing that such a procedure has been initiated in this
case.

Further, one who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.

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Municipality of Malabang vs. Benito


Facts
The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors, of
the municipality of Balabagan of the same province. Balabagan was formerly a part of the
municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of the
then President Carlos P. Garcia, out of barrios and sitios of the latter municipality.

The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the
respondent municipal officials from performing the functions of their respective office

Issue
Whether or not respondent is a de facto corporation.

Held
Respondent isn’t a de facto corporation.

Generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding
for quo warranto or other direct proceeding, and that only in a few exceptions may a private person
exercise this function of government. But the rule disallowing collateral attacks applies only where
the municipal corporation is at least a de facto corporation. For where it is neither a corporation de
jure nor de facto, but a nullity, the rule is that its existence may be, questioned collaterally or directly
in any action or proceeding by any one whose rights or interests are affected thereby, including the
citizens of the territory incorporated unless they are estopped by their conduct from doing so.

In the cases where a de facto municipal corporation was recognized as such despite the fact that the
statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration
that there was some other valid law giving corporate vitality to the organization. Hence, in the case at
bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated
cannot conceivably make it a de facto corporation, as, independently of the Administrative Code
provision in question, there is no other valid statute to give color of authority to its creation.

There is no law that authorizes respondent’s creation, hence a nullity from inception.

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Albert vs. University Publishing


Facts
University Publishing, through Jose M. Aruego, its President, entered into a contract with Albert; with
defendant agreeing to pay Albert P30 thousand for the exclusive right to publish his book and for his
share in previous sales of the book's first edition; that defendant had undertaken to pay in installments
but failed to do so. Albert then sued University Publishing and was awarded damages.

Later, it was discovered that there’s no such entity as University Publishing registered with the SEC
causing Albert to instead go after Aruego for execution of the award.

Issue
Whether or not the judgement can be executed against Aruego, President of University Publishing.

Held
Judgment can be executed against Aruego.

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here.
Aruego represented a non-existent entity and induced not only the plaintiff but even the court to
believe in such representation. He signed the contract as "President" of "University Publishing Co.,
Inc.," stating that this was "a corporation duly organized and existing under the laws of the
Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who
has induced another to act upon his willful misrepresentation that a corporation was duly organized
and existing under the law, cannot thereafter set up against his victim the principle of corporation by
estoppel

It was "University Publishing Co., Inc." that purported to come to court, answering the complaint and
litigating upon the merits. But as stated, "University Publishing Co., Inc." has no independent
personality; it is just a name. Jose M. Aruego was, in reality, the one who answered and litigated,
through his own law firm as counsel. He was in fact, if not, in name, the defendant.

A person acting or purporting to act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered into or for other
acts performed as such agent.

Jose M. Aruego, acting as representative of a non-existent principal, was the real party to the contract
sued upon; that he was the one who reaped the benefits resulting from it, so much so that partial
payments of the consideration were made by him; that he violated its terms, thereby precipitating the
suit in question; and that in the litigation he was the real defendant. Perforce, in line with the ends of
justice, responsibility under the judgment falls on him.

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Lozano vs. delos Santos


Facts
Both petitioner and respondent are the president’s of different Jeepney associations. Later, the 2
Jeepney associations agreed to consolidate into 1 association. They also agreed to elect one set of
officers who shall be given the sole authority to collect the daily dues from the members of the
consolidated association elections. The elections were held and private respondent protested the
results, alleging fraud, and refused to recognize the results.

Respondent continued collecting the dues from the members of his association despite several
demands to desist.

Issue
Whether or not there was a de facto corporation in the form of the consolidated association.

Held
No de facto corporation.

The doctrine of corporation by estoppel advanced by private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. It cannot
be acquired through or waived, enlarged or diminished by, any act or omission of the parties; neither
can it be conferred by the acquiescence of the court.

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and
unfairness. It applies when persons assume to form a corporation and exercise corporate functions and
enter into business relations with third person. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who therefore know that it has
not been registered, there is no corporation by estoppel.

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Gokongwei vs. SEC (1979)


Minute digest

Issue
Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election
to the Board of Directors of SMC is valid and reasonable

Held
Valid and reasonable.

Every corporation has the inherent power to adopt by-laws for its internal government, to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs.

A corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors,
officers and employees ... " This must necessarily refer to a qualification in addition to that specified
by section 30 of the Corporation Law, which provides that "every director must own in his right at
least one share of the capital stock of the stock corporation of which he is a director ... “

Any person "who buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between
the corporation and the stockholders is infringed ... by any act of the former which is authorized by a
majority ... ."

Consequently, petitioner doesn’t have a vested right to be elected director, in the face of the fact that
the law contained the prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification.

Lastly, an amendment to the corporation by-law that renders a stockholder ineligible to be a director,
if he’s also a director in a corporation whose business is competing with that of another corporation is
valid.

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San Juan Structural Steel vs. CA


Facts
San Juan Structural entered into an Agreement with defendant-appellee Motorich Sales Corporation
for the transfer to it of a parcel of land. As stipulated in the Agreement, plaintiff-appellant paid the
downpayment. However, defendant-appellee Motorich Sales Corporation despite repeated demands
and in utter disregard of its commitments had refused to execute the pertinent transfer documents.

The President represented San Juan while the Treasurer represented Motorich in the Agreement.

Issue
Whether or not the corporate treasurer, by herself and without any authorization from he board of
directors, can validly sell a parcel of land owned by the corporation.

Held
Can’t validly sell.

Such contract cannot bind Motorich, because it never authorized or ratified such sale.

The property of the corporation is not the property of its stockholders or members and may not be
sold by the stockholders or members without express authorization from the corporation's board of
directors. A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express authorization from the corporation’s
board of directors.

A corporation may act only through its board of directors or, when authorized either by its by-laws or
by its board resolution, through its officers or agents in the normal course of business. The general
principles of agency govern the relation between the corporation and its officers or agents, subject to
the articles of incorporation, by-laws, or relevant provisions of law.

A corporate officer or agent may represent and bind the corporation in transactions with third persons
to the extent that the authority to do so has been conferred upon him, and this includes powers which
have been intentionally conferred, and also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers
as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.

Here, Motorich categorically denies that it ever authorized its treasurer, to sell the subject parcel of
land. Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized
to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Petitioner
cannot assume that the Treasurer was authorized to sell the property of the corporation. Selling is
obviously foreign to a corporate treasurer's function, which generally has been described as "to
receive and keep the funds of the corporation, and to disburse them in accordance with the authority
given him by the board or the properly authorized officers.”

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary
purpose of Motorich is marketing, distribution, export and import in relation to a general
merchandising business. Unmistakably, its treasurer is not cloaked with actual or apparent authority to
buy or sell real property, an activity that falls way beyond the scope of her general authority.

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Ong Yong vs. Tiu


Facts
The construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which
was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the
Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the
lots where the mall was being built, the Tius invited Ong Yong to invest in FLADC.

Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain
equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of
P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in
addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the
Tius were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs
were entitled to nominate the President, the Secretary and six directors (including the chairman) to the
board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the
mall.

The business was short-lived though because the Tiu’s rescinded the pre-subscription agreement.

Issue
Whether or not the Tiu’s are entitled to rescission.

Held
Not entitled to rescission.

The Tius allege that they were prevented from participating in the management of the corporation.
There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising
her function as such. The records show that the President, Wilson Ong, supervised the collection and
receipt of rentals in the Masagana Citimall; that he ordered the same to be deposited in the bank; and
that he held on to the cash and properties of the corporation. The Corporation Code prohibits the
President from acting concurrently as Treasurer of the corporation. The rationale behind the provision
is to ensure the effective monitoring of each officer's separate functions.

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Yao Ka Sin Trading vs. CA


Facts
Respondent Prime White Cement Corp. offered to sell cement to Yao Ka Sin in a letter-offer. Prime
White’s President, Maglana, made an offer and the same was accepted. But 23 days later, Prime
White’s Board of Directors disapproved the same. Yao Ka Sin insisted on the cement be delivered but
Prime White refused.

Issue
Whether or not the contract binds Yao Ka Sin.

Held
Contract doesn’t bind.

Since a corporation can act only through its officers and agents, "all acts within the powers of said
corporation may be performed by agents of its selection; and, except so far as limitations or
restrictions may be imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person govern the officer or agent
of a corporation.

Moreover, "a corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that authority to do so has been conferred upon him, and this includes
powers which have been intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused persons dealing with the officer or agent to believe that
it has conferred.

While there can be no question that Mr. Maglana was an officer — the President and Chairman — of
private respondent corporation at the time he signed the offer, the By-Laws do not in any way confer
upon the President the authority to enter into contracts for the corporation independently, of the Board
of Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate the
execution of the contract, only the President — and not all the members of the Board, or so much
thereof as are required for the act — shall sign it for the corporation. The By-Laws presuppose a prior
act of the corporation exercised through the Board of Directors. No greater power can be implied
from such express, but limited, delegated authority. Neither can it be logically claimed that any power
greater than that expressly conferred is inherent in Mr. Maglana's position as president and chairman
of the corporation.

Although there is authority "that if the president is given general control and supervision over the
affairs of the corporation, it will be presumed that he has authority to make contract and do acts
within the course of its ordinary business," We find such inapplicable in this case. Mr. Maglana did
not have a direct and active management of the business and operations of the corporation. Besides,
no evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts similar to
that of the offer either with the petitioner or with other parties. White Prime never clothe Maglana
with apparent authority to enter into contracts similar to the offer made. Simply put, White Prime isn’t
estopped from denying Maglana’s authority.

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Premium Marble vs. CA


Facts
Ayala Investment and Development Corporation issued three (3) checks payable to the plaintiff and
drawn against Citibank. Later, former officers of the plaintiff corporation headed by Saturnino G.
Belen, Jr., without any authority whatsoever from the plaintiff deposited the above-mentioned checks
to the current account of his conduit corporation, Intervest Merchant Finance that the latter
maintained with the defendant bank.

Although the checks were clearly payable to the plaintiff corporation and crossed on their face and for
payee's account only, defendant bank accepted the checks to be deposited to the current account of
Intervest and thereafter presented the same for collection from the drawee bank which subsequently
cleared the same thus allowing Intervest to make use of the funds to the prejudice of the plaintiff;

Plaintiffdemanded upon the defendant to restitute the amount representing the value of the checks but
defendant refused and continue to refuse to honor plaintiff's demands up to the present;

Issue
Whether or not Petitioner’s board of directors authorized the filing of the case against Respondent.

Held
Wasn’t authorized.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers
for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner
failed to show proof that this election was reported to the SEC. In fact, the last entry in their General
Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981.

In the absence of /any board resolution from its board of directors the [sic] authority to act for and in
behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue
and be sued in any court is lodged with the board of directors that exercises its corporate powers.
Thus, the issue of authority and the invalidity of plaintiff-appellant 's subscription which is still
pending, is a matter that is also addressed, considering the premises, to the sound judgment of the
Securities & Exchange Commission.

Evidently, the objective sought to be achieved by Section 26 of the Corporation Code is to give the
public information, under sanction of oath of responsible officers, of the nature of business, financial
condition and operational status of the company together with information on its key officers or
managers so that those dealing with it and those who intend to do business with it may know or have
the means of knowing facts concerning the corporation's financial resources and business
responsibility.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the
incumbent officers of Premium has not been fully substantiated. In the absence of an authority from
the board of directors, no person, not even the officers of the corporation, can validly bind the
corporation.

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Roxas vs. dela Rosa


Facts
The possessors of a majority of the shares of the Binalbagan Estate, Inc., formed a voting trust
composed of three members. In this voting trust, the trustees were authorized to represent and vote the
shares pertaining to their constituents. Later, the general annual meeting of the shareholders of the
Binalbagan Estate, Inc., took place, and the voting trust was able to nominate and elect a board of
directors to his own liking.

Later, the present trustee of the voting trust wanted to oust the elected officers, without awaiting the
termination of their official terms at the expiration of one year from the date of their election. In other
to effect this purpose the petitioners in their character as members of the voting trust, called for a
special general meeting of shareholders "for the election of the board of directors, for the amendment
of the By-Laws, and for any other business that can be dealt with in said meeting."

Respondents then filed suit to enjoin the meeting.

Issue
Whether or not the Judge can issue an order enjoining the meeting.

Held
Judge can issue the order.

Under the law the directors of a corporation can only be removed from office by a vote of the
stockholders representing at least two-thirds of the subscribed capital stock entitled to vote, while
vacancies in the board, when they exist, can be filled by mere majority vote. Moreover, the law
requires that when action is to be taken at a special meeting to remove the directors, such purpose
shall be indicated in the call.

The complaint directly asserts that the members of the present directorate were regularly elected at the
general annual meeting; and if that assertion be true, the proposal to elect, another directorate would
result in the election of a rival set of directors, who would probably need the assistance of judgment
of court to get them installed into office, even supposing that their title to the office could be
maintained. The law contemplates and intends that there will be one set of directors at a time and that
new directors shall be elected only as vacancies occur in the directorate by death, resignation,
removal, or otherwise.

The present board of directors are de facto incumbents of the office whose acts will be valid until they
shall be lawfully removed from the office or cease from the discharge of their functions. It will be
noted that the order in question enjoins the defendants from holding the meeting called for; and said
order must not be understood as constituting any obstacle for the holding of the regular meeting at the
time appointed in the by-laws of the corporation.

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Valle Verde Country Club vs Africa


Facts
During the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the
board of directors were elected. In later years, however, the requisite quorum for the holding of the
stockholders’ meeting could not be obtained. Consequently, the above-named directors continued to
serve in the VVCC Board in a hold-over capacity.

Later, a director resigned from his position. In a meeting, the remaining directors, still constituting a
quorum of VVCC’s nine-member board, elected a new director to fill in the vacancy created by the
resignation. Respondent Africa (Africa), a member of VVCC, questioned the election.

Issue
Whether or not the remaining directors of a corporation’s Board, still constituting a quorum, can elect
another director to fill in a vacancy caused by the resignation of a hold-over director.

Held
Can’t elect.

The holdover period is not part of the term of office of a member of the board of directors

The word “term” has acquired a definite meaning in jurisprudence. In several cases, we have defined
“term” as the time during which the officer may claim to hold the office as of right, and fixes the
interval after which the several incumbents shall succeed one another. The holdover does not affect
the term of office. The term is fixed by statute and it does not change simply because the office may
have become vacant, nor because the incumbent holds over in office beyond the end of the term due
to the fact that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officer’s “tenure” represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.

When Section 23 of the Corporation Code declares “the board of directors…shall hold office for one
(1) year until their successors are elected and qualified,” we construe the provision to mean that the
term of the members of the board of directors shall be only for one year; their term expires one year
after election to the office. The holdover period – that time from the lapse of one year from a
member’s election to the Board and until his successor’s election and qualification – is not part of the
director’s original term of office, nor is it a new term; the holdover period, however, constitutes part
of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a
holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is
holding the succeeding term.

After the lapse of one year from his election, Makalintal’s term of office is deemed to have already
expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be considered
as extending his term. This holdover period, however, is not to be considered as part of his term,
which, as declared, had already expired.

With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section
29 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special
meeting called for the purpose. His resignation as a holdover director did not change the nature of the
vacancy; the vacancy due to the expiration of Makalintal’s term had been created long before his
resignation.

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Central Cooperative Exchange vs. Tibe


Facts
Petitioner is a national federation of farmers' cooperative marketing associations. As a member of the
petitioner's board of directors, respondent Concordio Tibe, Sr. drew and collected from petitioner
CCE cash advances amounting to P5,668.00; of this sum, respondent had, admittedly, already
liquidated P3,317.25, leaving the sum of P2,350.75 still to be accounted for. By admission of the
petitioner the sum of P2,350.75 has been further reduced to P2,133.45 as of 31 January 1963 on
account of partial payments made after suit was filed.

Respondent Tibe had also drawn several sums, amounting to P14,436.95, representing commutable
per diems for attending meetings of the Board of Directors in Manila, per diems and transportation
expenses for FACOMA visitations, representation expenses and commutable discretionary funds. All
these sums were disbursed with the approval of general manager, treasurer and auditor of CCE.

Issue
Whether or not the board of directors of the CCE has the power and authority to adopt various
resolutions that appropriated the funds of the corporation for the above-enumerated expenses for the
members of the said board.

Held
No power and authority.

Section 8 of the By-Laws of petitioner federation provides:


The compensation, if any, and the per diems for attendance at meetings of the members of the Board
of Directors shall be determined by the members at any annual meeting or special meeting of the
Exchange called for the purpose.

In the annual meeting of the stockholders it was resolved that:


The members of the Board of Directors attending the CCE board meetings be entitled to actual
transportation expenses plus the per diems of P30.00 and actual expenses while waiting.

The questioned resolutions are contrary to the By-Laws of the federation and, therefore, are not within
the power of the board of directors to enact. The By-Laws, in Section 8, explicitly reserved unto the
stockholders the power to determine the compensation of members of the board of directors, and the
stockholders did restrict such compensation to "actual transportation expenses plus the per diems of
P30.00 and actual expenses while waiting." Even without the express reservation of said power, the
directors are not entitled to compensation, for —

... The law is well-settled that directors of corporations presumptively serve without compensation
and in the absence of an express agreement or a resolution in relation thereto, no claim can be
asserted therefor. Thus it has been held that there can be no recovery of compensation, unless
expressly provided for.

Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS,
acted within their power, but, by voting for themselves compensation for such additional duties, they
acted in excess of their authority, as expressed in the By-Laws.

Nor may the directors rely on Section 28 of the Corporation Law, giving the exercise of corporate
powers and the control of the corporation's business and property to the board of directors, or on
Section 1 of Article VI of the By-Laws, empowering the board with "general supervision and control
of the affairs and property of the Exchange," as justifications for the adoption of the questioned
resolutions, because these provisions of the law and the By-Laws pertain to the board's general
powers merely and do not extend to giving the members of the said board the compensations stated in
the resolution, as the matter of providing for their compensations are specifically withheld from the
board of directors, and reserved to the stockholders.
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Western Institute vs. Salas


Facts
Respondents Salas, all belonging to the same family, are the majority and controlling members of the
Board of Trustees of Western Institute of Technology, Inc (WIT). According to petitioners, the
minority stockholders of WIT held a Special Board Meeting. Prior to aforesaid Special Board
Meeting, copies of notice thereof were distributed to all Board Members. The notice allegedly
indicated that the meeting included Item No. 6 which states:

Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of
Technology, Inc. on compensation of all officers of the corporation.

In said meeting, the Board of Trustees passed a Resolution granting monthly compensation to the
private respondents as corporate officers.

A few years later, petitioners filed an affidavit-complaint against respondents before the Office of the
City Prosecutor, one for falsification of a public document and the other for estafa.

Issue
Whether or not the Resolution granting compensation to Respondents is valid.

Held
Resolution is valid.

Directors or trustees, as the case may be, aren’t entitled to salary or other compensation when they
perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors/trustees render service gratuitously, and that the return upon their shares
adequately furnishes the motives for service, without compensation. Under the Corporation Code Sec.
30, there are only two (2) ways by which members of the board can be granted compensation apart
from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation;
and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or
special stockholders' meeting agree to give it to them.

This proscription, however, against granting compensation to directors/trustees of a corporation is not


a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: ". . . [T]he
directors shall not receive any compensation, as such directors, . . . ." The phrase as such directors is
not without significance for it delimits the scope of the prohibition to compensation given to them for
services performed purely in their capacity as directors or trustees. The unambiguous implication is
that members of the board may receive compensation, in addition to reasonable per diems, when they
render services to the corporation in a capacity other than as directors/trustees. Here, the Resolution
granted monthly compensation to private respondents not in their capacity as members of the board,
but rather as officers of the corporation.

Clearly, therefore, the prohibition with respect to granting compensation to corporate


directors/trustees as such under Section 30 is not violated in this particular case.

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Tramat Mercantile vs CA
Facts
Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to
Tramat Mercantile, Inc. a tractor. In payment, David Ong, Tramat's president and manager, issued a
check. Tramat, in turn, sold the tractor to the Metropolitan Waterworks and Sewerage System
("NAWASA"). David Ong caused a "stop payment" of the check when NAWASA refused to pay the
tractor after discovering defects in the tractor.

Later, de la Cuesta filed an action to recover payment.

Issue
Whether or not Ong is solidarily liable with Tramat in the disputed transactions.

Held
Ong isn’t solidarily liable.

It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la
Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity, but as
an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only
be the corporation, not the person acting for and on its behalf that properly could be made liable
thereon.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when —

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.

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Llamado vs CA
Facts
Llamado, together with Jacinto Pascual, was charged with violation of Batas Pambansa Blg. 22 and
pleaded "not guilty" of the crime charged. Llamado and his co-accused Jacinto Pascual were the
Treasurer and President, respectively, of the Pan Asia Finance Corporation.

Complainant, Leon Gaw, delivered to accused the amount of P180,000.00, with the assurance of Aida
Tan, the secretary of the accused in the corporation, that it will be repaid on a certain date. Jacinto
Pascual and Ricardo Llamado signed Philippine Trust Company Check No. 047809, postdated 4
November 1983, in the amount of P186,500.00 in the presence of private complainant.
The aforesaid check was issued in payment of the cash money delivered to the accused by private
complainant, plus interests thereon for sixty (60) days in the amount of P6,500.00.

Complainant deposited the check but the same was dishonored due to a ‘stop payment order’ and
‘insufficient funds.’

Issue
Whether or not Llamado can be held liable for the bouncing check despite signing the same in his
capacity as Treasurer of Pan Asia Finance Corp.

Held
Llamado can be held liable.

Petitioner's argument that he should not be held personally liable for the amount of the check because
it was a check of the Pan Asia Finance Corporation and he signed the same in his capacity as
Treasurer of the corporation is also untenable. The third paragraph of Section 1 of BP Blg. 22 states:

Where the check is drawn by a corporation, company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable under this Act.

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Pascual vs Orozco
Facts
That during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the
knowledge, consent, or acquiescence of the stockholders, deducted their respective compensation
from the gross income instead of from the net profits of the bank, thereby defrauding the bank and its
stockholders of approximately P20,000 per annum

The second cause of action sets forth that defendants' and appellees' immediate predecessors in office
in this bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to their
compensation as is charged against the defendants themselves;

Issue
Whether or not Pascual has standing to sue.

Held
1st cause of action: Yes - he was a stockholder at the time the acts alleged transpired
2nd cause of action: No - he wasn’t a stockholder at the time the acts alleged transpired

In suits of this character the corporation itself and not the plaintiff stockholder is the real party in
interest. The rights of the individual stockholder are merged into that of the corporation. It is a
universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the
corporate property; that both of these are in the corporation itself for the benefit of all the
stockholders.

Notwithstanding this fact, however, that it was the duty and right of the corporation to bring suit
remedy these wrongs, it gradually became apparent that frequently the corporation was helpless and
unable to institute the suit. It was found, where the guilty parties themselves controlled the directors
and also a majority of the stock, that the corporation was in their power, was unable to institute suit,
and that the minority of the stockholders were being defrauded of their rights and were without
remedy. The time came when the minority of the stockholders of the defrauded corporation — the
corporation itself being controlled by the guilty parties — were given a standing in court for the
purpose of taking up the cause of the corporation, and, in its name and stead, of bringing the guilty
parties to an account.

So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation)
has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend
upon when, how, and for what purpose he acquired the shares which he now owns. In the
determination of these questions we can not see how, if it be true that the bank is a quasi-public
institution, it can affect in any way the final result.

A stockholder in a corporation who was not such at the time of the transactions complained of, or
whose shares had not devolved upon him since by operation of law, can not maintain suits of this
character, unless such transactions continue and are injurious to the stockholder, or affect him
especially and specifically in some other way.

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Republic Bank vs Cuaderno


Facts
Damaso Perez, a stockholder of the Republic Bank, instituted a derivative suit on behalf of said Bank,
against Respondents, the Board of Directors of the Republic Bank, and the Monetary Board of the
Central Bank of the Philippines. Damaso Perez had complained to the Monetary Board against certain
frauds allegedly committed by defendant Pablo Roman, in that being chairman of the Board of
Directors of the Republic Bank, and of its Executive Loan Committee, Roman had fraudulently
granted loans to fictitious and non-existing persons on the basis of fictitious and inflated appraised
values of real estate properties.

Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an
investigation that discovered that there were violations of the Banking Law. He later ordered a new
Board of Directors of the Republic Bank to be elected, which was done, and subsequently approved
by the Monetary Board. After Cuaredno retired, and to neutralize the impending action against him,
Pablo Roman engaged Miguel Cuaderno as technical consultant, and selected Bienvenido Dizon as
chairman of the Board of Directors of the Republic Bank. Perez alleges the Board of Directors,
composed of individuals personally selected and chosen by Roman, connived and confederated in
approving the appointment and selection of Cuaderno and Dizon; that such action was motivated by
bad faith and without intention to protect the interest of the Republic Bank but were prompted to
protect Pablo Roman from criminal prosecution.

Issue
Whether or not Perez has standing, as a stockholder, to institute this derivative suit questioning
Cuaderno’s and Dizon’s appointment.

Held
Perez has standing.

An individual stockholder is permitted to institute a derivative or representative suit on behalf of the


corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest,

Plaintiff is neither alleging nor vindicating his own individual interest or prejudice, but the interest of
the Republic Bank and the damage caused to it. The action he has brought is a derivative one,
expressly manifested to be for and in behalf of the Republic Bank, because it was futile to demand
action by the corporation, since its Directors were nominees and creatures of defendant Pablo Roman.
The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice. Further,
any authority from the corporation to file suit on its behalf could not be expected as the suit is aimed
to nullify the action taken by the manager and the board of directors of the Republic Bank.

The complaint expressly pleads that the appointment of Cuaderno and Bienvenido Dizon were made
only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and
avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the
complaint constitute a cause of action for the bank. That no other stockholder has chosen to make
common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no
ground for denying him relief. At any rate, it is yet too early in the proceedings for the absence of
other stockholders to be of any significance, no issues having even been joined.

There remains the procedural question whether the corporation itself must be made party defendant.
What is important is that the corporation should be made a party, in order to make the Court's
judgment binding upon it, and thus bar future relitigation of the issues. On what side the corporation
appears loses importance when it is considered that it lay within the power of the trial court to direct

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the making of such amendments of the pleadings, by adding or dropping parties, as may be required
in the interest of justice.

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Prime White Cement vs IAC


Facts
Respondent and petitioner, thru its President, Mr. Zosimo Falcon, and Justo C. Trazo, as Chairman of
the Board, entered into a dealership agreement. Under the dealership agreement, Respondent would
be the exclusive distributor of the petitioner’s cement products.

Relying heavily on the dealership agreement, respondent entered into a written agreement with
several hardware stores. Later, he informed the petitioner that he is making the necessary preparation
for the opening of the requisite letter of credit to cover the price of the due initial delivery. Several
demands to comply with the dealership agreement were made by respondent to the petitioner;
however, petitioner refused to comply with the same, and respondent was constrained to cancel his
agreement for the supply of white cement with third parties.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and
subsisting, the petitioner, in violation of, entered into an exclusive dealership agreement with a certain
Napoleon Co.

Issue
Whether or not the dealership agreement is a valid and enforceable contract.

Held
The dealership agreement isn’t valid and enforceable.

In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of
Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing"
director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his
corporation. In case his interest’s conflict with those of the corporation, he cannot sacrifice the latter
to his own advantage and benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders.” On the other hand, a director's
contract with his corporation is not in all instances void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure
of his adverse interest is made.

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if
entered into with a person other than a director or officer of the corporation, the fact that the other
party to the contract was a Director and Auditor of the petitioner corporation changes the whole
situation. Here, the contract was neither fair nor reasonable. The "dealership agreement" fixed the
price at P9.70 per bag. Respondent Te is a businessman himself and must have known that at that
time, prices of commodities in general, and white cement in particular, were not stable and were
expected to rise. He must have known that there would be a considerable rise in the price of white
cement. Despite this, no provision was made in the "dealership agreement" to allow for an increase in
price mutually acceptable to the parties. Fairness on his part as a director of the corporation, from
whom he was to buy the cement, would require such a provision. In fact, this unfairness in the
contract is also a basis that renders a contract entered into by the President, without authority from the
Board of Directors, void or voidable, although it may have been in the ordinary course of business.

What aggravates the situation is Te entered into contracts with 3rd parties right after his "dealership
agreement" with Petitioner Corporation, and in each one of them he protected himself from any
increase in the market price of white cement.

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Montelibano vs Bacolod-Murcia
Facts
Petitioners are sugar planters adhered to the defendant’s sugar central mill under identical milling
contracts. The original contract provided a ratio of 45% for the mill and 55% for the planters. Later,
an amended contract was proposed increasing the planters' share to 60% but extending the operation
of the milling contract from the original 30 years to 45 years. To this effect, a printed Amended
Milling Contract form was drawn up. Later, the Board of Directors of the appellee Bacolod-Murcia
Milling Co., Inc., adopted a resolution granting further concessions to the planters over and above
those contained in the printed Amended Milling Contract. Appellants then signed and executed the
printed Amended Milling Contract.

Later, petitioners initiated the present action, because Bacolod-Murcia Milling Co., inc., resisted
implementing the resolution arguing the same wasn’t part of the Amended Milling Contract.

Issue
Whether or not Bacolod-Murcia is obliged to implement the resolution.

Held
Bacolod-Murcia is obliged to implement the resolution.

The disputed resolution was adopted by Bacolod-Murcia as a supplement to the proposed milling
contract, and that was approved 21 days prior to the signing by appellants of the Amended Milling
Contract itself; so that when the Milling Contract was executed, the concessions granted by the
disputed resolution had been already incorporated into its terms.

When the resolution was adopted and the company made the additional concessions, the appellants
were not yet obligated by the terms of the printed contract, since they admittedly did not sign it until
21 days later. Before that date, the printed form was no more than a proposal that either party could
modify at its pleasure, and the appellee actually modified it by adopting the resolution in question.
Since there is no rational explanation for the company's assenting to the further concessions asked by
the planters before the contracts were signed, except as further inducement for the planters to agree to
the extension of the contract period, to allow the company now to retract such concessions would be
to sanction a fraud upon the planters who relied on such additional stipulations.

There can be no doubt that the directors of Bacolod-Murcia had authority to modify the proposed
terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the
other contracting parties.

It is a question, therefore, in each case of the logical relation of the act to the corporate purpose
expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is
done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those
ends, in a substantial, and not in a remote and fanciful sense, it may fairly be considered within
charter powers. The test to be applied is whether the act in question is in direct and immediate
furtherance of the corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.

As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, even if it will cause losses or decrease the profits of the central. It is a well-known rule of law
that questions of policy or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and so long as it acts in good faith its
orders are not reviewable by the courts.

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Alhambra Cigar vs SEC


Facts
Alhambra Cigar was duly incorporated under Philippine laws on 1912. By its corporate articles it was
to exist for fifty (50) years from incorporation. Its term of existence expired on 1962 and on that date,
it ceased transacting business, and entered into a state of liquidation.

On 1963 — within Alhambra's three-year statutory period for liquidation - Republic Act 3531 was
enacted into law; it empowered domestic private corporations to extend their corporate life beyond the
period fixed by the articles of incorporation for a term not to exceed fifty years in any one instance.
Previous to Republic Act 3531, the maximum non-extendible term of such corporations was fifty
years.

In 1963 Alhambra's board of directors resolved to amend its articles of incorporation to extend its
corporate life for an additional fifty years, or a total of 100 years from its incorporation. The board
approved the amendment and the amended articles filed with the SEC. The SEC denied the
amendment because Alhambra was already dissolved at the time RA 3531 was passed.

Issue
Whether or not a corporation can extend its life by amending its articles of incorporation effected
during the three-year statutory period for liquidation when its original term of existence had already
expired.

Held
Corporation can no longer extend its life.

From July 15 to October 28, 1963, when Alhambra made its attempt to extend its corporate existence,
its original term of fifty years had already expired (January 15, 1962); it was in the midst of the three-
year grace period statutorily fixed in Section 77 of the Corporation Law.

Republic Act 3531 allows all private corporations to extend their corporate existence. Thus
incorporated into the structure of Section 18 are the following:

... Provided, however, That should the amendment consist in extending the corporate life, the
extension shall not exceed fifty years in any one instance: Provided, further, That the original articles,
and amended articles together shall contain all provisions required by law to be set out in the articles
of incorporation: ...

Continuance of a "dissolved" corporation as a body corporate for 3 years has for its purpose the final
closure of its affairs, and no other; the corporation is specifically enjoined from "continuing the
business for which it was established". The liquidation of the corporation's affairs set forth in Section
77 became necessary precisely because its life had ended. For this reason alone, the corporate
existence and juridical personality of that corporation to do business may no longer be extended.

The privilege given to prolong corporate life under the amendment must be exercised before the
expiry of the term fixed in the articles of incorporation. RA 3531 requires the articles of incorporation
be amended but no corporation in a state of liquidation can act in any way, much less amend its
articles, "for the purpose of continuing the business for which it was established".

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Phil.. Trust vs Rivera


Facts
This action was instituted by the Philippine Trust Company, as assignee in insolvency of La
Cooperativa Naval Filipina, against Marciano Rivera, for the purpose of recovering a balance of
P22,500, alleged to be due upon defendant's subscription to the capital stock of said insolvent
corporation.

It appears in evidence that the Cooperativa Naval Filipina was duly incorporated under the laws of the
Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par value of P100
each. Among the incorporators of this company was numbered the defendant Mariano Rivera, who
subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by
other persons.

In the course of time the company became insolvent and went into the hands of the Philippine Trust
Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the
stock subscription of the defendant, which admittedly has never been paid.

Issue
Whether or not Phil Trust can recover the stock subscription of Rivera that he failed to pay after the
company has already become insolvent.

Held
Phil Trust can still recover.

Rivera argues the corporation passed a resolution adopting to the effect that the capital should be
reduced by 50 per centum and the subscribers released from the obligation to pay any unpaid balance
of their subscription in excess of 50 per centum of the same. Such resolution is void and without
effect.

It is established doctrine that subscription to the capital of a corporation constitute a find to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts.3 A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance
with the statutory regulations is necessary.

Here, the resolution releasing the shareholders from their obligation to pay 50 per centum of their
respective subscriptions was an attempted withdrawal of so much capital from the fund upon which
the company's creditors were entitled ultimately to rely and, having been effected without compliance
with the statutory requirements, was wholly ineffectual.

3
Trust Fund doctrine

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Benito vs SEC.
Facts
The Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc.were filed with the
Securities and Exchange Commission (SEC) and approved. The corporation had an authorized capital
stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized
capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for. Herein petitioner
Benito subscribed to 460 shares worth P4,600.00.

Later, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00
to P1,000,000.00. It was shown in said certificate that P191,560.00 worth of shares were represented
in the stockholders' meeting held on November 25, 1975 at which time the increase was approved.
Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued
portion of the authorized capital stock of P200,000.00.

Afterwards, Benito filed with respondent Securities and Exchange Commission a petition alleging
that the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was
made in violation of his pre-emptive right to said additional issue and that the increase in the
authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering
that the stockholders of record were not notified of the meeting wherein the proposed increase was in
the agenda.

Issue
Did the additional issue of previously subscribed shares violate Benito’s pre-emptive right.

Held
No. But for reasons of equity, Benito can still exercise his pre-emptive right.

Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he
was not able to exercise his right of pre-emption over the unissued shares. However, the general rule
is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to
additional issues of originally authorized shares.4 This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have offered all of those that it is authorized to issue.
An original subscriber is deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares. When the shares left unsubscribed are
later re-offered, he cannot therefore claim a dilution of interest.

Another thing that petitioner was able to disprove was the allegation in the certificate of increase that
all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive
right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to
subscribe, as he could not have done so for the reason that he was not present at the meeting and had
not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be
allowed to subscribe to the increased capital stock proportionate to his present shareholdings.”

4
Under the present Code, stockholders now have pre-emptive rights to all stocks.

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Islamic Directorate vs CA
Facts
Petitioner IDP-Tamano Group alleges that Islamic leaders of all Muslim major tribal groups in the
Philippines organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES
(IDP), the primary purpose of which is to establish an Islamic Center and other religious
infrastructures" so as to facilitate the effective practice of Islamic faith in the area. In the same year,
the Libyan government donated money to the IDP to purchase land to be used as a Center for the
Islamic populace. The land was registered in IDP’s name.

After the purchase of the land by the Libyan government in the name of IDP, the late President
Ferdinand Marcos declared Martial Law. Most of the members of the Board of Trustees flew to the
Middle East to escape political persecution. Thereafter, two Muslim groups sprung, the Carpizo
Group and the Abbas Group. Both groups claimed to be the legitimate IDP. The SEC declared the
election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void.

Neither group, however, took the necessary steps prescribed by the SEC and thus no valid election of
the members of the Board of Trustees of IDP was ever called. Later, without having been properly
elected as new members of the Board of Trustee of IDP, the Carpizo Group caused to be signed an
alleged Board Resolution of the IDP, authorizing the sale of the land to the private respondent INC.
The Tamano group then filed suit to stop the sale.

Issue
Is the sale between the Carpizo group and INC valid?

Held
No.

The SEC has already adjudged the election of the Carpizo Group to the IDP Board of Trustees to be
null and void. By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo
Group is a bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority
whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property.

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang
Sora property, allegedly in the name of the IDP, have to be struck down for having been done without
the consent of the IDP thru a legitimate Board of Trustees.

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's
failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP.
Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP
falling squarely within the contemplation of the foregoing section. For the sale to be valid, the
majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona
fide members of the corporation should have been obtained. These twin requirements were not met as
the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and
those whose names and signatures were affixed by the Carpizo Group together with the sham Board
Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members
of the IDP as they were made to appear to be. Apparently, there are only fifteen (15) official members
of the petitioner corporation including the eight (8) members of the Board of Trustees.

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private
respondent INC was intrinsically void ab initio.

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Steinberg vs Velasco
Facts
It is alleged that the defendants approved and authorised various lawful purchases already made of a
large portion of the capital stock of the company from its various stockholders, thereby diverting its
funds to the injury of the creditors of the corporation. That at the time of such purchase, the
corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the time
petition for the dissolution of the corporation was financial condition, in contemplation of an
insolvency and dissolution.

As a second cause of action, plaintiff alleges that the officers and directors of the corporation
approved a resolution to pay dividends to its stockholders, when at the time the petition for the
dissolution of the corporation was presented it had accounts payable in the sum of P9,241.19, "and
practically worthless accounts receivable.

Issue
Are the defendants’ actions valid considering they were done in fraud of creditors?

Held
No.

The corporation did not then have an actual bona fide surplus from which the dividends could be paid,
and that the payment of them in full at the time would affect the financial condition of the
corporation.

The action of the board in purchasing the stock from the corporation and in declaring the dividends on
the stock was all done at the same meeting of the board of directors, and it appears in those minutes
that the both Ganzon and Mendaros were formerly directors and resigned before the board approved
the purchase and declared the dividends. In other words, the directors were permitted to resign so they
could sell their stock to the corporation. In this situation and upon this state of facts, it is very
apparent that the directors did not act in good faith or that they were grossly ignorant of their duties.

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

Simply put, the corporation was already insolvent when the board of directors sold their stock to the
corporation and paid dividends to the stockholders at the same time.

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Dela Rama vs Ma-Ao Sugar Central


Facts
This was a derivative suit commenced by four minority stockholders against the Ma-ao Sugar Central
Co., Inc. and the corporation’s directors.

The complaint comprising the period November, 1946 to October, 1952, stated five causes of action,
to wit:
1. For alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and
unauthorized investments;
2. For alleged gross mismanagement;
3. For alleged forfeiture of corporate rights warranting dissolution;
4. For alleged damages and attorney's fees; and
5. For receivership.

Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00. The
investments were made not in pursuance of the corporate purpose and without the requisite authority
of two-thirds of the stockholders

Issue
Does the investment of corporate funds by the Ma-Ao Sugar Central in another corporation
(Philippine Fiber Processing Co) violate the Corporation Law?

Held
No.

The legal provision invoked by the plaintiffs, as appellants, Sec. 17-½ of the Corporation Law,
provides:

No corporation organized under this act shall invest its funds in any other corporation or business, or
for any purpose other than the main purpose for which it was organized, unless its board of directors
has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such proposal at a
stockholders' meeting called for the purpose

On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law,
which provides:

(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in
the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities and other evidences of indebtedness of any domestic or foreign corporation.

Reconciling these 2 apparently conflicting provisions is easy.

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

A private corporation has the power to invest its corporate funds in any other corporation or business,
or for any purpose other than the main purpose for which it was organized, provided that 'its board of
directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares
in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal
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at a stockholders' meeting called for that purpose,’ When the investment is necessary to accomplish
its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not
necessary.

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Gokongwei vs SEC
Minute digest

Issue
Did SEC gravely abuse its discretion in allowing the stockholders of San Miguel to ratify the
investment of corporate funds in a foreign corporation?

Held
No.

The purchase of beer manufacturing facilities by SMC was an investment in the same business stated
as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery,
Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in
1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. This is true because the
questioned investment is not contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which is defective from a supposed
failure to observe in its execution the requirement of the law that the investment must be authorized
by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement
is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted
may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect
that it may have had at the outset.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities that is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual meeting cannot be construed as
an admission that respondent corporation had committed an ultra vires act, considering the common
practice of corporations of periodically submitting for the gratification of their stockholders the acts of
their directors, officers and managers.

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Nielson & Co. vs Lepanto Consolidated


Facts
This case is an MR and the SC didn’t bother repeating the facts anymore. But basically the SC in a
previous decision ordered Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of extension of the contract. This was pursuant to the modified agreement regarding
the compensation of Nielson that provides, among others, that Nielson would receive 10% of any
dividends declared and paid, when and as paid,

Issue
Did the Court err in ordering Lepanto to issue and deliver to Nielson shares of stock together with
fruits thereof?

Held
Yes. Nielson is entitled to the cash equivalent of the value of the stocks under the contract.

Under the Corporation Law, the considerations for which shares of stock may be issued are:
1. Cash;
2. Property; and
3. Undistributed profits.

Shares of stock are given the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or property then those shares
do not fall under the category of "stock dividends". A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property. Likewise a share of stock issued in
payment of indebtedness is equivalent to issuing a stock in exchange for cash.

However, it is the shares of stock that are originally issued by the corporation and forming part of the
capital that can be exchanged for cash or services rendered, or property. But a share of stock coming
from stock dividends declared couldn’t be issued to one who is not a stockholder of a corporation.

A "stock dividend" is any dividend payable in shares of stock of the corporation. It is a distribution of
the shares of stock of the corporation among the stockholders as dividends. So, a stock dividend is
actually two things:
1. A dividend, and
2. The enforced use of the dividend money to purchase additional shares of stock at par.

When a corporation issues stock dividends, it shows that the corporation's accumulated profits have
been capitalized instead of distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer.

Consequently, stock dividends are issued only to stockholders because only stockholders are entitled
to dividends. They are the only ones who have a right to a proportional share in that part of the
surplus that is declared as dividends. A stock dividend really adds nothing to the interest of the
stockholder; the proportional interest of each stockholder remains the same.

The term "dividend" is that portion of the profits that the corporation sets apart for division among the
holders of the capital stock. Stock dividends cannot be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson cannot be paid in shares of stock that
form part of the stock dividends of Lepanto for services it rendered under the management contract.

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Pirovano (appelle) vs Dela Rama (appellant)


Minute digest

Issue
Can Defendant Corporation give by way of donation the proceeds of said insurance policies to the
minor children of the late Enrico Pirovano under the law or its articles of corporation, even if such
donation is allegedly ultra vires?

Held
Yes.

After a careful perusal of the provisions above quoted we find that the corporation was given broad
and almost unlimited powers to carry out the purposes for which it was organized. The donation in
question undoubtedly comes within the scope of this broad power.

Granting arguendo that the donation given by Pirovano children is an ultra vires act, still the same
can’t be invalidated, or declared legally ineffective for the reason alone, it appearing that the donation
represents not only the act of the Board of Directors but of the stockholders themselves as shown by
the fact that the same has been expressly ratified in a resolution duly approved by the latter. By this
ratification, the infirmity of the corporate act has been obliterated thereby making the act perfectly
valid and enforceable. This is specially so if the donation is not merely executory but executed and
consummated and no creditors are prejudiced, or if there are creditors affected, the latter has expressly
given their conformity.

A distinction should be made between corporate acts or contracts that are illegal and those that are
merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or
public policy or public duty, and are, like similar transactions between the individuals void.
Meanwhile, ultra vires acts are those that are not illegal and void ab initio but are not within the scope
of the articles of incorporation. These acts are merely voidable and may become binding and
enforceable when ratified by the stockholders.

Since it is not contended that the donation under consideration is illegal, or contrary to any of the
express provision of the articles of incorporation, nor prejudicial to the creditors of the defendant
corporation, the said donation, even if ultra vires is voidable and its infirmity has been cured by
ratification and subsequent acts of the defendant corporation. The defendant corporation, therefore, is
now prevented or estopped from contesting the validity of the donation. This is specially so in this
case when the very directors who conceived the idea of granting said donation are practically the
stockholders themselves, with few nominal exceptions.

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Republic vs Acoje Mining


Facts
The Acoje Mining Company, Inc. wrote the Director of Posts requesting the opening of a post,
telegraph and money order offices at its mining camp to service its employees and their families that
were living in said camp.

The Director of Posts agreed but with a condition in this wise: "In cases where a post office will be
opened under circumstances similar to the present, it is the policy of this office to have the company
assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence on the part of the employee of the
company who is assigned to take charge of the post office," The Director suggested that a resolution
be adopted by the board of directors of the company expressing conformity to the above condition.

The Company agreed and passed the requisite resolution. The post office branch was opened at the
camp with one Hilario M. Sanchez as postmaster. Later, the postmaster went on a three-day leave but
never returned. The accounts of the postmaster were checked and a shortage was found in the amount
of P13,867.24.

Issue
Can Acoje Mining be held liable for the shortage pursuant to the resolution even if allegedly said
resolutions as ultra vires?

Held
Yes.

The claim that the resolution adopted by the board of directors of appellant company is an ultra vires
act cannot also be entertained it appearing that the same covers a subject that concerns the benefit,
convenience and welfare of its employees and their families. While as a rule an ultra vires act is one
committed outside the object for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by law, there are however certain
corporate acts that may be performed outside of the scope of the powers expressly conferred if they
are necessary to promote the interest or welfare of the corporation. Thus, it has been held that
"although not expressly authorized to do so a corporation may become a surety where the particular
transaction is reasonably necessary or proper to the conduct of its business,” and here it is undisputed
that the establishment of the local post office is a reasonable and proper adjunct to the conduct of the
business of appellant company. Indeed, such post office is a vital improvement in the living condition
of its employees and laborers who came to settle in its mining camp which is far removed from the
postal facilities or means of communication accorded to people living in a city or municipality..

Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same
however is not void for it was approved not in contravention of law, customs, public order or public
policy. The term ultra vires should be distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated. It being merely voidable, an ultra vires act can be enforced or validated if there
are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the
ground of estoppel.

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Japanese War Notes Claimants Association vs SEC


Facts
The Securities and Exchange Commissioner issued an order requiring petitioner and its President, Mr.
Alfredo Abcede, to show cause why it should not be proceeded against for making misrepresentations
to the public about the need of registering and depositing Japanese war notes, with a view to their
probable redemption for otherwise they would be valueless.

The Commissioner found that according to its articles the petitioner has the privilege to work for the
redemption of the war notes of its members alone, but that it can not offer its services to the public for
a valuable consideration, because there is nothing definite and tangible about the redemption of the
war notes and its success is speculative; that any authority given to offer services can easily
degenerate into a racket; that under its articles of incorporation the petitioner is a civic and non-stock
corporation and should not engage in business for profit; that it has received war notes for deposit,
upon payment of fees, without authority in its articles to do so; that it had previously been ordered to
desist from collecting fees for those registering the war notes, but notwithstanding this prohibition it
has, done so in the guise of service fees.

Issue
Is Japanese War Notes Claimants Association authorized to register and accept war notes for deposit
and collect services for the same?

Held
No.

It is also argued that the registration of war notes and the corporation law therefor does not prohibit
the collection of fees and the authority of the petitioner to engage therein is implied from its articles of
incorporation

The articles authorize collection of fees from members; but they do not authorize the corporation to
engage in the business of registering and accepting war notes for deposit and collecting fees from
such services.

Neither do we find any merit in the contention that the association has authority to accept and collect
fees for reparation claims for civilian casualties and other injuries. This is beyond any of the powers
of the association as embodied in its articles and have absolutely no relation to the avowed purpose of
the association to work for the redemption of war notes.

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Loyola Grand Villas Homeowners vs CA


Facts
LGVHAI was organized as the association of homeowners and residents of the Loyola Grand Villas.
It was registered with the Home Financing Corporation, now HIGC, as the sole homeowners’
organization in the said subdivision. For unknown reasons, however, LGVHAI did not file its
corporate by-laws. Later, the officers of the LGVHAI tried to register its by-laws. They failed to do so
and discovered that there were two other organizations within the subdivision – the North Association
and the South Association.

The HIGC informed LGVHAI that it had been automatically dissolved for two reasons. First, it did
not submit its by-laws within the period required by the Corporation Code and, second, there was
non-use of the corporate charter because HIGC had not received any report on the association’s
activities.

Issue
May the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic dissolution?

Held
No.

Automatic corporate dissolution for failure to file the by-laws on time was never the intention of the
legislature. The failure to file such by-laws is only a ground for dissolution.

Section 46 reveals the legislative intent to attach a directory, and not mandatory, meaning for the
word “must” in the first sentence thereof. Note should be taken of the second paragraph of the law
which allows the filing of the by-laws even prior to incorporation. This provision in the same section
of the Code rules out mandatory compliance with the requirement of filing the by-laws “within one
(1) month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission.” It necessarily follows that failure to file the by-laws within
that period does not imply the “demise” of the corporation. By-laws may be necessary for the
“government” of the corporation but these are subordinate to the articles of incorporation as well as to
the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to
corporate existence or to the valid exercise of corporate powers,

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the
consequences of the non-filing of the same within the period provided for in Section 46.

There can be no automatic corporate dissolution simply because the incorporators failed to abide by
the required filing of by-laws embodied in Section 46 of the Corporation Code. Due process requires
the incorporators must be given the chance to explain their neglect or omission and remedy the same.

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Salafranca vs Philamlife
Facts
Salafranca started working with the private respondent Philamlife Village Homeowners Association
as administrative officer for a period of six months.

Later, private respondent decided to amend its by-laws. Included therein was a provision regarding
officers, specifically, the position of administrative officer under which said officer shall hold office
at the pleasure of the Board of Directors. In view of this development, private respondent informed
the petitioner that his term of office shall be coterminus with the Board of Directors which appointed
him to his position. Furthermore, until he submits a medical certificate showing his state of health,
his employment shall be on a month-to-month basis. Oddly, notwithstanding the failure of herein
petitioner to submit his medical certificate, he continued working until his termination. Claiming that
his services had been unlawfully and unceremoniously dispensed with, petitioner filed a complaint for
illegal dismissal with money claims and for damages.

Issue
Can an amendment of the by-laws violating an employee’s security of tenure under the Labor Code be
used to justify unlawful termination?

Held
No.

Furthermore, private respondent, in an effort to validate the dismissal of the petitioner, posits the
theory that the latter’s position is coterminus with that of the Village’s Board of Directors, as
provided for in its amended by-laws.

Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in
the exercise of management prerogative or business judgment. However this right, extensive as it may
be, cannot impair the obligation of existing contracts or rights.

Prescinding from these premises, private respondent’s insistence that it can legally dismiss petitioner
on the ground that his tenure has expired is untenable. To reiterate, petitioner, being a regular
employee, is entitled to security of tenure; hence, his services may only be terminated for causes
provided by law. A contrary interpretation would not find justification in the laws or the Constitution.
If we were to rule otherwise, it would enable an employer to remove any employee from his
employment by the simple expediency of amending its by-laws and providing that his/her position
shall cease to exist upon the occurrence of a specified event.

If private respondent wanted to make the petitioner’s position co-terminus with that of the Board of
Directors, then the amendment must be effective after petitioner’s stay with the private respondent,
not during his term. Obviously, the measure taken by the private respondent in amending its by-laws
is nothing but a devious, but crude, attempt to circumvent petitioners right to security of tenure as a
regular employee guaranteed under the Labor Code.

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Grace Christian High School vs CA


Facts
Grace Christian High School is an educational institution while respondent Grace Village
Association, Inc. is an organization of lot and/or building owners, lessees and residents at Grace
Village.

Later, a committee of the board of directors (Grace Village Association) prepared a draft of an
amendment to the by-laws. The amendment made Grace Christian High School a permanent director
of the association. This draft was never presented to the general membership for approval but
petitioner was given a permanent seat in the board of directors of the association.

Later, the Association told Tan “the proposal to make the Grace Christian High School representative
as a permanent director of the association, although previously tolerated in the past elections should
be reexamined.” Following this advice, notices were sent to the members of the association that the
provision on election of directors of the 1968 by-laws of the association would be observed.

Issue
Is the amendment to the by-laws granting Grace Christian High School, a non-stockholder, a
permanent seat in the board of directors valid?

Held
No.

The board of directors of corporations must be elected from among the stockholders or members.
There may be corporations in which there are unelected members in the board but in these instances
the unelected members sit as ex officio members. Here, there is no reason at all for petitioner’s
representative to be given a seat in the board. Nor does petitioner claim a right to such seat by virtue
of an office held.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been
questioned or challenged but, on the contrary, appears to have been implemented by the members of
the association cannot forestall a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the members of the association
to waive its invalidity. For that matter the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law.

Nor can petitioner claim a vested right to sit in the board on the basis of “practice.” Practice, no
matter how long continued, cannot give rise to any vested right if it is contrary to law.

Simply put, an amendment to the by-laws that’s contrary to law is void and without effect.

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Gokongwei vs SEC
Minute digest

Issue
Can the corporation amend the by-laws adding the qualifications to be a director?

Held
Yes.

It is recognized by authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. At common law,
the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power
as one of its necessary and inseparable legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation.

In this jurisdiction, under the Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by the Corporation Law, which
provides that "every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director.”

The Corporation Law expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity with good practice. "

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Board of Directors vs Tan


Facts
John Castillo et al., commenced suit to (1) declare null and void the election of the members of the
board of directors of the SMB Workers Savings and Loan Association, Inc. and (2) for the members
of the board of directors of the association to call for and hold another election. The Court rendered
judgment declaring the election held null and void and ordered the defendants to call for and hold
another election.

The election committee set the meeting of the members of the association to elect the new members
of the board of directors. Afterwards, the plaintiff filed an ex-parte motion alleging that the election
committee that had called the meeting of members of the association is composed of the same
members that had conducted and supervised the election of the members of the board of directors that
was declared null and void by the Court; that in view thereof it would be inequitable to allow them to
conduct and supervise again the forthcoming election; that the election to be conducted and
supervised by the said committee would not be held in accordance with the constitution and by laws
of the association.

The Court then ordered:

. . . the Court hereby orders that the election scheduled for March 28, 1957 be, as it hereby is,
cancelled, and a committee of three is hereby constituted and appointed to call, conduct and
supervise the election of the members of the board of directors of the association for 1957, said
committee to be composed of: Mr. Candido C. Viernes as representative of the Court and to act as
Chairman; and one representative each from the plaintiffs and defendant, as members. The committee
is vested with the sole and exclusive power and authority to call conduct and supervise the election of
the members of the board of directors of the association for the year 1957.

Issue
Can the Court issue an order forming the election committee?

Held
Yes.

Section 3 Article III, of the constitution and by-laws the association provides:

Notice of the time and place of holding of any annual meeting, or any special meeting, the members,
shall be given either by posting the same in a postage prepaid envelope, addressed to each member
on the record at the address left by such member with the Secretary of the Association, or at his
known post-office address or by delivering the same person at least (5) days before the date set for
such meeting. . . . In lieu of addressing or serving personal notices to the members, notice of the
members, notice of a regular annual meeting or of a special meeting of the members may be given by
posting copies of said notice at the different departments and plants of the San Miguel Brewery Inc.,
not less than five (5) days prior to the date of the meeting.

Notice of a special meeting of the members should be given at least five days before the date of the
meeting. Here, the five days previous notice required wasn't complied with.

As regards the creation of a committee of three vested with the authority to call, conduct and
supervise the election, and the appointment thereto of Candido C. Viernes as chairman and the
representative of the court and one representative each from the parties, the Court in the exercise of its
equity jurisdiction may appointment such committee, it having been shown that the Election
Committee provided for in section 7 of the by-laws of the association that conducted the election
annulled by the respondent court if allowed to act as such may jeopardize the rights of the
respondents.

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In a proper proceeding a court for equity may, on showing of good reason, direct the holding of a
stockholders' meeting under the control of a special master, when it appears that a fair election cannot
make directions contrary to statute and public policy with respect to the conduct of such election, and
the action taken at such a meeting will not be set aside because of a wrongful use of the court'
interlocutory decree, where not brought to the attention of the court prior to the meeting.

Lanuza vs CA
Facts
The Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with 700 founders’ shares
and 76 common shares as its initial capital stock subscription reflected in the articles of
incorporation. However, respondents registered the company’s stock and transfer book for the first
time in 1978, recording 33 common shares as the only issued and outstanding shares of PMMSI.
Later, a special stockholders’ meeting was called with a quorum of 27 common shares, representing
more than 2/3 of the common shares issued and outstanding.

Afterwards, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the SEC
to register his property rights over 120 founders’ shares and 12 common shares owned by their
father. The SEC affirmed Acayan’s ownership over the shares and such shares were recorded in the
stock and transfer book. In 1992, a special stockholders’ meeting was held to elect a new set of
directors. Respondents thereafter filed a petition with the SEC questioning the validity of the 1992
stockholders’ meeting, alleging that the quorum for the said meeting shouldn’t be based on the 165
issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital
stock of 776 shares, as reflected in the Articles of Incorporation.

Issue
Whether or not the basis of a quorum for a stockholders’ meeting should be the outstanding capital
stock as indicated in the articles of incorporation or that contained in the company’s stock and transfer
book.

Held
As indicated in the articles of incorporation.

The articles of incorporation has been described as one that defines the charter of the corporation and
the contractual relationships between the State and the corporation, the stockholders and the State, and
between the corporation and its stockholders. When PMMSI was incorporated, the prevailing law was
Act No. 1459, otherwise known as “The Corporation Law” and a review of PMMSI’s articles of
incorporation shows that the corporation complied with the requirements laid down by Act No. 1459.

The contents of the articles of incorporation are binding, not only on the corporation, but also on its
shareholders. Here, the articles of incorporation indicate that at the time of incorporation the
corporation had 776 issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment thereof; a statement of every alienation, sale or
transfer of stock made, the date thereof and by and to whom made; and such other entries as may be
prescribed by law.5

A quorum should be based on the totality of the shares which have been subscribed and issued. The
stock and transfer book of PMMSI can’t be used as the sole basis for determining the quorum as it
doesn’t reflect the totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and outstanding as compared to that

5
The Articles of incorporation should contain the same number of shares in the stock and transfer book.

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listed in the stock and transfer book. One who is actually a stockholder cannot be denied his right to
vote by the corporation merely because the corporate officers failed to keep its records accurately.

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Commissioner vs Manning
Facts
MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares;
24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three
respondents. A trust agreement on his and the respondents' interests in MANTRASCO was executed
where Reese’s shares would be transferred to respondents upon his death. Reese died but the
projected transfer of his shares in the name of MANTRASCO could not be immediately effected for
lack of sufficient funds to cover initial payment on the shares. MANTRASCO made a partial payment
of Reese’s shares, the certificate for the 24,700 shares in Reese's name was cancelled and a new
certificate was issued in the name of MANTRASCO.

At a special meeting of MANTRASCO stockholders, the following resolution was passed:

RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the
company as a stock dividend to be distributed to shareholders of record at the close of business on
December 22, 1958, in accordance with the action of the Board of Directors at its meeting on
December 19, I958 which action is hereby approved and confirmed.

Later, the entire purchase price of Reese's interest in MANTRASCO was finally paid in full by the
latter. The trust agreement was terminated and the trustees delivered to MANTRASCO all the shares
which they were holding in trust. Meanwhile, an examination of MANTRASCO's books was ordered
by the Bureau of Internal Revenue. On the basis of their examination, the BIR examiners concluded
that the distribution of Reese's shares as stock dividends was in effect a distribution of the "asset or
property of the corporation as may be gleaned from the payment of cash for the redemption of said
stock and distributing the same as stock dividend." The Commissioner of Internal Revenue issued
notices of assessment for deficiency income taxes to the respondents for the year.

Issue
Whether or not Reese’s shares were properly denominated as Treasury shares.

Held
Not Treasury shares.

Although authorities may differ on the exact legal and accounting status of so called "treasury
shares,” they are more or less in agreement that treasury shares are stocks issued and fully paid for
and re-acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury
shares are therefore issued shares, but being in the treasury they do not have the status of outstanding
shares. Consequently, although a treasury share, not having been retired by the corporation
reacquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because dividends cannot be declared by the
corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal
distribution of voting powers among stockholders will be effectively lost and the directors will be able
to perpetuate their control of the corporation though it still represents a paid-for interest in the
property of the corporation. The foregoing essential features of a treasury stock are lacking in the
questioned shares.

The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the
24,700 shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid.
Such being the true nature of the 24,700 shares, their declaration as treasury stock dividend was a
complete nullity and plainly violates public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.

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Lee vs CA
Facts
The International Corporate Bank, Inc. filed a complaint for a sum of money against the private
respondents who, in turn, filed a third party complaint against ALFA and the petitioners.

Meanwhile, the trial court issued an order requiring the issuance of an alias summons upon ALFA
through the DBP as a consequence of the petitioner's letter informing the court that the summons for
ALFA was erroneously served upon them considering that the management of ALFA had been
transferred to the DBP.

In a manifestation, the DBP claimed that it was not authorized to receive summons on behalf of
ALFA since the DBP had not taken over the company that has a separate and distinct corporate
personality and existence.

Issue
Whether or not a beneficial stockholder under a voting trust agreement can qualify as a director.

Held
Beneficial stockholder can’t qualify as a director.

A voting trust agreement results in the separation of the voting rights of a stockholder from his other
rights. However, in order to distinguish a voting trust agreement from proxies and other voting pools
and agreements, it must pass three tests namely:
1. That the voting rights of the stock are separated from the other attributes of ownership;
2. That the voting rights granted are intended to be irrevocable for a definite period of time; and
3. That the principal purpose of the grant of voting rights is to acquire voting control of the
corporation.

A voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also
other rights pertaining to his shares as long as the voting trust agreement is not entered "for the
purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud."

The most immediate effect of a voting trust agreement on the status of a stockholder who is a party to
its execution — from legal titleholder or owner of the shares subject of the voting trust agreement, he
becomes the equitable or beneficial owner. In order to be eligible as a director, what is material is the
legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation.

The facts of this case show that the petitioners, by virtue of the voting trust agreement, disposed of all
their shares in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one
share standing in their names on the books of ALFA as required under Section 23 of the new
Corporation Code. The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares
to the DBP created vacancies in their respective positions as directors of ALFA.

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership
of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of
record with respect to the said shares of stocks.

Hence, there is evidence on record that at the time of the service of summons on ALFA through the
petitioners, the voting trust agreement in question was not yet terminated so that the legal title to the
stocks of ALFA, then, still belonged to the DBP. There was no proper summons to ALFA.

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Bayla vs Silang Traffic Co.


Facts
Petitioners instituted this action against the respondent Silang Traffic Co., Inc. to recover certain sums
of money that they had paid to the corporation on account of shares of stock they individually agreed
to take and pay for under certain specified terms and conditions. The petitioners agreed to purchase
the shares and had paid sums on account thereof in installments. However, petitioners failed to pay
the subsequent installments causing the Corporation to treat the amounts already paid as forfeited and
to return the shares to the Corporation.

Petitioners' action for the recovery of the sums is based on a resolution by the board of directors of the
respondent corporation rescinding the agreement, forfeiting the amounts paid in the Corporation’s
favour, and reversion of the shares to the Corporation.

Issue
Whether or not the Agreement was a subscription contract or a sales contract and if the Resolution
rescinding the Agreement is valid.

Held
Contract? Sale || Rescission? Valid

The parties litigant, the trial court, and the Court of Appeals have interpreted or considered the said
agreement as a contract of subscription to the capital stock of the respondent corporation. It should be
noted, however, that said agreement is entitled "Agreement for Instalment Sale of Shares in the Silang
Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber," the corporation is
described as "seller"; that the agreement was entered into on March 30, 1935, long after the
incorporation and organization of the corporation, which took place in 1927; and that the price of the
stock was payable in quarterly installments spread over a period of five years.

It seems clear from the terms of the contracts in question that they are contracts of sale and not of
subscription. A subscription, properly speaking, is the mutual agreement of the subscribers to take and
pay for the stock of a corporation, while a purchase is an independent agreement between the
individual and the corporation to buy shares of stock from it at stipulated price. In some particulars
the rules governing subscriptions and sales of shares are different. For instance, the provisions of our
Corporation Law regarding calls for unpaid subscription and assessment of stock (sections 37-50) do
not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation to pay for his shares, is inapplicable to a
contract of purchase of shares.

Is the resolution of August 1, 1937, valid? The contracts in question being one of purchase and not
subscription as we have heretofore pointed out, we see no legal impediment to its rescission by
agreement of the parties. According to the resolution of August 1, 1937, the rescission was made for
the good of the corporation and in order to terminate the then pending civil case involving the validity
of the sale of the shares in question among others. To that rescission the herein petitioners apparently
agreed, as shown by their demand for the refund of the amounts they had paid as provided in said
resolution. It appears from the record that said civil case was subsequently dismissed, and that the
purchasers of shares of stock, other than the herein petitioners, who were mentioned in said resolution
were able to benefit by said resolution. It would be an unjust discrimination to deny the same benefit
to the herein petitioners.

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Trillana vs Quezon College


Facts
Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon College:

Please enter my subscription to dalawang daan (200) shares of your capital stock with a par value of
P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng
isda) pesos as my initial payment and the balance payable in accordance with law and the rules and
regulations of the Quezon College. I hereby agree to shoulder the expenses connected with said
shares of stock. I further submit myself to all lawful demands, decisions or directives of the Board of
Trustees of the Quezon College and all its duly constituted officers or authorities (ang nasa itaas ay
binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman).

Damasa Crisostomo died on October 26, 1948. As no payment appears to have been made on the
subscription mentioned in the foregoing letter, the Quezon College, Inc. presented a claim before the
Court of First Instance of Bulacan in her testate proceeding, for the collection of the sum of P20,000,
representing the value of the subscription to the capital stock of the Quezon College, Inc.

Issue
Whether or not the contract is enforceable against Crisostomo.

Held
Unenforceable.

…In other words, the relation between Damasa Crisostomo and the Quezon College, Inc. had only
thus reached the preliminary stage whereby the latter offered its stock for subscription on the terms
stated in the form letter, and Damasa applied for subscription fixing her own plan of payment, — a
relation, in the absence as in the present case of acceptance by the Quezon College, Inc. of the counter
offer of Damasa Crisostomo, that had not ripened into an enforceable contract.

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National Exchange vs Dexter


Facts
This action was instituted in the Court of First Instance of Manila by the National Exchange Co., Inc.,
as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose of
recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares of the
capital stock of C. S. Salmon & co., with interest and costs.

It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written subscription to the
corporate stock of C. S. Salmon & Co. in the following form:

I hereby subscribe for three hundred (300) shares of the capital stock of C. S. Salmon and Company,
payable from the first dividends declared on any and all shares of said company owned by me at the
time dividends are declared, until the full amount of this subscription has been paid.

Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend declared at
about that time by the company, supplemented by money supplied personally by the subscriber.
Beyond this nothing has been paid on the shares and the corporation has declared no further dividend.
There is therefore a balance of P15,000 still paid upon the subscription.

Issue
Whether or not the stipulation contained in the subscription to the effect that the subscription is
payable from the first dividends declared on the shares has the effect of relieving the subscriber from
personal liability in an action to recover the value of the shares.

Held
Illegal stipulation.

Pursuant to this provision we find that the Philippine Commission inserted in the Corporation Law,
enacted March 1, 1906, the following provision: ". . . no corporation shall issue stock or bonds except
in exchange for actual cash paid to the corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued." (Act No. 1459, sec. 16 as amended
by Act No. 2792, sec. 2.)

The prohibition against the issuance of shares by corporations except for actual cash to the par value
of the stock to its full equivalent in property is thus enshrined in both the organic and statutory law of
the Philippine; Islands; and it would seem that our lawmakers could scarcely have chosen language
more directly suited to secure absolute equality stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a
stipulation such as that now under consideration, in a stock subscription, is illegal, for this stipulation
obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock.
In the contingency that dividends are not paid, there is no liability at all. This is discrimination in
favor of the particular subscriber, and hence the stipulation is unlawful.

We may add that the law in force in this jurisdiction makes no distinction, in respect to the liability of
the subscriber, between shares subscribed before incorporation is effected and shares subscribed
thereafter. All like are bound to pay full value in cash or its equivalent, and any attempt to
discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden.
In what is here said we have reference of course primarily to subscriptions to shares that have not
been previously issued. It is conceivable that the power of the corporation to make terms with the
purchaser would be greater where the shares that are the subject of the transaction have been acquired
by the corporation in course of commerce, after they have already been once issued. But the shares
with which are here concerned are not of this sort.

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Escano vs Filipinas Mining Corp.


Facts
Escano obtained judgment against Silverio Salvosa whereby the latter was ordered to deliver to the
former 116 active shares and an undetermined number of shares in escrow of the Filipinas Mining
Corporation and to pay the sum of P500 as damages. The Filipinas Mining Corporation declared that
according to its books the judgment debtor Silverio Salvosa was the registered owner of 1,000 active
shares and about 21,339 unissued shares held in escrow by the said corporation. The sheriff sold the
1,000 active shares at public auction, realizing therefrom only the sum of P10, which was applied in
partial satisfaction of the judgment for damages in the sum of P500.

The present case, which was instituted by Antonio Escaño against the Filipinas Mining Corporational
and the Standard Investment of the Philippines, relates to the escrow shares. It appears that after the
complaint in the original case was filed but before judgment was rendered, Silverio Salvosa sold to
Jose P. Bengzon all his shares held in escrow. Bengzon in turn subsequently sold them to Standard
Investment. Salvosa's sale to Bengzon and Bengzon's sale to Standard Investment were noted and
recorded in the books of the Filipinas Mining Corporation only three years after the escrow shares
were attached by garnishment served on the Filipinas Mining Corporation.

Issue
Whether or not the issuance by the Filipinas Mining Corporation of the said 18,580 shares of its stock
to the Standard Investment of the Philippines was valid as against the attaching judgment creditor of
the original owner, Silverio Salvosa.

Held
Invalid.

The transfer of duly issued shares of stock is not valid as against third parties and the corporation until
it is noted upon the books of the corporation; but it is contended that the transfer of unissued shares of
stock held in escrow is valid against the whole world although not notified to the corporation and not
noted upon its books. Since the sale, transfer, or assignment of unissued shares of stock held in
escrow is not specifically provided for by law, the question has to be resolved by resorting to analogy.
What is the reason of the law for requiring the recording upon the books of the corporation of
transfers of shares of stock as a condition precedent to their validity against the corporation, and third
parties?

We imagine that it is:


1. To enable the corporation to know at all times who its actual stockholders are, because
mutual rights and obligations exist between the corporation and its stockholders;
2. To afford to the corporation an opportunity to object or refuse its consent to the transfer in
case it has any claim against the stock sought to be transferred, or for any other valid reason;
and
3. To avoid fictitious or fraudulent transfers.

Do these reasons hold as to the transfer of unissued shares held in escrow? There’s no valid reason for
treating unissued shares held in escrow differently from issued shares insofar as their sale and transfer
is concerned. In both cases the corporation is entitled to know who the actual owners of the shares are,
and to object to the transfer upon any valid ground. Likewise, in both cases the possibility of fictitious
or fraudulent transfers exists.

We are, therefore, of the opinion and so hold that section 35 of the Corporation Law, which requires
the registration of transfers of shares stock upon the books of the corporation as a condition precedent
to their validity against the corporation and third parties, is also applicable to unissued shares held by
the corporation in escrow.

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Razon vs IAC
Facts
In his complaint, Vicente B. Chuidian prayed that defendants be ordered to deliver certificates of
stocks representing the shareholdings of the deceased Juan T. Chuidian in the E. Razon, Inc.

In their answer, defendants alleged that all the shares of stock in the name of stockholders of record of
the corporation were fully paid for by defendant, Razon; that the shares of stock were actually owned
and remained in the possession of Razon. Appellees also alleged . . . that neither the late Juan T.
Chuidian nor the appellant had paid any amount whatsoever for the 1,500 shares of stock in question.
..

Issue
Whether or not Chuidian or Razon owns the 1,500 shares of stock in question considering the stock
certificate is in Razon’s possession.

Held
Chuidian owns the stocks.

In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are
in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that
during his lifetime Chuidian was elected member of the Board of Directors of the corporation that
clearly shows that he was a stockholder of the corporation. From the point of view of the corporation,
therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who
claims ownership over the questioned shares of stock must show that the same were transferred to him
by proving that all the requirements for the effective transfer of shares of stock in accordance with the
corporation's by laws, if any, were followed or in accordance with the provisions of law.

The petitioner failed in both instances. The petitioner did not present any by-laws which could show
that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's
by-laws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law
are made applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be
properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of
the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock
covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was
never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong
to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of
stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to
follow the procedure required by law or the proper conduct of business even among friends. To
reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective
transfer of a certificate of stock.

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Rural Bank of Salinas vs CA


Facts
Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of
Attorney in favor of his wife, private respondent Melania Guerrero, giving the latter full authority to
sell 473 shares of stock of the Bank registered in his name. Pursuant to said Special Power of
Attorney, private respondent Melania Guerrero, executed a Deed of Assignment for 472 shares out of
the 473 shares, in favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10
shares) and Francisco Guerrero, Jr. (6 shares).

Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the
Deed of Assignment for registration with a request for the transfer in the Bank's stock and transfer
book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of
Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of
stocks in the name of the new owners thereof. However, petitioner Bank denied the request of
respondent Melania Guerrero.

Private respondent Melania Guerrero then filed with the Securities and Exchange Commission" (SEC)
an action for mandamus against petitioners Rural Bank of Salinas, its President and Corporate
Secretary.

Issue
Whether or not the Securities and Exchange Commission can compel by Mandamus the Rural Bank
of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private
respondents.

Held
Mandamus lies.

A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in
stock transfers. The right of a transferee/assignee to have stocks transferred to his name is an inherent
right flowing from his ownership of the stocks. The corporation's obligation to register is ministerial.

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and
transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in
upholding the Decision of respondent SEC affirming the Decision of its Hearing Officer directing the
registration of the 473 shares in the stock and transfer book in the names of private respondents. At all
events, the registration is without prejudice to the proceedings in court to determine the validity of the
Deeds of Assignment of the shares of stock in question.

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China Bank vs CA
Facts
Calapatia, a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI), pledged
his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC). Petitioner wrote
VGCCI requesting that the aforementioned pledge agreement be recorded in its books. VGCCI
replied that the deed of pledge executed by Calapatia in petitioner's favor was duly noted in its
corporate books.

Afterwards, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured
by the aforestated pledge agreement. Due to Calapatia's failure to pay his obligation, petitioner, filed a
petition for extrajudicial foreclosure and moved to conduct a public auction sale of the pledged stock.

Petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the
pledged stock be transferred to its (petitioner's) name and the same be recorded in the corporate
books. However, VGCCI wrote petitioner expressing its inability to accede to petitioner's request in
view of Calapatia's unsettled accounts with the club. Petitioner emerged as highest bidder at the
public auction and was issued the corresponding certificate of sale.

VGCCI demanded from Calapatia full payment of his overdue account but the latter failed to pay.
VGCCI then sold Calapatia’s share as payment. Petitioner protested the sale by VGCCI of the subject
share of stock.

Issue
Whether or not VGCCI has a lien (the unpaid claim) as contemplated in Sec. 63 of the Corporation
Code arising from Calapatia’s delinquency in membership dues.

Held
No lien.

Finally, Sec. 63 of the Corporation Code that provides that “no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation” cannot be
utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid
subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation
arising from any other transaction." In the case at bar, the subscription for the share in question has
been fully paid as evidenced by the issuance of Membership Certificate No. 1219. What Calapatia
owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not
apply.

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Fua Cun vs Summers


Facts
Chua Soco subscribed for 500 shares of stock of the defendant Banking Corporation at a par value of
P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash, for which a
receipt was issued in the following terms:

This is to certify, That Chua Soco, a subscriber for 500 shares of the capital stock of the China
Banking Corporation at its par value of P100 per share, has paid into the Treasury of the
Corporation, on account of said subscription and in accordance with its terms, the sum of twenty-five
thousand pesos (P25,000), Philippine currency…

Later, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun, securing the note with
a chattel mortgage on the shares of stock subscribed for by Chua Soco. In the meantime Chua Soco
appears to have become indebted to the China Banking Corporation for dishonored acceptances of
commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in
the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The
attachment was levied after the defendant bank had received notice of the facts that the shares had
been endorsed over to the plaintiff.

Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-
half of the subscription price of five hundred shares Chua Soco in effect became the owner of two
hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the
chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation;
that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the
sum of P5,000 in damages for wrongful attachment.

Issue
Whether or not Chua Soco can mortgage the 250 shares despite paying only half of the total
subscription.

Held
Chua Soco only has a right consisting in equity in 500 shares.

Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price
of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.

There can be no doubt that an equity in shares of stock may be assigned and that the assignment is
valid as between the parties and as to persons to whom notice is brought home. Such an assignment
exists here, though it was made for the purpose of securing a debt.

As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and
fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon
payment of the unpaid portion of the subscription price he becomes entitled to the issuance of
certificate for said five hundred shares in his favor." In effect, until he pays the full amount of the
subscription, the subscribers only have an equity interest in the shares subscribed.

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Lao vs Lao
Facts
Petitioners David and Jose Lao filed a petition with the SEC against respondent Dionisio Lao,
president of Pacific Foundry Shop Corporation (PFSC). Petitioners prayed for a declaration as
stockholders and directors of PFSC, issuance of certificates of shares in their name and to be allowed
to examine the corporate books of PFSC.

Petitioners claimed that they are stockholders of PFSC based on the General Information Sheet filed
with the SEC, in which they are named as stockholders and directors of the corporation. Petitioner
David Lao alleged that he acquired 446 shares in PFSC from his father, Lao Pong Bao, which shares
were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleged
that he acquired 333 shares from respondent Dionisio Lao himself.

Respondent denied petitioners' claim. He alleged that the inclusion of their names in the corporation's
General Information Sheet was inadvertently made. He also claimed that petitioners did not acquire
any shares in PFSC by any of the modes recognized by law, namely subscription, purchase, or
transfer. Since they were neither stockholders nor directors of PFSC, petitioners had no right to be
issued certificates or stocks or to inspect its corporate books.

Issue
Whether or not Petitioners are PSFC shareholders.

Held
Not shareholders.

Records, however, disclose that petitioners have no certificates of shares in their name. A certificate
of stock is the evidence of a holder's interest and status in a corporation. It is a written instrument
signed by the proper officer of a corporation stating or acknowledging that the person named in the
document is the owner of a designated number of shares of its stock. It is prima facie evidence that the
holder is a shareholder of a corporation.

Nor is there any written document that there was a sale of shares, as claimed by petitioners.
Petitioners did not present any deed of assignment, or any similar instrument, between Lao Pong Bao
and Hipolito Lao; or between Lao Pong Bao and petitioner David Lao. There is likewise no deed of
assignment between petitioner Jose Lao and private respondent Dionisio Lao.

Absent a written document, petitioners must prove, at the very least, possession of the certificates of
shares in the name of the alleged seller. Again, they failed to prove possession. They failed to prove
the due delivery of the certificates of shares of the sellers to them.

In contrast, respondent was able to prove that he is the owner of the disputed shares. He had in his
possession the certificates of stocks of Hipolito Lao. The certificates of stocks were also properly
endorsed to him. More importantly, the transfer was duly registered in the stock and transfer book of
the corporation. Thus, as between the parties, respondent has proven his right over the disputed
shares. As correctly ruled by the CA:

Au contraire, Dionisio C. Lao was able to show through competent evidence that he is undeniably the
owner of the disputed shares of stocks being claimed by David C. Lao. He was able to validate that he
has the physical possession of the certificates covering the shares of Hipolito Lao. Notably, it was
Hipolito Lao who properly endorsed said certificates to herein Dionisio Lao and that such transfer
was registered in PFSC's Stock and Transfer Book. These circumstances are more in accord with the
valid transfer contemplated by Section 63 of the Corporation Code.

It should be stressed that the burden of proof is on petitioners to show that they are shareholders of
PFSC. This is so because they do not have any certificates of shares in their name. Moreover, they do

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not appear in the corporate books as registered shareholders. If they had certificates of shares, the
burden would have been with PFSC to prove that they are not shareholders of the corporation

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Apocada vs NLRC
Facts
Petitioner was employed in Respondent Corporation. Later, respondent Jose M. Mirasol persuaded
petitioner to subscribe to 1,500 shares of respondent corporation at P100.00 per share or a total of
P150,000.00. He made an initial payment of P37,500.00. Afterwards, petitioner was appointed
President and General Manager of the respondent corporation. However, he later resigned.

Then, petitioner instituted with the NLRC a complaint against private respondents for the payment of
his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses
and his bonus compensation for 1986. Petitioner and private respondents submitted their position
papers to the labor arbiter. Private respondents admitted that there is due to petitioner the amount of
P17,060.07 but this was applied to the unpaid balance of his subscription in the amount of
P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for the payment
of the unpaid subscription and that, accordingly, the alleged obligation is not enforceable.

Issue
Whether or not the unpaid wages can be set-off with the unpaid balance of the subscription.

Held
Can’t be set-off.

Assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the
circumstances of this case, the unpaid subscriptions are not due and payable until the corporation
makes a call for payment. Private respondents have not presented a resolution of the board of
directors of Respondent Corporation calling for the payment of the unpaid subscriptions. It does not
even appear that the respondent corporation has sent a notice of such call to petitioner.

What the records show is that the respondent corporation deducted the amount due to petitioner from
the amount receivable from him for the unpaid subscriptions. No doubt such set-off was without
lawful basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions,
the same is not yet due and payable.

Lastly, assuming further that there was a call for payment of the unpaid subscription, the NLRC
cannot validly set it off against the wages and other benefits due petitioner. Article 113 of the Labor
Code allows such a deduction from the wages of the employees by the employer, only in three
instances, to wit:

ART. 113. Wage Deduction. — No employer, in his own behalf or in behalf of any person, shall make
any deduction from the wages of his employees, except:

(a) In cases where the worker is insured with his consent by the employer, and the deduction is to
recompense the employer for the amount paid by him as premium on the insurance;

(b) For union dues, in cases where the right of the worker or his union to checkoff has been
recognized by the employer or authorized in writing by the individual worker concerned; and

(c) In cases where the employer is authorized by law or regulations issued by the Secretary of Labor.

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PNB vs Bitulok Sawmill


Facts
The Philippine Lumber Distributing Agency, Inc. was organized upon the initiative and insistence of
the late President Manuel Roxas of the Republic of the Philippines who for the purpose, had called
several conferences between him and the subscribers and organizers of the Philippine Lumber
Distributing Agency, Inc." The purpose was praiseworthy, to insure a steady supply of lumber, which
could be sold at reasonable prices to enable the war sufferers to rehabilitate their devastated homes.
"He convinced the lumber producers to form a lumber cooperative and to pool their sources together
in order to wrest, particularly, the retail trade from aliens who were acting as middlemen in the
distribution of lumber. At the beginning, the lumber producers were reluctant to organize the
cooperative agency as they believed that it would not be easy to eliminate from the retail trade the
alien middlemen who had been in this business from time immemorial, but because the late President
Roxas made it clear that such a cooperative agency would not be successful without a substantial
working capital which the lumber producers could not entirely shoulder, and as an inducement he
promised and agreed to finance the agency by making the Government invest P9.00 by way of
counterpart for every peso that the members would invest therein,...."

This was the assurance relied upon, which stated that the amount thus contributed by such lumber
producers was not enough for the operation of its business especially having in mind the primary
purpose of putting an end to alien domination in the retail trade of lumber products. Nor was there any
appropriation by the legislature of the counterpart fund to be put up by the Government, namely,
P9.00 for every peso invested by defendant lumber producers. Accordingly, "the late President Roxas
instructed the Philippine National Bank, for the latter to grant said agency an overdraft in the original
sum of P250,000.00 which was later increased to P350,000.00. The Philippine Government did not
invest the P9.00 for every peso coming from defendant lumber producers. The loan extended to the
Philippine Lumber Distributing Agency by the Philippine National Bank was not paid.

Issue
Whether or not the subscribers to the Corporation can be relieved from paying PNB because the
Government failed its promise of investment.

Held
Can’t be relieved.

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

A corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under the conditions prescribed
by the statute or the charter or the articles of incorporation.

In the case of Velasco v. Poizat, the corporation involved was insolvent, in which case all unpaid
stock subscriptions become payable on demand and are immediately recoverable in an action
instituted by the assignee.

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Velasco vs Poizat
Facts
The defendant subscribed for 20 shares of the stock of the company, and paid upon his subscription
the sum of P500, the par value of 5 shares. The action was brought to recover the amount subscribed
upon the remaining shares.

In a meeting of the board of directors, 2 resolutions were adopted. The 1st resolution provided that
Infante, who still has 15 shares unpaid for, would be released from the obligation of his subscription
but with no refund. Meanwhile, the 2nd resolution provided that Poizat should be required to pay the
amount of his subscription upon his 15 unpaid shares. The resolution further provided that, in case he
should refuse to make such payment, the management of the corporation should be authorized to
undertake judicial proceedings against him. Poizat replied that he had been given to understand that
he was to be relieved from his subscription upon the terms conceded to Infante; and he added:

My desire to be relieved from the payment of the remaining 75 per cent arises from the poor opinion
which I entertain of the business and the faint hope of ever recovering any money invested. In
consequence, I prefer to lose the whole of the 25 per cent I have already paid rather than to continue
investing more money in what I consider to be ruinous proposition.

Afterwards, the company soon went into voluntary insolvency,

Issue
Whether or not Poizat is still liable to pay the remaining 15 shares even if the company is already
insolvent.

Held
Still liable to pay.

A stock subscription is a contract between the corporation on one side, and the subscriber on the
other, and courts will enforce it for or against either. Section 36 of the Corporation Law clearly
recognizes that a stock subscription is subsisting liability from the time the subscription is made, since
it requires the subscriber to pay interest quarterly from that date unless he is relieved from such
liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the
share he subscribed, as he would be to pay any other debt, and the right of the company to demand
payment is no less incontestable.

The provisions of the Corporation Law (Act No. 1459) recognize two remedies for the enforcement of
stock subscriptions. The first and most special remedy given by the statute consists in permitting the
corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent
subscriber. The other remedy is by action in court.

When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind up, all
unpaid stock subscriptions become payable on demand, and are at once recoverable in an action
instituted by the assignee or receiver appointed by the court. Later, a further rule gained recognition to
the effect that the receiver or assignee, in an action instituted by proper authority, could himself
proceed to collect the subscription without the necessity of any prior call whatever.

The circumstance that the board of directors in their meeting of July 13, 1914, resolved to release
Infante from his obligation upon a subscription for 15 shares is no wise prejudicial to the right of the
corporation or its assignee to recover from Poizat upon a subscription made by him. In releasing
Infante the board transcended its powers, and he no doubt still remained liable on such of his shares as
were not taken up and paid for by other persons.

The general doctrine is that the corporation has no legal capacity to release an original subscriber to
its capital stock from the obligation of paying for his shares, in whole or in part, . . .
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De Silva vs Aboitiz
Facts
The plaintiff subscribed for 650 shares of stock of the defendant corporation of the value of P500
each, of which he has paid only the total value of 200 shares, there remaining 450 shares unpaid, for
which he was indebted to the corporation in the sum of P225,000, the value thereof.

Later, he was notified by the secretary of the corporation of a resolution adopted by the board of
directors of the corporation on the preceding day, declaring the unpaid subscriptions to the capital
stock of the corporation to have become due and payable on the following May 31st and that all such
shares as may have not been paid then, with the accrued interest up to that date, will be declared
delinquent, advertised for sale at public auction, and sold, for the purpose of paying up the amount of
the subscription unless said payment was made before.

The proper advertisement having been published, as announced in the aforesaid notice, the plaintiff
filed a complaint arguing that, in prescribing another method of paying the subscription to the capital
stock different from that provided in article 46 of its by-laws, the corporation had exceeded its
executive authority.

Issue
Whether or not, under the provision of article 46 of the by-laws of the defendant corporation, the
latter may declare the unpaid shares delinquent, or collect their value by another method different
from that prescribed in the aforecited article.

Held
The remedy provided in Art. 46 of the by-laws isn’t exclusive.

As will be seen from the context of the said article, its first part specifies the manner in which the net
profit from the annual liquidation should be distributed, fixing a certain per cent for the board of
directors; another for the general manager; another for the reserve fund, and the remaining 70 per cent
to be distributed in equal parts among the shareholders. But it authorizes or empowers the board of
directors to collect the value of the shares subscribed to and not fully paid by deducting from the 70
per cent, distributable in equal parts among the shareholders, such amount as may be deemed
convenient, to be applied on the payment of the said shares, and not to pay the subscriber until the
same are fully paid up. It lies therefore, within the discretion of the board of directors to make use of
such authority.

If the board of directors does not wish to make, or does not make, use of said authority it has two
other remedies for accomplishing the same purpose.

The first and most special remedy given by the statute consists in permitting the corporation to put the
unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the
provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and must be
followed. The other remedy is by action in court.

In the instant case the board of directors of the defendant corporation elected to avail itself of the first
of said two remedies. The Board didn’t deem it advantageous to the corporation to apply on the
payment of said shares, as was authorized by the by-law, a part of the profit that was, or might have
been realized, and was distributable among the stockholders in equal parts, or to enforce payment of
such shares by bringing in court the proper action against the debtor or delinquent stockholders.

The plaintiff has no right whatsoever under the provision of the above cited article 46 of the said by-
laws to prevent the board of directors from following, for that purpose, any other method than that
mentioned in the said article, for the very reason that the same does not give the stockholders any
right in connection with the determination of the question whether or not there should be deducted

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from the 70 per cent of the profit distributable among the stockholders such amount as may be
deemed fit for the payment of subscriptions due and unpaid.

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Pardo vs Hercules Lumber


Facts
The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc., one of the
respondents herein, seeks to obtain a writ of mandamus to compel the respondents to permit the
plaintiff and his duly authorized agent and representative to examine the records and business
transactions of said company.

The respondent, Ignacio Ferrer, as acting secretary of the said company, has refused to permit the
petitioner or his agent to inspect the records and business transactions of the said Hercules Lumber
Company, Inc., at times desired by the petitioner.

The main ground upon which the defense appears to be rested has reference to the time, or times,
within which the right of inspection may be exercised. In this connection the answer asserts that in
article 10 of the By-laws of the respondent corporation it is declared "Every shareholder may examine
the books of the company and other documents pertaining to the same upon the days which the board
of directors shall annually fix."

It is further averred that the board passed a resolution to the following effect:

…with notice to the shareholders that the books of the company are at their disposition from the 15th
to 25th of the same month for examination, in appropriate hours.

The contention for the respondent is that this resolution of the board constitutes a lawful restriction on
the right conferred by statute; and it is insisted that as the petitioner has not availed himself of the
permission to inspect the books and transactions of the company within the ten days thus defined, his
right to inspection and examination is lost, at least for this year.

Issue
Whether or not the board resolution limiting the days the stockholder can inspect the books is valid.

Held
Invalid.

We are entirely unable to concur in this contention. The general right given by the statute may not be
lawfully abridged to the extent attempted in this resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when sought at unusual hours or under other improper
conditions; but neither the executive officers nor the board of directors have the power to deprive a
stockholder of the right altogether.

A by-law unduly restricting the right of inspection is undoubtedly invalid. It will be noted that our
statute declares that the right of inspection can be exercised "at reasonable hours." This means at
reasonable hours on business days throughout the year, and not merely during some arbitrary period
of a few days chosen by the directors.

In addition to relying upon the by-law, to which reference is above made, the answer of the
respondents calls in question the motive which is supposed to prompt the petitioner to make
inspection; and in this connection it is alleged that the information which the petitioner seeks is
desired for ulterior purposes in connection with a competitive firm with which the petitioner is alleged
to be connected. It is also insisted that one of the purposes of the petitioner is to obtain evidence
preparatory to the institution of an action that he means to bring against the corporation by reason of a
contract of employment which once existed between the corporation and himself. These suggestions

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are entirely apart from the issue, as, generally speaking, the motive of the shareholder exercising the
right is immaterial.6

6
Amended under the new Corporation Code. Motive is now material

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Veraguth vs Isabela Sugar Co


Facts
Eugenio Veraguth, a director and stockholder of the Isabela Sugar Company, Inc. The petitioner
prays:
1. That the respondents be required within five days from receipt of notice of this petition to
show cause why they refuse to notify the petitioner, as director, of the regular and special
meetings of the board of directors, and to place at his disposal at reasonable hours, the
minutes, and documents, and books of the aforesaid corporation, for his inspection as director
and stockholder, and to issue, upon payment of the fees, certified copies of any
documentation in connection with said minutes, documents, and books of the corporation;
and
2. That, in view of the memoranda and hearing of the parties, a final and absolute writ of
mandamus be issued to each and all of the respondents to notify immediately the petitioner
within the reglementary period, of all regular and special meetings of the board of directors
of the Isabela Sugar Central Company, Inc., and to place at his disposal at reasonable hours
the minutes, documents, and books of said corporation for his inspection as director and
stockholder, and to issue immediately, upon payment of the fees, certified copies of any
documentation in connection with said minutes, documents, and the books of the aforesaid
corporation.

Issue
Whether or not Petitioner has made out a case for mandamus.

Held
No case.

On the second question pertaining to the right of inspection of the books of the company, we find
Director Veraguth telegraphing the secretary of the company, asking the latter to forward in the
shortest possible time a certified copy of the resolution of the board of directors concerning the
payment of attorney's fees in the case against the Isabela Sugar Company and others. To this the
secretary made answer by letter stating that, since the minutes of the meeting in question had not been
signed by the directors present, a certified copy could not be furnished and that as to other
proceedings of the stockholders a request should be made to the president of the Isabela Sugar
Company, Inc. It further appears that the board of directors adopted a resolution providing for
inspection of the books and the taking of copies "by authority of the President of the corporation
previously obtained in each case."

Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable times. Pretexts may not be put forward by officers of corporations to
keep a director or shareholder from inspecting the books and minutes of the corporation, and the right
of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms
with the officers of the corporation whose records are to be inspected. A director or stockholder
cannot of course make copies, abstracts, and memoranda of documents, books, and papers as an
incident to the right of inspection, but cannot, without an order of a court, be permitted to take books
from the office of the corporation. We do not conceive, however, that a director or stockholder has
any absolute right to secure certified copies of the minutes of the corporation until these minutes have
been written up and approved by the directors.

Combining the facts and the law, we do not think that anything improper occurred when the secretary
declined to furnish certified copies of minutes which had not been approved by the board of directors,
and that while so much of the last resolution of the board of directors as provides for prior approval of
the president of the corporation before the books of the corporation can be inspected puts an illegal
obstacle in the way of a stockholder or director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone.

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Philpotts vs PMC
Facts
The petitioner, W. G. Philpotts, a stockholder in the Philippine Manufacturing Company, one of the
respondents herein, seeks by this proceeding to obtain a writ of mandamus to compel the respondents
to permit the plaintiff, in person or by some authorized agent or attorney, to inspect and examine the
records of the business transacted by said company since January 1, 1918.

Issue
Whether or not the right of inspection can be exercised through an agent.

Held
Right of inspection can be exercised through an agent.

The real controversy that has brought these litigants into court is upon the question argued in
connection with the second ground of demurrer, namely, whether the right that the law concedes to a
stockholder to inspect the records can be exercised by a proper agent or attorney of the stockholder as
well as by the stockholder in person. There is no pretense that the respondent corporation or any of its
officials has refused to allow the petitioner himself to examine anything relating to the affairs of the
company, and the petition prays for a peremptory order commanding the respondents to place the
records of all business transactions of the company, during a specified period, at the disposal of the
plaintiff or his duly authorized agent or attorney, it being evident that the petitioner desires to exercise
said right through an agent or attorney. In the argument in support of the demurrer counsel for
respondents concede that there is a right of examination in the stockholder granted under section 51 of
the Corporation Law, but it is insisted that this right must be exercised in person.

Now it is our opinion, and we accordingly hold, that the right of inspection given to a stockholder in
the provision above quoted can be exercised either by himself or by any proper representative or
attorney in fact, and either with or without the attendance of the stockholder. This is in conformity
with the general rule that what a man may do in person he may do through another; and we find
nothing in the statute that would justify us in qualifying the right in the manner suggested by the
respondents.

In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to
say that there are some things which a corporation may undoubtedly keep secret, notwithstanding the
right of inspection given by law to the stockholder; as for instance, where a corporation, engaged in
the business of manufacture, has acquired a formula or process, not generally known, which has
proved of utility to it in the manufacture of its products. It is not our intention to declare that the
authorities of the corporation, and more particularly the Board of Directors, might not adopt measures
for the protection of such process form publicity. There is, however, nothing in the petition which
would indicate that the petitioner in this case is seeking to discover anything which the corporation is
entitled to keep secret; and if anything of the sort is involved in the case it may be brought out at a
more advanced stage of the proceedings.lawphil.net

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Gonzalez vs PNB
Facts
Previous to the present action, Gonzales instituted several cases in this Court questioning different
transactions entered into by PNB with other parties. In these cases, Gonzales’ personality to sue the
bank and question the letters of credit it had extended to 3rd parties was raised. Consequently, he
acquired one share of stock from PNB. Subsequent to his aforementioned acquisition of the share,
Gonzales, in his dual capacity as a taxpayer and stockholder, filed multiple cases involving PNB or
the members of its Board of Directors.

Later, Gonzales addressed a letter to the PNB President, requesting submission to look into PNB’s
records and books. PNB denied his request.

Issue
Whether or not Gonzales’ one-share in PNB grants him the right to inspect PNB’s records despite his
alleged improper motive.

Held
No right granted.

The Corporation Law now provides the right of inspection granted to a stockholder are the following:
the records must be kept at the principal office of the corporation; the inspection must be made on
business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the
refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and
criminal liabilities.

The new Code has prescribed limitations to the same. It is now expressly required as a condition for
such examination that the one requesting it must not have been guilty of using improperly any
information through a prior examination, and that the person asking for such examination must be
"acting in good faith and for a legitimate purpose in making his demand."

The circumstances under which he acquired one share of stock in PNB purposely to exercise the right
of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to
be a stockholder in order to pry into transactions entered into by PNB even before he became a
stockholder. His obvious purpose was to arm himself with materials that he can use against PNB for
acts done by the latter when Gonzales was a total stranger to the same. He could have been impelled
by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.

Further, PNB is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule,
by the Corporation Code of the Philippines. The provision of the new Corporation Code with respect
to the right of a stockholder to demand an inspection or examination of the books of the corporation
may not be reconciled with the PNB charter on confidentiality. It is not correct to claim, therefore,
that the right of inspection under the new Corporation Code may apply in a supplementary capacity to
the charter of PNB.

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Lanuza vs CA
Facts
The Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with 700 founders’ shares
and 76 common shares as its initial capital stock subscription reflected in the articles of
incorporation. However, respondents registered the company’s stock and transfer book for the first
time in 1978, recording 33 common shares as the only issued and outstanding shares of PMMSI.
Later, a special stockholders’ meeting was called with a quorum of 27 common shares, representing
more than 2/3 of the common shares issued and outstanding.

Afterwards, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the SEC
to register his property rights over 120 founders’ shares and 12 common shares owned by their
father. The SEC affirmed Acayan’s ownership over the shares and such shares were recorded in the
stock and transfer book. In 1992, a special stockholders’ meeting was held to elect a new set of
directors. Respondents thereafter filed a petition with the SEC questioning the validity of the 1992
stockholders’ meeting, alleging that the quorum for the said meeting shouldn’t be based on the 165
issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital
stock of 776 shares, as reflected in the Articles of Incorporation.

Issue
Whether or not the basis of a quorum for a stockholders’ meeting should be the outstanding capital
stock as indicated in the articles of incorporation or that contained in the company’s stock and transfer
book.

Held
As indicated in the articles of incorporation.

The articles of incorporation has been described as one that defines the charter of the corporation and
the contractual relationships between the State and the corporation, the stockholders and the State, and
between the corporation and its stockholders. When PMMSI was incorporated, the prevailing law was
Act No. 1459, otherwise known as “The Corporation Law” and a review of PMMSI’s articles of
incorporation shows that the corporation complied with the requirements laid down by Act No. 1459.

The contents of the articles of incorporation are binding, not only on the corporation, but also on its
shareholders. Here, the articles of incorporation indicate that at the time of incorporation the
corporation had 776 issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment thereof; a statement of every alienation, sale or
transfer of stock made, the date thereof and by and to whom made; and such other entries as may be
prescribed by law.7

A quorum should be based on the totality of the shares that have been subscribed and issued. The
stock and transfer book of PMMSI can’t be used as the sole basis for determining the quorum as it
doesn’t reflect the totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and outstanding as compared to that
listed in the stock and transfer book. One who is actually a stockholder cannot be denied his right to
vote by the corporation merely because the corporate officers failed to keep its records accurately.

7
The Articles of incorporation should contain the same number of shares in the stock and transfer book.

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Associated Bank vs CA
Facts
Associated Banking Corporation and Citizens Bank and Trust Company merged to form just one
banking corporation known as Associated Citizens Bank, the surviving bank. Later, the Associated
Citizens Bank changed its corporate name to Associated Bank by virtue of the Amended Articles of
Incorporation. Afterwards, the defendant executed in favor of CBTC a promissory note whereby the
former undertook to pay the latter the sum of P2,500,000.00. The defendant, to date, still owes
plaintiff bank the amount of P2,250,000.00 exclusive of interest and other charges. Despite repeated
demands the defendant failed to pay the amount due.

Issue
Whether or not CBTC could have conveyed its interest in the promissory note to Petitioner
considering the promissory note was executed when Petitioner didn’t exist yet.

Held
CBTC could convey its interest.

Ordinarily, in the merger of two or more existing corporations, one of the combining a corporation
survives and continues the combined business, while the rest are dissolved and the surviving
corporation acquires all their rights, properties and liabilities. Although there is dissolution of the
absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the
surviving corporation automatically acquires all their rights, privileges and powers, as well as their
liabilities.

The merger, however, does not become effective upon the mere agreement of the constituent
corporations. The Code requires the approval by the Securities and Exchange Commission (SEC) of
the articles of merger that, in turn, must have been duly approved by a majority of the respective
stockholders of the constituent corporations. The same provision further states that the merger shall be
effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the
merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when
its rights, privileges, properties as well as liabilities pass on to the surviving corporation.

The September 16, 1975 Agreement of Merger, which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its effectivity "shall, for all
intents and purposes, be the date when the necessary papers to carry out this [m]erger shall have been
approved by the Securities and Exchange Commission.” The records do not show when the SEC
approved the merger. Assuming that the effectivity date of the merger was the date of its execution,
we still cannot agree that petitioner no longer has any interest in the promissory note. A closer perusal
of the merger agreement leads to a different conclusion. The provision quoted earlier has this other
clause:

Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or other
papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes,
references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]. .
. . 6 (Emphasis supplied)

Thus, the fact that the promissory note was executed after the effectivity date of the merger does not
militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of
the date of execution — entered into in the name of CBTC shall be understood as pertaining to the
surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter
clause no longer specifically refers only to contracts existing at the time of the merger, no distinction
should be made. The clause must have been deliberately included in the agreement in order to protect
the interests of the combining banks; specifically, to avoid giving the merger agreement a farcical
interpretation aimed at evading fulfillment of a due obligation.

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Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the
note shall be construed, under the very provisions of the merger agreement, as a reference to
petitioner bank, "as if such reference [was a] direct reference to" the latter "for all intents and
purposes."

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Chinese YMCA vs Ching


Facts
Ching filed with the CFI an action for mandamus with preliminary injunction against Chinese
YMCA. Respondent Ching anchored his action upon the claim that in the Membership Campaign of
the Chinese YMCA only 175 applications for membership were submitted, canvassed and accepted
on the last day of the membership campaign.

The herein petitioners, on the other hand, alleged that 249 membership applications were filed during
the campaign period. Petitioners claim that of the 249 applications submitted, 174 were favorably
endorsed by the Membership Committee to the Board of Directors and subsequently approved by the
latter. Seventy-five applications, which were among those submitted by respondent Ching were not
approved for the reason that said respondent had given "stop-payment" orders on the checks
submitted by him and some others to cover payment of the fees corresponding to these 75
applications. Accordingly, petitioners contend that the 1966 membership of the Chinese YMCA
should be constituted as they are constituted, only by those 174 applicants whose applications were
approved by the Chinese YMCA Board of Directors.

The RTC annulled the YMCA elections.

Issue
Whether or not the YMCA Elections should be annulled.

Held
The YMCA Elections are valid.

The documentary evidence itself as cited by the trial court, consisting of the applications and the
receipts for payment of the membership fees show that they were filed and paid not later than the
deadline, and this was further supported by the bank statement of the petitioner YMCA deposit
account with the China Banking Corporation and the checks paid by certain members to the YMCA
which show that the application fees corresponding to the questioned 74 applications (that raised the
total to 249 from 175) were already paid to petitioner YMCA as the time of the said deadline. No
evidence could be cited by the trial court to rebut this well nigh conclusive documentary evidence
other than respondent's unsupported suspicion which the trial court adopted in a negative manner with
its statement that it is "not improbable" that "some of those applications filed after said deadline". If
there were indeed any applications filed after the deadline, they certainly should have been positively
pin-pointed and specifically annulled.

What is worse, 175 membership applications were undisputedly filed within the deadline (including
the 75 withdrawn by respondent) and yet the 100 remaining unquestioned memberships were nullified
by the questioned decision without the individuals concerned ever having been impleaded or heard
(except the individual petitioners president and secretary).

The appealed decision thus contravened the established principle that the courts cannot strip a
member of a non-stock non-profit corporation of his membership therein without cause. Otherwise,
that would be an unwarranted and undue interference with the well established right of a corporation
to determine its membership

Finally, the appealed decision did not give due importance to the undisputed fact therein stated that
"at the board meeting of the association held on December 7, 1965, a list of 174 applications for
membership, old and new, was submitted to the board and approved by the latter, over the objection
of the petitioner [therein private respondent] who was present at said meeting." Such action of the
petitioner association's board of directors approving the 174 membership applications of old and new
members constituting its active membership as duly processed and screened by the authorized
committee just be deemed a waiver on its part of any technicality or requirement of form, since

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otherwise the association would be practically paralyzed and deprived of the substantial revenues
from the membership dues of P17,400.00 (at P100.00 per application).

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Lions Club International vs Amores


Facts
Respondent Vicente Josefa belongs to the Manila Traders Lions Club and petitioner James L. So of
the Manila Centrum Lions Club, both are affiliated with Lions Clubs International. Josefa filed a
complaint alleging that Josefa and So filed their certificates of candidacy for the position of District
Governor. Before the elections they entered into an agreement whereby So withdrew his certificate of
candidacy in favor of Josefa. Gov. Huang informed Josefa that So had not filed a new certificate of
candidacy and that the District did not recognize So as a candidate to any position.

On the day of the election, the District recognized only one candidate, Vicente Josefa, for Governor.
However, some members of the Council of Past District Governors arbitrarily set aside said report and
proclaimed So as a qualified candidate. During all this time, armed men by force and intimidation
prevented known leaders and followers of Josefa from entering the Olongapo HS. Gov. Huang
changed the venue of the election from the Olongapo HS to the Admiral Hotel because of the
deteriorating peace and order situation in the old site.

However, the Council of Past District Governors continued holding elections in the Olongapo HS and
even proclaimed So as winner. Meanwhile, Josefa was proclaimed winner in the Admiral Hotel. The
dispute was brought before Lions Club International, the mother organization, who ruled in So’s favor
and recognized him as Governor.

Issue
Whether or not the Court has jurisdiction to try the instant case

Held
The Court has no jurisdiction.

As a general rule the courts will not interfere with the internal affairs of an unincorporated association
so as to settle disputes between the members, or questions of policy, discipline, or internal
government, so long as the government of the society is fairly and honestly administered in
conformity with its laws and the law of the land, and no property or civil rights are invaded. Under
such circumstances, the decision of the governing body or established private tribunal of the
association is binding and conclusive and not subject to review or collateral attack in the courts.

The general rule of non-interference in the internal affairs of associations is, however, subject to
exceptions, but the power of review is extremely limited. Accordingly, the courts have and will
exercise power to interfere in the internal affairs of an association where law and justice so require,
and the proceedings of the association are subject to judicial review where there is fraud, oppression,
or bad faith, or where the action complained of is capricious, arbitrary, or unjustly discriminatory.
Also, the courts will usually entertain jurisdiction to grant relief in case property or civil rights are
invaded, although it has also been held that the involvement of property rights does not necessarily
authorize judicial intervention, in the absence of arbitrariness, fraud or collusion. Moreover, the courts
will intervene where the proceedings in question violate the laws of the society, or the law of the land,
as by depriving a person of due process of law. Similarly, judicial intervention is warranted where
there is a lack of jurisdiction on the part of the tribunal conducting the proceedings, where the
organization exceeds its powers, or where the proceedings are otherwise illegal.

The instant controversy between petitioner So and respondent Josefa falls squarely within the ambit of
the rule of judicial non-intervention or non-interference. The elections in dispute, the manner by
which it was conducted and the results thereof, is strictly the internal affair that concerns only the
Lions association and/or its members.

The issue was resolved within the organization of Lions Clubs International in accordance with the
Constitution and By-Laws that are not immoral, unreasonable, contrary to public policy, or in

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contravention of the laws of the land. This clearly belies the claim of injustice alleged by respondent
Josefa.

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San Juan Structural Steel vs CA


Facts
San Juan Structural Steel entered into an Agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land. As stipulated in the Agreement, plaintiff-
appellant paid the downpayment. However, defendant-appellee Motorich Sales Corporation, despite
repeated demands and in utter disregard of its commitments, had refused to execute the pertinent
transfer documents.

The President represented San Juan while the Treasurer represented Motorich in the Agreement.

Issue
Whether or not the corporate treasurer, by herself and without any authorization from he board of
directors, can validly sell a parcel of land owned by the corporation.

Held
Can’t validly sell.

Such contract cannot bind Motorich, because it never authorized or ratified such sale.

The property of the corporation is not the property of its stockholders or members and may not be
sold by the stockholders or members without express authorization from the corporation's board of
directors. A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express authorization from the corporation’s
board of directors.

A corporation may act only through its board of directors or, when authorized either by its by-laws or
by its board resolution, through its officers or agents in the normal course of business. The general
principles of agency govern the relation between the corporation and its officers or agents, subject to
the articles of incorporation, by-laws, or relevant provisions of law.

A corporate officer or agent may represent and bind the corporation in transactions with third persons
to the extent that the authority to do so has been conferred upon him, and this includes powers which
have been intentionally conferred, and also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers
as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.

Here, Motorich categorically denies that it ever authorized its treasurer, to sell the subject parcel of
land. Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized
to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Petitioner
cannot assume that the Treasurer was authorized to sell the property of the corporation. Selling is
obviously foreign to a corporate treasurer's function, which generally has been described as "to
receive and keep the funds of the corporation, and to disburse them in accordance with the authority
given him by the board or the properly authorized officers.”

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary
purpose of Motorich is marketing, distribution, export and import in relation to a general
merchandising business. Unmistakably, its treasurer is not cloaked with actual or apparent authority to
buy or sell real property, an activity that falls way beyond the scope of her general authority.

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Manuel Dulay Enterprises vs CA


Facts
Manuel R. Dulay Enterprises, Inc, owned a property known as Dulay Apartment. It’s Board of
Directors consist of, among others, Manuel Dulay as President, Virgilio Dulay as Vice-President,
Linda Dulay, Cecila Dulay-Mendoza, and Jose as Secretary.

Manuel Dulay Enterprises, through its President Manuel Dulay, obtained various loans for the
construction of its hotel project. Later, Manuel Dulay, by virtue of Board Resolution of Petitioner
Corporation, sold the subject property to Respondent Sps. Veloso. Subsequently, Manuel Dulay and
the Sps. Veloso executed a Memorandum to the Deed of Absolute Sale giving Manuel Dulay within
(2) years to repurchase the subject property.

Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private
respondent Manuel A. Torres for a loan. Upon the failure of private respondent Maria Veloso to pay
private respondent Torres, the subject property was sold to private respondent Torres as the highest
bidder in an extrajudicial foreclosure sale. Maria Veloso then transferred her right to repurchase,
arising from the foreclosure sale, to Manuel Dulay. However, Dulay wasn’t able to redeem the
property.

Torres then filed an action against petitioner corporation, Virgilio Dulay for the recovery of
possession of the property. The Corporation alleged that Manuel Dulay sold the property without the
knowledge of the Board of Directors.

Issue
Whether or not Manuel Dulay’s sale to Maria Veloso is valid.

Held
The sale is valid.

Petitioner Corporation is classified as a close corporation and consequently a board resolution


authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for
the action of its president. At any rate, corporate action taken at a board meeting without proper call
or notice in a close corporation is deemed ratified by the absent director unless the latter promptly
files his written objection with the secretary of the corporation after having knowledge of the meeting
which, in his case, petitioner Virgilio Dulay failed to do.

Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private
respondents spouses Veloso is null and void as the alleged Board Resolution was passed without the
knowledge and consent of the other members of the board of directors cannot be sustained.

Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never
participated nor was even aware of any meeting or resolution authorizing the mortgage or sale of the
subject premises is difficult to believe. On the contrary, he is very much privy to the transactions
involved. To begin with, he is a incorporator and one of the board of directors designated at the time
of the organization of Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said entity is loosely
referred to as a "family corporation". The nomenclature, if imprecise, however, fairly reflects the
cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation
of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close
relatives namely, three (3) children and their father whose name identifies their corporation

Besides, the fact that petitioner Virgilio Dulay executed an affidavit that he was a signatory witness to
the execution of the post-dated Deed of Absolute Sale of the subject property in favor of private
respondent Torres indicates that he was aware of the transaction executed between his father and
private respondents and had, therefore, adequate knowledge about the sale of the subject property to
private respondents.
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Barlin vs Ramirez
Facts
The defendant, Ramirez, having been appointed by the plaintiff parish priest, took possession of the
church on the 5th of July 1901. He administered it as such under the orders of his superiors until the
14th day of November 1902. His successor having been then appointed, the latter made a demand on
this defendant for the delivery to him of the church, convent, and cemetery, and the sacred ornaments,
books, jewels, money, and other property of the church. The defendant, by a written document of that
date, refused to make such delivery.

In January, 1904, the plaintiff brought this action against the defendant, Ramirez, alleging in his
amended complaint that the Roman Catholic Church was the owner of the church building, the
convent, cemetery, the books, money, and other property belonging thereto, and asking that it be
restored to the possession thereof and that the defendant render an account of the property which he
had received and which was retained by him, and for other relief.

Issue
Whether or not the Roman Catholic Church owns the Church in question.

Held
The Roman Catholic Church has the right to exclusive possession and control of the Church.

The truth is that, from the earliest times down to the cession of the Philippines to the United States,
churches and other consecrated objects were considered outside of the commerce of man. They were
not public property, nor could they be subjects of private property in the sense that any private person
could the owner thereof. They constituted a kind of property distinctive characteristic of which was
that it was devoted to the worship of God.

But, being material things was necessary that some one should have the care and custody of them and
the administration thereof, and the question occurs, To whom, under the Spanish law, was intrusted
that possession and administration? For the purposes of the Spanish law there was only one religion.
That was the religion professed by the Roman Catholic Church. It was for the purposes of that
religion and for the observance of its rites that this church and all other churches in the Philippines
were erected. The possession of the churches, their care and custody, and the maintenance of religious
worship therein were necessarily, therefore, entrusted to that body. It was, by virtue of the laws of
Spain, the only body that could under any circumstances have possession of, or any control over, any
church dedicated to the worship of God. By virtue of those laws this possession and right of control
were necessarily exclusive. It is not necessary or important to give any name to this right of
possession and control exercised by the Roman Catholic Church in the church buildings of the
Philippines prior to 1898. It is not necessary to show that the church as a juridical person was the
owner of the buildings. It is sufficient to say that this right to the exclusive possession and control of
the same, for the purposes of its creation, existed.

It, therefore, follows that in 1898, and prior to the treaty of Paris, the Roman Catholic Church had by
law the exclusive right to the possession of this church and it had the legal right to administer the
same for the purposes for which the building was consecrated. It was then in the full and peaceful
possession of the church with the rights aforesaid.

Lastly, the Roman Catholic Church has legal personality in the Philippine Islands.

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IEMELIF Inc. vs Juane


Facts
IEMELIF is a religious corporation existing and duly organized under Philippine laws. Juane was a
former minister or pastor of IEMELIF and the Bishop of IEMELIF assigned him as resident pastor of
the Tondo Cathedral. Because of such assignment, Juan occupied the Tondo Cathedral and took
charge of the facilities and property there. A year later, the Bishop assigned Juane to the Sta. Mesa
Congregation. However, Juane refused to vacate the Tondo Cathedral and continued exercising the
powers of resident pastor therein. IEMELIF then expelled Juane as resident pastor and demanded the
latter to vacate the Tondo Cathedral. Juane stubbornly refused causing IEMELIF to file an unlawful
detainer suit.

Issue
Whether or not IEMELIF’s transformation from a corporation sole to a corporation aggregate
divested IEMELIF of personality to eject Juane.

Held
IEMELIF wasn’t divested of personality to eject Juane.

Juane pursued his argument that the transformation of IEMELIF from a corporation sole to a
corporation aggregate was legally defective and, therefore, IEMELIF had no personality to eject
Juane from the subject property.

As held by the Court of Appeals, even if the transformation of IEMELIF from a corporation sole to a
corporation aggregate was legally defective, its head or governing body, i.e., Bishop Lazaro, whose
acts were approved by the Highest Consistory of Elders, still did not change.

A corporation sole is one formed by the chief archbishop, bishop, priest, minister, rabbi or other
presiding elder of a religious denomination, sect, or church, for the purpose of administering or
managing, as trustee, the affairs, properties and temporalities of such religious denomination, sect or
church. As opposed to a corporation aggregate, a corporation sole consists of a single member, while
a corporation aggregate consists of two or more persons.

If the transformation did not materialize, the corporation sole would still be Bishop Lazaro, who
himself performed the questioned acts of removing Juane as Resident Pastor of the Tondo
Congregation. If the transformation did materialize, the corporation aggregate would be composed of
the Highest Consistory of Elders, which nevertheless approved the very same acts. As either Bishop
Lazaro or the Highest Consistory of Elders had the authority to appoint Juane as Resident Pastor of
the IEMELIF Tondo Congregation, it also had the power to remove him as such or transfer him to
another congregation.

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Santos vs Roman Catholic


Facts
Santos’ husband, Engracio Orense, died leaving an estate and his will which provided, among others,
that 6 parcels of land were left to the Roman Catholic Church as trustee for various purposes. Santos
was appointed administrator of the estate and submitted a proposed partition of the estate to the court.
The report stated that the estate was indebted to PNB and the Pacific Commercial Company. The
estate was able to pay off Pacific Commercial but unable to do so with PNB. Santos then filed a
motion to sell 6 parcels of land, 3 of which were held in trust by the Roman Catholic Church, to pay
the PNB debt. The court approved the motion.

Later, the Roman Catholic Archbishop, a corporation sole, filed a motion asking that the order
authorizing the sale of the property willed to the Roman Catholic Church be revoked on the ground
that parish priest have no control over the temporalities of the Roman Catholic Church and that,
therefore, the consent given by Father Julian Ope was invalid and of no legal effect.

Issue
Whether or not the consent given by the Parish Priest to the sale of land held in trust by the Roman
Catholic Church is binding upon the Church.

Held
The consent is void and without effect.

The appellant also maintains that the court below erred in vacating the order of sale upon an
unverified motion and without the presentation of evidence. In answer, we may say that the court
could properly take judicial notice of the fact that the corporation sole, the Roman Catholic
Archbishop of Nueva Caceres is the administrator of the temporalities of that church in the diocese
within which the land in question is situated and that the parish priest have no control thereover.

As all other facts upon which the order appealed from is based appear in the record, it was
unnecessary to require the presentation of other evidence.

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Roman Catholic vs LRC


Facts
Mateo L. Rodis sold a parcel of land in favor of the Roman Catholic Apostolic Administrator of
Davao Inc., a corporation sole with Msgr. Clovis Thibault, a Canadian citizen, as actual incumbent.
When the deed of sale was presented to Register of Deeds of Davao for registration, the Register of
Deeds required said corporation sole to submit an affidavit declaring that 60 per cent of the members
thereof were Filipino citizens.

The vendee explained the corporation sole has only one incorporator; and the totality of the Catholic
population of Davao would become the owner of the property bought to be registered.

The matter was referred to the Land Registration Commissioner en consulta for resolution in
accordance. A resolution was rendered holding that the vendee was not qualified to acquire private
lands in the Philippines in the absence of proof that at least 60 per centum of the capital, property, or
assets of the Roman Catholic Apostolic Administrator of Davao, Inc., was actually owned or
controlled by Filipino citizens, there being no question that the present incumbent of the corporation
sole was a Canadian citizen. It ordered the Registered Deeds of Davao to deny registration of the deed
of sale in the absence of proof of compliance with such condition.

Issue
Whether or not a religious corporation registered as a corporation sole can own real property when its
actual incumbent is an alien.

Held
The corporation sole with an alien for an incumbent can own real property.

A corporation sole is a special form of corporation usually associated with the clergy and was
designed to facilitate the exercise of the functions of ownership carried on by the clerics for and on
behalf of the church which was regarded as the property owner.

A corporation sole consists of one person only, and his successors (who will always be one at a time),
in some particular station, who are incorporated by law in order to give them some legal capacities
and advantages, particularly that of perpetuity, which in their natural persons they could not have had.
In this sense, the king is a sole corporation; so is a bishop, or dens, distinct from their several
chapters.

That leaves no room for doubt that the bishops or archbishops, as the case may be, as corporation's
sole are merely administrators of the church properties that come to their possession, in which they
hold in trust for the church. Church properties acquired by the incumbent of a corporation sole pass,
by operation of law, upon his death not his personal heirs but to his successor in office.

Under the circumstances of this case, We might safely state that even before the establishment of the
Philippine Commonwealth and of the Republic of the Philippines every corporation sole then
organized and registered had by express provision of law the necessary power and qualification to
purchase in its name private lands located in the territory in which it exercised its functions or
ministry and for which it was created, independently of the nationality of its incumbent unique and
single member and head, the bishop of the dioceses. It can be also maintained without fear of being
gainsaid that the Roman Catholic Apostolic Church in the Philippines has no nationality and that the
framers of the Constitution, as will be hereunder explained, did not have in mind the religious
corporations sole when they provided that 60 per centum of the capital thereof be owned by Filipino
citizens.

In view of these peculiarities of the corporation sole, it would seem obvious that when the specific
provision of the Constitution invoked by respondent Commissioner, was under consideration, the
framers of the same did not have in mind or overlooked this particular form of corporation. If this
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were so, as the facts and circumstances already indicated tend to prove it to be so, then the
inescapable conclusion would be that this requirement of at least 60 per cent of Filipino capital was
never intended to apply to corporations sole, and the existence or not a vested right becomes
unquestionably immaterial.

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Republic vs IAC
Facts
The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr. Jose T. Sanchez, filed an
application to confirm title to four (4) parcels of land. As basis for the application, the applicant
claimed title to the various properties through either purchase or donation dating as far back as 1928.

In behalf of the Director of Lands and the Director of the Bureau of Forest Development, the Solicitor
General filed an Opposition, alleging therein among others, that the applicant did not have an
imperfect title or title in fee simple to the parcel of land being applied for.

The Court granted the application from which the Republic appealed.

Issue
Whether or not the Roman Catholic Bishop of Lucena, as a corporation sole, is qualified to confirm
its title to 4 parcels of land subject of this case

Held
Roman Catholic Bishop of Lucena is qualified because it already has a vested right in the lands before
the 1973 Constitution was passed.

The parties herein do not dispute that since the acquisition of the four (4) lots by the applicant, it has
been in continuous possession and enjoyment thereof, and such possession, together with its
predecessors-in-interest, covering a period of more than 30 years (at least from the date of survey in
1928).

The questioned posed before this Court has been settled in the case of DIRECTOR OF LANDS vs.
Intermediate Appellate Court which reversed the ruling first enunciated in the 1982 case of Manila
Electric Co. vs. CASTRO BARTOLOME, imposing the constitutional ban on public land acquisition
by private corporations which ruling was declared emphatically as res judicata in Director of Lands
vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc., In said case, (Director of Lands v. IAC, supra),
this Court stated that a determination of the character of the lands at the time of institution of the
registration proceedings must be made. If they were then still part of the public domain, it must be
answered in the negative.

If, on the other hand, they were already private lands, the constitutional prohibition against their
acquisition by private corporation or association obviously does not apply.

It must be emphasized that the Court is not here saying that a corporation sole should be treated like
an ordinary private corporation. There is no doubt that a corporation sole by the nature of its
Incorporation is vested with the right to purchase and hold real estate and personal property. It need
not therefore be treated as an ordinary private corporation because whether or not it be so treated as
such, the Constitutional provision involved will, nevertheless, be not applicable.

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Director of Lands vs CA
Facts
Respondent Iglesia ni Cristo filed an application to register in its name a parcel of land. In said
application, Respondent alleged that it was the owner in fee simple of the land afore-described,
having acquired title thereto by virtue of a Deed of Absolute Sale by Aquelina de la Cruz in its favor
and that applicant and its predecessors-in-interest had been in actual, continuous, public, peaceful and
adverse possession and occupation of said land in the concept of owner for more than thirty [30]
years.

The Republic of the Philippines, represented by the Director of Lands, opposed the application on the
following grounds: [1] the applicant and its predecessors-in-interest did not possess sufficient title to
acquire ownership in fee simple of the parcel of land applied for; [2] neither the applicant nor its
predecessors-in-interest have been in open, continuous, exclusive and notorious possession and
occupation of the land in question; and, [3] the subject parcel of land is a portion of the public domain
belonging to the Republic of the Philippines not subject to private appropriation.

Issue
Whether or not Iglesia ni Cristo, a corporation sole, is qualified to own alienable parcels of public
land under the 1973 Constitution.

Held
Iglesia ni Cristo is qualified because the 1973 Constitution has no application to the instant case with
rights being vested before the 1973 Constitution took effect.

As observed at the outset, had this case been resolved immediately after it was submitted for decision,
the result may have been quite adverse to private respondent. For the rule then prevailing is that a
juridical person, private respondent in particular, is disqualified under the 1973 Constitution from
applying for registration in its name alienable public land, as such land ceases to be public land "only
upon the issuance of title to any Filipino citizen claiming it under section 48[b]" of Commonwealth
Act No. 141, as amended.

Since then, however, this Court had occasion to re-examine the rulings in these cases. Thus, in the
recent case of Director of Lands v. Intermediate Appellate Court, We categorically stated that the
majority ruling in Meralco is "no longer deemed to be binding precedent", and that "[T]he correct
rule, ... is that alienable public land held by a possessor, personally or through his predecessors-in-
interest, openly, continuously and exclusively for the prescribed statutory period [30] years under the
Public Land Act, as amended is converted to private property by mere lapse or completion of said
period, ipso jure.”

The crucial factor to be determined therefore is the length of time private respondent and its
predecessors-in-interest had been in possession of the land in question prior to the institution of the
instant registration proceedings. Taking the year 1936 as the reckoning point, there being no showing
as to when the Ramoses first took possession and occupation of the land in question, the 30-year
period of open, continuous, exclusive and notorious possession and occupation required by law was
completed in 1966. The completion by private respondent of this statutory 30-year period has dual
significance in the light of Section 48[b] of Commonwealth Act No. 141, as amended and prevailing
jurisprudence: [1] at this point, the land in question ceased by operation of law to be part of the public
domain; and [2] private respondent could have its title thereto confirmed through the appropriate
proceedings as under the Constitution then in force, private corporations or associations were not
prohibited from acquiring public lands, but merely prohibited from acquiring, holding or leasing such
type of land in excess of 1,024 hectares.

If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when
the registration proceedings were commenced. This being the case, the prohibition under the 1973
Constitution would have no application. Otherwise construed, if in 1966, private respondent could
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have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973
Constitution can neither impair nor defeat.

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PNB vs CFI
Facts
Private respondents are the registered owners of 3 parcels of land. Private respondents leased the
lands to Philippine Blooming Mills, Co., Inc., (PBM for brevity). PBM was duly organized and
incorporated on January 19, 1952 with a corporate term of twenty-five (25) years.

The contract of lease provides that the term of the lease is for 20 years beginning from the date of the
contract renewable for another 20 years at the Lessee’s option, if the Lessee extends its corporate life.

Later, PBM transferred the lease contract to PNB in consideration of the loans PNB granted to PMB.
Afterwards, PBM executed in favor of PNB a real estate mortgage covering all the improvements
constructed by PBM on the leased premises for a loan.

PBM then filed a petition for registration of improvements in the titles of real property owned by
private respondents. Private respondents filed a motion in the same proceedings seeking to cancel the
annotations on respondents' certificates of title pertaining to the assignment by PBM to PNB of the
former's leasehold rights, inclusion of improvements and the real estate mortgages made by PBM in
favor of PNB, on the ground that the contract of lease entered into between PBM and respondents-
movants had already expired by the failure of PBM and/or its assignee to exercise the option to renew
the second 20-year lease commencing on March 1, 1974 and also by the failure of PBM to extend its
corporate existence in accordance with law.

Issue
Whether or not Respondents can validly cancel the entries made in the TCT.

Held
Respondents can validly cancel the entries because the lease contract already expired when PBM
failed to extend its corporate life.

Clearly, the option of the lessee to extend the lease for another period of 20 years can be exercised
only if the lessee as corporation renews or extends its corporate term of existence in accordance with
the Corporation Code that is the applicable law.

In the instant case, the initial term of the contract of lease that commenced on March 1, 1954 ended
on March 1, 1974. PBM as lessee continued to occupy the leased premises beyond that date with the
acquiescence and consent of the respondents as lessor. However, PBM as a corporation had a
corporate life of only 25 years which ended in January 19, 1977. PBM didn’t take the necessary steps
to extend its corporate life.

Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner dissolved or unless said period is extended.
Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance
with the legal requisites for the extension of the period, the corporation ceases to exist and is
dissolved ipso facto

When the period of corporate life expires, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized. But it shall nevertheless be continued
as a body corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it gradually to settle and
close its affairs, to dispose of and convey its property and to divide its assets

Considering the foregoing in relation to the contract of lease between the parties herein, when PBM's
corporate life ended on January 19, 1977 and its 3-year period for winding up and liquidation expired
on January 19, 1980, the option of extending the lease was likewise terminated on January 19, 1977

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because PBM failed to renew or extend its corporate life in accordance with law. From then on, the
respondents can exercise their right to terminate the lease pursuant to the stipulations in the contract.

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Republic vs Security Credit & Acceptance Corp.


Facts
This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security
and Acceptance Corporation for allegedly engaging in banking operations without the authority
required therefor by the General Banking Act.

The record shows Respondent filed its Articles of Incorporation and By-Laws with the SEC. The SEC
referred the matter to the Central Bank to determine if Respondent complied with the General
Banking Act. The Central Bank deemed that Respondent didn’t comply with the General Banking
Act. The SEC then advised the corporation to comply first with the requirements of the General
Banking Act

Later, the police and Central Bank, by virtue of a search warrant, searched the premises of the
corporation and seized documents and records thereof relative to its business operations; that upon
examination and evaluation of said documents and records, the intelligence division of the Central
Bank submitted, to the Acting Deputy Governor thereof, a memorandum dated September 10, 1962,
finding that the corporation was performing banking functions.

Issue
Whether or not Respondent was actually performing banking functions despite not complying with
the General Banking Act.

Held
Respondent was performing banking functions.

Although, admittedly, Defendant Corporation has not secured the requisite authority to engage in
banking, defendants deny that its transactions partake of the nature of banking operations. It is
conceded, however, that, in consequence of a propaganda campaign therefor, a total of 59,463 savings
account deposits have been made by the public with the corporation and its 74 branches, with an
aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation
deemed suitable therefor. It is clear that these transactions partake of the nature of banking, as the
term is used in Section 2 of the General Banking Act.

A bank has been defined as a moneyed institute founded to facilitate the borrowing, lending and
safekeeping of money and to deal, in notes, bills of exchange, and credits.

An investment company which loans out the money of its customers, collects the interest and charges
a commission to both lender and borrower, is a bank.

Any person engaged in the business carried on by banks of deposit, of discount, or of circulation is
doing a banking business, although but one of these functions is exercised.

Accordingly, Defendant Corporation has violated the law by engaging in banking without securing
the administrative authority required in Republic Act No. 337. That the illegal transactions thus
undertaken by defendant corporation warrant its dissolution is apparent from the fact that the
foregoing misuse of the corporate funds and franchise affects the essence of its business, that it is
willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public,
owing to the number of persons affected thereby.

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Financing Corp. of the Phil vs Teodoro


Facts
Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de Panlilio and Efigenia Vda. de Paredes,
in their own behalf and in behalf of the other minority stockholders of the Financing Corporation of
the Philippines, filed a complaint against the said corporation and J. Amado Araneta, its president and
general manager, claiming among other things alleged gross mismanagement and fraudulent conduct
of the corporate affairs of the defendant corporation by J. Amado Araneta, and asking that the
corporation be dissolved; that J. Amado Araneta be declared personally accountable for the amounts
of the unauthorized and fraudulent disbursements and disposition of assets made by him, and that he
be required to account for said assets, and that pending trial and disposition of the case on its merits a
receiver be appointed to take possession of the books, records and assets of the defendant corporation
preparatory to its dissolution and liquidation and distribution of the assets.

The trial court granted the petition for the appointment of a receiver and designated Mr. Alfredo Yulo
as such receiver with a bond of P50,000.

Issue
Whether or not minority stockholders can ask for the corporation’s dissolution

Held
As a general rule, minority stockholders can’t ask for the corporation’s dissolution. Except in
exceptional cases like this one.

The main contention of the petitioners in opposing the appointment of a receiver in this case is that
said appointment is merely an auxiliary remedy; that the principal remedy sought by the respondents
in the action in Negros Occidental was the dissolution of the Financing Corporation of the
Philippines; that according to the law a suit for the dissolution of a corporation can be brought and
maintained only by the State through its legal counsel, and that respondents, much less the minority
stockholders of said corporation, have no right or personality to maintain the action for dissolution,
and that inasmuch as said action cannot be maintained legally by the respondents, then the auxiliary
remedy for the appointment of a receiver has no basis.

True it is that the general rule is that the minority stockholders of a corporation cannot sue and
demand its dissolution. However, there are cases that hold that even minority stockholders may ask
for dissolution, this, under the theory that such minority members, if unable to obtain redress and
protection of their rights within the corporation, must not and should not be left without redress and
remedy.

We repeat that although as a rule, minority stockholders of a corporation may not ask for its
dissolution in a private suit, and that such action should be brought by the Government through its
legal officer in a quo warranto case, at their instance and request, there might be exceptional cases
wherein the intervention of the State, for one reason or another, cannot be obtained, as when the State
is not interested because the complaint is strictly a matter between the stockholders and does not
involve, in the opinion of the legal officer of the Government, any of the acts or omissions warranting
quo warranto proceedings, in which minority stockholders are entitled to have such dissolution. When
they bring such action or private suit, the trial court has jurisdiction and may or may not grant the
prayer, depending upon the facts and circumstances attending it. The trial court's decision is of course
subject to review by the appellate tribunal.

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Government vs Phil Sugar Estate Development


Facts
This is an action in the nature of quo warrant to have the charter of the defendant corporation declared
forfeited. The parties entered into a stipulation of facts declaring the following
1. That defendant was a corporation duly organised and the Tayabas Land Company was a
partnership;
2. That a contract was entered into between the defendant and The Tayabas Land Company by
virtue of which the defendant delivered to the said The Tayabas Land Company
P304,459.42;
3. That the money thus received was devoted to the purchase of the real estate in the Province
of Tayabas along the proposed right of way of the Manila Railroad Company in that
province;
4. That the purpose of these purchases was for resale to the Manila Railroad Company or any
other person offering an acceptable price.

Issue
Whether or not Respondent has forfeited its franchise in buying the land at a low price and later
selling them to the Manila Railroad Company for a higher price.

Held
Respondent has forfeited its franchise unless it separates absolutely with The Tayabas Land
Company.

The Respondent is engaged in the business of buying and selling real estate which is unnecessary to
carry out the purpose for which it was created. Such business isn’t provided for in the Respondent’s
charter.

Section 212 of Act No. 190 provides a judgment that may be rendered in said case:
When in any such action, it is found and adjudged that the corporation has, by any act done or
omitted surrendered, or forfeited its corporate rights, privileges, and franchise, or has not used the
same during the term of five years, judgment shall be entered that it be ousted and excluded therefrom
and that it be dissolved; but when it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise
or exercised a power not conferred by law, but not of such a character as to work a surrender or
forfeiture of its franchise, judgment shall be rendered that it be ousted from the continuance of such
offense or the exercise of such power.

It will be seen that said section (212) gives the court a wide discretion in its judgment in depriving
corporations of their franchise.

While it is true that the courts are given a wide discretion in ordering the dissolution of corporations
for violations of its franchises, etc., yet nevertheless, when such abuses and violations constitute or
threaten a substantial injury to the public or such as to amount to a violation of the fundamental
conditions of the contract (charter) by which the franchises were granted and thus defeat the purpose
of the grant, then the power of the courts should be exercised for the protection of the people.

Under the law the people of the Philippine Islands have guaranteed the payment of the interest upon
cost of the construction of the railroad that occupied or occupies at least some of the lands purchased
by the defendant. Every additional dollar of increase in the price of the land purchased by the railroad
company added that much to the costs of construction and thereby increased the burden imposed upon
the people. The very and sole purpose of the intervention of the defendants in the purchase of the land
from the original owners was for the purpose of selling the same to the Railroad Company at profit —
at an increased price, thereby directly increasing the burden of the people by way of additional
taxation. The purpose of the intervention of the defendant in the transactions in question was to enrich
itself at the expense of the taxpayers of the Philippine Islands, who had, by a franchise granted,
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permitted the defendant to exist and do business as a corporation. The defendant was not willing to
allow the Railroad Company to purchase the land of the original owners. Its intervention with The
Tayabas Land Company was to obtain an increase in the price of the land in a resale of the same to
the railroad company. The conduct of the defendant in the premises merits the severest condemnation
of the law.

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Sumera vs Valencia
Facts
The corporation "Devota de Nuestra Señora de la Correa” was organized in 1920. Said corporation
was already in operation when, on petition of various stockholders thereof, an investigation into its
financial condition revealed that Eugenio Valencia, manager of the corporation, had withdraw the
amount of P600 from the remaining assets of the corporation.

On September 26, 1927, a petition was filed for the voluntary dissolution of the corporation referred
to. The court approved the voluntary dissolution, ordering the liquidation of the properties of the
corporation and appointing Damaso P. Nicolas assignee to take charge of such liquidation. The
corporation was formally dissolved in 1928. Afterwards, Damaso, in his capacity as assignee,
demanded the P600 from Valencia but the latter failed to pay the full amount.

Later, Damaso resigned from the office of assignee, and was substituted by the herein appellant,
Tiburcio Sumera, who then filed a motion with the court asking that Eugenio Valencia be ordered to
deliver to him the remaining amount belonging to the funds of the corporation. The action was filed in
1936.

Issue
Whether or not the action has prescribed because it was filed beyond the 3-year period from the time
the corporation was dissolved.

Held
The action hasn’t prescribed.

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

For the foregoing considerations, we are of the opinion and so hold that when a corporation is
dissolved and the liquidation of its assets is placed in the hands of a receiver or assignee, the period of
three years prescribed by section 77 of Act No. 1459 known as the Corporation Law is not applicable,
and the assignee may institute all actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.

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Gelano vs CA
Facts
Private respondent Insular Sawmill was a corporation organized on September 17, 1945 with a
corporate life of fifty (50) years, or up to September 17, 1995.

On July 14, 1952, Respondent executed a joint and several promissory note with Carlos Gelano in
favor of China Bank in the amount of P8,000.00 payable in sixty (60) days. Gelano failed to pay the
note upon maturity causing China Bank to collect from Respondent. Gelano was unable to fully
reimburse Respondent causing the latter to file a collection suit against Gelano on May 29, 1959.

In the meantime, Respondent amended its Articles of Incorporation to shorten its term of existence up
to December 31, 1960 only. On November 20, 1964 and almost four (4) years after the dissolution of
the corporation, the trial court rendered a decision in favor of Respondent.

Issues
Whether or not a corporation, whose corporate life had ceased by the expiration of its term of
existence, could still continue prosecuting and defending suits after its dissolution and beyond the
period of three years provided for under Act No. 1459, otherwise known as the Corporation law, to
wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assignee.

Held
The corporation can still continue prosecuting and defending such suits.

When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the
Corporation Law, it still has the right until December 31, 1963 to prosecute in its name the present
case. After the expiration of said period, the corporation ceased to exist for all purposes and it can no
longer sue or be sued.

However, a corporation that has a pending action and which cannot be terminated within the three-
year period after its dissolution is authorized to convey all its property to trustees to enable it to
prosecute and defend suits by or against the corporation beyond the Three-year period. Although
private respondent did not appoint any trustee, yet the counsel who prosecuted and defended the
interest of the corporation in the instant case and who in fact appeared in behalf of the corporation
may be considered a trustee of the corporation at least with respect to the matter in litigation only.
Said counsel had been handling the case when the same was pending before the trial court until it was
appealed before the Court of Appeals and finally to this Court.

We therefore hold that there was a substantial compliance with Section 78 of the Corporation Law
and as such, private respondent Insular Sawmill, Inc. could still continue prosecuting the present case
even beyond the period of three (3) years from the time of its dissolution.

The trustee may commence a suit that can proceed to final judgment even beyond the three-year
period. No reason can be conceived why a suit already commenced by the corporation itself during its
existence, not by a mere trustee who, by fiction, merely continues the legal personality of the
dissolved corporation should not be accorded similar treatment allowed — to proceed to final
judgment and execution thereof.

The word "trustee" as used in the corporation statute must be understood in its general concept that
could include the counsel to whom was entrusted in the instant case, the prosecution of the suit filed
by the corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its
dissolution is more for the protection of its creditor and stockholders. Debtors like the petitioners
herein may not take advantage of the failure of the corporation to transfer its assets to a trustee,
assuming it has any to transfer which petitioner has failed to show, in the first place. To sustain
petitioners' contention would be to allow them to enrich themselves at the expense of another, which
all enlightened legal systems condemn.
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Clemente vs CA
Facts
The "Sociedad Popular Calambeña" organization conceived by the parties as a "Sociedad Anonima.”
The "sociedad" actually did business and held itself out as a corporation from November 1909, up to
September 24, 1932. Its principal business was cockfighting or the operation and management of a
cockpit.

On June 8, 1911, or during its existence, the "Sociedad" acquired a parcel of land from the Friar
Lands Estate.

Plaintiff’s evidence also shows that Mariano Elepaño and Pablo Clemente, now both deceased, were
original stockholders of the aforesaid "sociedad." Such shares of stocks were however later distributed
and apportioned to his heirs. In accordance with the aforesaid project of partition, the "sociedad"
issued stock certificates to the aforesaid heirs of Pablo Clemente.

On the basis of their respective stocks certificates, the heirs of Clemente jointly claim ownership over
the above described property, asserting that their fathers being the only known stockholders of the
"sociedad" known as the "Sociedad Popular Calamba," they, to the exclusion of all others, are entitled
to be declared owners of the parcel of land.

Issue
Whether or not petitioners can be held, given their submissions, to have succeeded in establishing for
themselves a firm title to the property in question.

Held
Petitioners have failed to establish title.

All that appear to be certain are that the "Sociedad Popular Calambeña," believed to be a "sociedad
anonima" and for a while engaged in the operation and management of a cockpit, has existed some
time in the past; that it has acquired the parcel of land here involved; and that the plaintiffs'
predecessors, Mariano Elepaño and Pablo Clemente, had been original stockholders of the sociedad.
Except in showing that they are the successors-in-interest of Elepaño and Clemente, petitioners have
been unable to come up with any evidence to substantiate their claim of ownership of the corporate
asset.

If, indeed, the sociedad has long become defunct, it should behoove petitioners, or anyone else who
may have any interest in the corporation, to take appropriate measures before a proper forum for a
peremptory settlement of its affairs.

We might invite attention to the various modes provided by the Corporation Code (see Sees. 117-122)
for dissolving, liquidating or winding up, and terminating the life of the corporation. Among the
causes for such dissolution are when the corporate term has expired or when, upon a verified
complaint and after notice and hearing, the Securities and Exchange Commission orders the
dissolution of a corporation for its continuous inactivity for at least five (5) years.

The corporation continues to be a body corporate for three (3) years after its dissolution for purposes
of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its remaining assets. It may, during the three-year
term, appoint a trustee or a receiver who may act beyond that period.

The termination of the life of a juridical entity does not by itself cause the extinction or diminution of
the rights and liabilities of such entity or those of its owners and creditors. If the three-year extended
life has expired without a trustee or receiver. having been expressly designated by the corporation
within that period, the board of directors (or trustees) itself, may be permitted to so continue as
"trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of
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directors or trustees, those having any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make
proper representations with the Securities and Exchange commission, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the
corporate concerns.

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Pepsi Cola Products vs CA


Facts
Pepsi-Cola Products Philippines, Inc. Employees and Workers Union (PCEWU) is a duly- registered
labor union of the employees of the Pepsi-Cola Distributors of the Philippines (PCDP). PCEWU filed
a Complaint against PCDP with the DOLE for payment of overtime services rendered by fifty-three
(53) of its members, on the eight (8) days duly- designated as Muslim holidays for calendar year
1985, in their respective places of assignment.

DOLE rendered a Decision in favor of PCEWU, ordering PCDP to pay the claims of its workers.
PCDP appealed to the NLRC but the latter affirmed the decision. Both parties filed a motion for
reconsideration. Pending resolution of the said motions, ownership of various Pepsi-Cola bottling
plants was transferred to petitioner Pepsi-Cola Products Philippines, Inc. (PCPPI).

The NLRC dismissed the complaint of the PCEWU for the reason that, with the cessation and
dissolution of the corporate existence of the PCDP, rendering any judgment against it is incapable of
execution and satisfaction. The NLRC ruled that it was not competent for it to proceed against the
PCDP because it had ceased to exist as a juridical entity. Thus, it no longer resolved the respondent’s
motion for partial reconsideration, as well as the motion for reconsideration of the employees.

Issue
Whether or not the NLRC retained jurisdiction despite PCDP’s dissolution.

Held
NLRC retained jurisdiction.

The NLRC clearly erred in perceiving that, upon the petitioner’s acquisition of the PCDP, the latter
lost its corporate personality.

The PCDP was still in existence when the complaint was filed, and that the supervening dissolution of
the corporation did not warrant the dismissal of the complaint against it. Every corporation is given
three (3) years to wind up its affairs. Hence, in case any litigation is filed by or against the
corporation within the three (3)-year period which could not be terminated within the expiration of the
same, such period must necessarily be prolonged until the final determination of the case, for if the
rule were otherwise, corporations in liquidation would lose what should justly belong to them or
would be exempt from the payment of just obligations through mere technicality, something that
courts should not countenance.

The termination of the life of a corporate entity does not by itself cause the extinction or diminution of
the rights and liabilities of such entity. If the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation, within that period, the board of
directors (or trustees) itself, may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation.

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Expert Travel & Tours vs. CA


Facts
Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and
licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law firm. KAL, through Atty.
Aguinaldo, filed a Complaint against ETI for the collection of a sum of money. Atty. Aguinaldo, who
indicated therein that he was the resident agent and legal counsel of KAL and had caused the
preparation of the complaint, signed the verification and certification against forum shopping.

ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to
execute the verification and certificate of non-forum shopping. KAL opposed the motion, contending
that Atty. Aguinaldo was its resident agent and was registered as such with the Securities and
Exchange Commission (SEC) as required by the Corporation Code of the Philippines. It was further
alleged that Atty. Aguinaldo was also the corporate secretary of KAL. Appended to the said
opposition was the identification card of Atty. Aguinaldo, showing that he was the lawyer of KAL.

Atty. Aguinaldo claimed that he had been authorized to file the complaint through a resolution of the
KAL Board of Directors approved during a special meeting. Finally, KAL submitted an Affidavit of
even date, executed by its general manager Suk Kyoo Kim, alleging that the board of directors
conducted a special teleconference, which he and Atty. Aguinaldo attended. It was also averred that
in the same teleconference, the board of directors approved a resolution authorizing Atty. Aguinaldo
to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim also
alleged, however, that the corporation had no written copy of the aforesaid resolution. The trial court
denied the motion to dismiss.

Issue
Whether or not Atty. Aguinaldo had authority to execute the certificate of non-forum shopping on his
client’s behalf.

Held
Atty. Aguinaldo had no authority.

As gleaned from the certification, there was no allegation that Atty. Aguinaldo had been authorized to
execute the certificate of non-forum shopping by the respondent’s Board of Directors; moreover, no
such board resolution was appended thereto or incorporated therein. While Atty. Aguinaldo is the
resident agent of the respondent in the Philippines, this does not mean that he is authorized to execute
the requisite certification against forum shopping. Under the law, Atty. Aguinaldo was not
specifically authorized to execute a certificate of non-forum shopping. This is because while a
resident agent may be aware of actions filed against his principal (a foreign corporation doing
business in the Philippines), such resident may not be aware of actions initiated by its principal.

The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not specifically
authorized to execute the said certification. It attempted to show its compliance with the rule
subsequent to the filing of its complaint by submitting a resolution purporting to have been approved
by its Board of Directors during a teleconference allegedly with Atty. Aguinaldo and Suk Kyoo Kim
in attendance. However, such attempt of the respondent casts veritable doubt not only on its claim that
such a teleconference was held, but also on the approval by the Board of Directors of the resolution
authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping.

Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference
along with the respondent’s Board of Directors, the Court is not convinced that one was conducted;
even if there had been one, the Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification
against forum shopping. The Court is, thus, more inclined to believe that the alleged teleconference

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never took place, and that the resolution allegedly approved by the respondent’s Board of Directors
during the said teleconference was a mere concoction purposefully foisted on the RTC, the CA and
this Court, to avert the dismissal of its complaint against the petitioner

M.E. Grev vs. Insular Lumber Co.


Facts
According to the stipulation of facts, the defendants was and is a corporation organized and existing
under the laws of the State of New York, licensed to engage in business in the Philippines. The
plaintiff was and is the owner and possessor of 57 shares of the capital stock of the defendant
corporation; that he does not own three per cent of the total capital stock of the corporation, nor does
he represent stockholders who own three per cent of its capital; that during the years 1932 and 1933,
the plaintiff asked the offices of the defendant in the Philippines to permit him to examine the books
and records of the business of said defendant, but he was not allowed to do so; that under the law of
New York, the right of a stockholder to examine the books and records of a corporation organized
under the laws of that State, have been, during the entire period material to this action, only those
provided in section 77 of the Stock Corporation Law, which reads as follows:

Financial Statement to Stockholders: Stockholders owning three per centum of the shares of any corporation other than a
moneyed corporation may make a written request to the treasurer or other fiscal officer thereof for a statement of its affairs,
under oath, embracing a particular account of all its assets and liabilities, and the treasurer shall make such statement and deliver
it to the person making the request within thirty days thereafter, and keep on file in the office of the corporation for twelve
months thereafter a copy of such statement, which shall at all times during business hours be exhibited to any stockholders
demanding an examination thereof; but the treasurer shall not be required to deliver more than one such statement in any one
year. The Supreme Court, or any justice thereof, may upon application, for good cause shown, extend the time for making and
delivering such statement. For every neglect or refusal to comply with the provisions of this section the corporation shall and pay
to the person making such request the sum of Fifty Dollars, and the further sum of ten dollars for every twenty-four hours
thereafter until such statement shall be furnished.

Issue
Whether or not plaintiff is entitled, as stockholder of the defendant-appellee Insular Lumber
Company, to inspect and examine the books records of the transactions of said defendant.

Held
Plaintiff isn’t entitled

Section 77 of the Stock Corporation Law of New York is conceded to be the law that governs the
right of a stockholder to examine the books and papers of a corporation, it is a question fully settled
that the plaintiff not being a stockholder owning at least three per cent of the capital stock of the
defendant corporation, has no right to examine the books and records of the corporation nor to require
a statement of its affairs embracing a particular account of its assets and liabilities.

Plaintiff-appellant contends, however, that, in accordance with our Corporation Law, under which the
defendant company was registered to do business in the Philippines, the plaintiff, as stockholder, is
entitled to inspect the record of the transactions of the defendant corporation and this right has not
been altered by section 77 of the Stock Corporation Law of New York.

However, plaintiff-appellant is bound to adhere to the agreement made by him with the defendant
corporation to the effect that the rights of a stockholder, under the law of New York, to examine the
books and records of a corporation organized under the laws of said State, and during the entire period
material to this action, are only those provided in section 77 Stock Corporation Law of New York.
Neither can this right under the common law be granted the defendant in the present case, since the
same can only be granted at the discretion of the court, under certain conditions, to wit:

1. That the stockholder of a corporation in New York has the right to inspect its books and records if it can be shown that he
seeks information for an honest purpose or to protect his interest as stockholder.
2. That said right to examine and inspect the books of the corporation must be exercised in good faith, for a specific and
honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes.

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The appellant has made no effort to prove or even allege that the information he desired to obtain
through the examination and inspection of defendant's books was necessary to protect his interests as
stockholder of the corporation, or that it was for a specific and honest purpose, and not to gratify
curiosity, nor for speculative or vexatious purposes.

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Mentholatum Co. vs Mangaliman


Facts
The Mentholatum Co., Inc., and the Philippine-American Drug Co. Inc. instituted an action against
Anacleto Mangaliman, Florencio Mangaliman and the Director of the Bureau of Commerce for
infringement of trademark and unfair competition. Plaintiffs prayed for the issuance of an order
restraining Anacleto and Florencio Mangaliman from selling their product "Mentholiman," and
directing them to render an accounting of their sales and profits and to pay damages. The complaint
stated, among other particulars, that the Mentholatum Co., Inc., is a Kansas corporation which
manufactures Mentholatum, a medicament and salve; that the Philippine-American Drug co., Inc., is
its exclusive distributing agent in the Philippines authorized by it to look after and protect its interests;
that the Mentholatum Co., Inc., registered with the Bureau of Commerce and Industry the word,
"Mentholatum," as trademark for its products; that the Mangaliman brothers prepared a medicament
and salve named "Mentholiman" which they sold to the public packed in a container of the same size,
color and shape as "Mentholatum"; and that, as a consequence of these acts of the defendants,
plaintiffs suffered damages from the diminution of their sales and the loss of goodwill and reputation
of their product in the market.

In the Court of Appeals, the decision of the trial court was, on June 29, 1940, reversed, said tribunal
holding that the activities of the Mentholatum Co., Inc., were business transactions in the Philippines,
and that, by section 69 of the Corporation Law, it may not maintain the present suit.

Issue
Whether or not the plaintiff is transacting business in the Philippines.

Held
Plaintiff is transacting business in the Philippines and therefore can’t prosecute this action because it
doesn’t have the requisite license.

In the present case, no dispute exists as to facts:


1. That the plaintiff, the Mentholatum Co., Inc., is a foreign corporation;
2. That it is not licensed to do business in the Philippines. The controversy, in reality, hinges
on the question of whether the said corporation is or is not transacting business in the
Philippines.

No general rule or governing principle can be laid down as to what constitutes "doing" or "engaging
in" or "transacting" business. Indeed, each case must be judged in the light of its peculiar
environmental circumstances. The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it was organized or whether it
has substantially retired from it and turned it over to another. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in progressive prosecution of,
the purpose and object of its organization.

The Court of Appeals concluded "it is undeniable that the Mentholatum Co., through its agent, the
Philippine-American Drug Co., Inc., has been doing business in the Philippines by selling its products
here since the year 1929, at least."

The complaint filed clearly stated that the Philippine-American Drug Co., Inc., is the exclusive
distributing agent in the Philippine Islands of the Mentholatum Co., Inc., in the sale and distribution
of its product known as the Mentholatum. It follows that whatever transactions the Philippine-
American Drug Co., Inc., had executed in view of the law, the Mentholatum Co. Inc., did it itself.
And, the Mentholatum Co., Inc., being a foreign corporation doing business in the Philippines without
the license required by section 68 of the Corporation Law, it may not prosecute this action for
violation of trademark and unfair competition. Neither may the Philippine-American Drug Co., Inc.,

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maintain the action here for the reason that the distinguishing features of the agent being his
representative character and derivative authority, it cannot now, to the advantage of its principal,
claim an independent standing in court.

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Gen. Garments Corp vs. Director of Patents


Facts
The General Garments Corporation, organized and existing under the laws of the Philippines, is the
owner of the trademark "Puritan,"

The Puritan Sportswear Corporation, organized and existing in and under the laws of the state of
Pennsylvania, U.S.A., filed a petition with the Philippine Patent Office for the cancellation of the
trademark "Puritan" registered in the name of General Garments Corporation, alleging ownership and
prior use in the Philippines of the said trademark on the same kinds of goods, which use it had not
abandoned; and alleging further that the registration thereof by General Garments Corporation had
been obtained fraudulently.

On March 30, 1964 General Garments Corporation moved to dismiss the petition on the ground of
lack of capacity to sue.

Issue
Whether or not Puritan Sportswear Corporation, which is a foreign corporation not licensed to do
business and not doing business in the Philippines, has legal capacity to maintain a suit in the
Philippine Patent Office for cancellation of a trademark registered therein.

Held
Puritan Sportswear Corporation has legal capacity to sue.

Petitioner contends that Puritan Sportswear Corporation (hereinafter referred to as respondent), being
a foreign corporation which is not licensed to do and is not doing business in the Philippines, is not
considered as a person under Philippine laws and consequently is not comprehended within the term
"any person" who may apply for cancellation of a mark or trade-name. That respondent is a juridical
person should be beyond serious dispute. The fact that it may not transact business in the Philippines
unless it has obtained a license for that purpose, nor maintain a suit in Philippine courts for the
recovery of any debt, claim or demand without such license does not make respondent any less a
juridical person. Indeed an exception to the license requirement has been recognized in this
jurisdiction, namely, where a foreign corporation sues on an isolated transaction.

The object of the statute was not to prevent the foreign corporation from performing single acts, but to
prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to
render it amenable to suit in the local courts ... the implication of the law (being) that it was never the
purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order
for business from the Philippines, from securing redress in the Philippine Courts. ..."

To recognize respondent as a juridical person, however, does not resolve the issue in this case. It
should be postulated at this point that respondent is not suing in our courts "for the recovery of any
debt, claim or demand," for which a license to transact business in the Philippines is required, subject
only to the exception already noted. Respondent went to the Philippine Patent Office on a petition for
cancellation of a trademark registered by petitioner, invoking Section 17(c) in relations to Section
4(d) of the Trademark Law.

A foreign corporation which has never done ... business in the Philippine Islands and which is
unlicensed and unregistered to do business here, but is widely and favorably known in the Islands
through the use therein of its products bearing its corporate and trade name has a legal right to
maintain an action in the Islands… in the doing of which it does not seek to enforce any legal or
contract rights arising from, or growing out of any business which it has transacted in the Philippine
Islands.

It may also be stated that the ruling in the Mentholatum case was subsequently derogated when
Congress purposely enacted RA 638 which allows a foreign corporation or a juristic person to bring
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an action in the Philippine Courts for infringement of a mark or trade-name, for unfair competition, or
false designation of origin and false description, whether or not it has been licensed to do business in
the Philippines at the time it brings complaint.

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Facilities Management Corp. vs Dela Osa


Facts
Leonardo dela Osa sought his reinstatement with full backwages, as well as the recovery of his
overtime compensation, swing shift and graveyard shift differentials. Respondents filed their letter-
answer without substantially denying the material allegations of the basic petition but interposed the
following special defenses, namely: That respondents Facilities Management Corporation and J. S.
Dreyer are domiciled in Wake Island which is beyond the territorial jurisdiction of the Philippine
Government; that respondent J. V. Catuira, though an employee of respondent corporation presently
stationed in Manila, is without power and authority of legal representation; and that the employment
contract between petitioner and respondent corporation carries -the approval of the Department of
Labor of the Philippines.

Subsequently, respondents filed a motion to dismiss the subject petition on the ground that this Court
has no Jurisdiction over the instant case; petitioner then interposed an opposition thereto. Said motion
was denied by this Court in its Order sustaining jurisdiction in accordance with the prevailing doctrine
of the Supreme Court in similar cases.

We have also noted that the principal question involved to wit: Is the mere act by a non-resident
foreign corporation of recruiting Filipino workers for its own use abroad, in law doing business in the
Philippines? The principal issue presented in this special civil action is whether petitioner has been
'doing business in the Philippines' so that the service of summons upon its agent in the Philippines
vested the Court of First Instance of Manila with jurisdiction.

Issue
Whether or not the plaintiff appellant has been doing business in the Philippines, considering the fact
that it has no license to transact business in the Philippines as a foreign corporation.

Held
Plaintiff has been doing business in the Philippines.

From the facts of record, the petitioner may be considered as doing business in the Philippines.

Indeed, the petitioner, in compliance with Act 2486 as implemented by Department of Labor Order
No. IV dated May 20, 1968 had to appoint Jaime V. Catuira, 1322 A. Mabini, Ermita, Manila as agent
for FMC with authority to execute Employment Contracts and receive, in behalf of that corporation,
legal services from and be bound by processes of the Philippine Courts of Justice, for as long as he
remains an employee of FMC. It is a fact that when the summons for the petitioner was served on
Jaime V. Catuira he was still in the employ of the FMC.

In his motion to dismiss, petitioner admits that Mr. Catuira represented it in this country 'for the
purpose of making arrangements for the approval by the Department of Labor of the employment of
Filipinos who are recruited by the Company as its own employees for assignment abroad.' In effect,
Mr. Catuira was an officer, representing petitioner in the Philippines.

Indeed, if a foreign corporation, not engaged in business in the Philippines, is not banned from
seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done against a person or persons in the
Philippines.

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Far East International Import vs. Nankai Kogv.


Facts
The Far East International Import & Export Corporation, Far East for short, organized under
Philippine Laws, entered into a Contract of Sale of Steel Scrap with the Nankai Kogyo Co., Ltd.,
Nankai for short, a foreign corporation organized under Japanese Laws with address at Osaka, Japan.
Nankai opened a letter for credit with the China Banking Corporation, issued by the Nippon Kangyo,
Ltd., Tokyo, Japan, Three boats sent by Nankai arrived in the Philippines. On March 19, 1957, the
expiration of the export license, only 1,058.6 metric tons of scrap steel was loaded. Far East failed to
extend its license and so the two boats sailed to Japan without any cargo, the third (SS Mina) only
1,058.6 metric tons.

Nankai confirmed and acknowledged delivery of the 1,058.6 metric tons of steel scraps, but asked for
damages. Far East wrote the Everett Steamship Corporation, requesting the issuance of a complete set
of the Bill of Lading for the shipment, in order that payment thereof be effected against the Letter of
Credit. Everett and Nankai refused. As repeated requests for the issuance of the of Bill Lading were
ignored, Far East filed the present complaint directed against Nankai and the shipping company, to
issue and deliver to the plaintiff, a complete set of negotiable of Lading.

At the trial, plaintiff Far East, thru the testimony of its Secretary Pablo Ocampo, showed that the
transaction in question was intended to be the beginning of business to be undertaken by Nankai, as in
fact, the representatives of the company had made inquiries as to the operation of mines and mining
rights in this jurisdiction; (Nankai) thru its representatives, Messrs. Ishida and Tominaga, established
a temporary office at Room 517 Luneta Hotel and manifested their intention to put up one at the
Madrigal building, which did not materialize, to the belated confirmation of the head office;

Issue
Whether or not the trial court acquired jurisdiction over the subject matter and over the person of the
defendant-appellant

Held
Nankai’s single transaction of buying steel indicates an intention to do business in the Philippines and
consequently is covered by the rule on summons of private foreign corporations.

The above rule indicates three modes of effecting service of summons upon a private, foreign
corporation, viz:
1. By serving upon the agent designated in accordance with law to accept service of summons;
2. If there is no resident agent, by service on the government official designated by law to that effect; and
3. By serving on any officer or agent of said corporation with Philippines.

The plaintiff complied with the third stated above, for it has been shown that Mr. Ishida, who
personally signed the contract for the purchase of the scrap in question in behalf of the Nankai Kogyo,
the Trade Manager of said Company, Mr. Tominaga the Chief of the Petroleum Section of the same
company and Mr. Yoshida was the man-in-charge of the Import Section of the company's Tokyo
Branch. All these three, including the first two who were served with Summons, were officers of the
defendant company.

The appellant alleges that the lower court did not acquire jurisdiction, because it was not doing
business in the Philippines and the requirement of summons had not been fulfilled. In the instant case,
the testimony of Atty. Pablo Ocampo that appellant was doing business in the Philippines
corroborated by no less than Nabuo Yoshida, one of appellant's officers, that he was sent to the
Philippines by his company to look into the operation of mines, thereby revealing the defendant's
desire to continue engaging in business here, after receiving the shipment of the iron under
consideration, making the Philippines a base thereof.

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The rule stated in the preceding section that the doing of a single act doesn’t constitute business
within the meaning of statutes prescribing the conditions to be complied with the foreign corporations
must be qualified to this extent, that a single act may bring the corporation. In such a case, the single
act of transaction is not merely incidental or casual, but is of such character as distinctly to indicate a
purpose on the part of the foreign corporation to do other business in the state, and to make the state
a basis of operations for the conduct of a part of corporation's ordinary business.

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Agilent Technologies vs. Integrated Silicon Technology


Facts
Petitioner Agilent Technologies Singapore (Pte.), Ltd. (“Agilent”) is a foreign corporation, which, by
its own admission, is not licensed to do business in the Philippines. Respondent Integrated Silicon
Technology Philippines Corporation (“Integrated Silicon”) is a private domestic corporation, 100%
foreign owned. Respondents are current members of Integrated Silicon’s board of directors. The
juridical relation among the various parties in this case can be traced to a 5-year Value Added
Assembly Services Agreement (“VAASA”) between Integrated Silicon and the Hewlett-Packard
Singapore (Pte.) Under the terms of the VAASA, Integrated Silicon was to locally manufacture and
assemble fiber optics for export to HP-Singapore. HP-Singapore, for its part, was to consign raw
materials to Integrated Silicon; transport machinery to the plant of Integrated Silicon; and pay
Integrated Silicon the purchase price of the finished products. With the consent of Integrated Silicon,
HP-Singapore assigned all its rights and obligations in the VAASA to Agilent.

Integrated Silicon filed a complaint for “Specific Performance and Damages” against Agilent and its
officers. It alleged that Agilent breached the parties’ oral agreement to extend the VAASA. Agilent
filed a separate complaint against Integrated Silicon. Agilent prayed that defendants immediately
return and deliver to plaintiff its equipment, machineries and the materials to be used for fiber-optic
components that were left in the plant of Integrated Silicon.

Issue
Whether or not Agilent can sue before Philippine Court despite having no license to do business.

Held
Agilent doesn’t need a license because it isn’t engaged in business.

Respondents argue that since Agilent is an unlicensed foreign corporation doing business in the
Philippines, it lacks the legal capacity to file suit. A foreign corporation without a license is not ipso
facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a
foreign corporation is “transacting” or “doing business” in the country. The Corporation Code
prevents an unlicensed foreign corporation “doing business” in the Philippines from accessing our
courts.

However, an unlicensed foreign corporation doing business in the Philippines may bring suit in
Philippine courts against a Philippine citizen or entity that had contracted with and benefited from
said corporation. Such a suit is premised on the doctrine of estoppel. A party is estopped from
challenging the personality of a corporation after having acknowledged the same by entering into a
contract with it. This principle prevents a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes chiefly in cases where such person has
received the benefits of the contract.

The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus
be condensed in four statements:
1. If a foreign corporation does business in the Philippines without a license, it cannot sue before
the Philippine courts
2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction
3. If a foreign corporation does business in the Philippines without a license, a Philippine citizen
or entity which has contracted with said corporation may be estopped from challenging the
foreign corporation’s corporate personality in a suit brought before Philippine courts; and
4. If a foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction.

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Bulakhidas vs. Navarro


Facts
This is a petition for review on certiorari of the order of the then Court of First Instance of Rizal;
Branch 11 dated August 21, 1978, dismissing petitioner's complaint.

Petitioner, a foreign partnership, filed a complaint against a domestic corporation, Diamond Shipping
Corporation, before the Court of First Instance of Rizal for the recovery of damages allegedly caused
by the failure of the said shipping corporation to deliver the goods shipped to it by petitioner to their
proper destination. Paragraph 1 of said complaint alleged that plaintiff is "a foreign partnership firm
not doing business in the Philippines" and that it is "suing under an isolated transaction." Defendant
filed a motion to dismiss the complaint on the ground that plaintiff has no capacity to sue and that the
complaint does not state a valid cause of action against defendant.

Acting on said motion to dismiss, the Court of First Instance dismissed the complaint on the ground
that plaintiff being "a foreign corporation or partnership not doing business in the Philippines it
cannot exercise the right to maintain suits before our Courts."

Issue
Whether or not a foreign corporation not engaged in business in the Philippines can institute an action
before our courts.

Held
It is settled that if a foreign corporation is not engaged in business in the Philippines, it may not be
denied the right to file an action in Philippine courts for isolated transactions.

Except from another case:


…While plaintiff is a foreign corporation without license to transact business in the Philippines, it
does not follow that it has no capacity to bring the present action. Such license is not necessary
because it is not engaged in business in the Philippines. In fact, the transaction herein involved is the
first business undertaken by plaintiff in the Philippines, although on a previous occasion the National
Rice and Corn Corporation to carry rice cargo from abroad to the Philippines chartered plaintiff’s
vessel. These two isolated transactions do not constitute engaging in business in the Philippines
within the purview of Sections 68 and 69 of the Corporation Law so as to bar plaintiff from seeking
redress in our courts.

A foreign corporation not engaged in business in the Philippines is not barred from seeking redress
from the courts of the Philippines. The complaint filed by petitioner herein sufficiently alleged that it
is a foreign partnership (or corporation) not engaged in business in the Philippines and that it was
suing under an isolated transaction.

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Swedish East vs. Manila Port Service


Facts
The petitioner, The Swedish East Asia Co., Ltd., a corporation duly organized and existing under the
laws of Sweden with principal offices at Gothenburg, Sweden, is admittedly not licensed to do
business in the Philippines.

The MS "SUDAN", owned and operated by the petitioner, arrived at the port of Manila and
discharged cargo destined thereto unto the custody of the respondent Manila Port Service. By mistake,
cargo destined for Hongkong consisting of sixteen bundles of "lifts of mild steel tees window
sections" covering which the petitioner had issued a bill of lading in the name of S.A. Citals
Lodelinsart, as shipper, and of Welcome Trading Co. of Hongkong, as consignee, were also landed at
Manila. The erroneous discharge was obviously engendered by the fact that the same ship on the same
day discharged forty similar bundles destined for consignees in the Philippines.

Vicente Pacheco, claims manager of the International Harvester McCleod and Company, the
petitioner's agent in Manila, upon being notified by letter from Hongkong of the erroneous discharge,
sent the company's customs men to investigate, who found the sixteen bundles at the customs piers.
Pacheco then instructed their customs men to arrange for the reshipment of the sixteen bundles to
Hongkong and accomplish all necessary papers for payment of customs, arrastre and storage charges
due on the goods, which charges were as a matter of fact paid by the petitioner. However, the
reshipment of all the sixteen bundles was not effected, because only eight of these were available at
the time that all were scheduled to be loaded on board the M.S. "Minikoi" bound for Hongkong, as
the remaining eight could not be found. After an exchange of letters between Pacheco and the Manila
Port Service, in the last of which the latter advised the International Harvester of its inability to locate
the eight missing bundles, the petitioner, on January 10, 1958, presented a formal claim for the value
of the missing cargo to the Manila Port Service in the sum of P2, 349.62. On March 8, 1960 the
petitioner received a letter from the respondents rejecting the claim.

On March 13, 1961 the petitioner filed a complaint in the Court of First Instance of Manila, for
recovery of the amount of P2, 349.62, the value of the missing goods, which sum it had paid to the
consignee in Hongkong, as well as the amount of P2, 000 in moral damages and P1, 000 as attorney's
fees, and costs.

Issue
Whether or not Petitioner has capacity to sue despite having no license to engage in business in the
Philippines.

Held
Petitioner has capacity to sue because the bundles were inadvertently left in Manila not as a result of
any business or transaction.

The respondents challenge the petitioner's capacity to sue, it being admittedly a foreign corporation
without license to engage in business in the Philippines, citing section 69 of the Corporation Law. It
must be stated however that this section is not applicable to a foreign corporation performing single
acts or "isolated transactions." There is nothing in the record to show that the petitioner has been in
the Philippines engaged in continuing business or enterprise for which it was organized, when the
sixteen bundles were erroneously discharged in Manila, for it to be considered as transacting business
in the Philippines. The fact is that the bundles, the value of which is sought to be recovered, were
landed not as a result of a business transaction, "isolated" or otherwise, but due to a mistaken belief
that they were part of the shipment of forty similar bundles consigned to persons or entities in the
Philippines. There is no justification, therefore, for invoking the provisions of section 69 of the
Corporation Law.

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Puma vs IAC
Facts
On July 25, 1985, the petitioner, a foreign corporation duly organized and existing under the laws of
the Federal Republic of Germany and the manufacturer and producer of "PUMA PRODUCTS," filed
a complaint for infringement of patent or trademark with a prayer for the issuance of a writ of
preliminary injunction against the private respondent before the Regional Trial Court of Makati.

Prior to the filing of the said civil suit, three cases were pending before the Philippine Patent Office,
namely:

Inter Partes Case No. 1259 entitled 'PUMA SPORTSCHUHFABRIKEN v. MIL-ORO


MANUFACTURING CORPORATION, respondent-applicant which is an opposition to the
registration of petitioner's trademark 'PUMA and DEVICE' in the PRINCIPAL REGISTER;

Inter Partes Case No. 1675 similarly entitled, 'PUMA SPORTSCHUHFABRIKEN RUDOLF
DASSLER, K.G., petitioner, versus MIL-ORO MANUFACTURING CORPORATION,
respondent-registrant,' which is a case for the cancellation of the trademark registration of
the petitioner; and

Inter Partes Case No. 1945 also between the same parties this time the petitioner praying for
the cancellation of private respondent's Certificate of Registration No. 26875 (pp. 40-41, 255,
Rollo) (pp. 51 -52, Rollo)

On July 31, 1985, the trial court issued a temporary restraining order, restraining the private
respondent and the Director of Patents from using the trademark "PUMA' or any reproduction,
counterfeit copy or colorable imitation thereof, and to withdraw from the market all products bearing
the same trademark.

Issue
Whether or not Petitioner has capacity to sue in a case for trademark and unfair competition.

Held
Petitioner has capacity to sue because it’s a case for trademark and unfair competition.

In the leading case of La Chemise Lacoste, S.A .v. Fernandez, (129 SCRA 373), we ruled:

But even assuming the truth of the private respondents allegation that the petitioner failed to
allege material factor in its petition relative to capacity to sue, the petitioner may still
maintain the present suit against respondent Hernandes. As early as 1927, this Court was,
and it still is, of the view that a foreign corporation not doing business in the Philippines
needs no license to sue before Philippine courts for infringement of trademark and unfair
competition…this Court held that a foreign corporation which has never done any business in
the Philippines and which is unlicensed and unregistered to do business here, but is widely
and favorably known in the Philippines through the use therein of its products bearing its
corporate and tradename, has a legal right to maintain an action in the Philippines to
restrain the residents and inhabitants thereof from organizing a corporation therein bearing
the same name as the foreign corporation, when it appears that they have personal
knowledge of the existence of such a foreign corporation, and it is apparent that the purpose
of the proposed domestic corporation is to deal and trade in the same goods as those of the
foreign corporation.

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People vs. Rosenthal


Facts
Nicasio Osmeña and Jacob Rosenthal, two of ten promoters…the former being, in addition, one of the
members of the board of directors of, the O.R.O. Oil Co., Inc., a domestic corporation, the main
objects and purposes of which were "to mine, dig for, or otherwise obtain from earth…and to
manufacture, refine, prepare for market, buy, sell and transport the same in crude or refined
condition"…according to the said agreement which shares were speculative securities, because the
value thereof materially depended upon proposed promise for future promotion and development of
the oil business above mentioned rather than on actual tangible assets and conditions thereof, did then
and there, with deliberate intent of evading the provisions of sections 2 and 5 of the said Act No.
2581, and…trade in, negotiate and speculate with, their shares aforesaid, by making personally or
through brokers or agents repeated and successive sales of the said shares at a price ranging from
P100 to P300 per share, as follows:

The accused Nicasio Osmeña sold 163 shares to nine different parties, and the accused Jacob Rosenthal sold 21 shares to seven others,
without first obtaining the corresponding written permit or license from the Insular Treasurer of the Commonwealth of the Philippines, as by
law required.

The accused Nicasio Osmeña sold 185 shares to nine different parties, and the accused Jacob Rosenthal sold 12 shares to seven others,
without first obtaining the corresponding written permit or license form the Insular Treasurer of the Commonwealth of the Philippines, as by
law provided.

Issue
Whether or not the law provides sufficient standards for the Insular Treasurer to cancel certificates or
permits for sale of speculative securities.

Held
The law provides sufficient standards in the form of ‘public interest.’

Under section 2 of Act No. 2581, every person, partnership, association, or corporation attempting to
offer to sell in the Philippines speculative securities of any kind or character whatsoever, is under
obligation to file previously with the Insular Treasurer the various documents and papers enumerated
therein and to pay the required tax of twenty pesos…he shall issue to such person, partnership,
association or corporation a certificate or permit reciting that such person, partnership, association or
corporation has complied with the provisions of this Act, and that such person, partnership,
association or corporation, its brokers or agents are entitled to offer the securities named in said
certificate or permit for sale"; that "said Treasurer shall furthermore have authority, whenever in his
judgment it is in the public interest, to cancel said certificate or permit", and that "an appeal from the
decision of the Insular Treasurer may be had within the period of thirty days to the Secretary of
Finance."

Appellants argue that, while Act No. 2581 empowers the Insular Treasurer to issue and cancel
certificates or permits for the sale of speculative securities, no standard or rule is fixed in the Act
which can guide said official in determining the cases in which a certificate or permit ought to be
issued, thereby making his opinion the sole criterion in the matter of its issuance, with the result that,
legislative powers being unduly delegated to the Insular Treasurer, Act No. 2581 is unconstitutional.

We are of the opinion that the Act furnishes a sufficient standard for the Insular Treasurer to follow in
reaching a decision regarding the issuance or cancellation of a certificate or permit. The certificate or
permit to be issued under the Act must recite that the person, partnership, association or corporation
applying therefor "has complied with the provisions of this Act", and this requirement, construed in
relation to the other provisions of the law, means that a certificate or permit shall be issued by the
Insular Treasurer when the provisions of Act No. 2581 have been complied with. Upon the other
hand, the authority of the Insular Treasurer to cancel a certificate or permit is expressly conditioned
upon a finding that such cancellation "is in the public interest." In view of the intention and purpose
of Act No. 2581 — to protect the public against "speculative schemes which have no more basis than
so many feet of blue sky" and against the "sale of stock in fly-by-night concerns, visionary oil wells,
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distant gold mines, and other like fraudulent exploitations", — we incline to hold that "public interest"
in this case is a sufficient standard to guide the Insular Treasurer in reaching a decision on a matter
pertaining to the issuance or cancellation of certificates or permits.

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People vs. Fernandez


Facts
Together with other persons, organized a corporation under the name of Philippine Mutual
Cooperative Society, Inc.

…The corporation has established and admitted two classes of members, namely, class O and class S. Each member in O must pay a due of
P5 that entitled him to a regular benefit aid of P40. The payment of all and each of these benefit aids should be made whenever 16 new
members had been admitted. The second member would receive said aid of after 12 new members had been admitted. The third member and
each of those following would receive their respective benefit aids of P40 after the admission of each group of eleven new members. Those
of class S had to pay a due of P2 each, which was later increased to P2.50, and they would be entitled to a benefit aid of P12, which was
subsequently increased to P20 as soon as sixteen new members were admitted. The second member and each of those following would
receive their corresponding benefit aids after the admission of every group of ten new members. The members of both classes, who may
have received the benefit aids of the corporation, were bound to renew their subscriptions by paying every time they received said aid the
amount of p5 or P2.50, according to the class to which they belonged. The corporation would and did issue to each member a certificate of
membership that specified the class to which he belonged. The benefit aids were due and payable to the members strictly by turns according
to the respective dates of their enrollment. If after two years from the date of his admission, no benefit aid had been paid a member, the
corporation promised to refund him, on demand, the dues paid by him plus 25 per cent of the same. In order to obtain more members and
carry out its purpose, the corporation offered to each member, who secured new members, a commission of 10 per cent for each new
member, which was payable from the dues collected from the new members. Said commission was later reduced to 5 per cent, but an
additional 5 per cent for traveling expenses was allowed.

The corporation, without having previously obtained a license from the Insular Treasurer as required
by law and through the distribution of 20,000 prospectuses to the public, secured and admitted 477
members of class O and 278 members of class S…the corporation admitted 18,294 members of class
O and 4,351 members of class S…the corporation received dues from its members in the amount of
P103,514…there only remained as cash account the sum of P18,461.45…there was a cash balance of
P20,151.98.

Issue
Whether or not the shares are speculative securities.

Held
The certificates of membership issued by the Philippine Mutual Cooperative Society, Inc., are truly
speculative securities within the meaning of Act No. 2581.

First. In order to encourage and induce their sale, profit unusual in the ordinary course of business has
been advertised or promised, which represent the fabulous and extraordinary gain of 800 per cent.

Second. The speculative character of said certificates is also shown by the fact that such profit or
advantage of 800 per cent does not depend upon the actual tangible assets or conditions of the
corporation, but upon its growth and development that would be attained through the admission of
new groups.

Third. Another proof of their speculative nature is that even if a member of class O or class S should
be able to secure new members, as the case may be, this fact would not necessarily entitle him to
receive immediately the benefit aid for according to the by-laws of the corporation, he would have to
wait for his turn before he could receive his benefit aid. And it is possible that his turn may never
come because there may be no funds with which to pay his benefit aid, for the funds of the
corporation might have been exhausted.

Fourth. The certificates of membership in question also come within the purview of paragraph (c) of
section 1 of Act No. 2581 because to promote their sale, the corporation has offered and paid a
commission of 10 per cent which, though later on reduced to 5 per cent, was in fact more than 5 per
cent because the corporation has paid another 5 per cent for traveling expenses.

Fifth. The speculative character of the member certificates issued by the corporation is also shown by
the fact that when a member, whether belonging to class O or to class S, had not received his benefit
aid after two years from the date of his enrollment, he cannot expect anything more than the refund of

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the dues paid by him plus 25 per cent of the same. But it is possible, as they by-laws of the
corporation themselves provide, that there are no funds with which to reimburse the member or
members, who have not been able to collect any benefit aid, the dues paid by them.

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Palting vs San Jose Petroleum


Facts
SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn
registration statement, for the registration and licensing for sale in the Philippines Voting Trust
Certificates representing 2,000,000 shares of its capital stock. It was alleged that the entire proceeds
of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose
Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL).
While this application for registration was pending consideration by the Securities and Exchange
Commission, SAN JOSE PETROLEUM filed an amended Statement for registration of the sale in the
Philippines of its shares of capital stock, which was increased at a reduced offering price. Pedro R.
Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed
with the Securities and Exchange Commission an opposition to registration and licensing of the
securities on the grounds that:

1. The tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic
corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949;
2. The issuer has not been licensed to transact business in the Philippines;
3. The sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and
4. The issuer as an enterprise, as well as its business, is based upon unsound business principles.

Issue
Whether or not Petitioner has standing to file suit.

Held
Petitioner has standing because the phrase ‘person aggrieved’ under the RSA refers to any person.

In answer to the notice and order of the Securities and Exchange Commissioner, published in 2
newspapers of general circulation in the Philippines, for "any person who is opposed" to the petition
for registration and licensing of respondent's securities, to file his opposition in 7 days, herein
petitioner so filed an opposition. And, the Commissioner, having denied his opposition and instead,
directed the registration of the securities to be offered for sale, oppositor Palting instituted the present
proceeding for review of said order.

Respondent raises the question of the personality of petitioner to bring this appeal, contending that as
a mere "prospective investor", he is not an "Aggrieved" or "interested" person who may properly
maintain the suit.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party "aggrieved
by the judgment or decree where it operates on his rights of property or bears directly upon his
interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some personal
property right or the imposition upon a party of a burden or obligation." But a careful reading of the
case would show that the appeal therein was dismissed because the court held that an order of
registration was not final and therefore not appealable. The foregoing pronouncement relied upon by
herein respondent was made in construing the provision regarding an order of revocation which the
court held was the one appealable. And since the law provides that in revoking the registration of any
security, only the issuer and every registered dealer of the security are notified, excluding any person
or group of persons having no such interest in the securities, said court concluded that the phrase
"interested person" refers only to issuers, dealers or salesmen of securities.

Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration
statement. Pursuant thereto, the Securities and Exchange Commissioner caused the publication of an
order in part reading as follows:

…Any person who is opposed with this petition must file his written opposition with this Commission within said period (2
weeks). . . .

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Any person (who may not be "aggrieved" or "interested" within the legal acceptation of the word) is
allowed or permitted to file an opposition to the registration of securities for sale in the Philippines.
And this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to
protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities
that are in fact worthless or worth substantially less than the asking price. It is for this purpose that
herein petitioner duly filed his opposition giving grounds therefor. Respondent SAN JOSE
PETROLEUM was required to reply to the opposition.

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Martinez vs. Yek Tong Lin


Facts
The Central Brokerage Co., Inc applied for a certificate of authority to engage in brokerage business
in the Philippines. Jesus Lontoc was one of its incorporators and directors. The Central Brokerage Co.
Inc. as principal, and the Yek Tong Lin Fire & Marine Insurance Co., Ltd. as surety, bound
themselves to pay, jointly and severally, to the Government of the Philippine Islands, or to whom it
may concern, for the purpose of securing the obligations stipulated in the bond. The Bureau of
Commerce issued the certificate of authority applied for by the Central Brokerage Co., Inc. The
plaintiff, who was a licensed broker, purchased from Central Brokerage Co., Inc., 5,000 shares of the
Baguio Gold Mining Co. the price of which was paid by said corporation by means of checks. Jesus
Lontoc ordered the plaintiff to purchase 11,000 shares of the Baguio Gold Mining Co. at P0.34 a
share. The defendants Central Brokerage Co., Inc. thereof have not paid the price, and the Yek Tong
Lin Fire & Marine Insurance Co., Ltd., except P500 paid by Jesus Lontoc despite demands made upon
said defendants to do so.

Jesus Lontoc instructed the Baguio Gold Mining Co. to transfer the 11,000 shares in his name. The
plaintiff never had any personal transaction with Jesus Lontoc. Baguio Gold Mining Co. transferred
said 11,000 shares of the Baguio Gold Mining Co. in the name of Jesus Lontoc. Later, 5,000 of said
shares were transferred to Hess Investment Co. Inc.; and 6,000 of said shares were transferred to A.
Elsingre.

The CA held that said corporation was bound to live up to its part of the contract entered into by its
manager, Jesus Lontoc. This part is to pay the price of the shares purchased by it; but as to the liability
of the other defendant, the Yek Tong Lin Fire & Marine Insurance Co., Ltd., the Court of Appeals
found no reason to make it liable under the terms of its bond. This is the part of the decision that has
been appealed.

Before taking the appeal, the plaintiff filed a motion for reconsideration in the Court of Appeals on
the ground that the said court has entirely put out of view paragraph (c) of the bond of said surety
company, which paragraph reads:

(c) That with the exception of the case where he has underwritten an issue of securities and is reselling them to the public, he shall not
purchase and sell for his own account.

Issue
Whether or not Respondent Corporation sold the shares on its own behalf in violation of paragraph (c)
of the bond.

Held
Respondent Corporation violated paragraph (c) of the bond

Plaintiff contends:

"That with the exception of the cases where he has underwritten an issue of securities and is reselling them to the public, he shall not
purchase and sell for his own account", renders the Yek Tong Lin Fire & Marine Insurance Co., Ltd., liable upon its bond.

The Court of Appeals arrived at the conclusion that the contract of sale of the 11,000 shares of Baguio
Gold Mining Co. took place between the plaintiff and the defendant, Central Brokerage Co. Inc.; but
in the resolution denying the motion for reconsideration, it takes the view that "the liability of the
Central Brokerage Co. Inc., is not made to rest upon the fact that it had made the purchase of said
shares of stock, but upon the ground of estoppel. "Upon the ground of estoppel", that is to say, the
Central Brokerage Co., Inc., by its own acts, is estopped from denying that it has purchased the
shares.

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In view of the foregoing facts, there is no question that Central Brokerage Co., Inc., purchased the
aforesaid 11,000 shares of Baguio Gold Mining Co. upon its own account, and thereafter sold them
also upon its own account, a part to Hess Investment Co., Inc.; and a part to A. Elsingre, in violation
of its obligations as a broker, for as such broker it could neither purchase nor sell shares upon its own
account. The compliance with this obligation was guaranteed by the surety under paragraph (c) of the
bond above transcribed.

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Araneta vs. Gatmaitan


Facts
San Miguel Bay, is considered as the most important fishing area in the Pacific side of the Bicol
region. Sometime in 1950, trawl operators migrated to this region for the purpose of using this
particular method of fishing in said bay. On account of the belief of sustenance fishermen that the
operation of this kind of gear caused the depletion of the marine resources of that area, there arose a
general clamor among the majority of the inhabitants of coastal towns to prohibit the operation of
trawls in San Miguel Bay. This move was passed by the Municipal Mayors' League condemning the
operation of trawls as the cause of the wanton destruction of the shrimp specie and resolving to
petition the President of the Philippines to regulate fishing in San Miguel Bay by declaring it closed
for trawl fishing at a certain period of the year. In another resolution prayed the President to protect
them and the fish resources of San Miguel Bay by banning the operation of trawls therein,
recommending the cancellation of the licenses of trawl operators after investigation, if such inquiry
would substantiate the charges that the operation of said fishing method was detrimental to the
welfare of the majority of the inhabitants.

The President allowed trawl fishing during the typhoon season only. A group of Otter trawl operators
took the matter to the court praying that a writ of preliminary injunction be issued to restrain the
Secretary of Agriculture and Natural Resources and the Director of Fisheries from enforcing said
executive order; to declare the same null and void, and for such other relief as may be just and
equitable in the premises.

In the petition for prohibition and certiorari, petitioners (respondents therein) contended among other
things, that the order of, the respondent Judge requiring petitioners Secretary of Agriculture and
Natural Resources and the Director of Fisheries to post a bond in the sum of P30,000, had been issued
without jurisdiction or in excess thereof, or at the very least with grave abuse of discretion, because
by requiring the bond, the Republic of the Philippines was in effect made a party defendant and
therefore transformed the suit into one against the Government which is beyond the jurisdiction of the
respondent Judge to entertain;

Issue
Whether or not the Judge can require the officials to post a bond.

Held
The Judge can’t require but the issue has become moot and academic.

On the other hand, it shall be remembered that the party defendants are Salvador Araneta, as Secretary
of Agriculture and Natural Resources, and, Deogracias Villadolid, as Director of Fisheries, and were
sued in such capacities because they were the officers charged with duty of carrying out the statutes,
orders and regulations on fishing and fisheries. The trial court denied defendants' motion to set aside
judgment and they were required to file a bond for P30,000 to answer for damages that plaintiffs were
allegedly suffering at that time, as otherwise the injunction prayed for by the latter would be issued.

Because of these facts, We agree with the Solicitor General when he says that the action, being one
against herein petitioners as such Government officials, is essentially one against the Government,
and to require these officials to file a bond would be indirectly a requirement against the Government
for as regards bonds or damages that may be proved, if any, the real party in interest would be the
Republic of the Philippines.

The State undoubtedly is always solvent. However, as the records show that herein petitioners failed
to put up the bond required by the lower court, allegedly due to difficulties encountered with the
Auditor General's Office (giving the impression that they were willing to put up said bond but failed
to do so for reasons beyond their control), and that the orders subjects of the prohibition and certiorari
proceedings were enforced, if at all, in accordance with section 4 of Rule 39, which We hold to be

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applicable to the case at bar, the issue as to the regularity or adequacy of requiring herein petitioners
to post a bond, becomes moot and academic.

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Union Bank vs. SEC


Facts
Petitioner sought the opinion of Chairman Perfecto Yasay, Jr. of respondent Commission as to the
applicability and coverage of the Full Material Disclosure Rule on banks, contending that said rules,
in effect, amend Section 5 (a) (3) of the Revised Securities Act which exempts securities issued or
guaranteed by banking institutions from the registration requirement provided by Section 4 of the
same Act.

Respondent informed petitioner that while the requirements of registration do not apply to securities
of banks which are exempt under Section 5(a) (3) of the Revised Securities Act, however, banks with
a class of securities listed for trading on the Philippine Stock Exchange, Inc. are covered by certain
Revised Securities Act Rules governing the filing of various reports with respondent Commission.
Further, the Revised Securities Act Rule 11(a) requires the submission of reports necessary for full,
fair and accurate disclosure to the investing public, and not the registration of its shares.

Respondent wrote petitioner, enjoining the latter to show cause why it should not be penalized for its
failure to submit a Proxy/Information Statement in connection with its annual meeting, in violation of
respondent Commission’s ‘Full Material Disclosure Rule.’ Failing to respond to the aforesaid
communication, Petitioner was then assessed a fine. Petitioner was likewise advised by respondent
Commission to submit the required reports and settle the assessment, or submit the case to a formal
hearing. Petitioner wrote Respondent disputing the assessment.

Issue
Whether or not Banking Institutions are exempt from the reportorial requirements under the RSA.

Held
Banking Institutions aren’t exempt

Section 5(a)(3) of the said Act exempts from registration the securities issued by banking or financial
institutions mentioned in the law. Nowhere does it state or even imply that petitioner, as a listed
corporation, is exempt from complying with the reports required by the assailed RSA Implementing
Rules. Having confined the exemption enjoyed by petitioner merely to the initial requirement of
registration of securities for public offering, and not [to] the subsequent filing of various periodic
reports, respondent Commission, as the regulatory agency, is able to exercise its power of supervision
and control over corporations and over the securities market as a whole

It must be emphasized that petitioner is a commercial banking corporation listed in the stock
exchange. Thus, it must adhere not only to banking and other allied special laws, but also to the rules
promulgated by Respondent SEC. RSA Rules were issued by respondent pursuant to the authority
conferred upon it by Section 3 of the RSA. The said Rules do not amend Section 5(a)(3) of the
Revised Securities Act, because they do not revoke or amend the exemption from registration of the
securities enumerated thereunder. They are reasonable regulations imposed upon petitioner as a
banking corporation trading its securities in the stock market.

That petitioner is under the supervision of the Bangko Sentral ng Pilipinas (BSP) and the Philippine
Stock Exchange (PSE) does not exempt it from complying with the continuing disclosure
requirements embodied in the assailed Rules. Petitioner, as a bank, is primarily subject to the control
of the BSP; and as a corporation trading its securities in the stock market, it is under the supervision
of the SEC. It must be pointed out that even the PSE is under the control and supervision of
respondent. There is no over-supervision here. Each regulating authority operates within the sphere of
its powers. That stringent requirements are imposed is understandable, considering the paramount
importance given to the interests of the investing public.

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Otherwise stated, the mere fact that in regard to its banking functions, petitioner is already subject to
the supervision of the BSP does not exempt the former from reasonable disclosure regulations issued
by the SEC. Imposing such regulations is a function within the jurisdiction of the SEC. Since
petitioner opted to trade its shares in the exchange, then it must abide by the reasonable rules imposed
by the SEC.

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Nestle Philippines vs. CA


Facts
The authorized capital stock of petitioner Nestle Philippines Inc. ("Nestle") was increased. Nestle
underwent the necessary procedures and effected the necessary filings to secure the approval by
respondent SEC, which was in fact granted. Nestle also paid to the SEC the necessary filing fees.
Nestle has only two (2) principal stockholders: San Miguel Corporation and Nestle S.A. The other
stockholders, who are individual natural persons, own only one (1) share each, for qualifying
purposes, i.e., to qualify them as members of the Board of Directors.

Nestle approved resolutions authorizing the issuance of 344,500 shares out of the previously
authorized but unissued capital stock of Nestle, exclusively to San Miguel Corporation and to Nestle
S.A. Nestle filed a letter with the SEC seeking exemption of its proposed issuance of additional shares
to its existing principal shareholders, from the registration requirement of Section 4 of the Revised
Securities Act and from payment of the fee referred to in Section 6(c) of the same Act.

The SEC responded adversely to petitioner's requests and ruled that the proposed issuance of shares
did not fall under Section 6 (a) (4) of the Revised Securities Act, since Section 6 (a) (4) is applicable
only where there is an increase in the authorized capital stock of a corporation.

Issue
Whether or not the issuance of previously authorized but unissued capital stock is exempted from
registration requirements and filing fees under the RSA.

Held
The exemption covers only shares issued in the course of increasing the authorized capital stock.

Under Section 6 (a) (4) of the Revised Securities Act, the statutory phrase "issuance of additional
capital stock" is ambiguous. This phrase may refer either to: a) the issuance of capital stock as part of
and in the course of increasing the authorized capital stock of a corporation; or (b) issuance of already
authorized but still unissued capital stock. Also, the phrase "increased capital stock" found at the end
of Section 6 (a) (4), may refer either: 1) to newly or contemporaneously authorized capital stock
issued in the course of increasing the authorized capital stock of a corporation; or 2) to previously
authorized but unissued capital stock.

Both the SEC and the Court of Appeals resolved the ambiguity by construing Section 6 (a) (4) as
referring only to the issuance of shares of stock as part of and in the course of increasing the
authorized capital stock of Nestle. The SEC interpretation permits greater opportunity for the SEC to
implement the statutory objective of protecting the investing public. By limiting the class of exempt
transactions, the SEC is enabled to examine issuances by a corporation of previously authorized but
theretofore unissued capital stock, on a case-to-case basis, under Section 6(b); and thereunder, to
grant or withhold exemption from the normal registration requirements depending upon the perceived
level of need for protection by the investing public in particular cases.

Under the reading urged by petitioner Nestle, the issuance of previously authorized but unissued
capital stock would automatically constitute an exempt transaction, without regard to the length of
time which may have intervened between the last increase in authorized capital stock and the
proposed issuance during which time the condition of the corporation may have substantially
changed, and without regard to whether the existing stockholders to whom the shares are proposed to
be issued are only two giant corporations as in the instant case, or are individuals numbering in the
hundreds or thousands. In contrast, under the ruling issued by the SEC, an issuance of previously
authorized but still unissued capital stock may, in a particular instance, be held to be an exempt
transaction by the SEC so long as the SEC finds that the requirements of registration under the
Revised Securities Act are "not necessary in the public interest and for the protection of the
investors". In fine, petitioner Nestle's proposed construction of Section 6(a) (4) would establish an

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inflexible rule of automatic exemption of issuances of additional, previously authorized but unissued,
capital stock. We must reject an interpretation that may disable the SEC from rendering protection to
investors, in the public interest, precisely when such protection may be most needed.

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Onapal vs. CA
Facts
The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), is a corporation licensed as a
commission merchant/broker by the SEC, to engage in commodity futures trading in Cebu City.
Petitioner and private respondent (Susan Chua) concluded a "Trading Contract". Every time a
customer enters into a trading transaction with petitioner as broker, the trading order is communicated
by telex to its principal, Frankwell Enterprises of Hongkong. An order of a customer of the petitioner
is supposed to be transmitted from Cebu to petitioner's office in Manila. From Manila, it should be
forwarded to Hongkong and from there, transmitted to the Commodity Futures Exchange in Japan.
There were only two parties involved as far as the transactions covered by the Trading Contract are
concerned — the petitioner and the private respondent.

…Respondent testified that she understood the transaction of buying and selling as speculating in
prices, and her paying the difference between gains and losses without actual delivery of the goods to
be gambling, and she would like to withdraw from this kind of business, the risk of which she was not
made aware of. She was able to get only P470, 000.00 out of her total deposit of P800, 000.00. In
order to recover the loss of P330, 000.00, she filed this case. Private respondent was also told that the
petitioner's principal was Frankwell Enterprises with offices in Hongkong but the private respondent's
money which was supposed to have been transmitted to Hongkong, was kept by petitioner in a
separate account in a local bank.

Issue
Whether the contract, purportedly one for the sale of products for future delivery, is actually a
gambling agreement.

Held
The Contract is a subterfuge for a gambling agreement as both parties merely speculated on the rise
and fall in the price of goods/commodity subject matter of the transaction.

Commodity Futures Contract" shall refer to an agreement to buy or sell a specified quantity and grade
of a commodity at a future date at a price established at the floor of the exchange.

The trading contract is a contract for the sale of products for future delivery, in which either seller or
buyer may elect to make or demand delivery of goods, but where no such delivery is actually made.
As a contract, the trading contract bears all the indicia of a valid trading contract because it complies
with the Rules and Regulations on Commodity Futures Trading as prescribed by the SEC. But when
the transaction which was carried out to implement the written contract deviates from the true import
of the agreement because such delivery, actual or constructive, of the commodity or goods is made,
and final settlement is made by payment and receipt of only the difference in prices at the time of
delivery from that prevailing at the time the sale is made, the dealings in futures become mere
speculative contracts in which the parties merely gamble on the rise or fall in prices. A contract for
the sale or purchase of goods/commodity to be delivered at future time, if entered into without the
intention of having any goods/commodity pass from one party to another, but with an understanding
that at the appointed time, the purchaser is merely to receive or pay the difference between the
contract and the market prices, is a transaction which the law will not sanction, for being illegal.

The written trading contract in question is not illegal but the transaction between the petitioner and the
private respondent purportedly to implement the contract is in the nature of a gambling agreement.

We draw the conclusion that no actual delivery of goods and commodity was intended and ever made
by the parties. In the realities of the transaction, the parties merely speculated on the rise and fall in
the price of the goods/commodity subject matter of the transaction. If private respondent's speculation
was correct, she would be the winner and the petitioner, the loser, so petitioner would have to pay
private respondent the "margin". But if private respondent was wrong in her speculation then she

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would emerge as the loser and the petitioner, the winner. This is clearly a form of gambling provided
for with unmistakable certainty under Article 2018. It would thus be governed by the New Civil Code
and not by the Revised Securities Act nor the Rules and Regulations on Commodity Futures Trading
laid down by the SEC.

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What’s a ‘Tender Offer?’ – relevant for subsequent cases


For perspective, a “tender offer” is a publicly announced intention by a person acting alone or in
concert with other persons to acquire equity securities of a public company, i.e., one listed on an
exchange, among others. The term is also defined as “an offer by the acquiring person to stockholders
of a public company for them to tender their shares therein on the terms specified in the offer” Tender
offer is in place to protect the interests of minority stockholders of a target company against any
scheme that dilutes the share value of their investments. It affords such minority shareholders the
opportunity to withdraw or exit from the company under reasonable terms, a chance to sell their
shares at the same price as those of the majority stockholders

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Osmena III vs SSS


Facts
SSS wanted to liquefy its long-term investments and diversify them into higher-yielding and less
volatile investment products. Among such investments were its shareholdings in EPCIB because the
shares have substantially declined in value and SSS could no longer afford to continue holding on to
them at the present level of EPCIB’s income. Only Banco de Oro Universal Bank (BDO) and its
investment subsidiary, respondent BDO Capital, appeared in earnest to acquire the shares in question.
BDO and SSS agreed to purchase the EPCIB common shares. The parties also agreed “to negotiate in
good faith a mutually acceptable Share Sale and Purchase Agreement…

Following several drafting sessions, SSS and BDO Capital agreed on a final draft version of the Share
Purchase Agreement. The parties mutually agreed to the purchase by the BDO Capital and the sale by
SSS of all the latter’s EPCIB shares at the closing date at the specified price of P43.50 per share or a
total of P8, 171,383,258.50. SSS passed a resolution approving the sale of the EPCIB shares through
the Swiss Challenge method. SSS advertised an Invitation to Bid for the block purchase of the Shares.
The Invitation to Bid expressly provided that the “result of the bidding is subject to the right of BDO
Capital … to match the highest bid.” Even before the bidding, the herein petitioners filed suit on the
legality of the Swiss Challenge angle and a provision in the Instruction to Bidders under which the
SSS undertakes to offer the Shares to BDO should no bidder or prospective bidder qualifies. Under
the Swiss Challenge format, one of the bidders is given the option or preferential “right to match” the
winning bid.

Pending consideration of the petition, supervening events and corporate movements transpired that
radically altered the factual complexion of the case.
1. In January 2006, BDO made public its intent to merge with EPCIB. Under what BDO termed as “Merger of Equals”, EPCIB
shareholders would get 1.6 BDO shares for every EPCIB share.
2. On August 31, 2006, SM Investments Corporation, an affiliate of BDO and BDO Capital, in consortium with Shoemart, Inc. et
al., (collectively, the SM Group) commenced, through the facilities of the PSE and pursuant to R.A. No. 879, a mandatory
tender offer (Tender Offer) covering the purchase of the entire outstanding capital stock of EPCIB at P92.00 per share.
Pursuant to the terms of the Tender Offer, which was to start on August 31, 2006 and end on September 28, 2006 – the Tender
Offer Period – all shares validly tendered under it by EPCIB shareholders of record shall be deemed accepted for payment on
closing date subject to certain conditions. Among those who accepted the Tender Offer of the SM Group was EBC Investments,
Inc., a subsidiary of EPCIB.

Issue
Whether or not the issue has become moot and academic.

Held
The issue has become moot and academic

We start off with the core subject of this case, the Shares – the 187.84 Million EPCIB common
shares. The Shares, as a necessary consequence of the BDO-EPCIB merger that saw EPCIB being
absorbed by the surviving BDO, have been transferred to BDO and converted into BDO common
shares under the exchange ratio set forth in the BDO-EPCIB Plan of Merger. As thus converted, the
subject Shares are no longer equity security issuances of the now defunct EPCIB, but those of BDO-
EPCI. In net effect, therefore, the 187.84 Million EPCIB common shares are now lost or inexistent.
The fulfillment of any of the obligations agreed upon under the Letter-Agreement, the SPA or the
Swiss Challenge package is legally impossible.

BDO-EPCI, in a manner of speaking, stands now as the issuer of what were once the subject Shares.
Consequently, should SSS opt to exit from BDO and BDO Capital, or BDO Capital, in turn, opt to
pursue SSS’s shareholdings in EPCIB, as thus converted into BDO shares, the sale-purchase ought to
be via an Issuer Tender Offer -- a phrase which means a publicly announced intention by an issuer to
acquire any of its own class of equity securities or by an affiliate of such issuer to acquire such
securities. In that eventuality, BDO or BDO Capital cannot possibly exercise the “right to match”
under the Swiss Challenge procedure, a tender offer being wholly inconsistent with public bidding.
The offeror or buyer in an issue tender offer transaction proposes to buy or acquire, at the stated price

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and given terms, its own shares of stocks held by its own stockholder who in turn simply have to
accept the tender to effect the sale. No bidding is involved in the process.

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CEMCO vs National Life


Facts
Union Cement Corporation (UCC), a publicly listed company, has two principal stockholders –
UCHC, a non-listed company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%.
Majority of UCHC’s stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the
other hand, owned 9% of UCHC stocks.

BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed
resolutions to sell to Cemco BCI’s stocks in UCHC equivalent to 21.31% and ACC’s stocks in UCHC
equivalent to 29.69%. In the PSE Circular for Brokers, it was stated that as a result of petitioner
Cemco’s acquisition of BCI and ACC’s shares in UCHC, petitioner’s total beneficial ownership,
direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC.

As a consequence of this disclosure, the PSE inquired as to whether the Tender Offer Rule under Rule
19 of the Implementing Rules of the Securities Regulation Code is not applicable to the purchase by
petitioner of the majority of shares of UCC. The SEC responded to the query of the PSE that while it
was the stance of the department that the tender offer rule was not applicable, the matter must still
have to be confirmed by the SEC en banc. The SEC en banc had resolved that the Cemco transaction
was not covered by the tender offer rule.

Respondent National Life Insurance Company of the Philippines, Inc., a minority stockholder of
UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer.
Cemco, however, refused. A Share Purchase Agreement was executed by ACC and BCI, as sellers,
and Cemco, as buyer.

Issue
Whether or not the mandatory tender offer rule applies only to direct acquisition of shares in the
public company.

Held
The rule applies.

Tender offer is a publicly announced intention by a person acting alone or in concert with other
persons to acquire equity securities of a public company. A public company is defined as a
corporation which is listed on an exchange, or a corporation with assets exceeding P50, 000,000.00
and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such
company. Stated differently, a tender offer is an offer by the acquiring person to stockholders of a
public company for them to tender their shares therein on the terms specified in the offer. Tender offer
is in place to protect minority shareholders against any scheme that dilutes the share value of their
investments. It gives the minority shareholders the chance to exit the company under reasonable
terms, giving them the opportunity to sell their shares at the same price as those of the majority
shareholders.

Under existing SEC Rules, the threshold acquisition of shares was increased to thirty-five percent
(35%). It is further provided therein that mandatory tender offer is still applicable even if the
acquisition is less than 35% when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company. The SEC and the Court of Appeals ruled that the
indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed
UCHC shares is covered by the mandatory tender offer rule. The SEC and the Court of Appeals
accurately pointed out that the coverage of the mandatory tender offer rule covers not only direct
acquisition but also indirect acquisition or “any type of acquisition.”

The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of
control of the listed company and for the purpose of protecting the minority stockholders of a listed

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corporation. Whatever may be the method by which control of a public company is obtained, either
through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies.

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Excerpt on Section 30 of the Revised Securities Act


Sec. 30. Insider’s duty to disclose when trading. – (a) It shall be unlawful for an insider to sell or
buy a security of the issuer, if he knows a fact of special significance with respect to the issuer or
the security that is not generally available, unless (1) the insider proves that the fact is generally
available or (2) if the other party to the transaction (or his agent) is identified, (a) the insider
proves that the other party knows it, or (b) that other party in fact knows it from the insider or
otherwise.

(b) “Insider” means (1) the issuer, (2) a director or officer of, or a person controlling, controlled
by, or under common control with, the issuer, (3) a person whose relationship or former
relationship to the issuer gives or gave him access to a fact of special significance about the issuer
or the security that is not generally available, or (4) a person who learns such a fact from any of the
foregoing insiders as defined in this subsection, with knowledge that the person from whom he
learns the fact is such an insider.

(c) A fact is “of special significance” if (a) in addition to being material it would be likely, on being
made generally available, to affect the market price of a security to a significant extent, or (b) a
reasonable person would consider it especially important under the circumstances in determining
his course of action in the light of such factors as the degree of its specificity, the extent of its
difference from information generally available previously, and its nature and reliability.

(d) This section shall apply to an insider as defined in subsection (b) (3) hereof only to the extent
that he knows of a fact of special significance by virtue of his being an insider.

The provision explains in simple terms that the insider's misuse of nonpublic and undisclosed
information is the gravamen of illegal conduct. The intent of the law is the protection of investors
against fraud, committed when an insider, using secret information, takes advantage of an
uninformed investor. Insiders are obligated to disclose material information to the other party or
abstain from trading the shares of his corporation. This duty to disclose or abstain is based on two
factors: first, the existence of a relationship giving access, directly or indirectly, to information
intended to be available only for a corporate purpose and not for the personal benefit of anyone; and
second, the inherent unfairness involved when a party takes advantage of such information knowing
it is unavailable to those with whom he is dealing.

In the United States (U.S.), the obligation to disclose or abstain has been traditionally imposed on
corporate “insiders,” particularly officers, directors, or controlling stockholders, but that definition
has since been expanded. The term “insiders” now includes persons whose relationship or former
relationship to the issuer gives or gave them access to a fact of special significance about the issuer
or the security that is not generally available, and one who learns such a fact from an insider
knowing that the person from whom he learns the fact is such an insider. Insiders have the duty to
disclose material facts which are known to them by virtue of their position but which are not known
to persons with whom they deal and which, if known, would affect their investment judgment. In
some cases, however, there may be valid corporate reasons for the nondisclosure of material
information. Where such reasons exist, an issuer’s decision not to make any public disclosures is
not ordinarily considered as a violation of insider trading. At the same time, the undisclosed
information should not be improperly used for non-corporate purposes, particularly to disadvantage
other persons with whom an insider might transact, and therefore the insider must abstain from
entering into transactions involving such securities.

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SEC vs. Interport Resources


Facts
The Board of Directors of IRC approved a Memorandum of Agreement with Ganda Holdings Berhad
(GHB). Under the Memorandum of Agreement, IRC acquired 100% or the entire capital stock of
Ganda Energy Holdings, Inc. (GEHI, which would own and operate a 102 megawatt (MW) gas
turbine power-generating barge. The agreement also stipulates that GEHI would assume a five-year
power purchase contract with National Power Corporation. In exchange, IRC will issue to GHB 55%
of the expanded capital stock of IRC amounting to 40.88 billion shares. On the side, IRC would
acquire 67% of the entire capital stock of Philippine Racing Club, Inc. (PRCI). Under the Agreement,
GHB, a member of the Westmont Group of Companies in Malaysia, shall extend or arrange a loan
required to pay for the proposed acquisition by IRC of PRCI. IRC alleged that a press release
announcing the approval of the agreement was sent through facsimile transmission to the Philippine
Stock Exchange and the SEC, but that the facsimile machine of the SEC could not receive it. Upon
the advice of the SEC, the IRC sent the press release on the morning of 9 August 1994.

The SEC averred that it received reports that IRC failed to make timely public disclosures of its
negotiations with GHB and that some of its directors, respondents herein, heavily traded IRC shares
utilizing this material insider information. The SEC Chairman issued an Order finding that IRC
violated the Rules on Disclosure of Material Facts, in connection with the Old Securities Act of 1936,
when it failed to make timely disclosure of its negotiations with GHB. In addition, the SEC
pronounced that some of the officers and directors of IRC entered into transactions involving IRC
shares in violation of Section 30, in relation to Section 36, of the Revised Securities Act. While this
case was pending in the Supreme Court, the Securities Regulation Code took effect on 8 August 2000.

Issue
Whether or not the Revised Securities Act requires the enactment of implementing rules to make
them binding and effective.

Held
No need for implementing rules to make them binding and effective.

Respondents further aver that under Section 30 of the Revised Securities Act, the SEC still needed
to define the following terms: “material fact,” “reasonable person,” “nature and reliability” and
“generally available.”

This Court does not discern any vagueness or ambiguity in Sections 30 of the Revised Securities
Act, such that a person of ordinary intelligence would not understand the acts proscribed and/or
required. Under the law, what is required to be disclosed is a fact of “special significance” which
may be (a) a material fact which would be likely, on being made generally available, to affect the
market price of a security to a significant extent, or (b) one which a reasonable person would
consider especially important in determining his course of action with regard to the shares of stock.

(a) Material Fact – Section 30 of the Revised Securities Act provides that if a fact affects the sale or
purchase of securities, as well as its price, then the insider would be required to disclose such
information to the other party to the transaction involving the securities. This is the first definition
given to a “fact of special significance.

(b.1) Reasonable Person – The second definition given to a fact of special significance involves the
judgment of a “reasonable person.” This Court identified him as “the average man on the street,”
who weighs facts and circumstances without resorting to the calibrations of our technical rules of
evidence of which his knowledge is nil. Rather, he relies on the calculus of common sense of which
all reasonable men have in abundance.

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(b.2) Nature and Reliability – It can be deduced from the foregoing that the “nature and reliability”
of a significant fact in determining the course of action a reasonable person takes regarding
securities must be clearly viewed in connection with the particular circumstances of a case. To
enumerate all circumstances that would render the “nature and reliability” of a fact to be of special
significance is close to impossible. Nevertheless, the proper adjudicative body would undoubtedly
be able to determine if facts of a certain “nature and reliability” can influence a reasonable person’s
decision to retain, sell or buy securities, and thereafter explain and justify its factual findings in its
decision.

(c) Materiality Concept – The materiality concept is judgmental in nature and it is not possible to
translate this into a numerical formula. The Committee's advice to the [SEC] is to avoid this quest
for certainty and to continue consideration of materiality on a case-by-case basis as disclosure
problems are identified.

(d) Generally Available – Section 30 of the Revised Securities Act allows the insider the defense
that in a transaction of securities, where the insider is in possession of facts of special significance,
such information is “generally available” to the public. Whether information found in a newspaper,
a specialized magazine, or any cyberspace media be sufficient for the term “generally available” is a
matter which may be adjudged given the particular circumstances of the case. The standards cannot
remain at a standstill. Respondents failed to allege that the negotiations of their agreement with
GHB were made known to the public through any form of media for there to be a proper
appreciation of the issue presented

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Nicolas vs CA
Facts
Petitioner Roy Nicolas and private respondent Blesito Buan entered into a Portfolio Management
Agreement, wherein the former was to manage the stock transactions of the latter for a period of
three months with an automatic renewal clause. However, upon the initiative of the private
respondent the agreement was terminated on August 19, 1987, and thereafter he requested for an
accounting of all transactions made by the petitioner.

Three weeks after the termination of the agreement, petitioner demanded from the private respondent
the amount of P68,263.67 representing his alleged management fees as provided for in the Portfolio
Management Agreement. But the demands went unheeded, much to the chagrin of the petitioner.

Rebuffed, petitioner filed a complaint for collection of sum of money against the private respondent
before the trial court. In his answer, private respondent contended that petitioner mismanaged his
transactions resulting in losses; thus, he was not entitled to any management fees. Under the Portfolio
Management Agreement, it was agreed that private respondent would pay the petitioner 20% of all
realized profits every end of the month as his management fees.

Issue
Whether or not petitioner is entitled to management fees.

Held
Petitioner isn’t entitled.

Stockbrokers are entitled to commercial fees or compensation pursuant to the Revised Securities Act
Rule 19-13. Unfortunately, the profit and loss statements presented by the petitioner are nothing but
bare assertions, devoid of any concrete basis or specifics as to the method of arriving at the amounts
indicated in the documents.

…In short, no evidentiary value can be attributed to the profit and loss statements submitted by the
petitioner. These documents can hardly be considered a credible or true reflection of the transactions.
It is an incomplete record yielding easily to the inclusion or deletion of certain matters. The contents
are subject to suspicion since they are not reflective of all pertinent and relevant data. Thus, even
assuming the admissibility of these alleged profit and loss statements, they are devoid of any
evidentiary weight, for the amounts are conclusions without premises, its bases left to speculation,
conjectures, assertions and guesswork. There was no credible documentary evidence to support his
claim that profits were indeed realized.

Lastly, the futility of petitioner’s action became more pronounced by the fact that he traded securities
for the account of others without the necessary license from the Securities and Exchange Commission
(SEC). Clearly, such omission was in violation of Section 19 of the Revised Securities Act that
provides that no broker shall sell any securities unless he is registered with the SEC. The purpose of
the statute requiring the registration of brokers selling securities and the filing of data regarding
securities which they propose to sell, is to protect the public and strengthen the securities mechanism.

American jurisprudence emphasizes the principle that:

“x x x, an unlicensed person may not recover compensation for services as a broker where a statute or
ordinance requiring a license is applicable and such statute or ordinance is of a regulatory nature, was
enacted in the exercise of the police power for the purpose of protecting the public, requires a license
as evidence of qualification and fitness, and expressly precludes an unlicensed person from
recovering compensation by suit, or at least manifests an intent to prohibit and render unlawful the
transaction of business by an unlicensed person.”

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We see no reason not to apply the same rule in our jurisdiction. Stock market trading, a technical and
highly specialized institution in the Philippines, must be entrusted to individuals with proven
integrity, competence and knowledge, who have due regard to the requirements of the law.

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Excerpt on Exchange (like the Philippine Stock Exchange)


An exchange is a voluntary association or corporation organized for the purpose of furnishing to its
members a convenient and suitable place to transact their business of promoting uniformity in the
customs and usages of merchants, of inculcating principles of justice and equity in trade, of
facilitating the speedy adjustment of business disputes, of acquiring and disseminating valuable
commercial and economic information and generally of securing to its members the benefits of
cooperation in the furtherance of their legitimate pursuits.

Like any other association, an exchange has the power to adopt its own constitution, by-laws, rules
and regulations so far as they are not contrary to law or public policy and which will secure to the
members exclusive rights and privileges which the courts have fully recognized. Anyone who
becomes a member of the exchange voluntarily submits himself to the operation of these rules and is
expected to be bound by and to respect them.

The interest of each member in the property of the association is equal, but it is subject to the
constitution and by-laws, which are the basis on which is founded the association. They express the
contract by which each member has consented to be bound and which measures his duties, rights and
privileges as such. It seems most clear to me that this constitution and the by- laws derive a binding
force from the fact that they are signed by all the members, and that they are conclusive upon each of
them in respect of the regulations of the mode of transaction of his business, and of his right to
continue to be a member.

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Lopez, Locsin, Ledesma vs. CA


Facts
CMS Stock Brokerage, Inc. (CMS for short) sold to Lopez, Locsin, Ledesma and Co., Inc., (LLL for
short) on the floor of the Makati Stock Exchange, among others, 2,650 Benguet Consolidated shares
on a ten (10) to twenty (20) days delayed delivery basis. These shares were purchased for and on
orders of Jose Ma. Lopez, Ramos, Ledesma, and Lopez, Jr. CMS, however, failed to deliver to LLL
the Benguet Consolidated shares within the ten (10) to twenty (20) days stipulated in the exchange
contracts between them alleging non-delivery as due to mere oversight owing to the huge volume of
transactions. Four (4) months later, in the course of an audit of CMS's books of accounts and other
records by Sycip, Gorres Velayo & Co., the auditors discovered that the Benguet Consolidated shares
that CMS sold to LLL still remained undelivered and unpaid by LLL.

So CMS made known the LLL that it would effect delivery of said shares of stocks the following day.
LLL however, refused to accept delivery at that late time since its clients for whom the purchases
were made had "elected to cancel" the orders. CMS replied that, pursuant to the Rules and
Regulations of the Makati Stock Exchange, LLL had no right to cancel its orders, nevertheless, made
a disposal in favor of LLL the next day. LLL refused to acknowledge receipt of and sign the covering
disposal letter. What CMS did was to deposit the letter with the Office of the Stock Exchange's
Executive Secretary with the notation: "Refused Acceptance pending decision of the Exchange."

Issue
Whether or not Petitioner can be compelled to receive the stocks Respondent purchased.

Held
Petitioner can be compelled

It is the petitioner's main contention that the law on contracts is controlling in this case: Hence,
CMS' failure to deliver the shares of stocks within the stipulated time of ten (10) to twenty (20) days
warrants the rescission of the exchange contracts in question. There is no dispute that the exchange
contracts in question were drawn up on the floor of the Makati Stock Exchange between two (2)
member stockbrokers, CMS as the seller and LLL, as the buyer for and on orders of the third
parties. As members of the stock exchange, they are bound by the rules and by-laws of the
exchange.

The rule at issue in the instant case is Section I, Article V of the Rules and Regulations. It reads:
In the event of a Selling Member failing to make delivery within a reasonable period of time of shares sold under delayed
delivery contract,
It shall be the Buying Member duty to advise the Selling Member in writing giving him 1 full business day from the time of
receipt of said letter of demand to make delivery.
xxx
Fifteen days shall be considered a reasonable period of time within which to effect delivery unless otherwise stated in the sales
contract.
In the event a Selling Member is unable to make delivery within said period, the Buying Member shall deliver a copy of his letter
of demand to the Chairman of the Floor Trading & Arbitration Committee who may purchase the shares for the Selling
Member's Account.

The rule is clear that the exchange contracts in question fall under the last clause. The parties have
merely specified the period within which delivery must be made which is ten (10) to twenty (20)
days. Such qualification does not in any way change the nature of the exchange contracts. The rule
also provides a remedy in case the selling member fails to deliver the stocks ordered from the seller.
It would, therefore, be safe to say that unless the buying member timely notifies the seller that he is
canceling his orders, then the orders placed by the buying member still stand. LLL must, therefore,
accept the delivery of the shares of stocks. It was the duty of LLL to make a demand in the event
CMS failed to deliver within the stipulated time. The rules and regulations of the Stock Exchange
form part of the contract.

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Under the applicable rule, the failure of the seller to deliver the stocks does not give the buying
member the right to rescind the contract. If the selling member fails or refuses to deliver, it may be
compelled through the Chairman of the Floor Trading and Arbitration Committee to purchase the
same for the selling member's account. There being a special remedy agreed upon by the members,
the right of rescission under the New Civil Code as invoked by the petitioner is inapplicable.

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PSE vs. CA
Facts
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares
to the public. PALI was issued a Permit to Sell its shares to the public by the SEC. To facilitate the
trading of its shares among investors, PALI sought to course the trading of its shares through the
Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an
application to list its shares, with supporting documents attached.

Before it could act upon PALI’s application, the Board of Governors of PSE received a letter from the
heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial
owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which
PALI claims to be among its assets and that the Ternate Development Corporation, which is among
the stockholders of PALI, likewise appears to have been held and continue to be held in trust by one
Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested PALI’s
application to be deferred. PALI was requested to comment upon the said letter.

The Board of Governors of the PSE reached its decision to reject PALI’s application, citing the
existence of serious claims, issues and circumstances surrounding PALI’s ownership over its assets
that adversely affect the suitability of listing PALI’s shares in the stock exchange. PALI wrote a letter
to the SEC asking the latter to review the PSE’s action on PALI’s listing application and institute such
measures as are just and proper and under the circumstances. The SEC rendered its Order, reversing
the PSE’s decision.

Issue
Whether or not the SEC exercises regulatory power over PSE

Held
The SEC exercises regulatory power but can exercise such power only when there is bad faith on
PSE’s part

We affirm that the SEC is the entity with the primary say as to whether or not securities, including
shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the
SEC’s mission to ensure proper compliance with the laws, such as the Revised Securities Act and to
regulate the sale and disposition of securities in the country. Paramount policy also supports the
authority of the public respondent to review petitioner’s denial of the listing. Being a stock exchange,
the petitioner performs a function that is vital to the national economy, as the business is affected with
public interest.

This is not to say, however, that the PSE’s management prerogatives are under the absolute control of
the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE’s main concerns, as such, is still the generation
of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations,
including the right to sue and be sued, to hold property in its own name, to enter (or not to enter) into
contracts with third persons, and to perform all other legal acts within its allocated express or implied
powers.

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to
reverse the PSE’s decision in matters of application for listing in the market, the SEC may exercise
such power only if the PSE’s judgment is attended by bad faith.

In reaching its decision to deny the application for listing of PALI, the PSE considered important
facts, which in the general scheme, brings to serious question the qualification of PALI to sell its
shares to the public through the stock exchange. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the best interest of the general public. Also, as

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the primary market for securities, the PSE has established its name and goodwill, and it has the right
to protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose
to transact through its facilities. It was reasonable for PSE, therefore, to exercise its judgment in the
manner it deems appropriate for its business identity, as long as no rights are trampled upon, and
public welfare is safeguarded.

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Excerpt on the Securities Act: Section 18(a)(1)


The main purpose of Section 18(a) (1) of the Securities Act and Rule 12 of the Implementing Rules
and Regulations is "to give a government credit agency an effective method of reducing the aggregate
amount of the nation's credit resources which can be directed by speculation into the stock market"
and also for the protection of the small speculator by making it impossible for him to spread himself
too thin. Such requirements are intended to prevent the excessive use of credit for the purchase and
carrying on of securities, and of reducing the aggregate amount of the national credit resources that
are directed by speculation into the stock market and of achieving a more balanced use of such
resources. The secondary purpose is the protection of the investor.

Pursuant to the clear and explicit provision of Section 38(b) of the Securities Act, "Every contract
made in violation of any provision of this Act or of any rule or regulation thereunder... shall be void:
(1) As regards the rights of any person who, in violation of any such provision, rule or regulation shall
have made or engaged in the performance of any contract...." Section 38(b) (1) of the Securities Act is
copied from Section 29 of the United States Securities Exchange Act.

It has been uniformly held that if a broker extends credit to a customer in violation of the Securities
Act or the regulations promulgated pursuant thereto, all to induce a customer to purchase securities,
then the broker has violated the law and the customer may recover from him any loss proximately
resulting therefrom. The customer's right of action is not affected by his participation in the
transaction "since the legislation regarded him as incapable of protecting himself." It has been held
that such protection was intended to apply only to innocent investors as distinguished from those who
lose their innocence and wait to see how their investments turn out before deciding to invoke the act.
The acts of protecting of investors extend to corporations as well as to individuals.

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Carolina Industries vs. CMS


Facts
Defendant CMS Stock Brokerage, Inc. (formerly Sison, Luz & Jalbuena, Inc.) was a licensed
securities broker and dealer engaged, for compensation, in the business of buying and selling stocks
and securities for and in behalf of investors, such as the plaintiff. The CMS Stock Brokerage, Inc. is a
member firm of the Makati Stock Exchange.

Plaintiff opened a margin account with defendants for purchasing, carrying and selling stocks and
securities listed in the Makati Stock Exchange, as evidenced by a "Margin Account Agreement".
Plaintiff engaged in the buying and selling of stocks and securities listed in the Makati Exchange
through defendants, utilizing for that purpose the credit or margin extended to it by defendants. The
CMS Stock Brokerage, Inc. extended loans or credit to the petitioner in the purchasing and carrying of
securities under the "Margin Account Agreement". It is not disputed that the margin account of the
petitioner with Respondent Corporation was consistently under margin at all times.

Plaintiff’s debit balance was over the 50% ceiling of its security deposit set by Section 18 (a) (1) of
the Securities Act. Petitioner's total margin deposit amounted to only P634, 796.00 and that all credits
extended to it were over the ceiling allowed, as a result of which it was consistently under margin.
Despite such under margin, Defendant bought additional Marinduque and Atlas and Lepanto
Consolidated shares for plaintiff’s account increasing plaintiff’s liability.

To recover from petitioner, defendant unilaterally liquidated the former’s margin account amounting
to P634, 796.00 by selling, at a tremendous loss, all the stocks and securities credited to its account.

Issue
Whether or not Petitioner is entitled to recover the losses it suffered arising from the unilateral
liquidation.

Held
Petitioner can recover because Respondent over-extended credit despite Petitioner being under
margin.

The primary legal issue concerns the effect on subsequent transactions of the over-extension of credit
made by private respondents in favor of petitioner. It is noteworthy that Sec. 18(a)(1) Securities Act
enjoins the over-extension of credit and not the application for excessive credit. It does not mean that
the customer to whom credit has been extended or for whom it has been arranged has acted in
violation of the Act or any rule or regulation thereunder. The nature of the brokerage business is such
that it is the broker, not the client, who is in a position to verify, at any time, the status of the client's
account. It is only the broker, therefore, who can prevent the over-extension of credit.

In the instant case, it should be noted that petitioner did not know the exact amount of its under
margin, and that even after its request for a statement of account, it was only some three months
thereafter that private respondents were able to comply. Neither is private respondents' reason that
their records are messy sufficient to exonerate respondent brokerage from the effects of its statutory
violations. It is the duty or obligation of respondent brokerage firm to keep its records in proper order.

And yet, despite the failure of petitioner to cover its deficiency, private respondent allegedly bought
for the account of petitioner Marinduque shares and Atlas and Lepanto Consolidated Mining shares at
a time when petitioner's margin account was admittedly under margin or above the 50% ceiling
required by law. This excessive extension of credit by the broker cannot be considered innocent or
inadvertent mistake.

In sum, We hold that under the attendant circumstance the over-extension of credit by CMS Stock
Brokerage, Inc. to Carolina Industries, Inc. beyond the 50% allowed by law, and the non-compliance

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with Rule B-7 of the Implementing Rules and Regulations rendered null, insofar as the rights of CMS
Stock Brokerage, Inc. are concerned, the purported purchase for petitioner's account of Marinduque
shares and Atlas and Lepanto Consolidated shares. Petitioner is, therefore, entailed to the return of the
P634,796.00 deposited with respondent brokerage and to the amount of P500,000.00 deposited with
the Bank of the Philippine Islands, as per PNB Cashier's check No. 211367.

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Cases without digest


1. Ramirez vs. Orientalist Co.
2. Board of Liquidators vs. Heirs of M. Kalaw
3. Everett vs. Asia Bank Corp
4. Communication Materials Design vs. CA
5. Merrill Lynch Futures Inc. vs. CA

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