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Power of corporation into enter to a joint venture

CORPORATION LAWS  Rule: It can do so. It may enter into a joint venture with another where the nature of that venture is
in line with the business authorized by its charter. (Aurbach v. Sanitary Wares Manufacturing
Patterned from the syllabus of Atty. Reyes. Based on the books of De Leon, Villanueva, Aquino and Sundiang. Included are
Corporation, G.R. No. 75875, Dec. 15, 1989)
UST Golden Notes and Manguera notes.
ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM
1. CLV
THE CORPORATION CODE OF THE PHILIPPINES ADVANTAGES DISADVANTAGES
a) Strong Legal Personality a) Abuse of Corporate Management
BP Blg. 68 b) Centralized Management b) Abuse of Limited liability feature
c) Limited Liability to the investors c) High cost of maintenance
FORMATION AND ORGANIZATION OF CORPORATIONS d) Free Transferability of Units of Investments d) Double Taxation
e) Lack of Personal Element
CONSTITUTIONAL BASIS
2. SUNDIANG
Art. XII, Sec. 16: The Congress shall not, except by general law, provide for the formation, organization, or ADVANTAGES DISADVANTAGES
regulation of private corporations. Government-owned or controlled corporations may be created or a) The capacity to act as a legal unit; a) More complicated in formation and
established by special charters in the interest of the common good and subject to the test of economic b) Limitation of, or exemption from, management;
viability. individual liability of shareholders; b) Higher cost of formation and operation;
c) Continuity of Existence; c) Lack of personal element;
DEFINITION OF CORPORATION d) Transferability of Shares; d) Greater governmental control and
e) Centralized management of BoD; and regulation;
Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right f) Standardized method of organization, and e) Management and control are separate
of succession and the powers, attributes and properties expressly authorized by law or incident to its finance from ownership;
existence. f) Stockholders have little voice in the
conduct of business
Power of corporation to enter into contract of partnership
 GR: None. Corporations have no power to enter into partnership. ADVANTAGES, explained:
 Reason: Public policy. In a partnership, the corporation would be bound by the acts of the persons 1. Strong Legal Personality
who are not its duly appointed and authorized agents and officers, which would be entirely  The corporation has a legal capacity to act and contract as a distinct unit in its own name;
inconsistent with the policy of the law that the corporation shall manage its own affairs separately and it has continuity of existence. A corporation’s creation, organization, management and
and exclusively. dissolution are standardized as they are governed by a general incorporation law.
 XPNs: The SEC allowed corporations to enter into partnerships with other corporations and  A corporation is an entity separate and distinct from its stockholder. While not in fact and
individuals provided: in reality a person, the law treats the corporation as though it were a person by process of
1. The authority to enter into partnership relation is expressly conferred by the Charter or fiction or by regarding it as an artificial person distinct and separate from its individual
the AOI and the nature of the business venture to be undertaken by the partnership is in stockholders. (Remo vs. IAC)
line with the business authorized by the charter or the AOI. (SEC Opinions, Feb. 29, 1980,  Note: The transfer of corporate assets to the stockholder is not in the nature of a partition
Dec. 1, 1993, and Feb. 23, 1994.) but is a conveyance from one party to another.
2. The partnership must be a limited partnership and the corporation must be a limited
partner. 2. Centralized Management
3. If it is a foreign corporation, it must obtain a license to transact business in the country.  A corporation’s management is centralized in the board of directors. A corporation
presents a more stable and efficient system of governance and dealings with third parties,
since management prerogatives are centralized in its board of directors.

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 As can be gleaned from Sec 23 of Corporation Code, it is the board of directors or trustees
which exercises almost all the corporate powers in a corporation. (Firme vs. Bukal)
 The exercise of the corporate powers of the corporation rest in the Board of Directors
save in those instances where the Corporation Code requires stockholder’s approval for
certain specific acts. (Great Asain Sales Center vs. CA)
3. Limited Liability to Investors
 Provided by jurisprudence only
 Simple division between “naked title” and “beneficial title” gives rise to limited liability.
 Peculiar only between the shareholders and a corporation
 Underlying Principle: Principle of Relativity
 CLV's formula: Strong Juridical Personality + Centralized Management= Limited Liability
 CLV: There are ways to circumvent the law to make the shareholder liable for more than
his actual share (ex. The chairman makes himself joint debtor for a loan)
 When a person invest its property in the corporation, he abdicates his “jus” of ownership
 One of the advantages of the corporation is the limitation of an investor’s liability to the
amount of investment, which flows from the legal theory that a corporate entity is
separate and distinct from its stockholders. (San Juan vs. CA)
 It is hornbook law that corporate personality is a shield against personal liability of its
officers- a corporate officer and his spouse cannot be personally liable under a trust
receipt where he entered into and signed the contract clearly in his official capacity.
(Consolidated Bank vs. CA)
 Obligations incurred by the corporation acting through its directors, officers and
employees, are its sole liabilities. (Malayang Samahan vs. Ramos)
CLV Class Notes
Q: Is a corporation in our jurisdiction given the feature of limited liability?
A: No. The feature of limited liability is given to the stockholder and not to the corporation.
Q: Is limited liability a normal run of things?
A: No. It is only there because it comes with the separate juridical personality
Q: If limited liability as shown in the corporation setting is good for the investors, does it mean that delectus
personarum is a bad thing?
A: No. It is good in a way, since person are bound by the contracts they enter into.
5. Advantages as Registered Entity
a) Corporations enjoy perpetual succession under its corporate name and in an artificial
form;
b) It has the capacity to take and grant property, and contract obligations;
c) It can sue and be sued in its corporate name as a juridical person;
d) It has the capacity to receive and enjoy common grants of privileges and immunities; and
e) Its stockholders or members generally have no personal liability beyond their shares.
DISADVANTAGES, explained:
1. Abuse of Corporate Management
 In a practical sense, investors have very little voice over the conduct of business of the
corporation.
2. Abuse of limited liability feature
 Limited liability feature has tended to increase transaction cost by the parties being forced
to enter into contractual schemes skirting the limited liability of the corporation when it is
a party to a transaction. Limited liability hits innocent people.
3. High cost of maintenance
 Complicated and Costly Formation and Maintenance. There is a greater degree of
governmental control and supervision.
4. Double Taxation
 The profits if the corporation which are already subjected to corporate income tax when
declared and distributed as dividends to the stockholders are again subjected to the
further income tax. Dividends received by individuals from domestic corporations are
subject to final 10% tax fro income earned on or after January 1, 1998 (Section 24(B)(2),
1997 NIRC). Inter-corporate dividends between domestic corporations, however, are not
subject to any income tax (Sec. 27 (D)(4), 1997 NIRC). In addition, there is re-imposition of
the 10% ―improperly accumulated earnings tax‖ for holding companies (Sec 29, 1997
NIRC)
5. Lack of Personal Element
 This has spawned corporate irresponsibility.

4. Free Transferability of Units of Investments Corporation and Partnership, distinguished

 GR: the shares of stocks can be transferred without the consent of other stockholders. This CORPORATION PARTNERSHIP
places more liquidity in the corporate setting and encourages investors to channel their Manner of creation By law or by operation of law By mere agreement of the parties
investments through corporate vehicles. Number of At least five incorporators (except a At least two persons
 Authority granted to corporations to regulate the transfer of its stock does not empower incorporators corporation sole)
the corporation to restrict the right of a stockholder to transfer his shares, but merely Commencement of From the date of the issuance of the From the moment the execution of the
authorizes the adoption of regulations as to the formalities and procedure to be followed juridical personality certificate of incorporation by the SEC contract of partnership
in effecting transfer (Thomson vs. CA)
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under its official seal
Powers expressly granted by law or
Powers to be implied from those granted or incident
exercised to its existence
The power to do business is vested in the
Management board of directors or trustees
The suit against a member of the board
Effect of
of directors or trustees who mismanages
mismanagement
must be in the name of the corporation
Right of succession Has such right
The stockholders are liable only to the
Extent of liability to extent of their investment as
third persons represented by the shares subscribed by
them
In a stock corporation, a stockholder has
the right to transfer his shares without
Transferability of
the prior consent of the other
interest
stockholders because a corporation is
not based on this principle
May not be formed for a term in excess
Term of existence of 50 years extendible to not more than
50 years in any one instance
May adopt any firm name provided it is
not identical or deceptively similar to any
Firm name
registered firm name or contrary to
existing law
Can only be dissolved with the consent
Dissolution
of the State
Laws which govern Corporation Code
BASIC ATTRIBUTES / CHARACTERISTICS OF A CORPORATION
1. It is an artificial being
2. It is created by operation of law
3. It enjoys the right of succession
4. It has the powers, attributes and properties expressly authorized by law or incident to its existence
Powers authorized by the partners
provided it is not contrary to law, morals,
good customs, public order, or public
policy
When management is not agreed upon,
every partner is an agent of the
partnership
A partner can sue a co-partner who
mismanages
Has no such right
Partners (except limited partners) are
liable personally and subsidiarily
(sometimes solidarily) for partnership
debts to third persons
A partner cannot transfer his interest in
the partnership so as to make the
transferee a partner without the consent
of all other existing partners (pursuant to
delectus personarum)
May be established for any period of time
stipulated by the partners
A limited partnership is required by the
law to add the word "Ltd." to its name
May be dissolved at any time by will of
any or all of the partners
Civil Code
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ARTIFICIAL BEING
 Consequences of separate legal personality of corporations
a) Obligations incurred by a corporation, acting through its authorized agents, are its sole
liabilities.
b) A corporation may not, generally, be made to answer for acts or liabilities of its
stockholders (members) or those of the legal entities to which it may be connected vice
versa.
c) A corporate officer is not personally and solidarily liable with the corporation for the
money claims of discharged or retrenched employees
o XPN: Officer acted with evident malice or bad faith in terminating their
employment.
d) All contracts entered into in its name by its regular appointed officers and agents are the
contracts of the corporation and not those of the stockholders or members.
e) The property of the corporation is not the property of the stockholders or members
 Criminal case filed:
a) By a corporation -> YES, crimes against property
b) Against a corporation -> NO, but technically, MONOPOLY can be.
Constitutional rights of corporations
1. Due process
2. Equal protection
3. Protection against unreasonable search and seizure
 BUT a corporation is not entitled to the privilege against self-incrimination.
CREATED BY OPERATION OF LAW
 GR: Corporation is created by law or operation of law
 Meaning: Corporations cannot come into existence by mere agreement of the parties as in the case
of business partnerships.
 They require special authority or grant from the State.
 The State exercise the power through the legislature:
a) By a special incorporation law or charter which directly creates the corporation
b) By a general corporation law under which individuals desiring to be and act as a
corporation may incorporate.
 XPN: Corporation by prescription
 Note: Corporations can only come into existence in the manner prescribed by law.
In relation to the theory of concession
 Theory of concession: the existence and legal recognition to a private corporation emanates entirely
from the discretion of the State. When the State recognizes the corporation, the latter is being
conferred a privilege because it is not a fundamental right to create a corporation.
 Thus, recognition is conditioned on compliance with all legal documentary or otherwise
requirements for the issuance of a Certificate of Incorporation.
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RIGHT OF SUCCESSION NO, the RTC held Petron liable to NCBA for attorney’s fees under Article 2208(5), which allows such an award
 Rule: A corporation has a capacity of continuous existence irrespective of the death, withdrawal, "where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly valid, just,
insolvency, or incapacity of the individual stockholders or members and regardless of the transfer of and demandable claim." However, the only justification given for this verdict was that Petron had no reason to
their interest or shares of stock. claim the V. Mapa properties because, in the RTC’s opinion, the levy and sale thereof were void.
 BUT the corporation is NOT immortal.
 Under the Corporation Code, the life of the corporation is limited to the period of time Petron’s claim to the V. Mapa properties, founded as it was on final deeds of sale on execution, was far from
started in the AOI not exceeding 50 years from the date of incorporation unless sooner untenable. No gross and evident bad faith could be imputed to Petron merely for intervening in NCBA’s suit
dissolved or unless said period is extended. against DBP and the Monserrats in order to assert what it believed (and had good reason to believe) were
its rights and to have the disputed ownership of the V. Mapa properties settled decisively in a single
POWERS, ATTRIBUTES, AND PROPERTIES OF A CORPORATION lawsuit.
 Powers that may be exercised: Only such powers as are granted by the law of its creation.
 Is express grant of power necessary? NO, all powers which may be implied from those expressly With respect to the award of exemplary damages, the rule in this jurisdiction is that the plaintiff must show
provided by law and those which are incidental or essential to the corporation's existence may also that he is entitled to moral, temperate or compensatory damages before the court may even consider the
be exercised. question of whether exemplary damages should be awarded. In view of our ruling that Petron cannot be
 Test: Whether the act of the corporation is in direct and immediate furtherance of its business, fairly made liable to NCBA for compensatory damages (i.e., attorney’s fees), Petron cannot be held liable for
incidental to the express powers and reasonably necessary to their exercise. exemplary damages either.
 Note: The powers, attributes, and properties of a corporation reinforces the theory of special
capacities. Asset Privatization Trust v. CA, Dec. 29, 1998
 Thus, it cannot be said that a corporation has fundamental rights because these rights are Whether or no MMIC is entitled to moral damages.
sourced from the law.
NO, the Court held that how could the MMIC be entitled to a big amount of moral damages when its credit
Theory of special capacities and Theory of general capacities, distinguished reputation was not exactly something to be considered sound and wholesome. Under Article 2217 of the
THEORY OF SPECIAL CAPACITIES THEORY OF GENERAL CAPACITIES Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer. A
Juridical persons Natural persons corporation whose overdue and unpaid debts to the Government alone reached a tremendous amount of P22
Can only do what is authorized by the law Can do anything except those prohibited by law Billion Pesos cannot certainly have a solid business reputation to brag about.
Other notes: (as to theory of special capacities)
 The law itself provides what the corporation can do as a juridical entity. The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to
 It includes: the derivative suit:
a) Express powers
b) Implied powers MMIC was not joined as a party plaintiff or party defendant at any stage of the proceedings. As it is, the award
c) Incident powers of damages to MMIC, which was not a party before the Arbitration Committee, is a complete nullity.
 The law itself is the source of power and authority of corporation
 It also limits the power of corporation Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the
stockholder filing suit for the corporation's behalf is only a nominal party. The corporation should be
When corporation is entitled to moral damages included as a party in the suit.
1. Besmirched reputation  An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
2. Tainted goodwill 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
CASES: such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
Petron v. NCBA, Feb. 16, 2007 party in interest.
Whether petitioner Petron Corporation (Petron) should be held liable to pay attorney’s fees and exemplary
damages to respondent National College of Business and Arts (NCBA). It is a condition sine qua non that the corporation be impleaded as a party because:
a) It is its cause of action that is being litigated and

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b) Judgment must be a res judicata against it.
If at all an award was due MMIC, which it was not, the same should have been given, regardless of whether
or not the party liable had equity in the corporation, in view of the doctrine that a corporation has a
personality separate and distinct from its individual stockholders or members. DBP's alleged equity, even if it
were indeed 87%, did not give it ownership over any corporate property, including the monetary award, its
right over said corporate property being a mere expectancy or inchoate right.
The case is a derivative suit, in which the aggrieved party or the real party in interest is the MMIC and not
any individual stockholder.
a) It is a basic postulate that a corporation has a personality separate and distinct from its
stockholders. The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong
was committed in the foreclosure, it was done against the corporation.
b) Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that
would result in the appropriation by, and the distribution to, him part of the corporation's assets
before the dissolution of the corporation and the liquidation of its debts and liabilities.
Mambulao Lumber v. PNB, Jan. 30, 1968
Whether or not Mambulao Lumber is entitled to moral damages.
Obviously, an artificial person like herein appellant corporation cannot experience physical sufferings, mental
anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral
damages. A corporation may have a good reputation which, if besmirched, may also be a ground for the award
of moral damages.
The same cannot be considered under the facts of this case, however, not only because it is admitted that
herein appellant had already ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could
have upon its reputation or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in
the mortgage contract.
Hanil v. CA, July 30, 2001
The Court held that Hanil is entitled to temperate damages in the amount of P500,000.00. As a consequence
of the illegal writ, Hanil suffered the following damages: (1) some of the checks it issued were dishonored
after its bank accounts were garnished; (2) its operation stopped temporarily for five days because it was
prevented from using its equipments and machineries; and (3) its goodwill, reputation and commercial
standing as one of the top multi-national construction firms in Asia was tarnished.
Bache and Co v. Ruiz, 37 S 823
Do private corporations enjoy protection under the Constitution?
YES, they can also invoke right to due process, against unreasonable search and seizure,etc.
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Sulo ng Bayan v. Araneta, Aug. 17, 1976
Whether or not plaintiff corporation (non- stock may institute an action in behalf of its individual members for
the recovery of certain parcels of land allegedly owned by said members; for the nullification of the transfer
certificates of title issued in favor of defendants appellees covering the aforesaid parcels of land; for a
declaration of "plaintiff's members as absolute owners of the property" and the issuance of the corresponding
certificate of title; and for damages.
NO. A corporation is a distinct legal entity to be considered as separate and apart from the individual
stockholders or members who compose it, and is not affected by the personal rights, obligations and
transactions of its stockholders or members.
This separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in
cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or where necessary
to achieve equity.
Note: Real party in interest are the members and not the corporation, thus non-stock corporation cannot
institute action for them.
 May the members execute an SPA in favor of the corporation for the latter to represent them? YES!
 BUT note that this is the exception since as a general rule corporation cannot represent individual
members of the corporation.
NATIONALITY OF CORPORATION
Place of Incorporation Test
 The corporation is a national of the country under whose laws it is organized or incorporated.
 Primary test being used in Philippine jurisdiction.
Domicile Test
 Determined by the State where it is domiciled.
 Domicile: the domicile of a corporation is the place fixed by law creating or recognizing it, in the
absence thereof, it shall be understood to be the place where its legal representation is established
or where it exercises its principal functions (Art. 51, NCC)
Control test vis-a-vis wartime test
 Determined by the nationality of the controlling stockholders or members. It is applied in times of
war.
Haw Pia v. China Banking Corp., 80 P 604
Although the corporation may be organized under the laws of the Philippines, but if the controlling
stockholders are enemies, then the veil of corporate fiction will be pierced and the nationality of the
corporation will be based on the citizenship of the majority stockholders in times of war.
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Corporation as a Philippine national (under RA 7042, Foreign Investment Act of 1991) of contracts, renders such corporation not
1. A corporation organized under the law of the Philippines of which at least 60% of the outstanding subject to visitation, control, or change
capital stock entitled to vote is owned by Filipino citizens; by the State, except in the exercise of
2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding police power.
capital stock entitled to vote is wholly owned by Filipinos; and The consent of incorporators is necessary It may be created without the consent of the
3. Where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at Consent
to the creation of private corporation. locality to be affected.
least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60 % Corporation Code: private corporation Administrative Code
of the members of the Board of Directors of both corporations must be Filipino citizens (Double 60% Law of
Public Service Act: quasi-public Special charter
Rule) creation
corporation
 The law applies the Control Test both with respect to the ownership of shares entitled to Stock: Funds from stockholders -> State
vote and the membership in the BOD. Source of
subscription price
funds
Non-stock: Members -> contribution
Grandfather rule Stock: Board of Directors Board as provided for by law; Depends upon
 Method used to determine the nationality of a corporation, in cases where corporate shareholders Management
Non-stock: Board of Trustees that assigned in law of creation
are present in the situation, by which the percentage of Filipino equity in a corporation engaged in Other distinctions:
nationalized and/or partly nationalized areas of activities, is computed, by attributing the 1. As to taxation
nationality of second or even subsequent tier ownership to determine the nationality of the 2. Liability for the torts or negligence of officers and agents
corporate shareholder. Test: If the creation is created by the State as its own agency or instrumentality for political or public purpose
 Shares belonging to corporations or partnerships at least 60 % of the capital of which is owned by connected with the administration of government, then public corporation. Otherwise, private.
Filipino citizens shall be considered as of Philippine nationality.
 But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only Dual status of public corporations
the number of shares corresponding to such percentage shall be counted as of Philippine  A public or municipal corporation possesses two kinds of power:
nationality. 1. Governmental or public -> municipal government
 Relate to Medusa ruling: We opine that we must look into the citizenship of the individual 2. Proprietary or private -> corporate legal individual
stockholders, i.e. natural persons, of that investor-corporation in order to determine if the  Test in determining which function: Whether the act performed is for the common good or whether
Constitutional and statutory restrictions are complied with. If the shares of stock of the immediate it is for the special benefit or profit of the corporate entity.
investor corporation is in turn held and controlled by another corporation, then we must look into
the citizenship of the individual stockholders of the latter corporation. In other words, if there are Private corporation includes:
layers of intervening corporations investing in a mining joint venture, we must delve into the 1. [Ma'am says this is a public corporation] Government-owned and controlled corporations: those
citizenship of the individual stockholders of each corporation. This is the strict application of the created or organized by the government or of which the government is the majority of stockholder.
grandfather rule, which the Commission has been consistently applying prior to the 1990s.  Why GOCCs are treated as private corporations? Because they are not established for the
government of a portion of the State.
CLASSIFICATIONS OF PRIVATE CORPORATION  Examples: GSIS, NAPOCOR, PNR
2. Quasi-public corporations: private corporations which have accepted from the State the grant of
Private and Public Corporation, distinguished franchise or contract involving the performance of public duties but which are organized for profit.
PRIVATE CORPORATION PUBLIC CORPORATION  They are private corporations that perform public service.
Stock: Stockholders State  Also called "public utilities" and "public service corporations."
Control
Non-stock: Members  Examples: Electric, water, telephone and transportation companies.
The charter of a private corporation is a Being mere instrumentalities of the State, are
contract between the State and the subject to governmental visitation and
Governmental
corporation or incorporators, which, control
control
under the provision of the Constitution
prohibiting laws impairing the obligation

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CASES:
Boy Scouts of the Phils v. COA, July 7, 2011
Whether or not BSP is a public corporation.
YES. Reasons:
a) It is classified as a public corporation in the BSP charter, "An Act to Create a Public Corporation to be
Known as the Boy Scouts of the Philippines, and to Define its Powers and Purposes""
b) It is classified under Art. 44(2) of NCC, "Other corporations, institutions and entities for public
interest or purpose created by law; their personality begins as soon as they have been constituted
according to law." Thus, applying Art. 45 of NCC, "Juridical persons mentioned in Nos. 1 and 2 of the
preceding article are governed by the laws creating or recognizing them."
 Note that private corporations are regulated by laws of general application on the subject.
c) It is classified as an attached agency of the DECS under the Administrative Code
 Attachment: the lateral relationship between the department or its equivalent and the
attached agency or corporation for purposes of policy and program coordination.
 The coordination may be accomplished by having the department represented in the
governing board of the attached agency or corporation. In this case, the DECS Secretary is
a member of the National Executive Board of BSP.
 In this sense, the BSP is not under government control or "supervision and control." Still
this characteristic does not make the attached chartered agency a private corporation
covered by the constitutional proscription in question
BSP not subject to test of government ownership or control and economic viability
a) The BSP is a public corporation or a government agency or instrumentality with juridical personality,
which does not fall within the constitutional prohibition in Article XII, Section 16, notwithstanding
the amendments to its charter.
b) Not all corporations, which are not government owned or controlled, are ipso facto to be considered
private corporations as there exists another distinct class of corporations or chartered institutions
which are otherwise known as "public corporations."
c) These corporations are treated by law as agencies or instrumentalities of the government which are
not subject to the tests of ownership or control and economic viability but to different criteria
relating to their public purposes/interests or constitutional policies and objectives and their
administrative relationship to the government or any of its Departments or Offices.
Nature of BSP:
a) The BSP is appropriately regarded as "a government instrumentality" under the 1987 Administrative
Code.
b) It thus appears that the BSP may be regarded as both a "government controlled corporation with an
original charter" and as an "instrumentality" of the Government within the meaning of Article IX (B)
(2) (1) of the Constitution. x x x
Ruling:
 Since the BSP, under its amended charter, continues to be a public corporation or a government
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instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the COA of
its audit jurisdiction in the manner consistent with the provisions of the BSP Charter.
Liban v. Gordon, July 15, 2009 vis-a-vis Jan. 18, 2011
PNRC as National Society:
a) It is the main characteristic of National Societies that they "are not inspired by the desire for
financial gain but by individual commitment and devotion to a humanitarian purpose freely chosen
or accepted as part of the service that National Societies through its volunteers and/or members
render to the Community."
b) The PNRC, as a National Society of the International Red Cross and Red Crescent Movement, can
neither "be classified as an instrumentality of the State, so as not to lose its character of neutrality"
as well as its independence, nor strictly as a private corporation since it is regulated by international
humanitarian law and is treated as an auxiliary of the State.
Sui generis status of PNRC:
 Although it is neither a subdivision, agency, or instrumentality of the government, nor a
government-owned or controlled corporation or a subsidiary thereof, such a conclusion does not
ipso facto imply that the PNRC is a "private corporation" within the contemplation of the provision
of the Constitution, that must be organized under the Corporation Code.
Baluyot v. Holganza, Feb. 9, 2000
The test to determine whether a corporation is government owned or controlled, or private in nature:
 Is it created by its own charter for the exercise of a public function, or by incorporation under the
general corporation law?
 Those with special charters are government corporations subject to its provisions, and its employees
are under the jurisdiction of the Civil Service Commission, and are compulsory members of the
Government Service Insurance System.
The PNRC was not "impliedly converted to a private corporation" simply because its charter was amended
to vest in it the authority to secure loans, be exempted from payment of all duties, taxes, fees and other
charges of all kinds on all importations and purchases for its exclusive use, on donations for its disaster
relief work and other services and in its benefits and fund raising drives, and be allotted one lottery draw a
year by the Philippine Charity Sweepstakes Office for the support of its disaster relief operation in addition
to its existing lottery draws for blood program."
As to PNRC's status, see Liban v. Gordon.
VFP v. Reyes, Feb. 28, 2006
Is the VFP a private corporation?
NO, VFP is a public corporation. Reasons:
1. Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation to be Known as the Veterans
Federation of the Philippines, Defining its Powers, and for Other Purposes."
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2. Any action or decision of the Federation or of the Supreme Council shall be subject to the approval
of the Secretary of Defense.19
3. The VFP is required to submit annual reports of its proceedings for the past year, including a full,
complete and itemized report of receipts and expenditures of whatever kind, to the President of the
Philippines or to the Secretary of National Defense.20
4. Under Executive Order No. 37 dated 2 December 1992, the VFP was listed as among the
government-owned and controlled corporations that will not be privatized.
5. In Ang Bagong Bayani – OFW Labor Party v. COMELEC,21 this Court held in a minute resolution that
the "VFP [Veterans Federation Party] is an adjunct of the government, as it is merely an incarnation
of the Veterans Federation of the Philippines.
VFP's contention:
1. Petitioner claims that the VFP does not possess the elements which would qualify it as a public
office, particularly the possession/delegation of a portion of sovereign power of government to be
exercised for the benefit of the public.
 The functions of petitioner corporation enshrined in Section 4 of Rep. Act No. 2640 should
most certainly fall within the category of sovereign functions. The protection of the
interests of war veterans is not only meant to promote social justice, but is also intended
to reward patriotism.
2. Petitioner claims that VFP funds are not public funds
 The fact that no budgetary appropriations have been released to the VFP does not prove
that it is a private corporation.
 Funds in the hands of the VFP from whatever source are public funds, and can be used
only for public purposes.
3. Petitioner argues that it is a civilian federation where membership is voluntary
 Petitioner’s stand that the VFP is a private corporation because membership thereto is
voluntary is likewise erroneous. As stated above, the membership of the VFP is not the
individual membership of the affiliate organizations, but merely the aggregation of the
heads of such affiliate organizations. These heads forming the VFP then elect the Supreme
Council and the other officers, of this public corporation.
4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is an attached
agency, and nor does it provide that it is an entity under the control and supervision of the DND in
the context of the provisions of said code.
 The Administrative Code, by giving definitions of the various entities covered by it,
acknowledges that its enumeration is not exclusive. The Administrative Code could not be
said to have repealed nor enormously modified Rep. Act No. 2640 by implication, as such
repeal or enormous modification by implication is not favored in statutory construction.
5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government organization in its
certification that the VFP "has not been a direct recipient of any funds released by the DBM.
Page |8
 Respondents claim that the supposed declaration of the DBM that petitioner is a non-
government organization is not persuasive, since DBM is not a quasi-judicial agency.
MIAA v. CA, July 20, 2006
Is MIAA a GOCC?
NO, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.
A government-owned or controlled corporation must be "organized as a stock or non-stock corporation."
MIAA is not organized as a stock or non-stock corporation.
MIAA not a stock corporation
 MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares.
 Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is divided
into shares and x x x authorized to distribute to the holders of such shares dividends x x x." MIAA
has capital but it is not divided into shares of stock. MIAA has no stockholders or voting shares.
Hence, MIAA is not a stock corporation.
MIAA not a non-stock corporation
a) It has no members. Section 87 of the Corporation Code defines a non-stock corporation as "one
where no part of its income is distributable as dividends to its members, trustees or officers." A non-
stock corporation must have members.
b) Even if we assume that the Government is considered as the sole member of MIAA, this will not
make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their
income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its
annual gross operating income to the National Treasury.
c) Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is
not organized for any of these purposes. MIAA, a public utility, is organized to operate an
international and domestic airport for public use.
MIAA is a government instrumentality
 MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is
that MIAA is vested with corporate powers.
 Instrumentality: refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter.(Sec. 2, Adm. Code)
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 When the law vests in a government instrumentality corporate powers, the instrumentality does not 4. As to whether they are for charitable purpose or not:
become a corporation. Unless the government instrumentality is organized as a stock or non-stock a) Eleemosynary corporation: one established for or devoted to charitable purposes or those
corporation, it remains a government instrumentality exercising not only governmental but also supported by charity.
corporate powers. b) Civil corporation: one established for business or profit

Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock 5. As to state or country under or by whose laws they have been created:
corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the a) Domestic corporation: one incorporated under the laws of the Philippines
holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock b) Foreign corporation: one formed, organized, or existing under any laws other than those
corporations. All other corporations are non-stock corporations. of the Philippines and whose laws allow Filipino citizens and corporations to do business in
its own country or state. (Sec 123)
1. As to Corporation Code:  Modes to determine if local or foreign corporation:
a) Stock corporation: one which have capital stock divided into shares and are authorized to i. Law of incorporation
distribute to the holders of such shares dividends or allotments or the surplus profits on ii. Control test: At least 60% of capital stocks solely owned by Filipino citizens
the basis of the shares held. (Sec. 3)
o Ordinary business corporation created and operated for the purpose of making a 6. As to their legal right to corporate existence:
profit which may be distributed in the form of dividends to stockholders on the a) De jure corporation: one existing both in fact and in law
basis of their invested capital. b) De facto corporation: one existing in fact but not in law
b) Non-stock corporation: one which do not issue shares and are created not for profit but
for public good and welfare and where no part of its income is distributable as dividends to 7. As to whether they are open to the public or not:
its members, trustees, or officers. (Sec 87) a) Close corporation: one which is limited to selected persons or members of the family. (Sec
o Note: Absolutely prohibited by government to distribute dividends 96‐ 105)
 Note: Some kinds of corporations cannot be organized except in the form of stock b) Open corporation: one which is open to any person who may wish to become a
corporations: stockholder or member thereto.
i. Banks o Available for public distribution and subscription
ii. Close corporations
CLOSE CORPORATION OPEN CORPORATION
2. As to the number of persons who compose them: (relevant only to religious corporations) Shareholders cannot exceed 20 or any lesser number As many shareholders as possible
a) Corporation aggregate: corporation consisting of more than one member or corporator; as mention in AoI
o E.g. religious societies, congregations, CICM Ownership, acquisition, and transfer of share is Owner of stocks has absolute control of ownership
b) Corporation sole: religious corporation which consists of one member or corporator only subject to formal restrictions
and his successor, such as a bishop or other head of the church. Absolutely prohibited from selling share of stocks in Freedom to sell shares of stocks in any exchange
 Note: Freedom of religion applies in these corporations any exchange
o SEC cannot prevent formation of a religious corporation
o State cannot order dissolution of religious corporation 8. As to their relation to another corporation
 Note: A corporation aggregate does not become a corporation sole by the mere fact that a) Parent or Holding corporation: one which is related to another corporation that it has the
its shares of stock become vested in one person power either, directly or indirectly to, elect the majority of the director of such other
o Reason: The shares may again be transferred or sold by the holder to others. corporation
b) Subsidiary corporation: one which is so related to another corporation that the majority
3. As to whether they are for religious purpose or not: of its directors can be elected either, directly or indirectly, by such other corporation.
a) Ecclesiastical corporation: one organized for religious purpose o It is one which another corporation owns at least a majority of shares and thus
b) Lay corporation: one organized for a purpose other than for religion. has control.
c) Affiliated corporation: one related to another by owning or being owned by common
management or by a long-term lease of its properties or other control device.

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o Examples:
i. Between a holding or parent company and its subsidiary
ii. Between two corporations owned or controlled by a third.
9. As to whether they are corporations in a true sense or only in a limited sense:
a) True corporation: one which exists by statutory authority
b) Quasi corporation: one which exist without formal legislative grant.
i. Corporation by prescription: one which has exercised corporate powers for an
indefinite period without interference on the part of the sovereign power and which
by fiction of law, is given the status of a corporation;
o Example: Roman Catholic Church
ii. Corporation by estoppel: one which in reality is not a corporation, either de jure or
de facto, because it is so defectively formed, but is considered a corporation in
relation to those only who, by reason of theirs acts or admissions, are precluded
from asserting that it is not a corporation.
 Ma'am said that quasi-corporations includes those formed by the Administrative Code.
Thus, it is a public corporation and it performs purely political purposes
Jurisdiction of SEC
 Rule: SEC has NO jurisdiction over corporation with original charter or created by special law.
 Jurisdiction of SEC: SEC can rule on the status of corporation belonging to this type. It has
jurisdiction to determine this issue.
Rights, powers and privileges of the government
 As a member of a corporation, the government never exercises its sovereignty; it acts merely as a
corporator
 Note: The mere fact that the government happens to be a majority stockholder of a corporation
does not make it a public corporation.
 Thus, as a private corporation, it has no greater rights, powers, or privileges than any
other corporation organized under the Corporation Code.
EDUCATIONAL CORPORATION
 A stock or non-stock corporation organized to provide facilities for teaching or instruction.

10. As to whether they are for public (government) or private purpose: STAGES IN THE FORMATION / ORGANIZATION OF A CORPORATION
a) Public corporation: one formed or organized for the government or a portion of the State
for the general good and welfare. Stages: (generally)
b) Private corporation: one formed for some private purpose, benefit or end 1. Promotion
2. Incorporation
SPECIAL CHARTER CORPORATION 3. Reorganization (not all corporations though)
Sec. 4. Corporations created by special laws or charters. - Corporations created by special laws or charters 4. Dissolution
shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, 5. Liquidation/Winding Up
supplemented by the provisions of this Code, insofar as they are applicable.
PROMOTION
Incorporation of a private corporation  Number of business operations peculiar to the business world by which the company is brought into
 Rule: The enactment of special act creating a private corporation is subject to the constitutional existence.
limitation that such corporation shall be owned or controlled by the government.  Procuring necessary legislation
 Important: A special law creating a private corporation which is neither owned nor controlled by the  Getting incorporations together
government is VOID for being in violative of the constitutional provision.  Procuring necessary subscribers to the articles of incorporation.
 This can, however, be dispensed with if the persons promoting have sufficient capital or
Governing law funds; hence, there is no need to attract prospective investors to come in.
 Rule: A corporation created by a special law or charter is primarily governed by such law and
suppletorily by the provisions of the Corporation Code "insofar as they are applicable" CLV Class Notes
 When Corporation Code is suppletorily applicable: PROMOTER'S CONTRACTCORP BY ESTOPPELDE FACTO or DE JUREDISSOLUTION
a) They are not inconsistent with the special law or charter Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such doctrine?
b) Expressly made applicable by the special law A: Where there is a representation that a corporation exists when in fact there is none and at least one party thought there
 Law as to employees and officers of GOCC: was a corporation.
a) Created by special law (GOCC w/ original charter) -> Civil Service
b) Corporation Code -> Labor Code
 May a GOCC be organized under the provisions of the Corporation Code and not by special law? YES!
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Who are promoters?
 Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor.
 Other definition: natural or juridical person engaged in the business of undertaking and ensuring the
formation of a corporation. (MLR)
 Principal right of promoter: to be paid compensation.
 Thus, from the perspective of the promoter the pre-incorporation contract is a service
contract for which he is entitled to compensation.
CLV Class Notes
Q: Differentiate a promoter from an incorporator.
A: A promoter begins or initiates the formation of a corporation while an incorporator is one of the initial
members of the SH's
CLV: The definition of promoter is important to determine the liability for promoter's contract. Before you can
make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes
initiative on the founding and organization of the business venture which eventually ends up as the
corporation being organized.
Q: At the promoter's stage there is no juridical personality until SEC issues the certificate of Incorporation.
Until the certificate is issued, the stage of the de facto corporation has not yet been reached. Prior to the de
facto corporation stage, what then is the status of the contract entered into by a promoter for and in behalf
of the person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of
the person or agent who had undertaken the transaction.
Q: How can ratification be done?
A: Ratification can be done in two ways:
1. Express ratification- a mere board resolution making the corporation liable by accepting the
contract and
2. Implied ratification- by accepting of benefits.
Q: What is the effect of promoter's contract on the corp and other contracting parties?
A: As to the corp, it is voidable, as to other contracting parties, it is valid and enforceable
Pre-incorporation contracts or promotional contracts
 All contracts leading to the actual registration of corporation (MLR)
 Parties:
1. Promoter for and in behalf of the future corporation
2. Investors/subscribers
 They bind themselves to pay money or property as initial capital of the proposed
corporation with the privilege that this contribution will be converted to share of
stocks. (MLR)
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 They are bound by the promise to contribute to the capital not as to the
corporation but among themselves.
 One principal obligation: pay the services of the promoter
 Expectation: that a corporation shall be formed.
 Thus, if no corporation is formed the promotional contracts are negated and the
contribution of the investors shall be returned.
 Note: Prior to registration with the SEC, the AoI represents a contract between and among the
incorporators and initial subscribers. Thus, their agreement shall be expressly embodied in the AoI.
 Once approved by the SEC, such AoI is a contract between the State and corporation. And by
exemption, the Articles also regulate the relationship between corporation and its officers vis-a-vis
the stockholders.
Nature of Pre-incorporation Contracts
 Under Sec 60, any contract for the acquisition of unissued stock in a corporation still to be formed
shall be deemed a subscription within the meaning of the Corporation Code.
 Under Sec 61, a subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of 6 mos. from the date of subscription, unless all of the other subscriber
consent to the revocation, or unless the incorporation of said corporation fails to materialize within
said period or within a longer period as may be stipulated in the contract of subscription. However,
no pre-incorporation subscription may be revoked after the submission of the articles of
incorporation to SEC.
 Secs 60 and 61 have effectively adopted in our jurisdiction a fused version of both ―contract
theory‖ and the ―offer theory‖ in defining the nature of pre-incorporation subscription agreements.
 Offer Theory: construes subscription agreement as only continuing offers to proposed
corporations, which offer does not ripen into a contract until accepted by the corporation
when organized. The obvious result of the offer theory is that it allows withdrawal of
subscriber at least before the corporation comes into existence and accepts the offer.
 Contract Theory: A subscription agreement among several persons to take shares in a
proposed corporation becomes a binding contract and is irrevocable from time of
subscription, unless cancelled by all parties before acceptance by the corporation.
 Subscription agreements are "special contract" in the sense that they go beyond what we would
term as ordinary contracts. Although subscription agreements are contracts between the subscriber
and the corporation, they are at the same time deemed to be contracts among the stockholders of
the corporation.
When corporation is bound by promotional contracts
1. When there is express acknowledgment by the corporation
 Can only be made after the corporation is legally born.
 How: BoD pass a resolution formally adopting the said promotional contracts.
2. Implied ratification
a) When corporation accepted benefits or gain from the promotional contracts
b) Having knowledge of these contracts, the corporation failed to deny its liability either by
silence or acquiescence, and a third party will be prejudiced.
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Theories on Liabilities for Promoter’s Contracts
 Without ratification by a corporation after its due incorporation, a contract entered into in behalf of
a corporation yet to be organized or still in the process of incorporation is void as against the
corporation (Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937])
INCORPORATION PROPER
 Drafting and execution of the Articles of Incorporation
 Filing with the SEC of the Articles of Incorporation accompanied by an affidavit showing that at least
25% of the entire authorized shares has been subscribed and at least 25% of the entire subscription
has been paid in cash.
 If governed by a special law, a favorable recommendation of the appropriate government agency is
needed in filing the Articles of Incorporation.
 Payment of filing and publication fees.
 Issuance of Certificate of Incorporation by the SEC (within a period of two years).
FORMAL ORGANIZATION AND COMMENCEMENT OF BUSINESS OPERATIONS
 Election of Board of Directors/Trustees, its corporate officers (President, Vice President, Secretary,
Treasurer) within 2 years from date of incorporation.
 If it fails, then:
a) Corporate powers cease;
b) Corporation can be deemed dissolved.
 If it commenced transaction of business but subsequently becomes inoperative for a period of at
least 5 years, the same shall be a ground for the suspension of its corporate franchise (Certificate of
Incorporation).
Marc II Marketing v. Joson, December 12, 2011
Is the corporation liable for the Management Contract entered into before the certificate of incorporation was
issued?
The Court held that the Management Contract executed between respondent and petitioner Lucila has no
binding effect on petitioner corporation for having been executed way before its incorporation.
Logically, there is no corporation to speak of prior to an entity’s incorporation. And no contract entered into
before incorporation can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed between
respondent and petitioner Lucila months before petitioner corporation’s incorporation on 15 August 1994.
Similarly, it was done when petitioner Lucila was still the President of Marc Marketing, Inc. Undeniably, it
cannot have any binding and legal effect on petitioner corporation. Also, there was no evidence presented to
prove that petitioner corporation adopted, ratified or confirmed the Management Contract. It is for the
same reason that petitioner corporation cannot be considered estopped from questioning its binding effect
now that respondent was invoking the same against it. In no way, then, can it be enforced against petitioner
corporation, much less, its provisions fixing respondent’s compensation as General Manager to 30% of
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petitioner corporation’s net profit. Consequently, such percentage cannot be the basis for the computation of
respondent’s separation pay. This finding, however, will not affect the undisputed fact that respondent was,
indeed, the General Manager of petitioner corporation from its incorporation up to the time of his dismissal.
As regards petitioner Lucila’s solidary liability, this Court affirms the same.
Rule: Corporation has a personality separate and distinct from its officers, stockholders and members such
that corporate officers are not personally liable for their official acts unless it is shown that they have
exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to
confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the
corporation.
Note: Since services were rendered to Marc Marketing, if Lucila cannot pay then the former is subsidiarily
liable.
Summary: (MLR)
1. Corporation is not a party in the Management Contract between the promoter and the expert hired
prior to incorporation.
2. The difference in the salary claimed by the expert may be collected not from the corporation but
from the promoter.
3. A corporation cannot be bound by contracts perfected and entered into before the corporation
existed.
4. Even if the consideration in a promotional contract is the formation of a future corporation, the said
corporation is not a party thereto.
Cagayan Fishing v. Sandiko, Dec. 23, 1937
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on
May 31, 1930 and the actual incorporation of said company was affected later on October 22, 1930. In other
words, the transfer was made almost five months before the incorporation of the company.
The Court held that the contract here was entered into not between Manuel Tabora and a non-existent
corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the
same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For
reasons that are self-evident, these promoters could not have acted as agent for a projected corporation
since that which no legal existence could have no agent. A corporation, until organized, has no life and
therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances
may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized.
There are, of course, but under the peculiar facts and circumstances of the present case we decline to extend
the doctrine of ratification which would result in the commission of injustice or fraud to the candid and
unwary.
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As such, if the plaintiff corporation could not and did not acquire the four 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.
Caram v. CA, June 30, 1987
The petitioners (Carams) were not involved in the initial stages of the organization of the airline, which were
being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to
speak. The petitioners were merely among the financiers whose interest was to be invited and who were in
fact persuaded, on the strength of the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not
have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof,
responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable
for its corporate acts as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the
compensation claimed by the private respondent for the services performed by him in the organization of
the corporation. To repeat, the petitioners did not contract such services. It was only the results of such
services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed
airline. The most that can be said is that they benefited from such services, but that surely is no justification
to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including
those who came in later, and regardless of the amount of their share holdings, would be equally and
personally liable also with the petitioners for the claims of the private respondent.
Pioneer Insurance v. CA, July 28, 1989
Rule: While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners , it is ordinarily held that persons who attempt, but fail, to
form a corporation and who carry on business under the corporate name occupy the position of partners
inter se.
 Thus, where persons associate themselves together under articles to purchase property to carry on a
business, and their organization is so defective as to come short of creating a corporation within the
statute, they become in legal effect partners inter se, and their rights as members of the company to
the property acquired by the company will be recognized.
However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their purpose is that no partnership shall exist, and it
should be implied only when necessary to do justice between the parties; thus, one who takes no part except
to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and contribution.
 A partnership relation between certain stockholders and other stockholders, who were also
directors, will not be implied in the absence of an agreement, so as to make the former liable to
P a g e | 13
contribute for payment of debts illegally contracted by the latter.
HELD:
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the effect
that they were induced and lured by the petitioner to make contributions to a proposed corporation which
was never formed because the petitioner reneged on their agreement.
No de facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was
acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.
Rizal Light v. Municipality of Morong, Sept. 28, 1968
Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a
municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric
began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. Before that date,
or pending the issuance of said certificate of incorporation, the incorporators cannot be considered as de facto
corporation. But the fact that Morong Electric had no corporate existence on the day the franchise was
granted in its name does not render the franchise invalid, because later Morong Electric obtained its
certificate of incorporation and then accepted the franchise in accordance with the terms and conditions
thereof.
American jurisprudence applied:
 The fact that a company is not completely incorporated at the time the grant is made to it by a
municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But
such grant cannot take effect until the corporation is organized.
 While a franchise cannot take effect until the grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully organized.
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its
action in prosecuting the application filed with the Commission for the approval of said franchise, not only
perfected a contract between the respondent municipality and Morong Electric but also cured the
deficiency pointed out by the petitioner in the application of Morong EIectric.
The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not
incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko
upon which the petitioner leans heavily in support of its position. In said case this Court held that a
corporation should have a full and complete organization and existence as an entity before it can enter into
any kind of a contract or transact any business. It should be pointed out, however, that this Court did not say
in that case that the rule is absolute or that under no circumstances may the acts of promoters of a
corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there
are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of
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a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized.
FRANCHISES OF A CORPORATION
1. Primary franchise
 Right or privilege granted by the State to individuals to exist and act as a corporation after
its incorporation. It is inalienable. It is a part of the corporation and cannot be sold or
assigned; otherwise, a corporation would be created without the consent of the
legislature.
2. Secondary franchise
 "Certificate of authority to engage in ________ business"
 A corporation may start its operation only from the moment of issuance thereof.
 The special right or privilege conferred upon an existing corporation to the business for
which it was created. May ordinarily be conveyed/mortgaged under the general power
granted to a corporation to dispose of its property, except such franchises charged with a
public use (e.g., to operate a messenger and express delivery service, to use the streets of
a city to lay pipes or tracks).
ARTICLES OF INCORPORATION
Lanuza v. CA, March 28, 2005
Whether it is the company’s stock and transfer book, or its 1952 Articles of Incorporation, which determines
stockholders’ shareholdings, and provides the basis for computing the quorum.
Articles of Incorporation.
AoI and Stock and transfer book, distinguished
1. Articles of incorporation: 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.
2. 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.
 It provides the only certain and accurate method of establishing the various corporate acts
and transactions and of showing the ownership of stock and like matters.
 Like other corporate books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or should be written
therein.
 In fact, it is generally held that the records and minutes of a corporation are not conclusive
even against the corporation but are prima facie evidence only, and may be impeached or
even contradicted by other competent evidence. Thus, parol evidence may be admitted to
supply omissions in the records or explain ambiguities, or to contradict such records.
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This case is one instance where resort to documents other than the stock and transfer books is necessary. The
stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not
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.
Rationale why STB was not used: The stock and transfer book of PMMSI cannot be used as the sole basis for
determining the quorum as it does not 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.
It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock
and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the
company of its own shares, in which it becomes treasury shares, would not affect the total number of shares
in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares but not as to
the amount of shares already subscribed.
Notes: BUT when will stock and transfer book prevail over AOI, as a way of exception?
 When STB is reflective of the current outstanding stock ownership.
CORPORATE NAME
Necessity of the corporate name
1. The corporation acquires juridical personality under the name stated in the Articles of Incorporation;
2. The corporation has the power to succession thru that name;
3. It identifies and distinguishes it from other corporations;
4. By its name it is authorized to transact business;
5. Corporate/trade name is a property right, a right in which it may assert and protect against the
whole world.
Sec. 18. Corporate name. – No corporate name may be allowed by the Securities and Exchange Commission
if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.
Guidelines for corporate name
1. Not identical or deceptively or confusingly similar to that of another existing corporation or to any
other name already protected by law.
2. Not patently deceptive or contrary to existing law;
3. The name of the corporation must end with word “Incorporated” or “Inc.” unless it includes the
word “corporation”.
4. Prohibited Use of Certain Words:
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a) Emblem, official seal, and the name of the United Nations both in its full or abbreviated
form for commercial purposes (RA No. 226);
b) Unlawful to use the word “Bonded”, in part or in whole as business name of those
maintaining any warehouse not licensed under the General Bonded Warehouse Act (Act
No. 3893).
c) Using the word “bank”, “banking”, banker”, “building and loan association”, “trust
corporation”, “trust company”, or words of similar import, when not conducting the
business of commercial banking corporation, trust corporation, savings and mortgage
bank, or building and loan association;
d) Using the words “Rural Bank”, when not authorized under the Rural Banks Act (RA No.
7353);
e) Using the term “savings and loan association” when not organized under the Savings and
Loan Association Act (RA No. 3779), or the term “development bank” unless organized
under the Private Development Banks Act (RA No. 4093);
f) Using the word “National” as portion of their name or title, except the Philippines National
Bank (PD 694), due to its connotation of being a government agency or a government-
owned or controlled corporation;
g) “UN”, “Olympic”, and Bureau in full or abbreviated form or business purposes;
h) “Financing Company”, “Finance Investment Company”, unless organized as a financing
company (RA No. 5980);
i) “Engineer”, or “Architect” unless used by persons properly registered and licensed as civil
engineers or architects (RA Nos. 544, 545);
j) “Geodetic Engineers” is prohibited except when majority of the members of the
partnership or corporation are properly registered and licensed as geodetic engineers (RA
No. 4374);
k) Subsidiary corporation of a foreign firm may carry the name of the principal company with
the word “Phil.” Or “Philippines” affixed to the firm name, with the written consent of the
mother company.
l) The name of an internationally known foreign corporation or one similar to it may not be
used by a domestic corporation without the prior consent of the former;
m) If the full name of a person forms part of the corporate name, the consent of such person
or his heir must be obtained; and
n) The word “State”, “National”, “Maharlika” and the “Barangay” cannot be used as part of
the corporate name since these are reserved for the exclusive use of the government.
o) Use of "day care" or "child care" must have permit from DSWD.
Doctrine of secondary meaning
 A word or phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically, or otherwise descriptive, might nevertheless have been used so
long and so exclusively by one producer with reference to his article, that in that trade or to that
branch of the purchasing public, the word or phrase has come to mean that the article was his
product.
 Ex. “Ang Tibay,” merely descriptive, but its products are already associated with it.
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Test of infringement
 Whether the similarity is such as to mislead a person using ordinary care and discrimination. The
right to the exclusive use of a corporate name with freedom from infringement is determined by
priority of adoption.
 Remedy in case of infringement: Injunction.
Cases under corporate name
1. A corporation has no right to intervene in a suit using a name, not even its acronym, other than its
registered name, as the law requires and not another name which it had not registered. Laureano
Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997).
2. There would be no denial of due process when a corporation is sued and judgment is rendered
against it under its unregistered trade name, holding that ―*a+ corporation may be sued under the
name by which it makes itself known to its workers.‖ Pison-Arceo Agricultural Dev. Corp. v. NLRC,
279 SCRA 312 (1997).
3. A corporation may change its name by the amendment of its articles of incorporation, but the same
is not effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34 SCRA 252
(1970).
4. A change in the corporate name does not make a new corporation, and has no effect on the identity
of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals,
216 SCRA 738 (1992).
Alonso v. Cebu, January 31, 2002
Change of name of a corporation does not result to a change of ownership of property owned by the
corporation under the previous name. Thus, the title of the land can be validly reconstituted under the second
name of the corporation.
Industrial Refractories v. CA, October 3, 2002
P: Industrial Refractories Corporation of the Philippines (formerly Synclaire Manufacturing Corporation)
R: Refractories Corporation of the Philippines
Jurisdiction of SEC over corporate names
It is the SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the
corporations involved but more so for the protection of the public, and it has authority to de-register at all
times and under all circumstances corporate names which in its estimation are likely to generate confusion.
Presence of deceptive name
Prohibition of law: Section 18 of the Corporation Code expressly prohibits the use of a corporate name which
is “identical or deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws”.
Two requisites to fall under the prohibition:
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1. That the complainant corporation acquired a prior right over the use of such corporate name; and
2. The proposed name is either:
a) identical, or
b) deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law; or
c) patently deceptive, confusing or contrary to existing law.
Test: Whether the similarity is such as to mislead a person using ordinary care and discrimination.
Petitioner’s corporate name is “Industrial Refractories Corp. of the Phils.”, while respondent’s is “Refractories
Corp. of the Phils.” Obviously, both names contain the identical words “Refractories”, “Corporation” and
“Philippines”. The only word that distinguishes petitioner from respondent RCP is the word “Industrial”
which merely identifies a corporation’s general field of activities or operations. We need not linger on these
two corporate names to conclude that they are patently similar that even with reasonable care and
observation, confusion might arise. It must be noted that both cater to the same clientele, i.e.¸ the steel
industry.
In fact, the SEC found that there were instances when different steel companies were actually confused
between the two, especially since they also have similar product packaging. Such findings are accorded not
only great respect but even finality, and are binding upon this Court, unless it is shown that it had arbitrarily
disregarded or misapprehended evidence before it to such an extent as to compel a contrary conclusion had
such evidence been properly appreciated. And even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur.
Ang mga Kaanib sa Iglesia ng Diyos vs. Iglesia, Dec. 12, 2001
P: Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan
R: Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. (H.S.K means Haligi at
Saligan ng Katotohanan)
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are, as correctly
observed by the SEC, merely descriptive of and also referring to the members, or kaanib, of respondent who
are likewise residing in the Philippines.
Significantly, the only difference between the corporate names of petitioner and respondent are the words
SALIGAN and SUHAY. These words are synonymous — both mean ground, foundation or support.
Universal Mills Corp. v. Universal Textile Mills, July 28, 1977
P: Universal Mills Corp
R: Universal Textile Mills , Inc
The corporate names in question are not Identical, but they are indisputably so similar that even under the
test of "reasonable care and observation as the public generally are capable of using and may be expected
to exercise" invoked by appellant, We are apprehensive confusion will usually arise, considering that under
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the second amendment of its articles of incorporation on August 14, 1964, appellant included among its
primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which respondent
had been engaged for more than a decade ahead of petitioner. Factually, the Commission found existence of
such confusion, and there is evidence to support its conclusion.
Lyceum of the Phils v. CA, March 5, 1993
Lyceum of the Phils not deceptively similar to Lyceum of Camalaniugan, Aparri, etc.
The Court held that the corporate names of private respondent institutions are "identical with, or deceptively
or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private
respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri"
can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of
Camalaniugan" would be confused with the Lyceum of the Philippines.
Doctrine of secondary meaning: a word or phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographical or otherwise descriptive might nevertheless have
been used so long and so exclusively by one producer with reference to this article that, in that trade and to
that group of the purchasing public, the word or phrase has come to mean that the article was his produce.
 While the appellant may have proved that it had been using the word 'Lyceum' for a long period of
time, this fact alone did not amount to mean that the said word had acquired secondary meaning
in its favor because the appellant failed to prove that it had been using the same word all by itself
to the exclusion of others.
 More so, there was no evidence presented to prove that confusion will surely arise if the same
word were to be used by other educational institutions. Consequently, the allegations of the
appellant in its first two assigned errors must necessarily fail."
Other definition of DSM: Generic or dictionary words belong to the public domain and therefore not
susceptible of private appropriation. However, when such words have through time been long associated with
a particular product or merchandise, the manufacture or producer thereof is now allowed to exclusively
appropriate and use such generic word. the burden of proof lies upon the manufacturer or producer to show
that the generic word has attained a secondary meaning.
Indiana Aerospace University v. CHED, April 4, 2001
Rules:
 No school may claim to be a university unless it has first complied with the prerequisites provided in
Section 34 of the Manual of Regulations for Private Schools.
 The act sought to be enjoined by petitioner is not violative of the latter’s rights. Respondent’s Cease
and Desist Order of July 30, 1997 merely restrained petitioner from using the term “university” in its
name. It was not ordered to close, but merely to revert to its authorized name; hence, its
proprietary rights were not violated.
 SEC has no power or authority to confer University Status to an educational institution.
Philips Export BV v. CA, Feb. 21, 1992
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P: Philips Export BV, Philip Electrical Lamps, Inc. and Philips Industrial Development, Inc.
R: Standard Philips Corporation
Held: While the corporate names of Petitioners and Private Respondent are not identical, a reading of
Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant
word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the
Philippines and abroad as the PHILIPS Group of Companies.
It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably
or likely to occur.
Jack's Lecture (Corporate Name)
No corporation name may be allowed if it is identical or deceptively or confusingly similar to that of any
existing corp. And that the way the jurisprudence has developed, the name will not be allowed if it uses a
dominant word in the name of another corporation, and they are engaged in the same line of business. Well,
you have, for example, the case of UNIVERSAL TEXTILE MILLS and somebody formed another corporation:
UNIVERSAL MILLS. The dominant word is universal, and they both engage in the same line of business.
You know, the Telephone Directory is not owned by PLDT. That is prepared by the General Telephone
Directory Corporation. PLDT is the one which merely collects the payment from the advertisers in the yellow
pages. But they don't own/publish that directory. Now, there was this bunch of swindlers who formed a
corporation:
GENERAL DIRECTORY. They would start contacting advertisers in the yellow pages: "Ay, binago na ho 'yung
set-up. Ngayon ho, we will collect the payment directly. So, we will send our collector…" You file a crim case
against them for estafa, and they'll say: "NO! We are printing or own directory." And they will show it… and it
is a thin directory. We filed a complaint with the SEC and the SEC ordered them to change their name because
it is confusingly similar with General Telephone Directory.
There was this Philippine corporation that wanted the name "Standard Phillips Corporation". Court said: that
is part of the name of Phillips Electrical Lamps, Phillips export. Phillips is the dominant word… and both of
them manufacture electrical appliances.
On the other hand, the Court has said that Lyceum of the Phils. cannot prevent other schools from using
LYCEUM because lyceum is a generic name. It means a school. Like UNIVERSITY, UE cannot prevent others
from using university as part of their name because it's a generic name. So Lyceum of the Phils. cannot have
an exclusive right to use lyceum because it is a generic term for schools.
The same way Ateneo is a spanish word which means school. But I think what has happened is the reverse… it
is a generic term that has acquired secondary meaning. You can prevent another school from using that.
Well, you have this case of Carlos Valdes, the accountant, a very controversial character (Jack's side-story
omitted). His son left his company and formed the VALDES CONSULTANTS. Valdes objected to that, because it
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was a confusingly similar name. But the SEC said: "Eh, magkaiba naman kayo ng line of business… you are in
accounting, your son set up a consultancy firm. And your clients are sophisticated big men. They know that the
two are different." So the SEC allowed that.
Now, the existence of a corporation begins at the time when you get your certification, issued by the SEC. That
is when existence begins.
There are many limitations found in the law. As for example, you are not a bank, you cannot use bank as part
of your name; you are not a financing company, you cannot use financing.
And the law prohibits the use of United Nations as part of the business name of any company. The general
Bonded Warehouse Act says, if you are not a bonded warehouse, you cannot use that as part of your name.
The SEC issued a memo circular in 1987, it was updated 2002, which says, you cannot use certain name as part
of your… like engineering, architecture… as part of the corporate name because you cannot practice a
profession. Or, it says there you cannot use calabarzon or national as part of your corporate name. Also you
cannot use Philippines 2000 as part of your corporate name.
Or any which consists of similar words… 'coz you know the records are computerized, when you apply, they
will check. And the one who verifies will list down all the names which are similar to what you have. Now, you
could be allowed to use that if you add your line of business, and you add another word which signifies that
you are engaged in a different line of business. Like for example, you have a Golden Pawnshop Incorporated,
and you have somebody running a restaurant… so, Golden Restaurants Incorporated. The SEC will allow that.
PRIMARY AND SECONDARY PURPOSE
 Determines the core business or the nature of the corporation
Sec. 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;
Purpose of purpose clause
1. Source of power or authority on the part of corporation
2. Limits what the corporation can do
Note: The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of
incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline
the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the
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accomplishment of said purpose. Therefore, the Court brushed aside the contention that the corporations
were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as
being prohibited collateral attack.
Significance of separating the primary from secondary purpose (MLR)
1. Any act, transaction or expenditure of corporate funds in pursuit of the primary purpose is
considered in the ordinary course of business. Therefore, requires only the approval of the Board.
2. On the other hand, if in pursuit of secondary purpose is not considered in the ordinary course of
business but in furtherance of purpose other than the core purpose therefore requires approval of
majority votes of the Board and 2/3 of outstanding capital.
Note: Transactions must be reasonably connected to, auxiliary to or implied to the primary or secondary
purpose. Anything outside such are ultra vires transactions and therefore void.
Rule on purposes as to stock corporation
For a stock corporation, the primary or secondary purposes must be entirely different businesses and not
connected to one another for as long as they are susceptible of lawful combination.
Illegal combinations
1. Banking + insurance
2. Life + non-life insurance
3. Two or more forms of transportation
4. Stock dealership + stock brokerage
5. Radio/TV + print
Gala v. Ellice Agro-Industrial Corp, Dec. 11, 2003
Petitioners contend that the purposes for which Ellice and Margo were organized should be declared as illegal
and contrary to public policy. They claim that the respondents never pursued exemption from land reform
coverage in good faith and instead merely used the corporations as tools to circumvent land reform laws and
to avoid estate taxes.
HELD: Purpose not illegal
The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of
incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline
the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the
accomplishment of said purpose.
In the case at bar, a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the
allegedly illegal purposes that petitioners are complaining of. It is well to note that, if a corporation’s
purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire
whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue
the certificate of incorporation.
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As to the validity of transfers:
The Court was convinced that the arguments raised by the petitioners are nothing but unwarranted
conclusions of law. Specifically, they insist that the Gala spouses never meant to part with the ownership of
the shares which are in the names of their children and encargados, and that all transfers of property to these
individuals are supposedly void for being absolutely simulated for lack of consideration. However, as correctly
held by the SEC En Banc, the transfers were only relatively simulated, inasmuch as the evident intention of
the Gala spouses was to donate portions of their property to their children and encargados.
Heirs of Pael v. CA, Feb. 10, 2000
There was violation of the purpose clause
At the time PFINA acquired the disputed properties in 1983, its corporate name was PFINA Mining and
Exploration, Inc., a mining company which had no valid grounds to engage in the highly speculative business of
urban real estate development.
From the Feb 2000 decision:
The Court of Appeals also found it unbelievable for PFINA to acquire extremely valuable real estate in Quezon
City for only P30.00 per square meter. In 1983, PFINA Mining and Exploration, Inc. was a mining company. It
changed its corporate name to PFINA Properties, Inc., only on January 22, 1998, six (6) days before filing its
petition-in-intervention with the Court of Appeals. In its petition, PFINA claimed to have bought urban real
estate in 1983, notwithstanding that at the time it was still a mining company which had no business dabbling
in the highly speculative urban real estate trade.
Uy Siuliong v. Director, Dec. 1, 1919
HELD: A corporation may be organized under the laws of the Philippine Islands for mercantile purposes, and to
engage in such incidental business as may be necessary and advisable to give effect to, and aid in, the
successful operation and conduct of the principal business.
Notes:
 Corporations can engage in business with several purposes.
 BUT, current laws state that you cannot combine other purposes/businesses with BANKING
business.
Asuncion v. De Yriarte, Sept. 24, 1914
Prohibition to make a barrio a corporation: The object of the proposed corporation, as appears from the
articles offered for registration, is to make of the barrio of Pulo or San Miguel a corporation which will become
the owner of and have the right to control and administer any property belonging to the municipality of Pasig
found within the limits of that barrio. This clearly cannot be permitted.
PRINCIPAL OFFICE
Sec. 14. xxx The place where the principal office of the corporation is to be located, which must be within
the Philippines; xxx
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Notes:
 The articles of incorporation must state the principal place where the principal office of the
corporation is to be established or located, in which place, must be within the Philippines. The place
to be designated is the city or municipality where the principal office is to be located.
 Must be within RP so that service of summons may be easily made; establishes the residence of the
corporation which is important in determining the venue of actions by or against the corporation.
 Amendment: Change of principal office does not require formal amendment. Mere notice to SEC is
sufficient.
 US jurisprudence: Principal office is where the "hub" of the airline is located.
 Hub: Place where the principal or key corporate decisions are made and not the tax haven
territories where principal office is allegedly located.
Davao Light and Power Co., Inc. v. CA, Aug. 20, 2001
A corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in
the articles of incorporation.
The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place
where the principal office of the corporation is to be located which must be within the Philippines." The
purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to
be ambulatory.
Clavecilla Radio System v. Antillon, Feb. 18, 1967
Settled is the principle in corporation law that the residence of a corporation is the place where its principal
office is established. Since it is not disputed that the Clavecilla Radio System has its principal office in
Manila, it follows that the suit against it may properly be filed in the City of Manila.
The fact that it maintains branch offices in some parts of the country does not mean that it can be sued in
any of these places. To allow an action to be instituted in any place where a corporate entity has its branch
offices would create confusion and work untold inconvenience to the corporation.
Why actions cannot be filed against a corporation in any place where the corporation maintains its branch
offices?
 The Court ruled that to allow an action to be instituted in any place where the corporation has
branch offices, would create confusion and work untold inconvenience to said entity. By the same
token, a corporation cannot be allowed to file personal actions in a place other than its principal
place of business unless such a place
Sy v. Tyson Enterprises, Dec. 15, 1982
No waiver, in this case, as to improper venue.
The petitioners, before filing their answer, filed a motion to dismiss based on improper venue. That motion
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was seasonably filed. The fact that they filed a motion for a bill of particulars before they filed their motion to
dismiss did not constitute a waiver of their objection to the venue.
Notes:
 When summon is served and accepted in the residence of the president of the corporation, the said
corporation is not estopped from assailing the proper venue, if residence of president is different
from residence of corporation as mentioned in AOI, subject to the rules on waiver or exclusively
agreed venue in the contract.
 Who can receive summons on behalf of the corporation?
a) President
b) General manager
c) Corporate secretary
d) Treasurer
e) In-house counsel
 Where should summons be served?
 At the principal office mentioned in the articles of incorporation.
Young Auto Supply v. CA, June 25, 1993
The residence of a corporation is not that one mentioned in the deed of sale or any other contracts entered
into, but that which is mentioned in the Articles of Incorporation.
TERM
Sec. 11. Corporate term. – 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. The corporate term as originally
stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no
extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there
are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange
Commission.
Notes:
 Not exceeding 50 years
 No extension of term can be effected once dissolution stage has been reached, as it constitutes new
business.
 UP Class Notes: Shall exist for a period not exceeding 50 years from the date of incorporation; may
be extended for period not exceeding 50 years by an indefinite number of amendments (meaning
that the corporation can virtually live forever); no extension can be made earlier than 5 years before
the expiry date unless there are justifiable reasons for the earlier extension.
Duty of State to during the term of corporation
 GR: The State shall accord legal recognition and all rights of a corporation including the right to exist
and operate.
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 XPN: When the corporation is guilty of offending the privilege granted by the State then it is subject
to involuntary dissolution, and the same is a pre-termination of term of a corporation.
Extension of term
 Only by amendment of the Articles of Incorporation.
 When:
a) Within the period of 5 years before the expiry date.
b) Earlier than 5 years could be made if there is a justifiable reason as determined by the SEC.
Procedure for Extension (Sec. 37)
1. Amendment of the Articles of Incorporation to be approved by a majority vote of the Board of
Directors/Trustees (board resolution) and ratified at a meeting of stockholders representing at least
2/3 of the capital stock (or 2/3 of the members).
2. Written notice of the proposed action, time, place of the meeting must be addressed to each
stockholder as shown in the corporate books;
3. Delivery of the notice to the stockholder by depositing the same to the addressee in the post office
with postage prepaid, or served personally
4. Amendments (with appropriate markings) will be submitted to the SEC attached to the original copy.
5. Amendment is effected before the corporate term of existence, for after dissolution by expiration of
the corporate term, no more corporate life to extend.
Doctrine of relation
 Where the delay in effecting the amendment is due to the neglect of the officer with whom the
application is required to be filed or to a wrongful refusal on his part to receive it, the same will be
treated as having been filed before the expiry date.
 But the occurrence of a fortuitous event or force majeure may justify the doctrine. The doctrine
does not apply if the delay is attributable to the corporation.
Shortening of term
 One mode of voluntary dissolution
 Can be made ANYTIME
Alhambra Cigar v. SEC, 24 S 269
HELD:
a) Continuance of a dissolved corporation for 3 years has only for its purpose the closure of its affairs
and no other. The corporation is enjoined from doing business for which it was established.
b) Liquidation is necessary because the Corp’s life has ended. For this reason alone, the corporation's
life may no longer be extended.
c) An extension, which is in fact an amendment, must be made during the life of the corporation and
before the expiration of the term of existence as fixed by the Articles.
d) Moreover, the filing of the certificate of extension cannot retroact to the date of the passing of the
resolution extending the life.
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Notes:
 Once the corporation is dissolved, there is really nothing to extend. The three years is allotted for
liquidation only.
INCORPORATORS
Sec. 10. Number and qualifications of incorporators. – Any number of natural persons not less than five (5)
but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock
corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.
Incorporators, defined
 They are those mentioned in the article of Incorporation as originally forming and composing the
corporation, having signed the AoI and acknowledged the same before a notary public. They have no
powers beyond those vested in them by the statute.
Incorporators, corporators, stockholders and members
1. Incorporators: Only those stockholders or members from the beginning of the existence of a
corporation
2. Corporators: Those who compose the corporation, whether as stockholders or members, whether
joined from the beginning or after incorporation
3. Stockholders or shareholders: Owners of shares in a stock corporation
4. Members: Corporators in a non-stock corporation
Number & Qualifications of Incorporators
1. Not less than 5 but not more than 15 incorporators who must be natural persons
 Reason: Artificial persons, without brain or body and existing only on paper through
 legislative command, cannot create other artificial persons.
 Exception: Rural Banks Act of 1992 (Sec. 4, RA No. 7353). Duly established cooperatives
and corporations primarily organized to hold equities in rural banks and/or subscribe
shares of stocks of a rural bank can be incorporators of rural banks.
 Exception to the number requirement: a corporation sole which is incorporated by only
one person, e.g., bishop, priest, rabbi
 A corporation may become a stock holder in another corporation by subscribing or
purchasing the latter’s stocks for the power of one corporation to own a stock in another
corporation is entirely different from its power to create or itself become one of the
incorporators of another corporation.
 A cooperative cannot be a corporation because a corporation must be formed under the
Corporation Code, but it has a separate legal existence from its members.
2. Incorporators must have the capacity to enter into a valid contract
 Reason: an act of forming a corporation is contractual in nature.
 It must be acknowledged before a notary public (its articles of incorporation).
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 It is also to secure the State and all concerned individuals against the possibility of any the stockholders of a corporation, in money,
fictitious name being subscribed to the articles and to furnish proof of the genuineness of property, services or other means.
the signatures. Abstract: Amount Concrete: Actual corporate property
Amount fixed in the articles of incorporation (where Fluctuates or varies from day to day accordingly as
3. Majority of the incorporators must be residents of the Philippines shares are with par value) and is unaffected by profits there are profits or losses or appreciation or
 A corporation composed of entirely aliens may be incorporated as long as a majority of the and losses. depreciation of corporate assets.
incorporators are residents of the Philippines, except in cases of nationalized corporations. When issued belongs to the stockholders It belongs to the corporation
 Reasons for Residence Requirement: Always personal Real or personal property
a) Because they transact business in the Philippines.
b) So that they could be easily notified (as when there are special or regular Capital stock and legal capital, distinguished
meetings). CAPITAL STOCK LEGAL CAPITAL
Merely an amount and remains unchanged except as outstanding shares are increased or reduced in number
4. Citizenship Requirement or amount.
 It is a necessary qualification for incorporators in corporations in which a certain
Limits the maximum amount or number of shares Sets the minimum amount of the corporate assets
percentage of the capital stock is required to be owned by Filipino Citizens. This rule
that may be issued without formal amendment of the which for the protection of corporate creditors, may
applies to directors and trustees. articles of incorporation not be lawfully distributed to stockholders.
 Reason: Certain nationalized activities are exclusively reserved to Filipino Citizens like
quasi-public corporations.
Kinds of capital stock
1. Authorized capital stock
5. Each of the incorporators of a Stock Corporation must own or be a subscriber to at least one (1)
 The amount of capital stock as specified in the articles of incorporation.
share of the capital stock of the corporation.
 When shares have par value: ACS same as capital stock
 Reason: The presumption is that where an incorporator has a pecuniary interest in the
 When share have no par value: No ACS, but it has capital stock the amount of which is not
corporation, he will be concerned with the management of its affairs.
specified in the AOI.
 Note: Additional shares may not be issued unless the AOI are amended by vote of the
INCORPORATING DIRECTORS
stockholders.
Sec. 14. xxx 7. The names, nationalities and residences of persons who shall act as directors or trustees until
 Void shares: Share which exceeds the ACS; no rights whatsoever
the first regular directors or trustees are duly elected and qualified in accordance with this Code; xxx 2. Subscribed capital stock
 Amount of capital stock subscribed, whether fully paid or not.
Number of incorporating directors  It connotes an original subscription contract for the acquisition by a subscriber of
1. Stock corporation: 5 - 15 only unissued shares in a corporation.
 XPN: 3. Paid-up capital stock
a) Merged or consolidated corporation: 5 - 21  That portion of the subscribed or outstanding capital stock that is actually paid.
b) Closed corporation: 5 - 20  Basically same as "actual capital stock"
2. Non-stock corporation: 5 - no limit
Note: All the incorporating directors/trustees must be qualified as incorporators i.e. possesses 5
MSCI-NACUSIP v. NWPC, March 3, 1997
abovementioned qualifications
Discussions about paid-up capital:
By express provision of Section 13, paid-up capital is that portion of the authorized capital stock which has
AUTHORIZED CAPITAL STOCK
been both subscribed and paid. To illustrate, where the authorized capital stock of a corporation is worth P 1
million and the total subscription amounts to P250,000.00, at least 25% of this amount, namely, P62,500.00
Capital stock and capital, distinguished
must be paid up per Section 13. The latter, P62,500.00, is the paid-up capital or what should more accurately
CAPITAL STOCK CAPITAL be termed as "paid-up capital stock."
The amount fixed in the articles of incorporation, to The entire property or assets of the corporation
be subscribed and paid in or agreed to be paid in by In the case under consideration, there is no dispute, and the Board even mentioned in its August 17, 1993

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Decision, that MSCI was organized and incorporated on February 15, 1990 with an authorized capital stock of
P60 million, P20 million of which was subscribed. Of the P20 million subscribed capital stock, P5 million was
paid-up. This fact is only too glaring for the Board to have been misled into believing that MSCI'S paid-up
capital stock was P64 million plus and not P5 million.
The losses incurred by the company is way beyond its paid-up capital making it qualified to be a distressed
employer.
4. Outstanding capital stock
 The portion of the capital stock which is issued and held by persons other than the
corporation itself.
 Code: The total shares of stock issued to subscribers or stockholder, whether or not fully
or partially paid (as long as there is a binding subscription agreement), except treasury
shares.
5. Legal Capital
 Amount equal to the aggregate par value and/or issued value of the outstanding capital
stock.
 Excess not part of legal capital: When par value shares are issued above par, the premium
or excess is not to be considered as part of the legal capital.
 All legal capital if no par value shares: In case of no par value shares, the entire
consideration received forms part of legal capital and shall not be available for
distribution as dividends.
Subscription contract
 Contract between the corporation (issuer) and another (subscriber) whereby the latter agrees to
take and pay for a specified number of shares whether fully paid or not.
 Special kind of special contract whereby the only object is share of stock (originally being disposed
of)
Minimum requirements for incorporation (SLU Reviewer)
Sec. 12. Minimum capital stock required of stock corporations. – Stock corporations incorporated under this
Code shall not be required to have any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following section.
Minimum Capital Stock
 GR: No minimum capital stock is required for stock corporations incorporated under the Corporation
Code as long as the paid-up capital is not less than P5,000.00
 XPN: Filipino percentage ownership requirement regarding corporate capital in nationalized
corporations or when special laws state otherwise.
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Minimum Subscription and Paid-Up Capital for Incorporation
1. Minimum Subscribed Capital: At least 25% of the authorized capital stock as stated in the Articles
of Incorporation must be subscribed at the time of incorporation;
 Computation of the 25% subscription requirement:
a) Where capital stock consists of par value shares: The minimum subscription
should be 25% of the amount of the authorized capital stock or 25% of the
aggregate value of all the shares of stock the corporation is authorized to issue.
In par value stock corporations, the percentage subscription requirement shall
always be based on the amount of the authorized capital stock irrespective of
the class, number, and par value of the shares.
b) Where the capital stock consist of no par value shares: The 25% requirement
shall be computed on the basis of the entire number of authorized shares.
Corporations whose shares have no par value have no authorized capital stock
the issued price of no par value shares need to be fixed in the articles of
incorporation.
c) Where the capital stock is divided into par value shares and no par value
shares: The requirement as to par value shares is as indicated above and for the
no par value shares, the 25% is based on the number of the said no par value
shares.
2. Minimum Paid-Up Capital: At least 25% of the total subscription must be paid upon subscription but
must not be less than P5,000.00.
 Reason: To give assurance to the investing public dealing with the new corporation that it
is financially and actually able to operate and undertake to do business as they arise from
the start of its operations.
 XPN: When special laws require higher minimum capitalization such as:
i. Insurance Corporations – P5 million
ii. Pawnshop established as a corporation – P100,000.00
iii. Financial Intermediary applying for authority to perform quasi-banking functions
– P50 million
Filipino percentage ownership requirement with respect to corporate capital
Corporations for exploration, development, and utilization of natural At least 60% of the capital
resources
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Public service corporation
Educational corporations
Corporations engaged in mass media
Corporations engaged in advertising industry
Banking corporations
Corporations engaged in retail trade
Rural banks
Corporations engaged in coastwise shipping
Financing companies
At least 60% of the capital
The participation of foreign investors
in the governing body of any public
utility enterprise shall be limited to
their proportionate share in its
capital, and
All the executive and managing
officers of such corporation must be
Filipino citizens.
GR: At least 60% of the capital
XPN: Established by religious orders
and mission boards
The control and administration of
educational institutions shall be
vested in Filipino citizens
Wholly by citizens
At least 70% of capital stock
The participation of foreign investors
in the governing body of a
corporation engaged in the
advertising industry shall be limited
to their proportionate share in the
capital thereof.
All the executive and managing
officers of such corporation must be
Filipino citizens.
At least 60% of capital stock
Wholly owned by citizens
Wholly owned by citizens
Capital stocks must be held directly
or indirectly by Filipino citizens or
corporations, associations, or
cooperatives qualified under
Philippine laws to own or hold such
capital stock
At least 60% of capital stock
At least 60% of capital stock
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Corporations engaged in the pawnshop business At least 70% of voting capital stock
Corporations engaged in the recruitment or placement of workers, At least 75% of the authorized and
locally or overseas voting capital stock
Corporations engaged in the operation of a private detective, Wholly owned by citizens
watchman or security guard agencies
Summary of percentages (SLU Reviewer)
1. 100% Filipino owned:
a) Mass media (radio, TV, and printed)
b) Rural Banks – 100% of its capital stock
c) Rice and corn industry
d) Security, watchman, and detective agency
2. 70% Filipino owned
a) Advertising Industry
b) Banks other than rural banks and new banks established by consolidation of branches or
agencies of foreign banks in the Philippines
c) Private development Banks
d) Savings and Loan associations
3. 60% Filipino owned
a) Financing companies - 60 % of its capital stock
b) Fishing and business activity relating to fishing Industry – 60% of its capital stock
c) Exploration, Development, and Utilization of Natural Resources
d) Owners of lands
e) Operation of Public Utility
f) Educational institutions other than those established by religious groups
g) Any business reserved by Congress
4. Majority Owned by Filipinos
a) Investment House
DISCUSSIONS ON AUTHORIZED, SUBSCRIBED AND PAID-UP CAPITAL STOCKS (MLR CLASS NOTES)
Proprietary rights arising from ownership of share of stocks
1. Dividend rights - right to the surplus profit
2. Voting rights - right to participate in the management of the corporation
3. Asset rights
As to authorized capital stocks
 In AoI, state the following:
a) Max shares
b) IF one type only: Mere number of shares to its maximum
c) IF mix shares: Max number of shares for each class
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Examples the Securities and Exchange Commission.

ACS - P10M consisting of 1M par value shares
 800K of which common at par value P10.00 Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder
 200K of which preferred at par value P8.00 of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares
without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share:
ACS - P10M no par value shares, value to be determined by ______. Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be
Who must determine the par value share? treated as capital and shall not be available for distribution as dividends.
 GR: Expressly stated in AoI
 XPN: BoD + majority of ACS holders. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional
or legal requirements.
As to subscribed capital stocks
 Rule: At least 25% must be subscribed Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share
 Subscribed: Disposed of and in the hands of third persons, whether paid or unpaid. shall be equal in all respects to every other share.
 Need of subscription contract: It is a contract between the corporation and persons where the
latter agreed to pay for shares. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:
Who are initial subscribers?
 Incorporators! 1. Amendment of the articles of incorporation;
 Reason: They need to own at least one share of stock. 2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
As to paid up capital stocks property;
 Rule: At least 25% of the subscribed capital stocks 4. Incurring, creating or increasing bonded indebtedness;
 Minimum PCS requirement: 5. Increase or decrease of capital stock;
 GR: No minimum for paid up capital stock but must not be less than 5K. 6. Merger or consolidation of the corporation with another corporation or other corporations;
 XPN: If special law sets minimum PCS for a business 7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
SHARES OF STOCK
Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
series of shares, or both, any of which classes or series of shares may have such rights, privileges or corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise Stock or share of stock, defined
provided in this Code: Provided, further, That there shall always be a class or series of shares which have  One of the units which the capital stock is divided.
complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value
as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, Capital stock and share of stock, distinguished
insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par CAPITAL STOCK SHARE OF STOCK
value shares of stock. Used in a collective sense to signify the whole body of Commonly used in a distributive sense to refer to the
shares of stock in the corporation. stock in the hands of the stockholders and, therefore,
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets belong to them.
of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may
be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That Nature of share of stock
preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized 1. Each share merely represents a distinct undivided share or interest in the common property of the
in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series corporation.
thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with

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 The ownership of share of stock confers no immediate legal right or title to any of the utilities, and building and loan associations shall not be permitted to issue no par value
property of the corporation. shares of stock.
2. Shares of stock constitute property distinct from the capital or tangible property of the corporation
and belong to the different owners. COMMON AND PREFERRED SHARES, DISTINGUISHED
3. Incorporeal in nature, the shares are personal property of the stockholder (except treasury stock 1. Common shares
which belongs to the corporation)  Shares which do not enjoy any preference, thus rights by owners are purely STATUTORY.
4. They are in the nature of choses in action, but not in a strict sense.  One which entitles the holder thereof to a pro rata division of profits, if there are any, and
 Shares do not constitute an indebtedness of the corporation to the shareholder and are, in its assets upon dissolution, without any preference or advantage in that respect over
therefore, not credits as to make the stockholder a creditor of the corporation. other stockholders or class of stockholders but equally with all other stockholders except
5. A share of stock only typifies a proportionate or aliquot part of the corporation's property, or the preferred stockholders.
right to share in its proceeds to that extent when distributed according to law.  Its holders stand upon equal footing, without extraordinary rights or privileges.
 Common shares have complete voting rights.
Certificate of stock o They cannot be deprived of said rights except as provided by law.
 A written acknowledgment by the corporation of the interest, right, and participation of a person in  A corporation may issue more than one class of common stock e.g. "Class A," "Class B"
the management, profits, and assets of a corporation.
2. Preferred shares
Situs of share of stocks  One with a stated par value which entitles the holder thereof to certain preferences over
PURPOSE SITUS the holders of common stock.
Execution, attachment and garnishment Domicile or residence of the corporation  These entitle the shareholder to some priority on distribution of dividends and assets
Registration of chattel mortgages on shares of stock Province or city in which the corporation has its over those holders of common shares.
principal office or place of business  Distribute the dividends and assets first as mentioned in the AoI with regard to preferred
Property taxation GR: Domicile or residence of the owner shares, then whatever is left must be distributed to owners of common shares. Preference
XPNs: may be in form of:
1. Shares of stocks of domestic corporation of 1. Sum of money
a non-resident foreigner are taxable in the 2. Percentage
Philippines.  Rule: Preferred and redeemable shares may be issued only with a stated par value.
2. Estate tax: gross estate of a resident  There may be more than one class of preferred shares e.g. "first preferred," "second
decedent, whether citizen or alien, or a preferred"
citizen decedent, whether resident or  Preference, basis: Those stated in AOI
nonresident, includes intangible property  Guaranteed stock: Synonymous with preferred stock on which the payment of dividend is
wherever situated guaranteed.
o Distinction with preferred stock: GS is entitled to arrears in dividends, while PS
CLASSIFICATIONS OF SHARES OF STOCK is not.
 GR: The shares of stock in a corporation may be divided into classes or series of shares, or both, any  Interest bearing stock: The corporation agrees absolutely to pay interest before dividends
of which classes or series of shares may have such rights, privileges or restrictions thus must be are paid to common stockholders
stated in the AoI in order to be valid. o When legal: If construed as requiring payment of interest as dividends from net
 XPNs: earnings or surplus only.
a) No share may be deprived of voting rights except those classified and issued as "preferred"
or "redeemable" shares. Kinds of preferred shares
b) There shall always be a class or series of shares which have complete voting rights. 1. Preferred shares as to assets: Shares which gives the holder preference in the distribution of the
c) Any or all the shares or series of shares may have par value or have no par value as may be assets of the corporation in case of liquidation.
provided for in the AoI, except that banks, trust companies, insurance companies, public  Note: Cumulative and non-cumulative preferred shares can also be applied here.
a) Participating preferred shares

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o A share which gives the holder thereof not only the right to receive the
stipulated dividends but also to participate with the holders of common shares
in the remaining profits pro rata after the common shares have been paid the
amount of the stipulated dividend at the same preferred rate.
o Entitled to participate with the common shares in excess distribution
b) Non‐participating preferred shares
o It is a share which entitles the holder thereof to receive the stipulated preferred
dividends and no more. The balance, if any, is given entirely to the common
stocks.
o Not entitled to participate with the common shares in excess distribution
 Right of stockholders to assets of corporation
a) During lifetime of corporation: Stockholders has no right over the assets
b) When corporation is dissolved: Stockholders acquire rights over the assets PROVIDED
THAT there is residual assets after paying the corporation's liabilities.
c) How payment is made? Liquidating dividends
 Notice that stockholders are like heirs in succession. :)
Example: Participating and non-participating
Capital stock of A Corp. is 100K divided into 1000 shares with par value of P100 per share. 300 shares are
preferred and 700 are common. Preferred shares are entitled to dividends at the preferred rate of 10%.
NON-PARTICIPATING
A Corp declared a dividend of P5100, the 10% preference must first be paid to the owners of the preferred
shares, with a total of P3000 (10 per share * 300 shares). Balance of P2100 will be divided among the holders
of common shares at P3 each share (2100 remaining dividends / 700 shares).
NON- PARTICIPATING
A Corp declared dividend of P11,400, then 3000 will go to owners of preferred shares with P10 per share.
Thus, the owners of commons stocks would be receiving P8400 or P12 each share.
PARTICIPATING
1. Owners of preferred shares get P3000 or 10 per share * 300 shares.
2. Balance: P8400; Owners of common shares get P7000 or 10 per share * 700 shares.
3. Balance: P1400; Distribute this amount to both owners of preferred and common shares. Thus, they
will receive additional P1.40 per share (P1400 / 1000 total shares).
2. Preferred shares as to dividends: Shares which are entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of common stock.
 Note: Participating and non-participating preferred shares can also be applied here.
a) Cumulative preferred shares
o Share which entitles the holder thereof not only the payment of current
dividends but also to dividends in arrears.
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o Rule: If the stipulated dividend is not paid in a given year, it shall be added to the
dividend which shall be due the following year.
o Thus, the accumulated dividends must be paid to the holder of said preferred
share before any dividend may be paid to the holders of common stock.
b) Non-cumulative preferred shares
o Share which entitles the holder thereof to the payment of current dividends only
in preference to common stockholders.
o Rule: If dividends are not declared in a given year, the right to the dividends for
that particular year is extinguished.
o There is no need to make up for undeclared dividends
Example: Cumulative and non-cumulative
CUMULATIVE
S owns 10 preferred shares of X Corp with par value of P100 per share at 5% guaranteed cumulative dividends.
If after 4 years. the corporation decided to declare the regular annual dividend, how much will S receive?
P250: P50 for each year or total of P200 for 4 years (representing dividends in arrears) + the dividend of P50
for the current year.
NON-CUMULATIVE
He would only be paid for the current year at P5 per share, or a total of P50.
3. Cumulative –Participating Preferred Share
 The holder is entitled not only to dividends in arrears but also, after receiving his preferred
share of dividends, to participation with the holders of common stocks in the remaining
profits.
Preference among preferred shares
 Rule: Preferred shares of stock enjoy the same preferences or privileges.
 This is true when AOI is silent about such classification.
Other rules regarding preferred stockholders
1. Preferences granted to preferred stockholders do not give them a lien upon the property of the
corporation.
2. Stock cannot be issued with a fixed interest instead of dividends inasmuch as this will make the
contract of subscription one of loan.
3. The dividends payable by the corporation may be in the nature of interest.
 Note: In number 2, fixed interest is prohibited because the preferred shareholder must
also assume the risk of profit or loss. Whereas in this number, there is already a profit and
dividends is just made payable in the form of interest.
4. Dividends are, in terms, guaranteed.
 Does not make the shareholders creditors as they are entitled to dividends only when
there are profits out of which dividends may be declared.
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 Effect of guarantee: Makes the dividends cumulative, making the profits of one year make
up for the deficiencies of the preceding year or years.
5. It is immaterial how or where the holder obtained his stock since the preference belongs to the
stock and not to the stockholder.
 Thus, the fact that preferred stockholders were formerly corporate creditors gives them no
greater right as against creditors.
Limitations regarding issuance of preferred shares
1. Preferred shares deprived of voting rights in the AOI shall still be entitled to vote on the following
matters: (although they shall not be entitled to vote on other matters)
a) Amendment of the articles of incorporation;
b) Adoption and amendment of by-laws;
c) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
d) Incurring, creating or increasing bonded indebtedness;
e) Increase or decrease of capital stock;
f) Merger or consolidation of the corporation with another corporation or other
corporations;
g) Investment of corporate funds in another corporation or business in accordance with this
Code; and
h) Dissolution of the corporation.
2. Preferences of the preferred shares must not be violative of the provisions of the Code.
3. Preferred shares may be issued only with a stated par value.
4. The board of directors may fix the terms and conditions of preferred shares of stock or any series
thereof only when:
a) Authorized by the AOI; and
b) Such terms and conditions shall be effective upon filing a certificate thereof with the SEC.
 Concurrence of stockholders not required: No need for concurrence of 2/3 of the
outstanding capital under Sec. 16.
 No blanket authority for BOD: In fixing the terms and conditions of BOD, they must state
the privileges, preferences, restrictions, or rights of the preferred shares.
PAR VALUE AND NO PAR VALUE SHARES, DISTINGUISHED
1. Par value shares
 Shares with a value fixed in the articles of incorporation and the certificates of stock.
 Purpose: The par value fixes the minimum issue price of the shares.
 GR: A corporation cannot sell less than the par value but a shareholder may sell the same
less than the par value because it is his.
 XPN: Corporation can sell REISSUED TREASURY SHARES even below par values.
 May a corporation issue shares with different par values? YES.
 Shares sold below its par value is called watered stocks.
 Watered stocks are subject to Sec. 65 liability; you can hold responsible
corporate officers liable.
2. No par value shares
 These are shares having no stated value in the article of incorporation.
 A no par value share has no par value but it has always an issued value, which is the
consideration fixed by the corporation for its issuance.
 Note: BoD can change the issued value of NPV shares unlike PV shares.
 Note further that the law PROHIBITS the selling of stocks WITHOUT
consideration.
 NPV shares represent only an aliquot part of the whole number of such shares of the
issuing corporation and NOT proportionate interest in the capital stock measured by value
 Limitations:
a) Shares which are no par value, cannot have an issued price of less than P5.00;
b) The entire consideration for its issuance constitutes capital so that no part of it
should be distributed as dividends;
c) They cannot be issued as preferred stocks;
d) They cannot be issued by banks, trust companies, insurance companies, public
utilities and building and loan association;
e) The articles of incorporation must state the fact that it issued no par value
shares as well as the number of said shares;
f) Once issued, they are deemed fully paid and non‐assessable.
o This presumption is rebuttable.
o Non-assessable: Cannot be declared delinquent (if really not paid),
thus it eliminates the risk of delinquency.
VOTING AND NON-VOTING SHARES, DISTINGUISHED
1. Voting shares
 Share with right to vote
 Each common share shall be equal in all respect to every other common share. Thus,
prohibited acts:
i. Issuing multiple voting and non-voting common shares
ii. Limiting the maximum number of votes per stockholder irrespective of the
number of shares he holds.
 Preferred and redeemable shares: May be deprived of voting rights
 Founder's shares: May be given exclusive right to vote and be voted for in the election of
directors for a limited period in which case voting common stocks will have no right to
vote for directors.
 Note: Whenever a vote is necessary to approve a particular corporate act, such vote refers
only to stocks with voting rights except those mentioned under Sec.6, par.6.
o Rule: "One share, one vote" and NOT "one holder, one vote"
2. Non-voting shares
 Share without right to vote
 There must be EXPRESS denial of voting rights in AoI; otherwise, they are considered as
voting shares.

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 Rules:
i. If stock is originally issued as voting stock, it may not thereafter be deprived of
the right to vote without the consent of the holder.
ii. The law only authorizes the denial of voting rights in the case of redeemable
shares and preferred shares, provided that there shall always be a class or series
of shares which have complete voting rights.
iii. Where non-voting shares are provided for, the Code requires that there shall
always be a class or series of shares which have complete voting rights.
iv. Only preferred and redeemable shares may be denied the right to vote.
Instances where holders of non-voting shares are allowed to vote
 These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental matters: (AASIIMID)
a) Amendment of articles of incorporation
b) Adoption and amendment of by‐laws
c) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property
d) Incurring, creating or increasing bonded indebtedness
e) Increase or decrease of capital stock
f) Merger or consolidation of the corporation with another corporation or other corporations
g) Investment of corporate funds in another corporation or business in accordance with this Code
h) Dissolution of the corporation.
FOUNDERS SHARES
Section 7. Founders’ shares. – Founders’ shares classified as such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period
shall commence from the date of the aforesaid approval by the Securities and Exchange Commission.
REDEEMABLE SHARES
Section 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions as may be stated in the articles of incorporation,
which terms and conditions must also be stated in the certificate of stock representing said shares.
Redeemable shares, defined
 Shares, usually preferred, which by their terms are redeemable at a fixed date or at the option of:
a) The issuing corporation or
b) The stockholder or
c) Both at a certain redemption price.
Redemption, defined
 It is the repurchase, the reacquisition of stock by a corporation which issued the stock in exchange
for cash or property, whether or not the acquired stock is cancelled, retired or held in the treasury.
 Effects of redemption:
a) Redemption, in a sense, is a repurchase of the stock for cancellation.
b) Reacquired redeemable shares are considered retired and no longer issuable, except if
provided otherwise by AoI.
Limitations on redeemable shares
1. Redeemable shares may be issued only when expressly provided for in the Articles of
Incorporation;
 Note: Common shares are never "redeemed."
 Redemption optional with corporation: The redemption rests entirely with the
corporation, and the stockholder is without right to either compel or refuse the
redemption of his stock.

Founders' shares, defined 2. The terms and conditions affecting such shares must be stated both in the articles of Incorporation
 Shares issued to organizers and promoters of a corporation in consideration of some supposed right and in the certificates of stock representing such shares;
or property.
 Such share usually share in profits only after a certain percentage has been paid upon the common 3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless
stock BUT are often given special privileges over the other stock as to voting and as to division of otherwise provided in the Corporation Code.
profits
 But if an exclusive right to vote and be voted for as director is granted, it needs: 4. Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings
a) The approval of the SEC, and provided that the corporation has, after such redemption, sufficient assets in its books to cover
b) Cannot exceed 5 years from the date of approval. debts and liabilities inclusive of capital stock.
o This limitation is non-extendible.  Unrestricted retained earnings: These are surplus profits not subject to encumbrance.
o Thus, after the 5-year limitation period, founders shall have equal rights with the
holders of common shares. 5. Redemption may not be made where the corporation is:
o Notes: Preferred shares are not affected by this limitation. Their status remains a) insolvent; or
even after the expiration of 5-year period.
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b) if such redemption would cause insolvency or inability of the corporation to meet its  Since they do not lose their status as issued shares, they cannot be treated as new issues
debts as they mature. when disposed of or reissued.
6. Corporation who issued redeemable shares must set up and maintain a sinking fund to cover the  Treasury shares are not liability of corporation: Treasury shares are issued shares but being in the
redemption price of the redeemable shares at specified dates in the future. treasury, they do not have the status of outstanding shares in the sense that they do not constitute a
liability of the corporation.
Illustration
Pogi Corp issued 1000 redeemable shares at 5000/share to X, so P5,000,000. Treasury shares vs. authorized but unissued shares
 The acquisition of the former does not reduce the number of issued shares or the amount of capital
Terms: stock
1. Maturity: 5 years  Their sale does not increase the number of issued shares or the amount of stated capital.
2. Coupon rate: 12%/annum
3. Redemption: At option of Pogi Corp or conversion into common share Treasury shares vs. retired or cancelled shares
 Former may be sold, the latter has disappeared altogether.
Thus:  Status of TS on resale differs from that of newly created shares which cannot be issued for less than
 Every year, detach the coupon and ask for payment of interest from Pogi Corp the legal minimum consideration.
 At the end of the 5 year period, ask for P5M plus the interest on that year.
 What will happen to those reacquired/redeemed shares by Pogi Corp? They become TREASURY Effect of purchase or acquisition
SHARES.  If purchased from stockholders: The transaction in effect is a return to the stockholders of the value
of their investment in the company and a reversion of the shares to the corporation.
TREASURY SHARES  The corporation must have surplus profits with which to buy the shares so that the
Section 9. Treasury shares. – Treasury shares are shares of stock which have been issued and fully paid for, transaction will not cause impairment of the capital.
but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some  If acquired by donation from the stockholders: The act would amount to surrender of their stock
other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of without getting back their investments that are, instead voluntary given to the corporation.
directors.  Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable,
provided it is reasonable.
Treasury shares, defined  Subject to tax: The sale of treasury shares should be treated as a sale of ordinary property of the
 Shares which have been lawfully issued by the corporation and fully paid for and later reacquired it corporation.
either by: (PROF-D)
a) Purchase Limitations on treasury shares
b) Redemption 1. They may be re‐issued or sold again as long as they are held by the corporation as treasury shares.
c) Donation 2. Cannot participate in dividends.
d) Forfeiture or 3. It cannot be represented during stockholder’s meetings.
e) Other lawful means. 4. The amount of URE equivalent to the cost of treasury shares being held shall be restricted from
 To put simply, these are shares reacquired by the corporation. They are called treasury shares being declared and issued as dividends.
because they remain in the corporate treasury until reissued. More importantly, they have no:  Note: When treasury shares are sold below its par or issued value, there can be no watering of stock
a) Voting Rights because such watering contemplates an original issuance of shares.
b) Right to dividends.
 Note: Treasury shares are not retired shares. They do not revert to the unissued shares of the Other classifications of stocks
corporation but are regarded as property acquired by the corporation which may be reissued or 1. Convertible shares
resold at a price to be fixed by the Board of Directors.  A share that is changeable by the stockholder from one class to another at a certain price
 So how would you retire treasury shares? By decreasing the capital stock of the and within a certain period.
corporation in accordance of Sec. 38 for the purpose of eliminating the treasury shares.  GR: Stockholder may demand conversion at his pleasure.
 XPN: Otherwise restricted by the articles of incorporation.

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 Convertibility of Shares:
i. Preferred to Common – in the absence of an express provision in the AoI as to
that convertibility, preferred shares cannot be converted to common.
ii. No Par Value to Par Value – allowed by SEC provided there would be no change
in the stockholders’ percentage interest in the total assets of the corporation.
2. Fractional share
 A share with a value of less than one full share
. 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the
3. Shares in escrow
 Subject to an agreement by virtue of which the share is deposited by the grantor or his
agent with a third person to be kept by the depositary until the performance of certain
condition or the happening of a certain event contained in the agreement.
4. Over‐issued stock
 It is a stock issued in excess of the authorized capital stock; it is null and void.
5. Street certificate
 It is a stock certificate endorsed by the registered holder in blank and the transferee can
command its transfer to his name from issuing corporation.
6. Promotional share
 This is a share issued by promoters or those in some way interested in the company, for
incorporating the company, or for services rendered in launching or promoting the welfare
of the company.
Are classes of shares infinite?
 Yes. There can be other classifications as long as they are indicated in the AOI, stock certificate and
not contrary to law.
 Who may classify shares then?
a) Incorporators: the classes and number of shares which a corporation shall issue are first
determined by the incorporators as stated in the articles of incorporation filed with the SEC.
b) Board of directors and stockholders: After the corporation comes into existence; they may be
altered by the board of directors and the stockholders by amending the articles of
incorporation pursuant to Sec. 16.
 Doctrine of equality of shares: Where the Articles of Incorporation do not provide for any
distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and
enjoy the same rights and privileges and are also subject to the same liabilities (Sec. 6).
SUBSCRIBERS
Subscription requirement, explained
Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. – At least
twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be
subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must
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be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription
without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00)
pesos.
Sec. 14.
xxx
number of shares into which it is divided, and in case the share are par value shares, the par value of each, the
names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are without par value, such fact must be stated; x x x
25-25 RULE
 When you form a corporation, at least 25% of the authorized capital stock must be subscribed and
at least 25% of the subscription must be paid.
 You can form a subsidiary where 5 individuals will subscribe to 1 share each to qualify for the
board—you must own at least 1 share to be an incorporator, the rest of the shares will be
subscribed by the holding corporation and that will satisfy the 25-25 rule, because that holding
corporation paid for the subscription. In computing 25-25 rule, subscriptions made by a corporation
will be included. Corporations can be subscribers, only that they cannot be incorporators.
 Note: It is not required for purposes of incorporation that each and every subscriber shall pay 25%
of his subscription as long as the 25% of the total subscription is paid.
 Note: The minimum 25% paid-up requirement applies only to par value shares
 Reasons: A subscriber to no par value shares must pay in full his subscription.
 In no case shall the paid-up capital be less than P5K. Other considerations
a) Violation of the provision may subject the erring incorporators and/or directors for
prosecution.
b) Full payment of subscription by foreigners
o Reason: Difficulty in compelling them to pay when outside the country
c) The number of shares subscribed, the amount subscribed, and the amount paid by each
stockholder must be stated in the AOI.
 When 25-25 rule is applicable:
a) During the incorporation period
b) In case of increase of the authorized capital stock
Computation of 25% capital subscription requirement
The capital stocks consist only 25% of the authorized capital stock
of par value shares
Note: In par value stock corporations, the percentage subscription
requirement shall be based on the amount of the authorized capital stock
irrespective of the class, number, and par value of the shares.
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The capital stocks consists only Entire number of authorized shares 2. The number of shares into which the capital stock is divided
of no par value shares 3. The number of shares with par value and their par value
Note: Corporations whose shares have no par value have no authorized 4. The number of shares without par value
capital stock.
The capital stocks is divided As to par value shares, same rule above, and for no par value shares it is Acknowledgment, signature and verification; rules
into par value shares and no par based on the number of said no par value. 1. Each of the signatories must acknowledge his signature to the articles and there is no corporation de
value shares jure unless acknowledged by the minimum number required by law.
2. Unless otherwise provided by the statute, the acknowledgment of the signatures of the
Subscription of corporations incorporators is not a part of the AoI.
 They may subscribe initially to the capital stock of another proposed corporation but their 3. Purpose of law in requiring acknowledgment
subscriptions cannot be taken into consideration in the computation of 25%. a) To secure the State and all concerned against the possibility of any fictitious name being
 Note: It is the policy of SEC to require corporations to pay their subscriptions in full. subscribed to the articles
 Reason: While a corporation has an unlimited capacity to contract obligations, it has only a b) To furnish proof of the genuineness of the signatures
limited capacity to pay.
TREASURER-IN-TRUST
Summary of contents of AOI as to capital stock/capital and subscribers/contributors  The person elected by the subscribers as Treasurer of the corporation at the time of the
As to stock corporations incorporation who is named as such in the AoI and who has been authorized to receive for and in
1. The amount of its authorized capital stock in pesos the name of the corporation, all subscriptions, fees, contributions or donations paid of given by the
2. The number of shares into which it is divided subscribers or members.
3. The par value in pesos of each share  Not a regular treasurer
4. The names, nationalities, and residences of the original subscribers  The treasurer who signs the treasurer’s affidavit in Section 15.
5. The amount of capital stock subscribed and paid by each on his subscription; and
6. If some or all of the shares are without par value, such fact. SPECIAL PROVISIONS
Section 15. x x x No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less
As to non-stock corporations than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted
1. The amount of its capital or money contributed or donated by specified persons to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock
2. The names, nationalities, and residences of the donors or contributors certificates issued by the corporation.
3. The respective amount contributed by each.
1. "No Transfer" Clause: Prohibition of transfer of stock or interest which will reduce the ownership of
Where shares with par value Filipino citizens to less than the required percentage of the capital stock as provided by existing laws
 If shares have only one par value: Authorized capital stock would be the number of shares  Must be stated not just in AoI but also in all certificate of stock.
multiplied by the par value. 2. Expanded Pre-emptive Rights: Pre-emptive right is the stockholder’s right to SUBSCRIBE to all issues
 If different classes of shares with different par value: Authorized capital stock would be the total of or disposition of shares of any class in proportion of his stockholdings.
the products of the number of shares in each class multiplied by the par value of such class of 3. Right of first refusal
shares. 4. High quorum and/or high voting requirements

Where shares without par value, requirements: DOCUMENTS ACCOMPANYING THE ARTICLES
1. Such fact must be stated in the AOI. 1. Treasurer's affidavit
2. The number of shares into which said capital stock is divided must be stated since no amount of 2. Favorable recommendation from government agency regulating the business
capital stock is specified in the articles  "Certificate of Authority to Register"
 Business regulated by law: Not required to all businesses as it is only required when
Where shares with par value and without par value, requirements business or purpose is regulated by law.
1. The AOI must state such fact 3. Bank certificate or any proof of payment of paid-up capital stocks

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 In whose name shall the bank account be opened for the purpose of payment of paid up  Differentiate with franchise: Charter is the instrument bestowing such right and privilege while
capital stock? Treasurer in trust franchise is the right and privilege itself of being a corporation.

AMENDMENT AND/OR REJECTION OF ARTICLES OF INCORPORATION Components of corporate charter

Section 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or by special 1. Corporations formed under general incorporation law
law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be a) The law under which it is organized
amended by a majority vote of the board of directors or trustees and the vote or written assent of the b) Articles of incorporation
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the c) By-laws
appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written d) All applicable provisions of the Constitution and the general laws of the State in force at
assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. the time the corporation is incorporated which are as much a part of its charter though
expressly written therein.
The original and amended articles together shall contain all provisions required by law to be set out in the
articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes 2. Corporations formed under special laws
made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors a) The special law which creates the corporation
or trustees stating the fact that said amendment or amendments have been duly approved by the required b) Executive orders of the President
vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. c) Rules and regulations applicable to such corporations
d) All laws applicable thereto, including the Corporation Code the provisions of which apply
The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the suppletorily
date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a
cause not attributable to the corporation. Procedure in amending Articles of Incorporation
1. Board of Directors convene to a meeting and make a proposal for amendments to be converted into
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. – The a board resolution;
Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment 2. The resolution stating such amendments must be approved by a majority vote of the Board of
thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission Directors/Trustees;
shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of 3. The approved resolution must be submitted to the stockholders for ratification;
the articles or amendment. The following are grounds for such rejection or disapproval: 4. The required vote for ratification is the approval of stockholders representing at least 2/3 of the
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with outstanding capital stock or 2/3 of the members (for non-stock); a meeting to that effect may not be
the form prescribed herein; necessary since they can just submit their written assent representing at least 2/3 of the outstanding
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or capital stock.
contrary to government rules and regulations;  Note: Written assent is not allowed in
3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; i. Extending or shortening the corporate term (Sec.37);
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has ii. Decreasing or increasing the capital stock and
not been complied with as required by existing laws or the Constitution. iii. In close corporations (Sec. 103), a meeting of the stockholders is always
necessary.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking 5. The articles, as amended, must be indicated by underscoring the change or changes made, a copy
institutions, building and loan associations, trust companies and other financial intermediaries, insurance thereof must be certified under oath by the corporate secretary and the fact that it has been duly
companies, public utilities, educational institutions, and other corporations governed by special laws shall be approved by the required vote of the stockholders/members.
accepted or approved by the Commission unless accompanied by a favorable recommendation of the 6. Submission to the SEC; and
appropriate government agency to the effect that such articles or amendment is in accordance with law. 7. It takes effect upon approval by the SEC or from the date of filing if not acted upon within 6 months
if the delay is not attributable to the corporation.
Corporate charter  This rule does NOT apply if the amendment is intended to dissolve the corporation. You
 An instrument or authority from the sovereign power bestowing the right or privilege to be and act have to wait for the approval of the SEC.
as a corporation.  There can be no presumption that when 6 months have already lapsed, it is deemed
approved.
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 Reason: dissolution must be made at the consent of the State.
Non-amendable facts in the Articles of Incorporation
 Those matters referring to facts existing as of the date of the incorporations such as:
a) Names of incorporators;
b) Names of original subscribers to the capital stock and their subscribed and paid-up capital;
c) Treasurer elected by the original subscribers;
d) Members who contributed to the initial capital of a non-stock corporation;
e) Date and place of execution of the AOI;
f) Witnesses to the signing and acknowledgment of the AOI.
Grounds for disapproval of Articles of Incorporation
1. Not substantially in compliance with the form prescribed by the Code;
2. Purpose/purposes are patently unconstitutional, illegal, immoral or contrary to government rules
and regulations;
3. Treasurer’s affidavit concerning the amount of capital stock subscribed and/or paid is false;
4. Required percentage of ownership of the capital stock to be owned by citizens of the Philippines has
not been complied with as required by existing laws or the Constitution.
 E.g. Monetary Board of the Central Bank for banking institutions.
 However, if the corporation is involved in a public utility the SEC may give such corporation
a reasonable time to modify the objectionable portion.
 Note, however, the following:
a) Action of SEC in approving or rejecting is discretionary and NOT ministerial function.
b) SEC is required to give the incorporators reasonable time within which to correct or
modify the objectionable portions of the AOI or amendment
 Rejection is not preferred; a defective AOI may be returned by the SEC which shall give the
incorporators a reasonable time to correct or modify the objectionable portions without the
necessity of filing the same again (UP class notes)
Asuncion v. De Yriarte, 28 Phil. 67 (1914)
When the proposed articles show that the object is to organize a barrio into a separate corporation for the
purpose of taking possession and having control of all municipal property within the incorporated barrio and
administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied
registration.
Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)
It is well to note that, if a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the
SEC has no authority to inquire whether the corporation has purposes other than those stated, and
mandamus will lie to compel it to issue the certificate of incorporation.
Revocation of certificate of registration of corporations
 Effectivity: SEC order of revocation is immediately effective.
 Effects of revocation
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a) The subject corporation's existence is terminated at that very instant and is deemed
terminated until the particular revocation order is lifted.
b) It may not continue to operate its business and issue shares
c) It may, however, sell its assets pursuant to Sec. 122 but it may only purchase property if
such purchase will be consistent with liquidation.
d) It may sue for purposes of recovering its property.
e) It may not, however, allege in its complaint in court that it is a corporation duly organized
and existing under the Philippine laws.
 Lifting of Order of Revocation, effect: The lifting restores the corporation to its original status as if
there was no revocation order issued against it, with the capacity to exercise all the powers a duly
registered corporation under the Corporation Code.
Grounds for suspension/revocation of certificate
1. Fraud in procuring the certificate of incorporation (ex. Paid-up capital);
2. Serious misrepresentation causing great damage and prejudice to the public;
3. Refusal to comply with a lawful order of the SEC;
4. Continuous inoperation for a period of at least 5 years;
5. Failure to file by-laws within the required period; and
6. Failure to file required reports in appropriate forms as determined by the SEC within the prescribed
period.
Republic Planters Bank v. CA, Dec. 21, 1992
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a different name, and its character is in no respect
changed.
A change in the corporate name does not make a new corporation, and whether effected by special act or
under a general law, has no affect on the identity of the corporation, or on its property, rights, or liabilities.
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had
previously contracted or incurred.
GR: Officers or directors under the old corporate name bear no personal liability for acts done or contracts
entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity
as agent of the old corporation and the change of name meant only the continuation of the old juridical entity,
the corporation bearing the same name is still bound by the acts of its agents if authorized by the Board.
COMMENCEMENT OF CORPORATE EXISTENCE / THEORY OF CONCESSION
Sec. 19. Commencement of corporate existence. – A private corporation formed or organized under this Code
commences to have corporate existence and juridical personality and is deemed incorporated from the date
the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the period of time mentioned therein,
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unless said period is extended or the corporation is sooner dissolved in accordance with law.
Concession Theory
 Espouses that a corporation is an artificial creature without any existence until it has received the
imprimatur of the State acting according to law, through the SEC.
DOCTRINE OF SEPARATE PERSONALITY
Doctrine of separate personality
 A corporation has a juridical personality separate and distinct from that of its stockholders or
members.
 Important: From the date of issuance of AoI and not date of acceptance.
 Used for purposes of convenience and to subserve the ends of justice
 Consequences:
a) Ownership of property, capacity to sue and be sued in its own right (Art. 46, NCC);
b) Entitlement to constitutional rights; e.g. Due process, equal protection;
c) Liability for crimes or torts;
d) Cannot always claim equal rights with natural persons; i.e. entitlement to moral damages.
LBP v. Court of Appeals, 364 SCRA 375 (2001)
A corporation, upon coming into existence, is invested by law with a personality separate and distinct from
those persons composing it as well as from any other legal entity to which it may be related. This separate and
distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of
justice.
APPLICATIONS OF DOCTRINE
Majority equity ownership and interlocking directorship
 Ownership of a majority of capital stock and the fact that majority of directors of a corporation are
the directors of another corporation creates no employer-employee relationship with the latter's
employees. (DBP v. NLRC, 186 SCRA 841 (1990))
 Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. (Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000))
 Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor
warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence
to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the
corporations are to be rightly treated as distinct and separate from each other. (Laguio v. NLRC, 262
SCRA 715 (1996))
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 Having interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.
(Velarde v. Lopez, 419 SCRA 422 (2004))
Being corporate officer
 Being an officer or stockholder of a corporation does not by itself make one's property also of the
corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal
sense the owners of corporate property which is owned by the corporation as a distinct legal person.
Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). (The Shareholders and members are covered
by the main doctrine but the actors (officers) are not. They are covered by agency)
 The mere fact that one is president of the corporation does not render the property he owns or
possesses the property of the corporation, since that president, as an individual, and the corporation
are separate entities. Booc v. Bantuas, 354 SCRA 279 (2001).
 It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T.
Ty v. Court of Appeals, 356 SCRA 61 (2001).
Dealings between corporation and stockholders
 The fact that the majority stockholder had used his own money to pay part of the loan of the
corporation cannot be used as the basis to pierce. ―It is understandable that a shareholder would
want to help his corporation and in the process, assure that his stakes in the said corporation are
secured. LBP v. Court of Appeals, 364 SCRA 375 (2001).
 Use of a controlling stockholder’s initials in the corporate name is not sufficient reason to pierce the
corporate veil, since by that practice alone does it mean that the said corporation is merely a
dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and
there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its
shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001).
 The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a
collection case against the corporation, does not make such stockholder personally liable for the
corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is
the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. PNB v.
Ritratto Group, Inc., 362 SCRA 216 (2001).
 Just because two foreign companies came from the same country and closely worked together on
certain projects would the conclusion arise that one was the conduit of the other, thus piercing the
veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
 The creation by DBP as the mother company of the three mining corporations to manage and
operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their
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value, does not indicate fraud or wrongdoing and will not constitute application of the piercing
doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
 The facts that two corporations may be sister companies, and that they may be sharing personnel
and resources, without more, is insufficient to prove that their separate corporate personalities are
being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v.
Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation would generally
warrant alter-ego piercing.]
On privileges enjoyed
 The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed by even
its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936).
Obligations and debts
 Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or
credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989).
 A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its
members in their individual capacity, even when the corporation is organized for the benefit of the
members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).
 Stockholders have no personality to intervene in a collection case covering the loans of the
corporation since the interest of shareholders in corporate property is purely inchoate. Francisco
Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999).
 The majority stockholder cannot be held personaly liable for the attorney’s fees charged by a lawyer
for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA 261 (1993).
 Even when the foreclosure on the corporate assets was wrongfully done, stockholders have no
standing to recover for themselves moral damages; otherwise, it would amount to the appropriation
by, and the distribution to, such stockholders of part of the corporation’s assets before the
dissolution of the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals,
300 SCRA 579 (1998).
 The obligations of a stockholder in one corporation cannot be offset from the obligation of the
stockholder in a second corporation, since the corporation has a separate juridical personality. CKH
Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).
Query
Q: Do SHs have insurable interest over corporate assets?
A: None, because corporation assets are owned by the corporation and not by the SHs.
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PIERCING THE VEIL OF CORPORATE FICTION
 This doctrine allows the State to disregard the fiction of juridical personality of the corporation
where the entity is formed or used for non-legitimate purposes.
 Grounds:
a) Where corporate fiction is used to defeat public convenience;
o Corporate Fiction is a personality separate from the stockholders/members.
o Public Convenience: Instead of dealing with all the individual stockholders, it is
for public convenience to deal with the corporation alone.
b) Where corporate fiction is used to justify a wrong, to protect fraud, or to defend a crime;
c) Where the corporation serves as a mere alter ego of another person;
d) Where the corporation serves merely as an instrument of another corporation.
e) Where the corporation is controlled by aliens, in violation of the law as where it was
organized under Philippine laws but most of its stockholders are Germans (normally a
Filipino corporation), the Supreme Court went beyond the corporate fiction during the war
and considered it as an enemy corporation.
Pointers as to the nature of piercing the veil of corporate fiction
1. Piercing doctrine is only an equitable remedy: It is an equitable doctrine developed to address
situations where the separate corporate personality of a corporation is abused or used for wrongful
purposes
 Important: It does not warrant the revocation of the corporation; it only makes
responsible officers personally liable.
 It is a remedy of last resort.
2. Piercing the veil cannot be employed to allow fraud.
3. Piercing applies only when the corporate fiction was the very tool used to commit fraud or evade
obligations.
Types of piercing application
 The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
a) Defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation;
b) Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime (fraud piercing); or
c) Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation (alter ego piercing or instrumentality test).
Alter Ego or Instrumentality Rule
 Requisites:
a) Control test: There must be control, not merely majority or complete stock control, but
complete dominion, not only on finances but of policy and business in respect to the
transaction attacked so that the corporate entity as to this transaction had at the time no
separate mind, will, or existence of his own; (control)
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b) Fraud test: Such control must have been used by the defendant to commit fraud or wrong, to Landmark cases in piecing the veil of corporate fiction
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act Hacienda Luisita v. PARC, July 5, 2011
in contravention of plaintiff’s legal right (breach of duty) ; and LIPCO and RCBC are purchasers in good faith for value entitled to the benefits arising from such status.
c) Harm test: Such control and breach of duty must proximately cause the injury to the plaintiff.
 In piercing the veil, the stockholders become liable instead of the corporation. When LIPCO and RCBC purchased industrial land, there was no notice of any supposed defect in the title of its
 Do not immediately pierce the veil just because a ground exists. Determine first the facts and transferor, Centennary, or that any other person has a right to or interest in such property.
circumstance.
 Steps: To be sure, intervenor RCBC and LIPCO knew that the lots they bought were subjected to CARP coverage by
a) Determine first the following Items: means of a stock distribution plan, as the DAR conversion order was annotated at the back of the titles of the
i. Common Ownership lots they acquired. However, they are of the honest belief that the subject lots were validly converted to
ii. Identity of directors; commercial or industrial purposes and for which said lots were taken out of the CARP coverage subject of
iii. Identity of stockholders PARC Resolution No. 89-12-2 and, hence, can be legally and validly acquired by them.
iv. Manner of keeping records;
v. Manner of conducting business. Both RCBC and LIPCO cannot be considered at fault for believing that certain portions of Hacienda Luisita
b) Is there a misuse of corporate fiction? are industrial/commercial lands and are, thus, outside the ambit of CARP. The PARC, and consequently DAR,
o The mere control by a single person of the majority shares is not a ground to pierce gravely abused its discretion when it placed LIPCO’s and RCBC’s property which once formed part of Hacienda
the veil [Sunio vs. NLRC, 127 SCRA 390 (1984)] Luisita under the CARP compulsory acquisition scheme via the assailed Notice of Coverage.
o Evidence of fraud must be proven clearly and convincingly [Del Rosario vs. NLRC, 182
SCRA 777 (1990)] Note: Sale even after judgment against the properties of Luisita was held valid due to belief of RCBC and LIPCO
that the same were industrial/commercial lands thus outside the ambit of CARP.
Concept Builders, Inc. v. NLRC, May 29, 1996
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere Pantranco Employees v. NLRC, March 17, 2009
instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities. PNB was only a
disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such stockholder of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate of the Pantranco properties. Moreover, these corporations are registered as separate entities and, absent any
mind, will or existence of its own, and is but a conduit for its principal. valid reason, we maintain their separate identities and we cannot treat them as one.

Purpose of Piercing the Veil
1. To seek satisfaction of an obligation directed against the stockholders;
2. Direct always the action against the stockholders: If directed against the corporation, you cannot
anymore pierce the veil. A suit cannot be brought against the corporation to satisfy the obligation of
its stockholders. (Umali case [182 SCRA 529 (1990)])
Net Effect of Piercing the Veil
1. Only one corporation: Liability attaches to its stockholders;
 The corporation will be treated merely as an association of persons and the stockholders
or members will be considered as corporation, that is, liability will attach personally or
directly to the officers and stockholders.
2. Two or more Corporations: The court treats them as only one.
 They will be merged into one, the one being merely regarded as the instrumentality,
agency, conduit or adjunct of the other.
Where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is
not, by that fact alone, liable for the debts and liabilities of the transferor.
 Court cannot can merge the personality of PNEI with PNB simply because the latter acquired the
former.
Effects of piercing the veil of corporate fiction:
a) Corporation is a mere collection of individuals or an aggregation of persons undertaking business as
a group, disregarding the separate juridical personality of the corporation unifying the group.
b) When two business enterprises are owned, conducted and controlled by the same parties, both law
and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that
two corporations are distinct entities and treat them as identical or as one and the same.
Circumstances that justify piercing the veil of corporate fiction (CD-FSG-SBD-PIR)
1. The parent corporation owns all or most of the capital stock of the subsidiary
2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;

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4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business except with the parent corporation or no assets except
those conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation’s own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary, but take their orders from the parent corporation;
11. The formal legal requirements of the subsidiary are not observed.
Allegation: In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the buyer of
its entire stockholdings in PNB-Madecor was indebted to it (PNB). Considering that said indebtedness remains
unpaid, PNB insists that it has an interest over PNB-Madecor and Mega Prime’s assets.
 Held: The contention is bereft of merit. While PNB has an apparent interest in Mega Prime’s assets
being the creditor of the latter for a substantial amount, its interest remains inchoate and has not
yet ripened into a present substantial interest, which would give it the standing to maintain an
action involving the subject properties. PNB only has an inchoate right to the properties of Mega
Prime in case the latter would not be able to pay its indebtedness. This is especially true in the
instant case, as the debt being claimed by PNB is secured by the accessory contract of pledge of the
entire stockholdings of Mega Prime to PNB-Madecor.
First International Bank v. CA, January 24, 1996
Landmark: In addition to the many cases where the corporate fiction has been disregarded, we now add the
instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise blatant
violation of the prohibition against forum-shopping.
 Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit,
cannot be allowed to trifle with court processes, particularly where, as in this case, the corporation
itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and
applying remedies available to it. To rule otherwise would be to encourage corporate litigants to use
their shareholders as fronts to circumvent the stringent rules against forum shopping.
Related discussions
The Court held that there was identity of parties, or at least, of interests represented. Although the plaintiffs in
the Second Case (Henry L. Co. et al.) are not name parties in the First Case, they represent the same interest
and entity, namely, petitioner Bank, because:
1. They are not suing in their personal capacities, for they have no direct personal interest in the
matter in controversy. They are not principally or even subsidiarily liable; much less are they direct
P a g e | 37
parties in the assailed contract of sale; and
2. The allegations of the complaint in the Second Case show that the stockholders are bringing a
“derivative suit.” In the caption itself, petitioners claim to have brought suit “for and in behalf of the
Producers Bank of the Philippines.” Indeed, this is the very essence of a derivative suit:
“An individual stockholder is permitted to institute a derivative 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. (Gamboa v. Victoriano, 90
SCRA 40, 47 [1979]).
In the face of the damaging admissions taken from the complaint in the Second Case, petitioners, quite
strangely, sought to deny that the Second Case was a derivative suit, reasoning that it was brought, not by the
minority shareholders, but by Henry Co et al., who not only own, hold or control over 80% of the outstanding
capital stock, but also constitute the majority in the Board of Directors of petitioner Bank. That being so, then
they really represent the Bank. So, whether they sued “derivatively” or directly, there is undeniably an
identity of interests/entity represented.
INSTANCES WHERE THE VEIL WAS PIERCED
Collector v. Norton & Harrison Co., 11 S 714 (1964)
Where a corporation functions for the benefit of a single person who has complete control over the funds
and the said person is the sole owner thereof.
The corporate entity is but an alter ego or the business conduit of the owner and the property of the
corporation may be considered the property of the controlling individual and may be seized in an action
against the latter.
MR Dulay v. CA, 225 S 678 (1993)
Where the transaction was entered into by the President who was also the treasurer and general manager of
a close family corporation where the incorporators and directors belong to one single family.
The corporation is liable for the contract and it cannot claim that it was entered into without the knowledge
and consent of the other members of the board.
Phil. Commercial & International Bank v. Custodio, 545 S 367
Where the corporation is a mere instrumentality of the individual stockholders, the latter must individually
answer for corporate obligations.
Tan Boon Bee v. Jarencio, 163 S 153 (1988)
Where a corporation is merely instrumentality, an adjunct, business conduit or alter ego of another
corporation, the separate personality of the corporation may be disregarded.
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Yutivo Sons v. CA, 1 S 160
Where a subsidiary company is created by a parent company merely as an agency of the latter especially of
the stockholders or officers of the two corporations are substantially the same or their system of operations
unified.
Reynoso v. CA, 345 S 335 (2000)
Where the parent company assumes complete control of the operation of its subsidiary's business, the
separate corporate existence of the subsidiary must be disregarded.
But even when there is dominance over the affairs of the subsidiary, the doctrine applies only when such
fiction is used as a subterfuge to commit injustice and circumvent the law.
RF Sugay v. Reyes, 12 S 700
Where it appears that a corporation is merely a business conduit of its president who entered into a contract
of administration and supervision for the painting of the factory of another corporation, and to evade liability,
the first corporation claims that the President acted as an agent of the second corporation.
Telephone Engineering & Service Co v. Workmen Compensation Commission, 104 S 354 (1981)
In workmen's compensation cases, where there is admission that two corporations are sister companies,
operating under one single management, and housed in same building, piercing the veil may be considered.
Azcor Manufacturing v. NLRC, 303 S 26 (1999)
Where the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade
obligations, it would be discarded and the two corporations would be merged as one, the first being merely
considered as the instrumentality, agency, conduit or adjunct of the other
Union Bank v. CA, 290 S 198
But even when there is dominance over the affairs of the subsidiary, the doctrine applies only when such
fiction is used as a subterfuge to commit injustice and circumvent the law.
Filipinas v. Christen Huenefeld, 89 P 54
Where a domestic or Philippine corporation is controlled by aliens, its nationality shall be deemed that of the
controlling security.
This is the control test in determining the nationality of a private corporation.
Claparols v. CIR, July 31, 1975
Where a corporation is dissolved and its assets are transferred to another corporation to avoid a financial
liability of the first corporation to its employees, both firms being owned and controlled by the same persons
with the result that the second corporation should be considered a continuation and successor of the first
entity.
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Villa Rey Transit, Inc. v. Ferrer, 25 S 845
Where a corporation is formed by a seller of a certificate of public convenience for the purpose of evading his
individual contract that he "shall not for a period of 10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."
Kelluz v. Douglas, 58 Conn. 43
Where a corporation is organized by an insolvent debtor to defraud his creditors and he transfers his
properties to it in furtherance of such fraudulent purpose.
Other instances:
1. Where all the stockholders or members of a corporation, acting as individuals instead of formal
corporate action, enter into an illegal act.
2. To shield a violation of the prohibition against forum shopping.
3. To avoid a judgment credit
4. To avoid the payment of higher taxes
5. To avoid inclusion of corporate assets as part of the estate of a decedent
6. To promote unfair objectives
7. To violate a provision under the Labor Code declared to be penal in nature
8. To avoid judgment in favor of an employee where the employer corporation is no longer existing
and is unable to satisfy the judgment, the employee's recourse being against the officers of the
corporation who were, in effect, acting in behalf of the corporation.
INSTANCES WHERE THE VEIL WAS NOT PIERCED
Manila Hotel Corp v. NLRC, 343 S 1
The mere fact that a corporation owns 50% of the capital stock of another corporation or the mere majority
ownership of the stocks of a corporation is not per se a cause for piercing the corporate veils.
Borromeo v. CA, 550 S 269
The mere fact that a corporation owns all the stocks of another corporation, taken alone, is NOT sufficient to
justify their being treated as one entity.
Del Rosario v. NLRC, 187 S 777
Substantial identity of the incorporators of two corporations does not necessarily imply fraud. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.
China Banking v. Dyne-Sem, Sesbreno v. CA, Jardine Davies v. JRB Realty
The mere fact, however, that:
1. The businesses of two or more corporations are interrelated.
2. A common director sits on the boards of directors of all three companies organized as separate
corporate entities
3. When some of the employees of one corporation are the same persons manning and providing for
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auxiliary services to the units of the other corporation and that the physical plants, offices and 3. Same liability as de jure corporation: In comparison with a corporation by estoppel where the
facilities are situated in the same compound stockholders are liable as general partners, stockholders in a de facto corporation are liable as a de
4. Two corporations are admittedly sister companies and sharing personnel and resources jure corporation. Hence, up to the extent of their share holdings.
5. The mere existence of interlocking directors, corporate officers and shareholders 4. Colorable compliance: There must be a true, colorable compliance with the statute to constitute a
IS not enough justification for disregarding their personalities. de facto corporation.
9. XPN: Unless there is sufficient showing that the corporate entity was purposely used as a shield to  Note: Substantial compliance results to de jure corporation.
defraud creditors and third persons of their rights, or perpetrate wrong. 5. Actual users of power needed: To create a de facto corporation, it is a MUST that there is an actual
user or exercise of corporate powers or franchise.
Marubeni Corp v. Lirag, 362 S 620 6. Corporation must act in good faith upon discovery of defect: There is a duty to correct the defect if
Not because two foreign corporations came from the same country and closely worked together on certain discovered.
projects i.e. first corporation as the supplier and contractor of the project hired and subcontracted the project
to the second corporation, would the conclusion arise that one was conduit of the other. Bona fide attempt to incorporate
 Rule: When there has been no attempt in good faith to create a corporation de jure, there can be no
Allied Bank v. Dyne-Semi Electronics, 494 S 493 de facto corporation.
Where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is  There must be a bona fide attempt to comply with the requirements of the law.
not, by that fact alone, liable for the debts and liabilities of the transfer. "In sale of assets, the purchaser is
only interested in the raw assets of the selling corporation perhaps to be used to establish his own business Defects which will result to the creation of de facto corporation
enterprise or as an addition to his on-going business enterprise." 1. The AOI fails to state all the matters required by the Code to be stated, or state some of them
incorrectly.
DE FACTO CORPORATION 2. The name of the corporation closely resembles that of a pre-existing corporation that it will tend to
deceive the public.
3. The incorporators or a certain number of them are not residents of the Philippines
Sec. 20. De facto corporations. – The due incorporation of any corporation claiming in good faith to be a
4. The acknowledgment of the AOI or COI is insufficient or defective in form, or it was acknowledged
corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally
before the wrong officer.
in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor
5. The percentage of Filipino ownership of the capital stock required for the business is less than that
General in a quo warranto proceeding.
prescribed by the law.
6. The minimum paid-up capital stock has not been paid to and received by the corporate treasurer
Requisites of a de facto corporation
contrary to his affidavit.
1. Organized under a valid law.
7. The failure to submit its by-laws on time. (Sawadjaan v. CA, 459 S 516)
2. Attempt in good faith to form a corporation according to the requirements of the law.
 Note: The Supreme Court requires that Articles of Incorporation have already been filed
Defects which will not result to creation of de facto corporation
with the SEC and the corresponding certificate of incorporation is obtained.
1. Absence of articles of incorporation
3. Use of corporate powers.
2. Failure to file articles of incorporation with the SEC
 Bona fide user of corporate powers
3. Lack of certificate of incorporation from the SEC
 Note: The corporation must have performed the acts which are peculiar to a corporation
like entering into a subscription agreement, adopting by‐laws, and electing directors.
De facto corporation and corporation by estoppel, distinguished
4. Must have a certificate of incorporation issued in their favor
DE FACTO CORPORATION CORPORATION BY ESTOPPEL
There is existence in law There is no existence in law
Other rules:
1. Remedy, quo warranto: The existence of a de facto corporation shall not be inquired into The dealings among the parties on a corporate basis The dealings among the parties on a corporate basis
is NOT required is required
collaterally in any private suit to which such corporation may be a party. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding. When the requisites are lacking, it can be corporation It will be considered a corporation in any shape or
2. As long as it exists, a de facto corporation enjoys all attributes of a corporation until the State by estoppel form
questions its existence.

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Hall v. Piccio, June 29, 1950 BUT there can be substituted

Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its service in their place of principal
stockholders — may not probably claim "in good faith" to be a corporation. business
Property of Same as de jure Separate property of person who
CORPORATION BY ESTOPPEL Judgment debt corporation misrepresented
(liabilities of general partners)
Sec. 21. Corporation by estoppel. – All persons who assume to act as a corporation knowing it to be without Yes (due to violation Yes (for the State to No
authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as of its franchise as correct its own
Quo warranto
a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction corporation, Sec. 6 of mistake)
entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a PD 902A)
defense its lack of corporate personality.
Lim Tong Lim v. Philippine Fishing Gear Industries, 317 S 728
On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the Rule: An unincorporated association, which represented itself to be a corporation, will be estopped from
ground that there was in fact no corporation. denying its corporate capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it
Corporation by estoppel (Ostensible corporation) entered into and by virtue of which it received advantages and benefits.
 Note: Corporation by estoppel may arise even if no de facto corporation exists.
 When applied: Reasons for the doctrine:
a) When persons assume to form a corporation and exercise corporate functions and enter 1. An unincorporated association has no personality and would be incompetent to act and appropriate
into business relations with third persons. for itself the power and attributes of a corporation as provided by law;
b) Applies to a third party only when he tries to escape liability on a contract from which he 2. It cannot create agents or confer authority on another to act in its behalf; thus, those who act or
has benefited on the irrelevant ground of defective corporation. purport to act as its representatives or agents do so without authority and at their own risk.
 When not applied: When no third persons (subject to exception below) involved and the conflict 3. A person acting or purporting to act on behalf of a corporation which has no valid existence assumes
arises only among those assuming the form of a corporation who know that it has not been such privileges and obligations and becomes personally liable for contracts entered into or for other
registered. acts performed as such agent.
 Liability of persons: General partners
International Express v. CA, Oct. 19, 2000
Estoppel of persons dealing with the corporation PFF, upon its creation, is not automatically considered a national sports association. It must first be recognized
1. Stockholders or members and accredited by the Philippine Amateur Athletic Federation and the Department of Youth and Sports
2. Third persons, who deal with such a corporation recognizing it as such and the pretended Development. This fact was never substantiated by Kahn.
corporation itself.
As such, PFF is considered as an unincorporated sports association. And under the law, any person acting or
Pogi Inc. purporting to act on behalf of a corporation which has no valid existence assumes such privileges and
X - Pres DE JURE DE FACTO OSTENSIBLE becomes personally liable for contract entered into or for other acts performed as such agent. Kahn is
Y- GM therefore personally liable for the contract entered into by PFF with IETTI.
yes yes X and Y doing business under the
Plaintiff
name Pogi Inc. There is also no merit on the finding of the CA that IETTI is in estoppel. The application of the doctrine of
Residence Principal office in AoI Same as de jure Residence of X, Y or defendant corporation by estoppel applies to a third party only when he tries to escape liability on a contract from
Yes Yes A vs. X and Y doing business under which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, IETTI is not
Defendant trying to escape liability from the contract but rather is the one claiming from the contract.
the name Pogi Inc
Principal office in AoI Same as de jure Residence of persons
Summons misrepresenting (X & Y)

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Albert v. University Publishing, Jan. 30, 1965 revocation has been lawfully declared by the Commission after due notice and hearing. (SEC
The fact of non-registration of University Publishing Co., Inc. in the SEC has not been disputed. Defendant Opinion, Oct. 4, 1989)
would only raise the point that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party  Justification allowed: Where non use of charter or continuous inoperation is due to causes beyond
defendant; thereby assuming that "University Publishing Co., Inc." is an existing corporation with an the control of the corporation.
independent juridical personality. Precisely, however, on account of the non-registration it cannot be
considered a corporation, not even a corporation de facto. It has therefore no personality separate from Acts constituting formal organization
Jose M. Aruego; it cannot be sued independently. 1. Adoption of by-laws
2. Filing of by-laws with SEC
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego 3. Elections of Board of Directors
represented a non-existent entity and induced not only the plaintiff but even the court to believe in such 4. Establishment of principal office
representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was 5. Providing for the subscription and payment of the capital stock
"a corporation duly organized and existing under the laws of the Philippines," and obviously misled plaintiff 6. Taking of such other steps as are necessary to enable the corporation to transact legitimate business
(Mariano A. Albert) into believing the same. One who has induced another to act upon his wilful or accomplish the purpose for which it was created.
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. Acts constituting commencement of business
 When it has performed preparatory acts geared toward the fulfillment of the purposes for which it
NON-USER OF CHARTER v. CONTINUOUS INOPERATION was established.

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. – If a Exceptions
corporation does not formally organize and commence the transaction of its business or the construction of its  The rule that a corporation must formally organize and commence the transaction of its business or
works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation the construction of its works within 2 years from the date of its incorporation (the exercise of its
shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but secondary franchise) does not apply to:
subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a a) Special Corporations, because the law creating them provides for the commencement of their
ground for the suspension or revocation of its corporate franchise or certificate of incorporation. juridical personality;
b) Corporation Sole, the person incorporating is not required to wait for the certificate of
This provision shall not apply if the failure to organize, commence the transaction of its businesses or the incorporation. Mere filing of the Articles of Incorporation makes it incorporated already.
construction of its works, or to continuously operate is due to causes beyond the control of the corporation as
may be determined by the Securities and Exchange Commission. Loyola Grand Villas v. CA, Aug. 7, 1997
Whether or not LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation
ACT PERIOD EFFECT Code had the effect of automatically dissolving the said corporation.
Non-user of charter Within 2 years from Corporate powers cease
 Does not formally organize and commence the date of its and the corporation shall NO. The legislative deliberations of the Corporation Code reveals that it was not the intention of Congress to
the transaction of its business or the incorporation be deemed dissolved. automatically dissolve a corporation for failure to file the By-Laws on time.
construction of its works (Though not automatic)
Continuous inoperation At least 5 years Ground for the suspension Moreover, By-Laws may be necessary to govern the corporation, but By-Laws are still subordinate to the
 Commenced the transaction of its business or revocation of its Articles of Incorporation and the Corporation Code. In fact, there are cases where By-Laws are unnecessary to
but subsequently becomes continuously corporate franchise or the corporate existence and to the valid exercise of corporate powers.
inoperative certificate of incorporation
The Corporation Code does not expressly provide for the effects of non-filing of By-Laws. However, these have
been rectified by Section 6 of PD 902-A which provides that SEC shall possess the power to suspend or revoke,
Dissolution not automatic
 SEC opined that the dissolution contemplated under this section is NOT automatic. The corporation after proper notice and hearing, the franchise or certificate of registration of corporations upon failure to
file By-Laws within the required period.
continues to exist as such, notwithstanding its non-operational status until the dissolution or

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This shows that there must be notice and hearing before a corporation is dissolved for failure to file its By-
Laws. Even assuming that the existence of a ground, the penalty is not necessarily revocation, but may only
be suspension.

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BOARD OF DIRECTORS
Sec. 23. The board of directors or trustees. – Unless otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for
one (1) year until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner
of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to
be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or
trustees of all corporations organized under this Code must be residents of the Philippines.
Doctrine of Centralized Management
 A corporation’s management is centralized in the board of directors. A corporation presents a more
stable and efficient system of governance and dealings with third parties, since management
prerogatives are centralized in its board of directors.
 As can be gleaned from Sec 23 of Corporation Code, it is the board of directors or trustees which
exercises almost all the corporate powers in a corporation. (Firme vs. Bukal)
NATURE OF OFFICE
Theory of Directly Vested Power
 Power of the Board is original and undelegated.
 Under Sec. 23, it is the board of directors or trustees which exercises almost all the corporate
powers in a corporation.
 As such, it cannot be said that the Board acts as agents of the stockholders, since their source of
power originally vested by law and not delegated by the stockholders.
Theory of Delegated Power (from the Stockholders)
 The directors are the officers and agents of the corporation, representing the interests of that
abstract legal entity and of those who own shares of stock and as such, they can bind the
corporation provided they act within the scope of their authority.
As to other nature
1. Power is really directly conferred by law
2. Board must act as a body: Can bind the corporation only by action taken at a board meeting.
 Reasons:
i. A meeting is necessary in order that any action may be deliberately adopted, after
opportunity for discussion and an interchange of views, and
ii. As agents of the corporation managing its affairs, directors/trustees have no power to
act other than as a board.
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 Effect of Bogus Board: The acts or contracts effected by a bogus board would be VOID pursuant to
Art. 1318 of Civil Code because of the lack of consent.
Exceptions: Where act is binding despite lack of board meeting
1. Where the directors happen to be the sole stockholders.
2. Where contract entered into by a corporate officer, authorized by the board of directors either
expressly or impliedly, to bind it by contract.
3. Where transaction is ratified in a subsequent board meeting.
4. Acts of one of its directors or agents held out by the corporation to the public as possessing power
to do those acts.
5. Where stockholders waived the necessity for a meeting of the board of directors.
6. Acts of executive committee with authority to act on such specific matters within the competence
of the board, subject to limitations set forth by law.
7. Presence of management contract under which the corporation delegates the management of its
affairs to another corporation for a certain period of time.
8. In a close corporation, any action by the directors without a meeting or at a meeting improperly laid,
shall, unless the by-laws otherwise provide, be deemed valid or ratified in cases in Sec. 101.
DELEGATION OF BOARD POWER
 Under Section 23 of the Corporation Code, the power and the responsibility to decide whether the
corporation should enter into a contract is lodged in the Board, subject to the articles of
incorporation, by laws, or relevant provisions of law.
 However, just as a natural person may authorize another to do certain acts for and on his behalf, the
BoD may validly delegate some of its functions and powers to officers, committees or agents.
 Source: The authority of such individuals to bring the corporations is generally derived from law,
corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom
or acquiescence in the general course of business.
Limitations: Board cannot delegate
1. Discretionary powers e.g. to declare dividends.
 It may delegate purely ministerial duties.
2. Entire supervision and control of the corporation to others.
3. Special powers especially conferred upon it by a resolution of the stockholders or members of the
corporation.
4. Other powers restricted by the by-laws.
BUSINESS JUDGMENT RULE
 Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in
the BoD.
 Consequences:
a) The resolution, contracts and transactions of the Board, cannot be overturned or set aside
by the stockholders or members and not even by the courts under the principle that the
business of the corporation has been left to the hands of the Board.
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b) Directors and duly authorized officers cannot be held personally liable for acts or contracts
done with the exercise of their business judgment.
 XPNs:
i. When the Corporation Code expressly provides otherwise
ii. When the Directors or officers acted with fraud, gross negligence or in bad faith;
and
iii. When Directors or officers act against the corporation in conflict of interest
situation
Remedies in case of mismanagement
 In case of mismanagement or abuse of powers, the remedy of stockholders shall be:
a) Receivership
b) Injunction if the act has not yet been done
c) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General refuses to
act
d) Derivative suit or complaint filed with RTC (special commercial courts)
REQUIREMENTS
QUALIFICATIONS AND DISQUALIFICATIONS
Qualifications of Directors/Trustees
1. Stock Corporation: Must own at least one (1) share capital stock of the corporation in his own name;
Non-stock Corporation: Must be a member.
 He must be a stockholder in his own right. It must be a legal title and not beneficial title.
 Example: the stockholder- trustor in a voting trust agreement cannot be a director
because he has beneficial title; the trustee can be elected as director because he has legal
title.
2. The share of stock held by the director must be registered in his name on the books of the
corporation
 The election of a person to the BoD of a corporation does not necessarily mean that he has
paid for the shares recorded in his name. In most cases, nominee directors do not pay for
the qualifying shares assigned to them. (Baguio v. CA, 226 S 366)
3. A majority of the directors/trustees must be residents of the Philippines.
4. He must not have been convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years or a violation of the Corporation Code, committed within five (5) years
before the date of his election
 Note: It is the commission (not conviction) that must take place during the 5-year period.
5. He must be of legal age
6. He must possess other qualifications as may be prescribed in the by-laws of the corporation.
 Note: Additional qualifications of directors or trustees cannot be enforced unless
approved by the stockholders or members and contained in the by-laws of the
corporation.
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 Example: The percentage of equity participation of foreigners with respect to nationalized
activities must be complied with or he must not be a director in a competing corporation.
7. Only natural persons can be elected directors/trustees.
 It is clearly deducible from Section 23 that only natural persons can be elected as directors
or trustees and they must be elected from among the stockholders or members. However,
a corporation which owns shares of stock or is a corporate member in another corporation
can designate by board resolution its officer or representative to sit in the latter’s board
and thus qualifying him to be elected as director or trustee. A contrary rule would create a
situation where there would be no board as where all the stockholders or members are
corporation or juridical persons. The appointment must be recorded in the corporate
books. (SEC Opinion No. 05-06, June 8, 2005)
Disqualifications of Directors/Trustees
DQ as to Corporation Code
Sec. 27. Disqualification of directors, trustees or officers. – No person convicted by final judgment of an
offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed
within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or
officer of any corporation.
1. Must not have been convicted of a crime punishable by imprisonment of exceeding six (6) years
2. Must not have committed any violation of the Corporation code within five (5) years prior to his
election
DQ as to General Banking Law of 2000 (Fit and proper rule)
 Except in rural banks, no appointive or elective public official, whether fulltime or part-time shall at
the same time serve as officer of any private bank, save in cases where such service is incident to
financial assistance provided by the government or GOCCs to the bank or unless otherwise provided
under existing laws
DQ as to Code of Corporate Governance
1. Any person who has been finally convicted by a competent judicial or administrative body of the
following crimes:
a) Involving purchase or sale of securities;
b) Arising out of the person’s conduct as an underwriter, broker, dealer, investment adviser,
principal distributor. Mutual fund dealer, principal distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, floor broker; and
c) Arising out of his relationship with a bank, quasi-bank, trust company, investment house or
as an affiliated person of any one of them
2. Any person who, by reason of any misconduct, is permanently or temporarily enjoined by order,
judgment or decree by the SEC or any court or other administrative body from:
a) Acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual
fund dealer, futures commission merchant, commodity trading advisor, or a floor broker;
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b) Acting as a director or officer of a bank, quasi-bank, trust company, investment house,
investment company or an affiliated person of any of them;
c) Engaging in or continuing any conduct or practice in connection with any such activity or
willfully violating laws governing securities, and banking activities (but also includes when
covered by an effective interim order); such person is also disqualified when he is currently
subject to an effective order of a self-regulatory organization suspending or expelling him
from membership or participation or from associating with a member or participant of the
organization
3. Any person finally convicted judicially or administratively of an offense involving moral turpitude,
fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false oath,
perjury or other fraudulent act of transgressions.
4. Any person finally found by SEC or a court or other administrative body to have willfully violated, or
willfully aided, abetted, counseled, induced or procured the violation of, any provision of the
Securities and Regulation Code, or any other law administered by SEC or Corporation Code, or any
rule, regulation or order of SEC or BSP, or by a foreign court or equivalent financial regulatory of
similar acts.
5. Any person judicially declared to be insolvent.
6. Any person finally found guilty by a foreign court or equivalent regulatory authority of acts,
violations or misconduct similar to any of the acts, violations or misconduct listed in numbers 1 to 5.
7. Any affiliated person who is ineligible, by reason of numbers 1 to 5 to serve or act in the capacities
listed in those paragraphs.
8. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6)
years, or a violation of Corporation Code, committed within five (5) years prior to the date of his
election or approval.
RESIDENCE
 A majority of the directors/trustees must be residents of the Philippines.
NATIONALITY
 Rule: There is no citizenship requirement demanded of the members of BoD.
 In corporations not organized under the Code, citizenship requirements are established.
 Thus, in case of domestic banks, the General Banking Act requires that at least two-thirds
of the members of the BoD must be citizens of the Philippines. (Section 13 of RA No. 337).
 For rural banks, registered investment companies and private development banks, all the
members of the BoD must be citizens of the Philippines. (Section 4 of RA 720, as amended
by RA 1097; Section 4 of RA 4093)
 Under the Constitution, aliens may not be elected as directors of corporation engaged in business or
industries which are totally or partially nationalized business or industries.
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ELECTION
Sec. 24. Election of directors or trustees. – At all elections of directors or trustees, there must be present,
either in person or by representative authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The
election must be by ballot if requested by any voting stockholder or member. In stock corporations, every
stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the
by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as
many persons as there are directors to be elected or he may cumulate said shares and give one candidate as
many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he
may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the
total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no
delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws,
members of corporations which have no capital stock may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of
votes shall be declared elected. Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is
held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.
Mere designation of directors/trustees NOT allowed
 Mere designation by the stockholders or by a corporate officer empowered by the stockholders
without election of the directors in the manner provided by the by-laws will not be sufficient.
QUORUM
What constitutes a quorum?
 Stock: Majority of the outstanding capital stock (presence of holders of majority stock)
 Note: Non-voting stocks are to be taken into account although they are not entitled to
vote for purposes of determining the majority.
 Non-stock: Majority of the members entitled to vote
VOTING
Manner of election
 GR: By-laws
1. In any form; or
2. By ballot when requested by any voting stockholder or member;
3. Voting may be in person or by proxy (authorized in writing to represent stockholder)
Time to determine voting right
1. Share standing in one's name at the time fixed in by-laws
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2. Where by-laws is silent, at the time of election.
Time of annual election
 The Code authorizes the corporation to provide in its by-laws "the time for holding the annual
election of directors or trustees."
 Why annual election? Because Sec. 23 fixes the tenure of directors or trustees at one year.
Postponement of election
 GR: BoD cannot change the date of annual meeting prescribed in by-laws to lengthen their terms of
office
 XPN: Reason is justifiable (e.g. lack of quorum) and proper notice of the postponement is given to
the stockholders or members.
Methods of voting
1. Straight voting
 Every stockholder may vote such number of shares for as many persons as there are
directors to be elected.
Illustration
X owns 100 shares in ABC Corporation. If there are 5 directors to be chosen, X is entitled to 500 votes obtained
by multiplying 100 by 5. He may give to the 5 candidates he wants to be elected 100 votes each.
Under this method, the votes are distributed equally among the 5 candidates without preference.
2. Cumulative voting for one candidate
 A stockholder gives to one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal.
 Purpose of cumulative voting: To give the minority stockholders representation in the
BoD by electing one or more directors BUT such a provision has been held not to insure
minority stockholders of proportional representation or of representation in that BoD
under all circumstances.
 Note: A director elected because of the vote of minority stockholders who united in
cumulative voting cannot be removed without just cause.
Illustration
X owns 100 shares in ABC Corporation. There are 5 directors to be elected. Under this method, the entire 500
vote can be given to a single candidate.
Observe:
Suppose there are 1000 shares, A and B own 800 shares while C, D, E and F own 200 shares.
If there are 5 directors to be elected, A and B are entitled to 4000 votes while C, D, E and F can give 1000
votes. The highest number of votes that A and B can give each of their four candidates is 1,000. Hence, by
cumulating their 1,000 votes in favor of a candidate, C, D, E and F would be able to secure representation in
the board of directors.
3. Cumulative voting by distribution
 A stockholder cumulates his shares by multiplying also the number of his shares by the
number of directors to be elected and distribute the same among as many candidates as
he shall see fit.
Illustration
X owns 100 shares in ABC Corporation. There are 5 directors to be elected.
X may distribute his votes as follows: A = 100, B = 150 and C = 250 votes. Any combination is allowed provided
the total of votes cast by him does not exceed 500 votes.
Right of stockholders to use cumulative voting
 Right to cumulative voting is a STATUTORY right.
 Rule: A corporation is without power to deprive the stockholders of its use or even to restrict the
right to vote to only one way or method.
 A stockholder may or may not exercise the right as "he shall see fit."
Other considerations
 Plurality and not majority: The law requires only plurality, and not majority of the votes cast at the
election.
 Failure to hold election, suspension: The meeting may be adjourned from day to day or time to time
but it cannot be adjourned sine die or indefinitely
 Presence of winning director/member not required: For one to be elected as director/trustee or
officer, it is not required that he must be physically present at the meeting at the time of his
nomination and election
 XPN: Unless otherwise provided by the by-laws
 Questions regarding qualifications, disqualifications, or conduct of elections can be questioned in
special commercial courts under intra-corporate controversies.
Voting in non-stock corporation
 Rule: Members of non-stock corporations may cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate.
Illustration
If Sheldon is a member of a non-stock corporation and there are 5 directors to be elected, he is entitled only
to five votes. He may give one vote to each of the five candidates he wants to be elected.
If he has only one candidate, he can cast only one vote for said candidate unless cumulative voting is
authorized in the AoI or in the by-laws.

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Thus, where cumulative voting exists, and there are 9 trustees to be elected, a member is entitled to cast 9
votes for one candidate or to distribute the same among as any candidates as he shall see fit.
REPORT ON ELECTION
Sec. 26. Report of election of directors, trustees and officers. – Within thirty (30) days after the election of
the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation,
shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the
directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease
to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the
director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange
Commission.
Report on election
 When: Within 30 days after the election of the directors, trustees and officers of the corporation
 Who: The secretary, or any other officer of the corporation
 What: Submit to the Securities and Exchange Commission, the names, nationalities and residences
of the directors, trustees, and officers elected
Report on death, resignation or cessation from office of director, trustee or officer
 Who:
a) Heirs in case of death
b) Secretary or any other officer of the corporation
c) Director, trustee or officer himself
 What: Report to SEC, fact of death, resignation or cessation from office
Nature of these reports
 MANDATORY and JURISDICTIONAL
 The determination of who are the legal directors and officers of the corporation is conditioned upon
the reports submitted to SEC pursuant to said section.
Premium Marble v. CA, 264 S 11
The objective sought to be achieved by Sec. 26 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.
Only the directors and officers of the corporation whose names appear in the report submitted to SEC are
deemed legally constituted to bind the corporation in bringing any suit in behalf of the corporation.
Note: Failure to submit report of elections will make the previous members of the Board still the legal and
authorized BoD under holdover capacity.
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TERM OF OFFICE / HOLDOVER
Term of office
 Rule: One year (term expires one year after election to the office) AND until their successors are
elected and qualified.
 Note: Permanent unelected seat in BoD is PROHIBITED.
Educational non-stock corporation Up to 5 years
Other non-stock corporation Up to 3 years
Stock corporation One year subject to holdover rule
Holdover principle
 Rule: Upon failure of a quorum at any meeting of the stockholders or members called for an
election, the directorate naturally holds over and continuous to function until another directorate is
chosen and qualified.
 The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation.
Seneres v. COMELEC, April 16, 2009
Purpose of holdover: To accord validity to what would otherwise be deemed as dubious corporate acts and
gives continuity to a corporate enterprise in its relation to outsiders.
The old holdover officer is a de facto officer and by fiction of law, his acts as such are considered valid and
effective. (Ma'am says those holdover officers are de jure officer)
HOW REMOVED
Sec. 28. Removal of directors or trustees. – Any director or trustee of a corporation may be removed from
office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members
entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or
at a special meeting called for the purpose, and in either case, after previous notice to stockholders or
members of the corporation of the intention to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or on the written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation,
on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call
the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call
for the meeting may be addressed directly to the stockholders or members by any stockholder or member of
the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention
to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under Section 24 of this
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Code.  Effectivity date: At the moment the resignation is made to the proper officer or body.

Requisites for removal Acceptance of incompatible office

1. It must take place either at a regular meeting or special meeting of the stockholders or members
called for the purpose;
 GR: President through corporate secretary calls meeting
 XPN: Stockholders may file petition to special commercial courts, similar to mandamus for
the conduct of a meeting
2. There must be previous notice to the stockholders or members of the intention to remove;
3. The removal must be by a vote of the stockholders representing 2/3 of outstanding capital stock or
2/3 members.
4. The director may be removed with or without cause unless he was elected by the minority, in which
case, it is required that there is cause for removal.
 Note: The removal of a director does not depend upon the qualification of his successors as long as
the removal has been duly made.
Mead v. McCullough, 21 P 95
Where a director (or trustee) in a corporation accepts a position in which his duties are incompatible with
those as such director (or trustee), it is presumed that he has abandoned his office as director (or trustee) of
the corporation.
HOW VACANCY FILLED
Sec. 29. Vacancies in the office of director or trustee. – Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the
vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office.

No removal by electing replacement prior to expiration of term Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall
 Rule: The incumbent directors or trustees CANNOT be removed merely by electing a new set of be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the
directors or trustees prior to the expiration of their term. purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of
 Reason: Directors or trustees can only be removed by at least 2/3 of OCS or members entitled to the meeting.
vote, while vacancies in the Board, when they exist, can only be filled by mere majority (or plurality)
of vote. How vacancy is created
1. Death
Removal by disqualification 2. Resignation from the Board and not as stockholder
 In case of disqualification by operation of law, there is no need to follow the procedure under Sec. 3. Withdrawal
28. 4. Disqualification (e.g. conviction of crime of murder)
 A mere declaration of such disqualification is sufficient to remove him from office. (SEC Opinion, 5. Removal
Oct. 6, 1994) 6. Expiration of the term
7. Increase in the number of directors/trustees
Power to remove vested on stockholders  Requisite: Amendment of the AoI
 Officers deriving their title from the stockholders (or members), they can be removed only by the
power that appointed them. How vacancy is filled
 Board has no power to remove: The Board has no power to remove one of its members as director 1. Death 1. By appointment: remaining members of the BoD/BoT, if still
or trustee. 2. Resignation from the constituting a quorum
 Neither can it replace the vacancy caused by removal effected by the stockholders or Board  Who should they choose? Stockholders possessing
members of the corporation. 3. Withdrawal or transfer qualifications and not possessing disqualifications
4. Disqualification 2. By special elections: if no quorum
Resignation of directors or trustees
 Right to resign anytime: Nothing in the law prevents a director or trustee from resigning any time. Example: 5 BoDs
 Form of resignation: In the absence of express provision, a resignation need not be in any particular a) 3 BoDs died, then special elections
form. b) 1 BoD died, then the remaining 4 will choose from SH
 It may be either oral or in writing, but it must clearly show an intent to resign.
 Report to SEC: The Code requires the resignation of director or trustee to be immediately reported 5. Removal Special or regular elections
to the SEC.
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6. Expiration of term  Elections in a regular or special meeting called for that purpose HOW COMPENSATED
7. Increase in number of
directors/trustees Sec. 30. Compensation of directors. – In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for reasonable per
HOLDOVER PRINCIPLE diems: Provided, however, That any such compensation other than per diems may be granted to directors by
the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or
Board of Directors under holdover capacity special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors,
 When: Occurs if no election was held due to lack of quorum, or successors have not elected or exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.
qualified
 Nature: Compensation of BoD/BoT
a) Their acts are binding against the corporation  GR: BOD/BOT are not entitled to compensation except for reasonable per diems
b) They are entitled for all rights, monuments, etc.  XPN: (when they can receive compensation as a matter of right)
c) They will extend for another term otherwise they will abandon their office a) If provided for in the by-laws; or
d) They are de facto officers b) By a vote of stockholders representing at least a majority of the outstanding capital stock.
 Note: A stockholder's resolution or agreement for the payment of compensation for such
Valle Verde Country Club v. Africa, 598 S 202 services would be valid.
Can a member of a corporation's BoD elect another director to fill in a vacancy caused by the resignation of a  BUT the stockholders CANNOT ratify a board of directors' action fixing their own salaries.
hold-over director?  Limitation: The yearly compensation of directors shall in no case exceed 10% of the NET income
before income tax of the corporation during the preceding year.
NO. The holdover period is not part of the term of office of a member of the board of directors. Consequently,
when during the holdover period, a director resigns from the board, the vacancy can only be filled-up by the Per diems of directors
stockholders, since there is no term left to fill up pursuant to the provisions of Sec. 29 of the Corporation Code  The power of the BoDs to fix per diems for themselves is conferred by the law itself.
which mandates that a vacancy occurring in the board of directors caused by the expiration of a member's  Basis of reasonableness of per diems
term shall be filled by the corporation's stockholders. a) Financial condition of the corporation
b) Nature of service performed by the director
That a director continues to serve after one year from his election (i.e. on a holdover capacity), cannot be c) Actual cost incurred by the director
considered as extending his term. This holdover period, however, is not to be considered as part of his term,  Per diems granted to directors should not be included in their total yearly compensation for
which, as declared, had already expired. purposes of the 10% limitation.
 Stockholders' or members' suit: Per diems received without proper authorization or found to be
Notes: unreasonably excessive may ordinarily be recoverable in a stockholders' or members' suit.
 During holdover period, 2 of the 5 BoDs resigned, can the 3 remaining choose or appoint? NO, they
are only on their holdover capacities; Conduct special elections instead. Other considerations
 Only de jure officers can fill up vacancies in the Board during their term  Corporate officer who are not director: But a corporate officer who is not a director may be
compensated as an employee of the corporation.
Tenure and term, distinguished  Corporate officer and director at the same time: A corporate officer who is also a director may
 Tenure: Represents the term during which the incumbent actually holds office. likewise be compensated, in addition to his per diems, the amount to be fixed by a board resolution
 It may be SHORTER or LONGER (in case of holdover) than the term for reasons within or in the absence of provision to the contrary in the by laws and subject to the limitation.
beyond the power of the incumbent.
 Term: Shall only be ONE year after election to the office. AUTHORITY OF BOARD OF DIRECTORS
 The holdover period is not part of director's original term of office nor is it a new term.
BOD/BOT as repository of corporate powers
 GR: The corporate powers of the corporation, all business conducted and all property of such
corporation controlled and held by the BOD/BOT (Sec. 23)

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 XPNs:
a) In case of an Executive Committee duly authorized in the by-laws;
b) In case of a contracted manager which may be an individual, a partnership, or another
corporation. (Note: In case the contracted manager is another corporation – special rule:
Sec. 44 applies)
c) In case of close corporations, the stockholders may manage the business of the
corporation instead by a board of directors, if the Articles of Incorporation provide.
Tips
When majority of quorum required: Transactions in the ordinary course of business
When majority of total members of the Board required: ABISIMID
Rules as to verification and certification of non-forum shopping
 GR: All the members of the Board must sign
 XPN: (When only one member of the Board signed yet the same is valid)
a) Authorized by Board resolution
b) Authorized by by-laws
c) Inherent in the nature of office e.g. President, general manager, chairman of the Board,
HRD Director (in labor cases)
CORPORATE OFFICERS (statutory)
 Generally, they cannot act alone unless to those functions inherent in their office. They need
authority either from the by-laws or resolutions by the Board.
1. The President (who shall be and director)
 He executes or implements policies, in-charge in day-to-day operations
 Shall be selected in accordance with: by-laws (usually through election by SH) or Board
itself from among themselves (if by-laws is silent)
 All certificates must be issued in the name of Pres
2. Treasurer (who may not be a director)
 Custodian of money of corporation
 Custodian of the trust fund
 Duty to submit financial statement to SEC and other offices annually
3. Corporate Secretary (who shall be a resident and citizen of the Philippines)
 Custodian of all corporate books and records
 His signature is required in all stock certificates and reports submitted to government
agencies
 Manages minutes of meetings, stock and transfer book
4. And such other officers as may be provided in the by-laws.

DELEGATION OF AUTHORITY TO CORPORATE OFFICERS Notes:

1. Consent of the Board is not always required as to order by the corporate president, provided that
CORPORATE OFFICERS / OFFICE vis-a-vis EMPLOYMENT such decision or transaction relates to the business of the corporation.
 Who are "corporate officers?" 2. Treasurer and secretary may not even be required to be stockholders unless provided in the by-laws.
a) The officers provided by the Corporation Code, namely, the President, Treasurer and
Secretary Matling v. Coros, Oct. 13, 2010
b) Those provided for in the by-laws of the corporation Although the by-laws provide expressly that the BoD "shall have full power to create new offices and to
 Nature: They do not enjoy security of tenure, and their incumbency is within the business judgment appoint the officers thereto," any office created, and any officer appointed pursuant to such clause DOES
discretion of the BOD/BOT. NOT become a "corporate officer," but is an employee and the determination of the rights and liabilities
 Removal: Their removal is considered an intra-corporate controversy and beyond the reach of labor relating to his removal are within the jurisdiction of the NLRC. They do not constitute intra-corporate
tribunals. controversies.

Ongkingco v. NLRC, 270 S 613 A different interpretation can easily leave the way open for the BoD to circumvent the constitutionally
When the by-laws provide for the position of "Superintendent/ Administrator," it is clearly a corporate officer guaranteed security of tenure of the employee by the expedient inclusion in the by-laws of an enabling clause
position and issues of reinstatement would be within the jurisdiction of the SEC (now RTC) and not the NLRC. on the creation of just any corporate officer position.

Okol v. Slimmers World International, 608 S 97 The Tabang and Nacpil rulings are no longer controlling.
Office: created by charter of the corporation and the officer is elected by the directors or stockholders
Gomez v. PNOC DMC, 606 S 187
Employee: usually occupies no office and generally is employed not by action of the directors or stockholders Ordinary company employees are generally employed not by action of the directors and stockholders but by
but by the managing officer of the corporation who also determines the compensation to be paid to such that of the management officer of the corporation who also determines the compensation to be paid such
employee. employees.

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Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those
who are given that character either by the Corporation Code or by the corporation's by-laws.
The relationship of a person to a corporation whether as officer or agent or employee is not determined by
the nature of services he performs but by the incidents of his relationship with the corporation as they
actually exists.
A corporation is not prohibited from hiring a corporate officer to perform services under circumstances which
will make him an employee.
De Rossi v. NLRC, 314 S 245
An officer’s removal is a corporate act, and if such removal occasions an intra-corporate controversy, its
nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in
taking such action. Perforce, the matter would come within the area of corporate affairs and management,
and such a corporate controversy would call for SEC adjudicative expertise, not that of NLRC.
Catindig Class Notes
Q: Who are the basic set of officers?
A: President, Secretary and Treasurer
Q: Who are the by-laws officers of a corporation?
A: If the by-laws provides that the BoD may create positions and provide for their function. The officers
elected to such positions are bylaws officers. But the by-laws should be amended to reflect the office created.
Q: Why is the determination whether an officer is a bylaw officer or a management officer important?
A: As regards intra-corporate dispute. Bylaws officers are under the SEC while non-by-laws officers are under
the NLRC
Q: Who are management officers?
A: Those not mentioned in the by-laws and not elected by the BoD. Their positions are created by the
management.
UP Class Notes
How do you elect Chairman and Vice-Chairman if the bylaws does not provide for it?
1. By laws must give power to the BoD to create other positions and provide for their functions;
2. Amend the Bylaws if there is no such provision;
QUALIFICATIONS
 The Corporate Officers are:
a) The President (who shall be a director)
b) Treasurer (who may not be a director)
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c) Corporate Secretary (who shall be a resident and citizen of the Philippines
d) And such other officers as may be provided in the by-laws.
 GR: Any two (2) or more positions may be held concurrently by the same person.
 XPN: No one shall act as President and Secretary or as President and Treasurer, at the same time.
DISQUALIFICATIONS
 Sec. 27, CC: No person convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.
AUTHORITY
Rule on Corporate Officer’s Power to Bind Corporation
 An officer’s power as an agent of the corporation must be sought from the statute, charter, the by-
laws or in a delegation of authority to such officer, from the acts of the board of directors formally
expressed or implied from a habit or custom of doing business.
Actual: express or implied authority
1. Inherent authority or power of an officer or agent is taken to mean that authority to act and bind
the corporation which the officer has by reason of his office, although it may not be sanctioned by
express authority.
2. Express authority of an officer or agent includes every power or authority expressly conferred upon
him by law and the by-laws of the corporation.
3. Implied authority of an officer or agent of a corporation includes all such incidental authority as is
necessary, usual, and proper to effectuate the main authority expressly conferred.
Apparent or ostensible authority
 Apparent authority is naturally the same as and based upon the same principle as authority by
estoppel.
 Purpose: To place the corporation in estoppel
 Requisites:
a) Unauthorized person guilty of misrepresenting himself as an agent of a corporation with
knowledge that no such power exists
b) Corporation also has knowledge of such misrepresentation and acquiesce to the acts of its
unauthorized agent
 Corporation is bound by the acts of its unauthorized agent if an innocent third party relied on such
misrepresentation in good faith.
GR: 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.
XPNs:
1. Doctrine of Ratification or Estoppel:
 Acts of contracts which are not per se illegal can be validated. Even when the contract
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entered into in behalf of the corporation is outside the usual powers of the corporate
officer, the corporation’s ratification of the contract and acceptance of the benefits have
made such contract binding upon the corporation.
 Note: Ratification that would bind the corporation would have to come from the board
of directors or a properly authorized representative. Ratification can never be made on
the part of the corporation by the same persons who wrongfully assume the power to
make the contract, but the ratification must be by the officers as governing body having
authority to make such contract.
2. Doctrine of Apparent Authority: If a corporation knowingly permits one of its officers, or any other
agent to act within the scope of an apparent authority, it holds him out to the public possessing the
power to do so those acts; and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agent’s authority.
Note: Existence of apparent authority must be ascertained through:
a) General manner in which the corporation holds out an officer or agent as having the power to act or
in, other words, the apparent authority to act in general, with which it clothes him; or
b) The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond of his ordinary powers.
Ramirez Doctrine: If the corporation desires to set up the defense that the contract was executed by one not
authorized as agent, it must plead such fact.
Yao Ka Sin-Timely Repudiation Doctrine: However, once the corporation has discharged its burden under the
Ramirez Doctrine, then the burden of proof now shifts to the contracting party to show that indeed by
previous acts and actuations, the acting officer had been clothed by the corporation with apparent authority
for the public to take such authority at face value.
UP Class Notes
Pedro went to bank. Ana is the manager of the bank. Ana told Pedro that BSP required higher collateral and
told him to increase his collateral for his loan. SMC shares were given by Pedro to Ana. Ana was about to go to
Canada, and before she left, she sold Pedro‟s SMC shares. Could Pedro sue the bank?
Ans: Yes. Ana is clothed with authority as officer to act in behalf of the bank. (UP-Elective Class Reviewer at 39)
Q: If teller? A: Agency case. (Id.)
LIABILITY
 Rule: Officers or directors bear no personal liability for acts done or contracts entered into for the
corporation, if duly authorized.
 See discussions on three-fold and personal liabilities of directors, officers, etc.
EXECUTIVE COMMITTEE
Sec. 35. Executive committee. – The by-laws of a corporation may create an executive committee, composed
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of not less than three members of the board, to be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any
action for which shareholders’ approval is also required; (2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of
cash dividends to the shareholders.
Creation of Execom
1. The by-laws of a corporation may create an executive committee
2. Composed of not less than three members of the board,
3. To be appointed by the board.
Actions of Execom
 Said committee may act, by majority vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the by-laws or on a majority vote of the
board.
Prohibited acts (powers that execom cannot exercise, asked in 2014 Bar Exam)
1. Approval of any action for which shareholders’ approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of by-laws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and
5. A distribution of cash dividends to the shareholders.
 Ma'am said not just cash dividends but other kinds of dividends as well.
Purpose of Execom
 To take off part of the work from the Board during the periods when the Board does not meet.
Membership of Execom
 Non-members of the Board may be appointed as members of the executive committee provided
that there are at least 3 members of the Board therein.
Other considerations
 Executive Committee is a governing body which functions as the board itself.
 Thus, membership therein shall be governed by the same law rules applicable to the board
of directors as provided in Section 35. (SEC Opinion, June 3, 1998)
 As a matter of business practice, the use of execom in many companies may reduce the
directors to little more than a supervising and ratifying body
 Section 35 recognizes an already existing corporate practice in the Philippines dictated by necessity
owing to the growing complexities of modern business, whereby the board of directors delegates to
an executive committee composed of some members of the board corporate powers to assure
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prompt and speedy action and solution to important matters without the need for a board meeting,
especially where such meetings cannot be readily be held.
 Thus, the committee directly manages the operations of the corporation between
meetings of the board, thereby reducing the work load of the latter.
DOCTRINE OF APPARENT AUTHORITY
 Check discussions above on apparent or ostensible authority of corporate officers
Banate v. Philippine Countryside, July 13, 2010
The decision of the trial court was utterly silent on the manner by which PCRB, as supposed principal, has
"clothed" or "held out" its branch manager as having the power to enter into an agreement, as claimed by
petitioners. No proof of the course of business, usages and practices of the bank about, or knowledge that the
board had or is presumed to have of, its responsible officers’ acts regarding bank branch affairs, was ever
adduced to establish the branch manager’s apparent authority to verbally alter the terms of mortgage
contracts. Neither was there any allegation, much less proof, that PCRB ratified Mondigo’s act or is estopped
to make a contrary claim.
Although a branch manager, within his field and as to third persons, is the general agent and is in general
charge of the corporation, with apparent authority commensurate with the ordinary business entrusted him
and the usual course and conduct thereof, yet the power to modify or nullify corporate contracts remains
generally in the board of directors.
Being a mere branch manager alone is insufficient to support the conclusion that Mondigo has been clothed
with "apparent authority" to verbally alter terms of written contracts, especially when viewed against the
telling circumstances of this case. In other words, the burden of proving the authority of Mondigo to alter or
novate the mortgage contract has not been established.
Sargasso v. PPA, July 5, 2010
Application of doctrine if government contract: The government is NOT bound by unauthorized acts of its
agents, even though within the apparent scope of their authority.
Doctrine under law on agency: The power to affect the legal relations of another person by transactions with
third persons arising from the other’s manifestations to such third person38 such that the liability of the
principal for the acts and contracts of his agent extends to those which are within the apparent scope of the
authority conferred on him, although no actual authority to do such acts or to make such contracts has been
conferred.
Acts of principal, not agents
 It imposes liability, not as the result of the reality of a contractual relationship, but rather because of
the actions of a principal or an employer in somehow misleading the public into believing that the
relationship or the authority exists.
 Apparent authority is determined only by the acts of the principal and not by the acts of the agent.
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The principal is, therefore, not responsible where the agent’s own conduct and statements have
created the apparent authority.
 In this case, not a single act of respondent, acting through its Board of Directors, was cited as having
clothed its general manager with apparent authority to execute the contract with it.
ANOTHER MODE OF DELEGATION: MANAGEMENT CONTRACT
Section 44. Power to enter into management contract. – No corporation shall conclude a management
contract with another corporation unless such contract shall have been approved by the board of directors
and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the
same interest of both the managing and the managed corporations own or control more than one-third (1/3)
of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of
the members of the board of directors of the managing corporation also constitute a majority of the members
of the board of directors of the managed corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation.
No management contract shall be entered into for a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes
to manage or operate all or substantially all of the business of another corporation, whether such contracts
are called service contracts, operating agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the pertinent laws or
regulations
Management contract
 An agreement which a corporation delegates the management of its affairs to another corporation
for a certain period of time.
 Instead of employing other persons to manage the corporation's business, it employs
another corporation.
 A corporation under management is bound by the acts of the managing corporation and is
estopped to deny its authority.
 NO need for amendment of AoI
Management contract with parent corporation
 Valid.
 Purpose: To provide more efficient operation and greater convenience to both.
 THUS, a holding company may, in some cases, intervene in the management and affairs of
its subsidiaries or affiliates PROVIDED the management in those affairs will not affect the
separate and continuing existence of the managed corporation.
 When invalid: When there is fraud or bad faith
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Limitations on power
1. Ratification of the contract
 Both managing and managed corporation: Majority votes of quorum of BOD + Majority
votes of respective shareholders representing the OCS (not in joined session)
 Interlocking interest: At least one stockholder represents interest in both managing and
managed corporation and owns more than 30% ownership of either corporation
o Additional requirement: 2/3 votes of OCS of managed corporation
 Interlocking directors: Majority of BOD in both corporations are one and the same.
o Additional requirement: 2/3 votes of OCS of managed corporation
2. Period of the contract
 GR: Must not exceed 5 years
 XPN: Contracts which relate to the exploration, development, exploitation or utilization of
natural resources -> follow period as provided for by law
3. Managerial power under the contract
 Delegation of entire supervision and control, prohibited: A management contract cannot
delegate entire supervision and control over the officers and business of a corporation to
another as this will contravene Section 23.
 The board cannot surrender or abdicate its power and duty of supervision and control for
otherwise, it becomes a mere instrumentality of the management company.
 Note: Some powers may not be delegated to the managing corporation e.g. amendment
of the AoI of the managed corporation
Rationale for Ratification Requirements on Part of Managed Corporation
 That such a management contract is a deviation from the principle under Section 23 that the
corporate affairs shall be managed by the board of directors, and thereby a departure from such an
agreement would require the approval of the stockholders under the principle that it would vary the
contractual corporate arrangements, by allowing basically an outsider to involve itself in the
management of corporate affairs.
Rationale for Ratification Requirements on Part of Managing Corporation.
 That the management arrangement is a deviation from the principle also that the board of directors
in the managing corporation assumed office with the understanding that they would devote their
time and resources for the affairs of the corporation.
Other considerations
 If management company: The ratificatory procedure should not therefore be applicable to a
corporation that is organized primarily as a management company, and its entering into a
management contract is clearly within the primary purpose of the corporation and in accordance
with the contractual understanding with the stockholders of such managing corporation. (Page 263
of CLV’s Textbook)
 Cases not covered by Section 44: When it comes to a management contract entered into by the
managed corporation under the definition of Section 44, not with another corporation but with a
partnership or an individual, the same would not be covered by and thereby need not comply with
the ratificatory requirements of Section 44. (Page 263 of CLV’s Textbook)
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Jack's Lecture on Management Contract (you may skip this)
A corporation can enter into a management contract. What the law really does here is to regulate
management contracts. Mgt contracts can be necessary at times. Like here is a mining company whose
directors and officers don’t know anything about mining. They can enter into a contract with a corporation
which has technical expertise to manage its mines.
You have that case of Nielson & Co. vs. Lepanto where Lepanto entered into a managment contract with
Nielson & Co. to manage its mines. When the war broke out, the Japs took over the mines of Lepanto.
(Yamashita must have been there.) After the war, Nielson wanted to continue the contract because there was
a stipulation there that if the contract is interrupted, it will be extended. Lepanto did not agree. Nielson & Co.
sued. The contract provided that they would be provided a certain percentage of the gross income as their
management fee. In addition, Nielson & Co. would get a certain percentage of the stock dividends that will be
declared. Lepanto lost in the SC in December 1966. The award reached about 30 Million pesos. (That case was
handled by Ike Bello (for Lepanto) who was devastated by the decision.) Lepanto went to our office which
drafted a motion for reconsideration. One of the arguments raised was that a management contract is a
contract of agency. Therefore, it can be terminated at any time. But the Court rejected that argument. The
Court said that a management contract is a contract for lease of services. It does not involve a representation
so you cannot terminate it at any time. The Court, however, eliminated the award for stock dividend. It said
that Nielson & Co. was not a stockholder and only a stockholder can be given stock dividends.
The law tries to regulate management contracts because it has been used too often to _______ money for the
corporation. When Soriano was still managing PAL, he was a minority stockholder but he had this compania
which had a management contract. So Soriano & Co. was getting a percentage of the gross income of PAL.
Everytime PAL would buy or sell anything, it had a commission. When Toda(?) took over PAL, he did the same
thing with his Rubicon which had a management contract. That’s why when Mr. Fred Ramos of National
Bookstore was questioning this/ was waging a proxy fight against Soriano III in Atlas Mines, that was an issue
he raised. He said that Atlas Mining had a management contract with Soriano Compania which was charging a
fee based on the gross income. This was a time when Atlas was incurring losses. In fact, later, Atlas Mining
closed.
This is why the laws says that a management contract should be approved by majority of the Board, by
majority of the stockholders, of both the managed and managing corporation. And if a stockholder of the
managed corporation owns more than 1/3 of the managing corporation, the management contract must be
approved by at least 2/3 of the stockholders of the managed corporation. A management contract should not
be valid for more than 5 years for any one term. You can just keep renewing it provided, that it is not for more
than 5 years at any one time.
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THREE-FOLD DUTIES
1. Duty of obedience
THREE-FOLD DUTIES OF DIRECTORS AND OFFICERS: DILIGENCE, LOYALTY AND OBEDIENCE 2. Duty of diligence
3. Duty of loyalty
DUTIES: BUSINESS JUDGMENT RULE
Duty of obedience
Business judgment rule  The directors or trustees and officers to be elected shall perform the duties enjoined on them by law
 Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in and by the by-laws of the corporation.
the BoD. Consequently, the rule has two consequences:  They cannot exceed the powers and authority limited by law, AoI, or by-laws; otherwise, they shall
a) The resolution, contracts, and transactions of the Board, cannot be overturned or set aside be liable.
by the stockholders or members and not even by the courts under the principle that
business of the corporation has been left to the hands of the Board; and Notes
b) Directors and duly authorized officers cannot be held personally liable for acts or contracts  Includes criminal liability of directors and officers of corporation, BUT there must be exact provision
done with the exercise of their business judgment. of statute holding them liable.
 XPNs:  Examples:
a) When the Corporation Code expressly provides otherwise; a) Monopoly, illegal restraints of combination of trades. DIRECTORS shall be liable.
b) When the Directors or officers acted with fraud, gross negligence or in bad faith; and b) General Banking Act: unsafe and unsound banking practices
c) When Directors or officers act against the corporation in conflict of interest situation. c) Securities Regulation Code: insider trading (only to directors) or manipulation of security
 No court can, as an integral part of resolving the issues between squabbling stockholders, order the prices.
corporation to undertake certain corporate acts, since it would be in violation of the business d) Other persons directly responsible of the crime can also be held liable.
judgment rule.
 Directors and officers who purport to act for the corporation, keep within the lawful scope of their
authority and act in good faith, do not become liable, whether civilly or otherwise, for the Duty of diligence
consequences of their acts, which are properly attributed to the corporation alone.  Directors or trustee who:
a) Willfully and knowingly vote for or assent to patently unlawful acts of the corporation
UP Class Notes b) Guilty of gross negligence
Reason for this title is that nobody would want to be a director if he is liable for a wrong decision. Not liable c) Guilty of bad faith in directing the affairs of the corporation
for mistakes and errors provided they acted in good faith and with due care and prudence. (UP-Elective Class  Shall be liable solidarily for all the damages resulting therefrom suffered by the corporation, its
Reviewer at 36) stockholders or members and other persons.

Catindig Class Notes-Ateneo Notes

Q: What matters require BoD action? What are the exceptions?
A: All corporate powers except such delegated to Executive Committee, SPAs etc.
Q: Are directors liable for wrong decision resulting to losses to the corporation?
A: No unless…
MAIN DUTY: ACT AS AGENTS OF THE CORPORATION
 The directors of a corporation are its agents
 Fiduciary relationship: They also occupy a fiduciary relationship to the corporation
 In the absence of malice, bad faith or specific provision of law, a director or officer of a corporation
cannot be made personally liable for corporate liabilities.
 Directors must possess not only prudence, knowledge, skills BUT also expertise
 Relate to Sec. 31: Personal liability of directors if GROSS NEGLIGENCE or BAD FAITH.
 In relation to BJR: As long as there is honesty in making judgment even if not sound, or
does not result to profit then BOD cannot be held personally liable.
 BJR not subject to judicial review: Business judgment of the Board cannot be subject to
judicial review.
 Degree of diligence of BOD: Depends on business and obligations engaged with.
 THUS if common carrier, then extraordinary as well
Steinberg v. Velasco, March 12, 1929
Directors are not liable for losses resulting to the corporation from want of knowledge on their part; or for
mistake of judgment, provided they were honest, and provided they are fairly within the scope of the powers

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and discretion confided to the managing body.
But the acceptance of the office of a director of a corporation implies a competent knowledge of the duties
assumed, and directors cannot excuse imprudence on the ground of their ignorance or inexperience; and if
they commit an error of judgment through mere recklessness or want of ordinary prudence or skill, they may
be held liable for the consequences. Like a mandatory, to whom he has been likened, a director is bound not
only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise ordinary
skill and judgment, he cannot set up that he did not possess them.
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.
Notes:
 Negligence may also be committed by the director who failed to obtain necessary information to
perform his function as a director.
 A director who relied solely on what the other directors told him to do is guilty of negligence. And in
this case, ignorance is negligence.
Duty of loyalty
 Sec. 31(2): When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profits which otherwise
would have accrued to the corporation.
 Instances of conflict of interest
a) Self-dealing director (Section 32)
b) Fixing compensation of directors and officers (Section 30)
c) Interlocking directors (Section 33)
d) Seizing corporate opportunity; Disloyalty (31,34)
e) Using inside information (SRC Sections 3.8, 23.2, 61, 71.2)
PERSONAL LIABILITIES OF DIRECTORS AND OTHER CORPORATE OFFICERS
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly vote
for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the
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corporation and must account for the profits which otherwise would have accrued to the corporation.
GR: Cannot be held personally liable
XPNs:
1. Instances under Sec. 31
2. Assents or votes for issuance of watered stocks or failed to object in writing
3. Expressly or impliedly assumes liability of corporation
 E.g. guaranty, suretyship, accommodation mortgages to secure corporation loans
4. By express provision of law
a) Labor Code: Bad faith and malice in dismissal of employee
b) General Banking Act: Unsafe and unsound banking practice
Liability of director
 A director is liable if he:
a) Willfully and knowingly vote for and assent to patently unlawful, acts of the corporation;
b) Is guilty of gross negligence or bad faith in directing the affairs of the corporation; or
c) Will acquire any personal or pecuniary interest in conflict of duty. (Secs 31 and 34)
Tramat Mercantile v. CA, 238 S 14
Personal liability of a corporate 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.
Ateneo list of cases on liability of directors, trustees or officers
 Generally, officers or directors under the old corporate name bear no personal liability for acts done
or contracts entered into for the corporation, if duly authorized. Republic Planters Bank v. Court of
Appeals, 216 SCRA 738 (1992).
 Corporate officers who entered into and signed contracts on behalf of the corporation in their
official capacities cannot be made personally liable thereunder in the absence of stipulation to that
effect, due to the personality of the corporation being separate and distinct from the persons
composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Rustan Pulp &
Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v. Walter Bull and Co., 84 Phil.
164 (1949).
 A president cannot be held solidarily liable personally with the corporation absent evidence of
showing that he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230 (1992).
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 The finding of solidary liability among the corporation, its officers and directors would patently be
baseless when the decision contains no allegation, finding or conclusion regarding particular acts
committed by said officers and director that show them to have been individually guilty of
unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When
corporate officers and directors are sued merely as nominal parties in their official capacities as
such, they cannot be held liable personal for the judgment rendered against the corporation. NPC. v.
Court of Appeals, 273 SCRA 419 (1997); Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965);
Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
 An officer-stockholder who signs in behalf of the corporation to a fraudulent contract cannot claim
the benefit of separate juridical entity: ―Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape liability under the said contract by using
the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced
to avoid injustice and inequity.‖ Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).
 While the limited liability doctrine is intended to protect the stockholder by immunizing him from
personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this
protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank
Corp., 408 SCRA 544 (2003).
 Labor. Corporate officers cannot be held personally liable for damages on account of the employees
dismissal because the employer corporation has a personality separate and distinct from its officers
who merely acted as its agents. Malayang Samahan ng mga Mangagagawa sa M. Greenfields v.
Ramos, 357 SCRA 77 (2001).
 Only the responsible officer of a corporation who had a hand in illegally dismissing an employee
should be held personally liable for the corporate obligations arising from such act and for the
separate juridical personality of a corporation to be disregarded as to make the highest corporate
officer personally liable on labor claims, the wrongdoing must be clearly and convincingly
established. Del Rosario v. NLRC, 187 SCRA 777 (1990).
 Corporate officers are not personally liable for money claims of discharged employees unless they
acted with evident malice and bad faith in terminating their employment. AHS/Philippines v. Court of
Appeals, 257 SCRA 319 (1996); Nicario v. NLRC, 295 SCRA 619 (1998).
 A corporation, being a juridical entity, may act only through its directors, officers and employees and
obligations incurred by them, acting as corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).
 In labor cases, corporate directors and officers are solidarily liable with the corporation for the
termination of employment of corporate employees done with malice or in bad faith. In this case, it
is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees.
They were the one, who as high-ranking officers and directors of the corporation, signed the Board
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Resolution retrenching the employees on the feigned ground of serious business losses that had no
basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no
evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997).
 Since a corporation is an artificial person, it must have an officer who can be presumed to be the
employer, being the ―person acting in the interest of the employer‖—the corporation, in the
technical sense only, is the employer. The manager of the corporation falls within the meaning of an
―employer‖ as contemplated by the Labor code, who may be held jointly and severally liable for the
obligation of the corporation to its dismissed employees. NYK International Knitwear Corp. Phil. V.
NLRC, 397 SCRA 607 (2003).
SELF DEALING DIRECTOR
Section 32. Dealings of directors, trustees or officers with the corporation. – A contract of the corporation
with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all
the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.
Contracts of self-dealing director
 Instance where a director of a corporation personally enter into contract with the same corporation.
 These contracts are VOIDABLE at the instance of the corporation because entered into with undue
influence.
 Important: The mere possibility of undue influence is what the law seeks to avert.
 Can be avoided by fulfilling all the conditions: (if these are present then there is a valid contract)
a) The presence of such director/trustee in the board meeting approving the contract was
not necessary to constitute a quorum for such meeting;
b) The vote of such director/trustee in the board meeting approving the contract was not
necessary for the approval of the contract;
c) The contract is fair and reasonable under the circumstances;
d) In case of an officer, there was previous authorization by the BOD/BOT.
Remedies to avoid annulment (summary)
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1. Presence of the self-dealing director is not necessary to constitute quorum in the meeting of the
dealing of the contract.
2. Vote of the self-dealing director is not necessary for the approval of the contract
3. Call for a stockholders or members meeting. In that meeting, self-dealing director must prepare full,
fair, honest disclosure of the adverse interest. Then if ratified by 2/3 of OCS or members
 Note: In any of the three remedies, contract must be FAIR and REASONABLE. Otherwise, Court may
annul.
Other considerations
 Sec. 32 does not require that the corporation suffers injury or damage as a result of the contract.
 Sec. 32 fails to specify whether the vote of the self-dealing director or trustee shall be counted in the
meeting for the ratification of the contract.
 Ma'am said that if the self-dealing director owns more than 2/3 of the OCS, the remedy for
the stockholders is to exclude the share of the self-dealing director in the total OCS which
serves as basis for the 2/3 vote requirement.
 Example: If the self-dealing director owns 70% of the OCS, then the 2/3 vote requirement
shall be reckoned from the 30%. Thus 2/3 of 30% OCS is required; otherwise, the self-
dealing director will just vote in his favor.
CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS
Section 33. Contracts between corporations with interlocking directors. – Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one corporation is substantial and his interest in the other corporation
or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial
for purposes of interlocking directors.
Contracts between corporations with interlocking directors
 Interlocking director, defined: one who sits on the Board of two or more corporations
simultaneously.
 Status of contract: Valid, provided that there is no fraud and the contract is fair and reasonable
under the circumstances.
 When rules on self dealing directors applicable: When interlocking director's interest in one
corporation is SUBSTANTIAL and in the second corporation NOMINAL.
 Important: In this case, the INTERLOCKING director is also a SELF-DEALING director.
 Substantial: Stockholdings exceed 20% of OCS (>20)
 Nominal: Stockholdings do not exceed 20% of OCS (<=20)
 If condition satisfied, then remedies enumerated under self-dealing directors must be
satisfied.
 Contract voidable at whose instance: At the instance of the corporation where the share of the self-
dealing, interlocking director is NOMINAL.
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 Applicability: It applies to transactions between corporation with interlocking directors and NOT
when the corporation allegedly prejudiced a third party, not one of the corporations with
interlocking director.
 By-laws prohibiting interlocking directors, VALID: By-laws which prohibit a director of a corporation
from serving at the same time as a director of a competing corporation is VALID and REASONABLE.
DISLOYALTY
Section 34. Disloyalty of a director. – Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds
in the venture.
Doctrine of corporate opportunity
 If there is presented to a corporate officer or director a business opportunity which:
a) Corporation is financially able to undertake;
b) From its nature, is in line with corporation’s business and is of practically advantage to it;
and
c) One in which the corporation has an interest or a reasonable expectancy.
 By embracing the opportunity, the self-interest of the officer or director will be brought into
conflict with that of his corporation. Hence, the law does not permit him to seize the opportunity
even if he will use his own funds in the venture.
 Important: There must be misuse of confidential corporate information in favor of such director.
 If he seizes the opportunity thereby obtaining profits to the expense of the corporation, he must
account all the profits by refunding the same to the corporation unless the act has been ratified by
a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock.
 Sec. 34 is silent on whether the disloyal director shall be allowed to vote his shares in
ratification of his act.
 Such ratification is not available in Sec. 31.
 Sections 31 and 34 contain the doctrine of corporate opportunity. In case of such conflict-of-
interests, and the director acts against the good of the corporation, he shall be accountable for the
profits he obtained, even if he had risked his own funds.
 Injunction is also proper for the closure of the business itself because there was fraud, but NOT
confiscation of the assets, equipment and other properties of the corporation because the same is
tantamount to violation of due process.
When doctrine not applicable
1. Director engaged in a distinct enterprise of the same general class of business in good faith
2. Opportunity is one which is not essential to the corporation's business
3. Director or officer does not exploit opportunity by employment of company's resources
4. If the corporation is unable to acquire the opportunity
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LIABILITY FOR WATERED STOCKS 2. Subscriber

Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation consenting to
the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form
other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith
express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with
the stockholder concerned to the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the same.
Watered stocks, explained
 Definition: Shares issued and fully-paid when in fact the consideration agreed to and accepted by
the directors of the corporation was something known to be much less than the par value or issued
value of the shares.
 As to corporation: The issuance of watered stock is not merely ultra vires but is illegal per se as it is
a violation of Sec. 62.
 The term has also been defined as stocks issued by a corporation for which it has in fact intentionally
or knowingly received or agreed to receive nothing at all from them or less than their par value
whether in money, or in property or in service.
 Water, meaning: "water" in the stock refers to the difference between the fair market value at the
same time of the issuance of the stock (not at the time of discovery of the inadequate consideration
or at the time of demand for payment) and the par or issued value of said stock.
 Subsequent increase in the value of the property used in paying the stock does not do
away with the "water"‖ in the stock. The existence of such "water"‖ is determined at the
time of the issuance of the stock.
Watered stock includes:
1. Bonus share: Issued without consideration
2. Discount share Issued as fully paid when the corporation has received a lesser sum of money than
its par or issued value
3. Issued for a consideration other than actual cash, such as property or services, the fair valuation of
which is less than the par or issued value; or
4. Issued as stock dividend when there are no sufficient retained earnings or surplus
Prohibition on ORIGINAL issue only
 Rule: The prohibition to issue watered stock refers only to the original issue of stocks BUT NOT to
subsequent transfer of such stocks by the corporation
 Hence, it arises only in a transaction between the corporation and a subscriber.
 Any subsequent appreciation in value of the shares will not cure the defect.
 Reason: The liability for watered stocks arises from the time the stocks are issued.
Persons primarily liable
1. Consenting director or officer
 Liability is solidary with the participating stockholder
 The holder of the watered stock shall be liable to the corporation and its creditors for the
difference between the fair values received at the time of issuance of the stock and the
par or issued value of the same.
 The holder of watered stock cannot escape liability by transferring the same to an
irresponsible person or to a bona fide purchaser.
Jack's Lecture on History of Watered Stock (Commercial break!)
Now under Sec. 65 *Liability of directors for watered stocks+, we’ve mentioned this before, an officer or
director who agrees to the issuance of watered stock or such officer who, having knowledge of it, does not file
with the corporate secretary his written objection, will be liable if a stock is watered. In other words, the
stockholder paid less than the par value or the stated value for the shares of stock and then he was issued a
stock certificate. When the corporation receives less consideration than the par value of a par value share or
the stated value if it is a no-par value share… that is called watered stock. Because remember, cattle is called
stock. And in the old days of the wild, wild west, when the cowboys would bring their cattle to the market to
be sold, they will make the cattle eat salt so the cattle will be very thirsty. And then along the way, they will
pass by a stream. And so the cattle are very thirsty and so they will drink a lot of water. So when they arrive at
the market, the cattle will be very heavy because of the water. So when the cattle is weighed by the buyer, the
cattle is heavy and he will pay the price for that weight but what he is paying for - water. He is not getting his
money’s worth. That cattle which is full of water which is being sold for a heavier weight – watered stock.
That’s why shares of stock where the corporation did not get its money’s worth came to be called watered
stock.
DERIVATIVE SUIT: REMEDIES TO ENFORE PERSONAL LIABILITY
Enforcement of liability of directors or officers
1. Administrative
a) Removal by stockholders or government regulators
b) Administrative fine or penalties by SEC or other government regulators
c) GBA: Removal by Monetary Board
2. Criminal
 Applicable crime under RPC and/or special laws
3. Civil
a) Damages
b) Other reliefs
Who may file?
1. Stockholder, if private injury
2. Third party, in cases of unauthorized contracts
3. Corporation in a direct or derivative suit

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Derivative suit, definition
 An action brought by minority shareholders in the name of the corporation to redress wrongs
committed against the corporation, for which the directors refuse to sue. It is a remedy designed by
equity and has been the principal defense of the minority shareholders against abuses by the
majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
 Those brought by one or more stockholders/members in the name and on behalf of the corporation
to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials
of the corporation refuse to sue, or the ones to be sued has control of the corporation.
Requisites of Derivative Actions
1. The party bringing suit should be a shareholder as of the time of the act or transaction complained
of;
 Important: The right to sue by the stockholders is inherent and implied by the mere fact
that they own shares on the corporation.
2. He has exhausted intra-corporate remedies; and
3. The cause of action actually devolves on the corporation, the wrongdoing or harm having been
caused to the corporation and not to the particular stockholder bringing the suit.
4. Acts must be brought in the name of the corporation.
General discussions about derivative suit (based on cases)
 Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with
its board of directors or trustees. But an individual stockholder may be permitted to institute a
derivative suit in behalf of the corporation in order to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or when a demand upon them to file the
necessary action would be futile because they are the ones to be sued, or because they hold control
of the corporation. In such actions, the corporation is the real-party-in-interest while the suing
stockholder, in behalf of the corporation, is only a nominal party. (Filipinas Port Services, Inc. v. Go
(2007)
 Purpose of derivative suit: To allow the stockholders/member to enforce rights which are derivative
(secondary) in nature, i.e., to enforce a corporate cause of action. (R.N. Symaco Trading Corp. v.
Santos (2005)
 Real party in interest: It is a settled is the doctrine that in a derivative suit, the corporation is the
real party in interest while the stockholder filing suit for the corporation’s behalf is only nominal
party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220
(2003).
Who may bring the suit
 Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in
which case Cruz is only a nominal party while Filport is the real-party-in-interest. (Filipinas Port
Services, Inc. v. Go (2007)
 Under Section 36 of the Corporation Code, in relation to Section 23, where a corporation is an
injured party, its power to sue is lodged with its board of directors or trustees. An individual
stockholder is permitted to institute a derivative suit in behalf of the corporation wherein he holds
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stocks in order to protect to vindicate corporate rights, whenever 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. (Chua
v. CA, 2004)
 In the absence of a special authority from the Board of Directors to institute a derivative suit for
and in behalf of the corporation, the president or managing director is disqualified by law to sue in
her own name. The power to sue and be sued in any court by a corporation even as a stockholder is
lodged in the Board that exercises its corporate powers and not in the president or officer thereof.
Bitong v. Court of Appeals, 292 SCRA 503 (1998).
 A minority stockholder and member of the board has no power or authority to sue on the
corporation’s behalf. Nor can we uphold this as a derivative suit, since it is required that the minority
stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing
on a derivative cause of action on behalf of the corporation and all other stockholders similarly
situated who may wish to join him in the suit. There is no showing that petitioner has complied with
the foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).
 When must be stockholder: The relators must be stockholders both at time of occurrence of the
events constituting the cause of action and at the time of the filing of the derivative suit. Gochan v.
Young, 354 SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911).
 A minority stockholder can file a derivative suit against the president for diverting corporate income
to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
 A lawyer engaged as counsel for a corporation cannot represent members of the same corporation’s
board of directors in a derivative suit brought against them. To do so would be tantamount to
representing conflicting interests, which is prohibited by the Code of Professional Responsibility.‖
Hornilla v. Salunat, 405 SCRA 220 (2003).
Exhaustion of Intra-corporate remedies.
 A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can
be filed without prior demand upon the Board of Directors where the legality of the constitution of
the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993).
Nature of Relief
 In a derivative suit, any monetary benefits under the decision of the court shall pertain to the
corporation and not to the stockholders or members. (R.N. Symaco Trading Corp. v. Santos, 2005)
 The allegations of injury to the relators can co-exist with those pertaining to the corporation, and
does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives
rise to an additional cause of action for damages against the erring directors. Gochan v. Young, 354
SCRA 207 (2001).
 In a derivative action, the real party in interest is the corporation itself, not the shareholders who
actually instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit,
and therefore a temporary restraining order enjoining a person from representing the corporation
will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not
the corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001).
 Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18
SCRA 602 (1966)
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Common action in a derivative suit

1. Damages
2. Annulment of contract
3. Action for mandamus to compel director to perform duties
4. Action for injunction to restrain director from doing acts harmful to corporation

NO prejudicial question in DS
 Pendency of derivative suit cannot suspend a criminal case arising from the same act

Consolidation of personal and derivative suit

 VALID, for as long as the personal injury and that of caused by the corporation arose from the same
acts.
 To avoid splitting of cause of action

Order of dissolution of corporation, improper

 Court, in derivative suit, cannot order dissolution of corporation
 Reason: Dissolution is contrary to the purpose of a derivative suit

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POWERS OF CORPORATION to note that there is no prohibition against the hiring by corporations of optometrists.

Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has the power
and capacity: No prohibition
1. To sue and be sued in its corporate name; There is no law that prohibits the hiring by corporations of optometrists or considers the hiring by
2. Of succession by its corporate name for the period of time stated in the articles of incorporation corporations of optometrists as a practice by the corporation itself of the profession of optometry.
and the certificate of incorporation; Furthermore, it was ruled that the employment of a qualified optometrist by a corporation is not against
3. To adopt and use a corporate seal; public policy.
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in Doctrine of estoppel does not apply
accordance with this Code; The fact that petitioner acquiesced in the special conditions imposed by the City Mayor in subject business
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers permit does not preclude it from challenging the said imposition, which is ultra vires or beyond the ambit of
and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to authority of respondent City Mayor. Ultra vires acts or acts which are clearly beyond the scope of one’s
the corporation if it be a non-stock corporation; authority are null and void and cannot be given any effect. The doctrine of estoppel cannot operate to give
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal effect to an act which is otherwise null and void or ultra vires.
with such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require, subject EXPRESS, IMPLIED AND INCIDENTAL POWERS, DISTINGUISHED
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code; Express powers
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,  Powers expressly conferred upon by the Corporation Code, special law or AoI.
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall  Sources:
give donations in aid of any political party or candidate or for purposes of partisan political activity; a) Those provided in the law (Corporation Code)
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers b) Purpose clause of the AoI
and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or Implied powers
purposes as stated in the articles of incorporation.  Those powers which are reasonably necessary to execute the express powers and to accomplish or
Note: carry out the purposes for which the corporation was formed.
 Section 36 enumerates 11 powers that a corporation enjoys in addition to the special powers that
may be provided for in the purpose clause of the articles of incorporation, which would also Classification of implied powers
constitute express powers. 1. Acts in the usual course of business
 Examples: Borrowing money, making ordinary contracts, executing promissory notes,
POWERS IN GENERAL acquiring personal property for use in connection with the business etc.
 Key: All acts necessary to run a business under ordinary circumstances
THEORY OF SPECIAL CAPACITIES v. THEORY OF GENERAL CAPACITIES 2. Acts to protect dents owing to a corporation
 General capacity: A corporation is said to hold such powers as are not prohibited or withheld from it 3. Embarking in different business
by general law (everything is allowed except when prohibited)  A corporation may not engage in a business different from that for which it was created as
 Special capacity: A corporation cannot exercise powers except those expressly or impliedly given a regular and a permanent part of its business.
(everything is prohibited except when allowed)  Especially true with respect to those particular kinds of corporate activities which are
governed by the special laws.
Acebedo Optical v. CA, March 31, 2000  It is generally held that a corporation may temporarily conduct an outside business to
The fact that private respondent hires optometrists who practice their profession in the course of their collect a debt out of its profits.
employment in private respondent’s optical shops, does not translate into a practice of optometry by private 4. Acts in part or wholly to protect or aid employees
respondent itself." The Court further elucidated that in both the old and new Optometry Law, it is significant 5. Acts to increase business

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 A corporation may conduct contests or sponsor radio or television programs, or promote 1. Construing charters: They shall be construed strictly; any ambiguity in the terms of the corporate
fairs and other gatherings to advertise and increase its business. charter must operate against the corporation and in favor of the public.
2. Determination of powers conferred: The whole instrument is to be taken together.
Express powers vs. implied powers 3. Grant of corporate franchises: They should be so construed as not to defeat the purpose of their
EXPRESS POWER IMPLIED POWER creation.
Have to do largely with the main business, objects Deals with the means and methods of attaining those 4. Charters are also to be construed in view of the circumstances, usages, and practices existing at the
and purposes of the corporation objects and purposes time they were granted.
Determined once and for all by the language of the May change according to time, place and surrounding 5. Charter susceptible of two meanings: The construction to be adopted is one which works the least
corporate charter and the applicable law circumstances harm to the State.
Test is whether they are found in the words of the Test is whether they are fairly incidental and 6. Provisions of a general incorporation law may apply to corporations operating under special statutes
charter or the law necessary to carry them out in furtherance of the when no specific provision has been made.
corporation's business
POWER TO HAVE/USE CORPORATE NAME AND SEAL
Incidental or inherent powers Laureano Investment v. CA, May 6, 1997
 Powers which a corporation can exercise by the mere fact of its being a corporation or powers which When Laureano Investment and Development Corporation intervened using the name LIDECO Corporation,
are necessary to corporate existence and are, therefore, impliedly granted. the Court held that intervenor LIDECO Corporation and LAUREANO INVESTMENT AND DEVELOPMENT
 They exist independently of the express powers. CORPORATION are two (2) separate and distinct entities. Inasmuch as the documents in support of its
complaint in intervention -- tax declarations -- are in the names of Laureano Investment and Development
Ratification of corporate acts Corporation, and it appearing that LIDECO Corporation is not a corporation or partnership duly organized and
 Rule: Ultra vires acts may be ratified provided they are NOT illegal registered with the SEC, there is, therefore, no way whatsoever that LIDECO Corporation’s interests will be
1. By stockholders (or members) adversely affected by the outcome of the instant case.
 They may ratify and render valid acts done or authorized by the BOD but which were
beyond the powers of the directors, or acts done or authorized by the directors at an LIDECO Corp has no right to intervene
illegal meeting, or unauthorized acts of others than the directors, provided the acts done "Lideco Corporation” had no personality to intervene since it had not been duly registered as a corporation. If
are such as may be done or authorized by the stockholders. petitioner legally and truly wanted to intervene, it should have used its corporate name as the law requires
2. By board of directors (or trustees) and not another name which it had not registered. Nowhere in the motion for intervention and complaint in
 A transaction if within the powers of a corporation, may be consented to, ratified, or intervention does it appear that “Lideco Corporation” stands for Laureano Investment and Development
acquiesced in by the BOD/BOT if it could be authorized by them Corporation. Bormaheco, Inc., thus, was not estopped from questioning the juridical personality of “Lideco
 Retroactive effect: Ratification by a corporation of an unauthorized act or contract by its officers or Corporation,” even after the trial court had allowed it to intervene in the case.
others relates back to the time of the act or contract ratified, and is equivalent to original
authority. POWER TO SUE AND BE SUED
 As a rule, suits are to be brought by or against the corporation in his own name.
Pilipinas Loan Company v. SEC, April 4, 2001
A corporation, under the Corporation Code, has only such powers as are expressly granted to it by law and by Dissolved corporation Corporation de facto may sue or be sued but a corporation
its articles of incorporation,8 those which may be incidental to such conferred powers, those reasonably which has been dissolved after the expiration of 3-year winding-
necessary to accomplish its purposes and those which may be incident to its existence. up period ceases to exist de jure or de facto.
Unregistered corporation A corporation not duly registered in accordance with law has no
In the case at bar, the limit of the powers of petitioner as a corporation is very clear, it is categorically legal capacity to sue as such.
prohibited from "engaging in pawnbroking as defined under PD 114". Foreign corporation Neither can a foreign corporation which transacts business in
the Philippines without necessary license from SEC sue in the
Its act of engaging in pawnbroking without license is both ultra vires and illegal, thus cannot be ratified. Philippine courts

Construction of powers; rules

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Tam Wing Tak v. Makasiar, January 29, 2001
Where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority
stockholder who is a member of the Board has no such power or authority to sue on the corporation’s behalf.
Concord-World is the named payee in the check that bounced. As payee, Concord-World is the injured party
hence only Concord-World can file the criminal case against Ang Siong but it did not do so because it chose to
amicably settle the issue with Ang Siong. Where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. This can be delegated but Tam Wing Tak never proved that he was
authorized by the Board of Concord-World.
But may the suit be considered a derivative suit where the Board’s authorization may not be had?
No. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join him in the suit. In this case, this
was not complied with. Hence, Tam Wing Tak cannot sue Ang Siong.
Metropolitan Cebu Water District v. Adala, July 4, 2007
Since the signing of the verifications against forum shopping is not integral to the act of filing cases in behalf of
a corporation, the signing may not be deemed as necessarily included in an authorization merely to file cases.
There must be a specific authorization to sign the verification and certification in behalf of the corporation.
Cagayan Valley Drug Corporation v. CIR, February 13, 2008
The following officials or employees of the company can sign the verification and certification WITHOUT the
need of a board resolution:
1. Chairperson of the Board of Directors
2. President
3. General manager or acting general manager
4. Personnel officer
5. Employment specialist in a labor case
Reason for rule: They are in a position to verify the truthfulness and correctness of the allegations in the
petition.
Other principles
 Where the corporation is real party-in-interest, neither administrator or a project manager could
sign the certificate against forum-shopping without being duly authorized by resolution of the Board
of Directors (Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 [2001]), nor the General Manager who has
no authority to institute a suit on behalf of the corporation even when the purpose is to protect
corporate assets. (Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 [1988]).
 When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint
counsel to represent the corporation in a pre-trial hearing without need of a formal board
resolution. (Citibank, N.A. v. Chua, 220 SCRA 75 (1993)).
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 For counsel to sign the certification for the corporation, he must specifically be authorized by the
Board of Directors. Metro Drug Distribution Inc. v. Narciso, (2006).
POWER TO ADOPT AND USE A CORPORATE SEAL
Seal, defined
 A device (as an emblem, symbol, or word) used to identify or replace the signature of an individual
or organization and to authenticate written matter purportedly emanating from such individual or
organization. It may refer also to the impression of such a device on documents like certificates of
stocks.
 A corporation may exist even without a seal.
Seal may be altered anytime
 Any seal adopted and used by the corporation may be altered by it at pleasure. Where a corporation
adopts a seal for a special occasion, different from its corporate seal, the seal adopted is the
corporate seal only for that time or occasion. .
Seal is not required for the validity of any corporate act
 Under Section 63, certificates of stock issued by corporations are required to be sealed with the seal
of the corporation. Nevertheless, the use of a corporate seal in certificates of stock must be deemed
merely directory rather than mandatory.
 The presence of a seal establishes, prima facie, that the instrument to which it is affixed is the act of
the corporation
POWER TO ACQUIRE, DISPOSE, ENCUMBER PROPERTY
Art. XII of 1987 Constitution
Section 2. x x x The exploration, development, and utilization of natural resources shall be under the full
control and supervision of the State. The State may directly undertake such activities, or it may enter into co-
production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for
a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such
terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply fisheries,
or industrial uses other than the development of water power, beneficial use may be the measure and limit of
the grant.
The President may enter into agreements with foreign-owned corporations involving either technical or
financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other
mineral oils according to the general terms and conditions provided by law, based on real contributions to the
economic growth and general welfare of the country. In such agreements, the State shall promote the
development and use of local scientific and technical resources. x x x
Section 3. x x x Private corporations or associations may not hold such alienable lands of the public domain
except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five
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hundred hectares, or acquire not more than twelve hectares thereof, by purchase, homestead, or grant. x x x
Power incident to every corporation
 This power under Section 36(7) which is also expressly conferred under the law has always been
regarded as an incident to every corporation. A corporation need properties or assets to carry on its
business.
Power must be necessary to the transaction of its lawful business
 The power under Section 36(7) is qualified by the phrase ―as the transaction of the lawful business
of the corporation may reasonably and necessary require.
 Property obtained by a corporation which is foreign to the purposes for which it was organized is an
unlawful acquisition.
 The transfer or sale of shares owned by a corporation in another corporation requires approval by
the board of directors of the seller corporation (Sec. 25) and while a corporation is expressly
empowered by Section 36(7) to dispose corporate assets, such power is subject to the provisions of
Section 40 on sale or disposition of assets.
Power subject to limitations and restrictions
 The right or power of private corporations to deal in real as well as personal property is also subject
to limitations or restrictions prescribed by special laws and the Constitution.
a) Secs. 2-3, 1987 Constitution
b) General Banking Law of 2000 or RA 8791: Any real property acquired by a bank by way of
satisfaction of claims under the circumstances enumerated in the law shall be disposed of
by it within a period of 5 years or as may be prescribed by the Monetary Board
o The bank may, after said period, continue to hold the property for its own use,
subject to limitations with respect to ceiling on investments in certain assets.
Director of Lands v. CA, March 14, 1988
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 Court
reiterated the time honored principle of non-impairment of vested rights.
The completion by private respondent Iglesia ni Cristo, a corporation sole, 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
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registration proceedings were commenced. This being the case, the prohibition under the 1973 Constitution
would have no application. Otherwise construed, if in 1966, Iglesia ni Cristo could have its title to the land
confirmed, then it had acquired a vested right thereto, which the 1973 Constitution can neither impair nor
defeat.
POWER TO ACQUIRE SHARES OR SECURITIES
 Section 36(7) authorizes a private corporation to acquire shares or securities of other corporations.
 Such an act does not need the approval of the stockholders if done in pursuance of the purpose or
purposes of the corporation as stated in its articles of incorporation.
 But when the purpose is done solely for investment, the approval of the stockholders as required by
Section 42 is necessary.
Limitations of such power
 Power to acquire shares in other corporation is subject to specific limitations established by the
Code, special laws and the Constitution.
 Examples:
a) The shares must be limited to shares of existing corporations because only natural persons
can be incorporators.
b) Section 140 on limits set by Congress on stock ownership in corporations
Payment in full
 When a corporation subscribes to the capital stock of another corporation, it is required, as a rule, to
pay its subscription in full. This is based upon the fact that while a corporation has an unlimited
capacity to contract obligations, it has only a limited capacity to pay.
Purchase of own stocks
 A corporation may purchase its own stock, however, only when it has ―unrestricted retained
earnings to cover the shares to be purchased or acquired. (De Leon 2006 at 327)
POWER TO MAKE DONATIONS
 Section 36(9) expressly vests in business corporations the authority to contribute for purely
charitable purposes.
Basis of power
 Section 36(9) gives recognition to the growing tendency to regard charitable gifts as within the scope
of corporate authority.
 It is based on the modern view that business corporations are not organized solely as profit-
making enterprises but also as economic and social institutions with corresponding public
responsibility to aid in the betterment of economic and social conditions in the community in which
such corporation are doing business.
Limitations to power
1. The amount thereof must be reasonable; and
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2. The donations must not be in aid of any political party or candidate or for purposes of partisan
political activity.
Pirovana v. De la Rama Steamship, Dec. 29, 1954
Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of the
defendant corporation, or the scope of the powers that it may exercise under the law, or it is an ultra vires act,
still it may said that the same cannot 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, it may has been obliterated thereby making the cat
perfectly valid and enforceable. This is specially so if the donation is not merely executory but executed and
consummated and no creditors are prejudice, or if there are creditors affected, the latter has expressly given
their conformity.
Corporate acts or contracts which are ultra vires and illegal
 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.
 They cannot serve as basis of a court action, nor require validity.
Corporate acts or contracts which are merely ultra vires
 Those which are not illegal and void ab initio, but are merely within are not illegal and void ab initio,
and are not merely within the scope of the articles of incorporation,
 They are merely voidable and may become binding and enforceable when ratified by the
stockholders.
POWER TO PROVIDE GRATUITY PAY FOR EMPLOYEES
 Such powers are expressly permitted by the Code on the theory that such activities promote better
relations between the corporation and its employees.
 Providing gratuity pay for employees is an express power of a corporation under the Corporation
Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).
POWER TO BORROW FUNDS
 The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the
corporation to be approved by its Board of Directors.
 Loan not in the ordinary course of business: The argument that the obtaining of loan was in
accordance with the ordinary course of business usages and practices of the corporation is devoid of
merit because the prevailing practice in the corporation was to explicitly authorize an officer to
contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).
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The argument that the obtaining of loan was in accordance with the ordinary course of business usages and
practices of the corporation is devoid of merit because the prevailing practice in the corporation was to
explicitly authorize an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of
Appeals, 270 SCRA 503 (1997).
CATCH ALL PROVISION OF POWERS OF CORPORATION
 Sec. 36(11): To exercise such other powers as may be essential or necessary to carry out its purpose
or purposes as stated in the articles of incorporation.
POWER TO EXTEND OR SHORTEN CORPORATE TERM
Section 37. Power to extend or shorten corporate term. – A private corporation may extend or shorten its
term as stated in the articles of incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice
of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.
Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
Requirements for extending or shortening corporate life
1. Majority vote of the BoD/T
2. Ratification in a meeting by 2/3 of outstanding capital stock or 2/3 of the members, as the case may
be.
Note: The extension or shortening of corporate life actually requires the amendment of the articles of
incorporation. But whereas, in general amendments of the articles can be made by written assent of the
stockholder or members, without need of meeting, in the case provided for under Section 37, a meeting must
be duly called for the purpose.
Appraisal right for dissenting stockholder; conflicting opinion
 De Leon: Section 37 grants appraisal right to a dissenting stockholder (right of the stockholder in the
cases provided by law to demand payment of the fair value of his shares) ―in case of extension of
corporate term.
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 Such right should also be available to a dissenting stockholder if the corporate term is
shortened as it is expressly recognized in Section 81(1). CLV says otherwise.
 CLV: The appraisal right should not be triggered when it comes to shortening of corporate life,
because there is really no violation of the original contractual intent since. Therefore, the inclusion
of the case of shortening of corporate life under Section 81 should not prevail over the specific
provision under Section 37.
 The exercise of appraisal rights rightly belongs to a case of extension of corporate term
because extension actually novates the corporate contract with each shareholder, which
now seeks to extend the corporate relationship beyond the original term provided for in
the articles of incorporation.
Who may exercise appraisal right
 Note that the appraisal right applies only to a stockholder of a stock corporation.
 In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right to
have his shares bought back at fair value by the corporation.
TO INCREASE OR DECREASE CAPITAL STOCK
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. – No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness
unless approved by a majority vote of the board of directors and, at a stockholder’s meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder’s meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or
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increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From
and after approval by the Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has
been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall
have the authority to determine the sufficiency of the terms thereof.
Nature of Power
 The power to increase or decrease capital stock is not an inherent of the corporation, not only
because it touches item expressly required to be provided for in the articles of incorporation, but
also the capital stock of a corporation is governed by common law doctrines, such as the trust fund
doctrine and pre-emptive rights.
Limitations on the power
1. A corporation cannot lawfully decrease its capital stock if such decrease will have the effect of
relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a
valuable consideration for such release, as such an act of the corporation constitutes an attempted
withdrawal of so much capital upon which corporate directors are entitled to rely. (Phil Trust Co. v.
Rivera, see case below)
2. A corporation cannot issue stock in excess of the amount limited by its AoI; such issue is ultra vires
and the stock so issued is void even in the hands of a bona fide purchaser for value.
3. Sec. 38: A reduction or increase of the capital stock can take place only in the manner and under the
conditions prescribed by law.
Note: The Corporation Code contains no prohibition for a corporation to increase its authorized capital stocks
even if the same has not yet been fully subscribed.
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Requirements
1. Majority vote of the members of the BoD
2. Ratification by 2/3 vote of the outstanding capital stock, in a meeting duly called for that purpose
with notice previously given
3. Certificate of said corporate act shall be signed by majority of the members of the Board and the
Chairman and Secretary of the stockholders’ meeting
4. Certificate must be accompanied by the Treasurer’s Affidavit certifying compliance with the 25%-
25% requirements as to stock corporation.
Note:
1. The corporation must submit proof to the SEC that such decrease will not prejudice the rights of
creditors.
2. No treasurer’s affidavit is required to be attached in case of decrease of capital stock.
Necessity for increasing capital stock
1. Increase of corporate assets: An increase of the amount of capital stock may be for the purpose of
effecting an increase in the corporate assets by authorizing:
a) The creation of new shares to be offered and issued at a fixed valuation
b) The increase of the par value shares authorized to be issues
2. Issuance of stock dividends: This is an increase in capital stock without any corresponding increase
in the corporate assets.
Necessity of new subscription for increase
 An increase in the authorized capital stock cannot be lawfully accomplished without an actual
increase in the assets of the corporation and additional subscriptions except when such increase is
for the purpose of effecting a stock dividend previously authorized.
 If the actual capital is increased by accumulated profits and such profits are distributed to the
stockholders in the form of stock dividends, the capital stock is increased, for the profits are
reinvested in the corporation by transferring the same from surplus account to a capital account.
 If the increase not for the purpose of making effective stock dividends previously authorized: The
law requires to be stated in the certificate the matters mentioned in Sec. 38, par. 2(3).
Effectivity of increase or decrease
 Rule: Only from and after approval and issuance by the SEC of its certificate of filing of increase or
decrease of capital stock.
 Note: The subscribers to the proposed increase cannot be considered as stockholders and be
accorded the rights as such for the shares subscribed by each.
Over-issued stock
 Also known as spurious stock.
 An issue of stock by a corporation in excess of the amount prescribed or limited by its articles of
incorporation is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser
for value.
 If the proposed stock dividend would result in the issuance of shares of stock in excess of the
corporation’s authorized capital stock, the over-all issue is null and void. Such dividend declaration
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may be validly done provided that the corporation simultaneously increases its capital stock and
applies the proposed stock dividends as full payment of the subscriptions to the capital stock
increase.
Unauthorized increase of capital stock
 An attempted unauthorized increase of capital stock amounts to an over-issue and such stock is
absolutely void and cannot be validated by application of the doctrine of estoppel.
 Effects:
a) Subscriptions for such stock are likewise VOID both on the ground of illegality and for want
of consideration.
b) Subscribers for or purchasers of such stock acquire none of the rights of stockholders.
o Remedy of bona fide subscribers: Right of action against the corporation for
damages.
c) Subscribers for or purchasers of such shares do not become liable to creditors of the
corporation or on a winding up as stockholders for unpaid subscriptions, and are not
subject to statutory liability to creditors imposed upon stockholders.
d) Subscribers may recover from the corporation money paid unless they are precluded from
such relief as parties in pari delicto.
Ways of increasing (decreasing) authorized capital stock
1. Increasing the number of shares authorized to be issued without increasing the par value thereof.
2. By increasing the par value of each share without increasing the number thereof
3. By increasing both number of shares authorized to be issued and the par value thereof. Increase by
way of stock dividends.
Increase by way of stock dividends
 A corporation may also increase its capital stock by way of stock dividends without touching its
unissued shares as long as there are sufficient retained earnings to cover the increase. (Sec. 62(5))
Distribution of surplus on reduction
 Where there is no impairment of capital: Unless the rights of creditors will be affected or the capital
impaired, the directors may make an equitable distribution of such surplus or so much thereof as
may not be required in carrying on the business for the best interests of stockholders.
 Distribution not mandatory: The distribution to stockholders of surplus remaining after a reduction
of capital stock is authorized by the Code, BUT cannot be compelled.
Persons entitled to question increase or decrease of capital stock
1. By corporation itself
2. By dissenting stockholders in the absence of an estoppel
3. By creditors of the corporation
4. By a receiver or assignee representing the creditors
No appraisal right in decrease in capital stock
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 The decrease of the capital stock of a corporation should not trigger the exercise of the appraisal
right for precisely, the decrease of capital stock would result in returning part of the investments of
the stockholders who dissented.
When appraisal right not available to dissenting stockholders in increase of capital stock; reasons
 The non-granting of appraisal right to dissenting stockholders in case of increase of capital stock may
be rationalized on two grounds:
a) The increase in capital stock does not prevent any stockholder, including a dissenting
stockholder from opting out of the contractual relationship by simply selling his shares in
the corporation to any interested buyer.
b) The grant of appraisal right in case of increase of capital stock would defeat the very
purpose for which the power is exercised, i.e., to raise funds for the operation or even
survival of the corporate business.
Central Textile Mills Inc v. NWPC, August 7, 1996
Despite the board resolution approving the increase in capital stock and the receipt of payment on the future
issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of
the corporation until approval of the increase by SEC.
Madrigal v. Zamora, June 30, 1987
Doctrine
A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to
nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast
profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice.
Reduction of capital stock to avoid wage increase invalid
What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business
operations but confronted with the demand of the union for wage increases, decided to evade its
responsibility towards the employees by a devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union
members, who, by then, had agitated for wage increases. In the face of the petitioner company's piling profits,
the unionists had the right to demand for such salary adjustments.
Philippine Trust Company v. Rivera, Jan. 29, 1923
Defendant was still liable for the unpaid balance of his subscription despite the existence of a board resolution
with provision 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. "
Release of subscriber from payment of unpaid subscription without any valuable consideration is violative
of trust fund doctrine
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 an under the conditions prescribed by the statute or the
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charter or the articles of incorporation.
TO INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS
Bond, meaning
 It is a security representing denominated units of indebtedness issued by a corporation to raise
money or capital obliging the issuer to pay the maturity value at the end of a specified period which
should not less than 360 days, where applicable, payment of interest on stipulated dates. (SEC
Interim Guidelines for the Registration of Bonds)
Bonded indebtedness, meaning
 SEC has limited such term to cover only indebtedness of the corporation which are secured by
mortgage on real or personal property.
 Debentures: are issued on the basis of the general credit of the corporation and are not secured by
collaterals, and therefore do not constitute bonded indebtedness and will not require approval of
the stockholders.
Corporate bond, meaning
 It is an obligation to pay a definite sum of money at a future time at a fixed rate of interest.
Nature of power
 The power to incur or create liabilities is an inherent power on the part of business corporations,
since it is presumed that they would need to incur or create liabilities as part of the normal
operations of the business and the pursuit of the purpose of the corporation.
 Note: Non-stock corporations are now expressly authorized to incur, create, or increase bonded
indebtedness.
 Who can vote: Even holders of non-voting shares (included in ABISIMID)
Particular requirements of SEC
 Under the SEC Interim Guidelines, an application for registration and issuance of bonds can only be
filed by the issuing corporation which has a minimum net worth of P25M at the time of the filing of
the application, and must have been in operation for 3 years.
 In addition, it must fulfill the financial ratios mandated by the SEC in the Interim Guidelines.
 An issuing corporation must also execute and submit a Trust Indenture with a trustee bank and an
Underwriting Agreement, together with the printed prospectus and titles covering the securities for
the bonded indebtedness.
No appraisal right granted
 Note that no appraisal right is granted to dissenting stockholders when the corporation either validly
incurs, creates or increases bonded indebtedness since, the granting of such appraisal right under
such circumstances would drain the corporation of financial resources contrary to the purpose for
which the power is exercised to raise funds for corporate affairs.
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Note:
1. Where a corporation increases capital stock, stockholders are entitled to a pre-emptive right to
subscribe to a sufficient number of shares in order to maintain their previous relative voting power.
2. Dissenting stockholders cannot exercise the right of appraisal in this case.
Procedure and formalities
 The procedure is the same as the procedure for increasing or decreasing the capital stock
 EXCEPT that:
a) The certificate need not state Nos 2 and 3 thereof.
b) Not required to be accompanied by the sworn statement of the treasurer of the
corporation concerning the amount of the increased capital stock subscribed and paid.
TO DENY PRE-EMPTIVE RIGHTS
Section 39. Power to deny pre-emptive right. – All stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided,
That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval
of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted debt.
Pre-emptive right, meaning
 The shareholder’s right to subscribe to all issues or disposition of shares or any class in proportion
to his present stockholdings, the purpose being to enable the shareholder to retain his
proportionate control in the corporation and to retain his equity in the retained earnings and also in
the net assets in the event of dissolution.
Right of pre-emption of stockholders
 Whenever a capital stock of a corporation is increased and new shares of stocks are issued, the new
issue must be offered first to the stockholders who are such at the time the increase was made in
proportion to their existing shareholdings and on equal terms with other holders of the original
stocks before subscriptions are received from the general public.
 Example: if a stockholder with pre-emptive right owns 20% of the outstanding shares of the
corporation, he may subscribe 20% of any shares of stock issued by the corporation. This principle is
known as the right of pre-emption or pre-emptive right of stockholders.
Reason for the grant of right
 The rule on pre-emption aims to safeguard the right of stockholder to preserve unaltered and
unimpaired his proportionate influence and interest in the corporation and the relative value of his
holdings.
Shares to which right not available
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1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership
by the public.
2. Shares to be issued in good faith with the approval of stockholders representing 2/3 of the
outstanding capital stock in exchange for property needed for corporate purposes; and
3. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the OCS
in payment of previously contracted debt.
Pre-emptive right as to treasury shares
 In close corporations, the pre-emptive right of stockholders extends to ALL stock to be issued (old or
new) including reissuance of treasury shares, unless the AoI provide otherwise.
Datu Benito v. SEC, July 25, 1983
GR: Pre-emptive right is recognized only with respect to new issue of shares, and not with respect to
additional issues of originally authorized shares.
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 which 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.
Q. What if 200k originally authorized shares but X was informed that only 10k are available and being offered
for subscription, does X have pre-emptive right over the 190k shares which he was not informed? YES.
Dee v. SEC, July 16, 1991
The questioned issuance of the 113,800 stocks is valid even assuming that it was made without notice to the
stockholders as claimed by the petitioner
The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders
meeting is required to consider it because additional issuance of shares of stocks does not need approval of
the stockholders. Thus, there was no violation of preemptive right.
TO SELL OR OTHERWISE DISPOSE OF ALL OR SUBSTANTIALLY ALL CORPORATE ASSETS
Section 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets,
including its goodwill, upon such terms and conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or other property or consideration, as its board
of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose.
Written notice of the proposed action and of the time and place of the meeting shall be addressed to each
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stockholder or member at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties under any contract relating thereto, without further
action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of said corporation or
if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of
its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.
Jack's lecture (preliminaries)
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section. In the sale, lease, exchange, mortgage or disposition of all or substantially all of the
properties or assets of the corporation, you need approval not only of the majority of the Board but also of at
least 2/3 of the stockholders. According to the law, the test of whether the sale covers all or substantially all of
the assets of the corporation is this: will the corporation be capable of continuing its business or
accomplishing its purpose. For example, Jollibee must have more than 400 stores all over the country. If they
sell 5 stores, you don’t have to get stockholder approval. You have a case where the assets of a corporation
were foreclosed and the only remaining asset of the corporation was the right of redemption and they sold it.
The Court said you need stockholder approval.
I don’t know whatever happened to this but you have that property in Commonwealth Avenue owned by the
Islamic Directorate. The Muslim countries in the Middle East donated money for the Muslims to acquire that
property. When Martial Law was declared, the Board of Trustees fled to the Middle East and a bunch of
people who were not directors sold that property to Iglesia Ni Cristo.
The Supreme Court said the sale was not valid because the people who sold it were not the elected directors
and secondly, that was the only property of that corporation and therefore, stockholder approval was
required. A corporation can acquire its own shares but it is required that it should have unrestricted retained
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earnings, as a rule. Remember that we said the assets of a corporation constitute a trust fund to answer for its
obligations to its creditors. If you allow a corporation when it has no retained earnings, in effect, it is returning
the investment of its stockholders. Thus, that will prejudice the creditors.
Principles
1. The property of the corporation is not the property of the stockholders or members, and as such,
may not be sold without the express authority from the board of directors. (Litonjua v. Eternity Corp,
2006)
2. Disposition of properties in the regular course of the business does not need approval by or
authority of stockholders or members.
3. Any disposition of corporate asset or property, which is not in the usual course of business of the
corporate, would be within the covered transactions under Section 40 which would require
stockholders’ or members’ approval, even when practically, the corporation is an entity is still
capable of pursuing its charter purpose.
Query (Catindig notes)
ABC Corp is a Property Development Corporation. It sells property (100 lots) to a manufacturing corporation.
Tell whether approval of the following will be enough: (a) BoD only (b) Stockholders only (c) Both.
A:
1. BoD only: Yes, if the corporation after the sale decides or has the intention to continue its business.
2. SHs only: No, because the corporation acts thru its BoD
3. Both: Yes, if there is no intention to continue business.
Note: If the sale is in accordance with the primary purpose of the corporation then only BoD approval is
needed. Otherwise, SH approval is necessary. Consider also the intention to continue the corporation
business.
Nature of power
 A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable if:
a) Continuing the business;
b) Accomplishing the purpose for which it was incorporated.
Requisites
 A corporation by the action of its board of directors or trustees supported by the vote of
shareholders or members may sell, lease exchange, mortgage, pledge, or otherwise dispose of all
or substantially all of all of its property, and assets including its good will. The requisites for the
validity of such sale, etc. are as follows:
a) Vote of BoD: The sale etc. must be approved by the board of directors or trustees;
b) Vote of SH: The action of the board of directors or trustees must be authorized by the vote
of stockholding representing 2/3 of the outstanding capital stock including holders of non-
voting shares or 2/3 of the members as the case may be; and
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c) In a meeting: The authorization must be done at a stockholders’ or members’ meeting
duly called for that purpose after written notice.
Note: Non-compliance with the requisites would make the sale null and void.
Requirement under Bulk Sales Law
 Aside from the requirements of Section 40 , the sale of all or substantially all of the corporate assets
of property may require compliance with the Bulk Sales Law.
 Rule: Under the Bulk Sales Law, the sale, etc. of all or any portion of a stock of goods, merchandise,
provisions or materials otherwise than in the ordinary course of business is declared fraudulent and
void as to creditors of the vendor unless specified formalities are observed such as the giving by the
vendor to the vendee of a list of creditors to whom said vendor may be indebted.
 Requirement: A written statement, sworn to substantially, of the names and addresses of all
creditors to whom said vendor or mortgagor may be indebted, together with the amount of
indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of said
creditors.
 Effect of non-compliance: If no sworn statement then any such sale, transfer or mortgage shall be
fraudulent and void.
 Solidary liability: When the requirement of BSL have not been complied with, both the selling and
buying corporation may be held solidary liable to the creditor of the selling corporation.
Sale of assets without dissolution
 A corporation may sell all its assets without necessarily dissolving or terminating its existence.
 If such sale is made to another corporation and there is no intent to combine, the selling corporation
may continue in a state of suspended animation.
Liability of purchasing corporation
 GR: Where one corporation sells or transfers all its assets to another corporation, the latter is not
liable for debts and liabilities of the transferor, provided the latter acted in good faith and paid
adequate consideration.
 XPNs: (purchasing corporation is liable)
a) Where the purchaser is expressly or impliedly agrees to assume such debts
b) Where the transaction amounts to a consolidation or merger of the corporations
c) Where the purchasing corporation is merely a continuation of the selling corporation
d) Where the transaction is entered into fraudulently in order to escape liability for such
debts
Appraisal right of dissenting stockholder
 Any dissenting stockholder may exercise his appraisal right in case of sale of all or substantially all
of the corporate assets or property.
 It should be noted that the exercise of the appraisal right of any stockholder is predicated on the
sale or other disposition of all or substantially all of the corporate assets. Any disposition which
does not involve all or substantially all of the corporate assets, does not require the approval of the
stockholders or members and would not entitle any dissenting stockholder to exercise his appraisal
right.
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 Test: To determine if the sale is made in the ordinary course of business, the test is not the amount
involved but the nature of the transaction.
Nell Co. v. Pacific Farms, Nov. 29, 1965
GR: Where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor.
XPNs:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
Sale not fraudulent, reasons
1. Sales took place over a month before the filing of the case which said judgment was rendered.
2. Appellee purchased the shares of stock of Insular Farms as the highest bidder at an auction sale held
at the instance of a bank to which said shares had been pledged as security for an obligation of
Insular Farms in favor of said bank
3. Although the consideration was considered inadequate the same did not result to fraud because the
sale was submitted to and approved by the Securities and Exchange Commission.
TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS
Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. –
Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder’s or member’s meeting duly called for the purpose. Written notice of the
proposed investment and the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be necessary.
When approval of stockholders or members not necessary
 Where the investment by the corporation is reasonably necessary to accomplish its primary
purpose.
Funds, meaning
 The term funds in Section 42 includes any corporate property to be used in furtherance of the
business.
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 Thus, idle corporate property may be temporarily leased to make it productive in the absence of
express restrictions in the articles of incorporation or by-laws and the leasing is not used as a
scheme to prejudice corporate directors, subject to the requirements of Section 42.
 A non-stock, non-profit foundation may invest its funds in or subscribe to shares of another
domestic corporation. The term "funds" as used in Section 42 include "donations" received by the
corporation from other entities.
When for secondary purpose
 The other purposes for which funds may be invested without amending the article of incorporation
must be among those enumerated in the articles of incorporation.
 In order to legally engage in any of its secondary purposes, the corporation must comply with
Section 42.
When incident to primary purpose
 A corporation may invest its funds in another business which is incident or auxiliary to its primary
purpose as stated in its AoI without the approval of the stockholders or members as required under
Section 42.
 Even holders of non-voting shares or members, as the case may be, are entitled to vote on the
matter. In such a case, a dissenting stockholder shall have no appraisal right.
Ratification of defective investment
 Such investment must be authorized by the affirmative vote of the stockholders or members, then it
is ratified.
 Voidable acts, may be ratified: Mere ultra vires acts or those which are not illegal and void ab initio
but are not merely within the scope of the AoI, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Query
Q: A corporation is engaged in mining. It makes no much money and decides to engage in commercial fishing.
What kinds of approval needed?
 If within the secondary purpose -> BoD + SHs
 If outside secondary purpose -> BoD + SHs + SEC
Gokongwei v. SEC, April 11, 1979
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign corporation
NO. The Code allows a corporation to "invest its 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 by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds
of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the
approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to
P a g e | 73
accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares
entitling them to exercise at least two-thirds of the voting power is necessary.
As stated by respondent corporation, 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.
Dela Rama v. Ma-ao Sugar, Feb. 28, 1969
The Court REVERSED the order stating that Ma-ao Sugar shall refrain from making investments in Acoje
Mining, Mabuhay Printing and any other company whose purpose is not connected with the sugar central
business.
Reason: The law allows a corporation to "invest its fund 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 by the affirmative vote of stockholders holding shares entitling them to exercise at least
two-thirds of the voting power.
TO ACQUIRE OWN SHARES
Section 41. Power to acquire own shares. – A stock corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in
a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code.
Limitations of corporation's right to purchase its shares
1. That its capital is not thereby impaired
2. That it be for a legitimate and proper corporate purpose
3. That there shall be unrestricted retained earnings to purchase the same and its capital is not
thereby impaired
4. That the corporation acts in good faith and without prejudice to the rights of creditors and
stockholders
5. That the conditions of corporate affairs warrant it.
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Elimination of fractional share
 Fractional share: A share which is less than one corporation share.
 Inasmuch as fractional shares cannot be represented at corporate meetings, the corporation may
purchase the same from the stockholder concerned.
Satisfaction of indebtedness to corporations
 This does not authorize, however, a corporation to arbitrarily purchase the shares it issued to any
of its stockholders indebted to it, for the purpose of applying the proceeds thereof to the
satisfaction of its claim against them, and this is particularly true where the consent of such
stockholders has not been secured.
Payment of shares of dissenting or withdrawing stockholders
 This refers to instances when a dissenting stockholder is given appraisal right and the right to
withdraw from the corporation.
Purposes not exclusive
 The enumeration is by no means exclusive since other purposes, which have legitimate business
objectives, are acceptable to justify a stock corporation purchasing or acquiring its own shares.
 Example of other cases
a) Under Section 9 on treasury shares
b) With respect to redeemable shares, they may be purchased by the corporation regardless
of the existence of unrestricted retained earnings in the books of the corporation.
c) To effect a decrease in the capital stock of a corporation
d) In close corporation, where there is a deadlock respecting the management of its
business, the SEC may order the purchase at their fair value of shares of any stockholder
by the corporation regardless of the availability of unrestricted retained earnings in its
books.
Trust fund doctrine
 Generally: Capital stock, property and other assets of a corporation are regarded as equally in trust
for the payment of corporate creditors.
 The assets of a corporation as represented by its capital stock are "trust funds" to be maintained
unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution
of such assets among the stockholders without provision being first made for the payment of
corporate debts and that any such disposition of it is a fraud on the creditors of the corporation who
extend credit to the corporation on the faith of its outstanding capital stock and, therefore, VOID.
 Note: The prohibition against the distribution of the capital of a corporation as cash dividend is also
based on the same doctrine.
Catindig Class Notes
Q: Can a corporation acquire its own share?
A: No. the general rule is that the corporation has no right to acquire its own share unless permitted by
legitimate corporate purposes.
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Q: Is acquisition of own shares the only way to eliminate fractional shares?
A: No. The BoD may allow the SH to round-up or to pay the corporation to get 1 whole share. If the SH refuses
to buy, the BoD may provide that the corporation shall buy the fractional part of the SH.
Q: Can redeemable shares once redeemed be revived?
A: No. Same is true with regard to convertible shares (e.g. preferred to common, preferred disappears)
Example: There are 5 incorporators. 1 died and survived by his widow. Can the corp buy the shares from the
widow? For what good corporate purpose?
(1) The corp can exercise its right of first refusal (applies to transferors thru succession)
(2) In the Minutes, to help the widow to liquidate her shares of stock. (good reputation of the corporation). If
all signed the Minutes, no one can complain afterwards.
Boman Environmental v. CA, Nov. 22, 1988
Intra-corporate controversy: Because the parties are stockholder and corporation
Fajilan's offer to resign as president and director "effective as soon as my shares and interests are sold and
fully paid" implied that he would remain a stockholder until his shares and interests were fully paid for, for
one cannot be a director or president of a corporation unless he is also a stockholder thereof.
The fact that he was replaced as president of the corporation did not necessarily mean that he ceased to be a
stockholder considering how the corporation failed to complete payment of the consideration for the
purchase of his shares of stock and interests in the goodwill of the business
SEC has jurisdiction
The SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the corporation
has unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a
legitimate corporate purpose.
TO DECLARE DIVIDENDS
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of stockholders representing
not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for
the purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of
their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs
approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with
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any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, Dividends from property in which capital is invested
and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is 1. To engage in "wasting business"
necessary under special circumstances obtaining in the corporation, such as when there is need for special 2. To utilize a lease or patent
reserve for probable contingencies. 3. To liquidate a business

Concept of dividends Wasting assets doctrine

 Dividend: that part or portion of the profits of a corporation set aside, declared and order by the
directors to be paid ratably to the stockholders on demand or at a fixed time. It is a payment to the
stockholders of a corporation as a return upon their investment.
 A sum which can be divided among stockholders without touching the capital stock.
 Dividends, regardless of the form declared, are valued at the amount of the declared
dividend taken from the unrestricted retained earnings of the corporation.
 Stock dividend: the amount that the corporation transfers from its surplus profit account to its
capital account. It is the same amount that can loosely be termed as the "trust fund" of the
corporation.
 Note: The power granted to stockholders to demand from the Board the declaration of dividends
under Section 43 is one for the few instances under the Code where the stockholders themselves
exercise a primary power, instead of the usual ratificatory vote on action taken primarily by the
board of directors.
Dividends and profits, distinguished
1. Dividends come from profits, while profits are the source of dividends.
2. Profits are not so dividends until so declared or set aside by the corporation.
 In the meantime, all profits are a part of the assets of the corporation and do not belong to
the stockholders individually.
Power to declare dividends
 Stock dividends: 2/3 of OCS in a meeting called for that purpose
 Other dividends: Mere majority of the quorum of the BoD
Dividends payable out of unrestricted retained earnings
 Under the law, dividends other than liquidating dividends (which are not really dividends as they are
from capital) may be declared and paid out ―the unrestricted retained earnings of the corporation.
Capital stock which may not be impaired, meaning
 The capital or capital stock which may not be impaired or depleted by the dividends is not the entire
net assets of the corporation; rather, it is the legal capital of the corporation in the strict sense,
referring to that portion of the net assets directly or indirectly contributed by the stockholders as
consideration for the stocks issued to them upon the basis of their par or issued value.
Rule as to par value stock
 With respect to no par value shares, the entire consideration (including paid-in surplus, etc) received
from the same shall be treated as capital and shall not be available for distribution as dividends.
 A wasting assets corporation, the capital of which is necessarily exhausted in the carrying on of its
operations, may rightfully declare and pay dividends out of net income without making up for the
loss of its capital which is thus being constantly diminished.
 When a corporation is created for the purpose of investing its capital in property which will
necessarily be consumed or exhausted in the ordinary course of its operations, so that the
depreciation in the value of the property cannot be repaired, it is not subject to the same rules as
other corporations.
 Examples of wasting assets corporation: Mining, timber-cutting
Unrestricted retained earnings, explained
 The difference between the total present value of its assets after deducting losses and liabilities and
the amount of its capital stock (outstanding capital stock, and not authorized capital stock).
 Retained earnings = Assets - liabilities and legal capital
 Unrestricted, meaning: Free for dividend distribution to stockholders.
 They should not have been reserved or set aside by the board for some other purpose in
accordance with managerial, legal, or contractual requirements.
Kinds of dividends
1. Cash
2. Stock
3. Property
4. Scrip
Cash dividends
 Dividends payable in cash
 As soon as cash dividends are publicly declared, the stockholders have the right to their pro rata
shares.
 It is the declaration of the dividends which creates both the dividends itself and the right of the
stockholders to demand and receive it.
 Can be declared by mere Board resolution from unrestricted earnings.
 Revocable before announcement to the shareholders.
Stock dividends
 It is dividend payable in unissued or increased or additional shares of the corporation instead of in
cash or in property out of the unrestricted retained earnings of the corporation.
 A stock dividend may be declared only to the extent of the maximum number of shares authorized
in the articles of incorporation.
 Declaration may be revoked prior to actual issuance.
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 Share of stock are given the special name "stock dividends" only if they are issued in lieu of  If the resolution declares that it shall be payable at such time as the board of directors may direct
undistributed profits. If they are issued in exchange for cash or property, then they do not fall under and the board fixes no time: the law implies that it shall be paid within a reasonable time.
the category of such "stock dividends."
 Note: The mere acquisition and distribution of previously issued stock does not constitute a stock Limitation on retention of surplus profits
dividend  Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in
capital stock except when justified by any of the reasons mentioned. (Section 43(2))
Cash and stock dividends, distinguished  If the requirement which is mandatory is violated, the corporation may be compelled by
CASH DIVIDEND STOCK DIVIDEND the SEC to declare dividends to its stockholders.
Involves a disbursement to the stockholder of It does not involve any disbursement  The prohibition on retention of profits provided in Section 43 is applicable to all stock corporations.
accumulated earnings  There may be some question as to whether or not the retention of profits is justified by the
Absolute property of the stockholder and cannot be Being still part of the corporate property, may be "reasonable needs of the business."
reached by the creditors of the corporation in the reached by corporate creditors  Suffice it to say that the policy of the law to encourage and force the distribution of
absence of fraud dividends curtails the discretionary power of directors to retain corporate earnings.
Declared only by the BoD, at its discretion Declared by the BoD with the concurrence of the  Note: No dividends can be declared out of capital, except liquidating dividends distributed at
stockholders representing at least 2/3 of the OCS at a dissolution. (Section 122)
regular or special meeting called for the purpose  Dividends (whether cash or stock) can be declared only out of the unrestricted retained earnings,
Does not increase the corporate capital It increases corporate capital although stock dividends may be issued out of premium surplus (since in the latter case, it is nothing
Its declaration creates a debt from the corporation to No debt from the corporation to stockholders is but a book-entry procedure).
each of its stockholders who then hold such stock created by the declaration of stock dividend
Steinberg v. Velasco, Mar. 12, 1929
Property dividends Issuance of dividends invalid
 It is dividend distributed to the stockholders in the form of property, real or personal, such as The corporation did not then have an actual bona fide surplus from which the dividends could be paid, and
warehouse receipts, or shares of stock of another corporation. that the payment of them in full at the time would "affect the financial condition of the corporation." They
 If the property does not form part of the surplus or retained earnings of the corporation, the same alleged receivables without presenting evidence to prove the same
cannot be declared as property dividends.
Nielson v. Lepanto, Dec. 28, 1968
Scrip dividends Subject provision: That Nielson would receive 10% of any dividends declared and paid, when and as paid,
 It is a dividend in the form of a writing or certificate issued to a stockholder entitling him to the Nielson should be paid 10% of the stock dividends declared by Lepanto during the period of extension of the
payment of money, stock or other benefit at some future time. contract.
 It is in the form of a promissory note or a promise to pay and may be issued to bear interest.
 Effect of declaration: Such dividend, when the obligation to pay is absolute, is a debt absolutely due Held: Nielson is not entitled to receive shares of stock as stock dividends in payment of its compensation
to the stockholders, although the payment is postponed to a future date. under the management contract. Nielson is not a stockholder. Only stockholder can receive dividends from
the corporation.
Declaration, payment and record dates
 Record date is fixed by the board of directors for determination of stockholders entitled to vote; if it Lepanto was to make the value of the dividends declared — whether the dividends were in cash or in stock —
does not do so, such date shall be the date of the notice of meeting. as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of
 There is no hard and fast rule describing the interval of time between the date of the declaration of 10% of the cash value of the dividends so declared. It does not mean, however, that the compensation of
dividends, the date of record of stockholders entitled thereto, and the date of payment, the same Nielson would be taken from the amount actually declared as cash dividend to be distributed to the
being left to the sound and judicious discretion of the directors. stockholder, nor from the shares of stocks to be issued to the stockholders as stock dividends, but from the
 It is customary for the directors to fix the time for payment of a dividend. But a corporation cannot other assets or funds of the corporation which are not burdened by the dividends thus declared.
discriminate among the shareholders as to the time of payment of dividends.
 If no time is fixed by the resolution declaring a dividend: it is payable on demand CIR v. Manning, Aug. 6, 1975
The manifest intention of the parties to the trust agreement was to treat the 24,700 shares of Reese as

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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 in 1958 was a complete nullity and plainly violative
of public policy.
Although a treasury share, not having been retired by the corporation re-acquiring 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, 4 nor in the meetings of the corporation as
voting stock
TO ENTER INTO A MANAGEMENT CONTRACT
Already discussed under Delegation of Authority to Corporate Officers
Aurbach v. Sanitary Wares, Dec. 15, 1989
Parties formed a JOINT VENTURE and not a corporation. Thus, such stipulations are valid:
1. Require greater than majority vote for shareholder and director action;
2. Give certain shareholders or groups of shareholders power to select a specified number of directors;
3. Give to the shareholders control over the selection and retention of employees; and
4. Set up a procedure for the settlement of disputes by arbitration
ULTRA VIRES ACTS
Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of incorporation and except such as
are necessary or incidental to the exercise of the powers so conferred.
Ultra vires, defined
 It refers to an act outside or beyond corporate powers, including those that may ostensibly be within
such powers but are, by general or special laws, prohibited or declared illegal.
 It is an act which is not positively forbidden, but impliedly forbidden because not expressly or
impliedly authorized or necessary or incidental in the exercise of the powers so conferred.
 Note:
 If the contract is ultra vires but has been completely performed by both parties, it can no
longer be set aside.
 If it has been performed by one party and the other party doesn't comply, if he is sued, he
cannot raise the defense that the contract is ultra vires because having benefited from the
performance of that contract, he will be in estoppel to raise that defense.
Ultra vires acts
1. Acts done beyond the powers of the corporation as provided for in the law or its articles of
incorporation;
 Test:
o If the act is one which is lawful in itself
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o The act in question is not in direct and immediate furtherance of the
corporation’s business, and is not fairly incident to the express powers and
reasonably necessary to their exercise.
2. Acts or contracts entered into in behalf of the corporation by persons who have no corporate
authority; and
3. Acts or contracts which are per se illegal as being contrary to law.
 The act is illegal per se
 Harden Test:
o Even when acts are illegal per se, when only public or government policy is at
stake and no private wrong is committed, the courts will the parties as they are,
in accordance with their original contractual expectations.
Manguera Notes
For acts or contracts which are not per se illegal
GR: 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.
XPNs:
(1) Doctrine of Ratification or Estoppel- Acts of contracts which are not per se illegal can be validated. Even
when the contract entered into in behalf of the corporation is outside the usual powers of the corporate
officer, the corporation’s ratification of the contract and acceptance of the benefits have made such contract
binding upon the corporation.
Note: Ratification that would bind the corporation would have to come from the board of directors or a
properly authorized representative. Ratification can never be made on the part of the corporation by the same
persons who wrongfully assume the power to make the contract, but the ratification must be by the officers
as governing body having authority to make such contract.
(2) Doctrine of Apparent Authority- If a corporation knowingly permits one of its officers, or any other agent
to act within the scope of an apparent authority, it holds him out to the public possessing the power to do so
those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority.
Note: Existence of apparent authority must be ascertained through:
(a) General manner in which the corporation holds out an officer or agent as having the power to act or in,
other words, the apparent authority to act in general, with which it clothes him; or
(b) The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond of his ordinary powers. If the corporation desires to set up the defense that the
contract was executed by one not authorized as agent, it must plead such fact.(Ramirez Doctrine)
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to resell the same with guaranty

However, once the corporation has discharged its burden under the Ramirez Doctrine, then the burden of
proof now shifts to the contracting party to show that indeed by previous acts and actuations, the acting
officer had been clothed by the corporation with apparent authority for the public to take such authority at
face value.
Effects of ultra vires acts which are not illegal
1. An ultra vires contract, while executory on both sides, cannot be enforced by either party thereto.
2. When an ultra vires contract has been fully performed on both sides, neither party can maintain an
action to set aside the transaction or to recover what has been parted with.
 Doctrine: The defense of ultra vires cannot be set up or availed of in completed or
consummated transaction.
3. When an ultra vires contract has been performed on one side and the other has received benefits by
reason of such performance, recovery is permitted in most courts on behalf of the former (one who
performed) on the ground that it would be unjust to sanction retention of benefits coupled with
refusal to perform.
Who may invoke ultra vires
1. State
2. Stockholders, except when laches set in
3. Strangers, only if he was directly injured by such act or contract
4. Competitors in business, but only if there is invasion of some legal or equitable right and not merely
on the ground of injurious competition, where such acts are neither public nuisances or trespasses.
5. Creditors, only when the contract is entered into in fraud of creditors
Carlos v. Mindoro Sugar, Oct. 26, 1932
Purpose: To engage in trust business
Republic v. Acoje Mining, Feb. 28, 1963
Resolution by Acoje Mining board: "That the requirement of the Bureau of Posts that the Company should
accept full responsibility for all cash received by the Postmaster be complied with, and that a copy of this
resolution be forwarded to the Bureau of Posts."
Thus, corporation is estopped from claiming that the said resolution was ultra vires. Besides, the same is not
ultra vires because it covers a subject which concerns the benefit, convenience and welfare of its employees
and their families.
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.
Republic v. Security Credit and Acceptance Corp, Jan. 23, 1967
Defendant corporation has violated the law by engaging in banking without securing the administrative
authority required in Republic Act No. 337. Thus, act is both ultra vires and illegal.
Normally, case will be remanded to trial court. However, the main issue here is one of law, namely, the legal
nature of said facts or of the aforementioned acts of the corporation. For this reason, and because public
interest demands an early disposition of the case, we have deemed it best to determine the merits thereof.
The Court ordered the DISSOLUTION of the corporation.
Notes:
 Accepting deposits from 20 or more persons and lending the same is considered an act of BANKING.
 BUT if money came from own fund, and not from deposits, then not act of BANKING.

It is not ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the
legitimate furtherance of its purposes and business.

Where a corporation acquires commercial paper or bonds in the legitimate transaction of its business it may
sell them, and in furtherance of such a sale it may, in order to make them the more readily marketable,
indorse or guarantee their payment.

Whenever a corporation has the power to take and dispose of the securities of another corporation, of
whatsoever kind, it may, for the purpose of giving them a marketable quality, guarantee their payment, even
though the amount involved in the guaranty may subject the corporation to liabilities in excess of the limit of
indebtedness which it is authorized to incur.

Notes:
 The guaranty of debt of sister/subsidiary company is VALID.
 Trust corporations are special form of banking, thus they have inherent power to buy properties and

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BY-LAWS
Sec. 46. Adoption of by-laws. – Every corporation formed under this Code must, within one (1) month after
receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of
by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of the stockholders or members during office
hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the
secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be
attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted
to the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a
certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of
any bank, banking institution, building and loan association, trust company, insurance company, public utility,
educational institution or other special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-laws or amendments are in
accordance with law.
By-laws, defined
 These are rules of action adopted by a corporation for its internal government and for the
government of its stockholders or members and those having the direction, management and
control of its affairs in their relation to the corporation and as among themselves.
 Inherent power: Power to adopt by-laws by is inherent in every corporation.
 Is not binding on extra-corporate parties (except if third parties have prior notice of the by laws)
FUNCTION
Function of by-laws
 To define rights and duties of corporate officers and directors or trustees, and of stockholders or
members towards the corporation and among themselves with reference to the management of
corporate affairs and to regulate transaction of the business of the corporation in a particular way.
 Source of authority for corporate officers and agents of the corporation
 Note: By-laws supplement the AoI.
Binding effect of by-laws
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 As to corporation and its officers
 By laws, as the self-imposed private laws of a corporation, have substantially the same
force and effect as laws of the corporation as have the provisions of its charter insofar as
the corporation and the persons within it are concerned.
 Corporation and its directors (or trustees) and officers are bound by and must comply with
them unless they are changed, amended, or repealed in accordance with Sec. 48.
 BUT subordinate employees without actual knowledge of the by-laws are not bound
 As to stockholders or members
 GR: Stockholders or members of a corporation are presumed to know the provisions of the
corporation's by-laws
 Note: It is required that the original by-laws be approved by at least majority of the OCS
(including non-voting) or of the members, signed by the stockholders or members voting
for them, and kept in principal office of the corporation, subject to their inspection during
office hours.
 As to third persons
 GR: They are not bound by the by-laws of a corporation since the by-laws operate merely
as an internal rules among stockholders
 XPN: When the third person has knowledge of its provisions either actually or
constructively at the time the transaction in question was entered into.
 A corporate contract cannot be held invalid just because the signatory thereon was not the
chairman of the board which allegedly violated the corporation's by-laws. Since by-laws
operate merely as internal rules among the stockholders, they cannot affect or prejudice
third persons who deal with the corporation unless they have knowledge of the same (PMI
Colleges v. NLRC [1997])
Loyola Grand Villas v. CA, Aug. 7, 1997
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? NO.
Under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est
ipsum statutum), 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,
thus:
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“In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the
existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where
the charter sufficiently provides for the government of the body; and even where the governing statute in
express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the power will
be ascribed to mere non-action which will not render void any acts of the corporation which would
otherwise be valid.”
Fletcher: The mere fact, however, of the existence of power in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity
of any of its acts.”
KINDS
Kinds of by-laws
1. Pre-incorporation by-laws: Adopted and filed, prior to incorporation, with the articles of
incorporation
 By-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall
be approved and signed by all the incorporators and submitted to the SEC, together with
the Articles of Incorporation.
2. Post-incorporation by-laws: Every corporation formed under this Code must, within one (1) month
after receipt of official notice of the issuance of its Certificate of Incorporation by the SEC adopt a
code of by-laws for its government not inconsistent with this Code.
WHEN TO ADOPT AND FILE
When to adopt by-laws
1. Pre-incorporation by-laws: Any time prior to incorporation
2. Post-incorporation by-laws: Within one (1) month after receipt of official notice of the issuance of
its certificate of incorporation by the SEC
Effect to failure to file by-laws
 Rule: Non-filing of by-laws on time will not result in the automatic dissolution of the corporation.
 Required: There must be a hearing to determine the existence of the ground.
 The penalty is not necessarily revocation but may only be suspension
Construction and application of by-laws
 Rule on construction: By-laws should be construed and given effect according to the general rules
governing the construction of contracts.
 When strict construction: Only if the by-laws provides for disenfranchisement of members of a
corporation and penal in character.
 Prospective: By-laws should be made to apply prospectively, not retroactively.
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Effectivity of by-laws
 By-laws become effective only upon the issuance by the SEC of a certification that they are not
inconsistent with the Code.
 Note: In case of foreign corporations licensed to transact business in the Philippines, matters
relating to their by-laws are governed by the law governing their incorporation.
Validity by laws
1. They must not be contrary to law and not inconsistent with the Corporation Code;
 Subject to the provisions of the Constitution, the Corporation Code, other special laws, and
the AoI.
 A by-law or provision thereof that is contrary to law cannot attain validity through
acquiescence or on the basis of long practice, nor give rise to any vested right (Grace
Christian HS v. CA [1997])
2. Must not be contrary to morals and public policy;
3. Must not impair obligations of contracts;
 A by-law may not operate retrospectively if it does thereby disturb or impair any existing
contract or vested right.
4. Must be general and uniform in their operation and not directed against particular individuals;
 It must affect alike, and operate equally as to all stockholders or members under the same
circumstances, and not be directed against particular stockholders or members.
 If the by-law were to be applied in the case of one stockholder but waived in the case of
another, then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner (Gokongwei v. SEC [1979]).
5. Must be consistent with the charter or articles of incorporation;
 A by-law is subordinate to the charter of the corporation and part of its charter is its AoI,
thus a by-law which is not consistent with the charter but is in conflict with or repugnant
to it, is VOID.
 A by-law can neither enlarge the rights and powers conferred by the charter nor restrict
the duties and liabilities imposed thereby, and in case it attempts to do so, the charter will
prevail
6. Must be reasonable (capable of compliance)
 A by-law which disqualifies a competitor from election to the BoD of another corporation
has been held as valid and reasonable (Gokongwei v. SEC [1979]).
 Authority granted to a corporation to regulate the transfer of its stock does not empower
the corporation to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to be followed
in effecting transfer (Thomson v. Court of Appeals, 298 SCRA 280 [1998]).
 By-laws are intended merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the charter of the corporation. (Rural
Bank of Salinas, Inc. v. CA, 210 SCRA 510 [1992]).
Waiver of by-laws
 Note: Such waiver of by-law is a QUESTION OF FACT.
 By the corporation
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 May be waived by the corporation both express and implied
 By the stockholders or members
 May be waived by the stockholder or member when it is he whose individual rights are
advanced or protected by its provisions.
 Note: The directors or trustees, or officers of corporation may not waive the by-laws for
the stockholders or members
CONTENTS
Sec. 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and
the articles of incorporation, a private corporation may provide in its by-laws for: (TTQ-PQEE-PSO)
1. The time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice
thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business
and affairs.
Place of meeting
 Directors' or trustees' meeting: Place determined in by-laws "anywhere in or outside of the
Philippines"
 Stockholders' meeting: Must always be held at the city or municipality where the principal office of
the corporation is located or if practicable in the principal office of the corporation
Quorum
 By-laws cannot provide lesser number to constitute a quorum compared that of required by law for
the validity of certain acts.
 A corporation has also the power to prescribe in their AoI or by-laws a number greater than the
majority of the members of the board of directors or trustees to constitute a quorum
Proxies
 By-law may provide for:
a) The form of such proxies
b) The manner of voting them subject to the date of provisions of Sec. 58
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Qualifications of directors
 The qualifications of directors may be fixed in the by-laws provided that the minimum legal
requirement (owner of at least one share) is met.
Disqualification for position of director
 E.g. Being engaged in any business which competes with or is antagonistic to that of the corporation.
Compensation to stockholders or members
 The by-laws may not provide compensation to them, if they are not "directors or trustees, officers
and employees."
Election and term of office of directors or trustees
 Rule: Neither can the corporation provide in the by-laws for the manner of election and the term of
office of directors or trustees which are already provided by law.
Imposition of penalties or sanctions
 The corporation has a power to enforce its by-laws properly made, by pecuniary penalties and
corporate disabilities proportionate to the violation.
 Note: It has been held that by-laws cannot be enforced by forfeiture of property or stock of the
defaulting member.
 Remedy of mandamus: The remedy of mandamus is generally available to compel officers of a
corporation to perform the duties imposed on them by the by-laws.
Issuance of certificate of stocks
 Matter is internal one which the law has left for the corporation to decide.
 BUT the authority granted to a corporation to regulate the transfer of its stock does not empower it
to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be followed effecting the transfer (Thomson v. CA,
[1998])
Fleischer v. Botica Nolasco, March 14, 1925
If a person contracts with a corporation with reference to a by-law, as, for example, a by-law which the
stockholders or members bind themselves individually for all debts that may be contracted by the corporation,
the by-law becomes a part of his contract and he may enforce the same; but it is otherwise if he does not
contract with reference to or on faith of the by-law.
Rules regarding by-laws
1. The by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the
objects of the corporation, and are not contradictory to the general policy of the laws of the land.
2. By-laws of a corporation must be reasonable and for a corporate purpose, and always within the
charter limits.
3. They must always be strictly subordinate to the constitution and the general laws of the land.
4. They must not infringe the policy of the state, nor be hostile to public welfare.
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5. They must not disturb vested rights or impair the obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of property or create obligations unknown
to the law.
Government v. El Hogar Filipino, July 13, 1927
SECOND CAUSE OF ACTION: the acquisition of this lot, the construction of the new office building thereon,
and the subsequent renting of the same in great part to third persons, are ultra vires acts on the part of the
corporation, and that the proper penalty to be enforced against it in this action is that if dissolution.
Untenable. The law expressly declares that corporations may acquire such real estate as is reasonably
necessary to enable them to carry out the purposes for which they were created; and we are of the opinion
that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a
building and loan association such as the respondent was at the time this property was acquired.
THIRD CAUSE OF ACTION: The administration and management of properties belonging to delinquent
shareholders of the association.
Untenable. The Court saw no reason to doubt the validity of the clause giving the association the right to take
over the property which constitutes the security for the delinquent debt and to manage it with a view to the
satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and
the validity of the clause allowing this course to be taken appears to us to be not open to doubt.
FOURTH CAUSE OF ACTION: The board of directors of the association, by the vote of an absolute majority of
its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from
the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as
members of the owners of such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct conflict with the Code which expressly declares that
the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock
except in case of liquidation of the corporation or of forfeiture of the stock for delinquency.
Even though the provision is a nullity, the same does not justify the dissolution of El Hogar.
AMENDMENT AND/OR REJECTION OF BY-LAWS
Sec. 48. Amendments to by-laws. – The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-
laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3)
of the members in a non-stock corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked
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whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to
the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the
corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange
Commission of a certification that the same are not inconsistent with this Code.
Formalities
 By a vote of the majority of the BOD/BOT and the owners of at least a majority of the OCS (both
voting and non-voting)/members, at a regular or special meeting DULY called for the purpose.
 THUS, it cannot be done in a referendum.
Delegation of power to amend by-law
 Rule: The owners of 2/3 of the OCS or members may delegate to the BOD or trustees the power to
amend or repeal any by-laws
 Power to amend AoI is non-delegable.
 HOWEVER, the authority given to the BOD to alter or amend the by-laws must be so construed as to
restrict it from altering or annulling a by-law imposing a limitation on its powers.
 Necessity of meeting: Although not expressly mentioned under the law, the delegation of such
power must be properly made in a meeting called for that purpose.
Revocation of delegated power of BOD or BOT
 The power delegated is deemed revoked whenever the stockholders owning or representing a
majority of the OCS or a majority of the members in non-stock corporations, shall so vote at a
regular or special meeting.
 Previous notice in revocation not necessary: The revocation is valid notwithstanding that no
previous notice was given to stockholders or members of the intention to propose such revocation.
Implied repeal of by-law
 Rule: A by-law is impliedly repealed by a subsequent by-law inconsistent with it.
Filing and effectivity of amended or new by-laws
 A certificate of the appropriate government agency, when required, must be secured first before the
SEC accepts such amended by-laws.
 Effectivity: Amended or new by-laws shall only be effective upon the issuance by the SEC of a
certification that the same are not inconsistent with the Code.
 If special corporation: If governed by special law, the amended by-laws or new by-laws
shall be effective only upon the approval by BOTH the appropriate government agency and
the SEC.
 Prospective: The amended or new by-laws shall be prospectively and not retroactively.
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By-laws and resolution, distinguished

Nature and subject matter
Rule in case of conflict
Necessity of approval by SEC
BY-LAWS RESOLUTIONS
Permanent rule of action (except if Ordinarily limited in its operation,
repealed or amended) of the applying usually to a single act or
conduct of the corporate affairs transmission of the corporation or
to some specific, person, situation
or occasion.
Will prevail over a resolution
Its other rules and regulations do
not need its approval, unless they
involve matters where the law
requires such approval

By-laws and Articles of incorporation, distinguished

BY-LAWS AOI
Merely rules and regulations adopted by the The charter or fundamental law of the corporation
corporation
Usually after the incorporation by the stockholders or Executed before incorporation by the incorporators
members
Condition subsequent to corporate existence Filing of the same is a condition precedent to
corporate existence

Salafranca v. Philamlife, December 23, 1998

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

The right to amend the by-laws lies solely in the discretion of the employer corporation, this being in the
exercise of management prerogative or business judgment. However, this right, extensive as it may be,
cannot impair the obligations of existing contracts or rights, such as right to security of tenure as a regular
employee guaranteed by the Labor Code.

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 petitioner’s right to security of tenure as a regular employee
guaranteed under the Labor Code.

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MEETINGS OF STOCKHOLDERS AND BOARD OF DIRECTORS IF non-stock: personal only

unless by-laws says otherwise
MEETINGS (Summary) Majority of all BOD/BOT (if ABISIMID)
By-law (higher voting is allowed)
BOD / BOT SH Regular or
VOTE Majority of OCS
Time/date under the by-laws; or Special Majority of those present in a quorum
2/3 of OCS
Time/date under the by-laws; or Annually (on any date in April of (if ORDINARY COURSE OF BUSINESS)
Regular
WHEN Monthly every year as determined by the
BOD/BOT) KINDS
Special At any time deemed necessary At any time deemed necessary
By-laws; BUT must be in the city Sec. 49. Kinds of meetings. – Meetings of directors, trustees, stockholders, or members may be regular or
or municipality where the special.
By-laws, even beyond the bounds of principal office is located
the State where the corporation exists Meetings of stockholders or members
Regular or
WHERE (if BOD) If practicable, principal office of 1. Regular: Those held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of
Special
the corporation every year as determined by the board of directors or trustees
IF BOT, cannot be abroad  It is held principally for the purpose of electing another set of directors or trustees
Metro Manila shall be 2. Special: Those held at any time deemed necessary or as provided in the by-laws
considered a city or municipality
NOTICE Meetings of directors or trustees
Regular By-laws; if none, in writing 1. Regular: Those held by the board monthly, unless the by-laws provide otherwise
By-laws; Always in writing 2. Special: Those held by the board at any time upon the call of the president or as provided in the by-
Form laws
Special If none in BL, then in writing Publication (as required by some
special laws)
By-laws (shorter or longer Requisites for a valid meeting of stockholders or members:
period); or 1. It must be held at a proper place (Section 51)
Regular 2. It must be held at the stated date and at the appointed time or at a reasonable time thereafter;
At least 2 weeks prior to the
By-laws; meeting (Section 51)
When given 3. It must be called by the proper person (Section 50)
If none in BL, at least 1 day before By-laws (shorter or longer
period); or 4. There must be a previous notice. (Secs 50,51)
Special 5. There must be a quorum (Section 52)
At least 1 week prior to the
meeting
By-laws; Requisites for board meeting
Regular or By-laws; If none, majority of OCS  Under Section 25, the validity of a corporate act is predicated on the presence of the following
QUORUM requisites:
Special If none, majority of all BOD 2/3 of OCS (when 2/3 vote is
required) 1. Meeting of the directors or trustees duly assembled as a board, i.e., as a body in a lawful meeting;
By-laws 2. Presence of the required quorum;
President/Chairman/Vice- 3. Decision of the majority of the quorum or, in other cases, a majority of the entire board; and
PRESIDING Regular or By-laws; Chairman 4. Meeting at the place, time, and manner provided in the by-laws.
OFFICER Special President Petitioning stockholder
Necessity of meetings
(in order)  Meetings of stockholders or members: Unless the statute otherwise provides, stockholders or
Regular or IF stock: personal or proxy members can act only in meetings properly convened and assembled.
ATTENDANCE Personal (includes videoconferencing)
Special
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 The written assent of a majority of the shareholders or members without meeting to a
matter requiring action by them is not sufficient.
 Meetings of directors or trustees: Any determination affecting the corporation shall only be arrived
at after a consultation at a meeting of the board upon notice to all, attended by at least a quorum of
its members.
Pena v. CA, Feb. 7, 1991
Only three (3) out of five (5) members of the board of directors of respondent PAMBUSCO convened on
November 19, 1974 by virtue of a prior notice of a special meeting. There was no quorum to validly transact
business since, under Section 4 of the amended by-laws hereinabove reproduced, at least four (4) members
must be present to constitute a quorum in a special meeting of the board of directors of respondent
PAMBUSCO.
Moreover, the three (3) alleged directors who attended the special meeting on November 19, 1974 were not
listed as directors of respondent PAMBUSCO in the latest general information sheet of respondent
PAMBUSCO filed with the SEC dated 18 March 1951. Similarly, the latest list of stockholders of respondent
PAMBUSCO on file with the SEC does not show that the said alleged directors were among the stockholders of
respondent PAMBUSCO.
Thus, the non-compliance of the requirements set forth under the by-laws makes the donation by the
PAMBUSCO through its BoD null and void.
WHEN AND WHERE HELD
Sec. 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or
members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees: Provided, That written notice of regular meetings
shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in
the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange
Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an
order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving
proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or members present have chosen one of their number as
presiding officer.
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Sec. 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s meetings,
whether regular or special, shall be held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro
Manila shall, for purposes of this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or duly represented at the meeting.
When meetings of stockholders or members is MANDATORY
1. Election of directors or trustees
2. Removal of directors or trustees
3. Filling of vacancies in the office of director or trustee
4. Ratification of a contract of the corporation with a self-dealing director
5. Extension or reduction of a corporate term
6. Increase or decrease of capital stock
7. Creation or increase of bonded indebtedness
8. Sale or other disposition of all or substantially all of the corporate assets
9. Investment of corporate funds in another corporation or business or for any other purpose
10. Declaration of stock dividends
11. Entering into a management contract with another corporation
12. Amendment to, or repeal of, any by-laws or adoption of new by-laws
13. Fixing the issued price of no par value shares
14. Plan of merger or consolidation
15. Amendments of AoI of a close corporation
16. Voluntary dissolution of the corporation, whether or not there are creditors affected
17. Dissolution by shortening corporate term
Postponement of stockholders' or members ANNUAL meeting
 GR: Where the date of the annual meeting is fixed in the by-laws of the corporation, the BOD/BOT
cannot change the date so as to lengthen their term of office.
 XPN: Presence of valid reason for postponement, but there must be proper notice of the change of
date given to the stockholders or members.
Effect of failure to comply with requisites for meeting
 GR: All proceedings had and any business transacted at any meeting of stockholders or members
shall be valid even if the meeting be improperly held or called.
 Requisites before the rule applies:
a) Proceedings and business transactions had are not ultra vires.
b) That all the stockholders or members of the corporation are present or duly represented
in the meeting.
 Note: Absent one requisite, any action taken at the meeting shall not be valid.
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 If the meeting is held at an unauthorized place or without proper notice and not all the
stockholders or members are present, those who have a right to complain may take steps Quorum, general concepts
to set aside any action taken at such meetings even though majority of the stockholders  GR: Must be not less than such number as required by the Code necessary to transact business.
or members were present in the absence of waiver, estoppel, or ratification.  E.g. if the required vote is 2/3 OCS then the required quorum is also 2/3 of OCS.
 XPN: If by-laws provides for higher quorum.
NOTICE REQUIRED
Quorum in members' meetings (non-stock)
Sec. 53. Regular and special meetings of directors or trustees. – Regular meetings of the board of directors or  Basis: Total number of registered members
trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.  Only those who are actual, living members with voting rights shall be counted in determining the
existence of a quorum during members' meetings.
Special meetings of the board of directors or trustees may be held at any time upon the call of the president  Dead members shall not be counted
or as provided in the by-laws.
Effect of death of a stockholder
Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless  If stock: The executor or administrator is vested with legal title to stock and entitled to vote. (So
the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the count the shares of the deceased in determining the base for quorum)
meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless  If non-stock: The determination of whether or not "dead members" are entitled to exercise their
otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or voting rights, through their executor or administrator, depends on those articles of incorporation
impliedly. or by-laws.

Requisites of notice of meeting MINIMUM NUMBER OF VOTES REQUIRED (Summary)

1. Issued by one who has authority to issue it;
2. Must be in writing;
3. Must state the time, date and place of the meeting, unless otherwise provided in the bylaws;
4. Must state the business to be transacted thereat;
5. Must be sent at a certain time before the scheduled meeting as fixed by law, unless a different
period is required by the by-laws.
6. The notice must comply with any other requirements prescribed by the law or the by-laws
a) Notice of meeting for the approval of merger or consolidation "shall state the purpose of
the meeting and shall include a copy or a summary of the plan of merger or consolidation,
as the case may be."
b) In notice of meetings for voluntary dissolution, it shall be made by publication, in addition
to written notice which shall be sent by registered mail or personal delivery.
 Note: A special meeting may not consider business other than those listed in the notice of meeting
 XPN: Unanimous waiver
 The CALL for a meeting is exercised by the person who has the power to call the meeting. It may
consist of direction to the secretary of the corporation to notify the stockholders or members of the
meeting.

QUORUM REQUIRED
Sec. 52. Quorum in meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or a majority of the
members in the case of non-stock corporations.
WHO PRESIDES
Sec. 54. Who shall preside at meetings. – The president shall preside at all meetings of the directors or
trustee as well as of the stockholders or members, unless the by-laws provide otherwise.

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Order of preference
1. Person mentioned in by-laws Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are prima facie public in
2. President character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present
3. Chairman case were undisputably acquired with coco levy funds which are public in character, then the right to vote
4. Vice-chairman them shall be exercised by the PCGG. In sum, the "public character" test, not the "two-tiered" one, applies.
5. Stockholder authorized by SEC to call a meeting
 He shall preside thereat until at least a majority of the stockholders or members present When board meeting is unnecessary
have chosen one of their number as presiding officer. Unless the bylaws provide otherwise, any action by the directors of a close corporation without a meeting
6. Stockholder or member in temporary capacity (pending the selection of presiding officer) shall nevertheless be deemed valid if:
 Where the officer entitled to preside is not present at the time for a meeting to convene 1. Before or after such action is taken, written consent thereto is signed by all the directors; or
 BUT presiding officer must be chosen and he may be elected by viva voce vote of the 2. All the stockholders have actual or implied knowledge of the action and made no prompt objection
stockholders or members present. thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of al
WHO COULD ATTEND AND VOTE the stockholders; or
4. All the directors have express or implied knowledge of the action in question, and none of them
Meeting of the BOD/BOT makes prompt objection thereto in writing.
 Only the directors or trustees may attend personally and vote.  Note: if a directors’ meeting is held without a proper call or notice, an action taken therein within
 Proxies or representatives are not allowed the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files
his written objection with the Secretary of the corporation after having knowledge thereof.
Meeting of Stockholders
 Stock corporation: Stockholder whose name is recorded in the stock and transfer book, personally CONTINUE READING DL - P479
or through a proxy
 Appointment of proxy is a statutory right
 Non-stock corporation: Members, but must always be personal appearance unless if otherwise
provided by the by-laws
 Appointment of proxy is NOT a statutory right and allowed only if provided for in the by-
law

As to sequestered shares
 The sequestration of shares does not entitle the government to exercise acts of ownership over the
shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v.
Roxas, 195 SCRA 797 (1991).

Republic v. Cocofed, December 14, 2001

The right to vote sequestered shares of stock registered in the names of private individuals or entities and
alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered owner.

When PCGG may exercise voting right

The PCGG may, however, be granted such voting right provided it can
1. Show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and
2. Demonstrate imminent danger of dissipation of the assets, thus necessitating their continued
sequestration and voting by the government until a decision, ruling with finality on their ownership,
is promulgated by the proper court.

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VOTING  When no record date fixed: Absent the record date, such date shall be the date of the
notice of meeting.
PRELIMINARIES; REVIEW
May corporation vote?
What are the basic rights of shareholders?  YES, through its representative.
1. Direct or indirect participation in management;  A corporation holding shares in another corporation may vote said shares through the corporate
2. Voting rights (Section 6) officer duly authorized by the BOD.
3. Right to remove directors (Section 28)
4. Proprietary rights May a transferee of stock vote?
a) Right to dividends  YES, provided the transfer was registered in the book of the corporation and the name of the
b) Appraisal right (Section 81) transferee appears in the stock and transfer book.
c) Right to issuance of stock certificate for fully paid shares (Section 64)
d) Proportionate participation in distribution of assets in liquidation (Section 188-119) May PCGG representative vote?
e) Right to transfer of stocks in corporate books (Section 63)  GR: The registered owners of shares sequestered by the government (PCGG), or they duly
f) Pre-emptive right (Section 39) authorized representatives or proxies, may vote said shares.
5. Right to inspect books and records (Section 74)  Reason: The government cannot perform acts of ownership of sequestered property as it
6. Right to be furnished with the most recent financial statement/financial report (Section 74,75) does not become the stockholder of record by virtue of such sequestration.
7. Right to recover stocks unlawfully sold for delinquent payment of subscription;  Government is mere CONSERVATOR.
8. Right to file individual suit, representative suit, and derivative suits.(Page 298 of JRS)  XPN: (when the government has authority to vote the shares)
a) Where government shares are taken over by private persons or entities who/which
Right to vote registered them in their own names
 An inherent right of the stockholders or members in the management of the corporation. b) Where the capitalization or shares that were acquired with public funds somehow landed
 May a stockholder be compensated for his time in coming to the corporation to vote? in private hands.
 NO, because voting is a right hence one is not paid for exercising such right.  IMPORTANT: The two-tiered test (under the exception) does not apply where:
a) Shares have been conclusively shown to have been purchased with public funds, or funds
Manner of Voting that are prima facie public in character or,
1. Directly (in person) b) Shares are clearly affected with public interest as in the case of coconut levy funds.
2. Indirectly, through a representative
a) By means of proxy (Sections 55, 56, 58 and 89 par. 2) OWNERS OF NON-VOTING SHARES
b) By a trustee under a voting trust agreement (Sec 59)  They can vote only in cases of ABISIMID.
c) By executors, administrators, receivers, or other legal representatives duly appointed by
the court. (Section 55(2)) OWNERS OF DISQUALIFIED SHARES
 Note: Voting may be either straight or cumulative (See Section 24)  Whenever the law disqualifies shares from voting on any matter, they are not considered
outstanding for the determination of the quorum at any meeting to act upon
WHO MAY EXERCISE  E.g. treasury shares

OWNERS OF VOTING SHARES OWNERS OF PREFERRED AND REDEEMABLE SHARES

 GR: Only legal owners of shares in a stock corporation have the right to be present and vote in any  They are allowed to vote provided they were not deprived of voting rights (subject in cases of
corporate meeting. ABISIMID again).
 Note: One who does not appear to be a stockholder upon the books of the corporation is not eligible
to vote a stock although he may be entitled to the legal title to the stock voted. OWNERS OF DELINQUENT SHARES
 Record date: There is a "record date" fixed by the BOD for determination of stockholders entitled to  Holders of stock declared delinquent by the BOD for unpaid subscriptions are not entitled to vote or
vote. to representation at any stockholders' meeting.
 BUT they may act as proxies for stockholders whose shares are not delinquent.
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TREASURY SHARES (only a corporation owns this)
 They have no voting rights
 Note: Fractional shares cannot also be voted unless they constitute at least one full share.
OWNERS OF SHARES NOT FULLY PAID
 Entitled to vote provided not delinquent
REPRESENTATIVE VOTING
 Rule: Executors, administrators, receivers, or other legal representatives duly appointed by the court
may ATTEND AND VOTE in behalf of the stockholders or members on shares under their
administration without need of any written proxy.
DECEASED STOCKHOLDERS
 If there is legal representative: Such administrator or executor may vote on behalf of the deceased
stockholder
 No legal representative, estate undivided: No person can vote the shares of the deceased since
nobody can legally represent his estate.
 No legal representative, estate partitioned: Where there is judicial or extrajudicial settlement, and
properties were partitioned, the heirs are entitled to vote the shares allotted in their respective
names at the meeting.
Gamboa v. Teves, June 28, 2011
COCOFED v. Republic, Feb. 11, 2010 in relation to Republic v. COCOFED,
Lee v. CA
PLEDGORS, MORTGAGORS, EXECUTORS, RECEIVERS AND ADMINISTRATORS
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. – In case of pledged or mortgaged shares
in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of
stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in
writing which is recorded on the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend
and vote in behalf of the stockholders or members without need of any written proxy.
Right to vote of pledgor or mortgagor
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 GR: Pledgor and mortgagor remains the owner of the stock pledged or mortgaged thus they have
the right to vote.
 XPN: Pledgee and mortgagee shall have the right to attend and vote at meetings of stockholders
ONLY WHEN expressly given such right in writing by the pledgor or mortgagor.
 Note: If the pledgor or mortgagor of the shares of stock is disqualified to vote, the disqualification
extends as well to the pledgee or mortgagee
 When shares are pledged by means of endorsement in blank and delivery of the covering certificates
to a loan, the pledgee does not become the owner thereof simply by the failure of the registered
stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand
that the shares be registered in his name. (Lim Tay v. Court of Appeals, 293 SCRA 634 (1998))
When no authority in writing is needed
 Executors, administrators, receivers, and other legal representatives duly appointed by the court
When heirs are allowed to vote
 Once there is partition and their name is already registered in the stock and transfer book
 Note: Although the Rules of Court, while permitting an executor or administrator to represent or to
bring suits on behalf of the deceased, do not prohibit the heirs from representing the deceased.
When no administrator has been appointed, there is all the more reason to recognize the heirs as
the proper representatives of the deceased. (Gochan v. Young, 354 SCRA 207 (2001))
JOINT OWNERS OF STOCK, ITF SHARES, AND/OR SHARES
Sec. 56. Voting in case of joint ownership of stock. – In case of shares of stock owned jointly by two or more
persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a
written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such
share or shares: Provided, That when the shares are owned in an “and/or” capacity by the holders thereof,
any one of the joint owners can vote said shares or appoint a proxy therefor.
When joint owners of stock
 GR: The consent of all the co-owners is required to vote such stock.
 XPNs: (when the consent is not necessary)
a) There is a written proxy executed by the joint-owners authorizing one or some of them or
any other person to vote for all.
b) The shares are owned in an "and/or" capacity by the holders thereof.
 Note: If property relations of husband and wife is ACP, then it is govern by co-ownership.
 "AND shares": Can each joined owners vote for half of the total shares? NO
When ITF shares
 "In trust for"
 Trustor still has right to vote, unless there is a Voting Trust Agreement and its requirements are
complied with
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 Even when it is shown that the registered owner of shares of stock holds the share in trust for the or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled
benefit of the principal, it is necessary nevertheless that the trustee must still endorse the stock meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the
certificate to validate the cancellation of her share and to have the transfer recorded in the books of meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at
the corporation in favor of the principal or another trustee. (Bitong v. CA) any one time.

When "And/Or" shares Jack's Lecture: Intro to Proxy (you may skip this)
 One or more owners can cast the vote on the shares held Now, as I said before, a stockholder can vote by proxy. But if he gave a later proxy, the later proxy will prevail
over the earlier proxy. If you cannot tell which one is later because they don’t have dates, well, neither can
NON-VOTING SHARES vote. Or if the stockholder personally showed up at the stockholders’ meeting, then he is personally present,
then the proxy will lose the right to vote because the proxy is just an agent and agency can be revoked at any
Rule as to non-voting shares time. However if the proxy is coupled with an interest, then it cannot be revoked. For instance, if you have a
 Note: That no share may be deprived of voting rights except those classified and issued as bank which loaned a substantial amount of money and it required this borrower to pledge his shares of stock
"preferred" or "redeemable" shares, unless otherwise provided in this Code as collateral and to give a proxy until the loan is fully paid, then he cannot revoke the proxy because it is
 GR: Not entitled to vote coupled with an interest.
 XPNs: (review ulit)
a) Amendment of the articles of incorporation; Three concepts of proxy
b) Adoption and amendment of by-laws; 1. Authority: Formal written authority given by the owner or holder of the stock, who has a right to
c) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the vote it, or by a member, as principal to another person, as agent, to exercise the voting rights of the
corporate property; former.
d) Incurring, creating or increasing bonded indebtedness; 2. Holder of authority: Person authorized by an absent stockholder or member to vote for him at a
e) Increase or decrease of capital stock; stockholders' or members' meeting.
f) Merger or consolidation of the corporation with another corporation or other 3. Instrument: Instrument which evidences the authority of the agent
corporations;
g) Investment of corporate funds in another corporation or business in accordance with this Purpose and use of proxy
Code; and 1. Presence of quorum in meetings
h) Dissolution of the corporation. 2. Exercise of right to vote though absent
 Proxy voting enables those who do not wish to attend a stockholders' or members'
TREASURY SHARES meeting to protect their interest by exercising their right to vote through a representative.
3. Voting and management control
Sec. 57. Voting right for treasury shares. – Treasury shares shall have no voting right as long as such shares  Note: Voting by proxy is not allowed in board meetings.
remain in the Treasury.
Who may be proxy
Voting right for treasury shares  Rule: The law sets NO LIMITATIONS as to the persons who may be appointed as proxy.
 Rule: Treasury shares have no voting rights as long as such stocks remains in the treasury.  By-laws restricting the right of a stockholder to appoint proxy is VOID.
 Such shares are NOT also entitled to dividends.  Other rules:
 Treasury shares are not outstanding shares. a) Disqualified person as proxy: Since a proxy acts for another, he may act as such although
 Only right by corporation as to TS: To reissue the same for valuable consideration he himself is disqualified to vote because his stock has been declared delinquent.
 Note: In case of sale or reissue, treasury shares regain whatever voting rights and b) Common proxy: The same person may act as proxy for one or several stockholders or
dividends to which they were originally entitled. members.
c) Director as proxy in stockholders meeting: Directors or trustees cannot attend or vote by
PROXIES proxy at board meetings but they may act as proxies in stockholders' meetings.

Sec. 58. Proxies. – Stockholders and members may vote in person or by proxy in all meetings of stockholders Nature of proxies

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 In writing: Proxy shall be in writing, signed by the stockholder or the member.
 Purely personal: The appointment of proxy is purely personal and to be valid, a proxy to vote stock
must have been given by the person who is the legal owner of the stock entitled to vote the same at
the time it is voted
 Proxy may not re-designate another proxy: A designated proxy may not further re-designate
another under the same proxy.
 An alternate proxy can only act as proxy in case of non-attendance of the other designated
party.
Limitations on proxies of stockholders or members
1. It shall be in writing and signed by the SH or member;
 Oral proxies are not valid.
2. It must be filed before the scheduled meeting with the corporate secretary;
3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended
or valid only for the specified meeting;
4. A continuing proxy must be for a period not exceeding 5 years at any one time
 Otherwise, it will be void as to the excess period from the fifth year
 Note: A proxy sold for consideration is obviously contrary to public policy.
Form and execution of proxies
1. It shall be in writing and signed by the stockholder or member
2. It shall show an intention to empower the person to whom it is given to act as agent in voting the
stock.
 No particular form or words are necessary to constitute a proxy or extend the authority
thereof.
3. For corporations, a board resolution authorizing the signatory to the proxy should be submitted.
 XPN: By-laws may prescribe form necessary for a valid proxy
 Proxy date: The proxy must be dated, but absence of such will NOT make the instrument invalid.
 Presumption of regularity: There is a presumption of regularity in the execution of proxies.
 Rule: Proxies should be accepted if they have the appearance of prima facie authenticity in
the absence of a timely and valid challenge and are signed as the names appear in the
record of the corporation.
Kinds of proxy
1. General proxy
 Confers a general discretionary power of attorney to attend and vote at an annual meeting
"with all the powers the undersigned would possess if personally present," to vote for
directors and all ordinary matters that may properly come before a regular meeting.
 Note: It is no authority, however, to vote for a fundamental change in the corporate
charter or other unusual transactions such as merger or consolidation.
2. Limited proxy
 It limits the power conferred
 It may restrict the authority to vote to specified matters only and may direct the manner in
which the vote shall be cast.
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Denial of right to vote by proxy in the by-laws
 Stock corporations: The appointment of proxy is purely personal and an incident of ownership and,
therefore, by-laws provision prohibiting the use of proxy by stockholders is contrary to law and,
hence, null and void.
 Non-stock corporations: The right to vote by proxy, or even the right to vote itself may be denied to
members in the AoI or the by-laws, provided that the denial is NOT discriminatory.
 Reason for distinction: In a stock corporation, the stockholder has an investment that he is
protecting while the same is not true in a non-stock corporation.
Restrictions on right to vote by proxy in the by-laws
 Rule: The by-laws of a stock corporation may impose reasonable restrictions on the right to vote by
proxy, so long as the restrictions do not conflict with the law or deprive the stockholders of the right
thereby given them.
 Example of valid restrictions:
a) The by-laws may provide a deadline for the submission of the proxies before the
scheduled meeting
b) No proxy shall be used at more than one annual meeting of the corporation
c) The number of proxies to be designated by the stockholder
 When restriction is void: Only where restrictions operate unjustly, unreasonably, and oppressively
so as to work the disenfranchisement of a majority of the legal voters.
Proxy given to two or more persons
1. One proxy given to two or more persons
a) All must agree upon the vote.
b) If they cannot agree, rule of the majority applies.
 This is subject to the stockholder's instructions
2. Several proxies
a) Where proxies are dated
o Latest proxy revokes the earlier proxy.
b) Where proxies are undated
o If proxy is mailed to the corporation – the one having the latest time of day of
postmark
o If submitted in person – one presented latest.
 Dated proxies prevail over undated proxies
Revocation of proxies
 GR: Proxies, even though with irrevocable terms, have always been considered as revocable
 XPN: When the proxy is coupled with an interest
 Proxy has parted with value or incurred liability at the stockholders request, looking to the
exercise or the proxy as the means of reimbursement or indemnity.
 E.g. Where D borrows money from C and D pledges his certificates of stock to C for the
debt, giving C a written continuing proxy to attend and vote the shares at meetings of
stockholders until the debt is paid. It is clear that D cannot revoke the proxy unless he first
pays C.
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 Manner of revocation:
a) By a formal notice, written or orally
b) By appearance of the stockholder or member giving the proxy during the meeting
c) By issuing a subsequent proxy
d) By selling the shares
 Other rules:
a) Last proxy given revokes all previous proxies
b) Where proxies both undated, the one with latest postmark date is the effective one.
Duration of proxy
 GR: Proxies expire either:
a) By their own terms or
b) At a statutory time after date.
1. Limited and specific proxy
a) If the proxy is for a certain meeting: It can only be used at such meeting
b) If it is for a time stated: It can be used at any meeting within the period fixed not
exceeding 5 years at any one time.
2. Continuing proxy
 One which authorizes the holder thereof to vote for the absent stockholder or member at
any meeting of stockholders or members for a fixed or an indefinite period of time.
 If authorized "at any and all regular and special meetings" without providing any limitation
with respect to the period, it shall be valid only for 5 years from its date, whether or not it
is coupled with an interest.
 Note: As a matter of policy, the SEC is against the use of continuing proxies without specific periods
of time.
 Renewal of proxy: A proxy may be renewed for not more than 5 years for each renewal. (So
realistically a proxy can be perpetual by just renewing the same every 5 years)
VOTING TRUST AGREEMENT
Sec. 59. Voting trusts. – One or more stockholders of a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for
a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but
shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed
with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be
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transferable in the same manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of
the corporation in the same manner as any other corporate book or record: Provided, That both the transferor
and the trustee or trustees may exercise the right of inspection of all corporate books and records in
accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions
stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end
of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the
name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.
Jack’s Lecture: Voting Trust (Summary)
A stockholder can create a voting trust. What will happen is that the share of stock under his name will be
cancelled and will be issued in the name of the trustee. The VTA is valid only for 5 years. But, if this was
imposed as a condition in a loan, it will be valid for a longer period because the lender imposed that condition
to protect his interest especially if it is a big exposure. The bank will want to know what is happening so they
will insist that a bank officer should be given a voting trust and sit in the Board to find out what’s happening. If
the loan is for 10 years it can be for 10 years but if the loan is paid, automatically the VTA will lapse even if the
10 year period has not yet expired because the voting trust is merely to protect the interest of the bank. These
are different devices to accumulate votes, the proxies, the trusts. You can also have a pooling agreement
where 2 or more SH sign an agreement that they will vote their shares together, in the same way.
Voting trust agreement (VTA), defined
 It is an agreement in writing whereby one or more stockholders of a stock corporation transfer his or
their shares to any person or persons or to a corporation having authority to act as a trustee for the
purpose of vesting or conferring upon a trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding 5 years at any one time.
Rationale for VTA
 Such an agreement makes possible a unified control of the affairs of the corporation and consistent
policy by binding the SH to vote as a unit.
 It also makes it possible for a majority group of shareholders to dispose of the beneficial interest in a
large proportion of their shares and still retains control of the corporation through the voting
trustee.
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Purpose of VTA
 Principal purpose: It makes possible a unified control of the affairs of the corporation and a
consistent policy by binding stockholders to vote as a unit.
 Purposes held invalid:
a) To make profit for participating stockholders through contracts with the corporation
b) To interrupt the harmonious conduct of the corporate business
c) To secure employment and salaries for the contracting parties
d) To force minority stockholders out of a corporation
VTA as a corporate control device
 Principal control device: By this , groups may seek to gain or retain control over the management by
a combination of voting power.
How VTA works
1. VTA is executed.
2. Corporate secretary cancels the certificate of stock covered by the VTA and issues a new one in the
name of the trustee or trustees stating that they are issued pursuant to said agreement.
3. The transfer through VTA shall be reflected in the stock and transfer book with the trustee as the
new registered owner of the shares
4. Trustee(s) shall execute and deliver to the transferor a voting trust certificates (VTC), which shall be
transferable in the same manner and with the same effect as certificates of stock..
Pooling agreement, defined
 An agreement between 2 or more shareholders to vote their shares in the same way or as a unit.
Status of parties
 Voting trustee: VTA transfers only voting or other rights pertaining to the shares subject of the
agreement, or control over the stock, not the properties or assets of the corporation.
 Title to the shares conveyed is transferred to the trustee on the books of the corporation.
 The certificates of stock covering said shares are surrendered and cancelled and new
certificates are issued in the name of the voting trustee in which new certificates as well as
in the entry of transfer on the books it shall appear that they are issued pursuant to said
agreement.
 Transferring stockholder: VTA results in the separation of the voting rights of a stockholder from his
other rights.
 The transferring stockholder of a stock corporation parts with the voting power only but
retains the equitable or beneficial ownership of the stock.
 He has ceased to be stockholder of record, BUT he enjoys some other rights.
Rights retained by the transferring stockholder
1. Right of inspection of corporate books which he can exercise concurrently with the voting trustee.
2. Right to receive the dividends when they are collected by the trustee
3. Right to recover his stock at the expiration of the trust
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4. Other rights a stockholder may be entitled until the liquidation of the corporation.
 Note: Transferring stockholder is disqualified from being elected as director unless he retains at
least one share in his name on the books of the corporation.
Rights of the voting trustee
1. The trustee(s) shall possess the right to vote and other rights pertaining to the shares so transferred
and registered in his or their names subject to the terms and conditions of and for the period
specified in the agreement.
2. When he votes, he may vote in person or by proxy unless the agreement provides otherwise.
3. They may exercise, like the transferor, the rights of inspection of all corporate booked and records.
4. He is the legal title holder or owner of the shares so transferred under the agreement. Hence he can
be voted as he is qualified to be a director.
Voting Trust Certificate (VTC)
 The voting trustee executes and delivers to the stockholders VTC to show that the latter are, in
reality, the owners of the shares held by the voting trustee.
 Note: A subsequent purchaser of stock with full knowledge of the agreement takes it impressed with
the trust and is bound thereby.
 XPN: VTA without complying with the statutory requirements does not affect the right of
a subsequent transferee, to whom the stock has been transferred.
Limitations on VTA
1. It shall be good for a period not exceeding five (5) years at any one time BUT if required by a loan
agreement, the period may go beyond five (5) years but the trust shall automatically cease upon full
payment of the loan;
2. It must be in writing and duly notarized;
3. It shall not be entered to circumvent laws against monopolies and illegal combinations in
4. restraint of trade nor shall it be used for purposes of fraud;
5. A certified copy of such agreement shall be filed with the corporation and with the SEC, otherwise
said agreement is ineffective and unenforceable;
6. It shall be subject to examination by any stockholder of the corporation in the same manner as any
other corporate book or record: Provided that both the transferor and the trustee or trustees may
exercise the right of inspection of all corporate books and records in accordance with the provision
of the code;
7. Unless expressly renewed, all rights granted in a VTA shall automatically expire at the end of the
agreed period, and the voting trust certificates as well as the certificates of stock in the name of the
trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the
name of the transferors.
Cancellation of the VTA
 Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stocks
shall be reissued in the name of the transferors.
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Difference of voting trust and proxy
VOTING TRUST
Trustee acquires legal title to the shares of the
transferring stockholder
Generally, the agreement is irrevocable for a definite
and limited period of time.
Trustee can act in all meetings during the lifetime of
the VTA.
Trustee can vote and exercise all the rights of the
transferring stockholder even when the latter is
present.
A VTA must not exceed 5 years at any one time
except when the same is made a condition of a loan.
There is transfer of share
Filed with the SEC otherwise it is ineffective and
unenforceable.
The agreement must be notarized
The voting right is divorced from the ownership of
stocks
The trustee votes as owner rather than as mere agent
Trustee has a right of inspection of corporate books
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PROXY
Proxy has no legal title to the shares of the principal
Generally revocable except when coupled with
interest.
Proxy can only act at a specified meeting unless
otherwise provided (continuing)
Proxy can only vote if in the absence of the owner of
the stock.
Reason: Presence of SH in a meeting is an implied
revocation of the proxy.
A proxy is usually shorter in duration although it
cannot exceed 5 years at any one time
No transfer of share
Filed only with the Corporate secretary. Filing with
the SEC not needed.
The proxy need not be notarized
The right to vote is inherent and inseparable from the
right to stock ownership.
The proxy holder votes as agent
A proxy does not have such right to inspect corporate
books
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CAPITA STRUCTURE: STOCKS AND STOCKHOLDERS Other FIA provisions

1. Compliance with the required Filipino ownership of a corporation shall be determined on the basis
of outstanding capital stock whether fully paid or not, but only such stocks which are generally
GAMBOA V. TEVES CASE, JUNE 8, 2011 and OCT. 9, 2012 entitled to vote are considered.
2. For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
DEFINITION OF THE TERM "CAPITAL" IN SECTION 11, ARTICLE XII OF THE 1987 CONSTITUTION title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential.
Sec. 11, Art. XII (National Economy and Patrimony) of 1987 Constitution  Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot
 Section 11. No franchise, certificate, or any other form of authorization for the operation of a be considered held by Philippine citizens or Philippine nationals.
public utility shall be granted except to citizens of the Philippines or to corporations or associations 3. Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by Philippine nationals.
such citizens; x x x 4. Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
 It mandates the Filipinization of public utilities Constitution.
 The provision is an express recognition of the sensitive and vital position of public utilities both in  Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
the national economy and for national security. percent of the voting rights, is required.
 Purpose of the citizenship requirement: To prevent aliens from assuming control of public utilities,
which may be inimical to the national interest. EFFECTIVELY CONTROLLED BY FILIPINOS
Illustration
Capital in context of Sec. 11, Art. XII A corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned
 Refers only to shares of stock entitled to vote in the election of directors. by Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad
 In the present case only to common shares, and not to the total outstanding capital stock definition of the term "capital," such corporation would be considered compliant with the 40 percent
comprising both common and non-voting preferred shares. constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.999
 Refers to the voting stock or controlling interest of a corporation percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.
 GR: It applies only to common shares
 XPN: It may include preferred shares IF the preferred shares also have the right to vote in the In the example given, only the foreigners holding the common shares have voting rights in the election of
election of directors directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent,
exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of
PHILIPPINE NATIONAL UNDER FOREIGN INVESTMENT ACT the equity, cannot vote in the election of directors and hence, have no control over the public utility. This
1. Citizen of the Philippines starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the
2. Domestic partnership or association wholly owned by citizens of the Philippines Constitution, to place the control of public utilities in the hands of Filipinos. It also renders illusory the State
3. Corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the policy of an independent national economy effectively controlled by Filipinos.
capital stock outstanding and entitled to vote is owned AND held by citizens of the Philippines
4. Corporation organized abroad and registered as doing business in the Philippines under the PLDT Scenario
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and NOT entitled to vote at
35.73% by
entitled to vote is wholly owned by Filipinos Common PV: P5.00 any meeting of the
22.15% Filipino P70 per share
5. Trustee of funds for pension or other employee retirement or separation benefits, where the trustee Capital CSMV: P2,328.00 stockholders for the
of ACS 64.27% by dividend
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Stock per share election of directors or
Foreigner
Philippine nationals for any other purpose
6. Where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise: Have the exclusive
99.44% by
a) At least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of Serial PV: P10.00 right to vote for the
77.85% Filipino P1 per share
both corporations must be owned and held by citizens of the Philippines and Preferred CSMV: P10.92 - election of directors
of ACS 0.56% by dividend
b) At least sixty percent (60%) of the members of the Board of Directors of each of both Stock 11.06 per share and for all other
Foreigner
corporations must be citizens of the Philippines purposes.

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 THUS Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT.
 This directly contravenes the express command in Section 11, Article XII of the
Constitution
 PV - Par Value; CSMV - Current Stock Market Value
BENEFICIAL INTEREST NOT WITH FILIPINOS
 Beneficial interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.
Summary
1. Foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the sole right
to vote in the election of directors, and thus exercise control over PLDT;
2. Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and
thus do not exercise control over PLDT;
3. Preferred shares, 99.44% owned by Filipinos, have no voting rights;
4. Preferred shares earn only 1/70 of the dividends that common shares earn;
5. Preferred shares have twice the par value of common shares; and
6. Preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution.
SEC. 11, ART. XII IS SELF-EXECUTING
 Rule: Unless the contrary is clearly intended, the provisions of the Constitution should be considered
self-executing, as a contrary rule would give the legislature discretion to determine when, or
whether, they shall be effective.
 Reason: For if they are not treated as self-executing, the mandate of the fundamental law ratified by
the sovereign people can be easily ignored and nullified by Congress. Suffused with wisdom of the
ages is the unyielding rule that legislative actions may give breath to constitutional rights but
congressional inaction should not suffocate them.
SEC'S REGULATORY AND ADJUDICATIVE FUNCTIONS
 Under its regulatory functions: the SEC can be compelled by mandamus to perform its statutory
duty when it unlawfully neglects to perform the same.
 Under its adjudicative or quasi-judicial functions: the SEC can be also be compelled by mandamus
to hear and decide a possible violation of any law it administers or enforces when it is mandated by
law to investigate such violation.
SEC's related functions under the law
1. Sec. 17(4)of the Corporation Code: the SEC has the regulatory function to reject or disapprove the
Articles of Incorporation of any corporation where "the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution."
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2. Sec. 5(m) of the Securities Regulation Code: SEC is vested with the "power and function" to
"suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law."
3. Sec. 5(d) of the SRC: SEC is vested with the "power and function" to "investigate the activities of
persons to ensure compliance" with the laws and regulations that SEC administers or enforces.
GAMBOA V. TEVES CASE, OCT. 9, 2012
NO CHANGE OF ANY LONG-STANDING RULE; THUS, NO REDEFINITION OF THE TERM "CAPITAL"
 No long standing rule because for the past 75 years the Court did not interpret the word "capital."
Stock-swap transaction during the time of Justice Minister Estelito Mendoza
 Ruling: The resultant equity arrangement which would place ownership of 60% of the common
(voting) shares in the Japanese group, while retaining 60% of the total percentage of common and
preferred shares in Filipino hands would amount to circumvention of the principle of control by
Philippine stockholders that is implicit in the 60% Philippine nationality requirement in the
Constitution.
 Criteria used by Mendoza:
a) The criterion of beneficial ownership
b) In applying the same, the primordial consideration is situs of control
Force and effect of SEC's opinions
 Rule: It is the SEC as a collegial body, and not any of its legal officers, that is empowered to issue
opinions and approve rules and regulations.
 Effects:
a) The act of the individual Commissioners or legal officers of the SEC in issuing opinions that
have the effect of SEC rules or regulations is ultra vires.
b) Any opinion of individual Commissioners or SEC legal officers does not constitute a rule or
regulation of the SEC.
VOTING CONTROL TEST
 It uses only the voting stock to determine whether a corporation is a Philippine national.
GRANDFATHER RULE
 Compliance with the constitutional limitation(s) on engaging in nationalized activities must be
determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is
owned by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens.
 If such investing corporation is in turn owned to some extent by another investing corporation, the
same process must be observed. One must not stop until the citizenships of the individual or natural
stockholders of layer after layer of investing corporations have been established, the very essence of
the Grandfather Rule.
BENEFICIAL OWNERSHIP TEST
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 Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of
the voting rights, is required.
 Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution.
 The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine national."
DEFINITION OF "PHILIPPINE NATIONAL"
As to Foreign Investments Act (FIA)
 see discussion on first case
As to Omnibus Investments Code
 Definition of Philippine national same as FIA
 Article 48(3)26 of the OIC: No corporation which is not a ‘Philippine national’ shall do business in the
Philippines without first securing from the Board of Investments a written certificate to the effect
that such business or economic activity would not conflict with the Constitution or laws of the
Philippines.
Investment Incentives Act (Sept. 16, 1967)
 Philippine national means a corporation organized under the laws of the Philippines of which at least
sixty per cent of the capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines.
FOREIGN INVESTMENT ACT
 Foreign Investment Negative List A: It consists of "areas of activities reserved to Philippine nationals
by mandate of the Constitution and specific laws," where foreign equity participation in any
enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution
and other specific laws.
 To own and operate a public utility in the Philippines one must be a "Philippine national"
as defined in the FIA.
 The FIA is abundant notice to foreign investors to what extent they can invest in public
utilities in the Philippines.
 What is the effect of non-availment of incentives by the non-Philippine national corporation?
 Nothing. Mere non-availment of tax and fiscal incentives by a non-Philippine national
cannot exempt it from Section 11, Article XII of the Constitution regulating foreign
investments in public utilities.
RIGHT TO ELECT DIRECTORS, COUPLED WITH BENEFICIAL OWNERSHIP, TRANSLATES TO EFFECTIVE CONTROL
 Rule: Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential.
 It is therefore imperative that such requirement apply uniformly and across the board to all classes
of shares, regardless of nomenclature and category, comprising the capital of a corporation.
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60-40 Filipino ownership requirement applies even to non-voting rights
 Rules:
a) If a corporation, engaged in a partially nationalized industry, issues a mixture of common
and preferred non-voting shares, at least 60 percent of the common shares and at least
60 percent of the preferred non-voting shares must be owned by Filipinos.
b) Uniform application to each class share: The 60-40 ownership requirement in favor of
Filipino citizens must apply separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other class of shares.
 Rationale: Preferred shares, denied the right to vote in the election of directors, are anyway still
entitled to vote on the eight specific corporate matters mentioned above.
 Such uniform application to each class of shares insures that the "controlling interest" in public
utilities always lies in the hands of Filipino citizens.
 This addresses the worry that foreigners, owning most of the non-voting shares, will
exercise greater control over fundamental corporate matters requiring two-thirds or
majority vote of all shareholders.
LAST SENTENCE OF SECTION 11, ARTICLE XII OF THE CONSTITUTION
 Provision: The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines.
 Purpose: The provision ensures the limited participation of foreign investors in the governing body
of public utilities
 It mandates that:
a) The participation of foreign investors in the governing body of the corporation or
association shall be limited to their proportionate share in the capital of such entity; and
b) All officers of the corporation or association must be Filipino citizens.
FOREIGN INVESTMENTS IN THE PHILIPPINES
 Their (other SEA countries) solution is to make sure that those industries are in the hands of state
enterprises. So, in these countries, nationalization means the government takes over. And because
their governments are competent and honest enough to the public, that is the solution. :)
 THUS, Dr. Villegas’s argument that foreign investments in telecommunication companies like PLDT
are badly needed to save our ailing economy contradicts his own theory that the solution is for
government to take over these companies.
SUMMARY
 The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of
whose capital with voting rights belongs to Filipinos.
 The FIA’s implementing rules explain that "For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity.
Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential." In
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effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in Section
11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full
beneficial ownership. This is precisely because the right to vote in the election of directors, coupled
with full beneficial ownership of stocks, translates to effective control of a corporation.

 Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term "capital"
openly invites alien domination of economic activities reserved exclusively to Philippine nationals.
Therefore, respondents’ interpretation will ultimately result in handing over effective control of our
national economy to foreigners in patent violation of the Constitution, making Filipinos second-class
citizens in their own country.

Express Investment v. Bayantel, Dec. 5, 2012

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TO INCUR BONDED INDEBTEDNESS (Still Sec. 38)

 Corporation finances its operation by borrowing:
Sec. 38 a) Ordinary debts (loans, etc.) -> Only the BoD need to approve the transactions
When pre-emptive rights of SH is not available b) Increase bonded indebtedness -> Majority of BoD + 2/3 of SH
1. aaa  Bond: Written evidence of indebtedness secured by the general assets of the corporation.
2. aa  Disposed of by the debtor corporation to the public at large
3. Expressly mentioned in AoI

Denial of pre-emptive right

 AoI must be express as to such deprivation.
 Whether in original AoI or thru amendment
 Indicate in the 7th paragraph, AUTHORIZED CAPITAL CLAUSE.

REDUCE CAPITAL STOCK

 Requires FORMAL amendment of the AoI
 In 2/3 votes of SH in a meeting, 2/3 of what? Outstanding capital stock including voting and non-
voting rights
 How done?
a) Reduce number of shares
b) Reduce par value of shares
c) Reduce both number or par value

What would prompt to reduce capital stock?

1. In order that true value of the assets of the corporation will be reflected on the books
 Especially if assets suffered through depreciation
 Because: Assets = Liabilities + Legal Capital
 Yung assets mo bumaba na dahil nadepreciate na yung mga capital equipment na binili mo
gamit ang perang galing sa OCS. Effect: di na sila balance kasi yung legal capital hindi
bumaba pero yung assets bumaba na. Solution: Reduce your capital stock

2. When the corporation has more than enough capital to pursue or continue its present business
 Situation: There is surplus capital
 E.g. if initially 1M shares, but 600k outstanding shares is enough to keep the corporation
running. 400k is not needed so they are just reflected in books. What do you do? Reduce
capital stock through amendment.
 Thus, return the "reduced stock x par value" to SH through liquidating dividends.

3. To obviate losses suffered by the corporation in its operations.

 Assets = Liabilities + Legal Capital
 So the increase of liabilities entails increase in assets, but such is not the case so to remedy
such situation, reduce the legal capital instead.

SH's equity or net worth of corporation = Assets - Liabilities

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EXPRESS INVESTMENT V BAYANTEL
Bayantel -> 98.6% Bayantel Telecom Holdings Corp (BTHC)
BTHC -> 85.4% Lopez Group of companies
Transactions
1. Bayantel entered into several credit agreements with Express Investments III Private Ltd. and others
2. To secure said loans, Bayantel executed an Omnibus Agreement
3. Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in favor of the
lenders under the Omnibus Agreement
4. In the Assignment Agreement, Bayantel bound itself to assign, convey and transfer to the Collateral
Agent, the following properties as collateral security for the prompt and complete payment of its
obligations to the Omnibus Creditors
5. In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to an Indenture
dated July 22, 1999 that it entered into with The Bank of New York as trustee for the holders of said
notes.
6. Bayantel managed to make two interest payments, on January 15, 2000 and July 15, 2000, before it
defaulted on its obligation.
7. Foreseeing the impossibility of further meeting its obligations, Bayantel sent, in October 2001, a
proposal for the restructuring of its debts to the Bank Creditors and the Holders of Notes.
8. An Informal Steering Committee was formed
9. The members of the Informal Steering Committee are the assignees of the unsecured credits
extended to Bayantel
First Term Sheet: Bayantel suggested a 25% write-off of the principal owing to the Holders of Notes.
 Informal Steering Committee rejected the idea, but accepted Bayantel’s proposal to pay the
restructured debt, pari passu(equal treatment of debts), out of its cash flow.
 Bayantel continued to pay reduced interest on its debt to the Bank Creditors but stopped paying the
Holders of Notes starting July 17, 2000.
2003: US$674 million or P35.928 million
 Out of its total liabilities, Bayantel allegedly owes 43.2% or US$291 million (P15.539 billion) to the
Holders of the Notes.
 On July 25, 2003, The Bank of New York, as trustee for the Holders of the Notes, wrote Bayantel an
Acceleration Letter declaring immediately due and payable the principal, premium interest, and
other monetary obligations on all outstanding Notes.
 Then, on July 30, 2003, The Bank of New York filed a petition for the corporate rehabilitation of
Bayantel upon the instructions of the Informal Steering Committee.
Petitioners maintain that converting the unsustainable debt to 77.7% equity in Bayantel will not violate the
nationality requirement of the 1987 Constitution. They aver that the debts to domestic bank creditors account
is US$473 million or 70.18% of Bayantel’s total liabilities. Considering the substantial write-off of penalties and
default interest in the amount of US$34,044,553.00 and past due interest of US$25,243,381.07, petitioners
believe that it is only fair to accord the Financial Creditors greater equity in Bayantel to compensate for said
losses.
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Three kinds of debts of Bayantel
1. Those owed to secured Bank Creditors pursuant to the Omnibus Agreements (Omnibus Creditors) in
the total amount of US$334 million or P17.781 billion;
2. Those owed to Holders of the Senior Notes and Bank Creditors combined (Chattel Creditors),
comprising US$625 million, of which US$473 million (P25.214 billion) is principal and US$152 million
(P8.106 billion) is accrued unpaid interest; and
3. Those that Bayantel owed to persons other than Financial Creditors/unsecured creditors in the
amount of US$49 million or P2.608 billion.
According to The Bank of New York, out of the US$674 million that respondent owes its creditors under
groups 2 and 3 above, the amount outstanding under the Senior Notes represent 43.2% of its liabilities as of
May 31, 2003. Subsequently, negotiations for the restructuring of Bayantel’s debt reached an impasse when
the Informal Steering Committee insisted on a pari passu (proportional) treatment of the claims of both
secured and unsecured creditors.
Secured creditors challenged proportional treatment of debts
 The secured creditors likewise assailed the Rehabilitation Court’s June 28, 2004 Decision insofar as it
ordered the pari passu treatment of all claims against Bayantel. Said petitioners invoke a lien over
the cash flow and receivables of Bayantel by virtue of the Assignment Agreement.
The secured creditors agree with the appellate court in limiting the conversion of the unsustainable debt to a
maximum of 40% shares in Bayantel as more in keeping with the Constitution.
Ruling:
Third, petitioners fault the Court of Appeals for ruling that the debt-to-equity conversion rate of 77.7%, as
proposed by The Bank of New York, violates the Filipinization provision of the Constitution. Petitioners explain
that the acquisition of shares by foreign Omnibus and Financial Creditors shall be done, both directly and
indirectly in order to meet the control test principle under RA 704293 or the Foreign Investments Act of 1991.
Under the proposed structure, said creditors shall own 40% of the outstanding capital stock of the
telecommunications company on a direct basis, while the remaining 40% of shares shall be registered to a
holding company that shall retain, on a direct basis, the other 60% equity reserved for Filipino citizens.
Moreover, petitioners maintain that it is only fair to impose upon the Omnibus and Financial Creditors a bigger
equity conversion in Bayantel considering that petitioners will bear the bulk of the accrued interests and
penalties to be written off. Initially, the Rehabilitation Court approved the Receiver’s recommendation to
write-off interests and penalties in the amount of US$34,044,553.00. The Rehabilitation Court likewise
ordered a re-computation of past due interest in accordance with the rate proposed by the Receiver.
Following this, petitioners estimate the total unpaid accrued interest of Bayantel as of July 30, 2003 to be at
US$140,098,750.66 while the Rehabilitation Court arrived at the total amount of past due interest and
penalties of US$114,855,369.59 upon recomputation. This makes for a difference of US$25,243,381.07 which,
petitioners claim, represents an additional write-off to be borne by them for a total write-off of
US$59,287,934.07.
The provision adverted to is Article XII, Section 11 of the 1987 Constitution which states:
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SEC. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise,
certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the Philippines.
This provision explicitly reserves to Filipino citizens control over public utilities, pursuant to an overriding
economic goal of the 1987 Constitution: to "conserve and develop our patrimony" and ensure "a selfreliant
and independent national economy effectively controlled by Filipinos."94
In the recent case of Gamboa v. Teves, the Court settled once and for all the meaning of "capital" in the
above-quoted Constitutional provision limiting foreign ownership in public utilities. In said case, we held that
considering that common shares have voting rights which translate to control as opposed to preferred shares
which usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only
to common shares. However, if the preferred shares also have the right to vote in the election of directors,
then the term "capital" shall include such preferred shares because the right to participate in the control or
management of the corporation is exercised through the right to vote in the election of directors. In short, the
term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the
election of directors.
Applying this, two steps must be followed in order to determine whether the conversion of debt to equity in
excess of 40% of the outstanding capital stock violates the constitutional limit on foreign ownership of a public
utility:
1. First, identify into which class of shares the debt shall be converted, whether common shares,
preferred shares that have the right to vote in the election of directors or non-voting preferred
shares;
2. Second, determine the number of shares with voting right held by foreign entities prior to
conversion. If upon conversion, the total number of shares held by foreign entities exceeds 40% of
the capital stock with voting rights, the constitutional limit on foreign ownership is violated.
Otherwise, the conversion shall be respected.
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantel is that its
shareholders shall "relinquish the agreed-upon amount of common stock[s] as payment to Unsecured
Creditors as per the Term Sheet." Evidently, the parties intend to convert the unsustainable portion of
respondent's debt into common stocks, which have voting rights. If we indulge petitioners on their proposal,
the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of Bayantel, a public
P a g e | 101
utility company. This is precisely the scenario proscribed by the Filipinization provision of the Constitution.
Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion.
CASTILLO V. BALINGHASAY
 Petitioners and the respondents are stockholders of MCPI (Medical Center Parañaque, Inc.), with the
former holding Class "B" shares and the latter owning Class "A" shares.
Incorporation (1977)
SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (P2,000,000.00) PESOS,
Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of P100 each share, whereby
the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating stockholders shall be classified as
Class A shares while the other ONE THOUSAND unissued shares shall be considered as Class B shares. Only
holders of Class A shares can have the right to vote and the right to be elected as directors or as corporate
officers.
First amendment (1981)
SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (P5,000,000.00) PESOS. Only
holders of Class A shares have the right to vote and the right to be elected as directors or as corporate
officers.
 The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted
the right to vote and to be elected as directors or corporate officers only to holders of Class "A"
shares, holders of Class "B" stocks were granted the same rights and privileges as holders of Class
"A" stocks with respect to the payment of dividends.
Second amendment (1992)
 SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS
(P32,000,000.00). 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
During the meeting and election of directors
On February 9, 2001, the shareholders of MCPI held their annual stockholders’ meeting and election for
directors. During the course of the proceedings:
Respondent Rustico Jimenez, citing Article VII, as amended, 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.
 Note: 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, Jimenez 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 Article VII was null and void for
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depriving them, as Class "B" shareholders, of their right to vote and to be voted upon, in violation of the
Corporation Code (Batas Pambansa Blg. 68), as amended.
Ruling:
 The law referred to in the amendment to Article VII refers to the Corporation Code and no other
law.
 Section 6 of the Corporation Code being deemed written into Article VII of the Articles of
Incorporation of MCPI, 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.
 No violation of the non-impairment clause
 Section 148 of the Corporation Code expressly provides that it shall apply to corporations
in existence at the time of the effectivity of the Code.
REPUBLIC PLANTERS BANK v. AGANA
 Private respondents Robes-Francisco Realty and Development Corporation (hereafter, "the
Corporation") and Adalia F. Robes filed in the court a quo, an action for specific performance to
compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to pay
1% quarterly interest thereon as quarterly dividend owing them under the terms and conditions of
the certificates of stock.
 RFRD Corp secured a loan from petitioner in the amount of 120K.
 As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent
Corporation, through its officers then, private respondent Robes.
 Instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00,
petitioner lent such amount partially in the form of money and partially in the form of stock
certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or
for P4,000.00 each, for a total of P8,000.00.
 Terms and conditions of CS:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating.
2. That such preferred shares may be redeemed, by the system of drawing lots, at any time
after two (2) years from the date of issue at the option of the Corporation. x x x."
 On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint
anchored on private respondents' alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and conditions of the stock
certificates. Private respondents attached to their complaint, a letter-demand dated January 5, 1979
which, significantly, was not formally offered in evidence.
Ruling:
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PREFERRED SHARES
 One which entitles the holder thereof to certain preferences over the holders of common stock.
 The preferences are designed to induce persons to subscribe for shares of a corporation.
Forms of shares of stocks
1. Preferred shares as to assets
 A share which gives the holder thereof preference in the distribution of the assets of the
corporation in case of liquidation
2. Preferred shares as to dividends
 A share the holder of which is entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the holders of common stock.
 Note: There is no guaranty, however, that the share will receive any dividends.
Other considerations
1. Preferences granted to preferred stockholders do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right of the former being always
subordinate to the latter.
2. Dividends are thus payable only when there are profits earned by the corporation and as a general
rule, even if there are existing profits, the board of directors has the discretion to determine
whether or not dividends are to be declared.
3. Shareholders, both common and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts and liabilities are fully paid.
REDEEMABLE SHARES
 Shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of
either issuing corporation, or the stockholder, or both at a certain redemption price.
 A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation.
 Redemption of shares even if there are no unrestricted retained earnings on the books of the
corporation is ALLOWED.
 This is an exception to the general rule that the corporation cannot purchase its own
shares except out of current retained earnings.
 Condition for redemption: The corporation has, after such redemption, assets in its books to cover
debts and liabilities inclusive of capital stock.
 When redemption not allowed:
a) Where the corporation is insolvent; or
b) If such redemption will cause insolvency or inability of the corporation to meet its debts as
they mature.
RPB CANNOT BE COMPELLED TO REDEEM THE PREFERRED SHARES ISSUED TO THE PRIVATE RESPONDENT
Reasons:
1. While the stock certificate does allow redemption, the option to do so was clearly vested in the
petitioner bank. (Optional redemption)
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 Thus, except as otherwise provided in the stock certificate, the redemption rests entirely Pre-subscription Agreement
with the corporation and the stockholder is without right to either compel or refuse the  Ongs and the Tius agreed to maintain equal shareholdings in FLADC.
redemption of its stock.
Ongs in PSA
2. Redemption of preferred shares was prohibited for a just and valid reason. 1. Subscribe to 1,000,000 shares at a par value of P100.00
 Said petitioner has been suffering from chronic reserve deficiency 2. Entitled to nominate the President, the Secretary and six directors (including the chairman) to the
 Central Bank prohibited RPB from redeeming any preferred share, on the ground that said board of directors of FLADC.
redemption would reduce the assets of the Bank to the prejudice of its depositors and 3. Right to manage and operate the mall.
creditors.
Tius in PSA
RESPONDENT HAS NOT RIGHT TO RECEIVE "INTEREST BEARING STOCKS" 1. Subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing
 Interest bearing stocks: stocks issued by a corporation under an agreement to pay a certain rate of subscription of 450,200 shares.
interest thereon 2. Entitled to nominate the Vice-President and the Treasurer plus five directors
 Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the
issuance of any stock dividend without the approval of stockholders, representing not less than two- PAYMENT OF SHARES
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the Ongs
purpose. 1. P100 million in cash (1M shares)
 "Interest bearing stocks," on which the corporation agrees absolutely to pay interest before 2. Paid another P70 million to FLADC and P20 million to the Tius over and above their P100 million
dividends are paid to common stockholders, is legal only when construed as requiring payment of investment -> to settle the P190 million mortgage indebtedness of FLADC to PNB.
interest as dividends from net earnings or surplus only.
Tius
ACTION HAS ALREADY PRESCRIBED 1. Contribute to FLADC:
 The letter-demand, significantly, was not formally offered in evidence, nor were any other evidence a) 4-storey building - 20M - 200K shares
of demand presented. b) 1st parcel of land - 30M - 300K shares
 The only time the private respondents saw it fit to assert their rights, if any, to the preferred shares c) 2nd parcel of land - 49.8M - 49,800 shares should have been 4.98M
of stock, was after the lapse of almost eighteen years. The same clearly indicates that the right of 2. a four-storey building and two parcels of land respectively valued at P20 million (for 200,000 shares),
the private respondents to any relief under the law has already prescribed. P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional
 Barred by laches: Laches has been defined as the failure or neglect, for an unreasonable length of 549,800 stock subscription therein.
time, to do that which by exercising due diligence could or should have been done earlier;
 It is negligence or omission to assert a right within a reasonable time, warranting a Problem: Tius rescinded the PSA
presumption that the party entitled to assert it either has abandoned it or declined to 1. The Tius accused the Ongs of
assert it. a) Refusing to credit to them the FLADC shares covering their real property contributions;
 Considering that the terms and conditions set forth in the stock certificate clearly indicate b) Preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their
that redemption of the preferred shares may be made at any time after the lapse of two duties as Vice-President and Treasurer, respectively, and
years from the date of issue, private respondents should have taken it upon themselves, c) Refusing to give them the office spaces agreed upon.
after the lapse of the said period, to inquire from the petitioner the reason why the said 2. Ong's defense
shares have not been redeemed. a) They wanted the Tius to sign the checks of the corporation and undertake their
management duties but that the Tius shied away from helping them manage the
ONG v. TIU, April 8, 2003 corporation.
 Construction of Masagana Citimall in Pasay City was threatened with stoppage and incompletion b) The Ongs pointed out that the Tius did in fact already have existing executive offices in the
when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by the mall since they owned it 100% before the Ongs came in. What the Tius really wanted were
Tius, encountered dire financial difficulties. new offices which were anyway subsequently provided to them.
 To stave off foreclosure of the mortgage on the two lots where the mall was being built, Tius invited c) Although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in
Ongs to invest. favor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and
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documentary stamp tax. Without the payment thereof, the SEC would not approve the
valuation of the Tius' property contribution (as opposed to cash contribution). This, in
turn, would make it impossible to secure a new Transfer Certificate of Title (TCT) over the
property in FLADC's name. In any event, it was easy for the Tius to simply pay the said
transfer taxes and, after the new TCT was issued in FLADC's name, they could then be
given the corresponding shares of stocks.
d) On the 151 square-meter property, the Tius never executed a deed of assignment in favor
of FLADC. The Tius initially claimed that they could not as yet surrender the TCT because it
was "still being reconstituted" by the Lichaucos from whom the Tius bought it. The Ongs
later on discovered that FLADC had in reality owned the property all along, even before
their Pre-Subscription Agreement was executed in 1994. This meant that the 151 square-
meter property was at that time already the corporate property of FLADC for which the
Tius were not entitled to the issuance of new shares of stock.
ISSUE: Whether the Tius could legally rescind the Pre-Subscription Agreement.
Tius not real party in interest
 Considering therefore that the real contracting parties to the subscription agreement were FLADC
and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in
their personal capacities will not prosper.
RESCISSION WRONG REMEDY
 However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume
their positions, rescission due to breach of contract is definitely the wrong remedy for their
personal grievances.
 The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate
intra-corporate remedies, other than rescission, in situations like this.
 Rescission is certainly not one of them, specially if the party asking for it has no legal personality to
do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on
extremely dangerous ground because it will allow just any stockholder, for just about any real or
imagined offense, to demand rescission of his subscription and call for the distribution of some
part of the corporate assets to him without complying with the requirements of the Corporation
Code.
MAIN REASON WHY RESCISSION IS NOT PROPER
 Rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of
assets and property under the Corporation Code.
TRUST FUND DOCTRINE
 Trust Fund Doctrine: Subscriptions to the capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of their claims.
 This doctrine is the underlying principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution of corporate capital only in three
instances:
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a) Amendment of the Articles of Incorporation to reduce the authorized capital stock,
b) Purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and
c) Dissolution and eventual liquidation of the corporation.
 Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its
own shares and in Section 122 on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.
Ruling:
The rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the
capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation
Code, since rescission of a subscription agreement is not one of the instances when distribution of capital
assets and property of the corporation is allowed.
The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such action
never complied with the formal requirements for decrease of capital stock under Section 33 of the
Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurer's affidavit and no proof that said decrease will not
prejudice the creditors' rights. On the contrary, all their pleadings contained were alleged acts of violations by
the Ongs to justify an order of rescission.
ANALYSIS: If rescission is denied, will injustice be inflicted on any of the parties? The answer is no because
the financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other
hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because the Ongs will
find themselves out in the streets with nothing but the money they had in 1994 while the Tius will not only
enjoy a windfall estimated to be anywhere from P450 million to P900 million31 but will also take over an
extremely profitable business without much effort at all.
BOTH IN PARI DELICTO
Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1,
2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed
breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging from the
comparative gravity of the acts separately committed by each group, we find that the Ongs' acts were
relatively tame vis-à-vis those committed by the Tius in not surrendering FLADC funds to the corporation and
diverting corporate income to their own MATTERCO account. The Ongs were right in not issuing to the Tius
the shares corresponding to the four-story building and the 1,902.30 square-meter lot because no title for it
could be issued in FLADC's name, owing to the Tius' refusal to pay the transfer taxes. And as far as the 151
square-meter lot was concerned, why should FLADC issue additional shares to the Tius for property already
owned by the corporation and which, in the final analysis, was already factored into the shareholdings of the
Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one" on the
Ongs because that was where the problem precisely started. It is clear that, when the finances of FLADC
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improved considerably after the equity infusion of the Ongs, the Tius started planning to take over the
corporation again and exclude the Ongs from it. It appears that the Tius' refusal to pay transfer taxes might
not have really been at all unintentional because, by failing to pay that relatively small amount which they
could easily afford, the Tius should have expected that they were not going to be given the corresponding
shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other words, the Tius created
a problem then used that same problem as their pretext for showing their partners the door. In the process,
they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from
an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable
damage of the Ongs, FLADC and its creditors.

SALMON DEXTER CO V. UNSON, March 17, 1925

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