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.R. No. L-6776 May 21, 1955 three Trustees for the use of such associations; .

. .. (Printed Rec. App. p. 5.)


THE REGISTER OF DEEDS OF RIZAL, petitioner-
appellee, and (2) that the refusal of the Register of Deeds violates
vs. the freedom of religion clause of our Constitution [Art. III,
UNG SIU SI TEMPLE, respondent-appellant. Sec. 1(7)].

Alejo F. Candido for appellant. We are of the opinion that the Court below has correctly
Office of the Solicitor General Querube C. Makalintal and held that in view of the absolute terms of section 5, Title
Solicitor Felix V. Makasiar for appellee. XIII, of the Constitution, the provisions of Act No. 271 of
the old Philippine Commission must be deemed repealed
REYES, J.B.L., J.: since the Constitution was enacted, in so far as
incompatible therewith. In providing that, —
The Register of Deeds for the province of Rizal refused to
accept for record a deed of donation executed in due form Save in cases of hereditary succession, no
on January 22, 1953, by Jesus Dy, a Filipino citizen, private agricultural land shall be transferred or
conveying a parcel of residential land, in Caloocan, Rizal, assigned except to individuals, corporations or
known as lot No. 2, block 48-D, PSD-4212, G.L.R.O. associations qualified to acquire or hold lands of
Record No. 11267, in favor of the unregistered religious the public domain in the Philippines,
organization "Ung Siu Si Temple", operating through
three trustees all of Chinese nationality. The donation was the Constitution makes no exception in favor of religious
duly accepted by Yu Juan, of Chinese nationality, founder associations. Neither is there any such saving found in
and deaconess of the Temple, acting in representation sections 1 and 2 of Article XIII, restricting the acquisition
and in behalf of the latter and its trustees. of public agricultural lands and other natural resources to
"corporations or associations at least sixty per centum of
The refusal of the Registrar was elevated en the capital of which is owned by such citizens" (of the
Consultato the IVth Branch of the Court of First Instance Philippines).
of Manila. On March 14, 1953, the Court upheld the action
of the Rizal Register of Deeds, saying: The fact that the appellant religious organization has no
capital stock does not suffice to escape the Constitutional
The question raised by the Register of Deeds in inhibition, since it is admitted that its members are of
the above transcribed consulta is whether a deed foreign nationality. The purpose of the sixty per centum
of donation of a parcel of land executed in favor requirement is obviously to ensure that corporations or
of a religious organization whose founder, associations allowed to acquire agricultural land or to
trustees and administrator are Chinese citizens exploit natural resources shall be controlled by Filipinos;
should be registered or not. and the spirit of the Constitution demands that in the
absence of capital stock, the controlling membership
It appearing from the record of the Consulta that should be composed of Filipino citizens.
UNG SIU SI TEMPLE is a religious organization
whose deaconess, founder, trustees and To permit religious associations controlled by non-
administrator are all Chinese citizens, this Court Filipinos to acquire agricultural lands would be to drive the
is of the opinion and so hold that in view of the opening wedge to revive alien religious land holdings in
provisions of the sections 1 and 5 of Article XIII of this country. We can not ignore the historical fact that
the Constitution of the Philippines limiting the complaints against land holdings of that kind were among
acquisition of land in the Philippines to its citizens, the factors that sparked the revolution of 1896.
or to corporations or associations at least sixty
per centum of the capital stock of which is owned As to the complaint that the disqualification under article
by such citizens adopted after the enactment of XIII is violative of the freedom of religion guaranteed by
said Act No. 271, and the decision of the Article III of the Constitution, we are by no means
Supreme Court in the case of Krivenko vs. the convinced (nor has it been shown) that land tenure is
Register of Deeds of Manila, the deed of donation indispensable to the free exercise and enjoyment of
in question should not be admitted for admitted religious profession or worship; or that one may not
for registration. (Printed Rec. App. pp 17-18). worship the Deity according to the dictates of his own
conscience unless upon land held in fee simple.
Not satisfied with the ruling of the Court of First Instance,
counsel for the donee Uy Siu Si Temple has appealed to The resolution appealed from is affirmed, with costs
this Court, claiming: (1) that the acquisition of the land in against appellant.
question, for religious purposes, is authorized and
permitted by Act No. 271 of the old Philippine
Commission, providing as follows:

SECTION 1. It shall be lawful for all religious


associations, of whatever sort or denomination,
whether incorporated in the Philippine Islands or
in the name of other country, or not incorporated
at all, to hold land in the Philippine Islands upon
which to build churches, parsonages, or
educational or charitable institutions.

SEC. 2. Such religious institutions, if not


incorporated, shall hold the land in the name of
The essential facts are not in dispute. On November
4,1946, the Pacific Airways Corporation registered its
Section 11. No franchise, certificate, or any other form of articles of incorporation with the Securities and
authorization for the operation of a public utility shall be Exchanged Commission. The article were prepared and
granted except to citizens of the Philippines or to the registration was effected by the accused, who was in
corporations or associations organized under the laws of fact the organizer of the corporation. The article stated
the Philippines, at least sixty per centum of whose capital that the primary purpose of the corporation was to carry
is owned by such citizens; nor shall such franchise, on the business of a common carrier by air, land or water;
certificate, or authorization be exclusive in character or for that its capital stock was P1,000,000, represented by
a longer period than fifty years. Neither shall any such 9,000 preferred and 100,000 common shares, each
franchise or right be granted except under the condition preferred share being of the par value of p100 and entitled
that it shall be subject to amendment, alteration, or repeal to 1/3 vote and each common share, of the par value of
by the Congress when the common good so requires. The P1 and entitled to one vote; that the amount capital stock
State shall encourage equity participation in public utilities actually subscribed was P200,000, and the names of the
by the general public. The participation of foreign subscribers were Arsenio Baylon, Eruin E. Shannahan,
investors in the governing body of any public utility Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and
enterprise shall be limited to their proportionate share in William H. Quasha, the first being a Filipino and the other
its capital, and all the executive and managing officers of five all Americans; that Baylon's subscription was for
such corporation or association must be citizens of the 1,145 preferred shares, of the total value of P114,500,
Philippines. and for 6,500 common shares, of the total par value of
P6,500, while the aggregate subscriptions of the
American subscribers were for 200 preferred shares, of
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
the total par value of P20,000, and 59,000 common
shares, of the total par value of P59,000; and that Baylon
vs. and the American subscribers had already paid 25 per
cent of their respective subscriptions. Ostensibly the
WILLIAM H. QUASHA, defendant-appellant. owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon
nevertheless did not have the controlling vote because of
the difference in voting power between the preferred
Jose P. Laurel for appellant and William H. Quasha in his shares and the common shares. Still, with the capital
own behalf. structure as it was, the article of incorporation were
accepted for registration and a certificate of incorporation
was issued by the Securities and Exchange Commission.
Office of the Solicitor General Juan R. Liwag and
Assistant Solicitor General Francisco Carreon for
appellee.

There is no question that Baylon actually subscribed to


60.005 per cent of the subscribed capital stock of the
corporation. But it is admitted that the money paid on his
REYES, J.:
subscription did not belong to him but to the Americans
subscribers to the corporate stock. In explanation, the
accused testified, without contradiction, that in the
process of organization Baylon was made a trustee for the
William H. Quasha, a member of the Philippine bar, was American incorporators, and that the reason for making
charged in the Court of First Instance of Manila with the Baylon such trustee was as follows:
crime of falsification of a public and commercial document
in that, having been entrusted with the preparation and
registration of the article of incorporation of the Pacific
Airways Corporation, a domestic corporation organized
Q. According to this article of incorporation Arsenio
for the purpose of engaging in business as a common
Baylon subscribed to 1,135 preferred shares with a total
carrier, he caused it to appear in said article of
value of P1,135. Do you know how that came to be?
incorporation that one Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 per cent
of the subscribed capital stock of the corporation when in
reality, as the accused well knew, such was not the case,
the truth being that the owner of the portion of the capital A. Yes.
stock subscribed to by Baylon and the money paid
thereon were American citizen whose name did not
appear in the article of incorporation, and that the purpose
for making this false statement was to circumvent the The people who were desirous of forming the corporation,
constitutional mandate that no corporation shall be whose names are listed on page 7 of this certified copy
authorize to operate as a public utility in the Philippines came to my house, Messrs. Shannahan, Onstott,
unless 60 per cent of its capital stock is owned by O'Bannon, Caven, Perry and Anastasakas one evening.
Filipinos. There was considerable difficulty to get them all together
at one time because they were pilots. They had difficulty
in deciding what their respective share holdings would be.
Onstott had invested a certain amount of money in
Found guilty after trial and sentenced to a term of airplane surplus property and they had obtained a
imprisonment and a fine, the accused has appealed to considerable amount of money on those planes and as I
this Court. recall they were desirous of getting a corporation formed
right away. And they wanted to have their respective
shares holdings resolved at a latter date. They stated that
they could get together that they feel that they had no time
to settle their respective share holdings. We discussed crime of falsification under the above article of the
the matter and finally it was decided that the best way to Revised Penal Code.
handle the things was not to put the shares in the name
of anyone of the interested parties and to have someone
act as trustee for their respective shares holdings. So we
looked around for a trustee. And he said "There are a lot
Now, as we see it, the falsification imputed in the accused
of people whom I trust." He said, "Is there someone
in the present case consists in not disclosing in the
around whom we could get right away?" I said, "There is articles of incorporation that Baylon was a mere trustee (
Arsenio. He was my boy during the liberation and he or dummy as the prosecution chooses to call him) of his
cared for me when i was sick and i said i consider him my
American co-incorporators, thus giving the impression
friend." I said. They all knew Arsenio. He is a very kind
that Baylon was the owner of the shares subscribed to by
man and that was what was done. That is how it came
him which, as above stated, amount to 60.005 per cent of
about.
the sub-scribed capital stock. This, in the opinion of the
trial court, is a malicious perversion of the truth made with
the wrongful intent circumventing section 8, Article XIV of
the Constitution, which provides that " no franchise,
Defendant is accused under article 172 paragraph 1, in certificate, or any other form of authorization for the
connection with article 171, paragraph 4, of the Revised operation of a public utility shall be granted except to
Penal Code, which read: citizens of the Philippines or to corporation or other
entities organized under the law of the Philippines, sixty
per centum of the capital of which is owned by citizens of
the Philippines . . . ." Plausible though it may appear at
first glance, this opinion loses validity once it is noted that
ART. 171. Falsification by public officer, employee, or
notary or ecclesiastic minister. — The penalty of prision it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit
mayor and a fine not to exceed 5,000 pesos shall be
the mere formation of a public utility corporation without
imposed upon any public officer, employee, or notary
60 per cent of its capital being owned by the Filipinos, a
who, taking advantage of his official position, shall falsify
mistaken belief which has induced the lower court to that
a document by committing any of the following acts:
the accused was under obligation to disclose the whole
truth about the nationality of the subscribed capital stock
of the corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators, and
xxx xxx xxx that in not making such disclosure defendant's intention
was to circumvent the Constitution to the detriment of the
public interests. Contrary to the lower court's assumption,
the Constitution does not prohibit the mere formation of a
4. Making untruthful statements in a narration of facts. public utility corporation without the required formation of
Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation
of a public utility to a corporation already in existence but
without the requisite proportion of Filipino capital. This is
ART. 172. Falsification by private individuals and use of obvious from the context, for the constitutional provision
falsified documents. — The penalty of prision correccional in question qualifies the terms " franchise", "certificate", or
in its medium and maximum period and a fine of not more "any other form of authorization" with the phrase "for the
than 5,000 pesos shall be imposed upon: operation of a public utility," thereby making it clear that
the franchise meant is not the "primary franchise" that
invest a body of men with corporate existence but the
"secondary franchise" or the privilege to operate as a
xxx xxx xxx public utility after the corporation has already come into
being.

1. Any private individual who shall commit any of the


falsifications enumerated in the next preceding article in If the Constitution does not prohibit the mere formation of
any public or official document or letter of exchange or a public utility corporation with the alien capital, then how
any other kind of commercial document. can the accused be charged with having wrongfully
intended to circumvent that fundamental law by not
revealing in the articles of incorporation that Baylon was
a mere trustee of his American co-incorporation and that
for that reason the subscribed capital stock of the
Commenting on the above provision, Justice Albert, in his corporation was wholly American? For the mere formation
well-known work on the Revised Penal Code ( new of the corporation such revelation was not essential, and
edition, pp. 407-408), observes, on the authority of U.S. the Corporation Law does not require it. Defendant was,
vs. Reyes, (1 Phil., 341), that the perversion of truth in the therefore, under no obligation to make it. In the absence
narration of facts must be made with the wrongful intent of such obligation and of the allege wrongful intent,
of injuring a third person; and on the authority of U.S. vs. defendant cannot be legally convicted of the crime with
Lopez (15 Phil., 515), the same author further maintains which he is charged.
that even if such wrongful intent is proven, still the
untruthful statement will not constitute the crime of
falsification if there is no legal obligation on the part of the
narrator to disclose the truth. Wrongful intent to injure a
third person and obligation on the part of the narrator to It is urged, however, that the formation of the corporation
disclose the truth are thus essential to a conviction for a with 60 per cent of its subscribed capital stock appearing
in the name of Baylon was an indispensable preparatory
step to the subversion of the constitutional prohibition and Section 11. (1) The ownership and management of mass
the laws implementing the policy expressed therein. This media shall be limited to citizens of the Philippines, or to
view is not correct. For a corporation to be entitled to corporations, cooperatives or associations, wholly-owned
operate a public utility it is not necessary that it be and managed by such citizens.
organized with 60 per cent of its capital owned by Filipinos
from the start. A corporation formed with capital that is
entirely alien may subsequently change the nationality of
its capital through transfer of shares to Filipino citizens. The Congress shall regulate or prohibit monopolies in
conversely, a corporation originally formed with Filipino commercial mass media when the public interest so
capital may subsequently change the national status of
requires. No combinations in restraint of trade or unfair
said capital through transfer of shares to foreigners. What
competition therein shall be allowed.
need is there then for a corporation that intends to operate
a public utility to have, at the time of its formation, 60 per
cent of its capital owned by Filipinos alone? That condition
may anytime be attained thru the necessary transfer of
stocks. The moment for determining whether a (2) The advertising industry is impressed with public
corporation is entitled to operate as a public utility is when interest, and shall be regulated by law for the protection
it applies for a franchise, certificate, or any other form of of consumers and the promotion of the general welfare.
authorization for that purpose. And that can be done after
the corporation has already come into being and not while
it is still being formed. And at that moment, the corporation
must show that it has complied not only with the Only Filipino citizens or corporations or associations at
requirement of the Constitution as to the nationality of its least seventy per centum of the capital of which is owned
capital, but also with the requirements of the Civil Aviation by such citizens shall be allowed to engage in the
Law if it is a common carrier by air, the Revised advertising industry.
Administrative Code if it is a common carrier by water, and
the Public Service Law if it is a common carrier by land or
other kind of public service.

The participation of foreign investors in the governing


body of entities in such industry shall be limited to their
proportionate share in the capital thereof, and all the
Equally untenable is the suggestion that defendant should executive and managing officers of such entities must be
at least be held guilty of an "impossible crime" under citizens of the Philippines.
article 59 of the Revised Penal Code. It not being possible
to suppose that defendant had intended to commit a crime
for the simple reason that the alleged constitutional
prohibition which he is charged for having tried to
circumvent does not exist, conviction under that article is
out of the question.

The foregoing consideration can not but lead to the


conclusion that the defendant can not be held guilty of the
crime charged. The majority of the court, however, are
also of the opinion that, even supposing that the act
imputed to the defendant constituted falsification at the
time it was perpetrated, still with the approval of the Party
Amendment to the Constitution in March, 1947, which
placed Americans on the same footing as Filipino citizens
with respect to the right to operate public utilities in the
Philippines, thus doing away with the prohibition in section
8, Article XIV of the Constitution in so far as American
citizens are concerned, the said act has ceased to be an
offense within the meaning of the law, so that defendant
can no longer be held criminally liable therefor.

In view of the foregoing, the judgment appealed from is


reversed and the defendant William H. Quasha acquitted,
with costs de oficio.
FILIPINAS COMPAÑIA DE SEGUROS, petitioner, corporation is determine by the character or citizenship of
its controlling stockholders.
vs.

CHRISTERN, HUENEFELD and CO., INC., respondent.


There is no question that majority of the stockholders of
the respondent corporation were German subjects. This
being so, we have to rule that said respondent became an
enemy corporation upon the outbreak of the war between
Ramirez and Ortigas for petitioner.
the United States and Germany. The English and
American cases relied upon by the Court of Appeals have
Ewald Huenefeld for respondent. lost their force in view of the latest decision of the
Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which
PARAS, C.J.: the controls test has been adopted. In "Enemy
Corporation" by Martin Domke, a paper presented to the
Second International Conference of the Legal Profession
held at the Hague (Netherlands) in August. 1948 the
following enlightening passages appear:
On October 1, 1941, the respondent corporation,
Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner
,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in a Since World War I, the determination of enemy nationality
building located at No. 711 Roman Street, Binondo of corporations has been discussion in many countries,
Manila. On February 27, 1942, or during the Japanese belligerent and neutral. A corporation was subject to
military occupation, the building and insured merchandise enemy legislation when it was controlled by enemies,
were burned. In due time the respondent submitted to the namely managed under the influence of individuals or
petitioner its claim under the policy. The salvage goods corporations, themselves considered as enemies. It was
were sold at public auction and, after deducting their the English courts which first the Daimler case applied this
value, the total loss suffered by the respondent was fixed new concept of "piercing the corporate veil," which was
at P92,650. The petitioner refused to pay the claim on the adopted by the peace of Treaties of 1919 and the Mixed
ground that the policy in favor of the respondent had Arbitral established after the First World War.
ceased to be in force on the date the United States
declared war against Germany, the respondent
Corporation (though organized under and by virtue of the
laws of the Philippines) being controlled by the German The United States of America did not adopt the control
subjects and the petitioner being a company under test during the First World War. Courts refused to
American jurisdiction when said policy was issued on recognized the concept whereby American-registered
October 1, 1941. The petitioner, however, in pursuance of corporations could be considered as enemies and thus
the order of the Director of Bureau of Financing, Philippine subject to domestic legislation and administrative
Executive Commission, dated April 9, 1943, paid to the measures regarding enemy property.
respondent the sum of P92,650 on April 19, 1943.

World War II revived the problem again. It was known that


The present action was filed on August 6, 1946, in the German and other enemy interests were cloaked by
Court of First Instance of Manila for the purpose of domestic corporation structure. It was not only by legal
recovering from the respondent the sum of P92,650 ownership of shares that a material influence could be
above mentioned. The theory of the petitioner is that the exercised on the management of the corporation but also
insured merchandise were burned up after the policy by long term loans and other factual situations. For that
issued in 1941 in favor of the respondent corporation has reason, legislation on enemy property enacted in various
ceased to be effective because of the outbreak of the war countries during World War II adopted by statutory
between the United States and Germany on December provisions to the control test and determined, to various
10, 1941, and that the payment made by the petitioner to degrees, the incidents of control. Court decisions were
the respondent corporation during the Japanese military rendered on the basis of such newly enacted statutory
occupation was under pressure. After trial, the Court of provisions in determining enemy character of domestic
First Instance of Manila dismissed the action without corporation.
pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of
Manila was affirmed, with costs. The case is now before
us on appeal by certiorari from the decision of the Court
of Appeals. The United States did not, in the amendments of the
Trading with the Enemy Act during the last war, include
as did other legislations the applications of the control test
and again, as in World War I, courts refused to apply this
concept whereby the enemy character of an American or
The Court of Appeals overruled the contention of the neutral-registered corporation is determined by the
petitioner that the respondent corporation became an enemy nationality of the controlling stockholders.
enemy when the United States declared war against
Germany, relying on English and American cases which
held that a corporation is a citizen of the country or state
by and under the laws of which it was created or
organized. It rejected the theory that nationality of private
Measures of blocking foreign funds, the so called freezing In the case of an ordinary fire policy, which grants
regulations, and other administrative practice in the insurance only from year, or for some other specified term
treatment of foreign-owned property in the United States it is plain that when the parties become alien enemies, the
allowed to large degree the determination of enemy contractual tie is broken and the contractual rights of the
interest in domestic corporations and thus the application parties, so far as not vested. lost. (Vance, the Law on
of the control test. Court decisions sanctioned such Insurance, Sec. 44, p. 112.)
administrative practice enacted under the First War
Powers Act of 1941, and more recently, on December 8,
1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee
The respondent having become an enemy corporation on
Finanz Korporation, A. G., dealing with a Swiss
December 10, 1941, the insurance policy issued in its
corporation allegedly controlled by German interest, the
favor on October 1, 1941, by the petitioner (a Philippine
Court: "The property of all foreign interest was placed
corporation) had ceased to be valid and enforcible, and
within the reach of the vesting power (of the Alien since the insured goods were burned after December 10,
Property Custodian) not to appropriate friendly or neutral 1941, and during the war, the respondent was not entitled
assets but to reach enemy interest which masqueraded
to any indemnity under said policy from the petitioner.
under those innocent fronts. . . . The power of seizure and
However, elementary rules of justice (in the absence of
vesting was extended to all property of any foreign
specific provision in the Insurance Law) require that the
country or national so that no innocent appearing device
premium paid by the respondent for the period covered by
could become a Trojan horse." its policy from December 11, 1941, should be returned by
the petitioner.

It becomes unnecessary, therefore, to dwell at length on


the authorities cited in support of the appealed decision.
The Court of Appeals, in deciding the case, stated that the
However, we may add that, in Haw Pia vs. China Banking
main issue hinges on the question of whether the policy
Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held
in question became null and void upon the declaration of
that China Banking Corporation came within the meaning
war between the United States and Germany on
of the word "enemy" as used in the Trading with the December 10, 1941, and its judgment in favor of the
Enemy Acts of civilized countries not only because it was respondent corporation was predicated on its conclusion
incorporated under the laws of an enemy country but
that the policy did not cease to be in force. The Court of
because it was controlled by enemies.
Appeals necessarily assumed that, even if the payment
by the petitioner to the respondent was involuntary, its
action is not tenable in view of the ruling on the validity of
the policy. As a matter of fact, the Court of Appeals held
The Philippine Insurance Law (Act No. 2427, as that "any intimidation resorted to by the appellee was not
amended,) in section 8, provides that "anyone except a unjust but the exercise of its lawful right to claim for and
public enemy may be insured." It stands to reason that an received the payment of the insurance policy," and that
insurance policy ceases to be allowable as soon as an the ruling of the Bureau of Financing to the effect that "the
insured becomes a public enemy. appellee was entitled to payment from the appellant was,
well founded." Factually, there can be no doubt that the
Director of the Bureau of Financing, in ordering the
petitioner to pay the claim of the respondent, merely
obeyed the instruction of the Japanese Military
Effect of war, generally. — All intercourse between
citizens of belligerent powers which is inconsistent with a Administration, as may be seen from the following: "In
view of the findings and conclusion of this office contained
state of war is prohibited by the law of nations. Such
in its decision on Administrative Case dated February 9,
prohibition includes all negotiations, commerce, or trading
1943 copy of which was sent to your office and the
with the enemy; all acts which will increase, or tend to
concurrence therein of the Financial Department of the
increase, its income or resources; all acts of voluntary
submission to it; or receiving its protection; also all acts Japanese Military Administration, and following the
concerning the transmission of money or goods; and all instruction of said authority, you are hereby ordered to
pay the claim of Messrs. Christern, Huenefeld & Co., Inc.
contracts relating thereto are thereby nullified. It further
The payment of said claim, however, should be made by
prohibits insurance upon trade with or by the enemy, upon
means of crossed check." (Emphasis supplied.)
the life or lives of aliens engaged in service with the
enemy; this for the reason that the subjects of one country
cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien
subjects, or to do anything detrimental too their country's It results that the petitioner is entitled to recover what paid
interest. The purpose of war is to cripple the power and to the respondent under the circumstances on this case.
exhaust the resources of the enemy, and it is inconsistent However, the petitioner will be entitled to recover only the
that one country should destroy its enemy's property and equivalent, in actual Philippines currency of P92,650 paid
repay in insurance the value of what has been so on April 19, 1943, in accordance with the rate fixed in the
destroyed, or that it should in such manner increase the Ballantyne scale.
resources of the enemy, or render it aid, and the
commencement of war determines, for like reasons, all
trading intercourse with the enemy, which prior thereto
may have been lawful. All individuals therefore, who Wherefore, the appealed decision is hereby reversed and
compose the belligerent powers, exist, as to each other,
the respondent corporation is ordered to pay to the
in a state of utter exclusion, and are public enemies. (6
petitioner the sum of P77,208.33, Philippine currency,
Couch, Cyc. of Ins. Law, pp. 5352-5353.)
less the amount of the premium, in Philippine currency,
that should be returned by the petitioner for the unexpired
term of the policy in question, beginning December 11,
1941. Without costs. So ordered.
In determining compliance with the minimum Filipino 5. The place where the principal office of the corporation sole
equity requirement, there are two acknowledged tests. ... is to be established and located, which place must be within
On the other hand, the Grandfather Rule determines the the Philippines.
actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the
corporation.
The articles of incorporation may include any other provision
not contrary to law for the regulation of the affairs of the
corporation. (n)
Chapter II – RELIGIOUS CORPORATIONS

Sec. 112. Submission of the articles of incorporation. – The


Sec. 109. Classes of religious corporations. – Religious articles of incorporation must be verified, before filing, by
corporations may be incorporated by one or more persons. affidavit or affirmation of the chief archbishop, bishop, priest,
Such corporations may be classified into corporations sole and minister, rabbi or presiding elder, as the case may be, and
religious societies. accompanied by a copy of the commission, certificate of
election or letter of appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding elder, duly certified
Religious corporations shall be governed by this Chapter and to be correct by any notary public.
by the general provisions on non-stock corporations insofar as
they may be applicable. (n)
From and after the filing with the Securities and Exchange
Commission of the said articles of incorporation, verified by
Sec. 110. Corporation sole. – For the purpose of administering affidavit or affirmation, and accompanied by the documents
and managing, as trustee, the affairs, property and mentioned in the preceding paragraph, such chief archbishop,
temporalities of any religious denomination, sect or church, a bishop, priest, minister, rabbi or presiding elder shall become
corporation sole may be formed by the chief archbishop, a corporation sole and all temporalities, estate and properties
bishop, priest, minister, rabbi or other presiding elder of such of the religious denomination, sect or church theretofore
religious denomination, sect or church. (154a) administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held
in trust by him as a corporation sole, for the use, purpose,
behalf and sole benefit of his religious denomination, sect or
Sec. 111. Articles of incorporation. – In order to become a
church, including hospitals, schools, colleges, orphan asylums,
corporation sole, the chief archbishop, bishop, priest, minister,
parsonages and cemeteries thereof. (n)
rabbi or presiding elder of any religious denomination, sect or
church must file with the Securities and Exchange Commission
articles of incorporation setting forth the following:
Sec. 113. Acquisition and alienation of property. – Any
corporation sole may purchase and hold real estate and
personal property for its church, charitable, benevolent or
1. That he is the chief archbishop, bishop, priest, minister,
educational purposes, and may receive bequests or gifts for
rabbi or presiding elder of his religious denomination, sect or
such purposes. Such corporation may sell or mortgage real
church and that he desires to become a corporation sole;
property held by it by obtaining an order for that purpose from
the Court of First Instance of the province where the property
is situated upon proof made to the satisfaction of the court
2. That the rules, regulations and discipline of his religious that notice of the application for leave to sell or mortgage has
denomination, sect or church are not inconsistent with his been given by publication or otherwise in such manner and for
becoming a corporation sole and do not forbid it; such time as said court may have directed, and that it is to the
interest of the corporation that leave to sell or mortgage
should be granted. The application for leave to sell or
3. That as such chief archbishop, bishop, priest, minister, rabbi mortgage must be made by petition, duly verified, by the chief
or presiding elder, he is charged with the administration of the archbishop, bishop, priest, minister, rabbi or presiding elder
temporalities and the management of the affairs, estate and acting as corporation sole, and may be opposed by any
properties of his religious denomination, sect or church within member of the religious denomination, sect or church
his territorial jurisdiction, describing such territorial represented by the corporation sole: Provided, That in cases
jurisdiction; where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the
4. The manner in which any vacancy occurring in the office of method of acquiring, holding, selling and mortgaging real
chief archbishop, bishop, priest, minister, rabbi of presiding estate and personal property, such rules, regulations and
elder is required to be filled, according to the rules, regulations discipline shall control, and the intervention of the courts shall
or discipline of the religious denomination, sect or church to not be necessary. (159a)
which he belongs; and

Sec. 114. Filling of vacancies. – The successors in office of any


chief archbishop, bishop, priest, minister, rabbi or presiding
elder in a corporation sole shall become the corporation sole
on their accession to office and shall be permitted to transact
1. That the religious society or religious order, or diocese,
business as such on the filing with the Securities and Exchange
synod, or district organization is a religious organization of a
Commission of a copy of their commission, certificate of
religious denomination, sect or church;
election, or letters of appointment, duly certified by any notary
public.

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


their written consent or have voted to incorporate, at a duly
During any vacancy in the office of chief archbishop, bishop,
convened meeting of the body;
priest, minister, rabbi or presiding elder of any religious
denomination, sect or church incorporated as a corporation
sole, the person or persons authorized and empowered by the
rules, regulations or discipline of the religious denomination, 3. That the incorporation of the religious society or religious
sect or church represented by the corporation sole to order, or diocese, synod, or district organization desiring to
administer the temporalities and manage the affairs, estate incorporate is not forbidden by competent authority or by the
and properties of the corporation sole during the vacancy shall constitution, rules, regulations or discipline of the religious
exercise all the powers and authority of the corporation sole denomination, sect, or church of which it forms a part;
during such vacancy. (158a)

4. That the religious society or religious order, or diocese,


Sec. 115. Dissolution. – A corporation sole may be dissolved synod, or district organization desires to incorporate for the
and its affairs settled voluntarily by submitting to the Securities administration of its affairs, properties and estate;
and Exchange Commission a verified declaration of dissolution.

5. The place where the principal office of the corporation is to


The declaration of dissolution shall set forth: be established and located, which place must be within the
Philippines; and

1. The name of the corporation;


6. The names, nationalities, and residences of the trustees
elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first
2. The reason for dissolution and winding up;
year or such other period as may be prescribed by the laws of
the religious society or religious order, or of the diocese,
synod, or district organization, the board of trustees to be not
3. The authorization for the dissolution of the corporation by
less than five (5) nor more than fifteen (15). (160a)
the particular religious denomination, sect or church;

4. The names and addresses of the persons who are to


supervise the winding up of the affairs of the corporation.

Upon approval of such declaration of dissolution by the


Securities and Exchange Commission, the corporation shall
cease to carry on its operations except for the purpose of
winding up its affairs. (n)

Sec. 116. Religious societies. – Any religious society or religious


order, or any diocese, synod, or district organization of any
religious denomination, sect or church, unless forbidden by
the constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a part, or
by competent authority, may, upon written consent and/or by
an affirmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the management of
its affairs, properties and estate by filing with the Securities
and Exchange Commission, articles of incorporation verified by
the affidavit of the presiding elder, secretary, or clerk or other
member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination,
sect or church, setting forth the following:
7. Double taxation may be imposed on corporate
income.
AQUILA LEGIS FRATERNITY
8. Corporations are subject to governmental regulations
Corporation Law Reviewer
supervision and control including submission of reportorial
Page 1 of 87 requirements not otherwise imposed in other business form.

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

CHAPTER 2: DEFINITION AND ATTRIBUTES

A corporation is an artificial being created by


operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law
or incident to its existence.

Attributes:

1. Artificial being;

2. Created by operation of law;

3. Right of succession; and

4. Powers, attributes and properties expressly Disti


authorized by law or incident to its existence.

A corporation may claim for moral damages under


AQUILA LEGIS FRATERNITY
Art. 2219 (7) of the Civil Code in cases of libel, slander or any
form of defamation. (Filipinas Broadcasting Network vs. Ago Corporation Law Reviewer
Medical and Educational Center)
Page 2 of 87
Advantages of corporate form of business:
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
1. Capacity to act as a single unit;

2. Limited shareholder‟s liability;

3. Continuity in existence;

4. Feasibility of greater undertaking;

5. Transferability of shares;
CHAPTER 3: CLASSIFICATION OF CORPORATIONS
6. Centralized management; and
Classes of corporations:
7. Standardized method of organization, management
and finance 1. Stock

Disadvantage of corporate form of business: 2. Non-stock

1. To have valid and binding corporate act, formal Requisites to be classified as a stock corporation:
proceedings, such as board meetings are required.
1. That they have a capital stock divided into shares; and
2. The business transactions of a corporation is limited
2. That they are authorized to distribute dividends or
to the State of its incorporation and may not act as such
allotments as surplus profits to its stockholders on the basis of
corporation in other jurisdiction unless it has obtained a
the shares held by them
license or authority from the foreign state.
Non-stock corporations – no part of their income is
3. The shareholders‟ limited liability tends to limit the
distributable as dividends to its members, trustees or officers
credit available to the corporation as a separate legal entity.
subject to the provisions on dissolution. (Sec. 87)
4. By the very nature of shares of stock which are
The plain and ordinary meaning of a business is
personal properties, transferable at will by the owners thereof,
restricted to activities or affairs where profit is the purpose or
transfers of share may result to uniting incompatible and
livelihood is the motive, and the term business when used
conflicting interests.
without qualification, should be construed in its plain and
5. The minority shareholders have practically no say in ordinary meaning, restricted to activities for profit or
the conduct of corporate affairs. livelihood. (CIR vs. Club Filipino, Inc.)

6. In large scale enterprises, stockholders‟ voting The test in determining whether a government
rights may become merely fictitious and theoretical because owned or controlled corporation is subject to the Civil Service
of disinterest in management, wide-scale ownership and Law is the manner of its creation, such that government
inaccessible place of meeting. corporations created by special charter are subject to its
provisions while those incorporated under the General
Corporation Law are not within its coverage. (PNOC-EDC vs. a. Holding corporations – corporations that confine
NLRC) their activities to owning stock in, and supervising
management of other companies.

b. Subsidiary corporations – those which another


corporation owns at least a majority of the shares, and thus
AQUILA LEGIS FRATERNITY have control.

Corporation Law Reviewer c. Affiliates – those corporations which are subject to


common control and operated as part of a system.
Page 3 of 87
7. Quasi-public.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
a. Quasi-public corporations – private corporations
Other classes of corporations: which have accepted from the State the grant of a franchise or
contract involving the performance of public duties (public
1. Public and Private.
service corporations).
a. Public corporations – those created, formed or
organized for political or governmental purposes with political
powers to be exercised for purposes connected with the public
good in the administration of civil government.
AQUILA LEGIS FRATERNITY
b. Private corporations – those formed for some private
purpose, benefit, aim or end. Corporation Law Reviewer

2. Ecclesiastical (religious societies or corporation sole) Page 4 of 87


and Lay (eleemosynary or civil).
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
a. Ecclesiastical or religious corporations – those
8. Quasi corporations.
composed exclusively of ecclesiastics organized for spiritual
purposes or for administering properties held for religious a. Quasi corporations – public bodies or municipal
ones. They are further classified as religious societies or societies such as townships, counties, school districts, road or
corporation sole. highway districts which, though not vested with the general
powers of corporations, are organized by statutes or
b. Lay corporations – those established for the purposes
immemorial usage, as persons or aggregate corporations with
other than religion. They are further classified as
precise duties which may be enforced, and privileges which
eleemosynary or civil. Eleemosynary corporations are created
may be maintained, by suits of law.
for charitable and benevolent purposes. Civil corporations are
organized not for the purpose of public charity but for the 9. De jure corporations.
benefit, pecuniary or otherwise, of its members.
a. De jure corporations – juridical entities created or
3. Aggregate and Sole. organized in strict or substantial compliance with the statutory
requirements of incorporation and whose right to exist as such
a. Aggregate corporations – those composed of a
cannot be successfully attacked even by the State in a quo
number of individuals vested with corporate powers.
warranto proceeding.
b. Corporations sole – those that consist of one person
10. De facto corporations.
or individual only and who are made as bodies corporate and
politic in order to give them some legal capacity and advantage a. De facto corporations – those which exist by virtue of
which, as natural persons, they cannot have. an irregularity or defect in the organization or constitution or
from some other omission to comply with the conditions
4. Close and Open.
precedent by which corporations de jure are created, but there
a. Close corporations – those whose shares of stock are was colorable compliance with the requirements of the law
held by limited number of persons. under which they might be lawfully incorporated for the
purposes and powers assumed, and user of the rights claimed
b. Open corporations – those formed to openly accept to be conferred by law.
outsiders as stockholders or investors.
11. Corporations by estoppel.
5. Domestic and Foreign.
a. Corporations by estoppel – those which are so
a. Domestic corporations – those that are organized or defectively formed as not to be either de jure or de facto
created under or by virtue of the Philippine laws. Note: issues corporations but which are considered as corporations in
of intra-corporate nature are governed by Philippine law. relation only to those who cannot deny their corporate
existence due to their agreement, admission or conduct.
b. Foreign corporations – those formed, organized or
existing under any laws other than those of the Philippines and The mere fact that the government happens to be a
whose laws allow Filipino citizens and corporations to do majority stockholder does not make it a public corporation.
business in its own country or state. (National Coal vs. CIR)
6. Parent or Holding Companies and Subsidiaries and CHAPTER 4: FORMATION AND ORGANIZATION
Affiliates.
Stages in the life of a corporation: 8. If a stock corporation, amount of authorized capital
stock, number of shares, par value, original subscribers
1. Creation
9. If a non-stock corporation, amount of capital,
2. Reorganization or quasi-reorganization
contributors
3. Dissolution and winding up
10. Such other matters not inconsistent with law and
Steps in creation: which the incorporator may deem necessary and convenient

1. Promotional stage 11. Treasurer‟s certificate

2. Process of incorporation CORPORATE NAME

3. Organization and commencement of business A corporation cannot use a name which is:

PROMOTIONAL STAGE 1. identical or deceptively or confusingly similar to that


of any existing corporation or to any other name protected by
A promoter acting for a proposed corporation has 3 law; or
options:
2. patently deceptive, confusing or contrary to law.
1. He may make a continuing offer on behalf of the
corporation, which, if accepted after incorporation, will The law gives a corporation no express or implied
become a contract. In this case, the promoter does not assume authority to assume another name that is unappropriated; still
any personal liability, whether or not the corporation will less that of another corporation, which is expressly set apart
accept the offer. from it and protected by law. (Red Line Transportation Co. vs.
Rural Transit Co.)
2. The promoter may make a contract at the time
binding himself, with the understanding that if the A word or phrase originally incapable of exclusive
corporation, once formed, accepts or adopts the contract, he appropriation with reference to an article on the market,
will be relieved of responsibility. because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one
3. The promoter may bind himself personally and producer with reference to his article that, in that trade and to
assume the responsibility of looking to the proposed that branch of the purchasing public, the word or phrase has
corporation, when formed, for reimbursement. come to mean that the article was his product. (Doctrine of
secondary meaning, Lyceum of the Philippines, Inc. vs.CA)

A corporation's right to use its corporate and trade


name is a property right, a right in rem, which it may assert and
AQUILA LEGIS FRATERNITY protect against the world in the same manner as it may protect
its tangible property, real or personal, against trespass or
Corporation Law Reviewer conversion. It is regarded, to a certain extent, as a property
Page 5 of 87 right and one which cannot be impaired or defeated by
subsequent appropriation by another corporation in the same
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C field. (Philips Export B.V. vs. CA)
PROCESS OF INCORPORATION To come within the scope of the prohibition of Sec.
18, two requisites must be proven, namely:
Process of incorporation:
1. That the complainant corporation acquired a prior
1. Drafting the articles of incorporation
right over the use of such corporate name; and
2. Preparation and submission of additional and
2. The proposed name is either: (a) identical or (b)
supporting documents
deceptively or confusingly similar to that of any existing
3. Filing with the SEC corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
4. Subsequent issuance of certificate of incorporation (Philips Export B.V. vs. CA)
Contents of the articles of incorporation

1. Name

2. Purpose AQUILA LEGIS FRATERNITY


3. Principal office Corporation Law Reviewer
4. Term Page 6 of 87
5. Incorporators Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
6. Number of directors/trustees In determining the existence of confusing similarity in
7. Names, nationalities and residences of corporate names, the test is whether the similarity is such as
directors/trustees to mislead a person using ordinary care and discrimination.
Proof of actual confusion need not be shown. It suffices that with this Code; Provided, That no extension can be made
confusion is probably or likely to occur. (Philips Export earlier than five (5) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier
B.V. vs. CA)
extension as may be determined by the Securities and
A corporation has an exclusive right to the use of its Exchange Commission.
name, which may be protected by injunction upon a principle
INCORPORATORS
similar to that upon which persons are protected in the use of
trademarks and tradenames. (Philips Export B.V. vs. CA) Sec. 10. Number and qualifications of incorporators. -
Any number of natural persons not less than five (5) but not
A mere change in the name of a corporation, either
more than fifteen (15), all of legal age and a majority of whom
by the legislature or by the corporators or stockholders under
are residents of the Philippines, may form a private
legislative authority, does not, generally speaking, affect the
corporation for any lawful purpose or purposes. Each of the
identity of the corporation, nor in any way affect the rights,
incorporators of a stock corporation must own or be a
privileges or obligations previously acquired or incurred by it.
subscriber to at least one (1) share of the capital stock of the
PURPOSE CLAUSE corporation.

A corporation has only such powers as are expressly


granted to it by law and by its articles of incorporation
including those which are incidental to such conferred powers,
those reasonably necessary to accomplish its purpose and AQUILA LEGIS FRATERNITY
those which may be incidental to its existence.
Corporation Law Reviewer
Reasons for requiring a statement of purposes or
Page 7 of 87
objects:
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
1. In order that the stockholder who contemplates on an
investment in a business enterprise shall know within what General rule: Only natural persons can be
lines of business his money is to be put at risk. incorporators.
2. So that the board of directors and management may Exception: Cooperatives and corporations primarily
know within what lines of business they are authorized to act. organized to hold equities in rural banks.
3. So that anyone who deals with the company may Minors are not qualified to become incorporators.
ascertain whether a contract or transaction into which he
contemplates entering is one within the general authority of THE DIRECTORS/TRUSTEES
the management.
General rule: There must be at least 5 but not more
If the corporate purpose or objective includes any than 15 directors or trustees in a private corporation.
purpose under the supervision of another government agency,
Exceptions:
prior clearance and/or approval of the concerned government
agencies or instrumentalities will be required. 1. Educational corporations registered as a non-stock
corporation whose number of trustees, though not less than 5
General limitations on the purpose clause:
and not more than 15 should be divisible by 5;
1. The purpose must be lawful.
2. In close corporations where all the stockholders are
2. The purpose must be specific or stated concisely considered as members of the board of directors thereby
although in broad or general terms. effectively allowing 20 members in the board; and

3. If there is more than one purpose, the primary as well 3. Corporation sole.
as the secondary ones must be specified.
The by-laws may provide for additional qualifications
4. The purpose must be capable of being lawfully and disqualifications. However, it may not do away with the
combined. minimum disqualifications laid down by the Code.

THE PRINCIPAL OFFICE Qualifications:

The residence of the corporation is the place of its 1. Directors must own at least one (1) share of the
principal office as may be indicated in its articles of capital stock of the corporation. Trustees must be members.
incorporation and may, therefore, be sued only at that place.
2. A majority of the directors or trustees must be
(CRS vs. Antillon)
residents of the Philippines.
TERM OF EXISTENCE
Disqualifications:
Sec. 11. Corporate term. - A corporation shall exist for
1. Conviction by final judgment of an offense punishable
a period not exceeding fifty (50) years from the date of
by imprisonment for a period exceeding six (6) years, or a
incorporation unless sooner dissolved or unless said period is
violation of this Code committed within five (5) years prior to
extended. The corporate term as originally stated in the
the date of election or appointment.
articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an 2. Other disqualifications under applicable special laws.
amendment of the articles of incorporation, in accordance
A by-laws may validly provide that no person may be Shares of stock designate the interest or right which
elected as director unless he owns a specified number of the stockholder has in the management of the corporation,
shares required for the directorate qualification. and in the surplus profits and, in case of distribution, in all
assets remaining after the payment of its debts.
It may likewise disqualify a stockholder from being
elected into office if he has a substantial interest in a Stock certificate is a document or instrument
competitor corporation to avoid any possible adverse effects evidencing the interest of a stockholder in the corporation.
of conflicting interest of a director.
The shares of stock of stock corporations may be
In order to be eligible as a director, what is material is divided into classes or series of shares, or both, any of which
the legal title to, not beneficial ownership, of the stock as classes or series of shares may have such rights, privileges or
appearing on the books of the corporation. (Lee vs. CA) restrictions as may be stated in the articles of incorporation.

If no election is conducted or no qualified candidate Purpose of classification:


is elected, the incumbent director shall continue to act as such
1. To specify and define the rights and privileges of the
in a hold over capacity until the election is held and a qualified
stockholders.
candidate is so elected. (Detective and Protective Bureau vs.
Cloribel) 2. For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers and
CAPITALIZATION
stockholders.
Authorized capital – the maximum amount fixed in
3. As a management control device.
the articles to be subscribed and paid-in or secured to be paid
by the subscribers. 4. To comply with statutory requirements.
Subscribed capital stock – the total number of shares 5. To better insure return on investment.
and its total value for which there are contracts for their
acquisition or subscription. 6. For flexibility in price.

Paid-up capital stock – the actual amount or value Except as otherwise provided in the articles of
which has been actually contributed or paid to the corporation incorporation and stated in the certificate of stock, each share
in consideration of the subscriptions made thereon. shall be equal in all respects to every other share.

Stocks shall not be issued for a consideration less than Common and preferred shares
the par or issued price thereof.
Common stock – a stock which entitles its owner to
an equal pro-rata division of profits, if there be any, but
without any preference or advantage in that respect over any
other stockholder or class of stockholders.
AQUILA LEGIS FRATERNITY Preferred stock – a stock that gives the holder a
preference over the holder of common stocks with respect to
Corporation Law Reviewer
the payment of dividends and/or with respect to distribution
Page 8 of 87 of capital upon liquidation.

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C Limitations on preferred stock:

Consideration for the issuance of stock may be any or 1. Must be issued with a stated par value; and
a combination of any two or more of the ff:
2. The preferences must be stated in the articles of
1. Actual cash paid to the corporation; incorporation and in the certificate of stock, otherwise, each
share shall be, in all respect, equal to every other share.
2. Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its use and The guarantee to preference as to dividends does not
lawful purposes at a fair valuation equal to the par or issued create a relation of debtor and creditor between the
value of the stock issued; corporation and the holders of such stock. The board has the
discretion to determine whether or not to declare dividends.
3. Labor performed or services actually rendered to the
corporation; Preferred shares are presumed to be non-
participating.
4. Previously incurred indebtedness by the corporation;
Participating preferred shares – the holders thereof
5. Amounts transferred from unrestricted retained
are still given the right to participate with the common
earnings to stated capital; and
stockholders in dividends beyond their stated preference.
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion.

Stocks shall not be issued in exchange of promissory


notes or future services. AQUILA LEGIS FRATERNITY

Shares of stock and their classification Corporation Law Reviewer

Page 9 of 87
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 2. Evasion of the danger of liability upon watered stock;
and
Cumulative preferred share – those that entitle the
owner thereof to payment not only of current dividends but 3. Disappearance of personal liability on the part of the
also back dividends not previously paid whether or not, during holder thereof for unpaid subscription.
the past years, dividends were declared or paid.
Voting and non-voting shares
In absence of express stipulation, preferred shares
Voting shares – gives the holder thereof the right to
are presumed to be non-cumulative.
vote and participate in the management of the corporation
Non-cumulative preferred shares – those which grant through the exercise of such right, either at the election of the
the holders of such shares only to the payment of current board of directors, or in any manner requiring the
dividends but not back dividends, when and if dividends are stockholder‟s approval.
paid, to the extent agreed upon before any other stockholders
Non-voting shares – do not grant the holder thereof
are paid the same.
the right to vote except under the penultimate paragraph of
Types of non-cumulative preferred shares: Sec. 6.

1. Discretionary dividend type – gives the holder of such Only preferred and redeemable shares may be denied
shares the right to have dividends paid thereon in a particular the right to vote.
year depending on the judgment or discretion of the board of
There must always be a class or series of shares which
directors.
have complete voting rights.
2. Mandatory if earned type – impose a positive duty on
directors to declare dividends every year when profits are
earned.

3. Earned cumulative or dividend credit – gives the AQUILA LEGIS FRATERNITY


holder thereof the right to arrears in dividends if there were
profits earned during the previous years but dividends were Corporation Law Reviewer
not declared.
Page 10 of 87
Unless the right to vote is clearly withheld, a
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
preferred stockholder has the right to vote.
Non-voting shares shall nevertheless be entitled to
Preference upon liquidation must be clearly indicated
vote on the following matters:
otherwise they shall be placed on equal footing with other
shares. 1. Amendment of the articles of incorporation;

Par and no par value shares 2. Adoption and amendment of by-laws;

Par value shares – those whose value are fixed in the 3. Sale, lease, exchange, mortgage, pledge or other
articles of incorporation. disposition of all or substantially all of the corporate property;

Par value shares cannot be issued nor sold by the 4. Incurring, creating or increasing bonded
corporation at less than par. indebtedness;

No par value shares – those whose issued price are 5. Increase or decrease of capital stock;
not stated in the certificate of stock but which may be fixed in
the articles of incorporation, or by the board of directors when 6. Merger or consolidation of the corporation with
so authorized by the said articles or by the by-laws, or in the another corporation or other corporations;
absence thereof, by the stockholders themselves. 7. Investment of corporate funds in another corporation
Limitations of no par value shares: or business in accordance with this Code; and

1. Such shares, once issued, are deemed fully paid and 8. Dissolution of the corporation.
thus, non assessable; Except as provided in the penultimate paragraph of
2. The consideration for its issuance should not be less Sec. 6, the vote necessary to approve a particular corporate act
than P5.00; as provided in this Code shall be deemed to refer only to stocks
with voting rights.
3. The entire consideration for its issuance constitutes
capital, hence, not available for dividend declaration; Founders’ shares

4. They cannot be issued as preferred stock; and Sec. 7. Founders‟ shares. - Founders' shares classified
as such in the articles of incorporation may be given certain
5. They cannot be issued by banks, trust companies, rights and privileges not enjoyed by the owners of other
insurance companies, public utilities and building and loan stocks, provided that where the exclusive right to vote and be
associations. 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
Advantages to the issuance of no par value shares:
approval of the Securities and Exchange Commission. The five-
1. Flexibility in price; year period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.
Redeemable shares General rule: Restrictions or preferences must be
contained in the articles of incorporation and in all stock
Redeemable shares may be issued by the corporation
certificates to be issued by the corporation.
when expressly so provided in the articles of incorporation.
Exception: In close corporations, such restrictions and
They may be purchased or taken up by the
preferences must also be embodied in the by-laws.
corporation upon the expiration of a fixed period, regardless
of the existence of unrestricted retained earnings in the books NO TRANSFER CLAUSE
of the corporation, and upon such other terms and conditions
No transfer of stock or interest which will reduce the
as may be stated in the articles of incorporation, which terms
ownership of Filipino citizens to less than the required
and conditions must also be stated in the certificate of stock
percentage of the capital stock as provided by existing laws
representing said shares.
shall be allowed or permitted to be recorded in the books of
Treasury shares the corporation and this restriction shall be indicated in all of
the stock certificates to be issued by the corporation.
Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the GROUNDS FOR DISAPPROVAL
issuing corporation by purchase, redemption, donation or
Only substantial and not strict compliance is required.
through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of Grounds for disapproval:
directors.
1. The articles of incorporation or any amendment
Treasury shares may again be issued for a price less thereto is not substantially in accordance with the form
than par. prescribed;
Treasury shares have no voting and dividend rights. 2. The purpose or purposes of the corporation are
Such rights are only granted to outstanding shares of stock. patently unconstitutional, illegal, immoral, or contrary to
(CIR vs. Manning) government rules and regulations;
CAPITAL REQUIREMENT 3. The Treasurer‟s Affidavit concerning the amount of
capital stock subscribed and/or paid is false;
Sec. 12. Minimum capital stock required of stock
corporations. - Stock corporations incorporated under this 4. The percentage of ownership of the capital stock to
Code shall not be required to have any minimum authorized be owned by citizens of the Philippines has not been complied
capital stock except as otherwise specifically provided for by with as required by existing laws or the Constitution,
special law, and subject to the provisions of the following
section. 5. The articles of incorporation of corporations subject
to government supervision are not accompanied by a
Sec. 13. Amount of capital stock to be subscribed and favorable recommendation from the appropriate government
paid for the purposes of incorporation. - At least twenty-five agency.
percent (25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time of The grounds are not exclusive.
incorporation, and at least twenty-five (25%) per cent of the
COMMENCEMENT OF CORPORATE EXISTENCE
total subscription must be paid upon subscription, the balance
to be payable on a date or dates fixed in the contract of It is only from the time of the issuance of the
subscription without need of call, or in the absence of a fixed certificate of incorporation that a corporation acquires
date or dates, upon call for payment by the board of directors: juridical personality and legal existence.
Provided, however, That in no case shall the paid-up capital be
less than five Thousand (P5,000.00) pesos. Prior to incorporation, a corporation has no juridical
personality to enter into contracts. (Cagayan Fishing
Development vs. Sandiko)

DE FACTO CORPORATION

AQUILA LEGIS FRATERNITY De facto corporation – one that is so defectively


created as not to be a de jure corporation but nevertheless
Corporation Law Reviewer
exists, for all practical purposes, as a corporate body, by virtue
Page 11 of 87 of its bona fide attempt to incorporate under existing
statutory authority, coupled with the exercise of corporate
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C powers.
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES Requisites:
General rule: Corporations may or may not provide 1. There is a valid law under which the corporation could
for restrictions and preferences regarding the transfer, sale or have been created as a de jure corporation;
assignment of shares in the articles of incorporation. It is
discretionary. 2. An attempt, in good faith, to form a corporation
according to the requirements of law (colorable compliance);
Exception: Close corporations are required to subject
their shares to specified restrictions as required in Sec. 96. 3. A user of corporate powers; and
4. Good faith in claiming to be and doing business as a ostensible corporation. (Albert vs. University Publishing Co.,
corporation. Inc.)

A person who has contracted or dealt with an


association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action
AQUILA LEGIS FRATERNITY arising out of such transaction or dealing, yet this doctrine may
not be held to be applicable where fraud takes part in the said
Corporation Law Reviewer transaction. (Salvatierra vs. Garlitos)
Page 12 of 87 Persons who have continuously and for a long period
misrepresented themselves as a corporation as estopped from
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
denying such personality to defeat claims against it. (Chiang
Rules on collateral and direct attack against corporate Kai Shek School vs. CA)
existence:
In the absence of fraud, a person who has contracted
1. The corporate existence of a de jure corporation or dealt with an association in such a way as to recognize and
cannot be directly attacked either directly or collaterally, even in effect admit its legal existence as a corporate body is
by the State. thereby estopped to deny its corporate existence in an action
leading out of or involving such contract or dealing, unless the
2. The corporate existence of a de facto corporation can existence is attacked for causes which have arisen since
be directly attacked on a quo warranto proceeding. making the contract or other dealing relied on as an estoppel.
3. The corporate existence of a de facto corporation is (Asia Banking Corp. vs. Standard Products Co., Inc.)
not subject to collateral attack by any party. The doctrine of estoppel applies to a third party only
A municipal corporation created by an when he tries to escape liability on a contract from which he
unconstitutional law cannot be cannot exist as a de facto has benefited. It does not apply when the third party is the one
corporation unless there is some other valid law giving claiming from the contract. (International Express Travel &
corporate vitality to the organization. An unconstitutional law Tours Services, Inc. vs. CA)
confers no rights. (Municipality of Malabang vs. Benito) The doctrine of estoppel applies to foreign as well as
Without having obtained a certificate of domestic corporations. Foreign corporations doing business in
incorporation, a corporation – even its stockholders – may not the Philippines may sue in Philippine courts although not
claim in good faith to be a corporation. (Hall vs. Piccio) authorized to do business here against the Philippine citizen
who had contracted with and been benefited by said
CORPORATION BY ESTOPPEL corporation. (Georg Grotjahn GMBH & Co. vs. Isnani)
Sec. 21. Corporation by estoppel. - All persons who
assume to act as corporation knowing it be without authority
to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof; AQUILA LEGIS FRATERNITY
Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a Corporation Law Reviewer
corporation or on any tort committed by it as such, it shall not
Page 13 of 87
be allowed to use as a defense its lack of corporate personality.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
The doctrine of corporation by estoppel may apply to
the alleged corporation or to a third party transacting with the If a corporation by estoppel exists and enters into a
former. contract or transacts business with a third party, the latter has
three remedies:
The principle of estoppel cannot be invoked in favor
of a person who is a member of the association and therefore 1. He may file a suit against the ostensible corporation
must be presumed to know that it is not a corporation. (Lozano to recover from the corporate properties;
vs. De Los Santos)
2. He may file the case directly against the associates
The principle of estoppel applies when persons personally who held out the association a corporation; and
assume to form a corporation and exercise corporate functions
and enter into business relations with third persons. Where 3. Against both the ostensible corporation and persons
there is no third person involved and the conflict arises only forming it, jointly and severally.
among those assuming to form a corporation, who therefore
As regards the liability of the associates of the alleged
know that it has not been registered, there is no corporation
corporation, only those who actively participated in holding
by estoppel. (Lozano vs. De Los Santos)
out the association as a corporation should be held personally
One who has induced another to act upon his willful liable.
misrepresentation that a corporation was duly organized and
ORGANIZATION AND COMMENCEMENT OF BUSINESS
existing under the law, cannot, thereafter set up against his
victim the principle of corporation by estoppel. Such persons Sec. 22. Effects on non-use of corporate charter and
becomes liable for the contracts entered into by such continuous inoperation of a corporation. - If a corporation
does not formally organize and commence the transaction of
its business or the construction of its works within two (2)
years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction of
its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall
be a ground for the suspension or revocation of its corporate
Kinds of franchises:
franchise or certificate of incorporation.

This provision shall not apply if the failure to organize,


commence the transaction of its businesses or the AQUILA LEGIS FRATERNITY
construction of its works, or to continuously operate is due to
causes beyond the control of the corporation as may be Corporation Law Reviewer
determined by the Securities and Exchange Commission. Page 14 of 87
Organization – the election of officers, providing for Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
the subscription and payment of capital stock, the adoption of
by-laws, and such other steps as are necessary to endow the
legal entity with the capacity to transact the legitimate
1. Primary franchise – the right or privilege of being a
business for which it was created.
corporation which the state confers upon the applicant for this
Failure of the corporation to organize within the faculty.
prescribed period would result in its automatic dissolution,
2. Secondary franchise – the powers and privileges
unless its failure to do so is due to causes beyond its control.
vested in, and to be exercised by the corporate body as such.
Substantial compliance is sufficient.
CORPORATE ENTITY THEORY
Subsequent inoperation is merely a ground for
The corporation is possessed with a personality
suspension or revocation of corporate franchise. Dissolution is
separate and distinct from the individual stockholders or
not automatic.
members.
CHAPTER 5: THE CORPORATE CHARTER AND ITS
A corporation is a distinct legal entity to be
AMENDMENTS CORPORATE CHARTER
considered as separate and apart from the individual
Corporate charter – an instrument or authority from stockholders or members who compose it, and is not affected
the sovereign power, bestowing rights and power. by the personal rights, obligations and transactions of its
stockholders or members. Conversely, a corporation has no
The corporate charter is a three-fold contract: interest in the individual property of its stockholders unless
1. Between the corporation and the state insofar as it transferred to the corporation, even in case of a one- man
concerns its primary franchise to be and act as a corporation; corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)

2. Between the corporation and the stockholders or A bona fide corporation should alone be liable for its
members insofar as it governs their respective rights and corporate acts as duly authorized by its directors and officers.
obligations; and (Caram vs. CA)

3. Between and among the stockholders or members The president and manager of a corporation who
themselves as far as their relationship with one another is entered into and signed a contract in his official capacity,
concerned. cannot be made liable thereunder in his individual capacity in
the absence of stipulation to that effect due to the personality
The charter of corporations created under the of the corporation being separate and distinct from the person
Corporation Code consists of the articles of incorporation and composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)
the Corporation Code inclusive of the by-laws adopted
thereunder and all pertinent provisions of any statute A corporation has a personality distinct and separate
governing them. from its individual stockholders or members. The mere fact
that one is president of a corporation does not render the
The charter of corporations created by special laws property he owns and possesses the property of the
consists of the special law creating the same and any and all corporation, since the president, as an individual, and the
laws, rules and regulations affecting or applicable to them. corporation are separate entities. (Cruz vs. Dalisay)

Franchise – the right or privilege itself to be and act Mere ownership by a single stockholder or by another
as a corporation or to do a certain act. 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. (Palay Inc. vs. Clave)

In a right of action against the corporation, the


officers may not be held personally liable as long as they act
within the scope of their authority. (Soriano vs. CA)

PIERCING THE VEIL OF CORPORATE FICTION


Piercing the veil of the corporate fiction is resorted to a. The original and amender articles together shall
only in cases where the corporation is used or being used to contain all the provisions required by law to be set out in the
defeat public convenience, justify wrong, protect fraud, articles of incorporation. Such articles, as amended, shall be
defend crime, confuse legitimate issues, or to circumvent the indicated by underscoring the change or changes made.
law or perpetuate deception, or an alter-ego, adjunct or
b. A copy thereof, duly certified under oath by the
business conduit for the sole benefit of a stockholder or a
corporate secretary and a majority of the directors or trustees
group of stockholders or another corporation.
stating the fact that such amendments have been duly
Test in determining the applicability of the doctrine of approved by the required vote of the stockholders or
piercing the veil of corporation fiction: members.

1. Control, not mere majority or complete stock control, c. Favorable recommendation of the appropriate
but complete domination, not only of finances but of policy government agency concerned in the case where the
and business practice in respect to the transaction attacked so corporation is under its supervision.
that the corporate entity as to this transaction had at the time
Time when the amendments shall take effect:
no separate mind, will or existence of its own;
1. Upon approval of the SEC; or
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation of a 2. From the date of filing with the SEC if not acted upon
statutory or other positive legal duty, or dishonest and unjust with 6 months from the date of filing for a cause not
act in contravention of plaintiff's legal rights; and attributable to the corporation. (Note: not applicable to
special amendments)
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. Special amendments:
(Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
1. Extension or shortening of corporate term (Sec. 37)
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
2. Increase or decrease of capital stock (Sec. 38)
Corporate fiction cannot be disregarded in the
absence of intent to defraud in corporate transactions. (Remo, 3. Incurring, creating or increasing bonded
JR vs. IAC) indebtedness (Sec. 38)

For the separate juridical personality of a corporation PROVISIONS SUBJECT TO AMENDMENT


to be disregarder, the wrongdoing must be clearly and
Matters which are fait accompli are not subject to
convincingly established. (Del Rosario vs. NLRC)
change.

A change in the name of the corporation does not


affect the identity of the corporation, nor in any way affect the
rights, privileges, or obligations previously acquired or
AQUILA LEGIS FRATERNITY incurred by it. (Philippine First Insurance Co. vs. Hartigan)
Corporation Law Reviewer AMENDMENT OF THE CORPORATE TERM
Page 15 of 87 Procedure to amend the corporate term:
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 1. Approval by a majority vote of the board or directors
or trustees.
Mere corporate ownership of all the stocks of another
corporation will not justify their being treated as single entity. 2. Written notice of the proposed action and the time
(PNB vs. Ritratto) and place of meeting shall be served to each stockholder or
member either by mail or by personal service.
There being not the least indication that the second
corporation is a dummy or serves as a client of the first 3. Ratification by the stockholders representing at least
corporation, the fiction of separate and distinct corporate 2/3 of the outstanding capital stock or 2/3 of the members in
entities cannot be disregarder and brushed aside. (Yu vs. NLRC) case of non-stock corporations.
AMENDMENT OF THE CORPORATE CHARTER 4. In case of extension of corporate term, the extension
should be for periods not exceeding 50 years in any single
Steps to be followed for an effective amendment of
instance, and provided that no extension can be made earlier
the articles of incorporation:
than
1. Resolution by at least a majority of the board of
5 years prior to the original or subsequent expiry date(s) unless
directors or trustees.
there are justifiable reasons for an earlier extension as may be
2. Vote or written assent of the stockholders determined by the SEC.
representing at least 2/3 of the outstanding capital stock or 2/3
5. In cases of extension of corporate term, a dissenting
of the members in case of non-stock corporation.
stockholder may exercise his appraisal rights.
3. Submission and filing of the amendments with the
SEC as follows:
AQUILA LEGIS FRATERNITY Where a corporate contract has been effected with
the approval of the board of directors, a resolution adopted at
Corporation Law Reviewer
a meeting of stockholders refusing to recognize the contract or
Page 16 of 87 repudiating it is without effect. (Ramirez vs. Orientalist Co.)

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C Contracts between a corporation and third persons
must be made by or under the authority of its board of
Extension may be made only before the term directors and not of its stockholders. (Barreto vs. La Previsora)
provided in the corporate charter expires. (Alhambra Cigar &
Cigarette Mfg. Co., Inc. vs. SEC) QUALIFICATIONS AND DISQUALIFICATIONS

CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Qualifications:


POWERS OF THE BOARD
1. Directors must own at least one (1) share of the
Sec. 23. The board of directors and trustees. - Unless capital stock of the corporation. Trustees must be members.
otherwise provided in the Code, the corporate powers of all
2. A majority of the directors or trustees must be
corporations formed under this Code shall be exercised, all
residents of the Philippines.
business conducted and all property of such corporations
controlled and held by the board of directors or trustees.

The authority of the board of directors does not


extend to the fundamental changes in the corporate charter.

The board may delegate the exercise of corporate


powers.

A corporation is bound by the acts of its corporate


officers if they act within the scope of the 5 classifications of
powers of corporate agents:

1. Those expressly conferred or those granted by the


articles of incorporation, the corporate by-laws or by the
official act of the board of directors.

2. Those that are incidental or those acts as are naturally


Disqualifications:
and ordinarily done which are reasonable and necessary to
carry out the corporate purpose or purposes.

3. Those that are inherent or acts that go with the office. AQUILA LEGIS FRATERNITY

4. Those that are apparent or those acts which although Corporation Law Reviewer
not actually granted, the principal knowingly allows or permits
it to be done. Page 17 of 87

5. Powers arising out of customs, usage or emergency. Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

Where a corporation seeks to evade liability on a


contract on the ground of lack of authority on the part of the 1. Conviction by final judgment of an offense punishable
person who assumed to act for it, such defense should be by imprisonment for a period exceeding six (6) years, or a
specially pleaded. Failure to make an issue as to such authority violation of this Code committed within five (5) years prior to
eliminates any questions regarding it. (Ramirez vs. Orientalist the date of election or appointment.
Co.)
2. Other disqualifications under applicable special laws.
The fact that the power to make corporate contracts
is thus vested in the board of directors does not signify that a In order to be eligible as a director, what is material is
formal vote of the board must always be taken before the legal title to, not beneficial ownership, of the stock as
contractual liability can be fixed upon a corporation; for the appearing on the books of the corporation. (Lee vs. CA)
board can create liability, like an individual, by other means
If no election is conducted or no qualified candidate
than by a formal expression of its will. (Ramirez vs. Orientalist
is elected, the incumbent director shall continue to act as such
Co.)
in a hold-over capacity until the election is held and a qualified
The power to make corporate contracts resides candidate is so elected. (Detective and Protective Bureau vs.
primarily in the company's board of directors; but the board Cloribel)
may ratify an unauthorized contract made by an officer of the
ELECTION AND VOTING
corporation. Ratification in this case is held to have occurred
when the board, with knowledge that the contract had been In stock corporations, the majority of the outstanding
made, adopted a resolution recognizing the existence of the capital stock, in person or by representative authorized to act
contract and directing that steps be taken to enable the by written proxy, must be present at the election of directors.
corporation to utilize its benefits. (Ramirez vs. Orientalist Co.)
In non-stock corporations, a majority of the members AQUILA LEGIS FRATERNITY
entitled to vote, in person or by proxy, if allowed in its articles
Corporation Law Reviewer
of incorporation or by-laws, must be present in the election.
Page 18 of 87
The election may be adjourned if, for any reason, no
election is held, or if the required quorum is not obtained. Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
However, it may not be adjourned indefinitely.
Exception: The election of corporate officers requires
The election must be by ballot if requested by any the vote of a majority of all the members.
voting stockholder or member.
General rule: Individual directors cannot bind the
Candidates receiving the highest number of votes corporation by their individual acts.
shall be declared elected.
Exceptions:
In stock corporations, cumulative voting is a matter of
right. 1. By delegation of authority;

In non-stock corporations, cumulative voting is not 2. Where expressly conferred; or


available unless provided for in the articles of incorporation or
3. Where the officer or agent is clothed with actual or
by-laws. I.e., a member may cast as many votes as there are
apparent authority.
trustees to be elected but may not cast more than one vote for
one candidate. Although an officer or agent acts without, or in excess
of, his actual authority if he acts within the scope of an
In stock corporations, the stockholder may:
apparent authority with which the corporation has clothed
1. Vote such number of shares for as many persons as him by holding him out or permitting him to appear as having
there are directors to be elected; such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such
2. Cumulate said shares and give one candidate as many apparent authority, as where an officer is allowed to exercise
votes as the number of directors to be elected multiplied by a particular authority with respect to the business, or a
the number of his shares shall equal; particular branch of it, continuously and publicly, for a
considerable time. Also, if a private corporation intentionally
3. Distribute them on the same principle among as many
or negligently clothes its officers or agents with apparent
candidates as he shall see fit.
power to perform acts for it, the corporation will be estopped
No delinquent stock shall be voted. to deny that such apparent authority is real, as to innocent
third persons dealing in good faith with such officers or agents.
Officers to be elected
This apparent authority may result from (1) the general
1. President, who shall be a director manner by which the corporation holds out an officer or agent
as having power to act or, in other words, the apparent
2. Treasurer, who may or may not be a director authority with which it clothes him to act in general, or (2) the
acquiescence in his acts of a particular nature, with actual or
3. Secretary, who shall be a resident and citizen of the
constructive knowledge thereof, whether within or without
Philippines
the scope of his ordinary powers. (Yao Ka Sin Trading vs. CA)
4. Such other officers as may be provided for in the by-
Any action of the board without a meeting and
laws.
without the required voting and quorum requirement will not
Any two (2) or more positions may be held bind the corporation unless subsequently ratified, expressly or
concurrently by the same person, except that no one shall act impliedly. (Lopez vs. Fontecha)
as president and secretary or as president and treasurer at the
Where a general business manager of a corporation is
same time.
clothed with apparent authority to borrow money and the
The directors or officers shall hold office for one (1) amount borrowed does not exceed the ordinary requirements
year until their successors are elected and qualified. of the business, the authority is implied and that the
corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE
OFFICERS An invalid contract may be validated by the
ratification only of the board of directors; the president has no
General rule: the quorum requirement for a valid authority to ratify such contract. (Yu Chuck vs. Kong Li Po)
board meeting is the majority of the number of the directors
or trustees as fixed in the articles of incorporation. Silence coupled with acceptance of benefits
constitutes a binding ratification. (Francisco vs. GSIS)
Exception: The articles of incorporation or the by-laws
may provide for a greater majority. A corporate officer entrusted with the general
management and control of its business, has implied authority
General rule: To have a valid corporate act, the to make any contract or do any other act which is necessary or
decision of at least a majority of the directors or trustees appropriate to the conduct of the ordinary business of the
present at a meeting at which there is a quorum is required. corporation. As such officer, he may, without any special
authority from the Board of Directors, perform all acts of an
ordinary nature, which by usage or necessity are incident to his
office, and may bind the corporation by contracts in matters
arising in the usual course of business. Where similar acts have or the board of directors thereby effectively taking away the
been approved by the directors as a matter of general practice, rights of the directors to act as managers of the corporation.
custom, and policy, the general manager may bind the
Vacancies to be filled by the stockholders or members
company without formal authorization of the board of
in a regular or special meeting:
directors. (Board of liquidators vs. Kalaw)
1. Vacancy due to removal;
Lack of repudiation, acquiescence and acceptance of
benefits are equivalent to an implied ratification by the Board 2. Vacancy due to expiration of term;
of Directors and binds the corporation even without formal
resolution passed and recorded. (Buenaseda vs. Bowen & Co., 3. Vacancy due to an increase in the number of board of
Inc.) directors; and

Express ratification: through formal board action. 4. Vacancy due to other causes when the remaining
directors or trustees do not constitute a quorum.
Implied ratification:
Vacancy due to removal may be filled by an election
1. Silence or acquiescence; at the same meeting without further notice.
2. Acceptance and/or retention of benefits; or Any change in the constitution of the board of
directors or trustees must be reported to the SEC.
3. By recognition or adoption.
The tenure of the director filling up the vacancy shall
only be for the unexpired term of his predecessor in office.

If the successor is not qualified, the predecessor shall


AQUILA LEGIS FRATERNITY hold office in a hold-over capacity until such successor is duly
elected and qualified. (Detective and Protective Bureau vs.
Corporation Law Reviewer
Cloribel)
Page 19 of 87
COMPENSATION OF DIRECTORS
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: Directors shall not receive any
REMOVAL AND FILLING UP OF VACANCIES compensation, as such directors, except for reasonable per
diems.
Requirements and procedure:
Exceptions:
1. The removal should take place at a general or special
meeting duly called for that purpose; 1. When there is a provision in the by-laws fixing their
compensation;
2. The removal must be a vote of the stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 2. When the stockholders, by a majority vote the
of the members in case of non-stock corporations; outstanding capital stock grant the same; and

3. Prior notice of the proposed removal must be made 3. If the director renders extra-ordinary or unusual
stating the time and place of meeting either by publication or service.
by written notice.
In no case shall the total yearly compensation of
The special meeting must be called by the secretary, directors, as such directors, exceed 10% of the net income
on order of the president or on the written demand of the before income tax of the corporation during the preceding
stockholders representing a majority of the outstanding capital year.
stock, or 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 notice, or if there is no
secretary, the call for the meeting may be addressed directly
AQUILA LEGIS FRATERNITY
to the stockholders or members by any stockholder or
member signing the demand. Corporation Law Reviewer
General rule: Directors or trustees may be removed Page 20 of 87
with or without just cause.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Exception: Removal without just cause may not be
used to deprive minority stockholders or members of the right If there is wastage of corporate assets, the courts may
of representation to which they may be entitled under Sec. 24. be justified to look into the reasonableness and fairness of the
compensation despite the fact that the grant thereof is
PD 902-A grants the court the power and authority to authorized pursuant to the by-laws and by the vote of the
remove or oust a director and it can do so, even motu propio majority of the holders of the outstanding capital stock of the
by the appointment of a management committee. corporation.
In case of a deadlock in a close corporation, the SEC is The board may not grant compensation upon itself
authorized to issue an order cancelling, altering, or enjoining without authorization of the by-laws or in contravention of the
any resolution or other act of the corporation or its board of by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)
directors or directing or prohibiting any act of the corporation
Members of the board of directors may receive Business judgment rule – directors are not liable for
compensation, in addition to reasonable per diems, when they losses due to imprudence or honest error of judgment.
render services to the corporation in a capacity other than as Questions of policy and management are left solely to the
directors or trustees. (Western Institute of Technology, Inc. vs. honest decision of the board of directors and the courts are
Salas) without authority to substitute its judgment as against the
former.
The fact that the amount paid as compensation to
directors under a by-law provision has increased beyond what Resolutions passed in good faith by the board of
would probably be necessary to secure adequate service from directors are valid and binding, and whether or not it will cause
them is a matter that cannot be corrected by the court. The losses or decrease in profits are not subject to the review of
remedy is in the hands of the stockholders who have the the court. (Montelibano vs. Bacolod Murcia Milling, Co., Inc.)
power at any lawful meeting to change the rule. (Govt. vs. El
Hogar Filipino)

LIABILITY OF CORPORATE OFFICERS


AQUILA LEGIS FRATERNITY
The general rule is that unless the law specifically
provides, a corporate officer or agent is not civilly or criminally Corporation Law Reviewer
liable for acts done by him as such officer or agent.
Page 21 of 87
Personal liability of a corporate director, trustee or
officer along with the corporation may validly attach, as a rule, Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
only when:
General rule: A director is not liable for misconduct of
1. He assents (a) to a patently unlawful act of the co-directors or other officers.
corporation, or (b) for bad faith, gross negligence in directing
Exceptions:
its affairs, or (c) for conflict of interest, resulting in damages to
the corporation, its stockholders or other persons; 1. He connives or participates in it; or

2. He consents to the issuance of watered stocks or who, 2. He is negligent in not discovering or acting to prevent
having knowledge thereof, does not forthwith file with the it.
corporate secretary his written objection thereto;
The duty of loyalty is violated in the following
3. He agrees to hold himself personally and solidarily instances:
liable with the corporation; or
1. When a director or trustee acquires any personal or
4. He is made, by specific provision of law, to personally pecuniary interest in conflict with his duty as such director or
answer for his corporate action. (Tramat Mercantile, Inc. vs. trustee;
CA)
2. When he attempts to acquire or acquires, in violation
Where a check is drawn by a corporation, company or of his duty, any interest adverse to the corporation in respect
entity, the person or persons who actually signed the check in to any matter which has been reposed in him in confidence, as
behalf of such drawer shall be liable under this Act. (Sec. 1, BP to which equity imposes a disability upon him to deal in his
22) own behalf; and

In labor cases, corporate directors and officers are 3. When he, by virtue of his office, acquires for himself
solidarily liable with the corporation for the termination of a business opportunity which should belong to the
employment of corporate employees done with malice or in corporation, thereby obtaining profit to the prejudice of such
bad faith. (Uichico vs. NLRC) corporation.

THREE-FOLD DUTY OF DIRECTORS Corporate opportunity doctrine – It places a director


of a corporation in the position of a fiduciary and prohibits him
Three-fold duty of directors:
from seizing a business opportunity and/or developing it at the
1. Obedience expense and with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in fairness
2. Diligence should belong to the corporation.
3. Loyalty Distinction between Secs. 31 & 34:
Solidarily liability for all damages suffered by the 1. Sec. 31, where a director is liable to account for
corporation, its stockholders or members or other persons profits if he attempts to acquire or acquires any interest
shall be imposed upon directors or trustees: adverse to the corporation in respect to any matter reposed in
him in confidence as to which equity imposes a disability upon
1. Who willfully and knowingly vote for or assent to
him to deal in his own behalf is not subject to ratification by
patently unlawful acts of the corporation;
the stockholders.
2. Who are guilty of gross negligence or bad faith in
2. Sec. 34, where the director acquires for himself a
directing the affairs of the corporation; or
business opportunity which should belong to the corporation,
3. Who acquire any personal property or pecuniary he is bound to account for such profits unless his act is ratified
interest in conflict with their duty as such directors or trustees. by the stockholders owning or representing at least 2/3 of the
outstanding capital stock.
Directors are liable for fraud committed by Sec. 33. Contracts between corporations with
concealment of information as to the state and probable result interlocking directors. - Except in cases of fraud, and provided
of the negotiations for the sale of corporate assets which may the contract is fair and reasonable under the circumstances, a
affect the price of the corporation‟s stock. (Strong vs. Repide) contract between two or more corporations having
interlocking directors shall not be invalidated on that ground
SELF-DEALING DIRECTORS
alone: Provided, That if the interest of the interlocking director
A contract of the corporation with one or more of its in one corporation is substantial and his interest in the other
directors or trustees or officers is voidable, at the option of corporation or corporations is merely nominal, he shall be
such corporation, unless all of the following conditions are subject to the provisions of the preceding section insofar as the
present: latter corporation or corporations are concerned.

1. That the presence of such director or trustee in the Stockholdings exceeding twenty (20%) percent of the
board meeting in which the contract was approved was not outstanding capital stock shall be considered substantial for
necessary to constitute a quorum for such meeting; purposes of interlocking directors.

2. That the vote of such director or trustee was not A director who owns a substantial interest in one
necessary for the approval of the contract; corporation dealing with another where he has a nominal
interest is a regarded as a self-dealing director in so far as the
3. That the contract is fair and reasonable under the latter corporation is concerned.
circumstances; and
DERIVATIVE SUIT
4. That in case of an officer, the contract has been
previously authorized by the board of directors. Suits that stockholders may bring against erring
directors or officers:
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract with a 1. Individual or personal suit – one brought by the
director or trustee, such contract may be ratified, provided: shareholders for direct injury to his rights, such as denial of his
right to inspect corporate books and records or pre-emptive
1. The contract is ratified by the vote of the stockholders right;
representing at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of the members 2. Representative of class suit - ; and

2. Such ratification is made at a meeting called for that 3. Derivative suit – an action based on injury to the
purpose; corporation – to enforce a corporate right

3. Full disclosure of the adverse interest of the directors – wherein the corporation is joined as a necessary party, and
or trustees involved is made; and recovery is in favor of the corporation.

4. The contract is fair and reasonable under the A stockholder in a corporation who was not such at
circumstances. the time of the transactions complained of, or whose shares
had not devolved upon him since by operation of law, can not
In the absence of express delegation, a contract maintain a derivative suit unless such transactions continue
entered into by the president, on behalf of the corporation, and are injurious to the stockholder, or affect him specifically
may bind the corporation if the board should ratify the same in some other way. (Pascual vs. Orozco, et al.)
expressly or impliedly. Furthermore, the president as such may
bind the corporation by a contract in the ordinary course of When the board is under the complete control of the
principal defendants in the case, demand upon such board to
institute action and prosecute the same is not required. The
law does not require litigants to do useless acts. (Everett vs.
Asia Banking Corporation)
AQUILA LEGIS FRATERNITY
The corporation should be made a party, in order to
Corporation Law Reviewer make the court‟s judgment binding upon it, and thus bar
future relitigation of the issue. On what side the corporation
Page 22 of 87 appears is not important. (Republic Bank vs. Cuaderno)
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C The minority shareholder who is suing for and in
business, provided the same is reasonable under the behalf of the corporation must allege in his complaint before
circumstances. These rules only apply where the president or the proper forum that he is suing on a derivative cause of
other officer, purportedly acting for the corporation, is dealing action on behalf of the corporation and all other shareholders
with a third person, i.e., person outside the corporation. It similarly situated who wish to join. This is necessary to vest
does not apply to self-dealing directors or officers. (Prime jurisdiction upon the tribunal in line with the rule that it is the
White Cement Corp. vs. IAC) allegations in the complaint that vest jurisdiction upon the
court or quasi-judicial body concerned over the subject matter
A director or officer may in good faith and for an and nature of the action. (Western Institute of Technology, Inc.
adequate consideration purchase from a majority of the vs. Salas)
directors or stockholders the property even of an insolvent
corporation. (Mead vs. Mc Cullough) The bona fide ownership by a stockholder of stock in
his own right suffices to invest him with standing to bring a
INTERLOCKING DIRECTORS derivative action for the benefit of the corporation. The
number of his shares is immaterial since he is not suing in his 5. Any benefit or damages recovered shall pertain to the
own behalf, or for the protection or vindication of his own corporation.
particular right, or the redress of a wrong committed against
EXECUTIVE COMMITTEE
him, individually, but in behalf and for the benefit of the
corporation. (SMC vs. Khan) An executive committee may be created when
authorized by the by-laws.
Where corporate directors are guilty of breach of
trust – not mere error of judgment or abuse of discretion – and General rule: The executive committee may act, by
intra-corporate remedy is futile or useless, a stockholder may majority vote of all its members, on such specific matters
institute a suit in behalf of himself and other stockholders and within the competence of the board, as may be delegated to it
for the benefit of the corporation, to bring about a in the by-laws or on a majority vote of the board.

Exceptions:

1. Approval of any action for which shareholders'


approval is also required;
AQUILA LEGIS FRATERNITY
2. The filling of vacancies in the board;
Corporation Law Reviewer
3. The amendment or repeal of by-laws or the adoption
Page 23 of 87
of new by-laws;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
4. The amendment or repeal of any resolution of the
redress of the wrong inflicted directly upon the corporation board which by its express terms is not so amendable or
and indirectly upon the stockholders. (Reyes vs. Tan, et al.) repealable; and

The stockholders in a derivate suit cannot allege or 5. A distribution of cash dividends to the shareholders.
vindicate their own individual interests or prejudice. (Gamboa
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
vs. Victoriano, et al.)
Classification of corporate authority:
In a derivative suit, the injury complained of is
primarily to the corporation, so that the suit for the damages 1. Those expressly granted or authorized by law
claimed should be by the corporation rather than by the inclusive of the corporate charter or articles of incorporation
stockholders. The stockholders may not directly claim those
damages for themselves for that would result in the 2. Those impliedly granted as are essential or
appropriation by, and the distribution among them of part of reasonably necessary to the carrying out of the express powers
the corporate assets before the dissolution of the corporation
3. Those that are incidental to its existence.
and the liquidation of its debts and liabilities. (Evangelista vs.
Santos)

Rules, requirements and procedure so that a


derivative suit may proceed or prosper:
AQUILA LEGIS FRATERNITY
1. The party bringing the action should be a stockholder
as of the time the act or transaction complained of took place, Corporation Law Reviewer
or whose shares have evolved upon him since by operation of Page 24 of 87
law. This rule, however, does not apply if such act or
transaction continues and is injurious to the stockholder or Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
affects him specifically in some other way. The number of
Powers expressly granted
shares is immaterial.
1. Power to sue and be sued (Sec. 36)
2. He has tried to exhaust intra-corporate remedies, i.e.
he has made a demand on the board of directors for the 2. Power of succession (Sec. 36)
appropriate relief but the latter had failed or refused to heed
his plea. Demand, however, is not required if the company is 3. Power to adopt and use a corporate seal (Sec. 36)
under the complete control of the directors who are the very 4. Power to amend its articles of incorporation (Sec. 36)
ones to be sued (or where it becomes obvious that a demand
upon them would have been futile and useless) since the law 5. Power to adopt, amend or repeal by-laws (Sec. 36)
does not require a litigant to perform useless acts.
6. Power to issue or sell stocks/ to admit members (Sec.
3. The stockholder bringing the suit must allege in his 36)
complaint that he is suing on a derivative cause of action on
7. Power to acquire or alienate real or personal property
behalf of the corporation and all other stockholders similarly
(Sec. 36)
situated, otherwise, the case is dismissible.
8. Power to enter into merger or consolidation (Sec. 36)
4. The corporation should be made a party, either as
party-plaintiff or defendant, in order to make the court‟s 9. Power to make reasonable donations (Sec. 36)
judgment binding upon it.
10. Power to establish pension, retirement, and other
plans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37) General rule: Amendment of the articles of
incorporation is a matter of right (Note: procedure differs for
12. Power to increase or decrease capital stock (Sec. 38)
special amendments)
13. Power to incur, create or increase bonded
Exception: Corporations created by special law
indebtedness (Sec. 38)
POWER TO ADOPT BY-LAWS
14. Power to deny pre-emptive right (Sec. 39)
A corporation, once formed is required to adopt its
15. Power to sell or dispose corporate assets (Sec. 40)
by-laws, not contrary to law, morals or public policy, within
16. Power to acquire own shares (Sec. 41) one month from receipt of official notice of the issuance of
certificate of incorporation or registration.
17. Power to invest corporate funds in another
corporation or business or for any other purpose (Sec. 42) POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS

18. Power to declare dividends (Sec. 43) The power of a corporation to issue or sell stock is an
inherent right except where it sells or issues stocks of other
19. Power to enter into management contract (Sec. 44) corporations (Securities Regulation Code).
POWER TO SUE AND BE SUED POWER TO ACQUIRE/ALIENATE PROPERTY
The residence of the corporation is the place of its Real or personal properties must be acquired, held or
principal office as may be indicated in its articles of conveyed as the transaction of the lawful business of the
incorporation and may, therefore, be sued only at that place. corporation may reasonably and necessarily require.
(CRS vs. Antillon) Furthermore, it shall be subject to the limitations imposed by
law and the Constitution.
Service of summons upon a corporation must be
made upon: A corporation cannot undertake acquisition of
property which would have no purpose and would have no
1. President,
necessary connection with its legitimate business. (Luneta
2. Managing partner, Motors Co. vs. A.D. Santos, Inc.)

3. General manager, A corporation whose business may properly


conducted in a populous center may acquire an appropriate lot
4. Corporate secretary, and construct thereon an edifice with facilities in excess of its
5. treasurer, or own immediate requirements. (Govt. vs. El Hogar)

6. In-house counsel A corporation may register alienable public lands if it


has been held by it, personally or through its predecessor-in-
Strict compliance with the mode of service is interest, openly, continuously and publicly within the
necessary to confer jurisdiction of the court over a prescribed statutory period of 30 years under the Public Land
corporation. The officer upon whom service is made must be Law, as amended, since it is converted into private property by
one who is named in the statute; otherwise the service is mere lapse of completion of said period. (Dir. of Lands vs. CA)
insufficient. (Delta Motor Sales Corp. vs. Mangosing)
POWER TO MAKE REASONABLE DONATIONS
Under the new rules, service of summons upon an
agent of the corporation is no longer authorized. (E.B. Villarosa Limitations imposed upon corporate donations:
& Partner Co., LTD. vs. Benito) 1. The donation must be reasonable;
POWER OF SUCCESSION 2. It must be for public welfare, or for hospital,
Right of succession – a corporation persists to exist charitable, scientific, cultural or similar purpose; and
despite the death, incapacity, civil interdiction or withdrawal 3. It shall not be in aid of any political party or candidate,
of the stockholders or members thereof. or for purpose of partisan political activity.

POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER


PLANS

AQUILA LEGIS FRATERNITY While as a rule an ultra vires act is one committed
outside the object for which a corporation is created as
Corporation Law Reviewer defined by law of its organization and therefore beyond the
powers conferred upon it by law, there are however certain
Page 25 of 87
corporate acts that may be performed outside of the scope of
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation. (Republic
POWER TO ADOPT AND USE COMMON SEAL vs. Acoje Mining Co., Inc.)
Statutes empowering corporations to make and own POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
a seal are not mandatory but merely permissive. NECESSARY TO CARRY OUT ITS PURPOSES (IMPLIED POWERS)
POWER TO AMEND ARTICLES OF INCORPORATION Classification of implied powers:
1. Acts in the usual course of business 6. In case of extension, the same must be made during
the lifetime of the corporation;
2. Acts to protect debts owing to the corporation
7. Any dissenting stockholder may exercise his appraisal
3. Embarking on a different business
right;

8. Submission of the amended articles with the SEC; and

9. Approval thereof by the SEC.


AQUILA LEGIS FRATERNITY
POWER TO INCREASE/DECREASE CAPITAL; INCUR, CREATE OR
Corporation Law Reviewer INCREASE BONDED INDEBTEDNESS

Page 26 of 87 Requirements and procedure:

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 1. Approval by the majority vote of the board of
directors or trustees;
4. Acts in part or wholly to protect or aid employees
2. Ratification by the stockholders representing at least
5. Acts to increase business 2/3 of the outstanding capital stock or 2/3 of the members in
case of non-stock corporations;
A corporation has authority to do what will
legitimately tend to effectuate the express purposes and 3. The ratification must be at a meeting duly called for
objects; that it may ordinarily do all things that are convenient, that purpose;
suitable or necessary to enable it to fully perform the
undertaking designated in its charter, and for which it is 4. Prior written notice of the proposed action must be
organized. made stating the time and place of meeting addressed to each
stockholder or member at his place of residence, either by mail
There must be a logical and necessary relation of the or personal service;
act to the corporate purpose. (NPC vs. Vera)
5. A certificate in duplicate must be signed by a majority
If the act is one which is lawful in itself and not of the directors of the corporation, countersigned by the
otherwise prohibited, and is done for the purpose of serving chairman and the secretary of the stockholder‟s meeting,
corporate ends, and reasonably contributes to the promotion setting forth the matters contained in subsection 1 to 7 of Sec.
of those ends in a substantial and not in a remote and fanciful 38;
sense, it may be fairly considered within the corporation‟s
charter powers. (NPC vs. Vera)

Examples:

1. Operation and maintenance of an electric plant for a AQUILA LEGIS FRATERNITY


cement factory. (Teresa Electric Power Co., Inc. vs. PSC)
Corporation Law Reviewer
2. NPC‟s undertaking of stevedoring services for its
Page 27 of 87
power plant. (NPC vs. Vera)
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
3. International School‟s imposition of a development
fee for expansion and maintenance. (Powers vs. Marshall) 6. In case of increase in capital stock, 25% of such
increased capital must be subscribed and that at least 25% of
POWER TO EXTEND/SHORTEN CORPORATE TERM
the amount subscribed must be paid either in cash or property;
Requirements and procedure:
7. In case of decrease in capital stock, the same must not
1. Approval by the majority vote of the board of prejudice the right of the creditors;
directors or trustees;
8. Filing of the certificate of increase and amended
2. Ratification by the stockholders representing at least articles with the SEC; and
2/3 of the outstanding capital stock or 2/3 of the members in
9. Approval thereof by the SEC.
case of non-stock corporations;
3 ways of increasing the capital stock:
3. The ratification must be at a meeting duly called for
that purpose; 1. Increasing the par value of the existing number of
shared without increasing the number of shares;
4. Prior written notice of the proposal to extend or
shorten the corporate term must be made stating the time and 2. Increasing the number of existing shares without
place of meeting addressed to each stockholder or member at increasing the par value thereof; and
his place of residence, either by mail or personal service;
3. Increasing the number of existing shares and at the
5. In case of extension, the same cannot be made ealier same time increasing the par value of the shares.
than five (5) years prior to the original or subsequent expiry
Existence of unissued or unsubscribed share out of
date unless there are justifiable reasons for an earlier
the original capital stock will not prohibit the increase of
extension;
capital stock.
Reasons for decreasing capital stock: Corporation Law Reviewer

1. To reduce or wipe out existing deficit where no Page 28 of 87


creditors would thereby be affected;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
2. When capital is more than what is necessary to
The exceptions do not apply to stockholders of a close
procreate the business or reduction of capital surplus; or
corporation.
3. To write down the value of its fixed assets to reflect
The right may be lost by waiver, expressly or impliedly
the present actual value in case where there is a decline in the
by inability or failure to exercise it after having been notified.
value of the fixed assets of the corporation.
The pre-emptive right covers all issues or disposition
A corporation has no power to release an original
of share of any class. It includes new share issued pursuant to
subscriber to its capital stock from the obligation of paying for
an increase in capital stock, unissued shares which form part
his shares, without a valuable consideration for such release;
of the original capital stock and treasury shares.
and as against creditors a reduction of the capital stock can
take place only in the manner and under the conditions POWER TO SELL/DISPOSE ASSETS
prescribed by law. Moreover, strict compliance with the
statutory regulations is necessary. (Philippine Trust Company There is a sale or other disposition of substantially all
vs. Rivera) the corporate property and assets if the corporation would
thereby be rendered incapable of continuing the business or
A reduction of capital stock may not be used as a accomplishing the purpose for which it was incorporated.
subterfuge, a deception as it were, to camouflage the fact that
a corporation has been making profits to obviate a just sharing Conditions for the valid exercise of this right:
to labor. (Madrigal & Co. vs. Zamora)
1. Resolution by the majority vote of the board of
A corporation which has the power to borrow or raise directors or trustees;
money, to contract for labor or services, or otherwise contract
2. Authorization from the stockholders representing at
a debt has the implied power to issue bonds in payment or as
least 2/3 of the outstanding capital stock or 2/3 of the
a security provided it violates no prohibition or restriction in
members in case of non-stock corporations;
its charter or any other statutes.
3. The ratification must be at a meeting duly called for
Corporate bonds must be registered and approved by
that purpose;
the SEC before they are issued.
4. Prior written notice of the proposed action must be
POWER TO DENY PRE-EMPTIVE RIGHTS
made stating the time and place of meeting addressed to each
Pre-emptive right – is a right granted by law to all stockholder or member at his place of residence, either by mail
existing stockholders of a stock corporation to subscribe to all or personal service;
issues or disposition of shares of any class, in proportion to
5. The sale of the assets shall be subject to the
their respective stockholdings, subject only to the limitations
provisions of existing laws on illegal combinations and
imposed under Sec. 39.
monopolies; and
The basis for the grant of this right is the preservation,
6. Any dissenting stockholder shall have the option to
unimpaired and undiluted, of the old stockholders‟ relative
exercise his appraisal right.
and proportionate voting strength and control, that is, the
existing ratio of their proprietary interest and voting power in 7. (Note: In non-stock corporations where there are no
the corporation. members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the
All stockholders of a stock corporation shall enjoy pre-
corporation to enter into such transaction.)
emptive right to subscribe to all issues or disposition of shares
of any class, in proportion to their respective shareholdings, Exception to application of the procedure and
unless such right is denied by the articles of incorporation or requirements:
an amendment thereto.
1. The sale, lease, exchange, mortgage, pledge or other
Exceptions: dispose of property and assets is necessary in the usual and
regular course of business of the corporation; or
1. Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or 2. The sale or other disposition of property and assets is
appropriated for the conduct of the corporation‟s remaining
2. Shares to be issued in good faith with the approval of
business.
the stockholders representing two- thirds (2/3) of the
outstanding capital stock, in exchange for property needed for The sale or other disposition of all or substantially all
corporate purposes or in payment of a previously contracted of the corporate property or assets must be voted for by the
debt. legitimate board and concurred in by the bona fide
stockholders or members. (IDP vs. CA)

General rule: Where a corporation sells or otherwise


transfers all of its assets to another corporation, the latter is
AQUILA LEGIS FRATERNITY not liable for the debts and liabilities of the transferor.
Exceptions: 2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members in
1. Where the purchaser expressly or impliedly agrees to
case of non-stock corporations;
assume such debts;
3. The ratification must be at a meeting duly called for
2. Where the transaction amounts to a consolidation or
that purpose;
merger of the corporations;
4. Prior written notice of the proposed investment and
3. Where the purchasing corporation is merely a
the time and place of meeting shall be made, addressed to
continuation of the selling corporation; and
each stockholder or member at his place of residence, either
4. Where the transaction is entered into fraudulently in by mail or personal service; and
order to escape liability for such debts.
5. Any dissenting stockholder shall have the option to
exercise his appraisal right.

The approval of the stockholders or members is not


required where the investment is reasonably necessary to
AQUILA LEGIS FRATERNITY accomplish its primary purpose.
Corporation Law Reviewer An unauthorized investment which is not illegal or
void ab initio or not contrary to law, morals, public order or
Page 29 of 87
public policy, is merely voidable and may become binding and
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C enforceable when ratified by the stockholders. (Gokongwei, Jr.
vs. SEC)
POWER TO ACQUIRE OWN SHARES
POWER TO DECLARE DIVIDENDS
A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or Dividends – are corporate profits set aside, declared
purposes, including but not limited to the following cases: and ordered by the Board of Directors to be paid to the
stockholders.
1. To eliminate fractional shares arising out of stock
dividends; Dividends can only be declared out of unrestricted
retained earnings.
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a Unrestricted retained earnings – undistributed
delinquency sale, and to purchase delinquent shares sold earnings of a corporation which have not been allocated for
during said sale; any managerial, contractual or legal purpose and which are
free for distribution to the stockholders as dividends.
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares; and

4. To redeem redeemable shares.

General rule: the corporation must have unrestricted


retained earnings.

Exceptions:

1. Redemption of redeemable shares; and

2. Stockholder‟s right to compel a close corporation to


purchase his shares when the corporation has sufficient assets
to cover its debts and liabilities.

The acquisition of shares must be made in good faith,


free from fraud, actual or constructive, and that the
corporation is not insolvent or in the process of dissolution and Types of dividends:
that the rights of creditors and other stockholders are in no
way injuriously affected.
AQUILA LEGIS FRATERNITY
POWER TO INVEST FUNDS
Corporation Law Reviewer
The right refers to investment in the form of money,
stock, bonds and other liquid assets and does not include real Page 30 of 87
properties or other fixed assets.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Requirements and procedure:

1. Resolution by the majority vote of the board of


1. Cash dividend – those that are payable in lawful
directors or trustees;
money.
2. Property dividend – those that take form of bonds, 1. Resolution by the board of directors or trustees;
notes, evidences of indebtedness or stock in other
2. Approval by the stockholders representing a majority
corporations.
of the outstanding capital stock or majority of the members in
3. Stock dividends – refer to the corporation‟s shares of case of non-stock corporations;
stock.
3. The approval must be at a meeting duly called for that
Rules on dividends due on delinquent stock: purpose;

1. Cash dividend – first applied to the unpaid balance on 4. The contract shall not be for a period longer than 5
subscription costs and expenses. years for any one term, except those which relate to
exploration, development or utilization of natural resources
2. Stock dividend – withheld until subscription is fully
which may be entered into for such periods as may be
paid.
provided by pertinent laws and regulations.
General rule: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of their paid-in
capital stock.

Exceptions: AQUILA LEGIS FRATERNITY

1. When justified by definite corporate expansion Corporation Law Reviewer


projects or programs approved by the board of directors; or
Page 31 of 87
2. When the corporation is prohibited under any loan
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
agreement with any financial institution or creditor, whether
local or foreign, from declaring dividends without its/his When approval of the stockholders of the managed
consent, and such consent has not yet been secured; or corporation owning at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations
3. When it can be clearly shown that such retention is
are required:
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for 1. Where a stockholder or stockholders representing
probable contingencies. the same interest of both the managing and the managed
corporations own or control more than 1/3 of the total
General rule: The board of directors exercise
outstanding capital stock entitled to vote of the managing
exclusive authority in declaring dividends.
corporation;
Exception: In declaring stock dividends, the approval
2. Where a majority of the members of the board of
of the stockholders representing at least 2/3 of the
directors of the managing corporation also constitute a
outstanding capital stock is required.
majority of the members of the board of directors of the
The judgment of the board of directors in the matter managed corporation; or
of declaring dividends is conclusive except when they act in
3. Where the contract would constitute the
bad faith, or for a dishonest purpose or act fraudulently,
management or operation of all or substantially all of the
oppressively, unreasonably or unjustly or abuse of discretion
business of another corporation, whether such contracts are
can be shown so as to impair the rights of the complaining
called service contracts, operating agreements or otherwise.
stockholders to their just proportion of corporate profits.
ULTRA-VIRES ACTS
The essential test of bad faith is to determine if the
policy of the directors is dictated by their personal interest Ultra-vires acts – are those that can not be executed
rather than the corporate welfare. or performed by a corporation because they are not within its
express, inherent or implied powers as defined by its charter
The right of the stockholders to be paid dividends vest
or articles of incorporation.
as soon as they have been lawfully and finally declared by the
Board of Directors. Consequences of ultra-vires acts:
No revocation of dividend may be had unless it has 1. On the corporation itself – the proper forum may
not been officially communicated to the stockholders or is in suspend or revoke, after proper notice and hearing, the
the form of stock dividends which is revocable at any time prior franchise or certificate of registration of the corporation for
to distribution. serious misrepresentation as to what the corporation can do
or is doing to the great damage or prejudice of the general
Stock dividends cannot be issued to a person who is
public.
not a stockholder. (Neilson & Co., Inc. vs. Lepanto
Consolidated Mining Co.) 2. On the rights of the stockholders – a stockholder may
either an individual or derivative suit to enjoin a threatened
Directors are not liable for declaration of dividend
ultra-vires act or contract.
contrary to law, unless attended with bad faith, gross
negligence or willful and knowing assent. (Ladia) 3. On the immediate parties – (a) if the contract is fully
executed on both sides, the contract is effective; (b) if the
POWER TO ENTER INTO MANAGEMENT CONTRACTS
contract is executory on both sides, neither party can maintain
Requirements and procedure: an action for its non-performance; and (c) if the contract is
executory on one side only, and has been fully performed on
the other, the party who has received the benefits is estopped 1. The by laws must not be inconsistent with the Code;
to set up that the contract is ultra-vires.
2. If adopted prior to incorporation:
Acts which are clearly beneficial to the company or
a. Approved and signed by all the incorporators;
necessary to promote the interest or welfare of the
corporation, its employees and their families, or in the b. Submitted together with the articles of incorporation
legitimate furtherance of its business are within corporate to the SEC;
powers. (Republic vs. Acoje Mining)
3. If adopted subsequent to incorporation:
Mere ultra-vires acts which are not illegal per se may
become binding and enforceable either by ratification, a. Adopted within one (1) month after receipt of official
estoppel or on equitable grounds unless the public or third notice of the issuance of its certificate of incorporation by the
parties are thereby prejudiced. (Privano vs. De la Rama SEC;
Steamship)
b. Affirmative vote of the stockholders representing at
Corporations authorized to acquire the bonds have least a majority of the outstanding capital stock, or of at least
the implied power to guarantee them in order to place them a majority of the members in case of non- stock corporations,
upon the market under better, more advantageous conditions,
c. Signed by the stockholders or members voting for
and thereby secure the profit derived from their sale. When a
them
contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the d. Kept in the principal office of the corporation, subject
absence of proof to the contrary, be presumed to be valid. to the inspection of the stockholders or members during office
Corporations are presumed to contract within their powers. hours.
The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would e. A copy thereof, duly certified to by a majority of the
defeat the ends of justice or work a legal wrong. (Carlos vs. directors or trustees countersigned by the secretary of the
Midoro Sugar Co.) corporation, must be filed with the SEC which shall be attached
to the original articles of incorporation.
Actions which are beyond the powers of the
corporation as embodied in its articles of incorporation and 4. Certification of the appropriate government agency
have absolutely no relation to the avowed purpose of the concerned to the effect that such by- laws or amendments are
corporation are ultra-vires. (Japanese War Notes Claimants in accordance with law.
Assoc., Inc. vs. SEC) 5. Issuance by the Securities and Exchange Commission
Corporate officers have no power to execute for mere of a certification that the by-laws are not inconsistent with this
accommodation a negotiable instrument of the corporation Code.
for their individual debts or transactions arising from or in Contents of by-laws:
relation to matters in which the corporation has no legitimate
concern. Since such accommodation paper cannot thus be 1. The time, place and manner of calling and conducting
enforced against the corporation, especially since it is not regular or special meetings of the directors or trustees;
involved in any aspect of the corporate business or operations,
2. The time and manner of calling and conducting
the signatories thereof shall be personally liable therefor, as
regular or special meetings of the stockholders or members;
well as for the consequences arising from their acts in
connection therewith. (Crisologo-Jose vs. CA) 3. The required quorum in meetings of stockholders or
members and the manner of voting therein;
CHAPTER 8: BY-LAWS
4. The form for proxies of stockholders and members
By-laws – are rules and ordinances made by a
and the manner of voting them;
corporation for its own government; to regulate the conduct
and define the duties of the stockholders or members towards 5. The qualifications, duties and compensation of
the corporation and among 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


AQUILA LEGIS FRATERNITY
of office of all officers other than directors or trustees;
Corporation Law Reviewer
8. The penalties for violation of the by-laws;
Page 32 of 87
9. In the case of stock corporations, the manner of
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C issuing stock certificates; and

themselves. They are rules and regulations or private laws 10. Such other matters as may be necessary for the
enacted by the corporation to regulate, govern and control its proper or convenient transaction of its corporate business and
own actions, affairs and concerns and its stockholders or affairs.
member and directors and officers with relation thereto and
By-laws are subordinate to the articles of
among themselves in their relation to it.
incorporation, the Corporation Code and other statutes which
Requirements and procedure for adoption of by-laws: form part of the corporate charter.
By-laws become effective only upon the approval of 1. It must not be contrary to law, public policy or morals.
the SEC
2. It must not be inconsistent with the articles of
incorporate.

3. It must be general and uniform in its effect or


applicable to all alike or those similarly situated.

4. It must not impair obligations and contracts or vested


rights.

5. It must be reasonable.

CHAPTER 9: MEETINGS

Meetings – applies to every duly convened assembly


either stockholders, members, directors or trustees, manages,
etc. for any legal purpose, or the transaction of business of a
common interest.
Time of filing: Classes of meetings:

1. General
AQUILA LEGIS FRATERNITY 2. Special
Corporation Law Reviewer STOCKHOLDER’S MEETINGS
Page 33 of 87 Requirements to have a valid stockholder‟s meeting:
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 1. It must be held on the date fixed in the by-laws or in
accordance with law.

2. Prior notice must be given.


1. Prior to incorporation – must be signed by all the
incorporators, must be filed together with the articles of 3. It must be held at the proper place.
incorporation
4. It must be called by the proper party.
2. After incorporation – approval of at least a majority
of the outstanding capital stock 5. Quorum and voting requirements must be met

Failure to file by-laws may result to suspension or It must be held on the date fixed in the by-laws or in
revocation of corporate franchise after proper notice and accordance with law.
hearing
Regular meetings shall be held annually on a date
Failure to file by-laws does not result in automatic fixed in the by-laws, or if not so fixed, on any date in April of
dissolution. (LGVHA vs. CA) every year as determined by the board of directors or trustees.

By-laws are internal rules an cannot bind, effect or


prejudice third persons without knowledge. (Fleisher vs. Botica
Nolasco)
AQUILA LEGIS FRATERNITY
Two modes of amending or repealing by laws or
adopting a new one: Corporation Law Reviewer

1. By a majority vote of the directors or trustees and the Page 34 of 87


majority vote of the outstanding capital stock or members, at
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
a regular or special meeting called for that purpose; or
Special meetings of stockholders or members shall be
2. By the board of directors alone when delegated by
held at any time deemed necessary or as provided in the by-
2/3 of the outstanding capital stock or members
laws.
Delegated power to amend, repeal or adopt by-laws
Prior notice must be given.
may be revoked
Regular – 2 weeks prior notice
Incorporation of an invalid by-law provision is not a
misdemeanor. It does not justify the dissolution of the Special – 1 week prior notice
corporation. (Govt. vs. El Hogar)
The by-laws may provide for a different period
The by-laws may disqualify a stockholder from being (shorter or longer)
elected into office if he has a substantial interest in a
competitor corporation to avoid any possible adverse effects Failure to give notice of a meeting would render the
of conflicting interest of a director. (Gokongwei, Jr. vs. SEC) resolution made thereunder voidable at the option of the
stockholder or member who was not notified. (Board of
Elements of a valid by laws: Directors vs. Tan)
Notice may be waived, expressly or impliedly.

Notice must state the agenda otherwise it may


become voidable.
AQUILA LEGIS FRATERNITY
Notice of meetings shall be in writing, and the time
Corporation Law Reviewer
and place thereof stated therein.
Page 35 of 87
It must be held at the proper place.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General Rule: Stockholders' or members' meetings,
whether regular or special, shall be held in the city or Special meetings – held at any time upon the call of
municipality where the principal office of the corporation is the president or as provided in the by-laws
located, and if practicable in the principal office of the
corporation. Meetings may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.
Exceptions to the rule:
Notice must be sent at least one (1) day prior to the
1. A non-stock corporation, in its by laws, may provide scheduled meeting, unless otherwise provided by the by-laws.
for any place within the Philippines.
Notice may be waived, expressly or impliedly.
2. Metro Manila is considered a city or municipality.
If the notice requirement is not complied with the
It must be called by the proper party. meeting is illegal and will not bind the corporation except
when subsequently ratified. (Lopez vs. Fontecha)
Persons who may call the meeting:
In a close corporation, the act of any one director may
1. The person or persons authorized under the by-laws;
bind the corporation without a meeting.
2. Absent of any provision in the by-laws, the president;
Presence at a meeting waives want of notice.
3. Under Sec. 28 (removal of director), by the secretary
Physical presence at the meeting is not required;
on order of the president or on written demand of the
teleconferencing and videoconferencing is allowed. (RA 8792)
stockholder representing or holding at least a majority of the
outstanding capital stock or majority of the members entitled The president shall preside at the meeting, unless the
to vote in a non-stock corporation, or the stockholder or by-laws provide otherwise.
member making the demand if there is no secretary or he
refuses to do so; and A director or trustee cannot attend or vote by proxy
at any board meeting.
4. On order of the proper forum under Sec. 50.
STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING
A stockholder may only petition the SEC to issue an
order directing the petitioner to call a meeting when there is General rule: The right to vote is an inherent right and
no person authorized to call a meeting. Otherwise, the remedy the stockholder may vote any way he pleases.
is to file a petition for mandamus.
Exceptions:
Quorum and voting requirements must be met
1. Non-voting shares are not entitled to vote except in
A quorum shall consist of the stockholders those instances provided for in the penultimate paragraph of
representing a majority of the outstanding capital stock. Sec. 6

The by-laws or the Code itself may provide for a 2. Treasury shares
greater quorum.
3. Delinquent shares
The basis of determining the presence of a quorum:
4. Unregistered transferee of stock
1. Stock corporation – total subscription irrespective of
General rule: Stockholders or members may vote
the amount paid by them.
personally or through a representative by way of proxy, voting
2. Non-stock corporation – total number of registered trust agreement or by the executor, administrator, receiver of
voting members. other legal representative.

A quorum once present is not broken by the Exception: In non-stock corporations, the right to
subsequent withdrawal of a part or fraction of the vote may be limited, broadened or denied in the articles of
stockholders. incorporation or in the by-laws.

If the voting requirement is met, any resolution The right to vote is vested with the legal owner of the
passed in the meeting, even if improperly held or called will be shares.
valid if all the stockholders or members are present or duly
In case of pledged or mortgaged shares, the pledgor
represented.
or mortgagor is entitled to vote in absence of a written
DIRECTORS’/TRUSTEES’ MEETING agreement (recorded in the corporate books) to the contrary.
(Sec. 55)
Regular meetings – held monthly, unless the by-laws
provide otherwise
Executors, administrators, receivers, and other legal 2. To the election committee
representatives duly appointed by the court may attend and
3. By a subsequent proxy to another
vote in behalf of the stockholders or members without need of
any written proxy. (Sec. 50) 4. By sale of the shares
An executor or administrator of a stockholder may VOTING TRUST
not be elected unless he owns at least 1 share.
A voting trust is one created by an agreement
General Rule: In case of shares jointly owned, the between a group of stockholders of a corporation and a
consent of all the co-owners shall be necessary. trustee, or a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided
Exceptions:
that for a term of years, or for a period contingent upon a
1. Written proxy signed by all the co-owners certain event, or until the agreement is terminated, control
over the stock owned by such stockholders, shall be lodged in
2. The shares are owned in an "and/or" capacity
the trustee, either with or without reservation to the owners
PROXY or persons designated by them the power to direct how such
control shall be used. It is a device of binding stockholders to
Proxy – the authority given by the stockholder or vote as a unit and thus assuring a desirable stability and
member to another to vote for him at a stockholders‟ or continuity in management in situations where it is needed.
members‟ meeting. It also refers to the instrument or paper
which is evidence of the authority of the agent or the holder Requirements:
thereof to vote for and in behalf of the stockholder or member.
1. It should confer upon the trustee or trustees the right
to vote and other rights pertaining to the shares;

2. It should be for a period not exceeding five (5) years


at any time unless the voting trust is specifically required as a
AQUILA LEGIS FRATERNITY condition in a loan agreement, in which case, the voting trust
may be for a period exceeding five (5) years but shall
Corporation Law Reviewer
automatically expire upon full payment of the loan;
Page 36 of 87
3. It must be in writing and notarized, and shall specify
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C the terms and conditions thereof;

Two types of proxies: 4. A certified copy thereof must be filed with the
corporation and with the Securities and Exchange Commission,
1. General – gives a general discretionary power of otherwise, said agreement is ineffective and unenforceable;
attorney to vote for directors and all ordinary matters that may
properly come before a meeting. It is not an authority, 5. The certificate or certificates of stock covered by the
however, to vote for fundamental changes in the corporate voting trust agreement shall be canceled and new ones shall
charter or for other unusual transactions, unless specified. be issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books of
2. Limited – restricts the authority to vote on specified the corporation, it shall be noted that the transfer in the name
matters only and may direct the manner in which the vote will of the trustee or trustees is made pursuant to said voting trust
be cast. agreement;
Proxy voting may not be denied except in a non-stock
corporation.

Requirements:
AQUILA LEGIS FRATERNITY
1. In writing
Corporation Law Reviewer
2. Signed by the stockholder or member
Page 37 of 87
3. Filed before the scheduled meeting with the
corporate secretary Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

By-laws may reasonably regulate the form and 6. The trustee or trustees shall execute and deliver to
execution of proxies. the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect as
Unless otherwise provided in the proxy, it shall be certificates of stock.
valid only for the meeting for which it is intended.
7. It should not be entered into for the purpose of
No proxy shall be valid and effective for a period circumventing the law against monopolies and illegal
longer than five (5) years at any one time. combinations in restraint of trade or used for purposes of
A proxy is revocable unless coupled with an interest. fraud.

Revocation may be expresses: Voting trust distinguished from proxy

1. To the proxy holder


VOTING TRUST PROXY Conditional subscription – one made upon a
condition precedent, does not make the subscriber a
The beneficial owner of the shares ceases to be a stockholder
stockholder, or render him to pay the amount of his
of record of the corporation Legal title remains with
subscription, until the performance or fulfillment of the
the beneficial owner
condition.
The trustee votes as owner of the shares The proxy holder
Subscription upon special terms – an absolute
votes merely as an agent
subscription, making the subscriber a stockholder, and
The beneficial owner of the shares is disqualified to be a rendering him liable as such, as soon as the subscription is
director The owner of the shares may be elected as a director accepted, the special term being an independent stipulation.
since legal title remains with him

The purpose is to acquire voting control of the corporation


Generally used to secure voting and quorum
requirements or merely for the purpose of representing an AQUILA LEGIS FRATERNITY
absent stockholder
Corporation Law Reviewer
Irrevocable Revocable unless coupled with an interest
Page 38 of 87
The trustee can act and vote at any meeting during the
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
duration of the voting trust
In case of doubt, a subscription shall be considered
agreement A proxy holder can generally act as such only
one upon special terms in order to protect the creditors and
at a particular meeting
other subscribers.
The trustee may vote in person or by proxy A proxy holder
General rule: Conditional subscriptions are valid.
must vote in person
Exceptions:
The duration may exceed 5 years The duration may not
exceed 5 years 1. The charter or enabling act prohibits the same; or
Must be notarized and filed with the SEC Need not be 2. The conditions are such as to render their
notarized nor filed with the SEC performance beyond the powers of the corporation or in
violation of law or contrary to public policy.

An application for subscription which is at variance


A corporation is not a party to a voting trust
with the terms evidenced in a general form of subscription
agreement therefore it is not a real party interest in a suit to
must be accepted by the corporation to create a binding
enforce the same. (NIDC vs. Aquino)
contract. (Trillana vs. Quezon College, Inc.)
A voting trust transfers only voting and other rights
A condition facultative as to the debtor renders the
pertaining to the shares subject of the agreement or control
whole obligation void. (Trillana vs. Quezon College, Inc.)
over the stock. It does not include the assets, operation and
management of the corporation. (NIDC vs. Aquino) PRE-INCORPORATION SUBSCRIPTIONS
CHAPTER 10: STOCKS AND STOCKHOLDERS Types of subscriptions as to time of execution:
3 ways in which a person may become a stockholder: 1. Pre-incorporation subscriptions – subscriptions for
shares of stock of a corporation still to be formed; and
1. By a contract of subscription with the corporation;
2. Post-incorporation subscriptions – those made or
2. By the purchase of treasury shares from the
executed after the formation or organization of the
corporation; and
corporation.
3. By purchase or acquisition of shares from existing
General rule: A subscription for shares of stock of a
stockholders (includes purchase from the stock exchange).
corporation still to be formed is irrevocable.
SUBSCRIPTION CONTRACT
Exceptions:
Subscription – the mutual agreement of the
1. Lapse of a period of 6 months from the date of
subscribers to take and pay for the stocks of a corporation.
subscription;
Subscription contract – any contract for the
2. All the subscribers consent to the revocation; or
acquisition of unissued stock in an existing corporation or a
corporation still to be formed, not withstanding the fact that 3. The incorporation of said corporation fails to
the parties refer to it as a purchase or some other contract. materialize within 6 months or within a longer period as may
be stipulated in the contract of subscription.
A subscription contract is not required to be written;
an oral contract for subscription is valid and enforceable. The Exception to the exceptions: No pre-incorporation
statutes of fraud do not apply to a subscription contract subscription may be revoked after the submission of the
because such subscription does not fall under the statutory articles on incorporation to the SEC.
definition of a sale.
Pre-incorporation subscriptions are mandatory in Labor performed or services actually rendered to the
view of Secs. 13 and 14 which mandates that a corporation corporation must be capable of valuation and in fact fairly
may be registered as such only if at least 25% of its authorized valued.
capital stock has been subscribed and that at least 25% of the
Two theories in the valuation of property or services:
total subscription has been paid.
1. True value rule – the motives or intent of those
Stocks shall not be issued for a consideration less than
making the valuation are disregarded and the sole and decisive
the par or issued price thereof.
factor or question is whether or not the property or services
Consideration for the issuance of stock may be any or are in fact worth the value placed on them.
a combination of any two or more of the ff:
2. Good faith rule – the value of the property or services
1. Actual cash paid to the corporation; is a matter about which there can be an honest difference of
opinion. Therefore, if the parties have acted in good faith
2. Property, tangible or intangible, actually received by
without fraud or intentional over-valuation, the transaction
the corporation and necessary or convenient for its use and
cannot be overturned even if the later becomes evident that
lawful purposes at a fair valuation equal to the par or issued
the property or services were in fact worth much less than the
value of the stock issued;
value fixed on them initially.
3. Labor performed or services actually rendered to the
The set-off or satisfaction of a debt due from the
corporation;
corporation is a lawful and valid consideration for the issuance
4. Previously incurred indebtedness by the corporation; of stock.

5. Amounts transferred from unrestricted retained Amounts transferred from unrestricted retained
earnings to stated capital; and earnings to stated capital – refers to the declaration and
distribution of stock dividends where corporate earnings are
6. Outstanding shares in exchange for stocks in the capitalized.
event of reclassification or conversion.
Outstanding shares exchanged for stocks in the event
Stocks shall not be issued in exchange of promissory of reclassification or conversion – refers to stocks surrendered
notes or future services. Their realization is uncertain. to the corporation in exchange for a new or different type of
shares. (Ex. conversion of founder‟s shares to common
Issue – the making of a share contract or contract of
shares.)
subscription; transaction by which a person becomes the
owner of shares and by which new share contracts are created. The prohibition against the issuance of shares by
corporations except for actual cash or property at its fair
The issuance of shares is not dependent on the
valuation secures absolute equality among stockholders with
delivery of a certificate of stock.
respect to their liability upon stock subscriptions. A stipulation
is a stock subscription which obligates the subscriber to pay
nothing for the shares except as dividends may accrue upon
the stock is a discrimination in favor of the particular
AQUILA LEGIS FRATERNITY subscriber, and hence, illegal. (National Exchange Co., Inc. vs.
Dexter)
Corporation Law Reviewer
A corporation has no power to receive a subscription
Page 39 of 87 upon such terms as will operate as a fraud upon the other
subscribers as stockholders by subjecting the particular
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
subscribers to lighter burden, or by giving his greater rights and
Par or issue price – indicates the amount which the privileges, or as fraud upon creditors of the corporation by
original subscribers are supposed to contribute to the withdrawing or decreasing capital. Therefore, an agreement
corporate capital as the basis of the privilege of profit sharing between a corporation and a particular subscriber, by which
with limited liability. the subscription is not to be payable, or is to be payable in part
only, is illegal and void. (National Exchange Co., Inc. vs. Dexter)
Valuation of properties given as a consideration for
issuance of stock: CERTIFICATES OF STOCK AND THEIR TRANSFER

1. Tangible properties (particularly real properties): Certificate of stock – the piece of paper or document
which evidences the ownership of shares and a convenient
a. Appraisal report of an independent appraiser; instrument for the transfer of the title.
b. Zonal valuation as certified by the BIR; or

c. Market value indicated in the Real Estate Tax


Declaration.
AQUILA LEGIS FRATERNITY
2. Intangible properties (such as patents or copyrights):
Corporation Law Reviewer
a. Initial determination by the incorporators or the
board of directors subject to the approval of the SEC; or Page 40 of 87

b. Appraisal report of an independent appraiser. Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Requisites for the issuance of a certificate of stock: Exception: When the general principles of estoppel
apply. Thus, if the legal owner thereof, by his act or negligence,
1. It must be signed by the president or vice-president
is estopped from claiming ownership, (as when he clothes
and countersigned by the secretary or assistant secretary;
another with apparent title or authority to dispose of the
2. It must be sealed with the corporate seal; and same) a purchaser in good faith and without notice will acquire
a better title as against the owner so estopped.
3. The full amount of subscription together with interest
and expenses (in case of delinquent shares) if any is due, has Shares of stock are personal properties and the
been paid. owners thereof have the unbridled right to transfer the same
to anyone they please subject only to reasonable charter
General rule: Holders of subscribed shares not fully provisions.
paid are entitled to all the rights of a stockholder.
The duty of the corporate secretary to register a valid
Exceptions: transfer of shares is ministerial. Therefore, mandamus will lie
to compel registration in case the corporation or the corporate
1. The shares have been declared delinquent; or
secretary refuses
2. The stockholder exercises his appraisal right.

The issuance of a stock certificate is not a condition


sine quanon to consider a subscriber as a stockholder.
AQUILA LEGIS FRATERNITY
Two modes of transferring shares of stock:
Corporation Law Reviewer
1. When the corporation has already issued stock
certificates – only by delivery of the certificate or certificates Page 41 of 87
of stock indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

2. When the corporation has not yet issued certificates registration. (Rural Bank of Salinas vs. CA) However, the
of stock – by a duly notarized deed. transferee has no such right when his title to said shares has
no prima facie validity of is uncertain. (Tay vs. CA)
No transfer shall be valid, except as between the
parties, until the transfer is recorded in the books of the The right to transfer shares of stock may not be
corporation. unreasonably restricted or prohibited. Every owner of
corporate shares has the same uncontrollable right to alienate
Until registration is accomplished, the transfer of them and is under no obligation from selling them at his
stock, though valid between the parties, cannot be effective as sacrifice and for the welfare and benefit of the corporation and
against the corporation. The corporation looks only though its other stockholders. (Padgett vs. Bobcock & Templeton;
books for the purpose of determining who its stockholders are. Fleischer vs. Botica Nolasco)
Non-registration of a transfer of stock will not, However, the right to transfer may be “regulated” to
however, affect the validity thereof at least in so far as the give the corporation protection against colorable or fraudulent
contracting parties are concerned. transfer or to enable it to know who its stockholders are. Also,
as a matter of policy, the SEC allows the grant of “preferential
Reasons for the necessity of the registration of
rights” to existing stockholders and/or the corporation, giving
transfers of stock:
them the first option to purchase the shares of a selling
1. To enable the corporation to know who its stockholder within a reasonable period not exceeding 30 days
stockholders are; provided that the same is contained in the articles of
incorporation and in all of the stock certificates to be issued by
2. To enable the transferee to exercise his rights as a the corporation. This is considered “reasonable” since it
stockholder; merely suspends the right to transfer within the period
3. To afford the corporation an opportunity to object or specified.
refuse registration of the transfer in cases allowed by law (as A corporation may classify its shares and grant such
when it has unpaid claims on the shares transferred); “rights, privileges or restrictions” provided that such are made
4. To avoid fictitious and fraudulent transfers; and in the articles of incorporation and subject to reasonable
terms, conditions or period. (Go Soc & Sons vs. IAC)
5. To protect creditors who have the right to look upon
stockholders, in case of non-payment or watered shares, for Other restrictions on the right to transfer shares:
the satisfaction of their claims. 1. It is not valid, except as between the parties, until
The duty of the corporate secretary to record a valid recorded in the books of the corporation;
transfer of shares of stock is ministerial. Thus, he may be 2. Share of stock against which the corporation holds
compelled by mandamus. any unpaid claim shall not be transferable in the books of the
General rule: A certificate of stock is not a negotiable corporation; unpaid claims, refer to claims arising from unpaid
instrument. A bona-fide purchaser of a certificate of stock will subscription and not to any indebtedness which a stockholder
acquire no better title to the shares than his transferor had and may owe the corporation such as monthly dues;
will be subject to all rights, remedies and defenses which the
true and lawful owner may have.
3. Restrictions required to be indicated in the articles of Any restriction on a stockholder‟s right to dispose of
incorporation, by-laws and stock certificates of a close his shares must be construed strictly; and any attempt to
corporation; restrain a transfer of shares is regarded as being in restraint of
trade, in the absence of a valid lien upon its shares, and except
4. Restrictions imposed by special law, such as the Public
to the extent that valid restrictive regulations and agreements
Service Act requiring the approval of the government agency
exist and are applicable. Subject only to such restrictions, a
concerned if it will vest unto the transferee 40% of the capital
stockholder cannot be controlled in or restrained from
of the public service company;
exercising his right to transfer by the corporation or its officers
5. Sale to aliens in violation of maximum ownership of or by other stockholders, even though the sale is to a
shares under the Nationalization Laws; and competitor or the company, or to an insolvent person, or even
though a controlling interest is sold to one purchaser.
6. Those covered by reasonable agreement of the Therefore, restrictions consisting in the word “non-
parties. transferable” is illegal. (Padgett vs. Babcock & Templeton)
Transfer – refers to absolute and unconditional The suspension of the power to sell shares of stock
conveyance of the title and ownership of a share of stock to which has a beneficial purpose, results in the protection of the
warrant registration in the books of the corporation in order corporation as well as of the individual parties to the contract,
to bind the latter and other third persons. (Monserrat vs. and is reasonable as to the length of time of suspension is valid.
Ceron) (Lambert vs. Fox)
Only the transfer or absolute conveyance of the An indorsee of an undelivered certificate of stock has
ownership of the title to a share need be entered and noted no power to effectively transfer the shares to other persons or
upon the books of the corporation in order that such transfer his nominees. For an effective transfer of shares of stock the
may be valid, therefore, inasmuch as a chattel mortgage of the mode and manner of transfer prescribed by law must be
aforesaid title is not a complete and absolute alienation of the followed. (Embassy Farms, Inc. vs. CA)
dominion and ownership thereof, its entry and notation upon
the books of the corporation is not a necessary requisite to its Indorsement of the certificate of stock is a mandatory
validity. (Monserrat vs. Ceron) requirement of law for an effective transfer of a certificate of
stock. (Razon vs. IAC)
Chattel mortgages over shares of stock should be
registered both at the owner‟s domicile and in the province The right of a transferee/assignee to have stocks
where the corporation has its principal office or place of transferred to his name is an inherent right flowing from his
business in order to bind third persons. The ownership of ownership of the stocks. The corporation‟s obligation to
shares in a corporation is property distinct from the certificates register is ministerial. (Rural Bank of Salinas vs. CA)
which are merely the evidence of such ownership. The
The pledge of shares of stock does not vest ownership
property in the shares are deemed to be situated in the
of such shares to the pledgee. The pledgor remains the owner
province in which the corporation has its principal office or
during the pendency of the pledge and prior to foreclosure and
place of business. (Chua Guan vs. Samahang Magsasaka, Inc.)
sale. Therefore, the pledgee has no right to demand the
All transfers of shares should be entered in the books registration of the pledged shares in his name. In order that a
of the corporation. Transfers not so entered are invalid as to writ of mandamus may issue, it is essential that the person
attaching or execution creditors of the assignors as well as to petitioning for the same has a clear legal right to the thing
the corporation and to subsequent purchasers in good faith, demanded and that is it the imperative duty of the respondent
and indeed, as to all persons interested, except the parties to to perform the act required. (Tay vs. CA)
such transfer. (Uson vs. Diosomito)
Without a stock certificate, which is the evidence of
A clause contained in the by-laws of a corporation ownership of corporate stock, the assignment of corporate
which provides that the owner of a share of stock cannot sell shares is effective only between the parties to the transaction.
it to another person except to the defendant corporation is (Nava vs. Peers Marketing)
ultra-vires, violative of the property rights of shareholders, and
For a valid transfer of stocks, there must be strict
in restraint of trade. (Fleischer vs. Botica Nolasco Co.)
compliance with the mode of transfer prescribed by law.

1. There must be delivery of the stock certificate;

2. The certificate must be endorsed by the owner or his


AQUILA LEGIS FRATERNITY attorney-in-fact or other persons legally authorized to make
the transfer; and
Corporation Law Reviewer
3. To be valid against third parties, the transfer must be
Page 42 of 87 recorded in the books of the corporation.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C An assignment, without endorsement and delivery, while valid
as among the parties, does not necessarily make the transfer
Shares of stock being regarded as property, the
effective. The assignees cannot enjoy the status of a
owner of such shares may, as a general rule, dispose of them
stockholder, cannot vote nor be voted for, and will not be
as they see fit, unless the corporation has been dissolved, or
entitled to dividends, insofar as the assigned shares are
unless the right to do so is properly restricted, or the owner‟s
concerned. (Rural Bank of Lipa City, Inc. vs. CA)
privilege of disposing of his shares has been hampered by his
own action. (Padgett vs. Babcock & Templeton)
Delivery is not essential where it appears that the The duty of the corporate officers to issue stock
person sought to be held as stockholders are officers of the certificates to those entitled is a ministerial duty enforceable
corporation, and have custody of the stock books. (Tan vs. SEC) by mandamus.

After a valid transfer of share, the right to have such A stockholder whose subscription is not fully paid may
registered commences to exist. However, it would not follow not be issued a stock certificate for that portion already paid.
that said right should be exercised immediately or within a (Fua Cun vs. Summers and China Banking Corporation)
definite period. (Won vs. Wack Wack Golf & Country Club, Inc.)
WATERED STOCK
Certificates of stock are not negotiable instruments.
Watered stock – one which is issued by the
Consequently, a transferee under a forged assignment
corporation as fully paid-up shares when in fact the whole
acquires no title which can be asserted against the true owner,
amount of the value thereof has not been paid.
unless his own negligence has been such as to create an
estoppel against him. If the owner of the certificate has Directors or officers shall be solidarily liable with the
endorsed it in blank, and it is stolen from him, no title is stockholder concerned to the corporation and its creditors for
acquired by an innocent purchaser for value. (De Los Santos vs. the difference between the fair value received at the time of
Republic) issuance of the stock and the par or issued value of the same
for the following acts:

1. Consenting to the issuance of watered stocks; or

2. Having knowledge thereof, failing to forthwith


AQUILA LEGIS FRATERNITY
express his objection in writing and file the same with the
Corporation Law Reviewer corporate secretary.

Page 43 of 87 All creditors, whether prior or subsequent to the


issuance of watered stock may enforce payment of such water.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Ways in which watered stocks may be issued:
FORGED AND UNAUTHORIZED TRANSFERS
1. For a monetary consideration less than its par or
Forged and unauthorized transfer – what is forged or
issued value;
unauthorized is the transfer of the certificate from the true
and lawful owner to another person. 2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
Unauthorized issuance of certificate of stock – the act
of the corporation in issuing a certificate, either fraudulently 3. Gratuitously or under an agreement that nothing
or by mistake. shall be paid at all; or

General rule: In forged or unauthorized transfer of 4. In the guise of stock dividends when there are no
stock the purchaser acquires no title as against the lawful surplus profits of the corporation.
owner and will have no right or remedy against the
corporation (non-negotiability of stock certificates).

Exception: If after such forged or unauthorized


transfer, the corporation issues a new certificate and such AQUILA LEGIS FRATERNITY
certificate passes into the hands of subsequent bona fide
purchaser, the latter may rightfully acquire title thereto since Corporation Law Reviewer
the corporation will be estopped to deny the validity thereof.
Page 44 of 87
The subsequent purchaser in good faith took the shares by
virtue of the genuiness of the certificates issued by the Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
corporation or of the representation made by the corporation
that the same is valid and subsisting and that the person Evil effects of stock watering:
named therein is a stockholder of the corporation. He may 1. The corporation is deprived of its capital thereby
therefore, compel the corporation to recognize him as a hurting its business prospects, financial capability and
stockholder or claim reimbursement and damages against the responsibility;
latter.
2. Stockholders who paid their subscriptions in full, or
ISSUANCE OF STOCK CERTIFICATES promised to pay the same, are injured and prejudiced by the
Subscriptions to shares of stock are indivisible. Thus, reduction of their proportionate interest in the corporation;
no certificate of stock shall be issued to a subscriber until the and
full amount of his subscription together with interest and 3. Present and future creditors are deprived of
expenses (in case of delinquent shares), if any is due, has been corporate assets for the protection of their interest.
paid.
Two theories advanced as the basis for the liability on
Once a subscriber has paid his subscription in full, he water stocks:
becomes entitled to be issued a stock certificate.
1. Trust fund doctrine – treating the capital of the
corporation, inclusive of the unpaid portion of subscriptions to
said capital, as a “trust fund” which the creditors have a right 2. By a collection case in court.
to look up to for the satisfaction of their claims.

2. Fraud or misrepresentation theory – liability is based


on the false representation made by the corporation and the
stockholder concerned to the creditors that the true par value AQUILA LEGIS FRATERNITY
or issued price of the shared has been paid or promised to be
paid full. Corporation Law Reviewer

Effects of issuance of watered stock: Page 45 of 87

1. As to the corporation – when a corporation is guilty of Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
ultra-vires acts which constitute an injury to or fraud upon the
Failure or refusal of the corporation, through its
public, or which will tend to injure or defraud the public, the
board of directors to enforce or collect payment of unpaid
State may institute a quo-warranto proceeding to forfeit its
subscription will not prevent the creditors or the receiver of
charter for the misuse or abuse of its franchise.
the corporation to institute a court action to collect the unpaid
2. As between the corporation and the subscriber – the portion thereof (trust fund doctrine).
subscription is void; the subscriber is liable to pay the full par
Procedure for the enforcement of payment through
or issued value thereof, to render it valid and effective.
board action:
3. As to the consenting stockholders – they are
1. The board of directors, by a formal resolution,
estopped from raising any objection thereto.
declares the whole or any percentage of unpaid subscriptions
4. As to dissenting stockholder – in view of the dilution to be due and payable on a specific date. However, if the
of their proportionate interest in the corporation, they may contract of subscription provides the date or dates when
compel the payment of the “water” in the stock solidarily payment is due, no “call” declaration of the board is necessary;
against the responsible and consenting directors and officers
2. The stockholders concerned are given notice of the
inclusive of the holder of the watered stock.
board resolution by the corporation either personally or by
5. As to creditors – they may enforce payment of the registered mail. Publication of the notice of call is not required
difference in the price, or the water in the stock, solidary unless the by-laws provide otherwise. Notice is not likewise
against the responsible directors/officers and the stockholders necessary if the contract of the subscription stipulates a
concerned. specific date when any unpaid portion is due and payable;

6. As against transferees of the watered stock – his right 3. Payment shall be made in the date specified in the call
is the same as that of his transferor. If however, a certificate of or on the date provided for in the contract of subscription;
stock has been issued and duly indorsed to a bona fide
4. Failure to pay on the date required in the call or as
purchaser, without knowledge, actual or constructive, the
specified in the contract of subscription will render the entire
latter cannot be held liable, at least as against the corporation,
balance due and payable and making the stockholder liable for
since he took the shares on reliance of the misrepresentation
the interest;
made by the corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited from 5. If within 30 days from the date stated in the call or as
issuing certificates of stock until the full value of the may be provided in the contract of subscription no payment is
subscriptions have been paid and could not, therefore, deny made, all the stock covered by the subscription shall become
the validity of the stock certificate it issued as against a delinquent and shall be subject to a delinquency sale;
purchaser in good faith.
6. The board, by resolution, orders the sale of the
Subscribers for stock shall pay to the corporation delinquent stock stating the amount due and the date, time
interest on all unpaid subscriptions from the date of and place of the sale;
subscription, if so required by, and at the rate of interest fixed
in the by-laws. If no rate of interest is fixed in the by-laws, such 7. The sale shall be made not less than 30 days nor more
rate shall be deemed to be the legal rate. than 60 days from the date the stocks became delinquent;

ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS 8. Notice of the sale, with the copy of the board
resolution should be sent to every delinquent stockholder
When unpaid subscription or any percentage thereof, either personally or by registered mail;
together with interest if required, shall be paid:
9. Publication of the notice of sale must be made once a
1. On the date or dates fixed in the contract of week for two consecutive weeks in the newspaper of general
subscription; or circulation in the province or city where the principal officer is
located;
2. On the date or dates that may be specified by the
board of directors pursuant to a “call” declaring any or all 10. Sale at public auction if no payment is made by the
unpaid portion thereof to be so payable. delinquent stockholder in favor of the bidder who offered to
pay the full amount of the balance in the subscription, inclusive
Two possible remedies available to the corporation to
of interest, cost of advertisement and expenses for the
enforce payment of unpaid subscription:
smallest number of shares;
1. By board action (delinquency sale);
11. Registration or transfer of the shares of stock in the unpaid portion of stock subscriptions, the corporation may still
name of the bidder and corresponding issuance of the stock make use of the methods provided by the Code. (De Silva vs.
certificate covering the shares successfully bidded; Aboitiz & Co.)

12. If there be any remaining shares, the same shall be General rule: A valid and binding subscription for
credited in favor of the delinquent stockholder who shall be stock of a corporation cannot be cancelled so as to release the
entitled to the issuance of a certificate of stock covering such subscriber from liability thereon.
shares;
Exception: Consent of all the stockholders is given.
13. If there is no bidder at the public auction who offers
Exceptions to the exception:
to pay the total amount due plus interest, cost and expenses,
the corporation may, subject to the provisions of the Code, bid 1. Bona fide compromise;
for the same and the total amount due shall be credited or paid
in full in the corporate books; and 2. Set-off of a debt due from the corporation; or

14. The shares so purchased by the corporation shall be 3. Release supported by consideration. (Lingayen Gulf
vested in the latter as treasury shares. vs. Baltazar)

Highest bidder – is such bidder who shall offer to pay The NLRC has no jurisdiction to determine intra-
the full amount of the balance on the subscription together corporate disputes between the stockholder and the
with accrued interest, cost of advertisement and expenses of corporation as in the matter of unpaid subscriptions. (Apocada
sale, for the smallest number of shares or fraction of a share. vs. NLRC)

Grounds to question the delinquency sale: Unpaid subscriptions are not due and payable until a
call is made by the corporation for payment. (Apocada vs.
1. Irregularity or defect in the notice of sale; or NLRC)
2. Irregularity or defect in the sale itself. Subscription to the capital of a corporation
constitutes a fund to which the creditors have a right to look
for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its
AQUILA LEGIS FRATERNITY
debt. (Lumanlan vs. Cura)
Corporation Law Reviewer
The President of the Philippines is devoid of the
Page 46 of 87 prerogative of suspending the operation of any stature or any
of its items. Thus the President cannot condone the payment
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C of stock subscriptions in the event that the counterpart fund
to be invested by the government would not be available. (PNB
Two conditions before an action to recover
vs. Bitulok Sawmill, Inc.)
delinquent stocks irregularly sold may be allowed:
A stockholder is personally liable for the financial
1. The party seeking to maintain such action first pays or
obligations of a corporation to the extent of his unpaid
tenders to the party holding the stock the sum for which the
subscription. (Edward Keller & Co., Ltd. vs. Cob Group
same was sold, with interest from the date of the sale at the
Marketing, Inc.)
legal rate; and
The subscription to capital stock of the corporation,
2. The action shall be commenced by the filing of a
unless otherwise stipulated, is not payable at the moment of
complaint within six months from the date of the sale.
the subscriptions but on a subsequent date which may be fixed
A “call” is a condition precedent before the right of by the corporation. (Garcia vs. Suarez)
action to institute a recovery suit accrues. A demand is
Shares of stock become delinquent when no payment
required before a debtor may incur a delay in the performance
is made on the balance of all or any portion of the subscription
of his obligation.
on the date or dates fixed in the contract of subscription
Instances when a “call” is not necessary: without need of call, or on the date specified by the board of
directors pursuant to a call made by it.
1. The contract of subscription provides for a date or
dates when payment is due; or

2. The corporation has become insolvent.

A subscription for shares of stock does not require an AQUILA LEGIS FRATERNITY
express promise to pay the amount subscribed, as the law
Corporation Law Reviewer
implies a promise to pay on the part of the subscriber. The
subscriber is as much bound to pay the amount of the share Page 47 of 87
subscribed by him as he would be to pay any other debt, and
the right of the company to demand payment is no less Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
incontestable. (Velasco vs. Poizat)
General rule: No delinquent stock shall not be entitled
Notwithstanding the fact that the by-laws of the to:
corporation provides for a method for the collection of the
1. Be voted for or to vote; 2. To enter into a voting trust agreement;

2. Representation at any stockholder's meeting; or 3. To receive dividends and to compel their declaration
if warranted;
3. Any of the rights of a stockholder.
4. To transfer shares of stock subject only to reasonable
Exception: Delinquent stocks are entitled to the right
restrictions inclusive of the right of the transferee to compel
to dividends (any cash dividends due on delinquent
the registration of the transfer in the books of the corporation;
stockholders shall first be applied to the unpaid balance on his
subscription plus cost and expenses, while stock dividends 5. To be issued a certificate of stock for fully paid-up
shall be withheld until his unpaid subscription is paid in full). shares;

General rule: Holders of subscribed shares not fully 6. To exercise pre-emptive rights;
paid which are not delinquent shall have all the rights of a
stockholder.

Exception: Shares of stock not fully paid are not


entitled to be issued a certificate of stock. AQUILA LEGIS FRATERNITY
Requirements and procedure for issuance of new Corporation Law Reviewer
certificates of stock in lieu of those lost, stolen or destroyed:
Page 48 of 87
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with the Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
corporation an affidavit in triplicate setting forth:
7. To exercise their appraisal right;
a. The circumstances as to how the certificate was lost,
8. To institute and file a derivative suit;
stolen or destroyed;
9. To recover shares of stock unlawfully sold for
b. The number of shares represented by such certificate;
delinquency;
c. The serial number of the certificate; and
10. To inspect the books of the corporation;
d. The name of the corporation which issued the same.
11. To be furnished the most recent financial statements
2. He shall also submit such other information and of the corporation;
evidence which he may deem necessary.
12. To be issued a new stock certificate in lieu of the lost
3. Publication of a notice in a newspaper of general or destroyed one;
circulation published in the place where the corporation has
13. To have the corporation dissolved;
its principal office, once a week for 3 consecutive weeks at the
expense of the registered owner of such certificate of stock. 14. To participate in the distribution of the assets of the
corporation upon dissolution;
4. If no contest has been presented within 1 year from
the date of the last publication, the right to make such contest 15. In the case of a close corporation, to petition the SEC
shall be barred and said corporation shall cancel in its books to arbitrate a deadlock; and
the certificate of stock which has been lost, stolen or destroyed
and issue in lieu thereof new certificate of stock. However, the 16. In the case of a close corporation, to withdraw
registered owner may file a bond or other security, effective therefrom, for any reason, and to compel the purchase of his
for a period of 1 year, for such amount and in such form and shares.
with such sureties as may be satisfactory to the board of Certain obligations and liabilities of stockholders:
directors, in which case a new certificate may be issued even
before the expiration of the one 1 year period. 1. To pay the corporation the balance of his unpaid
subscriptions;
5. If a contest has been presented to said corporation or
if an action is pending in court regarding the ownership of said 2. To pay interest on his unpaid subscription if required
certificate of stock, the issuance of the new certificate of stock by the by-laws or by the contract of subscription;
shall be suspended until the final decision by the court
3. To answer to creditors for the unpaid portion of their
regarding the ownership of said certificate of stock.
subscription;
Except in case of fraud, bad faith, or negligence on the
4. To answer the “water” in their stocks;
part of the corporation and its officers, no action may be
brought against any corporation which shall have issued 5. To be liable, as general partners, for all debts,
certificate of stock in lieu of those lost, stolen or destroyed liabilities and damages of ostensible corporations; and
pursuant to the procedure above-described.
6. In case of a close corporation, to be personally liable
RIGHTS AND LIABILITIES OF STOCKHOLDERS for corporate torts when they actively participate in the
management of the corporation.
Certain basic rights for the protection of stockholders:
CHAPTER 11: CORPORATE BOOKS AND RECORDS
1. Participation in the management of the corporate
affairs by exercising their right to vote and be voted upon Records to be kept and maintained by the
either personally or by proxy; corporation:
1. Records of all business transactions – which include, financial statements may be certified under oath by the
among others, journals, ledgers, contracts, vouchers and treasurer or any responsible officer of the corporation.
receipts, financial statements and other books of accounts,
The basis of the right of the stockholder to inspect the
income tax returns, and voting trust agreement which must be
books and records of the corporation for a proper purpose is
kept and carefully preserved at its principal office.
to protect his interest as a stockholder.
2. Minutes of all meetings of stockholders or members
General rule: The right of stockholders to examine
and of the directors or trustees - setting forth in detail the time
corporate books extends to a wholly owned subsidiary which
and place of holding the meeting, how authorized, the notice
is completely under the control and management of the parent
given, whether the meeting was regular or special, if special its
company where he is such a stockholder. (Gokongwei vs. SEC)
object, those present and absent, and every act done or
ordered done thereat which must likewise be kept at the Exception: The subsidiary and the parent are legally
principal office of the corporation. being operated as separate and distinct entities.
3. Stock and transfer book – showing the names of the The right to inspect corporate books, although
stockholders, the amount padi or unpaid on all stock for which personal, may be exercised through an agent or representative
subscription has been made, a statement of every alienation, since it may be unavailing in many instances. (W.G. Philpotts
sale or transfer of stock made, the date thereof, and by and to vs. Philippine Manufacturing Co.)
whom made which must be kept either in the principal office
of the corporation or in the office of its stock transfer agent. The corporation, or its responsible directors and
officers cannot unduly restrict the right of inspection and may
These corporate books and records, inclusive of all not arbitrarily set a few days of the year within which the
business transactions and minutes of meetings, are subject to stockholder may make the inspection. (Pardo vs. Hercules
inspection by any director, trustee, stockholder or member of Lumber, Co.)
the corporation at reasonable hours on business days and a
copy of excerpts of said records may be demanded. Directors of a corporation have the unqualified right
to inspect the books and records of the corporation at all
General rule: Any officer or agent of the corporation reasonable hours. However, there is no absolute right to
who refuses to allow the inspection of corporate books and secure certified copies of the minutes of the corporation until
records, or any director or trustee who through a resolution by these minutes have been written up and approved by the
the board votes for such refusal shall be liable for damages and directors. (Vegaruth vs. Isabela Sugar Co., Inc.)
shall be guilty of an offense which shall be punishable under
Sec. 144. It is a required condition for the inspection of
corporate books that the one requesting it must not have been
guilty of using improperly any information secured through a
prior examination and that the person asking for such
examination must be acting in good faith and for a legitimate
AQUILA LEGIS FRATERNITY purpose in making his demand. (Gonzales vs. PNB)

Corporation Law Reviewer Remedies of a stockholder who is denied inspection


of corporate books:
Page 49 of 87
1. Mandamus;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
2. Damages either against the corporate or the
Exception. It shall be a defense that the person
responsible officer; or
demanding inspection
3. Criminal complaint based on Sec. 144 of the Code.
1. Has improperly used any information secured
through any prior examination of the records or minutes of CHAPTER 12: MERGER AND CONSOLIDATION
such corporation or of any other corporation; or
Merger – a union effected by absorbing one or more
2. Was not acting in good faith or for a legitimate existing corporations by another which survives and continues
purpose in making his demand. the combined business; the uniting of two or more
corporations by the transfer of property to one of them which
Within ten (10) days from receipt of a written request
continues in existence, the other or others being dissolved and
of any stockholder or member, the corporation shall furnish to
merged therein.
him its most recent financial statement, which shall include a
balance sheet as of the end of the last taxable year and a profit Consolidation – the uniting or amalgamation of two
or loss statement for said taxable year, showing in reasonable or more existing corporations to form a new corporation and
detail its assets and liabilities and the result of its operations. the termination of existence of the old ones.

At the regular meeting of stockholders or members,


the board of directors or trustees shall present to such
stockholders or members a financial report of the operations
of the corporation for the preceding year, which shall include AQUILA LEGIS FRATERNITY
financial statements, duly signed and certified by an
independent certified public accountant. However, if the paid- Corporation Law Reviewer
up capital of the corporation is less than P50,000.00, the
Page 50 of 87
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 1. There will only be a single corporation. In case of
merger, the surviving corporation, or in case of consolidation,
Requirements and procedure for merger or
the consolidated corporation;
consolidation:
2. Termination of the corporate existence of the
1. The board of directors or trustees of each constituent
constituent corporations, except that of the surviving or the
corporation shall approve a plan of merger or consolidation
consolidated corporation;
setting forth the following:
3. The surviving or the consolidated corporation will
a. The names of the constituent corporations;
possess all the rights, privileges, immunities and powers and
b. The terms of the merger or consolidation and the shall be subject to all the duties and liabilities of a corporation
mode of carrying the same into effect; organized under the Code;

c. A statement of changes, if any, in the articles of 4. The surviving or the consolidated corporation shall
incorporation; and possess all the rights, privileges, immunities and franchises of
the constituent corporations; and all property and all
d. Other provisions deemed necessary and desirable. receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other
2. Approval of the plan by the stockholders representing
interest of, or belonging to, or due to each constituent
2/3 of the outstanding capital stock or 2/3 of the members in
corporation, shall be deemed transferred to and vested in such
a non-stock corporations of each constituent corporation at
surviving or consolidated corporation without further act or
separate corporate meetings called for the purpose;
deed; and
3. Prior notice of such meeting, with a copy or summary
of the plan of merger or consolidation shall be given to all
stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally or by registered mail
stating the purpose thereof; AQUILA LEGIS FRATERNITY

4. Execution of the articles of merger or consolidation by Corporation Law Reviewer


each constituent corporation to be signed by the president or
Page 51 of 87
vice-president and certified by the corporate secretary or
assistant secretary setting forth the following: Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

a. The plan of the merger or consolidation; 5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations of
b. As to stock corporations, the number of shares
each of the constituent corporations; and any pending claim,
outstanding, or in the case of non-stock corporations, the
action or proceeding brought by or against any of such
number of members; and
constituent corporations may be prosecuted by or against the
c. As to each corporation, the number of shares or surviving or consolidated corporation. The rights of creditors
members voting for and against such plan, respectively. or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or
5. Submission of the articles of merger or consolidation consolidation.
in quadruplicate to the SEC subject to the requirement of that
if it involves corporations under the direct supervision of any Merger or consolidation does not become effective
other government agency or governed by special laws the upon the mere agreement of the constituent corporations. It
favorable recommendation of the government agency shall be effective only upon the issuance of a certificate of
concerned shall first be secured; and merger. (Associated Bank vs. CA)

6. Issuance of the certificate of merger or consolidation CHAPTER 13: APPRAISAL RIGHT


by the SEC at which time the merger or consolidation shall be
Appraisal right – the method of paying a shareholder
effective. If the plan, however, is believed to be contrary to
for the taking of his property; the statutory means whereby a
law, the SEC shall set a hearing to give the corporations
stockholder can avoid the conversion of his property into
concerned an opportunity to be heard upon proper notice and
another property not of his own choosing. The purpose of the
thereafter, the SEC shall proceed as provided in the Code.
right is to protect the property rights of dissenting
Any amendment to the plan of merger or stockholders from actions by the majority shareholders which
consolidation must be approved by majority vote of the alters the nature and character of their investment. It is a right
respective boards of directors or trustees of all the constituent granted to dissenting stockholders on certain corporate or
corporations and ratified by the affirmative vote of business decisions to demand payment of the fair market
stockholders representing at least 2/3 of the outstanding value of their shares.
capital stock or of 2/3 of the members of each of the
Instances when a stockholder may have the right to
constituent corporations.
dissent and demand payment of the fair value of his shares:
Mergers and consolidations may not be entered into
1. In case any amendment to the articles of
for the purpose of circumventing the law against monopolies
incorporation has the effect of:
and illegal combinations in restraint of trade or for purposes of
fraud. a. Changing or restricting the rights of any stockholder
or class of shares;
Effects of merger or consolidation:
b. Authorizing preferences in any respect superior to shares are restored and all dividend distributions which would
those of outstanding shares of any class; or have accrued on the shares shall be paid to the holder thereof.

c. Extending or shortening the term of corporate If the dissenting stockholder is not paid the value of
existence. his shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the No demand for payment may be withdrawn unless
corporate property and assets as provided in the Code; and the corporation consents thereto.

3. In case of merger or consolidation. Instances when the right to payment ceases:

Other instances provided for in the Code: 1. The stockholder withdraws his demand for payment
with the consent of the corporation;
1. Investment of corporate funds in another corporation
or business or for any other purpose; 2. The proposed corporate action is abandoned or
rescinded by the corporation;
2. In a close corporation, a stockholder has the right to
compel the corporation for any reason to purchase his shares 3. The proposed corporate action is disapproved by the
at their fair value which shall not be less than the par or issued SEC where such approval is necessary;
value when the corporation has sufficient assets to cover it
4. The SEC determines that such stockholder is not
debts and liabilities, exclusive of capital stock.
entitled to the appraisal right;
Requirements and procedure for the exercise of the
5. The stockholder fails within 10 days after demanding
appraisal right:
payment for his shares to submit the certificates of stock
1. The stockholder must have voted against the representing his shares to the corporation for notation and the
proposed corporate action in any of the instances allowed by corporation, at its option, terminates the right.
law for the exercise of the appraisal right;
6. The shares represented by the certificates bearing
2. A written demand for payment must be made by the such notation are transferred and the certificates
dissenting stockholder within 30 days after the date on which subsequently canceled.
the vote was taken. Failure to make the demand within the
General rule: The costs and expenses of appraisal
said period shall be deemed a waiver of the appraisal right;
shall be borne by the corporation.
3. Surrender of the certificate of stock by the dissenting
Exception: The fair value ascertained by the
stockholder for notation in the corporate books and payment
appraisers is approximately the same as the price which the
by the corporation of the fair market value of said shares as of
corporation offered to pay the stockholder.
the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of General rule: In an action to recover the fair value of
such corporate action. If the stockholder and the corporation stocks, all costs and expenses shall be assessed against the
cannot agree on the fair market value thereof, the same shall corporation.
be determined by appraisers;
Exception: The refusal of the stockholder to receive
4. The corporation must have unrestricted retained payment is unjustified.
earnings in it books to cover the payment of the fair value of
the shares of the dissenting stockholder; A dissenting stockholder is required within 10 days
after demanding payment for his shares to submit the stock
5. Upon payment of the shares by the corporation, the certificates representing his shares to the corporation for
dissenting stockholder shall transfer his shares to the notation. His failure to do so shall, at the option of the
corporation. corporation, terminate his rights.

The dissenting stockholder is not prohibited from


selling, transferring or assigning his shares. If such be the case,
once the certificates are subsequently canceled, the rights of
AQUILA LEGIS FRATERNITY the transferor as a dissenting stockholder shall cease and the
transferee shall have all the rights of a regular stockholder; and
Corporation Law Reviewer
all dividend distributions which would have accrued on such
Page 52 of 87 shares shall be paid to the transferee.

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C A director who exercises his appraisal right remain to
be a director until his shares are no longer registered in his
Effects of demand for payment of the fair value of a name.
stockholder‟s shares:
A stockholder whose subscription is not fully paid is
1. From the time of demand for payment – all rights still entitled to exercise his appraisal right.
accruing to such shares, including voting and dividend rights,
are suspended, except the right to receive payment. CHAPTER 14: NON-STOCK CORPORATIONS

2. After either the right ceases or the purchase of the Non-stock corporation - one where no part of its
said shares by the corporation – all rights accruing to such income is distributable as dividends to its members, trustees,
or officers, subject to the provisions of the Code on dissolution.
Even if a corporation has capital stock divided into Membership in non-stock corporations may be
shares it is considered as non-stock so long as it does not acquired by complying with the provisions of its rules
distribute dividends to its members and officers. (CIR vs. Club prescribed in the by-laws. In absence of restrictions, a non-
Filipino de Cebu) stock corporation may act arbitrarily and exclude any persons
it may see fit, and the courts have no power to interfere. It is
Any profit which a non-stock corporation may obtain
free to fix qualifications for membership and to provide for
as an incident to its operations shall, whenever necessary or
termination of membership.
proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized. General rule: The board of directors of a non-stock
corporation shall have the authority to admit members.
The fact that a non-profit corporation earns a profit,
gain or income for the corporation or members does not make Exception: The by-laws provide otherwise.
it a profit-making corporation where such profit or income is
Membership shall be terminated in the manner and
used for the purpose
for the causes provided in the articles of incorporation or the
by-laws.

General rule: Termination of membership shall have


the effect of extinguishing all rights of a member in the
AQUILA LEGIS FRATERNITY
corporation or in its property.
Corporation Law Reviewer
Exception: The articles of incorporation or the by-laws
Page 53 of 87 provide otherwise.

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C In terminating membership, strict compliance with
the manner and procedure laid down in the by- laws must be
set forth in the articles of incorporation and is not distributable observed, otherwise it may render the expulsion ineffective
to its incorporators, members or officers, since mere and invalid. (Carmoan vs, PED)
intangible or pecuniary benefits of the members does not
change the nature of the corporation. In absence of any provision in the articles of
incorporation or by-laws relative to the manner and causes of
The determination of whether or not a non-stock termination, the power is nonetheless inherent in the
corporation can engage in profit-making business or activity following situations:
depends largely on the purpose or purposes indicated in the
articles of incorporation. If the business activity is authorized 1. When an offense is committed which, although it has
in the said articles, necessary, incidental or essential thereto, no immediate relation to a member‟s duty as such, it is so
the same may be undertaken by the corporation, otherwise, infamous as to render him unfit for society of honest men, and
not, as it would be an ultra-vires act. which is indictable at common law;

Purposes: Charitable, religious, educational, 2. When the offense is a violation of his duty as a
professional, cultural, fraternal, literary, scientific, social, civic member of the corporation; and
service, or similar purposes, like trade, industry, agricultural
3. When the offense is of a mixed nature, being both
and like chambers, or any combination thereof (non-
against his duty as a member of the corporation, and also
exclusive).
indictable at common law.
The provisions governing stock corporation, when
pertinent, shall be applicable to non-stock corporations.

MEMBERSHIP AND VOTING RIGHTS


AQUILA LEGIS FRATERNITY
General rule: Each member, regardless of class, shall
be entitled to one vote (no cumulative voting). Corporation Law Reviewer

Exception: The right to vote is limited, broadened or Page 54 of 87


denied in the articles of incorporation or the by- laws.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: A member may vote by proxy.
As to whether or not a member should be expelled or
Exception: Proxy voting is denied in the articles of maintained is the established right of the corporation to
incorporation or the by-laws. determine and the courts are without authority to strip a
member of his membership without cause.
Voting by mail or other similar means by members of
non-stock corporations may be authorized by the by-laws of Courts cannot strip a member of a non-stock
non-stock corporations with the approval of, and under such corporation of his membership therein without cause.
conditions which may be prescribed by the SEC. Otherwise, that would be an unwarranted and undue
interference with the well established right of a corporation to
General rule: Membership in a non-stock corporation
determine its membership. (Chinese YMCA vs. Ching)
and all rights arising therefrom are personal and non-
transferable. TRUSTEES AND OFFICERS

Exception: The articles of incorporation or the by-laws


provide otherwise.
Non-stock or special corporations may designate 1. The by-laws of the corporation provide otherwise;
their governing boards by any name through their articles of and
incorporation or their by-laws.
2. Metro Manila is considered a city or municipality.
General rule: The number of trustees in a non-stock
corporation may exceed 15.

Exception: The articles of incorporation or the by-laws


provide otherwise. AQUILA LEGIS FRATERNITY
General rule: The term of office of the board of Corporation Law Reviewer
trustees may be staggered. They shall classify themselves in
order that 1/3 of their number shall expire every year and Page 55 of 87
subsequent elections of trustees comprising 1/3 shall be held
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
annually.
Requirements for meetings held outside the location
Exception: The articles of incorporation or the by-laws
of the principal office as provided for by the by-laws:
provide otherwise.
1. Proper notice is sent to all members indicating the
Qualifications of trustees:
date, time and place of the meeting; and
1. He is a member of the corporation;
2. The place of meeting must be within the Philippines.
2. Majority thereof must be residents of the Philippines;
General rule: All proceedings and business
and
transactions at a meeting improperly held or called are invalid.
3. Other qualifications as may be provided for in the by-
Exception: All of the members are present or duly
laws.
represented at the meeting.
General rule: officers of a non-stock corporation may
DISTRIBUTION OF ASSETS UPON DISSOLUTION
be directly elected by the members.
Rules of distribution:
Exception: The articles of incorporation or the by-laws
provide otherwise. 1. All liabilities and obligations of the corporation shall
be paid, satisfied and discharged, or adequate provision shall
Trustees elected to fill vacancies occurring before the
be made therefore;
expiration of a particular term hold office only for the
unexpired period. 2. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which condition
General rule: The courts will not interfere on matters
occurs by reason of the dissolution, shall be returned,
involving the internal affairs of an unincorporated association
transferred or conveyed in accordance with such
such as elections, the manner by which it was conducted and
requirements;
the results thereof. (Lions Club International vs. CA)
3. Assets received and held by the corporation subject
Exceptions:
to limitations permitting their use only for charitable, religious,
1. There is fraud, oppression or bad faith; benevolent, educational or similar purposes, but not held
upon a condition requiring return, transfer or conveyance by
2. The action complained of is capricious, arbitrary or reason of the dissolution, shall be transferred or conveyed to
unjustly discriminatory; one or more corporations, societies or organizations engaged
in activities in the Philippines substantially similar to those of
3. Property and civil rights are invaded;
the dissolving corporation according to a plan of distribution;
4. The proceedings are violative of the laws of society,
4. Assets other than those mentioned in the preceding
or the law of the land, as by depriving a person of due process
paragraphs, if any, shall be distributed in accordance with the
of law;
provisions of the articles of incorporation or the by-laws, to the
5. There is lack of jurisdiction on the part of the tribunal extent that the articles of incorporation or the by-laws,
conducting the proceedings; determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
6. The organization exceeds its powers;
5. In any other case, assets may be distributed to such
7. The proceedings are illegal; or
persons, societies, organizations or corporations, whether or
8. An incorporated association or its members avail of not organized for profit, as may be specified in a plan of
the remedy of instituting an intra- corporate dispute case. distribution.

General rule: Regular or special meetings of members Procedure and requirements for a plan of distribution
of a non-stock corporation shall be held in the city or of assets:
municipality where the principal office is located, and if
1. Majority vote of the board of trustees adopting a plan
practicable in the principal office of the corporation.
of distribution;
Exceptions:
2. Approval of such plan by at least 2/3 of the members and the determination of whether or not it should be vested
having voting rights present or represented by proxy at a with public interest is within its domain.
regular or special meeting for that purpose; and
The provisions of Title XV of the Code shall primarily
3. Prior written notice setting forth the proposed plan of govern close corporations. However, the provisions of other
distribution or a summary thereof and the date, time and Titles of the Code apply suppletorily.
place of such meeting shall be given to each member entitled
A close corporation may partake the nature of a
to vote, within the time and in the manner provided in the
partnership in that the stockholders thereof take an active role
Code for the giving of notice of meetings to members.
in the management of the corporate affairs either as directors,
CHAPTER 15: CLOSE CORPORATIONS officers or even perhaps as partners in management which is
akin to the partnership form of business.
Close corporation - one whose articles of
incorporation provide that: The articles of incorporation of a close corporation
may provide:
1. All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of record by not 1. For a classification of shares or rights and the
more than a specified number of persons, not exceeding 20; qualifications for owning or holding the same and restrictions
on their transfers as may be stated therein;
2. All the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by 2. For a classification of directors into one or more
Title XV of the Code; and classes, each of whom may be voted for and elected solely by
a particular class of stock;
3. The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class. 3. For a greater quorum or voting requirements in
meetings of stockholders or directors;
Absent any of the three requisites, a corporation
cannot be considered a close corporation and would thus be 4. That the business of the corporation shall be
governed by the general provisions on ordinary corporations. managed by the stockholders of the corporation rather than
by a board of directors. So long as this provision continues in
A corporation does not become a close corporation
effect:
just because a husband and wife owns 99.86% of the capital
stock. (San Juan Structural Steel vs. CA) a. No meeting of stockholders need be called to elect
directors;

b. Unless the context clearly requires otherwise, the


stockholders of the corporation shall be deemed to be
AQUILA LEGIS FRATERNITY directors; and

Corporation Law Reviewer c. The stockholders of the corporation shall be subject


to all liabilities of directors.
Page 56 of 87
5. That all officers or employees or that specified
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
A corporation shall not be deemed a close
corporation when at least 2/3 of its voting stock or voting In order to bind purchasers in good faith, restrictions
on the right to transfer shares must appear in:
rights is owned or controlled by another corporation which is
not a close corporation. 1. The articles of incorporation;
General rule: Any corporation may be incorporated as 2. The by-laws; and
a close corporation.
3. The certificate of stock.
Exceptions:
Restrictions on the right to transfer shares shall not
1. Mining or oil companies; be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the
2. Stock exchanges;
transferring stockholder within reasonable terms, conditions
3. Banks; or period. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to
4. Insurance companies; purchase, the transferring stockholder may sell his shares to
5. Public utilities; any third person.

6. Educational institutions; and

7. Corporations declared to be vested with public


interest.

Sec. 140 authorizes the NEDA to recommend to the


legislature the setting of maximum limits to family or group
ownership of stock in corporation vested with public interest,
voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by
them.

No provision in any written agreement signed by the


stockholders, relating to any phase of the corporate affairs,
shall be invalidated as between the parties on the ground that
Effe its effect is to make them partners among themselves.

AQUILA LEGIS FRATERNITY

Corporation Law Reviewer AQUILA LEGIS FRATERNITY


Page 57 of 87 Corporation Law Reviewer
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C Page 58 of 87

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

A written agreement among some or all of the


stockholders in a close corporation shall not be invalidated on
the ground that it so relates to the conduct of the business and
affairs of the corporation as to restrict or interfere with the
discretion or powers of the board of directors: Provided, That
General rule: A close corporation may refuse to such agreement shall impose on the stockholders who are
register the transfer of stock in the name of the transferee who parties thereto the liabilities for managerial acts imposed by
has or is conclusively presumed to have notice that: this Code on directors.
1. He is not eligible to be a holder of stock of the To the extent that the stockholders are actively
corporation; engaged in the management or operation of the business and
2. Transfer of stock to him causes the stock of the affairs of a close corporation, the stockholders shall be held to
corporation to be held by more than the number of persons strict fiduciary duties to each other and among themselves.
permitted by its articles of incorporation to hold stock of the Said stockholders shall be personally liable for corporate torts
corporation; or unless the corporation has obtained reasonably adequate
liability insurance.
3. The transfer of stock is in violation of a restriction on
transfer of stock. Sec. 101. When board meeting is unnecessary or
improperly held. - Unless the by-laws provide otherwise, any
Exceptions: action by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. The transfer of stock has been consented to by all the
stockholders; or General rule: Any action by the directors of a close
corporation without a meeting is invalid.
2. The close corporation has amended its articles of
incorporation. Exceptions:
Options granted to the transferee: 1. Written consent is signed by all the directors;
1. Rescind the transfer; or 2. All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in writing;
2. Recover under any applicable warranty, express or
implied. 3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the
The term "transfer" is not limited to a transfer for
stockholders; or
value.
4. All the directors have express or implied knowledge
Agreements by and among stockholders executed
of the action in question and none of them makes prompt
before the formation and organization of a close corporation,
objection thereto in writing.
signed by all stockholders, shall survive the incorporation of
such corporation and shall continue to be valid and binding (If a director's meeting is held without proper call or notice, an
between and among such stockholders, if such be their intent, action taken therein within the corporate powers is deemed
to the extent that such agreements are not inconsistent with ratified by a director who failed to attend, unless he promptly
the articles of incorporation, irrespective of where the files his written objection with the secretary of the corporation
provisions of such agreements are contained, except those after having knowledge thereof.)
required by this Title to be embodied in said articles of
incorporation. Exception to the exceptions: The by-laws provide
otherwise.
An agreement between two or more stockholders, if
in writing and signed by the parties thereto, may provide that General rule: The pre-emptive right of stockholders in
in exercising any voting rights, the shares held by them shall be close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for money,
property or personal services, or in payment of corporate 2. A provisional director is not a receiver of the
debts. corporation and does not have the title and powers of a
custodian or receiver.
Exception: The articles of incorporation provide
otherwise. 3. A provisional director shall have all the rights and
powers of a duly elected director of the corporation, including
Any amendment to the articles of incorporation
the right to notice of and to vote at meetings of directors, until
which seeks to:
such time as he shall be removed by order of the SEC or by all
1. Delete or remove any provision required by Title XV the stockholders.
of the Code to be contained in the articles of incorporation, or
4. His compensation shall be determined by agreement
2. Reduce a quorum or voting requirement stated in said between him and the corporation subject to approval of the
articles of incorporation, SEC, which may fix his compensation in the absence of
agreement or in the event of disagreement between the
must be approved by the affirmative vote of at least 2/3 of the provisional director and the corporation.
outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be Any stockholder of a close corporation may, for any
specifically provided in the articles of incorporation for reason, compel the said corporation to purchase his shares at
amending, deleting or removing any of the aforesaid their fair value, which shall not be less than their par or issued
provisions, at a meeting duly called for the purpose. value, when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital stock.
Deadlock - the directors or stockholders are so
divided respecting the management of the corporation's Any stockholder of a close corporation may, by
business and affairs that the votes required for any corporate written petition to the SEC, compel the dissolution of such
action cannot be obtained, with the consequence that the corporation whenever:
business and affairs of the corporation can no longer be
1. Any of acts of the directors, officers or those in
conducted to the advantage of the stockholders generally.
control of the corporation is illegal, or fraudulent, or dishonest,
or oppressive or unfairly prejudicial to the corporation or any
stockholder; or

2. Corporate assets are being misapplied or wasted.


AQUILA LEGIS FRATERNITY

Corporation Law Reviewer

Page 59 of 87

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

In case of a deadlock and upon written petition by any


stockholder, the SEC has the power to arbitrate the dispute
and the authority to:

1. Cancel or alter any provision contained in the articles


of incorporation, by-laws, or any stockholder's agreement;

2. Cancel, alter or enjoin any resolution or act of the


corporation or its board of directors, stockholders, or officers;

3. Direct or prohibit any act of the corporation or its Clos


board of directors, stockholders, officers, or other persons
party to the action;
AQUILA LEGIS FRATERNITY
4. Require the purchase at their fair value of shares of
any stockholder, either by the corporation regardless of the Corporation Law Reviewer
availability of unrestricted retained earnings in its books, or by
the other stockholders; Page 60 of 87

5. Appoint a provisional director; Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

6. Dissolve the corporation; or

7. Grant such other relief as the circumstances may


warrant.

Provisional director:

1. A provisional director shall be an impartial person


who is neither a stockholder nor a creditor of the corporation
or of any subsidiary or affiliate of the corporation, and whose AQUILA LEGIS FRATERNITY
further qualifications, if any, may be determined by the SEC.
Corporation Law Reviewer
Page 61 of 87 Exception: Educational institutions established by
religious groups and mission boards.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: No educational institution shall be
In a close corporation, a corporate action taken at a
established exclusively for aliens and no group of aliens shall
board meeting without proper call or notice is deemed ratified
comprise more than 1/3 of the enrollment in any school.
by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after Exception: The rule shall not apply to schools
having knowledge of the meeting. (Manuel Dulay Enterprises established for foreign diplomatic personnel and their
vs. CA) dependents and, unless otherwise provided by law, for other
foreign temporary residents.
Stockholders who actively engage in the management
or operation of the business and affairs of a close corporation RELIGIOUS CORPORATIONS
shall be personally liable for corporate torts unless the
Religious corporation – one composed entirely of
corporation has obtained reasonably adequate liability
spiritual persons which is created for the furtherance of
insurance. Essentially a tort consists in the violation of a right
religion or perpetuating the rights of the church or for the
given or the omission of a duty imposed by law. Article 283 of
administration of church or religious work or property.
the Labor Code mandates the employer to grant separation
pay to employees in case of closure or cessation of operations Classes of religious corporations:
of establishment or undertaking not due to serious business
losses or financial reverses. CFTI failed to comply with this law- 1. Corporations sole; and
imposed duty or obligation. Consequently, its stockholder who
2. Religious societies.
was actively engaged in the management or operation of the
business should be held personally liable. (Naguiat vs. NLRC) Religious corporations are governed by the
appropriate chapter of the Code and the general provisions on
CHAPTER 16: SPECIAL CORPORATIONS EDUCATIONAL
non-stock corporations.
CORPORATIONS

Educational corporations – those which provide


facilities for teaching or instruction.

Educational corporations are governed primarily by


special laws and secondarily by the Code.

Educational institutions are required to incorporate


within 90 days after their recognition as such. However, failure
to comply will not immune the educational institution from
suit as a corporation.

A favorable recommendation of the Secretary of


Education, Culture and Sports is required before the SEC
accepts or approves the articles of incorporation or by-laws of
any educational institution.
Corporation Sole
Trustees of non-stock educational corporations shall
not be less than 5 nor more than fifteen 15, in multiples of 5.

Unless otherwise provided in the articles of AQUILA LEGIS FRATERNITY


incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning Corporation Law Reviewer
shall, as soon as organized, so classify themselves that the Page 62 of 87
term of office of 1/5 of their number shall expire every year.
Trustees thereafter elected to fill vacancies, occurring before Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for 5 years. A Corporation sole – consists of one person only and his
majority of the trustees shall constitute a quorum for the successor in some particular station, who are incorporated by
transaction of business. The powers and authority of trustees law in order to give them some legal capacities and
shall be defined in the by- laws. advantages, particularly that of perpetuity, which in their
natural persons they could not have had.
For institutions organized as stock corporations, the
number and term of directors shall be governed by the Purpose – Administration and management, as
provisions on stock corporations. trustee, of the affairs, properties and temporalities of any
religious denomination, sect or church.
General rule: Educational institutions shall be owned
solely by citizens of the Philippines or corporations or Who – Chief archbishop, bishop, priest, minister,
associations at least 60% of the capital of which is owned by rabbi or other presiding elder of such religious denomination,
such citizens. The control and administration of educational sect or church.
institutions shall be vested in citizens of the Philippines.
Requirements and procedure of incorporation:
1. The chief archbishop, bishop, priest, minister, rabbi or
other presiding elder of such religious denomination, sect or
church must file the articles of incorporation with the SEC
which must contain the following: AQUILA LEGIS FRATERNITY
a. That he is the chief archbishop, bishop, priest, Corporation Law Reviewer
minister, rabbi or presiding elder of his religious denomination,
sect or church and that he desires to become a corporation Page 63 of 87
sole;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
b. That the rules, regulations and discipline of his
A corporation sole may purchase and hold real estate
religious denomination, sect or church are not inconsistent
and personal property for its church, charitable, benevolent or
with his becoming a corporation sole and do not forbid it;
educational purposes, and may receive bequests or gifts for
c. That as such chief archbishop, bishop, priest, such purposes.
minister, rabbi or presiding elder, he is charged with the
General rule: A court order is required before a
administration of the temporalities and the management of
corporation sole may sell or mortgage real property held by it.
the affairs, estate and properties of his religious denomination,
Before such an order is granted, a verified petition must be
sect or church within his territorial jurisdiction, describing such
made by the chief archbishop, bishop, priest, minister, rabbi or
territorial jurisdiction;
presiding elder acting as corporation sole and it must be shown
d. The manner in which any vacancy occurring in the that notice of the application has been given as directed by the
office of chief archbishop, bishop, priest, minister, rabbi of court and that it is to the interest of the corporation that the
presiding elder is required to be filled, according to the rules, petition be granted. However, such application may be
regulations or discipline of the religious denomination, sect or opposed by any member of the religious denomination, sect or
church to which he belongs; and church represented by the corporation sole.

e. The place where the principal office of the Exception: Court intervention is not necessary when
corporation sole is to be established and located, which place the rules, regulations and discipline of the religious
must be within the Philippines. denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the
2. The articles of incorporation may include any other method of acquiring, holding, selling and mortgaging real
provision not contrary to law for the regulation of the affairs estate and personal property.
of the corporation.
Registration of real property in the name of the
3. The articles of incorporation must be: corporation sole does not vest ownership unto the head
thereof.
Verified by affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi or presiding elder, as the case The constitutional requirement that 60% of the
may be; capital of a corporation must be owned by Filipino citizens
before it may register land in its own name does not apply to
Accompanied by a copy of the commission, certificate of
a corporation sole. A corporation sole has no nationality and
election or letter of appointment of such chief archbishop,
the framers of the constitution did not have in mind the
bishop, priest, minister, rabbi or presiding elder; and
corporation sole when it provided for such requirement.
Duly certified to be correct by any notary public. (Roman Catholic Apostolic Adm. of Davao, Inc. vs. LRC)

4. From and after the filing of the aforementioned Whether or not a corporation sole, or any private
documents with the SEC, such chief archbishop, bishop, priest, corporation for that matter, can acquire alienable land of the
minister, rabbi or presiding elder shall become a corporation public domain depends upon the character of the land at the
sole. time of the institution of the registration proceeding. If it still
forms part of the public domain, no. If it is private, yes.
All temporalities, estate and properties of the
(Republic vs. INC)
religious denomination, sect or church administered or
managed by the corporation sole shall be held in trust for the Under the Public Land Act, alienable public land may
use, purpose, behalf and sole benefit of the religious be subject to registration by a possessor if he, personally or
denomination, sect or church, including hospitals, schools, through his predecessor-in-interest, had openly, continuously,
colleges, orphan asylums, parsonages and cemeteries thereof. exclusively and notoriously possessed the same for 30 years.
The law creates the legal fiction whereby the land, upon
A provision relative to its term of existence is not
completion of the requisite period ipso jure and without the
required since a corporation sole is supposed to exist in
need of judicial or other sanction, ceases to be public land and
perpetuity.
becomes private property. (Director of Lands vs. CA)
General rule: A corporation acquires juridical
In case of vacancy in the office of the “head” of the
personality only upon the issuance of a certificate of
corporation, the person authorized by the rules, regulations or
incorporation by the SEC.
discipline of the denomination shall exercise all the powers
Exception: A corporation sole becomes endowed with and authority of the corporation sole during such vacancy and
corporate personality after filing of the verified articles of until such vacancy has been filled-up.
incorporation together with other required documents.
The successors in office shall become the corporation
sole and shall be permitted to transact business as such only
upon the filing with the SEC of a copy of their commission, e. The place where the principal office of the
certificate of election, or letters of appointment, duly certified corporation is to be established and located, which place must
by a notary public. be within the Philippines; and

Requirements for the voluntary dissolution of f. The names, nationalities, and residences of the
corporations sole: trustees elected by the religious society or religious order, or
the diocese, synod, or district organization to serve for the first
1. Filing with the SEC of a verified declaration of
year or such other period as may be prescribed by the laws of
dissolution which must set forth the following:
the religious society or religious order, or of the diocese,
a. The name of the corporation; synod, or district organization, the board of trustees to be not
less than 5 nor more than 15.
b. The reason for dissolution and winding up;
3. The articles of incorporation must be verified by the
c. The authorization for the dissolution of the affidavit of the presiding elder, secretary, or clerk or other
corporation by the particular religious denomination, sect or member of such religious society or religious order, or diocese,
church; and synod, or district organization of the religious denomination,
sect or church.
d. The names and addresses of the persons who are to
supervise the winding up of the affairs of the corporation. 4. Issuance of the SEC of the certificate of incorporation.
2. Approval of the SEC. The articles of incorporation of a religious society
need not indicate a term since it is supposed to exist in
Religious Societies
perpetuity.
Religious society – a body of person associated
CHAPTER 17: DISSOLUTION
together for the purpose of maintaining religious worship.
Dissolution – the extinguishment of the corporate
Purpose – the administration of its temporalities or
franchise and the termination of corporate existence.
for the management of its affairs, properties and estate
General rule: When a corporation is dissolved, it
ceases to be a juridical entity and can no longer pursue the
business for which it is incorporated.

AQUILA LEGIS FRATERNITY Exception: The corporation will continue as a body


corporate for another period of 3 years from the time it is
Corporation Law Reviewer dissolved for the purpose of winding up its affairs and the
Page 64 of 87 liquidation of its assets.

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C Three modes of dissolution:

Who – any religious society or religious order, or any 1. By expiration of the corporate term;
diocese, synod, or district organization of any religious 2. By voluntary surrender of its primary franchise
denomination, sect or church. (voluntary dissolution); or
Requirements and procedure for incorporation: 3. By the revocation of its corporate franchise
1. Filing of the articles of incorporation with the SEC; (involuntary dissolution).

2. The articles of incorporation must set forth the EXPIRATION OF CORPORATE TERM
following: General rule: A corporation registered under the
a. That the religious society or religious order, or Corporation Code is required to indicate its term of existence
diocese, synod, or district organization is a religious in the articles of incorporation.
organization of a religious denomination, sect or church; Exceptions:
b. That at least 2/3 of its membership have given their 1. Corporations sole; and
written consent or have voted to incorporate, at a duly
convened meeting of the body; 2. Religious societies.

c. That the incorporation of the religious society or


religious order, or diocese, synod, or district organization
desiring to incorporate is not forbidden by competent
authority or by the constitution, rules, regulations or discipline AQUILA LEGIS FRATERNITY
of the religious denomination, sect, or church of which it forms
a part; Corporation Law Reviewer

d. That the religious society or religious order, or Page 65 of 87


diocese, synod, or district organization desires to incorporate
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
for the administration of its affairs, properties and estate;
A corporation ceases to exist and is automatically
dissolved upon the expiration of the term indicated in its
articles of incorporation without the need of formal
proceeding. There is no need to for the institution of a 3. Issuance of an order by the SEC reciting the purpose
proceeding for quo warranto to determine the time and date of the petition and fixing the date on or before which
of the dissolution of a corporation because the period of objections thereto may be filed by any person, which date shall
corporate existence is provided in the articles of incorporation. not be less than 30 days nor more than 60 days after entry of
(PNB vs. CFI) the order;

SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION) 4. Before such date, a copy of the order must be
published once a week for 3 consecutive weeks in a newspaper
Three modes of voluntary dissolution:
of general circulation published in the city or municipality
1. Voluntary dissolution where no creditors are where the principal office is situated or in a newspaper of
affected; general circulation in the Philippines;

2. Voluntary dissolution where creditors are affected; 5. Posting of the same order for 3 consecutive weeks in
and 3 public places in such city or municipality;

3. Shortening of corporate term.

Voluntary dissolution where no creditors are affected

Formal and procedural requirements for voluntary AQUILA LEGIS FRATERNITY


dissolution where no creditors are affected:
Corporation Law Reviewer
1. Majority vote of the board of directors or trustees;
Page 66 of 87
2. Sending of notice to each stockholder or member
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
either by registered mail or personal delivery at least 30 days
prior to the meeting (scheduled by the board for the purpose 6. Upon 5 days notice, given after the date on which the
of submitting the board action to dissolve the corporation for right to file objects has expired, the SEC shall hear the petition
approval of the stockholders or members); and try any issue made by the objections filed; and

3. Publication of the notice of time, place and subject of 7. Judgment dissolving the corporation and directing
the meeting for 3 consecutive weeks in a newspaper published disposition of its assets as justice requires and the
in the place where the principal office of said corporation is appointment of a receiver (if necessary in the court‟s
located or in a newspaper of general circulation in the discretion) to collect such assets and pay the debts of the
Philippines; corporation.

4. Resolution adopted by the affirmative vote of the The appointment of a receiver is only permissive and
stockholders owning at least 2/3 of the outstanding capital not mandatory. The law is intended to let the stockholders
stock or 2/3 of the members at the meeting duly called for the have control of the assets of the corporation upon dissolution
purpose; and winding up of its affairs.

5. A copy of the resolution authorizing the dissolution Dissolution by shortening the corporate term
must be certified by a majority of the board of directors or
Procedure to shorten the corporate term:
trustees and countersigned by the corporate secretary; and
1. Approval by a majority vote of the board or directors
6. Issuance of a certificate of dissolution by the SEC.
or trustees.
The requirements and formalities provided by law for
2. Written notice of the proposed action and the time
the dissolution of corporations are mandatory such that failure
and place of meeting shall be served to each stockholder or
to comply therewith will have no effect on the legal existence
member either by mail or by personal service.
of the corporation. A corporation being a creation of law may
only terminate its existence in the manner prescribed by law. 3. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members in
A mere resolution by the stockholders or the board of
case of non-stock corporations.
directors of a corporation to dissolve the same does not affect
the dissolution of a corporation. (Daguhoy Enterprises vs. 4. Submission of the amended articles of incorporation
Ponce) to the SEC.
Voluntary dissolution where creditors are affected 5. Approval of the SEC.
Formal and procedural requirements for voluntary In case of a corporation sole, an authorization for the
dissolution where creditors are affected: dissolution by the particular religious denomination, sect or
church is necessary.
1. Affirmative vote of the stockholder representing at
least 2/3 of the outstanding capital stock or at least 2/3 of the A vote must cast at a duly constituted meeting.
members at a meeting duly called for that purpose; Written assent is insufficient.
2. Petition for the dissolution shall be filled with the SEC It is only upon the approval of the SEC that the
signed by the majority of its board of directors or trustees or corporation is deemed dissolved.
other officers having the management of its affairs, verified by
the president or secretary or one of its directors or trustees, INVOLUNTARY DISSOLUTION
setting forth all claims and demands against it;
Requirements for involuntary dissolution by the SEC: as to amount to a violation of the fundamental conditions of
the contract (charter) by which the franchise were granted and
1. Filing of a verified complaint; and
thus defeat the purpose of the grant, then dissolution will be
2. Proper notice and hearing on the grounds provided granted. (Government vs. Philippine Sugar Estates Co.)
by laws, rules and regulations.
The court has a discretion with respect to the
Notwithstanding the fact that RA 8799 transferred infliction of capital punishment upon corporations and there
the jurisdiction of the SEC under Sec. 5 of PD 902-A to the are certain misdemeanors and misusers of franchises which
Special Commercial Courts, the same law granted the SEC should not be recognized as requiring their dissolution.
concurrent jurisdiction over revocation proceedings. Sec. 5 (m) (Government vs. El Hogar)
of RA 8799 provides that the SEC shall have the power to
That the corporation is guilty of willful and repeated
suspend or revoke, after proper notice and hearing, the
violation of the law and that its continuance inflicts substantial
franchise or certificate of registration of corporations,
injury to the public warrants its dissolution. (Republic vs.
partnerships or associations, upon any ground provided by
Security Credit)
law.
Relief by dissolution will be awarded only where no
Grounds for involuntary dissolution under Sec. 6, PD
other adequate remedy is available, and is not available where
902-A:
the rights of the stockholders can be, or are, protected in some
1. Fraud in procuring the certificate of registration; other way. The several acts of misuse and misapplication of the
funds and/or assets of the corporation were committed more
2. Serious misrepresentation as to what the corporation particularly by the corporation‟s president, for the
can do or is doing to the great prejudice of or damage to the commission of which they may be held personally liable.
general public; (Republic vs. Bisaya Land Transportation Co., Inc.)
3. Refusal to comply or defiance of any lawful order of Under the present state of law, any stockholder or
the Commission restraining commission of acts which would member of a corporation can institute a dissolution
amount to a grave violation of its franchise; proceeding against his own corporation before the proper
forum.
4. Continuous inoperation for a period of at least 5
years; The Special Commercial Courts, shall hear and decide
cases involving intra-corporate dispute or partnership
5. Failure to file by-laws within the required period; and
relations between and among stockholders, members or
6. Failure to file required reports in appropriate forms as associates; between any or all of them and the corporation,
determined by the Commission within the prescribed period. partnership or association of which they are stockholders,
members or associates, respectively; and between such
Other grounds provided for the in Corporation Code: corporation, partnership or association and the State insofar
1. Violation of any provision of the Code (Sec. 144); as it concerns their individual franchise or right to exist as such
entity. (PD 902-A)
2. In case of deadlock in a close corporation (Sec. 105);
The SEC has concurrent jurisdiction to suspend,
3. In a close corporation, any acts of directors, officers revoke, after proper notice and hearing, the franchise or
or those in control of the corporation which is illegal or certificate of registration of corporations, partnership or
fraudulent or dishonest or oppressive or unfairly prejudicial to associations upon any of the grounds provided by law. (Sec.
the 5(m) RA 8799)

The existence of a de jure corporation may be


determined in a private suit for its dissolution between
stockholders, without intervention of the State. (Hall vs. Piccio)
AQUILA LEGIS FRATERNITY
In a close corporation, a petition for the dissolution of
Corporation Law Reviewer the corporation may be instituted by any shareholder on the
ground of mere dishonesty.
Page 67 of 87
EFFECTS OF DISSOLUTION
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
No right or remedy in favor of or against any
corporation or any stockholder or whenever corporate assets corporation, its stockholders, members, directors, trustees, or
are being misapplied or wasted (Sec. 105). officers, nor any liability incurred by any such corporation,
Other grounds can be found in special laws, e.g. the stockholders, members, directors, trustees, or officers, shall be
Securities Regulation Code and the General Banking Act. removed or impaired by the subsequent dissolution of said
corporation.
Courts proceed with extreme caution in the
proceeding which have for their object the forfeiture of Dissolution terminates a corporation‟s primary
corporate franchises, and a forfeiture will not be allowed, franchise and generally prevents it from further exercising
except under express limitation, or for a plain abuse of power other or secondary franchises which have been conferred to it.
by which the corporation fails to fulfill the design and purpose Dissolution terminates the corporation‟s power to
of its organization. But when such abuses and violations enter into contracts or to continue the business as a going
constitute or threaten a substantial injury to the public or such concern. (Hall vs. Piccio)
General rule: In a lease to a corporation, the rights in interest, all interest which the corporation had in the
and obligations thereunder are not extinguished by the property terminates, the legal interest vests in the trustees,
corporation‟s dissolution since leases affect property rights and the beneficial interest in the stockholders, members,
and survives the death of parties. The stockholders succeed to creditors or other persons in interest.
the rights and liabilities of the dissolved corporation in an
Upon the winding up of the corporate affairs, any
unexpired leasehold state which may be enforced by or against
asset distributable to any creditor or stockholder or member
the receiver or liquidating trustee.
who is unknown or cannot be found shall be escheated to the
Exception: The lease, by its terms, terminates when city or municipality where such assets are located.
the corporation ceases to exist.
General rule: No corporation shall distribute any of its
Contracts for personal services are deemed assets or property except upon lawful dissolution and after
terminated by the dissolution of the corporation. There is an payment of all its debts and liabilities.
implied condition that the contract shall terminate in such
Exceptions:
event. (Gelano vs. CA)
1. By decrease of capital stock; or

2. As otherwise allowed the Code.

Three methods of liquidation:


AQUILA LEGIS FRATERNITY
1. By the corporation itself though the Board of
Corporation Law Reviewer
Directors.
Page 68 of 87
2. By a Trustee appointed by the corporation.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
3. By appointment of a receiver.
A dissolved corporation has no juridical personality; it
Mere appointment of a receiver without anything
ceases to exist as a corporation and cannot apply for a new
more does not imply the dissolution of a corporation.
certificate or a secondary franchise. (Buenaflor vs. Camarines
Sur Industry Corp.) Pending actions by or against a corporation are
abated upon expiration of the period allowed by law for the
The 3-year period allowed by the law is only for the
liquidation of its affairs; but trustees to whom the corporate
purpose of liquidation or winding up of corporate affairs. No
assets have been conveyed may sue or be sued as such in all
act can be done for the purpose of continuing the business for
matters connected with the liquidation. The effect of
which it was established. Neither can it enforce a contract
conveyance is to make the trustees the legal owners of the
executed prior to its dissolution. (Cebu Port Labor Union vs.
property conveyed, subject to the beneficial interest therein of
State Marine Co.)
creditors and stockholders. (National Abaca Other Fibers Co.
The termination of the life of a juridical entity does vs. Pore)
not, by itself, imply the diminution or extinction of rights
If the corporation carries out the liquidation of its
demandable against such juridical entity. Debts due to or
assets through its own officers and continues and defends the
against the corporation will not be extinguished. Otherwise, it
actions brought by or against it, its existence shall terminate at
will amount to an impairment of contracts or a denial of due
the end of three years from the time of dissolution; but if a
process. (Gonzales vs. Sugar Regulatory Administration)
receiver or assignee is appointed, as has been done in the
LIQUIDATION AND WINDING UP present case, with or without a transfer of its properties within
three years, the legal interest passes to the assignee, the
Liquidation and winding up – the collection of all
beneficial interest remaining in the members, stockholders,
corporate assets, the payments of all its debts and settlement
creditors and other interested persons; and said assignee may
of its obligations and the ultimate distribution of the corporate
bring an action, prosecute that which has already been
assets, if any of it remains, to all stockholders in accordance
commenced for the benefit of the corporation, or defend the
with their proportionate stockholdings in the corporation or in
latter against any other action already
accordance with their respective contracts of subscription (e.g.
preferred stocks).

A dissolved corporation continues as a body


corporate for a period of 3 years from the time of dissolution
AQUILA LEGIS FRATERNITY
for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to Corporation Law Reviewer
dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing the business for which it Page 69 of 87
was established.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
At any time during said three (3) years, the
instituted or which may be instituted even outside of the
corporation is authorized and empowered to convey all of its
period of three years fixed for the offices of the corporation.
property to trustees for the benefit of stockholders, members,
(Sumera vs. Valencia)
creditors, and other persons in interest. From and after any
such conveyance by the corporation of its property in trust for (Board of Liquidators vs. Kalaw)
the benefit of its stockholders, members, creditors and others
The counsel who prosecuted and defended the General rule: A corporation can have no legal
interest of the corporation and who appeared in behalf of the existence outside the boundaries of the sovereign by which it
corporation may be considered a trustee of the corporation at is created.
least with respect to the matter in litigation only. The word
Exception: By virtue of state comity, a corporation
“trustee” must be understood in its general concept. (Gelano
created by laws of one state is usually allowed to transact
vs. CA)
business in other states and to sue in the courts of the forum,
A claim established against the corporation may be subject to restrictions and certain requirements imposed
prosecuted against the liquidator of such corporation even therein.
after the three years from its dissolution. (Republic vs.
Requisites for a foreign corporation to transact
Marsman Development Company)
business in the Philippines:
Upon dissolution of the corporation its assets are held
1. A license or permit to do so; and
for the benefit of its stockholder after payment of its debts and
will be so distributed to the said stockholder in accordance 2. A certificate of authority from the appropriate
with their proportionate interest in the corporation or their government agency.
contracts of subscription.

Holders of preferred shares may be granted certain


rights or privileges upon dissolution.

General rule: The board of directors of a dissolved AQUILA LEGIS FRATERNITY


corporation is not permitted to undertake any activity outside
Corporation Law Reviewer
of the usual liquidation of the corporation.
Page 70 of 87
Exception: The stockholders of a dissolved
corporation may convey their respective shareholdings toward Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
the creation of a new corporation to continue the business of
the old. Winding up is the sole activity of a dissolved Procedure for application of a license:
corporation that does not intend to incorporate a new. (Chung 1. Submission to the SEC of its articles of incorporation
Ka Bio vs. IAC) and by-laws, certified in accordance with law, and their
If the three year period of liquidation has elapsed and translation to an official language of the Philippines, if
no effort to finally settle or close the corporate affairs was necessary.
undertaken, those having pecuniary interest in the corporate 2. The application shall be under oath and, unless
assets, including not only the stockholders but likewise the already stated in its articles of incorporation, shall specifically
creditors, acting for and its behalf, may make proper set forth the following:
representations with the SEC for working out a final settlement
of the corporate concern. (Clemente vs. CA) a. The date and term of incorporation;

Note: The above decision is an aberrant ruling. Once b. The principal office of the corporation in the country
the three year period for liquidation and winding up has or state of incorporation;
elapsed without any trustee or receiver being appointed, the
c. The resident agent;
assets of the corporation will be escheated in favor of the
Government thus barring the claims of stockholders and d. The place in the Philippines where the corporation
creditors. intends to operate;

CHAPTER 18: FOREIGN CORPORATIONS e. The purpose or purposes of the corporation;

Foreign corporation – one formed, organized or f. The directors and officers of the corporation;
existing under any laws other than those of the Philippines
(and whose laws allow Filipino citizens and corporations to do g. Its authorized capital stock;
business in its own country or state). h. Its outstanding capital stock;
The phrase “whose laws allow Filipino citizens and i. The amount actually paid in; and
corporations to do business in its own country or state” is a
mere condition precedent to the grand of a license of a foreign j. Such additional information as may be necessary or
corporation to do business in the Philippines. appropriate in order to enable the SEC to determine whether
such corporation is entitled to a license to transact business in
General rule: The “incorporation test” is applied in the Philippines, and to determine and assess the fees payable.
determining whether a corporation is domestic or foreign. If it
is incorporated in another state, it is a foreign corporation, 3. Attached to the application for license shall be a duly
while if it is registered under Philippine laws, it is deemed a executed certificate under oath by the authorized official or
Filipino or domestic corporation irrespective of the nationality officials of the jurisdiction of its incorporation, attesting to the
of its stockholders. fact that the laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein, and
Exception: In times of war, the “control test” would that the applicant is an existing corporation in good standing.
apply in determining the corporate nationality, i.e., the If such certificate is in a foreign language, a translation thereof
citizenship of the controlling stockholders determines the in English under oath of the translator shall be attached
nationality of the corporation. thereto.
4. The application for a license to transact business in MODES OF ENTRY OF FOREIGN CORPORATIONS
the Philippines shall likewise be accompanied by a statement
Modes of entry of foreign corporations:
under oath of the president or any other person authorized by
the corporation, showing to the satisfaction of the Securities 1. Branch office;
and Exchange Commission and other governmental agency in
the proper cases that the applicant is solvent and in sound 2. Representative or liaison office;
financial condition, and setting forth the assets and liabilities
3. Local subsidiary;
of the corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application. 4. Regional or area headquarters;

5. Foreign banking, financial and insurance corporations 5. Regional operating headquarters;


shall, in addition to the above requirements, comply with the
provisions of existing laws applicable to them. In the case of all 6. Regional warehouse; or
other foreign corporations, no application for license to 7. Joint venture.
transact business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous RESIDENT AGENT
authority from the appropriate government agency, whenever
The appointment of a resident agent is a condition
required by law.
precedent to the issuance of a license to transact business in
Foreign corporations already issued a license to the Philippines by a foreign corporation.
transact business in the Philippines prior to the effectivity of
The following may be appointed as a resident agent:
the Code continue to have such authority under the terms and
conditions of its license, subject to the provisions of the Code 1. An individual residing in the Philippines, of good
and other special laws. moral character and of sound financial standing; or

Upon compliance with the provisions of Sec. 125, 2. A domestic corporation lawfully transacting business
other special laws and the rules and regulations implementing in the Philippines (includes partnerships such as law firms and
them, the SEC shall thereafter issue the license. accounting firms).

Upon issuance of the license, such foreign The necessity of the appointment of a resident agent
corporation may commence to transact business in the is only for the purpose of receiving summons and other legal
Philippines and continue to do so for as long as it retains its processes in any legal action or proceeding against the foreign
authority to act as a corporation under the laws of the country corporation.
or state of its incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled in accordance Modes of service of summons upon a foreign
with this Code or other special laws. corporation:

Within 60 days after the issuance of the license, a 1. Service upon the resident agent – service upon the
foreign corporation, except those engaged in foreign banking resident agent is mandatory if the foreign corporation is
or insurance, shall deposit with the SEC, for the benefit of license to do business in the Philippines;
creditors, securities consisting of bonds or other evidence of 2. Service upon the SEC – if the licensed foreign
indebtedness of the Philippine government or its political corporation has ceased to transact business in the Philippines
subdivisions or instrumentalities, or of government owned or or has no resident agent in the Philippines; or
controlled corporations and entities, shares of stock in
“registered enterprises,” shares of stock in domestic insurance 3. Service upon any of its officers or agents within the
companies and Philippines.

DOING BUSINESS WITHOUT A LICENSE

General rule: No foreign corporation transacting


business in the Philippines without a license, or its successors
AQUILA LEGIS FRATERNITY or assigns, shall be permitted to maintain or intervene in any
Corporation Law Reviewer action, suit or proceeding in any court or administrative agency
of the Philippines
Page 71 of 87
Exception: Such corporation may be sued or
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under
banks, or any combination thereof, with an actual market
Philippine laws.
value of P100,000.00. Additional securities may be required by
the SEC if the actual market value of the securities on deposit A foreign corporation cannot transact business in the
has decreased by at least 10%. Philippines without the requisite license. If it does so, the
responsible officers may be subjected to the penal provisions
The objective of the law requiring the license is not to
of Sec. 144.
prevent the foreign corporation from performing isolated or
single acts, but to prevent it from acquiring a domicile for the
purpose of pursuing its business without taking steps to render
it amendable to suit in the local courts. (Marshall-Wells Co. vs.
H. W. Elser & Co.) AQUILA LEGIS FRATERNITY
Corporation Law Reviewer contemplates, to that extent, the performance of acts or works
or the exercise of some of the functions normally incident to,
Page 72 of 87
and in progressive prosecution of, the purpose and object of
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C its organization. (Mentholatum Co., Inc. vs. Mangaliman)

General rules regarding whether or not a foreign The object of the statute was to subject the foreign
corporation may sue or be sued in the Philippines: corporation doing business in the Philippines to the jurisdiction
of its courts. The object of the statute was not to prevent the
1. As to whether or not it can sue. foreign corporation from performing single acts, but to
prevent is from acquiring domicile for the purpose of business
a. A foreign corporation transacting or doing business in
without taking the steps necessary to render it amenable to
the Philippines with a license can sue before Philippine Courts.
suit in the local courts. The law simply means that no foreign
b. Subject to certain exceptions, a foreign corporation corporation shall be permitted “to transact business in the
doing business in the country without a license can not sue in Philippine Islands” unless it shall have the license required by
Philippine Courts. law, and until it complies with the law, shall not be permitted
to maintain any suit in the local courts. (Marshall-Wells Co. vs.
c. If it is not transacting business in the Philippines, even Henry W. Elser & Co.)
without a license, it can sue before the Philippine Courts.
A foreign corporation not engaged in business in the
2. As to whether it can be sued or not. Philippines may not be denied the right to file an action in
a. A foreign corporation transacting business in the Philippine courts for isolated transactions. (Bulakhidas vs.
Philippines with the requisite license can be sued in the Navarro)
Philippines.

b. A foreign corporation transacting business in the


Philippines without a license can be sued in Philippine courts.
AQUILA LEGIS FRATERNITY
c. If it is doing business in the Philippines, it cannot be
sued in Philippine courts for lack of jurisdiction. Corporation Law Reviewer

It is not the lack of required license but doing business Page 73 of 87


without a license which bars a foreign corporation from access
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
to our courts. (Universal Shipping vs. IAC)
If A foreign corporation not engaged in business in the
General rule: A foreign corporation must have the
Philippines has the right to sue on an isolated transaction,
requisite license to sue before the Philippine courts.
more so may it sue based on a mistake. (Swedish East Asia Co.,
Exceptions: Ltd. vs. Manila Port Service)

1. The act or transaction involved is an “isolated There was only one agreement between petitioners
transaction;” and the respondent. The three seemingly different
transactions were entered into by the parties only in an effort
2. The foreign corporation is not seeking to enforce any to fulfill the basic agreement and in no way indicate an intent
legal or contractual rights arising from, or growing out of any on the part of the respondent to engage in a continuity of
business which it has transacted in the Philippines; transactions with petitioners which will categorize it as a
3. The purpose of the suit is to protect its trademark, foreign corporation doing business in the Philippines. The
tradename, corporate name, reputation or goodwill; respondent, being a foreign corporation not doing business in
the Philippines, does not need to obtain a license to do
4. The suit is based on a violation of the Revised Penal business in order to have the capacity to sue. (Atnam
Code; Consolidated, Inc. vs. CA)
5. The foreign corporation is merely defending a suit Under the rules of the BOI, the phrase „doing
filed against it; business‟ has been exemplified with illustrations, among
them being as follows:
6. The party is estopped to challenge the personality of
the corporation by entering into a contract with it. 1. Soliciting orders, purchase (sales) or service
contracts. Concrete and specific solicitations by a foreign firm,
Exception to an exception: Where a single act or
not acting independently of the foreign firm amounting to
transaction however, is not merely incidental or casual but
negotiation or fixing of the terms and conditions of sales or
indicates the foreign corporation‟s intention to do other
service contract, regardless of whether the contracts are
business in the Philippines, said single act or transaction
actually reduced to writing, shall constitute doing business
constitutes „doing‟ or „engaging in‟ or „transacting‟
even in the enterprise has no office or fixed place of business
business in the Philippines.
in the Philippines.
The true test regarding “doing” or “engaging in” or
2. Appointing a representative or distributor who is
“transacting” business is whether the foreign corporation is
domiciled in the Philippines unless said representative or
continuing the body or substance of the business or enterprise
distributor has an independent status, i.e., it transacts
for which it was organized or whether it has substantially
business in its name and for its own account, and not in the
retired from it and turned it over to another. The term implies
name or for the account of the pricipal.
a continuity of commercial dealings and arrangements, and
3. Opening offices, whether called „liaison‟ offices, Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
agencies or branches, unless provided otherwise.
A foreign corporation which has never done business
4. Any other act or acts that imply a continuity of in the Philippine Islands and which is unlicensed and
commercial dealings or arrangements, and contemplate to unregistered to do business here, but is widely and favorably
that extent the performance of acts or works, or the exercise known in the Islands through the use therein of its products
of some of the functions normally incident to, or in the bearing its corporate and trade name has a legal right to
progressive prosecution of, commercial gain or of the purpose maintain an action in the Islands. Parenthetically the
and objective of the business organization. (Facilities Trademark Law allows a foreign corporation or juristic person
Management Corp. vs. De La Rosa) to bring an action in Philippine courts for infringement of a
mark or trade-name, for unfair competition, or false
A single act may bring the corporation within the
designation of origin and false description, whether or not it
purview of the statute where it is an act of the ordinary
has been licensed to do business in the Philippines. (General
business of the corporation. In such a case, the single act of
Garments Corporation vs. Director of Patents)
transaction is not merely incidental or casual, but is of such
character as distinctly to indicate a purpose on the part of the Article 8 of the Paris Convention to which the
operations for the conduct of a part of the corporation‟s Philippines became a party provides that a trade name shall be
ordinary business. (Far East Int‟l Import vs. Nankai) protected in all the countries of the Union without the
obligation of filing or registration, whether or not it forms part
ITEC‟s arrangement with its various business contacts
of the trademark. (Puma vs. IAC)
in the country indicate its purpose to bring about the situation
among its customers and the general public that they are A foreign corporation not doing business not doing
dealing directly with ITEC and that ITEC is actively engage in business in the Philippines needs no license to sue before
business in the country. In determining whether a corporation Philippine courts for infringement of trademark and unfair
does business in the Philippines or not, aside from their competition. (Le Chemise Lacoste vs. Fernandez)
activities within the forum, reference may be made to the
In a suit involving the violation of the Revised Penal
contractual agreements entered into by it with other entities
Code the complainant foreign corporation‟s capacity to sue is
in the country. (Communication Materials and Design, Inc. vs.
not significant. (Le Chemise Lacoste vs. Fernandez)
CA)
CAPACITY TO SUE
A foreign corporation doing business in the
Philippines may sue in Philippine courts although no General rule: A foreign corporation must affirmatively
authorized to do business here against a Philippine citizen or plead its capacity to sue in order that it may proceed and
entity who had contracted with and benefited by said effectively institute a case in Philippine courts.
corporation. To put it another way, a party is estopped to
challenge the personality of a corporation after having Exceptions:
acknowledged the same by entering into a contract with it. An
1. The action involves a complaint for violation of the
the doctrine of estoppel to deny corporate existence applies
Revised Penal Code.
to a foreign as well as to domestic corporations. One who has
dealt with a corporation of foreign origin as a corporate entity 2. The foreign corporation is not suing or maintaining a
is estopped to deny its corporate existence and capacity. The suit but is merely defending itself from one filed against it.
principle will be applied to prevent a person contracting with
a foreign corporation from later taking advantage of its The qualifying circumstance of whether or not a
noncompliance with the statutes chiefly in cases where such foreign corporation has engaged in business in the Philippines
person has received the benefits of the contract. is an essential part of the element of a foreign corporation‟s
(Communication Materials and Design, Inc. vs. CA) capacity to sue and must be affirmatively pleaded. (Atlantic
Mutual Insurance Co. vs. Cebu Stevedoring Co., Inc.)
The right of a corporation to use its corporate and
trade name is a property right, a right in rem, which it may If the dismissal of the case, based on failure of the
assert and protect against all the world, in any of the courts of foreign corporation to aver its capacity to sue, would not,
the world – even in jurisdictions where it does not transact however, bar the institution of the same action, dismissal
business – just the same as it may protect its tangible property, should not be allowed, especially so if it would be an idle,
real or personal, against trespass, or conversion. Since it is the circuitous ceremony considering the absence of any
trade and not the make that is to be protected, a trademark meritorious substantial defense of the defense of the
acknowledges no territorial boundaries or municipalities or defendant. Technical rules should not be accorded undue
states or nations, but extends to every market where the importance to frustrate and defeat a plainly valid claim.
trader‟s goods have become known and identified by the use (Olympia Business Machines Co. vs. Razon, Inc.)
of the mark. (Western Equipment and Supply Co. vs. Reyes) Since petitioner is not maintaining any suit but is
merely defending one against itself (it did not file any
complaint but only a corollary defensive petition to prohibit
the lower court from further proceeding with a suit that it had
no jurisdiction to entertain), its failure to aver its legal capacity
AQUILA LEGIS FRATERNITY
to institute the present petition is not fatal. (Time, Inc. vs.
Corporation Law Reviewer Reyes)

Page 74 of 87 LAWS GOVERNING FOREIGN CORPORATIONS


General rule: Any foreign corporation lawfully doing If the absorbed corporation is the foreign corporation doing
business in the Philippines shall be bound by all laws, rules and business in the Philippines, a petition for withdrawal of its
regulations applicable to domestic corporations of the same license must also be filed.
class.
Requirements and procedure for the withdrawal of
Exceptions: foreign corporations:

1. Laws which provide for the creation, formation, 1. Filing of a petition for withdrawal of license;
organization or dissolution of corporations; or
2. All claims which have accrued in the Philippines have
2. Laws which fix the relations, liabilities, been paid, compromised or settled;
responsibilities, or duties of stockholders, members or officers
3. All taxes, imposts, assessments and penalties, if any,
of a corporation to each other or to the corporation.
lawfully due to the Philippine Government or any of its
Intra-corporate or internal matters not affecting agencies or political subdivisions have been paid;
creditors or the public in general are governed not by
4. Publication of the petition for withdrawal once a
Philippine laws but the law under which the foreign
week for 3 consecutive weeks in a newspaper of general
corporation was formed or organized.
circulation in the Philippines; and
Special laws may provide or grant certain restrictions,
5. Issuance of the certificate of withdrawal by the SEC.
limitations, privileges or incentives to a foreign corporation not
otherwise applicable or granted to domestic corporations (e.g. Grounds for the revocation or suspension of license:
import duties and tax incentives under the Omnibus
Investments Code). 1. Failure to file its annual report or pay any fees as
required by the Code;
A foreign corporation authorized to transact business
in the Philippines which amends its articles of incorporation or 2. Failure to appoint and maintain a resident agent in
by-laws must file a copy of such amended articles of the Philippines;
incorporation or by-laws with
3. Failure, after change of its resident agent or of his
address, to submit to the SEC a statement of such change;

4. Failure to submit to the SEC an authenticated copy of


any amendment to its articles of incorporation or by-laws or of
AQUILA LEGIS FRATERNITY any articles of merger or consolidation within the time
prescribed by the Code;
Corporation Law Reviewer
5. Misrepresentation of any material matter in any
Page 75 of 87
application, report, affidavit or other document submitted;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
6. Failure to pay any and all taxes, imposts, assessments
the SEC or the appropriate government agency within 60 days or penalties, if any, lawfully due to the Philippine Government
from the effectivity of such amendment. or any of its agencies or political subdivisions;

Instances when a foreign corporation authorized to 7. Transacting business in the Philippines outside of the
transact business in the Philippines must obtain an amended purpose or purposes for which such corporation is authorized
license: under its license;

1. The foreign corporation changes its corporate name; 8. Transacting business in the Philippines as agent of or
or acting for and in behalf of any foreign corporation or entity not
duly licensed to do business in the Philippines; or
2. The foreign corporation desires to pursue other or
additional purposes in the Philippines. 9. Any other ground as would render it unfit to transact
business in the Philippines.
Requirements in a merger or consolidation of a
foreign corporation licensed in the Philippines: With a
domestic corporation:

Such must be permitted under Philippines laws and by the law


AQUILA LEGIS FRATERNITY
of its incorporation; and
Corporation Law Reviewer
The requirements on merger or consolidation provided by the
Code must be followed. Page 76 of 87
With a foreign corporation: Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Such must be permitted by the law of its incorporation; Other grounds for revocation of license under special
laws:
A duly authenticated articles of merger or consolidation must
be filed with the SEC or the appropriate government agency 1. General Banking Act – imminent danger of insolvency;
within 60 days from the effectivity of the merger or
consolidation; and 2. Insurance Code – unsound condition, failure to
comply with the provisions of law or regulation obligatory
upon it, a condition or method of business hazardous to the made by the Commission or by any other official authorized by
public or its policy holders, impairment of its security deposit, law to make an examination of the operations, books and
or deficiency in the margin of solvency. records of any corporation, shall be kept strictly confidential,
except insofar as the law may require the same to be made
3. Omnibus Investments Code – willful violation of the
public or where such interrogatories, answers or results are
provisions of existing laws and implementing guidelines or
necessary to be presented as evidence before any court.
violation of the terms and conditions of its license.
The SEC shall have the power and authority to
In case the revocation is warranted the SEC shall:
implement the provisions of this Code, and to promulgate
1. Issue a certificate of revocation; rules and regulations reasonably necessary to enable it to
perform its duties hereunder, particularly in the prevention of
2. Furnish a copy thereof to the appropriate fraud and abuses on the part of the controlling stockholders,
government agency; and members, directors, trustees or officers.
3. Mail a notice of such revocation accompanied by a Violations of any of the provisions of this Code or its
copy of the certificate of revocation to the corporation at its amendments not otherwise specifically penalized therein shall
registered office in the Philippines. be punished by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand
CHAPTER 18: MISCELLANEOUS PROVISIONS
(P10,000.00) pesos or by imprisonment for not less than thirty
Outstanding capital stock – the total shares of stock (30)
issued under binding subscription agreements to subscribers
or stockholders, whether or not fully or partially paid, except
treasury shares.

Non-stock or special corporations may, through their AQUILA LEGIS FRATERNITY


articles of incorporation or their by-laws, designate their
governing boards by any name other than as board of trustees. Corporation Law Reviewer

The NEDA shall, from time to time, make a Page 77 of 87


determination of whether the corporate vehicle has been used
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
by any corporation or by business or industry to frustrate the
provisions thereof or of applicable laws, and shall submit to days but not more than five (5) years, or both, in the discretion
Congress, whenever deemed necessary, a report of its of the court. If the violation is committed by a corporation, the
findings, including recommendations for their prevention or same may, after notice and hearing, be dissolved in
correction. appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not
Maximum limits may be set by Congress for
preclude the institution of appropriate action against the
stockholdings in corporations declared by it to be vested with
director, trustee or officer of the corporation responsible for
a public interest pursuant to the provisions of this section,
said violation: Provided, further, That nothing in this section
belonging to individuals or groups of individuals related to
shall be construed to repeal the other causes for dissolution of
each other by consanguinity or affinity or by close business
a corporation provided in this Code.
interests, or whenever it is necessary to achieve national
objectives, prevent illegal monopolies or combinations in No right or remedy in favor of or against any
restraint or trade, or to implement national economic policies corporation, its stockholders, members, directors, trustees, or
declared in laws, rules and regulations designed to promote officers, nor any liability incurred by any such corporation,
the general welfare and foster economic development. stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of
In recommending to Congress corporations, business or
said corporation or by any subsequent amendment or repeal
industries to be declared vested with a public interest and in
of this Code or of any part thereof.
formulating proposals for limitations on stock ownership, the
NEDA shall consider the type and nature of the industry, the All corporations lawfully existing and doing business
size of the enterprise, the economies of scale, the geographic in the Philippines on the date of the effectivity of this Code and
location, the extent of Filipino ownership, the labor intensity heretofore authorized, licensed or registered by the Securities
of the activity, the export potential, as well as other factors and Exchange Commission, shall be deemed to have been
which are germane to the realization and promotion of authorized, licensed or registered under the provisions of this
business and industry. Code, subject to the terms and conditions of its license, and
shall be governed by the provisions hereof: Provided, That if
Every corporation, domestic or foreign, lawfully doing
any such corporation is affected by the new requirements of
business in the Philippines shall submit to the SEC an annual
this Code, said corporation shall, unless otherwise herein
report of its operations, together with a financial statement of
provided, be given a period of not more than two (2) years
its assets and liabilities, certified by any independent certified
from the effectivity of this Code within which to comply with
public accountant in appropriate cases, covering the preceding
the same.
fiscal year and such other requirements as the SEC may
require. Such report shall be submitted within such period as PD 902-A, AS AMENDED
may be prescribed by the SEC.
The SEC‟s quasi-judicial functions under Sec. 5 of PD
All interrogatories propounded by the SEC and the 902-A, as amended were transferred to the Special
answers thereto, as well as the results of any examination Commercial Courts by RA 8799.
General rule: The Special Commercial Courts shall Intra-corporate controversies include those of
have exclusively and originally jurisdiction over cases falling corporations, partnerships and associations.
under Sec. 5 of PD 902-A.
Elements of intra-corporate controversies:
Exception: The SEC shall retain jurisdiction over cases
1. An intra-corporate relationship:
involving suspension of payments and corporate rehabilitation
filed on or before June 30, 2000. a. Between and among the stockholders, members,
associates of a corporation, partnership or association;
Distribution of Special Commercial Courts:
b. Between them and the corporation, partnership or
1. Two in Makati City;
association; or
2. Two in Quezon City;
c. Between the corporation, partnership or association
3. One in each in other cities in Metro Manila; and and the State.

4. One per region. 2. The controversy must arise out of said relationship.

DEVICES OR SCHEMES AMOUNTING TO FRAUD AND The dispute among the parties must be intrinsically
MISREPRESENTATION (Sec. 5 [a]) connected with the regulation of the corporation. If the nature
of the controversy involves matters that are purely civil in
General rule: The Special Commercial Courts shall
character necessarily the case does not involve an intra-
have original and exclusive jurisdiction to hear and decide
corporate controversy. (Speed Distributing Corp. vs. CA)
cases involving devices or schemes employed by or any acts of
the board of directors, business associates, its officers or The fact that shares of stock were issued to be used
partners, amounting to fraud and misrepresentation which as part payment for lease rentals does not convert it into a
may be detrimental to the interest of the public and/or of the intra-corporate controversy. (DMRC Enterprises vs. Este del
stockholder, partners, members of associations or Sol Mountain Reserve, Inc.)
organizations registered with the SEC.
Recovery of the control and management of a
Exception: The complaint is based on the violation of corporation in the guise of a complaint for rescission of a
the Revised Penal Code (Ex. Syndicated Estafa) memorandum of agreement which vested such control and
management is an intra-corporate controversy. (DPB vs.
Even if the action is for recovery of sums of money
Ilustre, Jr.)
paid or given to the corporation through devices and schemes
amounting to fraud or misrepresentation detrimental to the If all of the requirements for a valid transfer have
investing public, the same must be filed, heard and tried by the been complied the dispute is intra-corporate and is within the
Special Commercial Courts. jurisdiction of the Special Commercial Court. (Abejo vs. de la
Cruz; Rural Bank of Salinas, Inc. vs. CA)
Examples of acts amount to fraud or
misrepresentation within the original and exclusive jurisdiction If the petitioner does not have a “prima facie” title to
of the Special Commercial Courts: the share sought to be recorded in his name the dispute is not
intra-corporate and the ordinary or regular court can assume
1. Fraud committed by a corporation in failing to pay
jurisdiction over the case. (Rivera vs. Florendo; Tay vs. CA)
individual money market placements. (Orosa, Jr. vs. CA)
A dispute regarding the automatic rescission clause of
2. Corporations act of duping persons into investing
a Memorandum of Agreement regarding the sale of shares of
money when such corporations authority to issue commercial
a group of stockholders to another group of stockholders is
papers has already expired. (Mangalad vs. Premier
intra-corporate. (Saavedra vs. SEC)
Corporation)
Where the conflict involves the enforcement of rights
3. Corporate officer‟s act of diverting corporate funds
and obligations under the Corporation Code or the inter and
and assets for his personal use. (Alleje vs. CA)
intra-corporate affairs of the corporation, jurisdiction would
4. Pyramiding schemes. fall with the Special Commercial Courts. But if it requires a
mere determination of the contractual rights of the parties
under an ordinary agreement, the ordinary/regular courts can
acquire jurisdiction thereto.

The factor which decides whether the action is within


AQUILA LEGIS FRATERNITY
the jurisdiction of the Special Commercial Courts is that the
Corporation Law Reviewer controversy arose out of an intra-corporate relation between
and among the parties. (SEC vs. CA)
Page 78 of 87
The filing of the civil/intra-corporate case before the
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C SEC does not preclude the simultaneous and concomitant filing
The allegation of fraud must be stated with of a criminal action before the regular courts; such that, a
particularity to place the case with the jurisdiction of the fraudulent act may give rise to liability for violation of the rules
Special Commercial Courts. and regulations of the SEC cognizable by the SEC itself, as well
as criminal liability for violation of the Revised Penal Code
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b]) cognizable by the regular courts, both charges to be filed and
proceeded independently, and may be simultaneously, with EFFECTS OF SUSPENSION OF PAYMENTS
the other. (Fabia vs. CA)
The proper court may issue an order suspending
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND payments of claims due from a distress corporation.
REMOVAL OF DIRECTORS AND OFFICERS (Sec. 5 [c])
Upon the appointment of a management committee,
The Special Commercial Courts have original and rehabilitation receiver, board or body all actions for claims
exclusive jurisdiction to hear and decide cases involving against the corporation, partnership or association under
controversies in the election or appointment of directors, management or receivership pending before any court,
trustees, officers or managers of corporations, partnerships or tribunal, board or body shall be suspended accordingly.
associations.
The reason for suspension of payments for claims
against a distressed corporation is to enable the management
committee to effectively exercise its powers free from judicial
or extrajudicial interference that might unduly hinder or
AQUILA LEGIS FRATERNITY prevent the „rescue‟ of the debtor company. (PAL vs. Sps.
Sadic and Kurangking)
Corporation Law Reviewer
The suspension of all actions for claims against a
Page 79 of 87 corporation embraces all phases of the suit, be it before the
trial court or any tribunal or before this Court. No other action
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
may be taken, including the rendition of judgment during the
General rule: A corporate officer‟s election, state of suspension. It must be stressed that what are
appointment or termination by the board of directors is always automatically stayed or suspended are the proceedings of a
a corporate act, and the fact that the officer asks for suit and not just the payment of claims during the execution
backwages does not alter the picture. The original and stage after the case had become final and executory. Once the
exclusive jurisdiction rests with the Special Commercial Courts. process of rehabilitation, however, is completed, this Court
will proceed to complete the proceedings on the suspended
Exception: The main cause of action is for the actions. Furthermore, the actions that are suspended cover all
recovery of unpaid wages and separation pay. (Midland claims against the corporation whether for damages founded
Construction Co., Inc. vs. Movilla) on a breach of contract of carriage, labor cases, collection suits
The main aspect to be considered is whether the or any other claims of a pecuniary nature. No exception in
corporate officer asserts his rights as such officer or questions favor of labor claims is mentioned in the law. (PAL vs. Zamora)
his removal or ouster. If so, the case would fall within the ambit Claims – refers to debts or demands of pecuniary
of the jurisdiction of the Special Commercial Courts and not nature; the assertion of right to have money paid.
the NLRC.
Suspended proceedings include extra judicial
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d]) foreclosures. You cannot even consolidate. All proceedings at
Petitions for suspension of payments of corporations, whatever stage are suspended.
partnerships or associations, and appointment of receivership,
management committee, board or body are lodged within the
jurisdiction of the Special Commercial Courts.

A corporation, partnership or association, whether or AQUILA LEGIS FRATERNITY


not insolvent, can file a petition for suspension of payments
Corporation Law Reviewer
provided it is placed under a rehabilitation receiver or
management committee or rehabilitation receiver. Page 80 of 87
Three types of suspension of payments: Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
1. Simple suspension of payments – mere deferment of Even if the suspension order is issued after a
payment of debts and it refers to a petition which is filed by a creditor‟s action in court has already become final but pending
corporation which possesses sufficient assets to cover its execution, the execution of the decision is likewise suspended.
liabilities but foresees the possibility of meeting them when (Filinvest vs. Ejercito)
they respectively fall due owing to temporary liquidity
problems. Note the words “against the corporation.”

2. Suspension of payments with the appointment of a If a corporation secures a loan, and one of its key
receiver with or without a rehabilitation plan. The officers uses his private properties to guarantee the loan,
rehabilitation plan is a plan under which the corporation will corporation files for suspension, the bank want to foreclose on
reschedule the payment of its debts and liabilities. Either the the prop, may the bank foreclose? Yes. It is not an action for ac
petitioner corporation will propose the plan or ask for the claim against the corporation. Union bank case.
appointment of a receiver who will study and make the plan.
Properties of an individual stockholder, director or
3. Suspension of payments where the corporation has officer, as surety of corporate liabilities, are not, and will not
no sufficient assets to cover its debts and liabilities with or be covered by the suspension of payments order issued by the
without the appointment of a management committee with or court pursuant to PD 902-A.
without a rehabilitation plan.
Same with regard to criminal proceedings, personal It may also create or appoint a management
to corporate officer concerned. committee, board or body to undertake the management of
corporations, partnerships or other associations supervised or
Despite the appointment of a receiver for a
regulated by other government agencies such as banks and
corporation under PD 902-A, an action against a corporation
insurance companies, upon the request of the government
seeking the nullification of corporate documents cannot be
agency concerned.
suspended by reason thereof, since the civil action does not
present a monetary claim against the corporation. (Finasia Requisites before a management committee, board
Investment and Finance Corporation vs. CA) or body may be appointed or created:

The SEC does not have jurisdiction to entertain


petitions for suspension of payments filed by parties other
than corporations, partnerships or associations. (Union Bank
vs. CA) AQUILA LEGIS FRATERNITY
Equality is Equity – during suspension the assets are Corporation Law Reviewer
held in trust for the equal benefit of all creditors to preclude
one from obtaining an advantage or preference over another Page 81 of 87
by the expediency of an attachment, execution or otherwise.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
The creditors should stand on equal footing. Not anyone of
them should be given any preference by paying one of them 1. Dissipation, loss, wastage or destruction of assets or
ahead of the others. (Alemars Sibal and Son, Inc. vs. Elibenas) other properties; and

The issue of whether or not preferred creditors of 2. Paralyzation of its business operations which may be
distressed corporations stand on equal footing with all other prejudicial to the interest of the minority stockholders, parties-
creditors gains relevance and materiality only upon the litigants or the general public. (Sy Chim vs. Sy Siy Ho & Sons,
appointment of a management committee, rehabilitation Inc.)
receiver, board or body. Suspension of claims against the
corporation under rehabilitation is counted or figured up only Danger – a general term, including peril, jeopardy,
upon the appointment of a management committee or a hazard and risk; refers to exposure or liability to injury.
rehabilitation receiver. (RCBC vs. IAC) Imminent – something which is threatening to
VERY IMPORTANT!!! happen at once, something close at hand, something to
happen upon the instant, close although not yet happening,
1. All claims against corporations, partnerships or and on the verge of happening.
associations that are pending before any court, tribunal or
board, without distinction as to whether or not a creditor is In the absence of a strong showing of an imminent
secured or unsecured, shall be suspended effective upon the danger of dissipation, loss, wastage or destruction of assets or
appointment of a management committee, rehabilitation other properties of a corporation and paralysis of its business
receiver, board or body in accordance with the provisions of operations, the mere apprehension of future misconduct
PD 902-A. based upon prior mismanagement will not authorize the
appointment of a management committee/receiver. (Sy Chim
2. Secured creditors retain their preference over vs. Sy Siy Ho & Sons, Inc.)
unsecured creditors, but enforcement of such preferences is
equally suspended upon the appointment of a management Mere disagreement among stockholder as to the
committee, rehabilitation receiver, board or body. In the event fairness of the corporation would not in itself suffice as a
that the assets of the corporation, partnership or association ground for the appointment of a management committee.
are finally liquidated, however, secured or preferred credits However, where the dissention among the stockholders is
under the applicable provisions of the Civil Code will definitely such that the corporation cannot successfully carry on its
have preference over unsecured ones. corporate functions, the appointment of a management
committee becomes imperative. (Jacinto vs. First Women‟s
If the rehabilitation of the corporation is not feasible, Credit Corporation)
the court muto propio or the management committee may
petition the lifting and the preferences will be there again. A management committee shall have the power to
take custody of and control all assets and properties owned
APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR and possessed by the entity under management. It shall take
BODY (Sec. 6 [d]) the place of the management and board of directors of the
entity under management, assume their rights and
Special Commercial Courts may create or appoint a
responsibilities, and preserve the entity‟s assets and
management committee, board or body upon petition or muto
properties in its possession.
propio to undertake the management of corporations,
partnerships or association not supervised or regulated by The rehabilitation receiver shall not take over the
other government agencies in appropriate cases where there management and control of the debtor but shall closely
is imminent danger of dissipation, loss or wastage or oversee and monitor the operations of the debtor during the
destruction of assets or other properties or paralyzation of pendency of the proceedings. He shall be primarily tasked to
business operations of such corporation or entities which may study the best way to rehabilitate the debtor and to ensure
be prejudicial to the interest of minority stockholders, parties- that the value of the debtor‟s property is reasonably
litigant or the general public. maintained pending the determination of whether or not the
debtor should be rehabilitated, as well as implement the AQUILA LEGIS FRATERNITY
rehabilitation plan after its approval.
Corporation Law Reviewer
Venue of actions in intra-corporate controversies –
Page 82 of 87
Special Commercial Court which has jurisdiction over the
principal office of the corporation, partnership or association. Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Nature of proceedings is in rem. Jurisdiction acquired
upon publication of the proceeding.
Securities – are shares, participation or interests in a
Creditors have the personality (at least 25% of the corporation or in a commercial enterprise or profit-making
total outstanding liablitities) may file, ex. Bayantel. venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
Their compensation is subject to agreement of the
parties. 1. Shares of stock, bonds, debentures, notes, evidences
of indebtedness, asset-backed securities;
Actuations of the board, body, committee subject
to…. 2. Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of
Service of pleadings . Sec. 6 rule 1. may be by fax or
deposit for a future subscription;
email. When authorized by the court.
3. Fractional undivided interests in oil, gas or other
Service of summons. Sec. 5 rule 2. made upon any of
mineral rights;
the statutory or corporate officers or their respective
secretaries. vs. Eb Villarosa case. (Rule of Court) 4. Derivatives like option and warrants;
SECURITIES REGULATION CODE (SRC) 5. Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates or
Full disclosure rule – as long as there is full and
similar instruments;
complete disclosure relative to the issue of securities the
investing public should determine for themselves whether or 6. Proprietary or non proprietary membership
not to invest. certificates incorporations; and
Doctrine of primary jurisdiction – courts will not 7. Other instruments as may in the future be
determine a controversy involving a question within the determined by the Commission.
jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion The definition of securities is extra-ordinarily broad. It
requiring the specialized knowledge and expertise of said is a catch all phrase meant to include all novel devices which
administrative tribunal to determine technical and intricate are of the same nature. Investment contracts and golf club
matters of fact. shares are included in the definition of securities.

A criminal charge for violation of the SRC is a General rule: Securities cannot be sold or offered for
specialized dispute. Hence, it must first be referred to an sale or distribution to more than 19 persons without a
administrative agency of special competence, i.e., the SEC… Registration Statement duly filed and approved by the SEC.
The SRC is a special law. Its enforcement is particularly vested Once the securities are sold or offered to more than 19
in the SEC. Hence, all complaints for any violation of the Code persons, it becomes a public offering requiring prior
and its implementing rules and regulations should be filed with registration with the SEC. Violation thereof renders the person
the SEC. Where the complaint is criminal in nature, the SEC administratively, civilly and criminally liable.
shall indorse the complaint to the DOJ for preliminary
Exception: The securities involved are covered by Sec.
investigation and prosecution as provided in Section 53.1.
9 (exempt securities) and Sec. 10 (exempt transactions).
(Baviera vs. Paglinawan)
Persons engaging in the business of buying or selling
securities in the Philippines as a broker or dealer, or acting as
a salesman for such entities must be registered and authorized
as such by the SEC.

Investment contract – a contract or scheme whereby


a person invests his money in a common venture premised on
a reasonable expectation of profits to be derived from the
entrepreneurial or managerial efforts of others.

Issuance of certificates of participation in a multi-level


marketing scheme, solely on the management of others
without goods or services is an investment contract and thus a
security. (Justee vs. SEC)

Pyramiding schemes partakes of a nature of an


Securities investing contract which cannot be sold to more than 19
persons without prior approval of the SEC.
When an investor is relatively uninformed and turns securities to its stockholders or other security holders as a
over his money to others, essentially depending upon their stock dividend or other distribution out of surplus.
representations and their honesty and skill in managing it, the
5. The sale of capital stock of a corporation to its own
transaction generally is considered as an investment contract.
stockholders exclusively, where no commission or other
The touchstone is the presence of an investment in a common
remuneration is paid or given directly or indirectly in
venture premised on a reasonable expectation of profits to be
connection with the sale of such capital stock.
derived from the entrepreneurial or managerial efforts of
others. (People vs. Petralba) 6. The issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property, where the
Exempt Securities
entire mortgage together with all the bonds or notes secured
Exempt Securities (Sec. 9): thereby are sold to a single purchaser at a single sale.

1. Any security issued or guaranteed by the Government 7. The issue and delivery of any security in exchange for
of the Philippines, or by any political subdivision or agency any other security of the same issuer pursuant to a right of
thereof, or by any person controlled or supervised by, and conversion entitling the holder of the security surrendered in
acting as an instrumentality of said Government. exchange to make such conversion: Provided, That the security
so surrendered has been registered under the SRC or was,
2. Any security issued or guaranteed by the government
when sold, exempt from the provisions of the SRC, and that
of any country with which the Philippines maintains diplomatic
the security issued and delivered in exchange, if sold at the
relations, or by any state, province or political subdivision
conversion price, would at the time of such conversion fall
thereof on the basis of reciprocity: Provided, That the
within the class of securities entitled to registration under the
Commission may require compliance with the form and
SRC. Upon such conversion the par value of the security
content of disclosures the Commission may prescribe.
surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange are
sold.

8. Broker‟s transactions, executed upon customer‟s


AQUILA LEGIS FRATERNITY orders, on any registered Exchange or other trading market.
Corporation Law Reviewer 9. Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in pursuance
Page 83 of 87
of an increase in its authorized capital stock under the
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given in
3. Certificates issued by a receiver or by a trustee in connection with the sale or disposition of such securities, and
bankruptcy duly approved by the proper adjudicatory body. only when the purpose for soliciting, giving or taking of such
4. Any security or its derivatives the sale or transfer of subscriptions is to comply with the requirements of such law
which, by law, is under the supervision and regulation of the as to the percentage of the capital stock of a corporation which
Office of the Insurance Commission, HLURB, or BIR. should be subscribed before it can be registered and duly
incorporated, or its authorized capital increased.
5. Any security issued by a bank except its own shares of
stock. 10. The exchange of securities by the issuer with its
existing security holders exclusively, where no commission or
Exempt Transactions other remuneration is paid or given directly or indirectly for
soliciting such exchange.
Exempt Transactions (Sec. 10):
11. The sale of securities by an issuer to fewer than 20
1. Any judicial sale, or sale by an executor,
persons in the Philippines during any twelve-month period.
administrator, guardian or receiver or trustee in insolvency or
bankruptcy.

2. By or for the account of a pledge holder, or


mortgagee or any other similar lien holder selling or offering
for sale or delivery in the ordinary course of business and not AQUILA LEGIS FRATERNITY
for the purpose of avoiding the provisions the SRC, to liquidate Corporation Law Reviewer
a bona fide debt, a security pledged in good faith as security
for such debt. Page 84 of 87

3. An isolated transaction in which any security is sold, Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
offered for sale, subscription or delivery by the owner thereof,
12. The sale of securities to any number of the following
or by his representative for the owner‟s account, such sale or
qualified buyers:
offer for sale, subscription or delivery not being made in the
course of repeated and successive transactions of a like a. Bank;
character by such owner, or on his account by such
representative and such owner or representative not being the b. Registered investment house;
underwriter of such security.
c. Insurance company;
4. The distribution by a corporation, actively engaged in
the business authorized by its articles of incorporation, of
d. Pension fund or retirement plan maintained by the which has sold a class of equity securities to the public
Government of the Philippines or any political subdivision pursuant to an effective registration statement shall have at
thereof or managed by a bank or other persons authorized by least 2 independent directors or such independent directors
the Bangko Sentral to engage in trust functions; shall constitute at least 20% of the members of such board,
whichever is the lesser.
e. Investment company; or
Independent director – a person other than an officer
f. Such other person as the Commission may by rule
or employee of the corporation, its parent or subsidiaries, or
determine as qualified buyers, on the basis of such factors as
any other individual having a relationship with the
financial sophistication, net worth, knowledge, and experience
corporation, which would interfere with the exercise of
in financial and business matters, or amount of assets under
independent judgment in carrying out the responsibilities of a
management.
director.
Tender Offer

Tender Offers – a publicly announced intention by the


purchaser to acquire a certain block of equities of a company
through open market purchases or private negotiations. AQUILA LEGIS FRATERNITY

A tender offer is required of any person or group of Corporation Law Reviewer


persons acting in concert who intend to acquire:
Page 85 of 87
1. At least 15% of any class of any equity security of a
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
listed corporation or of any class of any equity security of a
corporation with assets of at least P50M and having 200 or The SEC may exempt corporations from the required
more stockholders with at least 100 shares each; or independent directors as it did in the rehabilitation of Victorias
Milling Co. Inc..
2. At least 30% of such equity over a period of 12
months. Insider Trading
Proxies Insider:
Proxies must be issued and proxy solicitation must be 1. The issuer;
made in accordance with rules and regulations to be issued by
the Commission. 2. A director or officer (or person performing similar
functions) of, or a person controlling the issuer;
Requisites for proxies:
3. A person whose relationship or former relationship to
1. In writing; the issuer gives or gave him access to material information
about the issuer or the security that is not generally available
2. Signed by the stockholder or his duly authorized
to the public;
representative; and
4. A government employee, or director, or officer of an
3. Filed before the scheduled meeting with the
exchange, clearing agency and/or self-regulatory organization
corporate secretary.
who has access to material information about an issuer or a
General rule: A proxy shall be valid only for the security that is not generally available to the public; or
meeting for which it is intended.
5. A person who learns such information by a
Exception: It is otherwise provided in the proxy. communication from any of the foregoing insiders.

No proxy shall be valid and effective for a period General rule: An insider may not sell or buy a security
longer than 5 years at one time. of the issuer while in possession of material information with
respect to the issuer or the security that is not generally
No broker or dealer shall give any proxy, consent or
available to the public.
authorization, in respect of any security carried for the account
of a customer, to a person other than the customer, without Exceptions:
the express written authorization of such customer.
1. The insider proves that the information was not
A broker or dealer who holds or acquires the proxy for gained from such relationship; or
at least 10% or such percentage as the Commission may
2. The insider disclosed the information to a party
prescribe of the outstanding share of the issuer, shall submit a
reasonably believed by the insider to possess the information.
report identifying the beneficial owner within 10 days after
such acquisition, for its own account or customer, to the issuer Material non-public information – has not been
of the security, to the Exchange where the security is traded generally disclosed to the public and:
and to the Commission.
1. would likely affect the market price of the security
Independent Director after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or
Any corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess of P50M 2. would be considered by a reasonable person
and having 200 or more holders, at least of 200 of which are important under the circumstances in determining his course
holding at least 100 shares of a class of its equity securities or of action whether to buy, sell or hold a security.
An insider may not communicate material non-public The shares of the Shell Company are often reverse-split four to
information to any person who will likely buy or sell a security one or more to reduce the number of shares. Stock certificates
of the issuer while in possession of such information. are often re-issued in the name of the merged entity to
relatives and associates who act as nominees of the person or
Trading by persons who have material non-public
group of persons employing the device. They would then look
information about a tender offer is prohibited.
for a broker- dealer who would be willing to make a market
Registration of Brokers, Dealers, Salesmen and Associated relative to the stocks of the newly merged company; then hire
Persons a promoter who would “hype” the virtues of the company, its
products and stocks. The broker-dealer then generates volume
Persons engaging in the business of buying or selling and advance bid price. When the market reaches a high price,
securities in the Philippines as a broker or dealer, or acting as they would “dump” their shareholdings and bail out.
a salesman for such entities must be registered and authorized
as such by the SEC. 7. Boiler room operations – involves an intensive selling
campaign through numerous salesmen by telephone or
Broker – a person engaged in the business of buying through direct mail offerings for securities of either a certain
and selling securities for the account of others. type or from a specific issuer. Investors are induced to
purchase through hard-sell techniques based on unfounded
Dealer – any person who buys and sells securities for
predictions and mailing of misleading market letters.
his/her own account in the ordinary course of business.
8. Circulating or dissemination information that the
Salesman - a natural person, employed as such or as
price of any security listed in the Exchange will or is like to rise
an agent, by a dealer, issuer or broker to buy and sell
or fall (illegal)
securities.
9. Making false or misleading statements with respect
A stockbrokerage firm can have no other business
to any material fact, which he knew or had reasonable ground
than that.
to believe was so false or misleading for the purpose of
Purchase of shares should be coursed through a inducing the purchase or sale of any security (illegal).
broker. However a private transaction can be made.
10. Pegging or fixing or stabilizing the price of security
Fraudulent Transactions and Other Market Manipulations effected either alone or with others through any series of
transactions for the purchase or sale thereof (illegal)
Fraudulent and manipulative devices:
11. Short sale – sale of securities which the vendor does
1. Wash sale – any transaction in a security which not own (illegal unless done in accordance with the rules and
involves no change in the beneficial ownership thereof. regulations of the SEC) (T3 rule).

12. Insider trading – the act of an insider of buying or


selling securities of the issuer while in possession of material
information with respect thereto that is not generally available
AQUILA LEGIS FRATERNITY to the public (illegal unless exempted).
Corporation Law Reviewer Wash sale and matched order is illegal when used as
a means to create a false or misleading appearance of active
Page 86 of 87
trading in the security concerned.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Marking the close, painting the tape, squeezing the
2. Matched order – an order or orders for the purchase float, hype and dump, and boiler room operations are illegal
or sale of security with the knowledge that a simultaneous when they are effected to:
order or orders of substantially the same size, time and price
1. Raise the price or induce the purchase of a security or
for the sale or purchase of such security has, or will be entered
of a controlling, controlled or commonly controlled company
by or for the same or different parties.
by others;
3. Marking the close – place of purchase or sale order,
2. Depress their price to induce the sale of a security,
at or near the close of the trading period.
whether of the same or of a different class, of the same issuer
4. Painting the tape – the activity is made during normal or of a controlling, controlled company, or common controlled
trading hours. It involves buying activity among nominee company of others; and
accounts at increasingly higher or lower prices or causing
3. Creates active trading to induce such purchase or sale
fictitious reports to appear on the “ticker tape.”
through said devices or schemes.
5. Squeezing the float – the part or portion of the
Other fraudulent transactions:
issue/security which is outstanding but intentionally held by
dealers or other persons with a view of reselling them later for 1. Employing any device, scheme, or artifice to defraud;
profit.

6. Hype and dump – the act employed by a person or


group of persons of purchasing the outstanding capital stock
of a dormant public shell company for a nominal amount and AQUILA LEGIS FRATERNITY
merge it with their privately held company. They would then
gain control of the majority of the stocks of the merged entity. Corporation Law Reviewer
Page 87 of 87

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

2. Obtaining money or property by means of any untrue


statement of a material fact of any omission to state a material
fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading; or

3. Engaging in any act, transaction, practice or course of


business which operates or would operate as a fraud or deceit
upon any person.

Fraud – akin to bad faith which implies a conscious


and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity.

Settlement Offer

At any time, during an investigation or proceeding


under this Code, parties being investigated and/or charged
may propose in writing an offer of settlement with the
Commission.

Upon receipt of such offer of settlement, the


Commission may consider the offer based on timing, the
nature of the investigation or proceeding, and the public
interest.

The Commission may only agree to a settlement offer


based on its findings that such settlement is in the public
interest. Any agreement to settle shall have no legal effect
until publicly disclosed. Such decision may be made without a
determination of guilt on the part of the person making the
offer.

Limitation of Actions

SEC. 62. Limitation of Actions. - 62.1. No action shall


be maintained to enforce any liability created under Section 56
or 57 of this Code unless brought within two (2) years after the
discovery of the untrue statement or the omission, or, if the
action is to enforce a liability created under Subsection 57.1(a),
unless brought within two (2) years after the violation upon
which it is based. In no event shall any such action be brought
to enforce a liability created under Section 56 or Subsection
57.1

(a) more than five (5) years after the security was bona fide
offered to the public, or under Subsection 57.1 (b) more than
five (5) years after the sale.

62.2. No action shall be maintained to enforce any


liability created under any other provision of this Code unless
brought within two (2) years after the discovery of the facts
constituting the cause of action and within five (5) years after
such cause of action accrued.

Fasle registration statement - liable civily - sec. 56

Ceiling as to amount of damages - triple of the amount


involved

limitation of actions - not later than 5 years after the cause of


action accrues