Corpo Midterms Notes 501 PDF

Corporation
Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

Corporation composing the corporation, as a general rule, are only limited
INTRODUCTION to their contribution to the corporation
o in other words, stockholders are liable only to the extent of
TYPES OF BUSINESS ORGANIZATIONS: their contributions in the corporation
1. SOLE PROPRIETORSHIP • Partnership
A form of business organization with only one proprietary o General partnership: liability can extend to personal assets
owner. It is when a person personally or a single individual conducts § partnership properties are exhausted prior to partners’
business under his own name or under a business name. personal properties
o Limited partnership: limited partner’s liability is limited to
Atty G: What distinguishes a sole proprietorship is that the individual is contribution
the business. You cannot separate the individual from the business. It is
the most basic form of business organization. AS TO MANAGEMENT
• Corporation: managed by Board of Directors acting together (not
2. PARTNERSHIP even individually) who can bind the corporation
Article 1767 NCC: By the contract of partnership, two or more o Ex. to open a bank account, an individual director cannot
persons bind themselves to contribute money, property, or industry to perform such in the name of the corporation as the bank will
a common fund, with the intention of dividing the profits among require a board resolution
themselves. • Partnership: generally every partner is an agent of the partnership
Two or more persons may also form a partnership for the and can bind the partnership
exercise of a profession.
AS TO TRANSFERABILITY OF INTEREST
Atty G: The essence of partnership is that it is “contractual in nature”. • Corporation: shares of stock can be transferred without seeking the
It is created by mere consent. The moment the partners agree as to consent of the other stockholders
what they will contribute and how to conduct business, there will now o corporation’s existence is independent of the composition of
be a contract of partnership between them. You don’t need to register its Board or stockholders
the partnership with the SEC in order to create it. • Partnership: transfer of partner’s interest requires the consent of all
Aside from being a contract, a partnership is a separate and partners
distinct entity from that of the partners. It is basically a bridge between o change in composition of partners automatically dissolves
sole proprietorship and a corporation. Partnership is a contract and at partnership
the same time an entity, a business organization thus, reflecting its
peculiarity. AS TO SUCCESSION
• Corporation: right of succession exists
3. CORPORATION o heirs of stockholder will succeed in the rights
Section 2, Corporation Code of the Philippines: An artificial • Partnership: no right of succession
being created by operation of law, having the right of succession and
the the powers, attributes and properties expressly authorized by law TITLE I- GENERAL PROVISIONS
or incident to its existence. CORPORATION DEFINED
Section 2. Corporation defined. A corporation is an artificial being
CORPORATION VS. PARTNERSHIP created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or
AS TO CAPITALIZATION incident to its existence.
l Corporation: The corporation can acquire more investments
since there are unlimited opportunities for the increase in NOTE: THIS PORTION WAS DISCUSSED UNDER THE OLD CORPORATION
capitalization. Consequently, this makes it feasible for the CODE
corporation to engage in bigger business.
l Partnership: Because of the principle of trust and confidence, Attributes of a Corporation
only those chosen may invest and be a partner. Capitalization is 1. An artificial being
limited to the contribution of the partners and loans from 2. Created by operation of law
creditors. 3. Has the right of succession
4. Has the powers, attributes and properties expressly authorized by
AS TO THE NUMBER OF PERSONS COMPOSING IT law or incident to its existence
l Corporation: needs at least 5 incorporators but not more than 15
l Partnership: atleast 2 partners would be enough 1 | Artificial being

AS TO MANNER OF CREATION As an artificial being, it has a separate juridical personality. It can enter
• Corporation: created through a legal process and requires SEC into obligations and contracts, and when it has liabilities, the
approval via Certificate of Incorporation corporation shall be liable but its members or stockholders could not
• Partnership: contractual, created by mere agreement be held personally liable as they are considered to be separate from the
corporation itself.
AS TO LIABILITIES
• Corporation: limited liability Atty. GC: So how does this relate to the Doctrine of Piercing the Veil?
o liability of the corporation is distinct from the liabilities of the
persons composing it and the liabilities of the persons
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Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
(Based on Aquino book) Doctrine of Piercing the Veil of Corporate
Atty. GC: So as a general rule, a stockholder can transfer his share in
Fiction: the corporation even without the consent of the other stockholders.
Basic in corporate law is the principle that a corporation has
Exception: If they expressly provide for a restriction on transfers as
a separate personality distinct from its stockholders and from other reflected in their Articles of Incorporation.
corporation to which it may be connected. It is a fiction created by
law with the intent that it should be treated as true. However, under 4 | Has the powers, attributes and properties expressly authorized by
this doctrine, the corporation’s separate juridical personality may be law or incident to its existence
disregarded when there is an abuse of the corporate form. Whenever S: It means that once a corporation is registered or has been approved
the doctrine applies, the principal and the conduit will be treated as by the SEC, it can immediately perform the different obligations or
one; the controlled corporation will be deemed to have, “ so to speak, exercise rights related to the purpose for which it is formed.
no separate mind, will or existence of its own, and is but a conduit for
its principal.” If applicable, “ the corporation is merely an aggregation
The corporation also has powers and attributes given by law and
of persons whose liabilities must be treated as one with the incidental to its existence. It means that a corporation can:
corporation.” The conduit corporation will then be solidarily liable 1. Sue in its own name
with the principal. 2. Acquire properties
3. Enter into contract
S: It means that the veil or the artificial or separate personality of the

corporation is disregarded and that the members or the stockholders This fourth attribute is a direct result of a corporation being an artificial
thereof are made personally liable because they are using the being.
corporation as an alter ego or an avatar(term used by Atty.) as a means
to defeat public convenience, justify a wrong, protect a fraud, defend This means that because a corporation is created by operation of law
a crime, to commit injustice or as a vehicle for the evasion of an existing
as a separate and distinct entity, the powers is limited to only that
obligation. prescribed by law and any power incidental to the express powers
provided by law. Anything beyond that, the corporation is not
2 | Created by operation of law authorized anymore.

S: As we have discussed, a corporation is different from a partnership KINDS OF POWERS
for the latter can be formed by mere consent. A corporation, however, • Express powers: those authorized by law
is formed once it gains the approval of the Securities and Exchange • Implied powers: those incidental to its existence
Commission. Technically, a corporation needs to comply with the
necessary requirements set forth by law and from that, the issuance of Atty: But the implied powers must be only those that are related to the
the Certificate of Incorporation follows which in turn starts its
expressed powers of the corporation. It cannot be just anything implied,
corporate existence. it has to be powers that are directly related or incidental to the powers
expressly provided for by law. As a creature of law, its powers are
3 | Has the right of succession limited only to that, and anything done beyond that will be considered
“ultra vires” or an authorized.
(Based on Aquino book) Right of Succession or Perpetual Succession:
Perpetual Succession is” that continuous existence which enables a HEIRS OF FE TAN UY V. INTERNATIONAL EXCHANGE BANK, G.R. NO.
corporation to manage its affairs, and hold property without the 166282-166283, FEBRUARY 13, 2013
necessity of perpetual conveyances , for purposes of transmitting it. By FACTS: Respondent International Exchange Bank (iBank), granted
reason of this quality, the ideal and artificial person remains, in its legal
loans to Hammer Garments Corporation (Hammer), covered by
entity and personality, the same though frequent changes may be promissory notes and deeds of assignment.
made of its members.”
These were made pursuant to the Letter-Agreement between iBank
Blackstone on the concept of perpetual succession: and Hammer, represented by its Pres and Gen Manager, Manuel
“All individual members that have existed from the foundation to the Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P
present time, or that shall ever hereafter exist, are but one person in 25 Million-Peso Omnibus Line. The loans were secured by a Real
law, a person that never dies; in like manner as the River Thames is stiull Estate Mortgage executed by Goldkey Development Corporation
the same river, though parts which compose it are changing every (Goldkey) over several of its properties and a Peso Surety Agreement
instant.” (char) signed by Chua and his wife, Fe Tan Uy (Uy).

IOW, a corporation continues to exist even if there is a change in those Hammer defaulted in the payment of its loans, prompting iBank to
who compose it. Death of a shareholder or a transfer of his shares will foreclose on Goldkey’s third-party Real Estate Mortgage.
not dissolve it.
The mortgaged properties were sold for P 12 million during the
Atty. GC: When a stockholder transfers his share, does it need the
foreclosure sale, leaving an unpaid balance of P 13,420,177.62. For
consent of the other stockholders just like in partnership? failure of Hammer to pay the deficiency, iBank filed a Complaint for
sum of money against Hammer, Chua, Uy, and Goldkey.
S: No. In the transfer or assignment of shares or rights in a corporation,
a stockholder does not need the consent of the other stockholders Despite service of summons, Chua and Hammer did not file their
because they own it in their own right and as oppose to a partner in a respective answers and were declared in default. In her separate
partnership, it is needed because of their highly fiduciary relationship. answer, Uy claimed that she was not liable to iBank because she
never executed a surety agreement in favor of iBank. Goldkey, on the
other hand, also denies liability, averring that it acted only as a third-
party mortgagor and that it was a corporation separate and distinct d. The assets of Goldkey and Hammer are co-mingled. The real
from Hammer. properties of Goldkey are mortgaged to secure Hammer's obligation
with creditor hanks.
ISSUES:
e. When defendant Manuel Chua "disappeared", the defendant
1. Whether Uy can be held liable to iBank for the loan obligation of Goldkey ceased to operate.
Hammer as an officer and stockholder of the said corporation? Uy is
not liable. The bank filed a collection case against Chua and Goldkey. There are
two issues in this case :
2. Whether Goldkey can be held liable for the obligation of Hammer first issue. Whether or not UY the wife of Chua can be personally
for being a mere alter ego of the latter? Goldkey is a mere alter ego liable being the officer of hammer garment.
of Hammer. second issue. Whether or not Goldkey can be peirce by the veil being
the surety where its property has been used as the mortgage on the
loan by the hammer garment ?
HELD:
With repspect to the first issue on the w/n Uy the wife of Chua can
Uy is not liable. be personally liable , the Supreme Court said no because the
corporation has its distinct and separate personality distinct from its
Basic is the rule in corporation law that a corporation is a juridical officer.
entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the So the ground was not that because she signed the surety
people comprising it. Following this principle, obligations incurred by agreement the ground was due to the fact that she was an officer
the corporation, acting through its directors, officers and employees, because it was found that its not here real signature so the only basis
are its sole liabilities. A director, officer or employee of a corporation that the court has in making here liable on the obligation of hammer
is generally not held personally liable for obligations incurred by the is the mere fact that she is an officer and a director of Hammer . So
corporation. Nevertheless, this legal fiction may be disregarded if it what happened there? What did the Supreme Court say?Is that a
is used as a means to perpetrate fraud or an illegal act, or as a vehicle sufficient ground to make her liable? The SC said it is not a sufficient
for the evasion of an existing obligation, the circumvention of ground that UY will be held liable in this case because of the separate
statutes, or to confuse legitimate issues. and distinct personality of the corporation.

Goldkey is a mere alter ego of Hammer Atty: So is she liable by the mere fact that she is an officer?

Goldkey’s argument, that iBank is barred from pursuing Goldkey for So the Supreme Court said , go back to general rule because of the
the satisfaction of the unpaid obligation of Hammer because it had separate personality of a corporation and its officer and stockholders
already limited its liability to the real estate mortgage, is completely the officer and the stockholders does not become liable of the
absurd. Goldkey needs to be reminded that it is being sued not as a obligation of the corporation by the mere fact of their being an
consequence of the real estate mortgage, but rather, because it officer.
acted as an alter ego of Hammer. Accordingly, they must be treated
as one and the same entity, making Goldkey accountable for the DOCTRINE OF PIERCING THE CORPORATE VEIL
debts of Hammer.
It is a recognition that while a corporation is granted by law a
Under a variation of the doctrine of piercing the veil of corporate
personality distinct and separate from its stockholder - meaning its a
fiction, when two business enterprises are owned, conducted and
separate person, its an artificial being which is recognized as a person
controlled by the same parties, both law and equity will, when
under the law separate from its stockholder and its members. That
necessary to protect the rights of third parties, disregard the legal
artificial being is only created by law, a mere legal fiction, because in
fiction that two corporations are distinct entities and treat them as reality there is no real person there. That recognition as a person is a
identical or one and the same. mere legal fiction created by law so that when that artificial being is
While the conditions for the disregard of the juridical entity may vary,
used as a means to commit fraud or injustice then the law allows that
the following are some probative factors of identity that will justify this legal fiction will be taken down. The law allows that it will pierce
the application of the doctrine of piercing the corporate veil: the veil of this separate entity and consider it as one with the persons
opposing it. That is the reason behind the Doctrine of Piercing the Veil.
a. Both corporations are family corporations of defendants Manuel
Chua and his wife Fe Tan Uy. SOLIDBANK CORPORATION VS
MINDANAO FERROALLOY CORPORATION
b. Hammer Garments and Goldkey share the same office and Facts:
practically transact their business from the same place. Philippine corporation Maria Cristina Chemical Industries (MCCI) and
three Korean corporations: Ssangyong Corporation, Pohang Iron and
c. Defendant Manuel Chua is the President and Chief Operating Steel Company and Dongil Industries Company, Ltd., entered into a
Officer of both corporations. All business transactions of Goldkey and joint venture under the name of Mindanao Ferroalloy Corporation.
Hammer are done at the instance of defendant Manuel Chua who is The officers of these corporation comprised the Board members of
authorized to do so by the corporations. Mindanao Ferroalloy Corporation: Guevara as the President and
Chairman, Hong the Vice President, Teresita Cu as a member.
Subsequently, the Board of Directors authorized Guevara to secure a
loan of 30Million pesos from Solidbank.

The Mindanao Ferroalloy started their operation in April 1991. Student: This is because of the artificial being created by law to a
However, the indebtedness acquired from Solidbank ballooned to corporation. Since there is an artificial created to a corporation by
200.4Million pesos while its asset is only 65.4Million pesos. The law then the officers, members, and representatives of such should
Corporation executed Promissory Note signed by Teresita Cu and not be held liable since their personality is different.
Jong-Won Hong. They also executed a Deed of Assignment in favor
of the Bank covering its rights, title and interests: entire proceeds of ATTY. GAVI: If the corporation has an obligation just because it was
drafts drawn under Irrevocable Letter of Credit a Quedan. Hong and contracted through a particular officer, does it now mean that it
Cu also affixed their signatures for the Corporation. The Corporation, becomes the liability of the officer? Why?
also, through Hong and Teresita Cu, executed a Trust Receipt
Agreement, by way of additional security for said loan, the Section 2. A corporation is an artificial being. Being an artificial being
Corporation undertaking to hold in trust, for the Bank, some of its its obligations are separate and distinct of its officers, directors, and
property. stockholders.

Shortly after the execution of the said deeds, the Corporation Question: Why would it have been different if the officers signed the
stopped its operations. The Corporation failed to pay its loan. Hence, second time around?
a collection of sum of money was filed against the Corporation
imploding Guevarra, Hong, and Cu as joint and solidary debtors. If they sign the second time around the Supreme Court was saying
that they are already signing in their own capacity and not mere
Question: What was the basis of Solidbank for impleading the representative of the corporation. By signing, it means that they are
officers of Ferro Alloy as solidary debtors of the loan? really liable to the loan.

Hong and Cu signed the promissory note. Now the bank is saying that Question: If they sign the second time, what happens now to that
they signed as a co-maker and not just a representative of the said obligation of solid bank?
corporation.
They are now solidary liable because they already bind themselves
However the Supreme Court said that they actually signed in one set not as officers of corporation but in their personal capacity. The first
of signature, as a mere representative of the corporation. It could time they signed, they are representing the corporation, if they sign
have been different if they affixed their signature twice. the second time (done na ang corporation na part), SC said they are
now signing on their own behalf, they are now obliged in their
Question: Why does it matter if they are signing as representative of personal capacity but in the case at hand, THEY DID NOT, they only
the corporation or signing under their own name? signed once. Hence, they signed on behalf of the corporation.

It is different because a corporation has a separate and distinct The officers were not made joint and solidary liable with the
personality as opposed to its officers. So because of that the officers corporation. It is only the corporation that is liable to the loan
should not be held liable with the liabilities of the corporation if they contracted by its officers.
did not act in bad faith or there has no fraud or illegality of the Being an artificial entity, a corporation can only act through its board
transaction, and that they are authorized to do such transaction. In of directors ( no physical hands to sign contract). It acts through its
this case, it was shown that they were authorized proven by the officers or board of directors. When they act on behalf of the
Board Resolution. corporation, it doesn’t mean that the obligations created are the
obligations of the board or its officers because a corporation is an
artificial being having a separate and distinct personality from its
There is a principle in the Negotiable Instruments Law that was stockholders and officers.
discussed in the case, if you are only signing as a representative of a But if the representatives would voluntarily take on themselves the
particular corporation and that you are actually authorized to obligation, that’s allowed. In which case they are now solidarily liable
represent the corporation you should not be held liable. with the corporation because they bound themselves as such.

This is because your personality is distinct from the corporation and
you are merely acting on behalf of the corporation. CLARIFICATION: REMEDY LEFT FOR CREDITORS WHEN THE DOCTRINE
OF PIERCING THE CORPORATE VEIL IS DISREGARDED. WHEN THE
Question: So, when they sign the loan documents as representatives OFFICERS AND STOCKHOLDERS ARE NOT PERSONALLY LIABLE.
of the corporation. Whose obligation was created?
Atty G: Remedy is against the corporation, when it is proved that the
The obligation created is that of the corporation and of the Bank, not grounds of piercing the corporate veil are not present or when they did
of their personal capacity. They only acted as a representative of the not bind themselves voluntarily, the creditors have no other remedy
corporation. but to go after the corporation. When the assets of the corporation are
not enough, they will have to go through insolvency proceeding and
ATTY. GAVI: That is correct, because they signed as officers of the follow the rule in preference of credits.
corporation and representing the corporation then that loan Just because a corporation is liable it does not mean that its people are
obligation that was created is not their personal obligation. It is the liable also, as long as they did not voluntarily bind themselves and as
obligation of the corporation. They were only acting as long as there are no grounds to pierce the veil.
representatives of the corporation. The act and obligation was
entered into by the corporation and not the officers even if they are WHAT ABOUT SIGNING AS CO-MAKER OR CO-DEBTOR?
the ones representing the corporation. Why is that?
That is not piercing the veil, they are liable because of contract. There B:First there was no finding of Unfair labor practice , since the
is no need to pierce the veil, no need to prove that they were in bad petitioner failed to prove and they were not able to cite a specific
faith. Piercing the veil is based on different grounds. ground for unfair labor practice

REVIEW: Second , there was no illegal dismissal. Since in as much as no one is
The first attribute of a corporation is based on Section 2 of Corporation compelled to open a business, no one is also compelled to sustain a
Code is that a Corporation is an artificial being which means it has a business.
personality which is separate and distinct from its stockholders, board
of directors and officers which means that the corporation can own CORPORATION AS AN ARTIFICIAL BEING
properties and it can incur obligations in its own name and that
whichever properties that are owned by the corporation or whatever Atty: Before going to the issue of Piercing of veil, this case also
obligations that are incurred by the corporation are its own properties discusses on the effects about the Corporation being an artificial
and obligations and not that of its stockholders, directors or officers. being.

Meaning, by fiction of law the person of the corporation is separate We mentioned earlier that as an Artificial being , it has a separate
from the person of stockholders that the latter may compose the personality form its directors, stockholders and officers. Besides
corporation but they are not the corporation. However, in certain those people who else has a Corporation distinct and separate
instances the fiction or the veil of the corporation and its stockholders personality?
may be lifted in which case the corporation is considered as one with
its board of directors and stockholders. There are only very specific B: From any other legal entities to which it may be related
instances where this is allowed because the law considers that
corporation as separate entity for the convenience of the parties Atty: Not just stockholders, directors or officers being the natural
involved and to facilitate economic transactions. If this artificial being person but also any other legal entity to which they were related.
is being used to commit injustice or to defraud the public, the law will
lift the veil because this is only a legal fiction, it’s not reality. The law Doctrine: The Concept of corporation being an Artificial being does
will pierce the veil of legal fiction and consider the corporation as one not only apply to the directors, officers or stockholders (natural
with its stockholders. persons) it also applies to ANY OTHER ENTITY to whom the
corporation may be related, even if that entity is a (Juridical entity)

ZAMBRANO CASE For example:
Facts:
Zambrano et al were employees of PhilCarp and then they were You have A-B-C-D-E(natural person-stockholder) of Corporation B
dismissed because PhilCarp ceased operation on the grounds of and C.
serious business reversals. So upon termination, they filled a case
against PhilCarp and Pacific contending that they were illegally Under the Concept of Artificial entity , Corporation B is separate
dismissed since Phil carp did not incur serious business losses and distinct from ABCDE (stockholders-BOD-officers) IN the same
because as a matter of fact they are earning. They also want to way Corporation C is separate and distinct from ABCDE. But at the
implead Pacific because they are mere Alter Ego given the fact that same time Corporation C is separate and distinct form Corporation
the assets of Phil Carp was transferred to Pacific and some of the C.
employees of Phil CArp were absorbed by Pacific
PIERCING OF VEIL ISSUE
The Court resolved that there was no illegal dismissal
The court said that , the mere fact that Pacific as a Subsidiary of Phil
Atty: So Zambrano was employed by which company? Carp it will not permit the piercing of veil .
B:by Phil Carp

Atty: What did Zambrano want done? And Why? Under the concept of artificial entity, corporation B is separate and
B:Wants Phil carp to be liable for illegal dismissal and at the same distinct from A, C, D and E, the stockholders, board of directors and
time to make Pacific Carpet also solidarily liable. officers. In this way, corporation C is separate and distinct from
Because they contend that there was no serious business losses corporation A, B, D and E, the stockholders, board of directors and
incurred by Phil Carp , there was unfair labor practice. officers and at the same time corporation C is separate and distinct
from corporation D. The separate entity applies not only to your
Atty: And what happened to the operations of PhilCarp according to stockholders, board of directors and officers but also to any other legal
Zambrano? entity in which the corporation is created. In this case, we have the
Their operations of Phil Carp was merely transferred to Pacific Philippine carpet being the stockholder of the pacific carpet so now the
employee’s contention are that Philippine carpet merely transferred
Atty: So according to Zambrano the closure of Phil Carp was merely its operations to pacific carpet and now they are trying to say that
a pretense just to get them out of their employment, to terminate Philippine Carpet committed unfair labor practice by transferring its
their employment when in fact the operations of Phil Carp was operations and now pacific carpet should also be liable to them so
merely transfered to Pacific which they own Subsidiarily . So now they’re not claiming against stockholders, board of directors and
they are claiming from both Phil Carp (initial employer) and officers of Philippine carpet, they’re claiming against the subsidiary of
according them ( Zambrano ) ALTER EGO Pacific Carpet. Philippine carpet. Thus the rule on artificial being apply in this case. The
Supreme Court said that a corporation has a personality separate and
Atty: Now what happened in the case? distinct from the persons composing it as well as from any other legal
entity which it may be related. The artificial entity is applicable not just corporation is merely your alter ego such that whatever obligations
to the persons composing the corporation but also to any other legal incurred by the corporation because of your control can be attributed
entity which it may be related. In regards to piercing, it is allowed only to you and that person controlling the corporation becomes liable.
in three instances; first is when there is evasion of obligation, second
is when there is protection of commission of a wrong and third is in So when do you apply the alter ego principle? There are three test
alter ego cases which is one given in this case. In alter ego cases, it must
passed the three test, first is the instrumentality test, second is fraud Student: the instrumentality, the fraud and the harm. The
test and third is the harm test. In instrumentality test, the mere fact instrumentality test means the person has control including the
that one corporation is controlled by a person, a single person does not financial activities and policies. Second is fraud test, the entity is used
permit the piercing because it must also be prove that such control to commit fraud. Lastly, the harm test, there is a causal connection
extends to policy making, financial activities and etc. with regards to between the injury to the person and the use of the corporate fiction.
the fraud, there must be a clear and proof of fraud that the corporation The ruling of the SC in this case is that, there was no alter ego or control
was used to commit a fraud. And in the harm test, there must be a because while there is control in the subsidiary it does not amount to
causal relationship between the use of the identity of the corporation alter ego. There is absence of harm and fraud.
and the harm committed. In this case, the mere fact that Pacific is a
subsidiary will not allow piercing. With regards to the transfer of assets, A: Why not?
it was found out that the transfer of asset was actually a sale from S: because the move of Philippine carpet to cease its operation is lawful
Philippine carpet to Pacific Carpet which explains the claim of the and there is no unfair labor practice committed.
petitioners why there are income generated by the Philippine carpet. A: so in order for there to be piercing of the veil based on alter ego the
Atty G: what do you mean by evasion of obligation? three elements must occur together. It is not because you own all the
stocks in a certain corporation and another corporation owns the
Student: since a corporation has a separate entity of its own, the stocks in another corporation, it does not mean automatically that you
owners may protect themselves by creating an entity that would will apply the alter ego rule. All three elements must occur. There was
absorbed the obligations that they may incur and therefore shield complete control, there was an intention to defraud, using that control
them on the doctrine of limited liability. What happens then is the and you cause harm to another person because of that control. In this
whole obligation of the supposed obligors may not be enforced against case it is true there was control by Phil Carpet of pacific carpet. It
them because of the shield of the corporate fiction so the creditors will owned 100% of the shares. However it was also found that there was
be prejudiced on the use of the corporation. In which case, the legal no fraud and there was no harm because Phil carpet’s reason for
fiction will not be allowed to prevail. foreclosure was legitimate. It was shown by the audited financial
statements of the corporation that it was really losing money and
Atty. G: so one, if the corporate vehicle is used to evade obligations, based on the labor code that is a sufficient ground to terminate the
the corporate then will be pierced and the stockholders will still be employment of your employees. There was no fraud and technically
made liable for the obligation of the corporation. there was no harm. So the SC said that the alter ego principle is not
applicable in this case to justify piercing the veil.
Student: second is the protection of commission of a wrong, since the
corporation is a separate entity, it can only act through its agents, so a A: So you have here CLL which is a foreign corporation engaged in buy
corporation cannot be held, for example, criminally liable. So if there and sell of molasses. One of its suppliers was MarTiera, which is based
are perpetrators, they might say for example commit estafa through in the Philippines and was owned partially by RJL Martinez fishing
the corporation then the corporate fiction will be used for them. corporation. RJL on the other hand was owned by Ruben Martinez.
Okay? so that was the relationship of the parties.
Atty. G: so when the corporate fiction is used to defraud or commit a
crime then a corporate fiction will be pierced and the stockholders will MARTINEZ VS. CA
be held liable. The third instance is alter ego cases. Facts:
In this case, CLL which is a foreign corporation engaged in the
Student: The alter ego principle is that, a corporation is created by importation of molasses from the Phil which are obtained from a
another person or juridical person through which the transactions of company called Mar Tierra which is a domestic company and the
that person is directly done through the corporation, the essence of president of Mar Tierra was Wilfred Martinez.
alter ego principle is that the person who is using the corporation in
shielding himself from any possible liabilities that may arise from its Who was Wilfredo to CLL?
transactions. The difference between that and the first one is that the
first one, there might be a pre-existing intent to defraud whereas the CLL has nominee shareholders and one of them was a firm also
third one there might be none, that he is just shielding himself from owned by Wilfredo which was Baker Mckenzie (their firm here in the
Phil is Quisumbing Torres). Baker was a nominee stockholder but the
any possible liability.
beneficial ownership was vested in Wilfredo Martinez, Lacson et.al
Atty. G:The essence of the alter ego principle is CONTROL. If somebody
is controlling the corporation such that the corporation basically does RJL owned some of the shares of Mar Tierra which was 42% owned
not have its own mind because a person is controlling not just majority by petitioner Ruben Maritnez. Ruben had nothing to with CLL he was
but complete dominion not only of its finances but also its policies and neither a beneficial owner nor a stockholder of CLL. He was a
stockholder of RJL.
business practice so whatever the decision of this controlling person is

considered the decision of the corporation, so control, not just
CLL purchases molasses from Mar Tierra through letters of credit.
financial but also with respect to business decisions and operations and
you use this control in order to commit a fraud or wrong, and that the This is how CLL and Mar Tierra did their business and their bank was
control causes harm or injury to other persons. In this case, the BPI. The bank transferred funds to Mar Tierra upon instructions of
CLL, so what happened next was that there was a non-payment of of Goldkey, by the mere fact that it benefited, then it should be held
$340k. liable.

CLL had Money market placements with BPI so the arrangement was Ordinarily, control alone is not sufficient, unless there is a finding of
that the bank will deduct the deposit from the amount that was paid fraud and harm. But an exception is this case of Uy, where the
to Mar Tierra. The bank did not do this because at the time the commingling of assets is considered sufficient ground to consider
money market placements were not matured and so instead of them as one entity.
deducting it from the deposit, it recorded as a receivable from CLL
meaning CLL owes the bank. Side Discussion about letter of credit:
What’s the letter of credit for? How does it work?
When the placements matured, the bank did not collect but they
allowed withdrawal from amount. So at the end of the day there was Atty. Gavi: It is a financial instrument it’s used basically as a bridge
no more money in the account of CLL but CLL still had an obligation between buyer and seller especially if they are located in different
to the bank. countries.
The bank filed a case against CLL, Wilfredo and Ruben, He was
included because he was one of the signatories of the account. Illustration: if I were a buyer, I am not going to pay you until I get the
Ruben questions why he was impleaded because he had nothing to goods because if I pay you what if I don’t get the goods? On the other
do with CLL. hand if I was the seller, I’m not also going to pay you if I don’t get
paid, because what happens if I ship the goods, its already with you
The bank filed a case for the payment of the 340k against CLL, and you don’t pay me? Okay ra if we’re in the same City, what if
Wilfredo et.al and Ruben. you’re in HK and I’m in Cebu. So how do you reconcile? You do a
letter of credit transaction. So as the buyer, you’re going to go to a
Atty G: Why was Wilfredo and Lacson liable in the RTC and CA? bank, open a letter of credit and then the bank will contact its
correspondent bank where the seller is, and then you will say “hey,
Because they signed and agreed that they bound themselves seller, I have here a letter of credit in your favor, you ship the goods
solidarily with CLL while Ruben Martinez was made liable by the RTC to the buyer then give me the shipping documents, the moment you
because he owned shares in RJL. give the complete shipping docs, me and the bank will pay you” so
the seller knowing that he will get paid by the bank will ship the
RJL owns share with Mar Tierra and Mar Tierra and CLL had common goods, the bank now will turn around and tells the buyer “hey mr.
stockholders and that he was a co-signor in the bank account, so they buyer the good are on their way, these are the docs you will need to
ruled that Ruben was liable because of such connection they pierced claim the goods, now pay me what I paid the seller”)
the veil.
So that is what was used in this case, we have here CLL buying
Atty G: Is this valid? molasses from Mar Tierra, so as part of that transaction, CLL opened
a letter of credit in favor of Mar Tierra. So Mar Tierra, shipped goods
No. The SC said that the mere fact the majority stockholder of Mar to CLL knowing that its going to get paid under the letter of credit.
Tierra is RJL and that Ruben along with Jose and Luis Martinez owned But ultimately, the letter of credit is a liability of the buyer because
42% of the corporate stock does not mean that they had complete iya man I reimburse ang bank, so the letter of credit is the liability of
domination over Mar Tierra. CLL.

There was no showing that Ruben even benefitted of the transaction.
Just because he was a signatory, does not mean that he can be made
liable. Control alone does not warrant piercing the veil. Atty. Gavi: (reiterations) So when everything was said and done, that
$340k transferred to Mar Tierra was supposed to be deducted from
The SC said that the mere fact, therefore, that the businesses of two their deposit with the bank, but the bank did not deduct, so it just
or more corporations are interrelated is not a justification for recorded a receivable, and then worse is it allowed CLL and its
disregarding their separate personalities, absent sufficient showing representatives to deduct the full amount of the deposit without
that the corporate entity was purposely used as a shield to defraud taking into consideration that they still had an obligation in the
creditors and third persons of their rights amount of $340k. So now, the bank was left with no money in its
hand but with a receivable with CLL. So what happened?
So Ruben was held not liable, Wilfredo and Lacson were liable.
S: So the bank tried to collect from CLL and Ruben and Gonzales, but
How does the case of Tan Uy differ from Martinez or Zambrano, they refused.
because we said that mere ownership of stock does not pierce the
corporate veil?
....the bank tried to collect from CLL, Ruben and Gozales but they
In this case, the corporation was used to evade the liability from the refused. Eventually, they discovered that they really have a payable
other corporation. It would cause harm, thus the corporate veil may to BPI after auditing their account. BPI filed a collection case. Since
be pierced. they refused to pay BPI asked the court to pierce the corporate veil,
claiming that since the majority of the stockholders are the same.
An important fact in this case was that Hammer and Goldkey
commingled their assets. Meaning one corporation benefited from The respondents to the complaint filed by the bank are CLL, Ruben,
the other’s loan. Even without an express finding of fraud on the part Lacson, Gonzales, and Wilfredo Martinez. Wilfredo is a stockholder
of CLL. Ruben is not a stockholder of CLL. He is the stockholder of RJL
corp which is a stockholder of Martiera. Martiera is the supplier of stockholders. The officer does not become liable with the obligations
CLL and they also have common stockholders. The SC ruled that the of the corporation by that mere fact.
mere identity of the officers is not sufficient to pierce the corporate
veil. As to the issue whether Goldkey can be held liable for the obligation
The persons, as ruled by the court, who were not held liable are of Hammer for being a mere alter ego of the latter?
Ruben and Gonzales. Wilfredo Martinez and Lacson were held liable
because they signed a surety agreement and not because of piercing It was ruled that the corporate veil must be pierced on the ground
the veil. This is because they voluntarily bound themselves. Ruben that Goldkey is a mere alter ego of Hammer because of certain
was one of the signatories of the account but he did not sign the circumstances such as they have common stockholders, both are
surety agreement. family corporations by Chua who is the president of both
corporations, they share the same office, when Chua disappeared,
The RTC found the claim of the bank to be valid. That yes, CLL, the Goldkey and Hammer ceased operations. But the reason which
two Martinez and Lacson are liable under the piercing of the veil. cannot found in any other case is the commingling of assets of the
That they were being used to defraud the bank. The CA agreed that corporations. This means that when Hammer contracted the loan,
they are liable except for Gonzales, considering that he was merely Goldkey was also benefited by it. Whatever benefits that Hammer
an employee and not a stockholder. Ruben went to the SC on the received from the loan was also enjoyed by Goldkey. SC said that you
ground that there was no basis on the judgment against him. Why? are under the same control, you have the same person running the
Because the rest of the stockholders signed a surety agreement. corps, and that you commingled you assets, even without
Having signed such will make one liable jointly and solidary liable mentioning fraud, or harm which is a requirement under the alter
with CLL. You do not even need to pierce the veil because they bound ego doctrine, Goldkey is still liable.
themselves voluntarily by contract.
Atty G: Whatever benefits that Hammer receives from the proceeds
What about Ruben? The ground for including him as one of the of the loan, it is assumed that Goldkey also enjoyed it because they
solidary debtor merely on the basis of piercing the veil/ the alter ego co-mingled their assets. So now that Hammer cannot pay, Goldkey
doctrine. According to the SC, it pierced the veil to CLL to Martiera to should be held liable.
RJL and to Ruben who was the majority stockholder of RJL, saying
that all of these persons are one and the same. That CLL was merely CIR VS NORTON & HARRISON.
a paper corporation and sham used to defraud the bank. The only It is about a case where Norton and Harrison company came into an
proof that they had is the common stockholding between Martiera agreement with Jackbilt where it manufacture concrete blocks. They
and CLL. THAT IS NOT A SUFFICIENT GROUND TO APPLY THE ALTER came into an agreement where Jackbilt will manufacture these
EGO PRINCIPLE. As we go back to the case of Zambrano, we apply the concrete blocks and Norton will sell it to the public, and it was found
alter ego when there is a concurrence of 3 elements: (control, fraud, out that, when Norton and Harrison sells it to the public, sells it, it
injury) will receive a lesser amount and the rest of the (inaudible) of the
THREE TESTS: amount goes to Jackbilt and.
CONTROL TEST – not just financial, but COMPLETE business and
operating control control. Atty G: So how many transactions were there in the sale of the
INSTRUMENTALITY TEST – that control must be used to defraud. goods? How did they structure their transactions?
HARM TEST – that fraud cause harm to the other party.
In this case, the bank was able to establish only the common S: It was like a buy and sell structure, buy and sell …
shareholdings between CLL and Martiera. But they have no proof to Norton and Harrison buys the concrete blocks from Jackbilt, and
show that Martiera was using CLL to conduct fraud. In fact, the SC then upon buying them, Norton and Harrison will sell it to the public.
found that there was a valid business transaction between CLL and And the proceeds of the sale will go to, will go to both of them. The
Martiera. Martiera also has other clients other than CLL. The SC
bigger amount goes to Jackbilt and the lesser amount serves as profit
found that there was no fraud. And since there was no fraud, there or the compensation in selling the concrete blocks to Norton and
was not harm. And since these two elements are missing then you Harrison.
cannot apply the alter ego doctrine. So, there can be no piercing the
veil as far as Ruben is concerned. Atty G: Okay, take note class that this case happened 1964 pa or
1940’s ang facts occured. So lahi pa, the corporate income tax then
HEIRS OF FE TAN UY VS. INTERNATIONAL EXCHANGE BANK was different. So you have here two companies, one is the
manufacturing, the other is the distributor. Okay? What did they
The bank granted a loan to Hammer which is secured by the property have in common?
of Goldkey under a surety agreement signed by Chua and his wife.
Hammer defaulted with the payment. The property of Goldkey was S: Three years after their agreement or their arrangement rather,
foreclosed. But there is still an outstanding balance of the loan. Bank here comes Norton and Harrison eventually buying the shares of
filed a collection case against Hammer, Goldkey and Chua. The issues Jackbilt.
are: whether or not UY can be held personally liable, being an officer
of Hammer; and whether or not the alter ego doctrine is applicable
in this case. Atty G: They purchased the shares. What’s the difference between
purchasing assets and purchasing shares? For example you have A
There was a finding by the trial court that Uy did not sign the loan company and B company. What is the difference if “A company will
agreement. But she was made liable solely because she is an officer buy all the assets of B company” or “A company buying the
and director of the corporation. That is the only basis that the court outstanding shares of B company”? Is it the same or are they
had. The SC said that it is not a sufficient ground to hold her liable different transactions? They are different. So don’t interchange
because a corporation has a personality distinct from its officers and them. What’s the difference?
separate and distinct. However, there are circumstances to show

When you buy assets, you acquire the business. You acquire the that the separate personality is used to evade an obligation then that
business because now you have all the assets of that other entity but separate personality will be disregarded and both corporations will
you don’t acquire another entity. Do you get it? You acquire the be considered as one.
assets of B so you acquire its business but you don’t acquire B. Get
it? So in this case, the Supreme Court found that Norton and Harrison
and Jackbilt were structed in such a way as to evade paying the larger
But if you buy shares, you are not only buying the business, you are amount of tax; and it was shown that basically the two corporations
buying the entity. Do you get it? So rather than buying the business, were under the same control. It was Norton and Harrison who
you buy the entity, you buy shares. So you acquire a subsidiary. So financed the operations of Jackbilt. Since there was a finding that the
be careful with that. That’s not the same. So in practice, you can do structure was made that the two-pronged sale was made just to avail
an asset purchase or a share purchase. Two very different of a lower tax, then the Supreme Court said that Yes, we disregard
transactions. the separate entity and consider that there should only be one sale—
the sale from Norton and Harrison to the public. So that sale is
Okay? So what was the transaction here? assessed with a higher tax rate, and Norton and Harrison were held
liable for deficiency tax.
S: The sale of the concrete blocks, or the purchase of the assets of
the, or the outstanding shares of stocks (End of Norton Case Discussion)

Atty G: The shares of Jackbilt were purchased by Norton. In effect, FRANCISCO MOTORS CORPORATION VS. CA
Norton now acquired control. GR NO. 100812, JUNE 25, 1999

Atty G: So Norton and Harrison became the sole stockholder of The stockholders had a payable to lawyer. What the lawyer did was
Jackbilt. They now have control over Jackbilt. What happened next? that he sued the stockholders and the Corporation. Nagreverse siya,
diba ang piercing the veil is when you sue the stockholders for the
S: The CIR (inaudible) collecting sales tax said that the sale, it should liabilities of the Corporation? In this case, you’re suing the
disregard the entity of Jackbilt since its shares were acquired by Corporation for the liability of the stockholders. The Supreme Court
Norton. The sales tax should be imposed upon the sales made by said na well, there’s no definite rule on how to apply here piercing
Norton to the public, and not the sale by Jackbilt to Norton. Because the veil, but definitely, it is for the protection of the public, diba. For
after the, after Norton purchased the outstanding shares of Jackbilt, the protection of the public, when you are using that legal fiction of
the CIR said that (inaudible) Jackbilt is now the corporation of Norton that corporation to defraud the public, that’s the essence of piercing
since it exercises control over Jackbilt. the veil. You’re using that legal fiction to defraud the public and in
order to escape liability. Is that applicable in this case? It’s not,
Atty G: What was the effect of the two transactions, the scheme because in this case, the legal entity of the Corporation was not being
done by Norton and Jackbilt? What was the effect of that of their tax used to defraud the public. In fact, the obligation that was being
liability? Why is the CIR saying that there should only be one sale? claimed was the personal obligation of the stockholders, so the
How many sales were there? Two diba? Jackbilt to Norton then Supreme Court refused to apply the piercing the veil principle here.
Norton to the public. But now the CIR is saying that no, there should
only be one sale because is the same as Norton. Why would the CIR It’s not black and white, but generally, piercing the veil will only apply
do that? Of course, they want to get more taxes. How is that scheme, if you want to make the stockholders liable for the liabilities of the
nga iduha ka transaction, depriving the CIR of taxes? Why? Because Corporation, not the other was around. Why? You go back to the
lain-lain man nga sales price. Lain ang price from Jackbilt to Norton, essence of piercing the veil—if you are using the legal entity to
and they declared that as different revenue. Okay? At that time, the defraud, so if naa na siya then you pierce the veil. In this case, there
lower the revenue, the lower your tax rate. Mura xag individual the was no such allegation that the Corp was being used to defraud the
taxation style bah. Have you have your tax already? Then from lawyer. So, the Supreme Court, it will not apply.
Jackbilt to Norton, another sale. So daku man ang cost, so again
lower na sad ang tax. Diba? Because they broke the transactions into KUKAN INTERNATIONAL CORPORATION VS. HON. AMOR REYES
two, ni-qualify sila for a lower bracket sa tax rates. You understand? GR NO. 182729, SEPTEMBER 29 2010
Whereas if ila lang tu giusa nga sale, daku ang revenue, that means
that they go to the higher bracket. So the CIR is saying that no, there Here, you have a supplier not being paid. Supplier sued Kukan Inc.,
should be only one sale, direct from Norton to the public. We and then Kukan Inc. stopped appearing in court, so that judgment
disregard from Jackbilt to Norton because that first sale was only was made and then Kukan Inc. was held liable. However, when they
used to create a buffer to lower their tax. So you understand? So served the writ of execution, they found that there was another
what happened? Corporation occupying the premises, Kukan International
Corporation—same stockholder but different corporation. So now
you have the supplier trying to enforce the judgment of Kukan Inc.
FOLLOW UP DISCUSSION against Kukan International Corporation and the justification is
piercing the veil. Can he do that? No. The Supreme Court said that
xx---direct from Norton to the public. We disregard the sale from while piercing the veil can be used as a basis to impute liability, it
Jackbilt to Norton because that first sale was only used to create a cannot be used as a basis to acquire jurisdiction. That’s a different
buffer to lower their tax. matter—acquisition of jurisdiction is something that’s technical. You
cannot just enforce a judgment against Corporation A when the
General Rule, just because one corporation owns another, it doesn’t judgment was against Corporation B under the guise of piercing the
mean that they are one and the same corporation; they are still
veil. The Supreme Court said that it is not how piercing the veil works. Thus, it can be possible that you have a domestic corporation but all of
It is used to establish a liability but it is not used to acquire its stockholders are foreign. There is no prohibition as to organizing a
jurisdiction. corporation that is 100% foreign-owned except in cases of nationalized
activities/corporations.
CLASSIFICATION OF CORPORATION
Section 3. Classes of Corporations. – Corporations formed or AS TO NATIONALITY:
organized under this Code may be stock or nonstock corporations. • Place of incorporation test: where the corporation was
Stock corporations are those which have capital stock divided into created [Corporation Code]
shares and are authorized to distribute to the holders of such o Domestic corporation: created in the Philippines
shares, dividends, or allotments of the surplus profits on the basis o Foreign corporation: created abroad
of the shares held. All other corporations are nonstock • Citizenship of stockholders [Foreign Investment Act]
corporations. o Philippine National: 100% owned by Filipino
citizens even if incorporated abroad
AS TO EXISTENCE OF STOCKS: o Foreign-owned corporation: majority of
• Stock corporation - Corporations which have capital stock stockholdings owned by foreigners, even if
divided into shares and are authorized to distribute to the incorporated in the Philippines
holders of such shares dividends or allotments of the surplus
profits on the basis of the shares held. TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDINGS
• Non-stock corporation - It does not issue stocks and does not APPLIES WHEN THE CORPORATION IS NOT 100% FILIPINO OWNED
declare or distribute dividends. They are organized for non- • Control test: at least 60% of the capital stock outstanding
profit purposes. and entitled to vote are owned by Filipinos
• Grandfather rule: if the percentage of Filipino citizenship is
less than 60% then only the number of shares corresponding
AS TO THE NUMBER OF COMPONENTS: to such percentage shall be counted as Philippine nationality

• Aggregate corporation - A corporation consisting of more
NARRA NICKEL V. REDMONT
than one member defined as an artificial body of men,
The “Control Test” is still the prevailing mode of determining whether
composed of diverse individuals, the ligaments of which
or not a corporation is a Filipino corporation, within the ambit of Sec.
body, the franchises and liberties bestowed upon it, bind and
2, Art. II of the 1987 Constitution. When in the mind of the Court there
unite all into one, and consists the whole frame and essence
is doubt, based on the attendant facts and circumstances of the case,
of the corporation. For corporation aggregate you need to
in the 60-40 Filipino-equity ownership in the corporation, then it may
have at least 5 members or stockholders.
apply the “Grandfather Rule”
• Corporation sole - It consists of only one person or member.

As per Section 110 of the Corporation Code, a corporation
AS TO CITIZENSHIP OF THE STOCKHOLDERS:
sole is one formed by the chief archbishop, bishop, priest,
rabbi, etc. For the purpose of managing and ministering, as • Philippine National
trustee, the affairs, property and temporalities of any
religious denomination, sect, or church. FOREIGN INVESTMENTS ACT OF 1991 (RA 7042), SECTION 3.
DEFINITION:
Atty. GC: Can you have a corporation with 3 corporators? The term "Philippine national" shall mean a citizen of the Philippines
or a domestic partnership or association wholly owned by citizens of
Ans: Technically, the corporation will not be dissolved if you have 3 the Philippines; or a corporation organized under the laws of the
corporators but the law requires that you must have atleast 5 members Philippines of which at least sixty percent (60%) of the capital stock
in the board, and each member of the board must have atleast 1 share. outstanding and entitled to vote is owned and held by citizens of the
So, that non-compliant corporation will be penalized by the SEC. Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine
AS TO LAWS OF INCORPORATION: national and at least sixty (60%) of the fund will accrue to the benefit
of the Philippine nationals: Provided, That where a corporation and its
• Domestic corporation - A corporation formed, organized or
non-Filipino stockholders own stocks in a Securities and Exchange
existing under Philippine laws.
Commission (SEC) registered enterprise, at least sixty percent (60%) of
• Foreign corporation - A corporation formed, organized, or
the capital stocks outstanding and entitled to vote of both corporations
existing under any laws other than those of the Philippines
must be owned and held by citizens of the Philippines and at least sixty
and whose laws allow Filipino citizens and corporations to do
percent (60%) of the members of the Board of Directors of both
business in its own country or state.
corporations must be citizens of the Philippines, in order that the

corporations shall be considered a Philippine national;
Atty. GC: So when we talk about domestic or foreign corporations,

what are we talking about specifically?
• Foreign-owned corporation - those that don’t qualify in the

abovementioned definition
Ans: We are talking about the classification based on the Law of

Incorporation or the Place of Incorporation. It answers the question as
NATIONALIZED ACTIVITY
to where the corporation is incorporated in order to call it as a
Determined by looking at the Foreign Investment Negative List (FINL)
“Domestic or a Foreign corporation.” It does not speak about the
which enumerates the activities which are limited or reserved to
citizenship of its corporators.
Filipinos. It is a list of areas of economic activity whose foreign

ownership is limited to a maximum of forty ownership is limited to a
maximum of forty percent (40%) of the equity capital of the enterprise
engaged therein. (pls. check Section 8 of RA 7042 or the Foreign Student: Actually McArthur Mining had was qble to get its mpsa from
Investments Act of 1991) its predecessor SMMI.
Atty: What was the capital Structure of MMI?
If the activity is not listed, that activity can be performed by a
corporation which is 100% foreign owned even if incorporated in the Student: It has a capital structure of 10M and it is divided into one , 10
Philippines. thousand common shares at 1 thousand pesos per share

Nationalized Corporations are those that by Constitution or by special
laws are limited to Filipino citizens. The Supreme Court held that McArthur is a foreign corporation
Eg. Natural resource exploration, development and use, public utility because applying the grandfather rule it has to account MBMI's
corporations, land ownership, educational institutions and advertising shareholdings in MMC which in turn is a shareholder of MMI. Applying
companies. the 60/40 foreign equity requirement based on the Constitution, it is
evident that MBMI adding up his percentage of shares in MMC and
[Atty. talks about foreigners and their attorneys’ erroneous belief that MMI it will exceed the 40 percent limitation.
they need Filipino stockholders to incorporate in the Philippines.
Moral of the story: get rid of the notion that you need to have McArthur Shareholdings Total Paid-up Total
citizenship in order to incorporate because to be an incorporator all Mining Subscribe outstanding
that is required is to be a resident. In fact, only a majority needs to be capital stock
residents.] MMC 5,997 shares @ 5,997,000 825,000 59.97%
(Filipino) 1k
MBMI 3,998 shares @ 3,998,000 1,878,174 39.98%
TAKE NOTE (Canadian) 1k
A domestic corporation can be foreign owned. This happens when a
corporation is incorporated in the Philippines but is composed of MMC Shareholdings Total Paid-up Total
foreigners. Subscribed Outstanding
capital stock
In the same way, a foreign corporation can be considered a Philippine
Olympic 6,663 shares @ 6,663,00 No paid up 66.63%
national when 100% of its capital stock or its stockholders are Filipino
Mines 1 K
citizens.
MBMI 3,331 @ 1K 3,331,000 2,803,900 33.31%

NARRA NICKEL V. REDMONT

In the case of Narra Nickel what happened here was Redmont, a Equation:
domestic corporation ,filed an action in order to cancel or revoke the
mineral production sharing agreements between 3 corporations 1. Shares of MMC in McArthur x MBMI shares in MMC = Indirect
shares of MBMI in McArthur
Atty: What is that document? mineral production sharing agreement 2. Direct shares of MBMI with McArthur + Indirect shares of MBMI
in McArthur = Total shares to determine compliance with foreign
or mpsa?
equity limitation
Student:These are like permits which allow or authorizes or allows a
foreign corporation to exploit, explore or extract minerals or do Applying in the case:
mining. This is a nationalized activity.
1. 60% x 33% = 19.8% or 20% is MBMI’s indirect shares in McArthur
Atty: A nationalized activity so under our constitution it can only be 2. 40% + 20% = 60% which is a clear violation of the foreign equity
done by corporations which are owned at least 60% by Filipino limitation.
citizens so it is a nationalized activity.

Atty: Redmont here try to apply for the same permits in certain parts CORPORATE LAYERING
in Palawan but it new that these permits are already distributed to the • A type of arrangement whereby a corporation has for its
three corporations namely , Narra , McArthur and Tesoro and after that stockholder another corporation
Redmont claimed that these 3 corporations are disqualified from • This is not a circumvention of the law. It is a valid structure
having such mpsas because they are basically foreigned owned thus UNLESS it can be establish that it is used to circumvent the
contradicts the prohibitions provided for under the constitution law or the constitution
basically for the exploitation, development and utilization of the • Basis: Foreign Investment Act where it only requires that the
natural resources because it claims that these 3 corporations are investee corporation and investor corporation should be
controlled by a 100% Canadian Corporation MBMI so with this regard Filipino citizens at least 60% of its outstanding stock entitled
those mpsa should be revoked or cancelled. In this case the major to vote and its board of directors should compose at least
issues was the determination really of the nationality of these three 60% filipino citizens
corporation.
Section 3. Definitions. - As used in this Act:
Atty: So let us take one corporation of those three, the Mcarthur

Mining Corporation, what was the structure of mcArthur Mining
Corp.?
a) The term "Philippine national" shall mean a citizen of the
Philippines or a domestic partnership or association WHERE DOES THE 60/40 RULE APPLY, Nationalized Activities:
wholly owned by citizens of the Philippines; or a 1. Public Utilities
corporation organized under the laws of the Philippines of 2. Land Ownership
which at least sixty percent (60%) of the capital stock 3. Mining Exploration
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for Clarification:
pension or other employee retirement or separation For tax laws, there is different classification based on where you earn
benefits, where the trustee is a Philippine national and at the income, or based on your situs. I don’t think we based it on FIA or
least sixty (60%) of the fund will accrue to the benefit of Corporation Law. There is different classification under NIRC. The
the Philippine nationals: Provided, That where a classification would depend on the purpose.
corporation and its non-Filipino stockholders own stocks Examples: a. ) Whether or not this entity is qualified to engage in a
in a Securities and Exchange Commission (SEC) certain activity, then you are going to look at the FIA classification.
registered enterprise, at least sixty percent (60%) of the Another, b.) whether or not this entity requires a permit with the SEC
capital stocks outstanding and entitled to vote of both in order to engage business in the Philippines, then you are going to
corporations must be owned and held by citizens of the look at the Corporation Code classifications. Bottomline, depends on
Philippines and at least sixty percent (60%) of the the purpose.
members of the Board of Directors of both corporations
must be citizens of the Philippines, in order that the The nationality classification based on place on incorporation will be
corporations shall be considered a Philippine national; discussed later because around section 60s pa sa Corpo code. It
matters whether you are domestic or foreign corporation as to
Summary of Narra Nickel Mining et. al v Redmont: whether or not you are doing business in the Philippines because if you
are doing business in the Philippines and you re domestic corporation,
1. Apply Control Test you don’t need to get a permit anymore from the SEC, your certificate
of incorporation is already sufficient but if you are a foreign
“at least sixty percent (60%) of the capital stock outstanding corporation (you are not registered in the SEC) if you want to do do
and entitled to vote of each of both corporations must be business in the Philippines, you need to get permit from SEC to operate
owned and held by citizens of the Philippines AND at least sixty either as a branch or a representative office. This classification is also
percent (60%) of the members of the Board of Directors of each important with regard to doing business in the Philippines. (will be
of both corporations must be citizens of the Philippines, in further discussed later on)
order that the corporation shall be considered a Philippine Place of incorporation whether domestic or foreign, citizenship of the
national; (as amended by R.A. 8179).” stockholding s as to what activities your corporation can engage in, you
look at the FIA. Philippine national or foreign owned. In order to
If it FAILED: then it means it does not comply with 60-40 requirement determine whether or not it’s a Philippine national or foreign owned,
and NO NEED TO APPLY THE GRANDFATHER RULE because you already apply the control test. If there are no doubts, control test is sufficient.
fell below the 60% requirement. Automatically, it is disqualified and it If there are doubts on the ownership of the corporation based on facts
is not a Philippine National. and circumstances then you need to apply the grandfather rule.
Question: In the corporate structure of MMC it is not MBMI but
If it PASSED and there is NO DOUBT as to the BENEFICIAL OWNERSHIP another foreign corporation, would you still consider the stockholdings
and CONTROL of the Corporation = stop here of another foreign corporation to determine whether MMI is a Filipino
corporation?
If it PASSED however there is DOUBT as to the BENEFICIAL Atty Gavi: Yes, the law does not distinguish as to who the stockholder
OWNERSHIP and CONTROL of the Corporation = apply GRANDFATHER is. What the law looks into is the citizenship of the stockholders. So as
RULE long as the stockholders of the investor corporation (MMC) is still
foreigner and if you are going to apply the grandfather rule, then it is
What do you mean by “doubt”? still considered foreign ownership.
Clarification: The SEC rulings were quoted by the SC but unless the SC
“Doubt” is any circumstance, which renders the beneficial ownership really adopts those rulings, they are merely guidelines, they are not
and control of the corporation outside of Filipino ownership. It is not black and white rules. I would like to maintain that you have to go the
when you fall below 60%. ultimate stockholders. Unless the SC will rule on a specific case really
saying to apply only second layer or third layer but for me grandfather
In the Narra Nickel Case the following circumstances were considered
rule means that you have to go to the ultimate stockholders.
to establish doubt:
Where do we apply the 60% in order to determine the nationality
1. MBMI fully funded the joint ventures or ventures that MMI will
because there are different kinds of shares? What shares are relevant
enter into. The fund of MMC actually came from MBMI
in determining nationality of a corporation?
2. Foreign corporation practically provides all the technical support

and supplies for that particular venture

3. Foreign corporation although has minor ownership in said

corporation but it is the own who prepares its economic viability

studies

4. During the pendency of the case the three petitioners converted

its MPSA application to an FTAA application. It confirmed that the
GAMBOA VS. TEVES, G.R. NO. 176579, JUNE 28, 2011
petitioners did not have the capacity to be given the MPSA

FACTS and averred that the sale would result in an increase in First Pacific’s
common shareholdings in PLDT from 30.7% to 37%, and this, combined
with Japanese NTT DoCoMo’s common shareholdings in PLDT would
result to 51.56% foreign shareholdings which is over the 40%
constitutional limit.

TN: First Pacific + Japanese NTT DoCoMo’s common shareholdings =
51.56% foreign shareholdings

Is PLDT in compliance with the constitutional requirement of the 60%
capital which must be owned by Filipino Citizens?

The contention of the petitioner
1) The Philippine Legislature granted PLDT the franchise and It is not compliant because when you say capital, you have to look at
right to engage in telecommunications business. common shares only. If that is the basis, foreigners already own 80%
2) The American company, General Telephone Electronics which is beyond the 60% limitation.
Corporation (GTE) which is a major stockholder of PLDT,
3) Sold 26% of its common shares to Philippine The contention of respondent
Telecommunications Investment Corporation (PTIC). If you look at all the outstanding shares, the 80% ownership in common
4) PTIC stockholders executed three deeds of assignment in shares of the foreigners will only be around 17% of the pie. Hence,
favor of Prime Holdings, Inc. (PHI) which became the owner PLDT is compliant since this is below 60%.
of 111,415 shares of stock of PTIC.
5) Such 111,415 shares of PTIC held by PHI were sequestered ISSUE:
by the PCGG which represent 46.125% of the outstanding Does the term "capital" in Section 11, Article XII of the Constitution
capital stock of PTIC that were later declared to be owned by refer to common shares or to the total outstanding capital stock
the Republic of the Philippines. (combined total of common and non-voting preferred shares)?
6) First Pacific which is a Bermuda-registered & HK-based firm
acquired the remaining 54% of PTIC. RULING
7) Subsequently, Interagency Privatization Council announced We agree with petitioner and petitioners-in-intervention. The term
selling the 111,415 shares or 46.125% of PTIC through a "capital" in Section 11, Article XII of the Constitution refers only to
public bidding. Parallax won the bid. shares of stock entitled to vote in the election of directors, and thus in
8) Thereafter, First Pacific as PTIC stockholder announced to the present case only to common shares, and not to the total
match the bid of Parallax to buy the 111,415 shares. outstanding capital stock comprising both common and non-voting
However, it failed to do so. preferred shares.
9) Through its subsidiary MPAH, First Pacific entered into a
Conditional Sale & Purchase Agreement with the The Supreme Court looked into the definition of Capital under the Law.
government for the 111, 415 shares. Under FIA, which governs foreign investments in the Philippines,
Capital is considered 60% of the capital stock outstanding and entitled
Since PTIC is a stockholder of PLDT, the sale by the Philippine to vote.
Government of 46.125% of PTIC shares is actually an indirect sale of
12M shares or about 6.3% of the outstanding common shares of PLDT. Capital was explained through differentiating common from preferred
With the completed sale, First Pacific common shareholdings in PLDT shares of PLDT. SC said that the shares that foreign nationals own was
increased from 30.7% to 37%, thereby increasing the shares of already in violation of the Constitutional requirement.
foreigners to about 81.47% and thus violating the constitutional
limitation of foreign ownership of the capital of a public utility. First, the foreigners owned 64% of the common shares. Common
shares include the sole, exclusive right to vote in the election of
Sec 11, Art 12 of the Constitution: directors. Thus, when they are such conferred with that right, they are
No franchise, certificate, or any other form of authorization for the already in control and in management of the corporation.
operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws However, Filipinos only owned 35% of the PLDT’s common shares. As
of the Philippines, at least sixty per centum of whose capital is owned between the holdings of the Filipino citizens and foreign nationals in
by such citizens of the Philippines. terms of common shares, the latter have the superiority. In preferred
shares, the Supreme Court described them as mere investors who do
The facts according to public respondents Finance Secretary Teves, not have the right to vote in the election of directors and officers.
Undersecretary Sevilla, and PCGG Commissioner Abcede: The HR
Committee on Good Government conducted a public hearing of the The preferred shares of PLDT is owned by 99% Filipinos. Thus, they do
impending sale and concluded that First Pacific’s intended acquisition not have the voting rights—they cannot control, manage or
of the government’s 111,415 PTIC shares (see 9 in the illustration participate. However, the rest are already owned by the foreigners.
above) resulting in First Pacific’s 100% ownership of PTIC will not
violate the constitutional limit since PTIC holds only 13.847% of the Compliance with the required Filipino ownership of a corporation shall
total outstanding common shares of PLDT. be determined on the basis of outstanding capital stock whether fully
paid or not, but only such stocks which are generally entitled to vote
Petitioner filed the instant petition for prohibition, injunction, are considered.
declaratory relief, and declaration of nullity of sale of 111,415 shares
For stocks to be deemed owned and held by Philippine citizens or The second ruling expanded the first ruling. They said that it must apply
Philippine nationals, mere legal title is not enough to meet the required to all types of shares—voting or non-voting. Common shares must
Filipino equity. Full beneficial ownership of the stocks, coupled with have 60-40 shares, preferred shares 60-40 limitation applies as well.
appropriate voting rights is essential. Thus, stocks, the voting rights of You apply it separately. You don’t apply it on total outstanding shares,
which have been assigned or transferred to aliens cannot be like what PLDT wanted in their MR. The SC wanted it more strict. SC
considered held by Philippine citizens or Philippine nationals. said that it must apply not just those entitled to shares but to each type
Individuals or juridical entities not meeting the aforementioned of shares—whether voting or non-voting, class A, class B…
qualifications are considered as non-Philippine nationals.
(sa IBL ni) Atty Gaviola: That interpretation for me is the correct
GAMBOA VS. TEVES, G.R. NO. 176579, OCTOBER 9, 2012 interpretation because when the law says outstanding capital stock
entitled to vote, this is very general. You cannot say that preferred
FACTS: stocks are not entitled to vote. General rule is that if the articles are
The lawyers of PLDT felt that they were disadvantaged by this decision, silent, preferred stocks are entitled to vote in the election of directors.
because now it is not based on total outstanding stock, but on the Only when they are deemed to be non-voting expressly can they be
common shares. They filed a Motion for Reconsideration brought by deprived of their right to vote but only in the election of directors. For
the foreigners and their lawyers who were insisting on the total all the 8 other items enumerated in the corporation code, they are
outstanding capital stock. required to vote.

So where do you apply the 60%?
ISSUE : Whether or not the MR should be granted 60% voting shares or 60%total outstanding shares?
The lawyers of PLDT were insisting that you should apply based on total
RULING: No. SC denied the MR. outstanding shares because these are the lawyers representing the
foreign stockholders of PLDT. If you apply it based on total outstanding
(...but according to Atty G: The SC now realized that their ruling in the shares, PLDT’s total outstanding shares, more than 70% of its
First Gamboa v. Teves case actually narrowed down the definition of outstanding shares were preferred non-voting shares and majority of
capital. Because of the MR, the SC revised their ruling although they that almost 99% were owned by Filipino citizens. On the other hand,
did not admit that they revised it. They just maintained that this it was the common stockholdings, the voting shares were only around 20+%
their ruling all along. But it’s not true because they said “entitled to but majority of that were owned by foreigners.
vote in the election of directors.” According to them, what they Do we apply it to common or do we apply it to the total?
focused on is on the pronouncement “that mere legal title is not If in common, it would mean PLDT should not own a utility franchise
sufficient, but full beneficial ownership.” ) because more than 60% of its voting shares are owned by foreigners.
But if we apply it on total outstanding, then that’s okay because more
Since a specific class of shares may have rights and privileges or than 60% of its total outstanding are owned by Filipinos.
restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to shares with voting GAMBOA CASE-DECISION
rights but also to shares without voting rights. Preferred shares, denied MEANING: TOTAL CAPITAL STOCK OUTSTANDING & ENTITLED TO
the right to vote in the election of directors, are anyway still entitled to VOTE : ON THE ELECTION OF DIRECTORS
vote on the eight speci c corporate matters mentioned above. Thus, if
a corporation, engaged in a partially nationalized industry, issues a Control Test:
mixture of common and preferred non-voting shares, at least 60 You need to have 60 % in your outstanding capital stock entitled to
percent of the common shares and at least 60 percent of the preferred vote should be owned by Filipino Citizens
non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of Now the question is , what is meaning of “60 % outstanding capital
such shares must necessarily be owned by Filipinos. In short, the 60-40 stock & entitled to vote?”
ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non- Summary :
voting, preferred voting or any other class of shares.
Gamboa Case: 60 % should be based on the total shares entitled to
Moreover, such uniform application to each class of shares insures that vote in the election of directors
the "controlling interest" in public utilities always lies in the hands of
Filipino citizens. Gamboa Resolution: Based on each class of shares regardless if
voting or non-voting :apply it to each class.

Philippine Nationality of Corporations SEC: total voting shares entitled to vote on the election of directors &
total outstanding shares whether voting or not.
Sec 3(a) of the Foreign Investments Act provides, “The term
"Philippine national" shall mean a citizen of the Philippines;or a Ans: Base on the Gamboa case, when you say total capital stock
domestic partnership or association wholly owned by citizens of outstanding & entitled to vote, it means the Total capital stock
thePhilippines; or a corporation organized under the laws of the outstanding and vote (Election of directors).
Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the IOW: apply the 60 & on the capital stock entitled to vote in the
Philippines;...” election of directors:

Ans: So basically, what you classify as voting shares are those shares entitled to vote must be owned by Filipino Citizen.
entitled to vote in the election of directors.
If there is corporate layering
Example. 200 shares outstanding, 60 % of both the investor and investee if outstanding capital stock
100- voting shares and entitled to vote must be owned by Filipino Citizens & 60 % of
100- non-voting the directors both corporation must be Filipino citizen. In which case,
your corporation is Philippine national .
Gamboa Decision:
60 % of the shares entitled to vote in the election of directors must be Can you have a Philippine national that is domestic?
owned by Filipino Citizens ( refers to 100 voting shares lang) non- Ans: Yes,
voting and shares outstanding (NOT IMPORTANT)
Can you have a Philippine national that is foreign?
Ans: Yes, because Philippine national at least 60 %. Foreign here in
200 SHARES OUTSTANDING the Philippines since incorporated. But it could still be considered as
Filipino if composed of 100 & Filipino.
100 -VOTING
Can you have a foreign corporation that is domestic?
100-NON VOTING Ans: Yes, because, incorporated here but less than 60 % Filipino
owned.
Gamboa Reso:
Its not just the shares entitled to vote in the election of directors ,
because the law says TOTAL OUTSTANDING AND ENTITLED TO VOTE, What are the other classifications?
and under the corporation code there are really no non-shares cause As to legal status:
even the non-voting shares are required to vote in certain De jure corporation- one that is organized in accordance with the
circumstances. Meaning it should be applied to each class of shares. requirements of law, a validly existing corporation;
De facto corporation- a corporation where there exists a flaw in its
incorporation. These three elements must exist In order for a
200 SHARES OUTSTANDING corporation to be considered as de facto:
a. There must be a valid law under which the corporation
100 - VOTING may be incorporated;
b. There must be an attempt in good faith to incorporate;
100 - NON VOTING c. There must be an exercise or use of corporate powers
There is also a corporation by estoppel where there is a group of
persons holding itself out in the public as a corporation and it enters
SEC: 60 % of the voting: entitled to vote in the election of directors &
into a contract with third persons, thus they cannot deny their
60 % of the total outstanding capital stock , meaning if you have 60 of existence to those persons. The persons making the corporation by
the voting but 0 % of the non-voting under the SEC test you will not estoppel is solidarily liable. They are liable as an association because
pass because you only have 60 of the total outstanding shares. they are not considered as a corporation. They are estopped from
claiming that they are not a corporation but their liability is individual.
Atty: Which will prevail? Corporation by prescription- it is not formally organized as a
Ans: The prevailing rule is the SEC. The SC said that in the Roy case, corporation as such but has been duly recognized by immemorial
basically everything of the discussion in the Gamboa Reso is a mere usage as a corporation, with rights and duties enforceable under the
Obiter. And the prevailing rule is still the Gamboa Decision That the law.
60 % should be based on the Total Capital stock entitled to vote on
the election of directors. But since the SEC requirement is more As to function:
stringent because it does not look at the total voting but also takes a Public Corporation: a corporation organized for the government of a
look at the total outstanding capital , then it SEC memorandum state for the purpose of serving general good and welfare.
Circular is VAlid. So as long as the memorandum circular exist that is Private Corporation: a corporation formed for some private purpose,
the prevailing rule. The SC upheld is because it’s in accordance with benefit aim or end.
our Gamboa Deicsion ruling in fact it is more stringent than the
Gamboa Deicion. Second GAmboa ruling, does not matter because As to manner of creation:
it’s just all Obiter. All the hours that you spend analyzing the Gamboa Corporation created by Special law - a corporation directly created by
Reso is a mere obiter. Congress through a special law.
Corporation created under a General law- a corporation created under
As to nationality , you can have the place of the corporation , the Corporation Code of the Philippines or the old Corporation Law.
citizenship of stockholders. Which classification you apply, it depends
on what’s the purpose. If it’s a matter on “can the corporation do As to whether they are for religious purposes or not:
business?” and to secure a permit, then you take a look at the place Ecclesiastical corporation or one organized for religious purposes.
of incorporation . If it a question on what activity can that corporation
Under the Code, religious corporations are classified into corporations
engage in?” Look at the Citizenship of the stock holders and you apply sole and religious societies.
the foreign investment act. Lay corporation or one organized for a purpose other than for religion.
Lay corporations, in turn, may be either eleemosynary or civil.
How do you determine nationality base on the FIA?
Apply the Control test: 60 % of the Capital stock outstanding and As to whether they are for charitable purposes or not:
Eleemosynary corporation or one established for or devoted to enterprise, procuring subscriptions or capital for the corporation
charitable purposes or those supported by charity; or and setting in motion the machinery which leads to the
Civil corporation or one established for business or profit, i.e., with a incorporation of the corporation itself.
view toward realizing gains to be distributed among its members. l Subscriber - Person who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed. All
As to their relation to another corporation: incorporators are subscribers but a subscriber need not be an
Parent or holding corporation or one which is so related to another incorporator.
corporation that it has the power, either directly or indirectly, to elect l Underwriter - A person, usually an investment banker, who:
the majority of the directors of such other corporation; a. Has agreed, alone or with others, to buy at stated terms an entire
- So basically a parent corporation controls the other issue of securities or a substantial part thereof; or
corporation. b. Has guaranteed the sale of an issue by agreement to buy from the
Subsidiary corporation or one which is so related to another issuing party any unsold portion at a stated price; or
corporation that the majority of its directors can be elected either c. Has agreed to sue his “best efforts” to market all or part of an issue;
directly or indirectly by such other corporation. it is one in which or
another corporation owns at least a majority of the shares and thus has d. Has offered for sale stock he has purchased from a controlling
control; or stockholder.
Affiliated corporation or one related to another by owning or being
owned by common management or by a long term lease of its Relationship between an incorporator as against a corporator
properties or other control device. l Incorporators are always corporators, but corporators are not
always incorporators.
GOVERNING LAW - incorporators refer only to those persons who first formed
SEC. 4. Corporations Created by Special Laws or Charters. – the corporation and signed the Articles of Incorporation.
Corporations created by special laws or charters shall be governed Some incorporators stop being corporators after they sell
primarily by the provisions of the special law or charter creating
their share but they never stop being incorporator because
them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable. their name will remain in the Articles of Incorporation of the
corporation.
COMPOSITION
SEC. 5. Corporators and Incorporators, Stockholders and Members. CLASSIFICATION OF SHARES
– Corporators are those who compose a corporation, whether as Section 6. Classification of shares. –The classification of shares,
stockholders or shareholders in a stock corporation or as members their corresponding rights, privileges, or restrictions, and their
in a nonstock corporation. Incorporators are those stockholders or stated par value, if any, must be indicated in the articles of
members mentioned in the articles of incorporation as originally incorporation. Each share shall be equal in all respects to every
forming and composing the corporation and who are signatories other share, except as otherwise provided in the articles of
thereof. incorporation and in the certificate of stock.

Components of a corporation: The shares in stock corporations may be divided into classes or
series of shares, or both. No share may be deprived of voting rights

1. Incorporators - those originally forming and composing the except those classified and issued as “preferred” or “redeemable”
shares, unless otherwise provided in this Code: Provided, That
corporation as mentioned in the articles, and who are signatories
there shall always be a class or series of shares with complete
thereof. voting rights.

Under the RCC, any person, partnership, association or corporation, Holders of nonvoting shares shall nevertheless be entitled to vote
singly or jointly with others but not more than fifteen (15) in number, on the following matters:
may organize a corporation for any lawful purpose or purposes.
Incorporators who are natural persons must be of legal age. Each of Amendment of the articles of incorporation;
the incorporators of a stock corporation must own or be a subscriber Adoption and amendment of bylaws;
to at least one (1) share of the capital stock of the corporation. Sale, lease, exchange, mortgage, pledge, or other disposition of all
or substantially all of the corporate property;
2. Corporators - they are the stockholders or members of the Incurring, creating, or increasing bonded indebtedness;
corporation. Increase or decrease of authorized capital stock;
Merger or consolidation of the corporation with another
They comprise the general population. corporation or other corporations;
Investment of corporate funds in another corporation or business
3. Officers - required officers under the law are the President, in accordance with this Code; and
Corporate Secretary and Treasurer. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
The corporation may add more positions under its by-laws. vote required under this Code to approve a particular corporate act
shall be deemed to refer only to stocks with voting rights.
Three other classes
l Promoters - Persons who bring about or cause to bring about The shares or series of shares may or may not have a par value:
the formation and organization of a corporation by bringing Provided, That banks, trust, insurance, and preneed companies,
together the incorporators or the persons interested in the public utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the public,
whether publicly listed or not, shall not be permitted to issue no- l OUTSTANDING CAPITAL STOCK - The Code defines the terms as
par value shares of stock. “the total shares of stock issued to subscribers or stockholders,
whether or not fully or partially paid (as long as there is a binding
Preferred shares of stock issued by a corporation may be given
subscription agreement), except treasury shares.” the portion of
preference in the distribution of dividends and in the distribution
the capital stock which is issued and held by persons other than
of corporate assets in case of liquidation, or such other preferences:
Provided, That preferred shares of stock may be issued only with a the corporation itself.
stated par value. The board of directors, where authorized in the
articles of incorporation, may fix the terms and conditions of l PAID-UP CAPITAL STOCK - It is that portion of the subscribed or
preferred shares of stock or any series thereof: Provided, further, outstanding capital stock that is actually paid.
That such terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange Commission, l UNISSUED CAPITAL STOCK - That portion of the capital stock that
hereinafter referred to as the “Commission”. is not issued or subscribed. It does not vote and draws no
dividends.
Shares of capital stock issued without par value shall be deemed
fully paid and nonassessable and the holder of such shares shall not l LEGAL CAPITAL - It is the amount equal to the aggregate par
be liable to the corporation or to its creditors in respect thereto: value and/or issued value of the outstanding capital stock. When
Provided, That no-par value shares must be issued for a par value shares are issued above par, the premium or excess is
consideration of at least Five pesos (P5.00) per share: Provided, not to be considered as part of the legal capital. In the case of no
further, That the entire consideration received by the corporation par value shares, the entire consideration received forms part of
for its no-par value shares shall be treated as capital and shall not
legal capital and shall not be available for distribution as
be available for distribution as dividends.
dividends. We’re talking here about the capital contribution. But
A corporation may further classify its shares for the purpose of financially, capital is not just the financial contribution. It includes
ensuring compliance with constitutional or legal requirements. the earnings in the corporation in the form of retained earnings.
So assets-liabilites, that composes your legal capital. But this
Stock - It is a unit of division of the capital stock of the corporation. term is not really used here in the Philippine practice.

The stock represents: TREASURY SHARES
1. It represents the interest or right of the stockholder in the
Shares which have been issued by the corporation, but are no longer
management of the corporation through the exercise of the outstanding because they have been acquired by the corporation.
voting right;
Status of treasury shares: not retired shares and they do not revert to
2. It represents the interest of right of the stockholder in the the unissued shares of the corporation but are regarded as property
earnings of the corporation in the form of the dividends to acquired by the corporation which may be reissued or resold by the
be distributed; and corporation at a price to be fixed by the board of directors. Hence,
when you acquire treasury shares, you don’t decrease your authorized
3. It represents the interest or right of the stockholder in the capital stock. The corporation cannot declare dividends on its own
treasury shares, nor can the corporation have the right to vote by
residual assets of the corporation upon dissolution.
virtue of these treasury shares.

So the share of stock represents your share in the corporation in the
When are shares considered retired?
form of dividends. Shares of stocks are therefore an asset on the part
When the shares are reacquired by the corporation with no intention
of the shareholder. It is an intangible asset representing its right and
of reissuing. When you retire your shares, you decrease your
interest in the corporation.
authorized capital stock, which needs the consent of all the creditors

pursuant of the trust fund doctrine.
Example: you have 1M capital divided into 1M shares, that means that

your capital is divided into 1M parts and each share represents 1 part.
Illustration:

A newly established corporation with authorized capital stock of 10
Types of capital Stock
million divided into 1 million shares at P10 per share. Out of the 10
l AUTHORIZED CAPITAL STOCK - It refers to the amount of capital million ACS, 5 million is subscribed.
stock as specified in the articles of incorporation. Additional
shares may not be issued unless the articles of incorporation are The remaining 5 million is the unissued shares. Meaning, there are no
amended by vote of the stockholders. But unissued authorized buyers yet. If it is subscribed, there must be an existing subscription
shares may be issued at a later date without amendment of the agreement over these shares. Meaning, these shares have been
articles of incorporation or approval of the stockholders. purchased.

l SUBSCRIBED CAPITAL STOCK - It is the amount of the capital Out of the 5 million subscribed, 4 million is paid, this is the paid up
stock subscribed, whether fully paid or not. It connotes an capital stock.
original subscription contract for the acquisition by a subscriber
of unissued shares in a corporation and would, therefore, Supposing the corporation repurchased/reacquired 1 million shares
preclude the acquisition of shares by reason of subsequent from the shareholders, the 1 million are the treasury shares. These
transfer from a stockholder or resale of treasury shares.
treasury shares remain subscribed and issued because somebody It is one without any stated value appearing on the face of the
already paid for it. Even the corporation that reacquired it, paid for it. certificate of stock. IOW, it is a stock which does not state show much
But they are no longer outstanding capital stock. Therefore, the money it represents.
outstanding capital stock is 4 million. ACS remains at 10M. Unissued Requirement as to its issuance:
shares remain at 5M.
1) Shares of stock issued without par value shall be deemed fully paid
There’s no difference in the right of stockholders who have paid or and non-assessable and the holder of such shares shall not be liable to
have not yet paid their subscription. They’re all entitled to the same the corporation or to its creditors in respect thereto.
right, even the right to the dividends. Only when your shares are - The consideration given shall be considered as the full amount of the
declared as delinquent will be the time that you stop enjoying issue price, there can be no subscription receivable.
stockholder rights. So as long as you’re not declared as delinquent,
even unpaid, you are considered as a stockholder. 2) The shares without par value may not be issued for a consideration
less than the value of Five pesos (P5.00) per share.
- This is the minimum consideration for a non par value share
Requirements before a corporation can purchase its own shares (sec
40 RCC) 3) The entire consideration received by the corporation for its non-par
value shares shall be treated as capital and shall not be available for
1. The corporation has unrestricted retained earnings in its books distribution as dividends.
nd
to cover the shares to be purchased or acquired (2 to the last paragraph, RCC)
2. For a legitimate corporate purpose or purposes, including the 3
instances mentioned.
THE FF INSTITUTIONS ARE NOT ALLOWED TO ISSUE SHARES WITH NO-
Power to classify shares PAR VALUE:
That banks, trust, insurance, and preneed companies, public utilities,
Unless restricted by law or the provision of its articles of incorporation, building and loan associations, and other corporations authorized to
a corporation has unrestricted freedom to issue such classes or series obtain or access funds from the public.
of shares as the prospects and needs of its business may require to
attract investors. 3. VOTING SHARE
Voting share is share with right to vote.
When classification of shares may be made
4. NON-VOTING STOCK

Non-voting share is share without right to vote.
1. By the Incorporator

The classes and numbers of shares which a corporation shall issue are Requirement as to its issuance:
1) Only preferred or redeemable shares may be made non-voting
first determined by the incorporators as stated in the articles of
shares.
incorporation fled with the SEC. The incorporators have the power to

classify while making/drafting the AOI.
2) There must remain other shares with full voting rights.
2. By the BOD and the stockholders - There can be no valid agreement where a corporation has all non-
voting shares. Any agreeement that will take away the right to vote of

all the shares in a corporation is not valid.
After the corporation comes into existence, they may be altered by the

BOD and the stockholders by amending the AOI. So the BOD has to
make the proposal, approved by the majority of the Board, and then it 3) Holders of non-voting shares shall nevertheless be entitled to vote
on the ff matters:
has to be ratified by the stockholders. Both of them working together.
a. Amendment of the articles of incorporation
Can amend the classification or characteristics of shares.
b. Adoption and amendment of by-laws
classes of shares
c. Sale, lease, exchange, mortgage, pledge or other disposition of all

or substantially all of the corporate property
1. PAR VALUE SHARE
d. Incurring, creating or increasing bonded indebtedness
Par value share is one with a specific money value fixed in the articles
e. Increase or decrease of capital stock
of incorporation and appearing in the certificate of stock.
f. Merger or consolidation of the corporation with another

corporation or other corporations
The primary purpose thereof is to fix the minimum issue price of the
g. Investment of corporate funds in another corporation or business
shares thus, assuring creditors that the corporation would receive a
in accordance with this Code, and
minimum amount for its stock.
h. Dissolution of the corporation.

Requirement as to its issuance:

A par value share cannot be issued below par but can be issued more

than par and the excess thereof shall form part of the paid-in capital
but it is accounted for as a premium or as an additional paid-in capital. Conditions for the issuance of non-voting shares

2. NO PAR VALUE SHARE
1. If the stock is originally issued as voting stock, it may not thereafter
be deprived of the right to vote without the consent of the holder.

2. Under the Code, no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, ii. Non-cumulative - Share which entitles the holder thereof
unless otherwise provided in the Code. to the payment of current dividends only in preference to commons
stockholders.
3.Where non-voting shares are provided for , the Code requires that
there shall always be a class or series of shares which have complete Example: 1000 shares; Stated in the AOI that these are preferred
voting rights. shares entitled to cumulative dividends at Php5/share per year. 2017
and 2018, no dividends declared. 2019 – corporation declares
4. Under Section 6 (par. 1), only preferred or redeemable shares may dividends.
be denied the right to vote. The issuance of common stock with a
feature that voting rights thereof shall be exercised by a trustee Entitled to how much dividends?
violates the rule that common shares cannot be deprived of voting Cumulative: 2017, 2018 and 2019, entitled to 5000/yr
rights. The automatic assignment of voting rights in an indirect Non-cumulative: 5000 only for the current year
violation of Section 6.
iii. Participating preferred share - Share which gives the
5. In case any amendment of the articles of incorporation has the effect holder thereof not only the right to receive the stipulated dividends at
of changing or restricting the rights of any stockholder, the latter shall the preferred rate but also to participate with the holders of common
have the right to dissent and demand payment of the fair value of his shares in the remaining profits pro rata (or in the proportion stated in
shares the articles of incorporation) after the common shares have been paid
the amount of the stipulated dividend at the same preferred rate.
Atty: The rule is that a corporation must always have voting shares Those which after they get their share of the dividends, they still
there can be no valid agreement where a corporation has all non- participate in the sharing of dividends of the common stockholders.
voting share. Any agreement that will take away the right to vote of all
the shares of a corporation is not valid. iv. Non-participating - Share which entitles the holder
thereof to receive the stipulated preferred dividends and no more. The
5. COMMON STOCK balance, if any, is given entirely to the common stocks.
It is one which entitles the holder thereof to a pro rata division of the
profits, if there are any, and in its assets upon dissolution, without any v. Cumulative-participating - Share which is a combination
preference or advantage in that respect over other stockholders but of the cumulative share and participating share. This means
equally with all other stockholders except preferred stockholders. that the holder is entitled not only to dividends in arrears but
Basic shares issued by the corporation. You cannot have a also, after receiving his preferred share of dividends, to
corporation that has no common shares. participation with the holders of common stock in the
remaining profits.
6. PREFERRED STOCK
It is one with a stated par value which entitles the holder thereof to NOTE: In the absence of an agreement, express or implied, dividends
certain preferences over the holder of common stock. Shares which should be deemed noncumulative and non-participating in accordance
are specified in the AOI that the preferred shares have preference with the presumption established in Section 6 par.5 that shares are
over the distribution of assets in case of liquidation and preference in equal in all respects unless otherwise stated in the articles of
the distribution of dividends. incorporation and in the certificate of stocks.

NOTE: Common and preferred shares are the 2 main classes or forms FOUNDER’S SHARES
of stock. Section 7. Founders' shares.
Founders' shares classified as such in the articles of incorporation
Kinds of preferred shares may be given certain rights and privileges not enjoyed by the
a. Preferred share as to assets owners of other stocks, provided that where the exclusive right to
Share which the holder thereof preference in the distribution of the vote and be voted for in the election of directors is granted, it must
assets of the corporation in case of liquidation. It has been held that be for a limited period not to exceed five (5) years subject to the
preferred stock, standing alone, creates a preference only to dividends approval of the Securities and Exchange Commission. The five-year
and not to assets in case of liquidation. period shall commence from the date of the aforesaid approval by
the Securities and Exchange Commission.
b. Preferred share as to dividends
Share the holder of which is entitled to receive dividends on said share
to the extent agreed upon before any dividends at all are paid to the “exclusive right to vote and be voted for in the election of directors
holders of common stock. The preference simply means that holders is granted”
of common stock may receive dividends only after the satisfaction of GR: Common shares cannot be deprived the right to vote.
the prior claims on dividends of preferred stockholders. There is no
guaranty that it will receive any dividends. The corporation is not XPN: In the case of Founder’s Shares – for a limited period of 5 years,
bound to pay dividends unless the BOD declare them. owners of founders’ shares shall have an exclusive right to vote and be
voted. (Sec. 7)
i. Cumulative preferred share - Share which entitles the
holders thereof not only to the payment of current dividends but also • Founders’ Shares – shares issued to the organizers and
to dividends in arrears. Dividends in arrears means that for every year promoters of a corporation in consideration of some
that the company did not declare dividends, each cumulative preferred supposed right or property having special rights and
shareholder will have an interest in those undeclared dividends.
privileges not enjoyed by the owners of other classes of -IF THE ARTICLES OF INCORPORATION ARE SILENT, PREFERRED SHARES ARE PRESUMED TO
shares. BE NON-CUMULATIVE AND NON-PARTICIPATING.

• Effect: After the lapse of 5 years the founder’s shares will be - AOI CAN SPECIFY THAT SHARES ARE BOTH CUMULATIVE AND PARTICIPATING
treated and given the same rights as other common .
shareholders. CUMULATIVE - MEANS YOU HAVE THE RIGHT TO DIVIDENDS IN ARREARS.
PARTICIPATING- MEANS YOU HAVE THE RIGHT TO PARTICIPATE WITH THE COMMON
Amendment: Changes in founder’s share expressly provided that SHARES.
exclusive right to vote and be voted on founders share in the election
of directors should not violate the Anti-Dummy Law and FIA. TN: PREFERRED SHARES CAN BE BOTH CUMULATIVE AND PARTICIPATING

Anti dummy law – persons not allowed to have interest in nationalized Rule in case of acquisition by the corporation in its own shares
corporation, they just nominate Filipino citizen to be legal stockholders
but in reality they are the one controlling, a violation of Anti-Dummy SEC. 41. POWER TO ACQUIRE OWN SHARES. – A STOCK CORPORATION SHALL HAVE
Law, a criminal offense. THE POWER TO PURCHASE OR ACQUIRE ITS OWN SHARES FOR A LEGITIMATE CORPORATE
PURPOSE OR PURPOSES, INCLUDING BUT NOT LIMITED TO THE FOLLOWING CASES:
Common Shares vs. Preferred shares PROVIDED, THAT THE CORPORATION HAS UNRESTRICTED RETAINED EARNINGS IN ITS
COMMON SHARES BOOKS TO COVER THE SHARES TO BE PURCHASED OR ACQUIRED:
• refers to the residual ownership of the corporation
1. TO ELIMINATE FRACTIONAL SHARES ARISING OUT OF STOCK DIVIDENDS;
PREFERRED SHARES 2. TO COLLECT OR COMPROMISE AN INDEBTEDNESS TO THE CORPORATION,
ARISING OUT OF UNPAID SUBSCRIPTION, IN A DELINQUENCY SALE, AND TO
• preference as to the distribution of the assets of the
corporation PURCHASE DELINQUENT SHARES SOLD DURING SAID SALE; AND
• preference as to the dividends of the corporation: 3. TO PAY DISSENTING OR WITHDRAWING STOCKHOLDERS ENTITLED TO
PAYMENT FOR THEIR SHARES UNDER THE PROVISIONS OF THIS CODE.

Kinds of Preferred shares as to dividends
• cumulative preferred shares CORPORATION has the power to acquire its own shares whether or not
- the stockholder is entitled to the dividends in the years these shares are deemed as redeemable.
where the corporation was not able to declare dividend
plus the current year. Even if there are no redeemable shares in the articles of incorporation,
- example: In 2017 and 2018 the corporation did not corporation is still allowed to reacquire its own shares under section 41.
declare dividend. In 2019 it declared dividend. In this But this section allows such purchase only if the corporation has
case, the stockholder shall be entitled to the dividends in unrestricted retained earnings.
2017, 2018, and 2019.
GR: Corporation has the power to acquire its own shares whether the
• non-cumulative preferred share shares are redeemable or not provided that:

- the stockholder does not have any right for the years that 1. if not redeemable the corporation has unrestricted retained
the corporation did not declare dividends but only earnings.
entitled to the dividends declared in the current year. 2. But if the shares are termed or classified as redeemable on
AOI, even without unrestricted retained earnings, it is
• participating preferred shares authorized to purchase or reacquire the shares.
- the stockholder is not only entitled to his preferred Effect of reacquisition of redeemable shares
shares but also entitled in the distribution with the 1. If retired. You need to amend the AOI in order to decrease the
common shareholders. authorized capital stock.

• non-participating preferred shares 2. If not retired. The corporation can sell the shares or they can
- the stockholder is entitled only to his preferred shares. be issued as property dividends because these shares once
- it is a common practice that a preferred shareholder reacquired by corporation become property by the
enters into a stipulation with a percentage of interest, corporation.
such stipulated interest will be followed in the
distribution of his share in the dividends. If it is redeemable shares at the option of the corporation, whether the
stockholders like it or not, the corporation can compel the acquisition.
Doctrine of Equality of Shares That’s one of the difference between ordinary shares and redeemable
shares.

• Absent any stipulation to the contrary in the Articles of
How about if the stockholders compel the corporation to redeem the
Incorporation, all shares are treated equal with the same
shares?
rights and privileges.

You can have redeemable shares at the option of the stockholders.
• Therefore, if the articles of incorporation provide only of

common and preferred shares but does not provide for
There is also an instance where the stockholders can compel the
anything else the two shares are treated equally.
corporation to purchase as an exercise of their appraisal right.

There’s a need to amend the Articles of Incorporation to
REDEEMABLE SHARES decrease the AUTHORIZED CAPITAL STOCK (ACS) . The
Sec. 8. Redeemable shares. — Redeemable shares may be issued by retirement or cancellation of the redeemed shares will not
the corporation when expressly so provided in the articles of automatically reduce the ACS , there has to be approval by
incorporation. They may be purchased or taken up by the the SEC.
corporation upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the CONVERTIBLE SHARE

corporation, and upon such other terms and conditions stated in
the articles of incorporation, which terms and conditions must also CONCEPT
be stated in the certificate of stock representing said shares, (n) Are shares which are convertible or changeable by the stockholder
from one class to another class (such as from preferred to common)
Rules to Redeem: at a certain price and within a certain period.

1. Redeemable shares are redeemable even without UNRESTRICTED Conversion of shares is a 2-step process:
RETAINED EARNINGS. 1ST AMENDMENT: PROVIDE CONVERTIBILITY FEATURE IN AOI
Provide the Right to Convert in the AOI. If your articles do not provide
2. BUT SEC RULES REQUIRES: for Convertibility, you need to amend the articles first to allow for the
- after redemption , there should still be sufficient assets to pay of all conversion.
liability plus the capital stock.
2ND AMENDMENT: ACTUAL CONVERSION: WIPE OUT OR DELETE
IOW: You cannot redeem without Retained Earnings. THE CONVERTIBLE SHARE
when you do convert , you need to amend the AOI to provide for the
The retained earnings may not be Unrestricted but if you have a issuance or addition (for example) of new common shares and delete
deficit (negative Retained earnings)= CANT REDEEM. the convertible preferred shares as you no longer have those class of
shares once conversion takes place.
WHO CAN REDEEM: Corporation/ shareholder
If you have shares that are redeemable , it means that the parties EXAMPLE
have already agreed beforehand whether it is redeemable at the If you allow Preferred shares to be converted to Common.
option of the corporation or whether redeemable at the option of the 1. Amend your articles to provide for the Convertibility Feature. (
stockholder. Preferred to Common)
nd
2. Do a 2 Amendment to wipe out the Convertible preferred and
WHEN TO REDEEM: it depends (Redemption Rights & Agreement) they are now all Common Shares

1. As a matter of right - when the redemption date comes, The two amendments can be filled simultaneously with the SEC
the stockholder can compel redemption as a matter of because they will not allow you to change without going though
right conversion. So what you will do is to apply for the convertibility
feature and at the same time you need to apply for the ACTUAL
2. As a matter of agreement - redemption date comes and the CONVERSION.
corporation does not redeem and the stockholders do not
compel redemption, it is now a matter of agreement NOTE: Generally it needs 2 amendments unless the Convertibility
between the two. feature is already there. You only need to amend for the actual
conversion.
If the stockholder dili ganahan magpa redeem sa iyahang
shares , then the corporation and the stockholder can just
agree that we’ll just amend our AOI to put in there that it’s TREASURY SHARES
no longer redeemable. Sec. 9. Treasury shares. - Treasury shares are shares of stock which
have been issued and fully paid for, but subsequently reacquired by
But if the redemption date arrives and the stockholders and the issuing corporation by purchase, redemption, donation or
corporation does not say anything and after a few years the through some other lawful means. Such shares may again be
stockholders now say “ui redeem or shares”, it’s now a disposed of for a reasonable price fixed by the board of directors.
matter on how the redemption date was worded.
Treasury shares- it refers to the shares wherein it is fully issued and
Ex: paid but is subsequently reacquired by the corporation who issued
1. “Redemption can take place anytime after March 30” such shares through redemption, donation or any other means.
Effect: Redemption can still be done.
2. “Redemption shall only be until March 30” What happens to the treasury? What is the status of the treasury
Effect: They can no longer redeem. shares?

TN: IT DEPENDS ON HOW REDEMTION RIGHTS ARE The treasury shares will become a property of the corporation meaning
WORDED IN THE ARTICLES OF INCORPORATION AND that the corporation can resell it in an amount which is fixed by the
AGREEMENT BETWEEN THE PARTIES. board of directors and it cannot be considered as a retired share
because it does revert into unissued shares.
AMEND ROI (reduce ACS) IF REDEEMED SHARES ARE
RETIRED Retirement is different from an unissued share.
purpose and the secondary purpose or purposes: Provided, That a
We said that when we have treasury shares, it becomes the property non-stock corporation may not include a purpose which would
of the corporation, it can reissue the shares, or it can retire the shares change or contradict its nature as such;
but regardless the shares do not revert to the unissued it will always c. The place where the principal office of the corporation is to be
be issued but no longer outstanding. located, which must be within the Philippines;
d. The term for which the corporation is to exist, if the corporation
Retirement – a decrease in the authorized capital stock. It has nothing has not elected perpetual existence;
to do with the unissued shares. e. The names, nationalities and residences of the incorporators;
f. The number of directors or trustees, which shall not be more than
TITLE II- INCORPORATION AND ORGANIZATION OF PRIVATE fifteen (15) or the number of trustees which may be more than
CORPORATIONs fifteen (15);
g. The names, nationalities and residences of persons who shall act
Steps in the creation of a corporation: as directors or trustees until the first regular directors or trustees
Promotion are duly elected and qualified in accordance with this Code;
(1) Promotion h. If it be a stock corporation, the amount of its authorized capital
(2) Incorporation stock, number of shares into which it is divided, the par value of
(3) Formal organization and commencement of business operations each, names, nationalities and residence addresses of the original
subscribers, amount subscribed and paid by each on the
INCORPORATION subscription, and a statement that some or all of the shares are
SEC. 18, Revised Corporation Code (RCC). Registration, without par value, if applicable;
Incorporation and Commencement of Corporate Existence. – A i. If it be a non-stock corporation, the amount of its capital, the
person or group of persons desiring to incorporate shall submit the names, nationalities and residence addresses of the contributors
intended corporate name to the Commission for verification. If the and the amount contributed by each; and
Commission finds that the name is distinguishable from a name j. Such other matters consistent with law and which the
already reserved or registered for the use of another corporation, incorporators may deem necessary and convenient.
not protected by law and is not contrary to law, rules and
regulations, the name shall be reserved in favor of the An arbitration agreement may be provided in the articles of
incorporators. The incorporators shall then submit their articles of incorporation pursuant to Section 181 of this Code.
incorporation and bylaws to the Commission.
The articles of incorporation and applications for amendments
If the Commission finds that the submitted documents and thereto may be filed with the Commission in the form of an
information are fully compliant with the requirements of this Code, electronic document, in accordance with the Commission’s rules
other relevant laws, rules and regulations, the Commission shall and regulations on electronic filing.
issue the certificate of incorporation.
FORM OF ARTICLES OF INCORPORATION
How to incorporate SEC. 14, RCC. Form of Articles of Incorporation. – Unless otherwise
1. Make a name reservation online on the SEC website + pay prescribed by special law, the articles of incorporation of all
the reservation fee domestic corporations shall comply substantially with the following
2. Submission to the SEC of: form:
a. Name verification slip
b. Articles of Incorporation Articles of Incorporation
c. By-laws of
d. For banks, quasi-banking institutions, preneed, __________________________
insurance and trust corporations, non-stock (Name of Corporation)
savings and loan associations (NSSLAs),
The undersigned incorporators, all of legal age, have voluntarily
pawnshops, and other financial intermediaries, a
favorable recommendation of the appropriate agreed to form a (stock) (nonstock) corporation under the laws of
government agency to the effect that such articles, the Republic of the Philippines and certify the following:
or even in case of an amendment, is in accordance
with law. First: That the name of said corporation shall be
“_______________, Inc., Corporation or OPC (ONE PERSON
CONTENTS OF THE ARTICLES OF INCORPORATION CORPORATION)”;
SEC. 13, RCC. Contents of the articles of incorporation. - All
corporations shall file with the Commission articles of Second: That the purpose or purposes for which such corporation
incorporation in any of the official languages duly signed and is incorporated are: (If there is more than one purpose, indicate
acknowledged or authenticated by all of the incorporators, primary and secondary purposes);
containing substantially the following matters, except as otherwise
prescribed by this Code or by special law: Third: That the principal office of the corporation is located in the
City/Municipality of ___________________, Province of
a. The name of the corporation; _________________________, Philippines;

b. The specific purpose or purposes for which the corporation is
being incorporated. Where a corporation has more than one stated Fourth: That the corporation shall have perpetual existence or a
term of ______________ years from the date of issuance of the
purpose, the articles of incorporation shall indicate the primary
certificate of incorporation;
stock as provided by existing laws shall be allowed or permitted to

Fifth: That the names, nationalities, and residence addresses of the be recorded in the proper books of the corporation, and this
incorporators of the corporation are as follows: restriction shall be indicated in all stock certificates issued by the
corporation.”
NAME NATIONALITY RESIDENCE
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Sixth: That the number of directors or trustees of the corporation Incorporation, this ________ day of _________________, 20______
shall be _________________; and the names, nationalities, and in the City/Municipality of _________________, Province of
residence addresses of the first directors or trustees of the _________________, Republic of the Philippines.
corporation are as follows: ____________________ ____________________
____________________ ____________________
NAME NATIONALITY RESIDENCE ____________________ ____________________
(Names and signatures of the incorporators)
Seventh: That the authorized capital stock of the corporation is ______________________________
______________ PESOS (P________), divided into ______ shares (Name and signature of Treasurer)
with the par value of ____________ PESOS (P_______________)
per share. (In case all the shares are without par value): That the Contents and Form of Articles of Incorporation
capital stock of the corporation is _____________________ shares It must be written in any of the official languages ( i.e., English or
without par value. Filipino) duly signed and acknowledged by all of the incorporators.

(In case some shares have par value and some are without par NAME OF THE CORPORATION
value): That the capital stock of said corporation consists of (In practice, as a lawyer, you will have to ask 3 corporate names from
___________________ shares, of which your client just in case the first name won’t pass)
_______________________ shares have a par value of - Once you have the name, apply for reservation and once
_________________ PESOS (P____________) each, and of which reserved, put that in the Articles of Incorporation.
_______________________ shares are without par value.
Importance:
Eighth: That the number of shares of the authorized capital stock - The corporation acquires juridical personality under the name stated
above-stated has been subscribed as follows: in the certificate of incorporation.
- It has the power of succession by its corporate name
Name of Subscriber - Nationality - No. of Shares Subscribed - - It is the name that identifies and distinguishes it from the other
Amount Subscribed - Amount Paid corporations, firms or entities. By that name it is authorized to transact
business.
(Modify No. 8 if shares are with no-par value. In case the - Therefore, a name is peculiarly essential to its existence.
corporation is nonstock, Nos. 7 and 8 of the above articles may be Nature:
modified accordingly, and it is sufficient if the articles state the - A corporate name is regarded as of the nature of a trademark even
amount of capital or money contributed or donated by specified though composed of individual names, and its simulation may be
persons, stating the names, nationalities, and residence addresses restrained.
of the contributors or donors and the respective amount given by - A corporation’s right to use its corporate and tradename is a property
each.) right, a right in rem, it may be asser or protect such right against
anybody, in the same way as it may protect its tangible property
Ninth: That _____________________ has been elected by the against trespass or conversion. It cannot be impaired or defeated by
subscribers as Treasurer of the Corporation to act as such until after subsequent appropriation by another corporation in the same field.
the successor is duly elected and qualified in accordance with the
bylaws, that as Treasurer, authority has been given to receive in the PURPOSE OF THE CORPORATION
name and for the benefit of the corporation, all subscriptions,
A corporation may be organized only for “any lawful purpose or
contributions or donations paid or given by the subscribers or
purposes” (SEC.10). The purpose or purposes must be stated with
members, who certifies the information set forth in the seventh
sufficient clarity.
and eighth clauses above, and that the paid-up portion of the

subscription in cash and/or property for the benefit and credit of
Primary Purpose
the corporation has been duly received.
refers to the primary activity of the corporation
Tenth: That the incorporators undertake to change the name of the
corporation immediately upon receipt of notice from the Secondary Purpose
Commission that another corporation, partnership or person has the additional activities that the corporation can do
acquired a prior right to the use of such name, that the name has
been declared not distinguishable from a name already registered If you do a transaction not covered by your purpose, the transaction is
or reserved for the use of another corporation, or that it is contrary ultra vires. The purpose determines the power and authorities of the
to law, public morals, good customs or public policy. corporation.

Eleventh: (Corporations which will engage in any business or PRINCIPAL OFFICE
activity reserved for Filipino citizens shall provide the following): It is important because any notice or communication or any letters that
“No transfer of stock or interest which shall reduce the ownership the government will issue or send to you will be addressed or directed
of Filipino citizens to less than the required percentage of capital to that address that you have indicated. It must be specific and must
contain the street number, street name, barangay, building name, unit unless otherwise provided under special laws. Incorporators who
number, municipality or the city where it is located. are natural persons must be of legal age.

GENERAL RULE Each of the incorporators of a stock corporation must own or be a
if there is a change of address, you amend the articles of incorporation subscriber to at least one (1) share of the capital stock of the
corporation.
EXCEPTION
if there is a change of address but within the same city, you can file a A corporation with a single stockholder is considered a One Person
general information sheet with the new address. Corporation as described in Title XIII, Chapter III of this Code.

TERM QUALIFICATIONS
SEC. 11, RCC. Corporate term. – A corporation shall have perpetual l OLD Code:
existence unless its articles of incorporation provides otherwise. - only natural persons - juridical persons such as a corporations and
partnership can never be incorporators but they can be initial
Corporations with certificates of incorporation issued prior to the stockholders.
effectivity of this Code, and which continue to exist, shall have Situation:
perpetual existence, unless the corporation, upon a vote of its Foreign Client wants to put up a subsidiary what should you advise
stockholders representing a majority of its outstanding capital since a corporation cannot be an incorporator?
stock, notifies the Commission that it elects to retain its specific - The foreign corporation can be subscribers in a corporation
corporate term pursuant to its articles of incorporation: Provided, here in the Philippines but they can never be incorporators
that any change in the corporate term under this section is without for the law specifically provides that they be natural persons.
prejudice to the appraisal right of dissenting stockholders in - must not be less than 5 and not more than 15
accordance with the provisions of this Code. - must be of legal age
- majority must be residents of the Philippines but in cases of
A corporate term for a specific period may be extended or corporation engaged in nationalized activities, they still have to comply
shortened by amending the articles of incorporation: Provided, with the minimum Filipino stockholdings required under special laws
That no extension may be made earlier than three (3) years prior to or the Constitution
the original or subsequent expiry date(s) unless there are justifiable - must own or be a subscriber to at least one (1) share of the capital
reasons for an earlier extension as may be determined by the stock of the corporation.
Commission: Provided, further, That such extension of the
corporate term shall take effect only on the day following the l REVISED Code:
original or subsequent expiry date(s). - any person, partnership, association or corporation, singly or jointly
with others may organize a corporation
A corporation whose term has expired may apply for a revival of its - no more minimum number for incorporators but should not be more
corporate existence, together with all the rights and privileges than fifteen (15)
under its certificate of incorporation and subject to all of its duties, - natural persons must be of legal age
debts and liabilities existing prior to its revival. Upon approval by -requirement that majority should be residents of the Philippines
the Commission, the corporation shall be deemed revived and a removed but still have to comply with the minimum Filipino
certificate of revival of corporate existence shall be issued, giving it stockholdings in cases of nationalized activities under special laws or
perpetual existence, unless its application for revival provides the Constitution
otherwise. - must own or be a subscriber to at least one (1) share of the capital
stock
No application for revival of certificate of incorporation of banks, - “ONE PERSON CORPORATION” or corporation with a single
banking and quasi-banking institutions, preneed, insurance and stockholder now recognized
trust companies, nonstock savings and loan associations,
pawnshops, corporations engaged in money service business, and CAPITAL STOCK
other financial intermediaries shall be approved by the Commission SEC. 12, RCC. Minimum capital stock required of stock corporations.
unless accompanied by a favorable recommendation of the – Stock corporations incorporated under this Code shall not be
appropriate government agency. required to have any minimum capital stock except as otherwise
specifically provided for by special law.
OLD Corporation Code: Not to exceed 50 years
Renewable for another 50 years. l OLD Code:
REVISED Corporation Code: Perpetual existence unless articles of -No minimum amount for authorized capital stock (ACS)
incorporation provides otherwise - Subscribed capital - must be at least 25% of the ACS
- Paid-up capital- at least 25% of the subscribed capital stock should be
NAME, NATIONALITIES AND RESIDENCE OF INCORPORATORS paid up
SEC. 10, RCC. Number and qualifications of incorporators. – Any
person, partnership, association or corporation, singly or jointly (EXAMPLE UNDER OLD CODE, JUST IN CASE):
with others but not more than fifteen (15) in number, may organize
a corporation for any lawful purpose or purposes: Provided, That IF A CORPORATION HAS AUTHORIZED CAPITAL STOCK OF P100,000,
natural persons who are licensed to practice a profession, and P25,000 (25% OF THE ACS) MUST BE SUBSCRIBED AND AT LEAST 25%
partnerships or associations organized for the purpose of practicing OF THE SUBSCRIBED CAPITAL STOCK MUST BE PAID UP.
a profession, shall not be allowed to organize as a corporation
IF THE 100,000 ACS IS SUBSCRIBED BY A,B,C, D AND E, WHAT IS (b) Punctuations, articles, conjunctions, contractions,
REQUIRED IS THAT THE TOTAL SUBSCRIPTION MUST AT LEAST BE 25,000. prepositions, abbreviations, different tenses, spacing,
IT IS NOT A REQUIREMENT THAT THE 25,000 MUST BE DIVIDED EQUALLY or number of the same word or phrase.
AMONG THE A,B,C, D AND E. IT IS NOT REQUIRED THAT A,B,C, D AND E 2. One that is not yet protected by law;
MUST SUBSCRIBE 5,000 EACH FOR AS LONG AS THE TOTAL SUBSCRIPTION 3. Not contrary to law, rules and regulations
IS AT LEAST 25% OF THE ACS.
Upon determination by the Commission that the corporate
THE LAW DOES NOT SAY WHO MUST SUBSCRIBE. WHAT THE LAW ONLY name violates either of the three requirements, it may summarily
REQUIRES IS THAT 25% OF THE SUBSCRIBED CAPITAL MUST BE PAID UP, SO order the corporation to IMMEDIATELY CEASE AND DESIST FROM
YOU MAY HAVE INCORPORATORS SUBSCRIBING TO SHARES WITHOUT USING SUCH NAME AND TO REGISTER A NEW ONE. IT SHALL ALSO
PAYING UP. IN FACT THAT IS WHAT HAPPENED IN THE NARRA NICKEL CASE. CAUSE THE REMOVAL OF VISIBLE SIGNAGES, MARKS, ADS, etc. bearing
OLYMPIC MINES DID NOT PAY THEIR SUBSCRIPTION. ALL THE PAID UP such corporate name.
CAPITAL CAME FROM MBMI, A FOREIGN INVESTOR. SO THAT IS THE
REQUIREMENT ON THE SUBSCRIPTION TO INCORPORATE. Upon approval of the new corporate name, the Commission
shall issue a certificate of incorporation under the amended name.
l REVISED Code
- no more minimum capital stock requirement unless Failure to comply WITH THE ORDER of the commission (last par.
specifically provided by special laws Sec.17,RCC) :
- The 25%/25% requirement under RCC is applicable only in The corporation and its responsible directors or officers , may be held:
case of increase in authorized capital stock under Title IV, SEC. 37, RCC. 1. In contempt and/or
2. Be administratively, civilly, and/or criminally liable under the
CORPORATE NAME Corporation Code and other applicable laws, and/or
SEC 17, RCC. Corporate name. – No corporate name shall be 3. May result into the revocation of the corporation’s registration
allowed by the Commission if it is not distinguishable from that
already reserved or registered for the use of another corporation, Atty’s Discussion:
or if such name is already protected by law, or when its use is Late December 2017, SEC came out with a new regulation concerning
contrary to existing law, rules and regulations. corporate names. Under the Intellectual Property Code, the moment
you create a trade name and start using a trade name it is already
A name is not distinguishable even if it contains one or more of the protected even if it is not yet registered under the IP Code. But under
following: this new regulation, if the corporation is doing business under a trade
(a) The word “corporation”, “company”, “incorporated”, name different from its corporate name, the trade name should be
“limited”, “limited liability”, or an abbreviation of one of such included in its Articles of Incorporation. In that regard, the protection
words; and granted by Section 18 of the Corporation Code (now Section 17 of the
(b) Punctuations, articles, conjunctions, contractions, Revised Corporation Code) is extended to that trade name.
prepositions, abbreviations, different tenses, spacing, or number of
the same word or phrase. Effect if the trade name is not included in the Articles of
Incorporation:
The Commission, upon determination that the corporate name is: SEC Rules provide that such trade name can be used by some other
(1) not distinguishable from a name already reserved or registered corporations subject to the consent of the owner of the trade name.
for the use of another corporation; (2) already protected by law; or
(3) contrary to law, rules and regulations, may summarily order the Trade name and Corporate name need not be the same.
corporation to immediately cease and desist from using such name
and require the corporation to register a new one. EXAMPLE
Trade name: Penshoppe
The Commission shall also cause the removal of all visible signages, Corporate name: Golden ABC
marks, advertisements, labels, prints and other effects bearing such
corporate name. Upon the approval of the new corporate name, Grounds to question a corporate name
the Commission shall issue a certificate of incorporation under the 1. Complainant corporation has acquired prior right over the
amended name. use of such corporate name; and
2. Proposed name is either:
If the corporation fails to comply with the Commission’s order, the a. Identical; or
Commission may hold the corporation and its responsible directors b. Deceptively or confusingly similar to that of any existing
or officers in contempt and/or hold them administratively, civilly corporation or to any other name already protected by
and/or criminally liable under this Code and other applicable laws law; or
and/or revoke the registration of the corporation. c. Patently deceptive, confusing or contrary to existing
laws.
REQUIREMENTS FOR A VALID CORPORATE NAME:
1. Distinguishable from a name already reserved or registered
for the use of another corporation; INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES,
TN: A name is not distinguishable even if it contains PETITIONER, VS. COURT OF APPEALS, SECURITIES AND EXCHANGE
one or more of the following: COMMISSION AND REFRACTORIES CORPORATION OF THE
(a) The word “corporation”,“company”, “incorporated”, PHILIPPINES, RESPONDENT
“limited”, “limited liability”, or an abbreviation of one G.R. NO. 122174. OCTOBER 3, 2002
of such words; and
FACTS: Refractories is a generic term but its usage is not widespread and its
continuous use by RCP for a considerable period has made the term
October 13, 1976 - RCP was organized for the purpose of engaging in so closely identified with it.
the business of manufacturing refractory bricks. IRCP’s appropriation of RCP’s corporate name cannot find
June 22, 1977-RCP registered its name with DTI justification under the generic word rule. A contrary ruling would
August 23, 1979- “Synclaire Mftg Corp” was organized encourage corporations to adopt verbatim and register an existing
August 23, 1985- Synclaire changed its name to IRCP. and protected corporate name, to the detriment of the public.
Both are the only local suppliers of monolithic gunning mix.
April 14, 1988- RCP filed a petition with SEC to compel IRCP to change Test in determining Identity/similarity
its corporate name on the ground that it was confusingly similar with “If it has the tendency to mislead a person using ordinary care and
RCP discrimination. “

SEC: Rendered judgment in favor of RCP In the case of a corporation desiring to incorporate a subsidiary:
SEC en banc: Ordered IRCP to delete or drop the name “Refractories” Usually you will have the same name. The SEC allows it provided that
Court of Appeals: Name is confusingly similar and RCP has the corporation which had a priority right will send a letter of consent.
established prior right to use the word “refractories” In this case, you cannot reserve your name online. You will have to
write a letter to the SEC main office in Manila to basically grant
IRCP argues: permission for the subsidiary to use the name of the parent. So, just
1. Jurisdiction is vested with regular courts as it is not under PD 902- because it’s similart, it’s automatically not allowed. So if the
a corporation with the prior right consents, then, it will be allowed. But
2. “refractories” is a generic name it has to be proven that there is a parent-subsidiary/affiliate.
3. Not confusing similarity
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA
RULING: BANSANG PILIPINAS, INC. PETITIONER, VS. IGLESIA NG DIOS KAY
CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN, RESPONDENT
SEC has jurisdiction— under regulatory powers G.R. NO. 137592. DECEMBER 12, 2001
Jurisdiction of SEC is not merely confined to adjudicative functions When Soriano, et al. registered the corporate name of petitioner
under PD 902-A. By express mandate, it has absolute jurisdiction, corporation, respondent corporation filed a petition before the SEC
supervision and control over all corporation. It exercises regulatory for the change of petitioner's corporate name on the ground that the
and administrative powers to implement and enforce the same causes confusion among their members and the public.
Corporation Code, one of which is Section 18 which provides:
Issue:
“Sec 18. Corporate name. — no corporate name may be allowed by Is the corporation name “Ang Mga Kaanib sa Iglesia ng Dios Kay
the SEC if the proposed name is identical or deceptively or Kristo Hesus, H.S.K, sa Bansang Pilipinas “(The acronym "H.S.K."
confusingly similar to that of any existing corporation…or is patently stands for Haligi at Saligan ng Katotohanan) confusingly similar to
deceptive, confusing or contrary to existing laws..” “IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN”?
It is the SEC's duty to prevent confusion in the use of corporate
names not only for the protection of the corporations involved but Held: YES.
more so for the protection of the public, and it has authority to de-
register at all times and under all circumstances corporate names The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas,
which in its estimation are likely to generate confusion. Inc.” in the petitioner’s name are, as correctly observed by the SEC,
merely descriptive of and also referring to the members, or kaanib,
There is confusing or deceptive similarity. of respondent who are likewise residing in the Philippines. These
To fall within the prohibition of the law, two requisites must be words can hardly serve as an effective differentiating medium
proven: necessary to avoid confusion or difficulty in distinguishing petitioner
1. That complainant corporation acquired a prior right over the use from respondent. This is especially so, since both petitioner and
of the corporate name respondent corporations are using the same acronym — H.S.K.; not
2. That proposed name is either: to mention the fact that both are espousing religious beliefs and
i. Identical; or operating in the same place. Parenthetically, it is well to mention that
ii. Deceptively or confusingly similar to that of any existing the acronym H.S.K. used by petitioner stands for "Haligi at Saligan ng
corporation or to any other name already protected by Katotohanan."
law; or In holding out their corporate name to the public, petitioner
iii. Patently deceptive, confusing or contrary to existing laws. highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN, which is strikingly similar to
In this case, anent the second requisite in determining the existence respondent's corporate name, thus making it even more evident that
of confusing similarity, the test is whether the similarity is such as to the additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc.,
mislead a person using ordinary care and discrimination. The only are merely descriptive of and pertaining to the members of
word that distinguishes them is the word “industrial” which merely respondent corporation.
identifies a corporation’s general field of activities or operations. Significantly, the only difference between the corporate names of
Both corporations also cater to the same clientele and as established petitioner and respondent are the words SALIGAN and SUHAY. These
by SEC, both have similar packaging. words are synonymous --- both mean ground, foundation or support.
Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc., where the Court ruled that the corporate the case. A corporation continues to exist even if you amend its
names Universal Mills Corporation and Universal Textile Mills, Inc., articles.
are undisputably so similar that even under the test of reasonable
care and observation confusion may arise. AMENDMENT OF ARTICLES OF INCORPORATION
Furthermore, the wholesale appropriation by petitioner of SEC. 15, RCC. Amendment of Articles of Incorporation. - Unless
respondent's corporate name cannot find justification under the otherwise prescribed by this Code or by special law, and for
generic word rule. We agree with the Court of Appeals conclusion legitimate purposes, any provision or matter stated in the articles
that a contrary ruling would encourage other corporations to adopt of incorporation may be amended by a majority vote of the board
verbatim and register an existing and protected corporate name, to of directors or trustees and the vote or written assent of the
the detriment of the public stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right
Atty’s Discussion: of dissenting stockholders in accordance with the provisions of this
Under the Intellectual Property law (IP), trade name is not protected Code. The articles of incorporation of a nonstock corporation may
if it is generic. If you use a generic name for a product, you cannot be amended by the vote or written assent of majority of the trustees
register it, and other companies can use that name. and at least two thirds (2/3) of the members.

Eg: Your product name is “bag”. You cannot prevent other The original and amended articles together shall contain
corporations from using that word because that is a generic word. all provisions required by law to be set out in the articles of
incorporation. Amendments to the articles shall be indicated by
The Supreme Court in this case said that such rule is not applicable underscoring the change or changes made, and a copy thereof duly
to the provision of the Corporation Code on corporate names. So, certified under oath by the corporate secretary and a majority of
even if the corporate name is generic, it is still protected under the the directors or trustees, with a statement that the amendments
Corporation Code because the SC, to rule otherwise, would have been duly approved by the required vote of the stockholders
encourage other corporations to adopt verbatim and register an or members, shall be submitted to the Commission.
existing corporate name to the detriment of the public. So, for
example you have a corporation named “bag Inc.”, you can prevent The amendments shall take effect upon their approval by
another corporation from using “bag Corp.”. Generic names, the Commission or from the date of filing with the said Commission
although not protected in the IP code, they are protected as if not acted upon within six (6) months from the date of filing for a
corporate names. This is the essence of the Iglesia ni Kristo case. cause not attributable to the corporation.

ZUELLIG FREIGHT AND CARGO SYSTEMS, PETITIONER, VS. NATIONAL Process of amending articles
LABOR RELATIONS COMMISSION AND RONALDO V. SAN MIGUEL , l Stock Corporation
RESPONDENTS 1. Approval by majority vote of the board of directors
G.R. NO. 157900, JULY 22, 2013 2. Ratified by the stockholders representing two thirds (2/3) of
Petitioner Zuellig (formerly, “zeta”) ceased operations and dismissed the outstanding capital stock.
some of its workers. One of those workers was Ronaldo San Miguel. TN: The vote is not on the stockholders, but on the
He filed a complaint, alleging that it was an illegal dismissal. outstanding capital stock. You don’t count by person.
You count by shares.
Zeta amended its articles and changed its name to “Zuellig”. It was Moreover, first paragraph of Section 15 also provides
found out that there was no business cessation but merely a change that the amendment may be effected by the “written
of business name and the upgrading of stocks of the corporation. SC assent” of the stockholders or members, meaning that
held that that there was no closure to speak of. The termination of such action need not be taken in a meeting and upon a
services allegedly due to cessation of business operations of Zeta was vote.
illegal. It was merely a change of name, and not a change of being. Except: If the amendments consists in extending or
shortening the corporate term, or increasing or decreasing
Atty’s Discussion: capital stocks, a meeting of the stockholders is necessary.
l Non-stock Corporation
The right of succession in corporate law basically is that: any change 1. Approval by majority vote of the trustees
in the stockholdings or in the board of directors of the corporation 2. Ratified by at least two thirds (2/3) of the members.
will not change the continuity of the corporation. A change in name TN: Both 1&2 could either be by vote or written assent
is basically just ancillary to the right of succession, in the sense that
the corporate entity continues to exist, even if it changes its name or ILLUSTRATION:
amend its articles. Although there is no change in the shareholdings 5 Stockholders, 4 owns one share each, and you have 1 stockholder
of the corporation, but there is a change of name. it’s similar to a owning 996 shares, total of 1000 shares.
person changing his name. it doesn’t mean that he is a new person.
The vote is based on the two thirds of the shares (1000), not two thirds
The SC said that: no, this is still one and the same corporation. of the stockholders. (5)
therefore, you cannot say that you’ve stopped business operations.
The corporation continued to exist. It merely changed its name, LEGAL IMPLICATIONS OF THE ILLUSTRATION:
purpose, and its authorized capital stock. The stockholder holding 996 shares already owns the two thirds vote
if he votes.
So, a corporation, unlike a partnership, where if you amend anything
in the articles of partnership, it automatically dissolves that one How to Amend
partnership and creates another one. In a corporation, such is not
1. Underscore all changes made disapprove the articles of incorporation or any amendment thereto
2. Indicate the date of the meeting under the provision if the same is not compliant with the requirements of this Code:
changed Provided, That the Commission shall give the incorporators,
TN: Date pertains to the date the amendment was directors, trustees, or officers a reasonable time from receipt of the
approved/ratified by the stockholders disapproval within which to modify the objectionable portions of
3. Copy thereof duly certified under oath by the corporate the articles or amendment. The following are grounds for such
secretary and a majority of the directors or trustees with a disapproval:
statement that the amendments have been duly approved
by the required vote of the stockholders or members 1.The articles of incorporation or any amendment thereto is
4. Submit to the Commission not substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are
Example: 5 Directors à 7 Directors patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
Seven (7) Directors 3. The certification concerning the amount of capital stock
(As amended on ______) subscribed and/or paid is false; and
4. The required percentage of Filipino ownership of the
INCORPORATORS; ACCOMPLISHED FACT capital stock under existing laws or the Constitution has not been
The original incorporators do not change despite approval of the complied with.
amended Articles of Incorporation by a new set of stockholders.

The Securities and Exchange Commission will only require the original No articles of incorporation or amendment to articles of
signature page bearing the signatures of the original Articles and incorporation of banks, banking and quasi-banking institutions,
append it to the amended articles. The original incorporators will never preneed, insurance and trust companies, NSSLAs, pawnshops and
change, it being an accomplished fact. other financial intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of the
EFFECTIVITY OF AMENDMENT: appropriate government agency to the effect that such articles or
1. Takes effect upon approval by the Commission, or amendment is in accordance with law.
2. From the date of filing with the Commission if not acted upon within GROUNDS TO DISAPPROVE INITIAL APPLICATION FOR
6 months from the date of filing for a cause not attributable to the INCORPORATION AND AMENDMENT OF ARTICLES
corporation. 1. Articles or Amendment is not substantially in accordance
with form prescribed under the law
IN COMPARISON WITH 2. Purpose or purposes of the corporation is patently
AMENDMENT OF ARTICLES OF INCORPORATION OF CLOSE unconstitutional, illegal, immoral, or contrary to government
CORPORATIONS, TITLE XII, SEC.102 rules and regulations
3. Certification concerning the amount of capital stock
SEC. 102, RCC. Amendment of articles of incorporation. - Any
subscribed and/or paid is false
amendment to the articles of incorporation which seeks to delete
4. Percentage of Filipino ownership of capital stock under
or remove any provision required by this Title or to reduce a quorum
existing laws or the Constitution not complied
or voting requirement stated in said articles of incorporation shall

require the affirmative vote of at least two- thirds (2/3) of the
INDUSTRIES REQUIRING PRIOR AUTHORITY BEFORE
outstanding capital stock, whether with or without voting rights, or
INCORPORATION (REGULATED CORPORATIONS; SEC. 16, LAST
of such greater proportion of shares as may be specifically provided
PARAGRAPH)
in the articles of incorporation for amending, deleting or removing

any of the aforesaid provisions, at a meeting duly called for the
1. Banks
purpose.
2. Banking and quasi-banking institutions

3. Preneed, insurance and trust companies

4. Non-stock savings and loan associations (NSSLAs)
Amending the Articles of incoporation of close corporations
5. Pawnshops
1. Affirmative vote of at least 2/3 of the outstanding capital stock, with 6. Other financial intermediaries
or without voting rights; or
2. Of such greater proportion of shares as may be specifically provided These industries cannot incorporate or apply for amendment without
in the articles of incorporation for amending, deleting or removing any the prior authority of the government agencies governing or
of the aforesaid provisions, at a meeting duly called for the purpose controlling them. (Ex. Certificate to Incorporate from the BSP before
TN: Unlike in stock/non-stock corporations, meeting is always required Incorporating a Bank)
in cases of amenmdents under this provision. A mere written assent
would not suffice. The Certificate to Incorporate is to be attached to the Articles of
Incorporation.

COMMENCEMENT OF CORPORATE EXISTENCE
DISAPPROVAL OF ARTICLES par. 2 & 3, SEC. 18, RCC. Registration, Incorporation and
SEC. 16, RCC. Grounds When Articles of Incorporation or Commencement of Corporate Existence. -
Amendment May be Disapproved. - The Commission may xxxxxxxxxxx.
If the Commission finds that the submitted documents and FACTS:

information are fully compliant with the requirements of this Code, Spouses Cosio donated a parcel of land to South Philippine Union
other relevant laws, rules and regulations, the Commission shall Mission of Seventh Day Adventist Church of Bayugan, Esperanza,
issue the certificate of incorporation. Agusan (SPUM-SDA Bayugan), petitoner’s predecessor, situated in
the Barrio of Bayugan, Municipality of Esperanza, Province of
A private corporation organized under this Code commences its Agusan, Philippines.
corporate existence and juridical personality from the date the The donation was allegedly accepted by one Liberato Rayos, an elder
Commission issues the certificate of incorporation under its official of the Seventh Day Adventist Church, on behalf of the donee.
seal and thereupon the incorporators, stockholders/members and 21 years later, however, the same parcel of land was sold by the
their successors shall constitute a body corporate under the name spouses Cosio to the Seventh Day Adventist Church of Northeastern
stated in the articles of incorporation for the period of time Mindanao Mission (SDA-NEMM), respondents in this case.
mentioned therein, unless said period is extended or the Petitioners asserted ownership over the property. It filed a case for
corporation is sooner dissolved in accordance with law. the cancellation of title, quieting of ownership and possession,
declaratory relief and reconveyance with prayer for preliminary
LIFE OF A CORPORATION injunction and damages), in the RTC of Bayugan, Agusan del Sur.
The issuance of the SEC of the certificate of incorporation if This was opposed by respondents who argued that at the time of the
all papers filed after verification and examination are found in order donation, SPUM-SDA Bayugan could not legally be a donee because,
commences the corporate existence, it’s juridical personality and legal not having been incorporated yet it, had no juridical personality.
existence. The incorporators, stockholders/members and their Neither were petitioners members of the local church then, hence,
successors shall constitute a body corporate under the name stated in the donation could not have been made particularly to them.
the articles of incorporation for the period of time mentioned therein, After trial, the trial court rendered a decision upholding the sale in
unless said period is extended or the corporation is sooner dissolved in favor of respondents.
accordance with law. On appeal, the CA affirmed the RTC decision but deleted the award
of moral damages and attorney's fees.
The certificate of incorporation is a final determination of the Issue:
corporation’s right to do business or enter into contracts in its name. Should respondent SDA-NEMM's ownership of the lot covered by
Once issued, the certificate becomes the charter or corporate franchise TCT No. 4468 be upheld?
from which the authority of the corporation to operate as such flows. Ruling:
It is the primary franchise of the corporation akin to a birth certificate. Yes.
Donation is an act of liberality whereby a person disposes
IOW, The life of the corporation starts at the date of the gratuitously of a thing or right in favor of another person who accepts
issuance of the certificate of incorporation.. it. The donation could not have been made in favor of an entity yet
inexistent at the time it was made. Nor could it have been accepted
The moment the SEC issues the certificate of incorporation, there as there was yet no one to accept it.
arises a relationship between: The deed of donation was not in favor of any informal group of SDA
1) The State and the corporation – because it is the state which members but a supposed SPUM-SDA Bayugan (the local church)
granted life to the corporation which, at the time, had neither juridical personality nor capacity to
2) The corporation to its stockholders – because the stockholders are accept such gift.
the one who compose the corporation Declaring themselves a de facto corporation, petitioners allege that
3) The stockholders and the State – because in reality, the corporation they should benefit from the donation.
is just an artificial being. The stockholder being the ones making up the But there are stringent requirements before one can qualify as a de
corporation, the franchise granted by the state to the corporation, is a facto corporation:
privilege granted to the stockholders. (a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
DE FACTO CORPORATIONS (c) assumption of corporate powers.
SEC. 19, RCC. De facto corporations. – The due incorporation of any There is no proof that there was an attempt to incorporate at that
corporation claiming in good faith to be a corporation under this time.
Code, and its right to exercise corporate powers, shall not be The filing of articles of incorporation and the issuance of the
inquired into collaterally in any private suit to which such certificate of incorporation are essential for the existence of a de
corporation may be a party. Such inquiry may be made by the facto corporation.
Solicitor General in a quo warranto proceeding. Petitioners themselves admitted that at the time of the donation,
they were not registered with the SEC, nor did they even attempt to
De Jure Corporation organize to comply with legal requirements.
Corporate existence begins only from the moment a certificate of
One created with substantial conformity to the mandatory statutory
incorporation is issued. No such certificate was ever issued to
requirements in the Corporation Code of the Philippines
petitioners or their supposed predecessor-in-interest at the time of

the donation. Petitioners obviously could not have claimed
De Facto Corporation
succession to an entity that never came to exist. Neither could the
One which actually exists for all practical purposes as a corporation, principle of separate juridical personality apply since there was never
but which has no legal right to corporate existence as against the State. any corporation to speak of. And, as already stated, some of the
CASE: SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF representatives of petitioner Seventh Day Adventist Conference
SOUTHERN PHILIPPINES VS. NORTHEASTERN MINDANAO MISSION Church of Southern Philippines, Inc. were not even members of the
OF SEVENTH DAY ADVENTIST, INC. local church then, thus, they could not even claim that the donation
G.R. NO. 150416, JULY 21, 2006 was particularly for them.
Principle: Corporation by Estoppel

"The de facto doctrine thus effects a compromise between two A group of persons which holds itself out as a corporation and enters
conflicting public interests - the one opposed to an unauthorized into a contract with a third person on the strength of such appearance
assumption of corporate privileges; the other, in favor of doing justice cannot be permitted to deny its existence in an action under said
to the parties and of establishing a general assurance of security in contract.
business dealing with corporations.
Generally, the doctrine exists to protect the public dealing with “On who assumes an obligation to an ostensible corporation as such,
supposed corporate entities, not to favor the defective or non- cannot resist performance thereof on the ground that there was in fact
existent corporation.’ no corporation.”
Requirements before one can qualify as a de facto corporation:
a. The existence of a valid law under which it may be incorporated; These are corporations who have exercised rights as a corporation and
b. An attempt in good faith to incorporate; and has undertaken obligations as a corporation, even without validly
c. Assumption of corporate powers incorporating. In which case, the person’s who made up the
corporation are estopped from claiming that they are not. But they
COLLATERAL ATTACK NOT ALLOWED: cannot, because there is no real corporation, they will not be liable as
De facto corporation’s existence can only be attacked directly, a corporation. They will be liable as partners. They will be solidarily
through a quo warranto proceeding. A quo warranto proceeding is a liable in their personal capacity.
direct attack which questions the very existence of the corporation
because the issue of the case is WON the corporation exist. Lack of corporate personality is not a defense that it can avail.

Attempt in good faith (minimum requirements): EFFECTS OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS
In order to have an attempt in good faith to incorporate, you must INOPERATION
actually have INCORPORATED. SEC. 21. Effects of Non-Use of Corporate Charter and Continuous
The corporation must have filed the articles of incorporation, Inoperation. – If a corporation does not formally organize and
treasurer’s affidavi (old Code)t, and by-laws with the SEC. commence its business within five (5) years from the date of its
The SEC must have actually issued the certificate of incorporation. incorporation, its certificate of incorporation shall be deemed
revoked as of the day following the end of the five (5)-year period.
Atty’s Discussion:
If you did not comply with the preceding minimum requirements, However, if a corporation has commenced its business but
that is not a de facto corporation. Hence, the existence of such may subsequently becomes inoperative for a period of at least five (5)
be attacked collaterally. consecutive years, the Commission may, after due notice and
If the SEC issued the certificate of incorporation, even if there was a hearing, place the corporation under delinquent status.
defect in the issuance by the SEC, that corporation is a de facto
corporation, and its existence cannot be attacked collaterally. It must A delinquent corporation shall have a period of two (2) years to
be done thru a direct attack, thru a quo warranto proceeding. resume operations and comply with all requirements that the
In relation to the Seventh Day Adventist case, the donee was saying Commission shall prescribe. Upon compliance by the corporation,
that you cannot just question my existence thru the revocation of the the Commission shall issue an order lifting the delinquent status.
donation, you cannot say that I do not exist because only the state Failure to comply with the requirements and resume operations
can question my existence thru a quo warranto. Only the state can within the period given by the Commission shall cause the
question the existence of a de facto corporation and I am a de facto revocation of the corporation’s certificate of incorporation.
corporation. We cannot just say that the donation is revoked
because I don’t exist. You have to file a quo warranto case first. Is this The Commission shall give reasonable notice to, and coordinate
contention valid? NO. with the appropriate regulatory agency prior to the suspension or
revocation of the certificate of incorporation of companies under
Ruling: In this case, the SC said that Northeastern Seventh Day their special regulatory jurisdiction.
Adventist did not even attempt to file their articles of incorporation,
hence, it is not a de facto corporation. Therefore, it is not protected ORGANIZATION
and its existence can be attacked collaterally. It may be negated even The issuance of the certificate of incorporation calls the corporation
without bringing a quo warranto case. into being but it is not ready to do business until it is organized. The
corporation must formally organize and commence the transaction
CORPORATION BY ESTOPPEL of its business or the construction of its works within five (5) years
SEC. 20, RCC. Corporation by estoppel. - All persons who assume to from the date of its incorporation, otherwise, its certificate of
act as a corporation knowing it to be without authority to do so incorporation shall be deemed revoked. (Sec. 21)
shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, Organization includes:
That when any such ostensible corporation is sued on any 1. Adoption of by-laws
transaction entered by it as a corporation or on any tort committed 2. Election of the corporate officers
by it as such, it shall not be allowed to use as a defense its lack of 3. Putting up of corporate office as the principal place of their business
corporate personality as a defense. Anyone who assumes an (as indicated in the articles of the incorporation)
obligation to an ostensible corporation as such cannot resist 4. Application for permits (eg. Mayor’s or business permits)
performance thereof on the ground that there was in fact no
corporation. INCORPORATION WITHOUT COMMENCEMENT OF OPERATIONS
(FAILURE TO FROMALLY ORGANIZE)
l OLD Code:
Within two (2) years from the date of its incorporation – DEEMED DISQUALIFICATION
DISSOLVED (Automatic) SEC. 26. Disqualification of Directors, Trustees or Officers. – A
person shall be disqualified from being a director, trustee or officer
l REVISED Code: of any corporation if, within five (5) years prior to the election or
Within five (5) years from the date of its incorporation - CERTIFICATE appointment as such, the person was:
OF INCORPORATION DEEMED REVOKED as of the day following the end
of the 5-year period. Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
INOPERATIVE AFTER COMMENCEMENT OF OPERATIONS exceeding six (6) years;
l OLD Code (2) For violating this Code; and
Continuously inoperative for a period of at least five (5) years – (3) For violating Republic Act No. 8799, otherwise known as
GROUND FOR SUSPENSION OR REVOCATION of corporate franchise or “The Securities Regulation Code”;
certificate of incorporation. (b) Found administratively liable for any offense involving
fraudulent acts; and
l REVISED Code (c) By a foreign court or equivalent foreign regulatory authority for
Inoperative for at least 5 consecutive years - Commission may, after acts, violations or misconduct similar to those enumerated in
due notice and hearing, place corporation under DELINQUENT STATUS. paragraphs (a) and (b) above.

TN: A delinquent corporation shall have a period of 2 years in which to The foregoing is without prejudice to qualifications or other
resume operations and comply with all the requirements that the disqualifications, which the Commission, the primary regulatory
Commission shall prescribe. agency, or the Philippine Competition Commission may impose in
its promotion of good corporate governance or as a sanction in its
COMPLIANCE - Commission issues an order lifting the delinquent administrative proceedings.
status
NON-COMPLIANCE - REVOCATION of the corporation’s certificate of Disqualification
incorporation. 1.Conviction by final judgment -
A.Offense punishable by imprisonment exceeding 6 years;
Reasonable notice shall be given to the appropriate regulatory agency B.Violation of the RCC regardless of the penalty involved;
in case of suspension or revocation of the certificate of incorporation C.Violation of the R.A. No. 8799 (Security Regulations Code) -
of companies under their special regulatory jurisdiction. newly inserted but already practiced
2.Found guilty in an administrative proceedings
3.Found guilty by foreign courts or equivalent foreign regulatory
TITLE III- BOARD OF DIRECTORS/TRUSTEES AND OFFICERS authority for analogous cases
QUALIFICATION AND TERM
SEC. 22. The Board of Directors or Trustees of a Corporation; Note: These are not perpetual disqualifications as it is qualified by the
Qualification and Term.- Unless otherwise provided in this Code, phrase “within five (5) years prior to the election or appointment as
the board of directors or trustees shall exercise the corporate such.” After the lapse thereof, one may qualify as a nominee in the
powers, conduct all business, and control all properties of the Board.
corporation.
ELECTION OF BOD
Directors shall be elected for a term of one (1) year from among the Sec. 23 Election of Directors or Trustees. – Except when the
holders of stocks registered in the corporation’s books, while exclusive right is reserved for holders of founders’ shares under
trustees shall be elected for a term not exceeding three (3) years Section 7 of this Code, each stockholder or member shall have the
from among the members of the corporation. Each director and right to nominate any director or trustee who possesses all of the
trustee shall hold office until the successor is elected and qualified. qualifications and none of the disqualifications set forth in this
A director who ceases to own at least one (1) share of stock or a Code.
trustee who ceases to be a member of the corporation shall cease
to be such. XXXXXXXXXXXXXXX At all elections of directors or trustees, there must be present,
either in person or through a representative authorized to act by
Qualifications for a Director: written proxy, the owners of majority of the outstanding capital
1. Must own at least 1 share of stock stock, or if there be no capital stock, a majority of the members
- by ownership, what is required is legal ownership which is entitled to vote. When so authorized in the bylaws or by a majority
determined through the stocks and transfer book reflecting one’s of the board of directors, the stockholders or members may also
name as the owner /holder thereof. Beneficial ownership not vote through remote communication or in absentia: Provided, That
necessary. the right to vote through such modes may be exercised in
2. Must not possess of any of the disqualifications corporations vested with public interest, notwithstanding the
absence of a provision in the bylaws of such corporations.
Take Note :
Majority of the directors should be resident of the Philippines A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for
Majority, not all. There is NO citizenship requirement except purposes of quorum.
Nationalized industries even foreigners can be voted as directors
The election must be by ballot if requested by any voting

stockholder or member. Eg. A owns 100 shares, if there are 5 directors to be elected, A is
In stock corporations, stockholders entitled to vote shall have the entitled to 500 votes multiplying 100 by 5. He may give to the 5
right to vote the number of shares of stock standing in their own candidates 100 votes each.
names in the stock books of the corporation at the time fixed in by-
laws or where the by-laws are silent, at the time of the election. • Cumulative voting for one candidate - cumulate said shares
The said stockholder may: (a) vote such number of shares for as and give one (1) candidate as many votes as the number of
many persons as there are directors to be elected; (b) cumulate said directors to be elected multiplied by the number of the
shares and give one (1) candidate as many votes as the number of shares owned.
directors to be elected multiplied by the number of the shares a.The privilege of cumulative voting is permitted for the
owned; or (c) distribute them on the same principle among as many purpose of giving minority stockholders representation in
candidates as may be seen fit: Provided, That the total number of the BOD. Stockholders shall have the right to vote the
votes cast shall not exceed the number of shares owned by the number of shares of stock standing in their own names.
stockholders as shown in the books of the corporation multiplied b.A director elected because of the vote of minority
by the whole number of directors to be elected: Provided, stockholders who united in cumulative voting cannot be
st
however, That no delinquent stock shall be voted. Unless otherwise removed without cause. (Sec.27, 1 par, last sentence)
provided in the articles of incorporation or in the by-laws, members
of non-stock corporations may cast as many votes as there are ● Cumulative voting by distribution - distribute them on the same
trustees to be elected but may not cast more than one (1) vote for principle among as many candidates as may be seen fit.
one (1) candidate. Nominees for directors or trustees receiving the
highest number of votes shall be declared elected. Note: Comparison with non-stock corporations: Members may cast as
many votes as there are trustees to be elected but may not cast more
If no election is held, or the owners of majority of the outstanding than one (1) vote for one (1) candidate unless otherwise provided in
capital stock or majority of the members entitled to vote are not the articles of incorporation or in the by-laws. They cannot cumulate.
present in person, by proxy, or through remote communication or
not voting in absentia at the meeting, such meeting may be 4.No delinquent stock shall be voted.
adjourned and the corporation shall proceed in accordance with
Section 25 of this Code. 5. Nominees for directors or trustees receiving the highest number of
votes shall be declared elected.
The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and bylaws 6.If no election is held, or the owners of majority of the outstanding
of the corporation. capital stock or majority of the members entitled to vote are not
present in person, by proxy, or through remote communication or not
Election of Directors: voting in absentia at the meeting, such meeting may be adjourned
1. Done at any meeting called for the election of BOD and voted for by and the corporation shall follow Section 25.
the stockholders. At all elections, owners of the majority of the
outstanding capital stocks must be present either: INDEPENDENT DIRECTORS
● In person; Sec. 22, last 6 paragraphs. Xxx The board of the following
● Through a representative authorized to act by written corporations vested with public interest shall have independent
proxy (in absentia) eg. proxy or trust; or directors constituting at least twenty percent (20%) of such board:
● If allowed by the by-laws or majority of the BOD,
through remote communication eg. Telephone Corporations covered by Section 17.2 of Republic Act No. 8799,
conference or video conference. otherwise known as “The Securities Regulation Code”, namely
Note: Such modes of attending the meeting and voting may be utilized those whose securities are registered with the Commission,
by corporations vested with public interest although not provided in corporations listed with an exchange or with assets of at least Fifty
their by-laws. million pesos (P50,000,000.00) and having two hundred (200) or
more holders of shares, each holding at least one hundred (100)
2.The election must be by ballot if requested by any voting stockholder. shares of a class of its equity shares;
Hence, voting by viva voces or roll call (raising hands) is valid except
when there is a request that it be by ballot. (b) Banks and quasi-banks, nonstock savings and loan associations,
pawnshops, corporations engaged in money service business,
3.Stockholders shall have the right to vote the number of shares of preneed, trust and insurance companies, and other financial
stock standing in their own names (1share=1vote) as long as the total intermediaries; and
number of votes cast shall not exceed the number of shares owned
by the stockholders as shown in the books of the corporation (c) Other corporations engaged in businesses vested with public
multiplied by the whole number of directors to be elected. interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
Formula: germane to the objective and purpose of requiring the election of
an independent director, such as the extent of minority ownership,
No. of votes = No. of shares x No. of vacancy
type of financial products or securities issued or offered to

investors, public interest involved in the nature of business
Methods of Voting:
operations, and other analogous factors.
● Straight voting - vote such number of shares for as many
persons as there are directors to be elected.
An independent director is a person who, apart from shareholdings

and fees received from the corporation, is independent of No election held
management and free from any business or other relationship • the reasons therefor shall be reported to the Commission 30
which could, or could reasonably be perceived to materially days from the date of the scheduled election. The report
interfere with the exercise of independent judgment in carrying out shall specify a new date for the election which shall not be
the responsibilities as a director. later than 60 days from the scheduled date
• the commission has authority to motu proprio issue an order
Independent directors must be elected by the shareholders present for the conduct of another election of the BOD
or entitled to vote in absentia during the election of directors.
Independent directors shall be subject to rules and regulations Now, it is expressly provided under the corporation Code that if the
governing their qualifications, disqualifications, voting elections of the BOD are not held at all the SEC may order the conduct
requirements, duration of term and term limit, maximum number of the election so this is a new power granted by Corporation Code to
of board memberships and other requirements that the SEC but this power is already reflected in the Securities Regulation
Commission will prescribe to strengthen their independence and Code.
align with international best practices.
CREATION OF COMMITTEES
Note: Independent directors are required in corporations vested with Section 34. Executive, Management, and Other Special
public interest which include: Committees– If the bylaws so provide, the board may create an
● regulated corporations such as bank, quasi-banks, etc., executive committee composed of at least three (3) directors.
● corporations covered by Sec. 17.2 of the SRC: Said committee may act, by majority vote of all its members,
- corporations whose securities are registered in the SEC on such specific matters within the competence of the board,
- listed corporations as may be delegated to it in the bylaws or by majority vote
- corporations with assets of at least 50M and have 200 of the board, except with respect to the: (a) approval of any
or more shareholders each holding at least 100 shares of a class of its action for which shareholders' approval is also required; (b)
equity shares. These are known as “public corporations” under filling of vacancies in the board; (c) amendment or repeal of
the SRC. bylaws or the adoption of new bylaws; (d) amendment or
repeal of any resolution of the board which by its express
ELECTION REPORT terms is not amendable or repealable; and (e) distribution of
Section 25. Report of Election of Directors, Trustees and Officers, cash dividends to the shareholders.
Non Holding of Election and Cessation from Office– Within thirty
(30) days after the election of the directors, trustees and The board of directors may create special committees of
officers of the corporation, the secretary, or any other officer temporary or permanent nature and determine the members'
of the corporation, shall submit to the Commission, the names, term, composition, compensation, powers, and responsibilities.
nationalities, shareholdings, and residence addresses of the
directors, trustees and officers elected. Executive Committee
- committee which exercise power within the competence of the
The non-holding of elections and the reasons therefor shall be board that requires the authority under the by-laws. The board
reported to the Commission within thirty (30) days from the cannot just create their own executive committee if that executive
date of the scheduled election. The report shall specify a new committee will be exercising powers of the board
date for the election, which shall not be later than sixty (60)
days from the scheduled date. Special Committee
- can be created by the board even without the authority under the by-
If no new date has been designated, or if the rescheduled laws
election is likewise not held, the Commission may, upon the
application of a stockholder, member, director or trustee, and FILIPINAS PORT SERVICES, INC VS. GO
after verification of the unjustified non-holding of the election, G.R. NO. 161886, MARCH 16, 2007
summarily order that an election be held. The Commission shall FACTS: FilPort is a domestic corporation engaged in stevedoring
have the power to issue such orders as may be appropriate, services with principal office in Davao City. On 4 September 1992,
including orders directing the issuance of a notice stating the petitioner Eliodoro Cruz, Filport’s president from 1968 until he lost
time and place of the election, designated presiding officer, his bid for re-election as Filport’s president during the general
and the record date or dates for the determination of stockholders’ meeting in 1991, wrote a letter to the corporation’s
stockholders or members entitled to vote. Board of Directors questioning the board’s creation of the positions
of Assistant Vice-Presidents for Corporate Planning, Operations,
Notwithstanding any provision of the articles of incorporation Finance and Administration, and the creation of the additional
or bylaws to the contrary, the shares of stock or membership positions of Special Assistants to the President and the Board
represented at such meeting and entitled to vote shall Chairman with a monthly remuneration of P13,050.00 each, and the
constitute a quorum for purposes of conducting an election election thereto of certain members of the board. In his aforesaid
under this section. letter, Cruz requested the board to take necessary action/s to
Should a director, trustee or officer die, resign or in any recover from those elected the salaries they have received. However,
manner cease to hold officer, the secretary, or the director, it was not shown on the records that action was taken. On 14 June
trustee or officer of the corporation, shall, within seven (7) 1993, Cruz, purportedly in representation of Filport and its
days from knowledge thereof, report in writing such fact to stockholders, among which is herein co-petitioner Mindanao
the Commission. Terminal and Brokerage Services, Inc., filed with the SEC a
petition which he describes as a derivative suit against the herein business operations of Filport as it is authorized to do so by the
respondents who were then the incumbent members of Filport’s corporation’s by-laws, pursuant to the Corporation Code.
Board of Directors, for alleged acts of mismanagement detrimental Amended Bylaws of Filport provides the following:
to the interest of the corporation and its shareholders at large. With Officers of the corporation, as provided for by the by-laws, shall be
the enactment of R.A. No. 8799, the case was first turned over to the elected by the board of directors at their first meeting after the
RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on election of Directors. xxx
respondents’ motion, it was eventually transferred to the RTC of The officers of the corporation shall be a Chairman of the Board,
Davao City. On 10 December 2001, RTC-Davao City rendered its President, a Vice-President, a Secretary, a Treasurer, a General
decision in the case. Even as it found that (1) Filport’s Board of Manager and such other officers as the Board of Directors may from
Directors has the power to create positions not provided for in the time to time provide, and these officers shall be elected to hold office
by-laws of the corporation since the board is the governing body; and until their successors are elected and qualified.
(2) the increases in the salaries of the board chairman, vice-
president, treasurer and Atty: Here the Supreme Court upheld the validity of the executive
assistant general manager are reasonable, the trial court committee even if the same was not authorized under the by-laws,
nonetheless rendered judgment against the respondents by ordering the by-laws was silent which should not be because under the law
the directors holding the positions of Assistant Vice President for executive committee can only be authorized under the by-laws.
Corporate Planning, Special Assistant to the President and Special The reason is as long as the power of a committee is within the power
Assistant to the Board Chairman to refund to the corporation the of the board that requires authority under the by-laws but if it is any
salaries they have received as such officers "considering that Filipinas other committee with only recommendatory authority meaning it
Port Services is not a big corporation requiring multiple executive cannot act on its own (ex. it cannot approves resolutions on its own)
positions" and that said positions "were just created for in that case a committee maybe created without any express
accommodation." On appeal, the CA taking exceptions to the authority under the by-laws
findings of the trial court that the creation of the positions of
Assistant Vice President for Corporate Planning, Special Assistant to In other words, the committees created are only required to be in
the President and Special Assistant to the Board Chairman was the by laws if they act as the board if they don’t act as the board then
merely for accommodation purposes, granted the respondents’ the board may create these committees even without authority
appeal, reversed and set aside the appealed decision of the trial under the by laws.
court and accordingly dismissed the so-called derivative suit filed by
Cruz, et al. Hence this petition for review on certiorari. Executive committee vis-a-vis Special Committee
• Executive Committee: Requires an authority in the by-laws.
ISSUE: One exercising powers that is within the power of the board
Whether or not Filport’s Board of Directors has the power to create of director. They are as powerful as the board of directors
positions not provided for in the by-laws of the corporation. and in effect acting for the board itself.
• Special Committee: No authority required in the by-laws and
RULING: is within the competency of the board to create. Any other
The governing body of a corporation is its board of directors. Section committee exercising a mere recommendatory power whose
23 of the Corporation Code explicitly provides that unless otherwise actions require ratification and confirmation by the board. It
provided therein, the corporate powers of all corporations formed cannot approve resolutions on its own. Reason here is that
under the Code shall be exercised, all business conducted and all the board is the corporation's governing body, clearly
property of the corporation shall be controlled and held by a board upholding the power of its board to exercise its prerogatives
of directors. Thus, with the exception only of some powers expressly in managing the business affairs of the corporation.
granted by law to stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in case of non- LIABILITY
stock corporations) has the sole authority to determine policies, Section 30. Liability of Directors, Trustees or Officers. — Directors
enter into contracts, and conduct the ordinary business of the or trustees who willfully and knowingly vote for or assent to
corporation within the scope of its charter, i.e., its articles of patently unlawful acts of the corporation or who are guilty of gross
incorporation, by-laws and relevant provisions of law. Verily, the negligence or bad faith in directing the affairs of the corporation or
authority of the board of directors is restricted to the management acquire any personal or pecuniary interest in conflict with their
of the regular business affairs of the corporation, unless more duty as such directors or trustees shall be liable jointly and severally
extensive power is expressly conferred. for all damages resulting therefrom suffered by the corporation, its
The raison d’etre behind the conferment of corporate powers on the stockholders or members and other persons.
board of directors is not lost on the Court. Indeed, the concentration
in the board of the powers of control of corporate business and of A director, trustee or officer shall not attempt to acquire, or acquire
appointment of corporate officers and managers is necessary for any interest adverse to the corporation in respect of any matter
efficiency in any large organization. Stockholders are too numerous, which has been reposed in them in confidence, and upon which,
scattered and unfamiliar with the business of a corporation to equity imposes a disability upon themselves to deal in their own
conduct its business directly. And so the plan of corporate behalf; otherwise, the said director, trustee or officer shall be liable
organization is for the stockholders to choose the directors who shall
as a trustee for the corporation and must account for the pro fits
control and supervise the conduct of corporate business.
which otherwise would have accrued to the corporation.
In the present case, the board’s creation of the positions of Assistant

Vice Presidents for Corporate Planning, Operations, Finance and

Administration, and those of the Special Assistants to the President
Best Judgement Rule
and the Board Chairman, was in accordance with the regular

• General Rule: The will of the majority of the Board Members b.Vote or assent to patently unlawful acts of the corporation;
controls in corporate affairs, and contracts intra vires c.Act in bad faith or with gross negligence in directing
entered into by the board of directors are binding on the corporate affairs;
corporation and courts will not interfere. There is no liability d.Are guilty of conflict of interest to the prejudice of the
for any damages caused by their decisions. corporation, stock holders or members, and other persons;
2) When a director or officer consented to the insurance of watered
• Exceptions: down stocks or who, having knowledge, did not forthwith file with
1.Assent to patently unlawful acts of the corporation the corporate secretary his written objection thereto; or
2.Gross negligence or bad faith in directing the affairs of the 3) When a director, trustee or officer is made by specific provision of
corporation law, personally liable for his corporate action.
3.Acquiring personal or pecuniary interest in conflict with their
duty In the instant case, Reynaldo Magaling’s very own testimony
convincingly displayed his gross negligence in the conduct of the
o Liability if it falls within the exceptions: The director shall affairs of Thermo Loans without due regard to the plight of its
be solidarity liable to the corporation, creditors, investor. He resigned as President of Thermo Loans in 1998 when the
stockholders, and to any other persons. company already became insolvent. He also admitted that no one or
nobody took over as president of the corporation, when he resigned.
MAGALING V ONG Neither was the investor in-formed about the bankruptcy thereof,
FACTS: nor was any bankruptcy or involvers proceeding instituted to protect
Spouses Reynaldo Magaling and Lucia Magaling is the controlling the assets of the corporation and the interest of its investor.
stock holders/owner of Thermo Loans and Credit Corporation. On Reynaldo Magaling miserably failed to exercise at most diligence
December 1994, defendant Reynaldo Magaling induce the Peter Ong expected from the highest officer of a corporation in the conduct of
at the latter’s store in Lipa City to lend him and/or his company its affairs. Hence, he should be held jointly and severally liable for the
Thermo Loans and Credit Corporation money amounting to corporate obligation of Thermo Loans to appellant Peter Ong.
P350,000.00 at the interest rate of 2 1⁄2% per month. The plaintiff,
herein defendant extended the loan to the defendant, herein JAMES IENT AND MAHARLIKA SCHULZE, VS. TULLETT PREBON
petitioner based on the assurance of Reynaldo Magaling. Sometime Facts: Ient is a British national and the Chief Financial Officer of
in September 1997, or three years thereafter the defendants issued Tradition Asia Pacific Pte. Ltd. (Tradition Asia) in Singapore.
and tendered to plaintiff series of postdated checks for the payment Petitioner Schulze is a Filipino/German who does Application
of interest and principal of the loan. Support for Tradition Financial Services Ltd. in London (Tradition
London). Tradition Asia and Tradition London are subsidiaries of
Upon failure of Thermo Loans and Credit Corporation to pay its Compagnie Financiere Tradition and are part of the "Tradition
outstanding loan despite demand from Mr. Ong, the latter filed a Group."
complaint with the RTC for the collection of the loan with interest,
attorney’s fees and cost of suit, with prayer for issuance of a writ of Tradition Group and Tullett are competitors in the inter-dealer
preliminary attachment against the spouses Reynaldo Magaling and broking business. Tullett was the first to establish a business
Lucia Magaling and Thermo Loans and Credit Corporation. presence in the Philippines and had been engaged in the inter-dealer
broking business or voice brokerage here since 1995. Meanwhile, on
The RTC dismissed the complaint of Peter Ong on the ground that the the part of the Tradition Group, the needs of its Philippine clients
subject obligation is the obligation of the defendant corporation in were previously being serviced by Tradition Asia in Singapore. The
which the stockholders and officers are not personally liable. Said other IDBs in the Philippines are Amstel and Icap.
corporation has a personality separate and distinct from that of
Reynaldo Magaling who happens to be only a stockholder and In August 2008, in line with Tradition Group's motive of expansion
president thereof at that time. and diversification in Asia, petitioners Ient and Schulze were tasked
with the establishment of a Philippine subsidiary of Tradition Asia to
On appeal the appellate court reversed and set aside the decision of be known as Tradition Financial Services Philippines, Inc. (Tradition
the RTC. The Court of Appeals pierced the veil of corporate fiction Philippines).[9] Tradition Philippines was registered with the
and held the spouse’s solidarity liable with Thermo Loans for the Securities and Exchange Commission (SEC) on September 19, 2008.
corporate obligations of the latter. Hence, this petition for
certioraris. On October 15, 2008, Tullett, through one of its directors, Gordon
Buchan, filed a Complaint-Affidavit against the officers/employees of
ISSUE: Whether or not the defendants being officers and the Tradition Group for violation of the Corporation Code.
stockholders of Thermo Loans and Credit Corporation are solidarity
liable to the financial liability of said corporation. Villalon ( formerly President and Managing Director of Tullett) and
Chuidian ( formerly a member of Tullett's Board of Directors) were
RULING: charged with using their former positions in Tullett to sabotage said
The Supreme Court affirmed the ruling of the Court of Appeals. The company by orchestrating the mass resignation of its entire
general rule is that obligations incurred by the corporation, acting brokering staff in order for them to join Tradition Philippines. Tullett
through its directors, officers and employees, are its sole liabilities, claimed that the Villalon held several meetings between August 22
and vice versa. However, there are exceptional circumstances to 25, 2008 with members of Tullett's Spot Desk and brokering staff
warranting the disregard of a separate personality and held such in order to convince them to leave the company. Villalon likewise
officer’s and director’s solidarily liable with the corporation: supposedly intentionally failed to renew the contracts of some of the
1) When directors /trustees and officers of a corporation: brokers. On August 25, 2008, a meeting was also allegedly held in
Howzat Bar in Makati City where petitioners and a lawyer of In a Consolidated Reply-Affidavit, Tullett argued that Villalon,
Tradition Philippines were present. At said meeting, the brokers of Chuidian, Schulze, and Ient have mostly admitted the acts attributed
complainant Tullett were purportedly induced, en masse, to sign to them in the Complaint-Affidavit and only attempted to
employment contracts with Tradition Philippines and were allegedly characterize said acts as "normal," "innocent" or "customary." Even
instructed by Tradition Philippines' lawyer as to how they should file assuming that Villalon and Chuidian were dissatisfied with their
their resignation letters. Villalon allegedly informed Mr. Barry employment in Tullett, this would supposedly not justify nor exempt
Dennahy, Chief Operating Officer of Tullett Prebon in the Asia-Pacific, them from violating their duties as Tullett's officers/directors. Tullett
through electronic mail that all of Tullett's brokers had resigned. asserts that Section 144 applies to the case at bar since the DOJ
Subsequently, , in another meeting with Ient and Tradition Resolution in UCPB is not binding as it applies only to the parties
Philippines' counsel, indemnity contracts in favor of the resigning therein and it likewise involved facts different from the present case.
employees were purportedly distributed by Tradition Philippines.
In a Resolution, State Prosecutor (Prosecutor Delos Trinos, Acting
According to Tullett, respondents Villalon and Chuidian(who were City Prosecutor of Makati City, dismissed the criminal complaints.
still its directors or officers at the times material to the Complaint-
Affidavit) violated Sections 31 and 34 of the Corporation Code which Tullett filed a petition for review with the Secretary of Justice to assail
made them criminally liable under Section 144. As for petitioners Ient the foregoing resolution of the Acting City Prosecutor of Makati City.
and Schulze, Tullett asserted that they conspired with Villalon and
Chuidian in the latter's acts of disloyalty against the company. Ient and Schulze moved for reconsideration of the foregoing
Resolution by the Secretary of Justice. Secretary of Justice denied the
In their respective Counter-Affivadits, Villalon alleged that motion for reconsideration filed by petitioners.
frustration with management changes in Tullett Prebon motivated
his personal decision to move from Tullett and accept the invitation
to enlist with the Tradition Group. Villalon further argued that his ISSUE:WON Section 144 of the Corporation Code aplicable to
resignation from Tullett was done in the exercise of his fundamental Sections 31 and 34 of the same statute such that criminal liability
rights to the pursuit of life and the exercise of his profession; he can attaches to violations of Sections 31 and 34.
freely choose to avail of a better life by seeking greener pastures; and
his actions did not fall under any of the prohibited acts under Ruling: the consolidated petitions are GRANTED
Sections 31 and 34 of the Corporation Code. He claimed that the DOJ
had previously proclaimed that Section 31 is not a penal provision of The main bone of disagreement among the parties in this case is the
law but only the basis of a cause of action for civil liability. Thus, he applicability of Section 144 of the Corporation Code to Sections 31
concluded that there was no probable cause that he violated the and 34 of the same statute such that criminal liability attaches to
Corporation Code nor was the charge of conspiracy properly violations of Sections 31 and 34.
substantiated.
Petitioners posit that Section 144 only applies to the provisions of
Chuidian claimed that she left Tullett simply to seek greener the Corporation Code or its amendments "not otherwise specifically
pastures. Like Villalon, She merely exercised her right to exercise her penalized" by said statute and should not cover Sections 31 and 34
chosen which both prescribe the "penalties" for their violation; namely,
profession and pursue a better life. She argued that Section 144 as a damages, accounting and restitution of profits. On the other hand,
penal provision should be strictly construed against the State and respondent and the appellate court have taken the position that the
liberally in favor of the accused and Tullett has failed to substantiate term "penalized" under Section 144 should be interpreted as
its charge of bad faith on her part. referring to criminal penalty, such as fine or imprisonment, and that
it could not possibly contemplate "civil" penalties such as damages,
In her Counter-Affidavit, petitioner Schulze denied the charges accounting or restitution.
leveled against her. She argued that "[s]ince the Corporation Code
does not expressly provide that the provisions of the Revised Penal After a meticulous consideration of the arguments presented by
Code shall be made to apply suppletorily, nor does it adopt the both sides, the Court comes to the conclusion that there is textual
nomenclature of penalties of the Revised Penal Code, the provisions ambiguity in Section 144; moreover, such ambiguity remains even
of the latter cannot be made to apply suppletorily to the former as after an examination of its legislative history and the use of other
provided for in the first sentence of Article 10 of the Revised Penal aids to statutory construction, necessitating the application of the
Code." She concluded that a charge of conspiracy which has for its rule of lenity in the case at bar.
basis Article 8 of the Revised Penal Code cannot be made applicable
to the provisions of the Corporation Code. A perusal of Section 144 shows that it is not a purely penal provision.
When it is a corporation that commits a violation of the Corporation
For his part, Ient alleged that the charges against him were merely Code, it may be dissolved in appropriate proceedings before the
filed to harass Tradition Philippines and prevent it from penetrating Securities and Exchange Commission. The involuntary dissolution of
the Philippine market. Adopting a similar line of reasoning as Schulze, an erring corporation is not imposed as a criminal sanction, 53 but
Ient rather it is an administrative penalty.
believed that the Revised Penal Code could not be made suppletorily
applicable to the Corporation Code so as to charge him as a There is no provision in the Corporation Code using similarly
conspirator. According to Ient, he merely acted within his rights emphatic language that evinces a categorical legislative intent to
when he offered job opportunities to any interested person as it was treat as a criminal offense each and every violation of that law.
within the employees' rights to change their employment. Consequently, there is no compelling reason for the Court to
construe Section 144 as similarly employing the term "penalized" or
"penalty" solely in terms of criminal liability.
section shall be construed to repeal the other causes for dissolution

Sections 31 to 34 were introduced into the Corporation Code to of a corporation provided in this Code.
define what acts are covered, as well as the consequences of such Liability for any of the foregoing offenses shall be separate from any
acts or omissions amounting to a failure to fulfil a director's or other administrative, civil, or criminal liability under this Code and
corporate officer's fiduciary duties to the corporation. A closer look other laws.
at the subsequent deliberations on C.B. No. 3, particularly in relation
to Sections 31 and 34, would show that the discussions focused on SELF-DEALING DIRECTORS
the civil liabilities or consequences prescribed in said provisions SEC. 31. Dealings of Directors, Trustees or Officers with the
themselves.There is no legislative intent to criminalize Sections 31 Corporation. – A contract of the corporation with one or more of its
and 34 was manifested in the deliberations on the Corporation Code. directors, trustees, officers or their spouses and relatives within the
fourth civil degree of consanguinity or affinity is voidable, at the
It is noteworthy from the same deliberations that legislators option of such corporation, unless all the following conditions are
intended to codify the common law concepts of corporate present:
opportunity and fiduciary obligations of corporate officers as found
in American jurisprudence into said provisions. In common law, the a.The presence of such director or trustee in the board meeting in
remedies available in the event of a breach of director's fiduciary which the contract was approved was not necessary to constitute a
duties to the corporation are civil remedies. If a director or officer is quorum for such meeting;
found to have breached his duty of loyalty, an injunction may be
issued or damages may be awarded. A corporate officer guilty of b.The vote of such director or trustee was not necessary for the
fraud or mismanagement may be held liable for lost profits. A disloyal approval of the contract;
agent may also suffer forfeiture of his compensation. There is
nothing in the deliberations to indicate that drafters of the c.The contract is fair and reasonable under the circumstances;
Corporation Code intended to deviate from common law practice
and enforce the fiduciary obligations of directors and corporate d.In case of corporations vested with public interest, material
officers through penal sanction aside from civil liability. contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the independent
directors voting to approve the material contract; and
The Corporation Code was intended as a regulatory measure, not
primarily as a penal statute. Sections 31 to 34 in particular were e.In case of an officer, the contract has been previously authorized
intended to impose exacting standards of fidelity on corporate by the board of directors.
officers and directors but without unduly impeding them in the
discharge of their work with concerns of litigation. Considering the Where any of the first three (3) conditions set forth in the preceding
object and policy of the Corporation Code to encourage the use of paragraph is absent, in the case of a contract with a director or
the corporate entity as a vehicle for economic growth, we cannot trustee, such contract may be ratified by the vote of the stockholders
espouse a strict construction of Sections 31 and 34 as penal offenses representing at least two-thirds (2/3) of the outstanding capital stock
in relation to Section 144 in the absence of unambiguous statutory or of at least two-thirds (2/3) of the members in a meeting called for
language and legislative intent to that effect. We stress that had the the purpose: Provided, That full disclosure of the adverse interest of
Legislature intended to attach penal sanctions to Sections 31 and 34 the directors or trustees involved is made at such meeting and the
of the Corporation Code it could have expressly stated such intent in contract is fair and reasonable under the circumstances.
the same manner that it did for Section 74 of the same Code.
WHEREFORE, the consolidated petitions are GRANTED. Requirements
1.Quorum (presence)
2. Approval ( vote)
Discussion: 3. Contract is fair and reasonable under the circumstances
Section 144 is not applicable since sections 31 and 34 already provide
penalty for violations of those provisions. Section 144 will only apply 1 | Quorum
if the act is not penalized in the sections that are violated.
There has to be a quorum but the presence of such director in the
Note: board meeting in which the contract was approved WAS NOT
Section 144 (now section 170 under the revised corporation code) is necessary to constitute a quorum.
no longer a criminal offense. It is now civil. However, it still applies to
violations of the corporation code that do not have specific penalties. ILLUSTRATION: 5 directors
a. to constitute quorum , needs 3 directors
SEC. 170. Other Violations of the Code; Separate Liability. – Violations b. the presence of the inter dealing director should not be counted in
of any of the other provisions of this Code or its amendments not constituting the quorum , ( not part of the 3 directors)
otherwise specifically penalized therein shall be punished by a fine of
not less than Ten thousand pesos (P10,000.00) but not more than 2 | Vote of such director or trustee was not necessary for the
One million pesos (P1,000,000.00). If the violation is committed by a approval
corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Commission: Provided, That His vote is still counted but his vote should not be necessary for the
such dissolution shall not preclude the institution of appropriate approval for such contract.
action against the director, trustee, or officer of the corporation
responsible for said violation: Provided, further, That nothing in this ILLUSTRATION:
3 Directors present and 1 of them is the Self-dealing director the provisions of the preceding section insofar as the latter
(Majority -2) corporation or corporations are concerned.

a. If one of the 2 is a self dealing director Stockholdings exceeding twenty percent (20 %) of the
Legal Effect : Contract is Voidable outstanding capital stock shall be considered substantial for the
purposes of interlocking.

3 |Contract should be fair and reasonable INTERLOCKING DIRECTOR
(Self -explanatory )
There is an interlocking director when you have two corporations
If any of the three is missing : contracting with each other and there is a common director/
Effect: Contract is voidable directors.

REMEDY : Ratification by Stockholders GENERAL RULE:
a. representing at least (2/3) of the members in a meeting called for Contracts between corporations with interlocking directors is valid SO
the purpose LONG AS IT IS FAIR AND REASONABLE.
b. Provided, that full disclosure of the adverse interest of the INTERLOCKING DIRECTORS IS NOT A GROUND TO INVALIDATE A
directors or trustees involve dis made at such meeting CONTRACT. There is no prohibition at all to be an interlocking director.
c. Contract is fair and reasonable under the circumstance
EXCEPTION:
SUMMARY 1. IN CASES OF FRAUD.
If a director contracts with the corporation , the contract that has been
entered into is VOIDABLE unless the following requirements are 2. IF THE INTEREST OF THE INTERLOCKING DIRECTOR IS
complied: SUBSTANTIAL IN ONE, AND NOMINAL IN THE OTHER
CONTRACTING CORPORATION, IN WHICH CASE, THE
a. There should be a QUORUM but the presence of the director is not CORPORATION WHERE THE DIRECTOR HAS A NOMINAL
necessary to constitute a quorum INTEREST HAS TO COMPLY WITH THE REQUIREMENTS ON
b. The VOTE (approval ) of such director is not necessary for the SELF- DEALING (SEC. 31).
approval of the contract.
c. Contract is fair and reasonable under the circumstances. Important: A director is considered to have substantial interest in a
corporation when he has stockholdings exceeding 20% percent of the
Atty: If 1 of this three or even if all is not complied with the contract is outstanding capital stock.
NOT VOID. There is still a quorum if his presence is required to
constitute a quorum , there is still a valid approval if his vote was EFFECT OF EXCEPTION
necessary for the approval. But that contract itself is voidable for being When this happens, the contract is voidable, unless:
a self dealing contract. But even if the contract is voidable it could still 1. The presence of such interlocking director is not necessary to
be ratified. (see above discussion on ratification) constitute a quorum.
2. The vote of such interlocking director is not necessary to approve a
Note: contract.
1. Contract entered into by the corporation is still considered as “self - 3. When contract is fair and reasonable under the circumstances
dealing “ if entered into with the spouses and relatives within the given.
fourth civil degree of consanguinity or affinity of the directors, trustees
, or officers REMOVAL OF DIRECTORS OR TRUSTEES
.
Section 27. Removal of directors or trustees. – any director or

trustee of a corporation may be removed from office by a vote of
CORPORATION VESTED WITH PUBLIC INTEREST
the stockholders holding or representing at least two-thirds (2/3)
● Material Contracts - they are approved by at least two- third ( of the outstanding capital stock, or if the corporation in a non-stock
2/3) of the ENTIRE MEMBERSHIP of the board, with at least a corporation, by a vote of at least two-thirds (2/3) of the members
majority of the independent directors voting to approve the entitled to vote: provided, that such removal shall take place either
material contract at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to
Atty: not just of the directors present but of the Entire stockholders or members of the corporation of the intention to
Membership propose such removal at the meeting. A special meeting of the
stockholders or members for the purpose of removing any director
INTERLOCKING DIRECTORS or trustee must be called by the secretary on order of the president,
Sec. 32 . Contracts Between Corporations with Interlocking or upon written demand of the stockholders representing or
Directors . - Except in cases of fraud , and provided the contract is holding at least a majority of the outstanding capital stock, a
fair and reasonable under the circumstances , a contract between majority of the members entitled to vote.
two (2) or more corporations having interlocking directors shall
not be invalidated on that ground alone: Provided , that if the If there is no secretary, or if the secretary, despite demand, fails or
interest of the interlocking director in one (1) corporation is refuses to call the special meeting or to give notice thereof, the
substantial and the interest in the other corporation or stockholder or member of the corporation signing the demand may
corporations is merely nominal , the contract shall be subject to call for the meeting by directly addressing the stockholders or
members. Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by Ruling:
publication or by written notice prescribed in this code. Removal The SC said that the relationship of the directors and the stockholder
may be with or without cause: provided, that removal without is a Fiduciary Relationship. Such that the stockholder being the
cause may not be used to deprive minority stockholders or proprietor of the corporate interest and the beneficiary of the
members of the right of representation to which they may be corporate interest should have the power to console the directors,
entitled under section 23 of this code. such that if the directors fail to perform their duty, then
the director has the right under the law, under the by-laws of the
The commission shall, motu propio or upon verified complaint, and corporation to remove and replace the erring director. So SC said, of
after due notice and hearing, order the removal of a director or course, the stockholders of a corporation has the right to remove the
trustee elected despite the disqualification, or whose directors because of the fiduciary relationship between the
disqualification arose or is discovered subsequent to an election. corporation, the stockholders and the directors. In the case, there is
The removal of a disqualified directed shall be without prejudice to a problem because the special stockholders meeting was not called
other sanctions that the commission may impose on the board of by the corporate secretary upon order of the president. The
directors or trustees who, with knowledge of the disqualification, corporate secretary and the president would not call because they
failed to remove such director or trustee were part of the ruling group, so it was not called by the secretary, it
was not even called by the members but rather it was called by the
Who may remove oversight committee. The by-laws of the Makati Sports Club says that
it is the president or the board of directors who can call for a special
• Stock corporation: vote of the stockholders holding or meeting. So it did not comply with the
representing at least two-thirds (2/3) of the outstanding procedure.
capital stock
• Non-stock corporation: vote of at least two-thirds (2/3) of So according to the SC that even if you have the right to remove the
the members entitled to vote directors you have to follow the procedure. Sec 28 says, it is the
corporate secretary or upon written demand of a stockholder.
How removal is done And even the by-laws says it is the president and board of directors.
SC said that nowhere in the corporation code or in the bylaws of the

Makati Sports Club that the oversight committee is authorized to set
• By the stockholders through a regular or special meeting
in whenever there is a breach of fiduciary duty and call for special
o If in a special meeting, the special meeting shall be for the
election for the purpose of removing the existing set of officers and
purpose of removing the director.
electing their replacement. The oversight committee did not have
o Must be called by the secretary on order of the president,
the power to call. Thus, the special stockholders meeting is void.
or upon written demand of the stockholders
Even if that special meeting was later on ratified during the annual
representing or holding at least a majority of the
stockholders meeting. “SC said, if the act is invalid it cannot be
outstanding capital stock, a majority of the members
ratified.” You have to distinguish an act which is illegal because it is
entitled to vote.
against the law and an act which is beyond the authority of the
o If there is no secretary, or if the secretary, despite
officers. SC said that the act is against the law, it cannot be ratified.
demand, fails or refuses to call the special meeting or to
The law is very specific, in order to remove a director you have to
give notice thereof, the stockholder or member of the
comply with the requirements of the corporation code or the bylaws.
corporation signing the demand may call for the meeting
There was also an issue that it’s impossible for the president to call
by directly addressing the stockholders or members.
for the meeting because he’s the person that’s supposed to be
o Notice of the time and place of such meeting, as well as
removed. SC said, it doesn’t matter because you are left recourse
of the intention to propose such removal, must be given
with the court. If the officers mentioned in the bylaws fails to call
by publication or by written notice prescribed in this code
such meeting you can
• By SEC
go to SEC.
o upon verified complaint, and after due notice and

hearing, order the removal of a director or trustee
Take note: An improper Board Meeting is a void meeting and if the
elected despite the disqualification, or whose
person calling the meeting is not the person authorized to do so, that
disqualification arose or is discovered subsequent to an
is a ground for voiding the meeting and any resolutions passed during
election
that meeting.

BERNAS V. CINCO, GR NO. 163356-57 JULY 1, 2015
HOW VACANCIES IN THE BOARD FILLED
Facts:

1. BY THE BOARD MEMBERS: If the reason for the vacancy is
The case is about Makati Sports Club where in this case, there is a
other than the removal or expiration of the term or
certain group that had been managing the sports club. And then
amendment of the Articles of Incorporation increasing the
there were rumor that the group was mismanaging and certain funds
numbers of the Directors, provided they still constitute a
were missing. The oversight committee which is made up of
quorum.
previous/past presidents of the organization, called for a special

meeting to remove the directors. And they were able to call that
2. BY THE STOCKHOLDERS: If the reason for the vacancy is the
meeting and they had that meeting and they were able to remove
expiration of the term or the removal by the stockholders, or
and replace the ruling group. So now a case was brought by the
vacancy due to the amendment of the Articles of
removed directors saying that the oversight committee had no right
Incorporation or if the Board Members does not constitute a
to remove them as director.
quorum.
a corporation expressly provides that an office shall become vacant
Take note: the stockholders always has the inherent right to fill in the at the expiration of the term of office for which the officer was
vacancies. Regardless of the reason. elected, the general rule is to allow the officer to hold over until his
VALLE VERDE CASE successor is duly qualified. Mere failure of a corporation to elect
Legal question on corporate governance: Can the members of a officers does not terminate the terms of existing officers.
corporation’s board of directors elect another director to fill in a
vacancy caused by the resignation of a hold-over director? RULING:
Unmeritorious.
FACT:
In 1996, during the Annual Stockholders Meeting of petitioner Valle The resolution of this legal issue is significantly hinged on the
Verde Country Club, Inc. (VVCC), an election was conducted (9 determination of what constitutes a directors term of office.
directors were elected). In the years 1997, 1998, 1999, 2000, and
2001, however, the requisite quorum for the holding of the The holdover period is not part of the term of office of a member of
stockholders meeting could not be obtained. Consequently, the the board of directors.
directors elected in 1996 continued to serve in the VVCC Board in a
hold-over capacity. Definite meaning of TERM (based on jurisprudence)
- time during which the officer may claim to hold the office as of right,
In 1998, Dinglasan resigned from his position as member of the and fixes the interval after which the several incumbents shall
VVCC Board. In a meeting after, the remaining directors, still succeed one another
constituting a quorum of VVCCs nine-member board, elected Roxas - not affected by the holdover
to fill in the vacancy. - fixed by statute and not change simply because the office may have
become vacant, nor because the incumbent holds over in office
A year later, Makalintal also resigned as member of the VVCC Board beyond the end of the term due to the fact that a successor has not
and was replaced by Ramirez, who was elected by the remaining been elected and has failed to qualify
members of the VVCC Board in 2001.
Term vs Tenure
Respondent Africa, a member of VVCC, questioned the election of Officer’s tenure represents the term during which the incumbent
Roxas and Ramirez with SEC and RTC, respectively. [SEC – Roxas; RTC actually holds office. The tenure may be shorter (or, in case of
– Ramirez] holdover, longer) than the term for reasons within or beyond the
power of the incumbent.
In his nullification complaint before the RTC, Africa alleged that the
election of Roxas was contrary to Section 29, in relation to Section Based on the above discussion, when Section 23 of the Corporation
23, of the Corporation Code of the Philippines (Corporation Code). Code declares that the board of directors shall hold office for one (1)
These provisions read: year until their successors are elected and qualified, we construe the
provision to mean that the term of the members of the board of
Africa claimed that a year after Makalintal’s election, his term as well directors shall be only for one year; their term expires one year after
as those of the others should be considered to have already expired. election to the office. The holdover period that time from the lapse
Thus, the resulting vacancy should have been filled by the of one year from a member’s election to the Board and until his
stockholders in a regular or special meeting called for that purpose. successor’s election and qualification is not part of the director’s
original term of office, nor is it a new term; the holdover period,
Africa additionally contends that for the members to exercise the however, constitutes part of his tenure. Corollary, when an
authority to fill in vacancies in the board of directors, Section 29 incumbent member of the board of directors continues to serve in a
requires, among others, that there should be an unexpired term holdover capacity, it implies that the office has a fixed term, which
during which the successor-member shall serve. Here, there is no has expired, and the incumbent is holding the succeeding term.
more unexpired term during which Ramirez could serve.
After the lapse of one year from his election as member of the VVCC
ISSUE: Board in 1996, Makalintal’s term of office is deemed to have already
Whether the remaining directors of the corporation’s Board, still expired. That he continued to serve in the VVCC Board in a holdover
constituting a quorum, can elect another director to fill in a vacancy capacity cannot be considered as extending his term. His resignation
caused by the resignation of a hold-over director. as a holdover director did not change the nature of the vacancy; the
Contention of VVCC: vacancy due to the expiration of Makalintal’s term had been created
The power to fill in a vacancy created by the resignation of a hold- long before his resignation.
over director is expressly granted to the remaining members of the
corporation’s board of directors under Section 29 of the Corporation The powers of the corporation’s board of directors emanate from its
Code. Correlating Section 29 with Section 23 of the same law, VVCC stockholders. VVCCs construction of Section 29 in relation to Section
alleges that a member’s term expires only when his successor to the 23 thereof, effectively weakens the stockholders power to
Board is elected and qualified. Thus, until such time as [a successor participate in the corporate governance by electing their
is] elected or qualified in an annual election where a quorum is representatives to the board of directors. The board of directors, in
present, VVCC contends that the term of [a member] of the board of drawing to themselves the powers of the corporation, occupies a
directors has yet not expired. position of trusteeship in relation to the stockholders, in the sense
that the board should exercise not only care and diligence, but
Upon failure of a quorum at any annual meeting the directorate utmost good faith in the management of corporate affairs.
naturally holds over and continues to function until another
directorate is chosen and qualified. Unless the law or the charter of
The underlying policy of the Corporation Code is that the business especially if you have a lot of stockholders. It will be difficult to get
and affairs of a corporation must be governed by a board of directors quorum, and it’s also the directors who manage the corporation. So, if
whose members have stood for election, and who have actually been the board of directors cannot act, because they’re missing a member,
elected by the stockholders, on an annual basis. The shareholder then that is not good for the corporation.
vote is critical to the theory that legitimizes the exercise of power by So, the law allows the directors to fill in a vacancy. But only in certain
the directors or officers over properties that they do not own. instances. But, if the stockholders really insist on holding a meeting to
fill in the vacancy, then that is their prerogative. Because the power of
The law has authorized the remaining members of the board to fill in the board, as mentioned in the valle verde case to fill in the vacancy is
a vacancy only in specified instances, so as not to retard or impair the merely a delegated power coming from the stockholders. IT’S
corporations operations; yet, in recognition of the stockholders right INHERENT IN THE STOCKHOLDERS TO FILL IN OR ELECT MEMBERS OF
to elect the members of the board, it limited the period during which THE BOARD.
the successor shall serve only to the unexpired term of his
predecessor in office. TITLE IV- POWERS OF CORPORATIONS
CORPORATE POWERS
While the Court in El Hogar (case cited by VVCC) approved of the Section 35. Corporate Powers and Capacity – Every corporation
practice of the directors to fill vacancies in the directorate, we point incorporated under this Code has the power and capacity.
out that this ruling was made before the present Corporation Code a) To sue and be sued in its corporate name;
was enacted and before its Section 29 limited the instances when the b) To have perpetual existence unless the certificate of
remaining directors can fill in vacancies in the board. incorporation provides otherwise;
c) To adopt and use a corporate seal;
As correctly pointed out by the RTC, when remaining members of the d) To amend its articles of incorporation in accordance with the
VVCC Board elected Ramirez to replace Makalintal, there was no provisions of this Code;
more unexpired term to speak of, as the term had already expired. e) To adopt by laws, not contrary to law, morals or public policy
Pursuant to law, the authority to fill in the vacancy lies with the , and to amend or repeal the same in accordance with this
VVCCs stockholders, not the remaining members of its board of Code;
directors. f) In case of stock corporations , to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with the
SEC. 28. VACANCIES IN THE OFFICE OF THE DIRECTOR OR TRUSTEE; provisions of this Code; and to admit members to the
EMERGENCY BOARD. corporation if it be a non-stock corporation;
X X X X g) To purchase , receive, take or grant , hold, convey , sell, lease,
X X X X pledge, mortgage, and otherwise deal with such real and
personal property, including securities and bonds of other
HOWEVER, WHEN THE VACANCY PREVENTS THE REMAINING corporations, as the transaction of the lawful business of the
DIRECTORS FROM CONSTITUTING A QUORUM AND EMERGENCY corporation may reasonably and necessarily require , subject
ACTION IS REQUIRED TO PREVENT GRAVE, SUBSTANTIAL, AND to the limitations prescribed by law and the Constitution;
IRREPARABLE LOSS OR DAMAGE TO THE CORPORATION, THE h) To enter into a partnership , joint venture , merger,
VACANCY MAY BE TEMPORARILY FILLED FROM AMONG THE consolidation , or any other commercial agreement with
OFFICERS OF THE CORPORATION BY UNANIMOUS VOTE OF THE natural and juridical persons;
REMAINING DIRECTORS OR TRUSTEES. THE ACTION BY THE i) To make reasonable donations, including those for the public
DESIGNATED DIRECTOR OR TRUSTEE SHALL BE LIMITED TO THE welfare or for hospital , charitable cultural , scientific , civic ,
EMERGENCY ACTION NECESSARY, AND THE TERM SHALL CEASE or similar purposes: Provided, That no foreign corporation
WITHIN A REASONABLE TIME FROM THE TERMINATION OF THE shall give donations in aid of any political party or candidate
EMERGENCY OR UPON ELECTION OF THE REPLACEMENT DIRECTOR or for purposes of partisan political activity;
OR TRUSTEE, WHICHEVER COMES EARLIER. THE CORPORATION j) To establish pension, retirement and other plans for the
MUST NOTIFY THE COMMISSION WITHIN THREE (3) DAYS FROM benefit of its directors, trustees, officers, and employees; and
THE CREATION OF THE EMERGENCY BOARD, STATING THEREIN THE k) To exercise such other powers as may be essential or
REASON FOR ITS CREATION. (New provision; POWER TO necessary to carry out its purpose or purposes as stated in the
CONSTITUTE AN EMERGENCY BOARD) articles of incorporation.
Kinds of Powers:
Atty: If there is an emergency situation, in order to prevent, grave, 1. Express Powers
substantial, and irreparable loss or damage to the corporation, the - This refers to the power expressly conferred upon the
vacancy may be temporarily filled from among the officers of the corporation by law. These powers can be ascertained from
corporation. Temporary only. After the emergency the Stockholders the special law creating the corporation, or from the general
would have to fill-in the vacancy because the board does not form a incorporation law under which it is created, the general laws
quorum anymore. of the land applicable to corporations (i.e., Corporation
Code), and its articles of incorporation.
Take note: for emergency situations, the board, even if they do not
constitute a quorum may temporarily fill-in the vacancy from the Atty: Ordinarily the express powers is provided under the Primary
officers of the corporation. Purpose in the Articles of Incorporation, in the primary purpose it does
not enumerate section 35. If you think about it, sec. 35 are incidental
Rationale powers they exist by virtue of the juridical personality of the
The reason why the law allows the directors to fill-in the vacancies is corporation.
for convenience because it’s very hard to call a stockholders’ meeting
To be strict about it, express powers will only exist if they are expressly
provided in the primary purpose in the Articles of Incorporation. Implied Power vs Incidental Power

2. Implied Powers IMPLIED POWER
Those which exist by virtue of the Express powers of the Corporation.
- Those powers which are reasonably necessary to exercise They need not be expressly provided in the articles but because of the
the express powers and to accomplish or carry out the express provisions provided in the articles they can exist. They are
purposes for which the corporation was formed. necessary for the exercise for the Express powers.

Atty: The implied power of the corporation is one which is related or INCIDENTAL POWER
exist by virtue of the express power even if it is not expressly provided. Powers given to a Corporation as a result or consequence of being a
They need not be expressly provided in the Articles of Incorporation Juridical Entity.
but they exist by virtue of the express powers.
TERESITA ELECTRIC AND POWER VS. PUBLIC SERVICE COMMISSION
EXAMPLES: AND FILIPINAS CEMENT CORP
a. Acts in the usual course of business FACTS:
b. Acts to protect debts owing to a corporation
c. Embarking in different business The Teresa Electric Light and Power Co., Inc., — hereinafter referred
d. Acts in part or wholly to protect or aid employees to as PETITIONER — is a domestic corporation operating an electric
e. Acts to increase business plant in Teresa, Rizal, under a subsisting certificate of public
convenience and necessity issued on June 2, 1960 (PSC Case No.
3. Incidental Powers 129940), while the RESPONDENT Filipinas is likewise a domestic
- Powers which a corporation can exercise by the mere fact of corporation engaged in the manufacture and sale of cement (who
it being a Corporation; or applied for a certificate of public convenience to install, maintain and
- This refers to powers which are necessary to the corporate operate an electric plan for its factory and employees living within its
existence and are, therefore, impliedly granted. As powers compound).
inherent in the corporation as a legal entity, they exist
independently of the express powers. On May 24, 1962 Filipinas filed an application with the Public Service
Commission for a certificate of public convenience to install,
Atty: These are the powers which are there by virtue of your being a maintain and operate an electric plant in sitio Kaysapon of barrio
corporation, so your ability to sue and be sued, your ability to buy and Pamanaan, municipality of Teresa, Rizal, for the purpose of supplying
sell properties, everything that is enumerated under Sec. 35 basically. electric power and light to its cement factory and its employees living
Regardless of the purpose, incidental powers exists. within its compound.

Side Note: Petitioner filed its written opposition alleging: that it is the duly
- There was a problem before on the secondary purpose authorized operator of an electric light, heat and power service in
because people just enumerated the secondary purpose and Teresa, Rizal; that Filipinas is not authorized by its articles of
among the secondary purpose the subparagraph (g) is to sell incorporation to operate an electric plant; that the Municipal Council
or lease property. A few years back, BIR came up a rule that of Teresa had not authorized it either to operate the proposed
they have been strictly enforcing, if it is ordinary asset- VAT service; that it is willing to supply Filipinas' need for electricity; and
AND INCOME TAX, if it is capital asset – then its CAPITAL that Filipinas' principal business does not come within the
GAINS. Ordinarily, you can say that it is an ordinary asset of jurisdiction of the respondent Commission.
the corporation if it is related to its express powers in its
primary purpose; real estate is an ordinary asset if the Answering the opposition, Filipinas averred that, under paragraph 7
corporation is engaged in real estate business. What if the of its articles of incorporation, it is authorized to operate the
corporation is engaged in retail, selling land ordinarily is proposed electric plant; that there is no need for securing the
considered a capital asset unless it is used for business. The approval of the Municipal Council before operating its electric plant
problem with the BIR is that, if they see it in your secondary as this is not a necessary requisite for the issuance of a certificate of
purpose, “to purchase, receive, take or grant real and public convenience inasmuch as it already possesses the 3 basic
personal property” they consider that you are a real estate requirements of law, namely: Filipino citizenship, financial capacity
company. So there is disconnect between SEC and BIR. and the need for the service in the interest and convenience of the
Corporations who copied the incidental powers in their consuming public.
secondary purpose, if they sell land even if it is not used as
capital asset they were assessed VAT plus the 30% tax as Upon consideration of the evidence, oral and documentary, adduced
against the 6% capital gains tax. by Filipinas to the effect that the proposed electric service will be
limited to the exclusive needs of its cement factory and to give light
EXAMPLES: facilities to its employees living in the compound only, without
a. Power of succession adversely affecting the interests and services of petitioner; that like
b. To sue and be sued the latter, Filipinas will not generate its own electric current but buy
c. To have a corporate name it from the MERALCO; and that no municipal streets will be traversed
d. To purchase and hold real property by its electric wires and posts except small portions of private
e. To adopt and use a corporate seal properties, the Commission, pursuant to section 15 of
f. To contract, to make by-laws, etc. Commonwealth Act. 146, as amended, issued a certificate of public
convenience to it on March 15, 1963, subject to the conditions set the business of manufacturing portland cement or arising therefrom
forth therein. or incidental thereto.
ISSUES:
It cannot be denied that the operation of an electric light, heat and
1. whether or not Filipinas should have secured either a municipal power plant is necessarily connected with the business of
or legislative franchise before it could be entitled to a certificate manufacturing cement. If in the modern world where we live today
of public convenience and necessity to operate and maintain an electricity is virtually a necessity for our daily needs, it is more so in
electric plant the case of industries like the manufacture of cement.
2. whether under its articles of incorporation Filipinas is
authorized to operate and maintain an electric plant 3. No. Nobody has any exclusive right to secure a franchise or a
3. whether Filipinas could be granted a certificate of public certificate of public convenience. Just because there is an existing
convenience and necessity to operate and maintain an electric grantee does not preclude the grant to another, but such grant must
plant notwithstanding the existence of an electric plant be guided by public service and interest.
operator (the petitioner) in the same municipality. While it is true that operators of public convenience and service
RULING: deserve some protection from unnecessary or unlawful competition,
yet the rule is that nobody has any exclusive right to secure a
1. No. The purpose is not for business but for exclusive use for its franchise or a certificate of public convenience. Above any or all
own factory and employees. Petitioner contends that under the considerations, the grant of franchises and certificates of public
provisions of Act. No. 667 of the Philippine Commission, a municipal convenience and service should be guided by public service and
or legislative franchise is a condition precedent to the granting to interest; the latter are the primordial considerations to be taken into
Filipinas of a certificate of public convenience and necessity to account.
operate and maintain an electric plant.
Moreover, it has been established in this case that petitioner was in
Section 1 of the Act mentioned above requires the filing of a formal no condition to supply the power needs of Filipinas, because its load
application with the Council of the municipality in which or through capacity was only 200 kilowatts while Filipinas was in need of 6,000
which the petitioner desires to construct or maintain its line, stating, kilowatts power to operate its cement factory.
among other things, the rate per month to be charged for electric
light by lamp of specified standard candle-power, and by amount of DISCUSSION
electricity consumed where a meter is used, and the rate per centum It must be emphasized that Filipinas needed 6,000 kilowatts power in
order to operate, while the load capacity of petitioner was only 2000
of the gross receipts which petitioner is willing to pay into the
kilowatts. It can be said therefore that petitioner was in no condition
provincial treasury for the franchise. Paragraphs 2 and 3, section 2 of
to supply the power needs of Filipinas.
the same act also provide that not less than one-half of one per

centum of the gross earnings shall be paid into the provincial
treasury, and that the rates to be charged shall always be subject to If Filipinas will not put up its own electric power it cannot continue its
operation. Thus, although the putting up of a power plant is not
regulations by act of the Philippine Commission or the legislative
body of the Islands. expressly provided in their purpose in the Articles of Incorporation, it
nevertheless provided for the authority to secure from any
governmental, state municipality, or provincial, city, or other authority,
The above requirements show that the act was intended to apply
exclusively to any person or corporation who desires a franchise to and to utilize and dispose of in any lawful manner rights, powers, and
privileges, franchises, and concessions obviously necessary or at least
construct and maintain an electric line or power plant and line for
business purposes, that is, to render service to the general public at related to the operation of the cement factory.
such rate of compensation as may be approved and regulated by the
government. Clearly, therefore, it should not be made to apply to REPUBLIC VS ACOJE MINING COMPANY
FACTS:
Filipinas who applied for a certificate of public convenience and
service to operate and maintain an electric plant exclusively for its
own use in connection with the operation of its cement factory and Acoje Mining Company has a lot of employees. In order to provide
for the use of its employees living within the compound of the factory more convenience to its employees, the company wrote the Director
— the latter to receive service free of charge. of Posts requesting the opening of a post, telegraph and money order
offices at its mining camp at Zamables for the use of its employees
and their families in said camp. The Director of Posts said yes but with
It is, consequently, our view that all that Filipinas needs for the
purpose above mentioned is a certificate of public convenience and a condition. The Director conditioned that the company should
assume direct responsibility for whatever pecuniary loss may be
necessity such as the one granted to it by the respondent Public
Service Commission. suffered by the Bureau of Posts by reason of any act of dishonesty,
2. Yes. It is necessarily connected with the business of manufacturing carelessness or negligence on the part of the employee of Acoje who
is assigned to take charge of the post. The BOD of Acoje passed a
cement. It appears that the Articles of Incorporation of Filipinas
(paragraph 7) provide for authority to secure from any resolution stating that: “That the requirement of the Bureau of Posts
governmental, state, municipality, or provincial, city or other that the company should accept full responsibility for all cash
authority, and to utilize and dispose of in any lawful manner, rights, received by the Postmaster be complied with, and that a copy of this
powers, and privileges, franchises and concessions — obviously resolution be forwarded to the Bureau of Posts.”
necessary or at least related to the operation of its cement factory.
Moreover, said Articles of Incorporation also provide that the Post Office branch was opened in October 13, 1949. However, after
corporation may generally perform any and all acts connected with 5 years, the postmaster, an employee of Acoje, went on a 3-day leave
and never returned. Acoje informed the Manila Post Office and upon
auditing, it was found that P13,867.24 was missing.
There are powers, although not expressly provided in the Articles of

The post office demanded payment and filed a suit with the CFI of Incorporation or even under the law, as long as it is necessary for your
Manila for the amount but Acoje denied liability alleging that the operations to promote the welfare of corporation or employees it is
BOD’s act in assigning a postmaster was ultra vires; also, the still considered as part of the scope of the Corporate Powers.
company alleged that their liability was merely that of a guarantor.
TO SUE AND BE SUED IN ITS CORPORATE NAME
CFI: Ruled in favor of the Post Office but only to the amount of
P9,515.23 (since they could only present evidence for such amount) As a Juridical entity the corporation can directly pursue all actions to
enforce its rights. It does not have to go through its stockholders. At
Acoje appealed to SC. the same time the corporation can directly be held liable for its
ISSUES: obligations. The creditor does not have to go through the stockholders.

1. Whether or not the acts of the BOD was ultra vires POWER TO ISSUE OR SELL STOCKS
2. Whether or not its liability is merely that of a guarantor
RULING: SECTION 35 (F)
f) In case of stock corporations , to issue or sell stocks to
1. No. The act covers a subject which concerns the benefit, subscribers and to sell treasury stocks in accordance with the
convenience, and welfare of the company’s employees and their provisions of this Code; and to admit members to the
families. An ultra vires act is one committed outside the object for corporation if it be a non-stock corporation;
which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by DISTINGUISHED FROM SECTION 37:
law. However, there are certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if SECTION 35 (f) – SECTION 37 –
they are necessary to promote the interests or welfare of the Power to issue or Power to Increase or
corporation. Establishment of the local post office is a reasonable sell stocks to Decrease Capital Stocks
and proper adjunct to the conduct of the business. subscribers and to
sell treasury stocks
Moreover, an ultra vires act is merely voidable, in contrast to illegal in accordance with
acts which are void. It may be enforced by performance, ratification the provisions of
or estoppel. Here it is fair that the resolution be upheld at least on this Code
the ground of estoppel since the company at least benefited from Coverage Sale of unissued but Increase of authorized
the transaction. authorized stock; capital stock
Includes sale of
The claim that the resolution adopted by the board of directors of treasury stocks;
appellant company is an ultra vires act cannot also be entertained it Approval Majority of the Majority vote of the
appearing that the same covers a subject which concerns the benefit, requirement board of directors board of directors in a
convenience and welfare of its employees and their families. Here it in a meeting meeting where there is a
is undisputed that the establishment of the local post office is a constituting a quorum and by two-
reasonable and proper adjunct to the conduct of the business of quorum thirds (2/3) of the
appellant company. outstanding capital stock
at a stockholders’
2. No. A mere reading of the resolution of the Board of Directors meeting duly called for
dated August 31, 1949, upon which the plaintiff based its claim would the purpose
show that the responsibility of the defendant company is not just Effect No change in There is a change in
that of a guarantor. Notice that the phraseology and the terms authorized capital Authorized capital stock,
employed are so clear and sweeping and that the defendant stock, but only and a change in the
assumed 'full responsibility for all cash received by the Postmaster.' change in the subscribed and issued.
Here the responsibility of the defendant is not just that of a subscribed and
guarantor. It is clearly that of a principal. The terms employed in the issued stock.
resolution are clear and sweeping. Acoje assumed “full responsibility
for all cash received by the Postmaster”. Its liability is that of a Amendment Only General Articles of Incorporation
principal. Information Sheet and General Information
(GIS) Sheet (GIS)
Minimum No minimum At least twenty-five
DISCUSSION subscription subscription percent (25%) of the
The power to put up a post office was not expressly granted by the required increase in capital stock
Articles of Incorporation of Acoje Mining Company or under the has been subscribed and
Corporation Code, the Supreme Court granted it because it was that at least twenty-five
necessary to promote the interest or welfare of the Corporation. percent (25%) of the
According to SC, It was part of the implied power of the Corporation amount subscribed has
based on the nature of the operations of the company as a mining been paid. This must be
industry - go back to the primary purpose of the Corporation. supported by a
Treasurer’s Affidavit.
Reporting Required under SECTION 35 (G)

requirement Securities and a) To purchase , receive, take or grant , hold, convey , sell, lease,
Regulation Code pledge, mortgage, and otherwise deal with such real and
(SRC) and not in personal property, including securities and bonds of other
Corporation Code. corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require , subject
SEC Form 10-1 to the limitations prescribed by law and the Constitution;
basically a form to
show that the
increase or that the DISTINGUISHED FROM SECTION 39:
new issuance is not
covered by the SECTION 35 (g)– SECTION 39 –
registration To purchase, Sale and other
requirement under receive, take or disposition of assets
the SRC. grant , hold,
Effectivity No prior approval Deemed effective upon convey, sell, lease,
from the SEC is approval of the SEC of pledge, mortgage,
needed the application and upon and otherwise deal
the issuance of SEC of with such real and
the certificate of filing. personal property
Object Sale of any asset of Sale or disposition of all
ILLUSTRATION: SECTION 35 (F) the corporation, as or substantially all of the
Authorized capital stock: 1,000,000 long as it is not all, assets
Subscribed Issued shares: 500,000 or substantially all
Unissued but authorized shares: 500,000 of the assets
Approval Majority of the Majority of the board of
If the corporation decides to sell the 500,000 unissued but authorized requirement board of directors the directors in a
shares, what is required is only the approval of the majority of the in a meeting quorum and at least
board of directors in a meeting constituting a quorum. In this case, constituting a two-thirds (2/3) of the
apply Sec. 35 (f) quorum outstanding capital stock
(both voting and non-
After the sale of the unissued 500,000 shares, the authorized capital voting)
stock will remain at 1,000,000. Your subscribed and issued, on the
other hand, will now be 1,000,000 instead of 500,000. NOTE:
- If the primary purpose of the corporation is to sell assets,
ILLUSTRATION: SECTION 37 there is no need for approval by the board. Any authorized
Authorized capital stock: 1,000,000 officer or employee can transact as long as it is in the
Subscribed Issued shares: 1,000,000 ordinary course of business.
- If it is not in the ordinary course of business of the
If the corporation decides to increase the authorized capital stock from corporation and it is a sale of not all or substantially all of the
1 million to 2 million, then such increase would need the approval of a assets, then you only need a board approval - majority vote
majority vote of the board of directors where there is a quorum and by of the directors in a meeting where there is a quorum.
two-thirds (2/3) of the outstanding capital stock.
POWER TO EXTEND OR SHORTEN CORPORATE TERM
In this case, apply sec. 37. In the end, after it has been approved by the Section 36. Power to extend or shorten corporate term. – A private
SEC, the Authorized capital stock will now be at 2 million. The corporation may extend or shorten its term as stated in the articles
subscribed issued shares should be at least 1,250,000 because of the of incorporation when approved by a majority vote of the board of
requirement under sec. 37 that at least twenty-five percent (25%) of directors or trustees, and ratified at a meeting by the stockholders or
the increase in capital stock has been subscribed and that at least members representing at least two-thirds (2/3) of the outstanding
twenty-five percent (25%) of the amount subscribed has been paid. capital stock or of its members. Written notice of the proposed action
and the time and place of the meeting shall be sent to stockholders
In the amended code, there is no need of the 25% requirement in order or members at their respective place of residence as shown in the
to incorporate. But to increase the authorized capital stock there is the books of the corporation, and must be deposited to the addressee in
requirement that at least twenty-five percent (25%) of the increase in the post office with postage prepaid, served personally, or when
capital stock has been subscribed and that at least twenty-five percent allowed in the bylaws or done with the consent of the stockholder,
(25%) of the amount subscribed has been paid. sent electronically in accordance with the rules and regulations of the
Commission on the use of electronic data messages. In case of
Note: the two-thirds (2/3) stockholder approval requirement includes extension of corporate term, a dissenting stockholder may exercise
both stocks – voting or non-voting the right of appraisal under the conditions provided in this Code.

Requirements to extend or shorten corporate term:
POWER TO PURCHASE, RECEIVE, TAKE OR GRANT, HOLD. CONVEY,
1. Voting
SELL, LEASE, PLEDGE, MORTGAGE REAL AND PERSONAL PROPERTIES

• majority vote of the board of directors or trustees (f) The vote authorizing the increase or decrease of the capital
constituting a quorum stock, or the incurring, creating or increasing of any bonded
• ratified at a meeting by the stockholders or members indebtedness.
representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of its Any increase or decrease in the capital stock or the incurring,
members. creating or increasing of any bonded indebtedness shall require
prior approval of the Commission, and where appropriate, of the
NOTE: they vote for the amendment of the Articles of Philippine Competition Commission. The application with the
Incorporation to extend or shorten the corporate term. Filing is Commission shall be made within six (6) months from the date of
not enough. It also requires the approval of the SEC. approval of the board of directors and stockholders, which period
may be extended for justifiable reasons.
2. Written Notice
• Notice of the proposed action and the time and place of Copies of the certificate shall be kept on file in the office of the
the meeting shall be sent to stockholders or members corporation and filed with the Commission and attached to the
at their respective place of residence as shown in the original articles of incorporation. After approval by the Commission
books of the corporation, and must be deposited to the and the issuance by the Commission of its certificate of filing, the
addressee in the post office with postage prepaid, capital stock shall be deemed increased or decreased and the
served personally ,or when allowed in the bylaws or incurring, creating or increasing of any bonded indebtedness
done with the consent of the stockholder, sent authorized, as the certificate of filing may declare: Provided, That
electronically in accordance with the rules and the Commission shall not accept for filing any certificate of increase
regulations of the Commission on the use of electronic of capital stock unless accompanied by a sworn statement of the
data messages. treasurer of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least twenty-five
3. Filing and Approval of the Securities and Exchange Commission is percent (25%) of the increase in capital stock has been subscribed
required and that at least twenty-five percent (25%) of the amount
• Mere filing of the amended Articles of Incorporation is subscribed has been paid in actual cash to the corporation or that
not enough it must be coupled with an approval by SEC. property, the valuation of which is equal to twenty-five percent
• The amendment shall take effect once the increase or (25%) of the subscription, has been transferred to the corporation:
decrease in the corporate term is approved by the SEC. Provided, further, That no decrease in capital stock shall be
approved by the Commission if its effect shall prejudice the rights
4. Dissenting Stockholder may exercise the right of appraisal of corporate creditors.

POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE Nonstock corporations may incur ,create or increase bonded
OR INCREASE BONDED INDEBTEDNESS indebtedness when approved by a majority of the board of trustees
and of at least two-thirds (2/3) of the members in a meeting duly
Section 37. Power to Increase or Decrease Capital Stock; Incur,
called for the purpose.
Create or Increase Bonded Indebtedness. - No corporation shall

increase or decrease its capital stock or incur, create or increase any
Bonds issued by a corporation shall be registered with the
bonded indebtedness unless approved by a majority vote of the
Commission, which shall have the authority to determine the
board of directors and by two-thirds (2/3) of the outstanding
sufficiency of the terms thereof.
capital stock at a stockholders’ meeting duly called for the purpose.

Written notice of the time and place of the stockholders’ meeting
and the purpose for said meeting must be sent to the stockholders Requirements to increase or decrease capital stock:
at their places of residence as shown in the books of the 1. Voting
corporation and served on the stockholders personally, or through • Majority vote of the Board of Directors in a meeting where
electronic means recognized in the corporation’s bylaws and/or there is a quorum; and
the Commission’s rules as a valid mode for service of notices. • Affirmative vote of the Stockholders owning 2/3 of the
outstanding capital stock at a meeting duly called for the
A certificate must be signed by a majority of the directors of the purpose
corporation and countersigned by the chairperson and secretary of
the stockholders’ meeting, setting forth: 2. Written Notice
• Notice for the Stockholder’s meeting served personally
(a) That the requirements of this section have been complied or through electronic means recognized by the by-laws
with; and/or rules of Securities and Exchange Commission
(b) The amount of the increase or decrease of the capital stock;
(c) and the amount paid by each on the subscription in cash or 3. Amendment of the Articles of Incorporation and General
property, or the amount of capital stock or number of shares Information Sheet
of no-par stock allotted to each stockholder if such increase is
for the purpose of making effective stock dividend therefor 4. Filing to the Securities and Exchange Commission is required
authorized; • Certificate signed by majority of the BOD and
(d) Any bonded indebtedness to be incurred, created or countersigned by the chairperson and secretary
increased; (contents refer to the section 37) which shall be filed
(e) The amount of stock represented at the meeting; and before the SEC.
• If it is an Increase in Capital Stock it further requires a 3. The corporation must secure the approval of the Securities and
Treasurer’s Affidavit which must show the following: Exchange Commission (SEC)
a) At least 25% of such increased capital stock • Unlike in the increase or decrease of capital stock, in
has been subscribed. bonded indebtedness amendment of the Articles of
b) At least 25% of the amount subscribed has Incorporation is not required but only requires an
been paid. approval from SEC. The reason is that the issuance of
• When appropriate filing before the Philippine bonds is governed by the Securities and Regulation
Competition Commission shall also be required. Code. Under the SRC, no security may be issued within
the Philippines unless it is first registered in the
NOTE: The required 25% subscription is based on additional amount Securities and Exchange Commission (SEC). A bond
by which the capital stock is increased and not on the total capital stock being a type of security is registrable under the SRC.
as increased.
Atty: You need to amend the articles of incorporation only when in the
ATTY: The law retains the 25/25 requirement in Section 37 for the first place it is provided there. Go back to the Contents of the Articles
increase of capital stock. Under the old law, the 25/25 requirement is of Incorporation it does not state that the amount of the liability of the
for incorporation but in the amended code that requirement has been corporation should be provided. It only requires the statement of the
taken out. However, the 25/25 requirement is retained for increase of capital of the corporation.
capital stock. For this purpose, when there is increase of Authorized
Capital Stock (ACS), you are required to submit Treasurer’s Affidavit. As SIDE NOTE:
distinguished from incorporation where this requirement is no longer
required. The securities under Commercial Law are different from the securities
that are governed under Civil Law.
5. Approval of the Securities and Exchange Commission; Effectivity
Commercial Law Civil Law
• The capital stock shall be deemed increased or
decreased, and the incurring, creating or increasing of Purpose security are issuances of security to ensure
any bonded indebtedness authorized shall be deemed the issuer payment of a debt
effective upon the approval and issuance by the SEC of Types 1. Equity security -i.e.
its certificate of filing. stocks
2. Debt security - i.e.
Increase in Subscription promissory notes, or
bonds
Refer back on the tabled distinction above between Section 35 (f) and
Section 37.
• There is no minimum requirement for subscription
• Only amend the General Information Sheet and not the POWER TO DENY PRE-EMPTIVE RIGHT
Articles of Incorporation. Section 38. Power to Deny Preemptive Right. – All stockholders of
a stock corporation shall enjoy preemptive right to subscribe to all
Atty: There is a reporting requirement in the increase of subscription issues or disposition of shares of any class, in proportion to their
that is not required in the increase of Authorized Capital Stock it is not respective shareholdings, unless such right is denied by the articles
found under the Corporation Code but it is found in the Security of incorporation or an amendment thereto: Provided, That such
Regulation. SEC Form 10-1 it is basically a form to show that the new preemptive right shall not extend to shares issued in compliance
issuance is not covered by the registration requirement under the with laws requiring stock offerings or minimum stock ownership by
Securities Regulation Code meaning it is among the exempt the public; or to shares issued in good faith with the approval of the
transactions or exempt securities under the SRC you need to file that stockholders representing two- thirds (2/3) of the outstanding
report in the SEC. It is not really for approval but it is just a notice and capital stock, in exchange for property needed for corporate
reportorial requirement. purposes or in payment of a previously contracted debt.

Increase in Bonded Indebtedness Pre-emptive right

Bonded indebtedness is an indebtedness that is evidenced by a bond. Rights given to all stockholders with regard to issuances or dispositions
It is a debt instrument that is long term in nature which is issued by a of shares. The rule is that stockholders enjoy preemptive right to all
corporation. issued shares in proportion to their respective shareholdings.

It is different from a promissory note. A promissory note is more of a Purpose of Preemptive Right
short or medium term and its normally issued to a particular person
(payee) which is not the case in a bond. To maintain the percentage of the stockholdings of the stockholders
and to prevent the dilution of their shares.
REQUIREMENTS FOR ITS ISSUANCE • The shareholder cannot insist on more than his
1. Majority vote of the Board of Directors in a meeting where there shareholdings but they can buy more if other
is a quorum; and shareholders waive their preemptive right, also in
2. Affirmative vote of the Stockholders owning 2/3 of the proportion to their shares.
outstanding capital stock at a meeting duly called for the purpose
• If the shares are diluted it has the effect of reducing the .

percentage of voting and the economic benefit of the Can A insist on more? A cannot.
share.
3. From the previous answer, can A buy more?
Rule on Pre-emptive rights • Yes. If the other shareholders do not exercise their pre-emptive
right, then the other existing shareholders can exercise their pre-
General rule: If the articles are silent, pre-emptive rights can be emptive right also in proportion to their current shareholdings.
exercised. For example, if C declines, the shares pertaining to C can now be
Exception: Pre-emptive right can be denied in the following instances: shared among A, B and D if they want.
1. When the right is expressly denied in the Articles of Incorporation
2. When shares are issued in compliance with laws requiring stock 4. What if the corporation want to issue to E? Meaning if A, B,
offerings or minimum stock ownership by the public; and C and D do not buy, what do they do? What do they do if they
3. When shares are issued in good faith with the approval of the want a fresh capital coming in?
stockholders representing two-thirds (2/3) of the outstanding • The corporation have to execute waiver of pre-emptive
capital stock, in exchange for property needed for corporate rights. If the current stockholders do not exercise their
purposes; or in payment of a previously contracted debt. pre-emptive rights, the SEC will require you to submit
proof thru a waiver of pre-emptive rights. It is one of the
Exception to the Exception: reportorial requirements to the SEC if you are increasing
If the directors acted in breach of trust and their primary purpose is to your subscribed capital.
perpetuate or shift control of the corporation, or to “freeze out” the
minority interest, the preemptive right may be exercised (Majority CLARIFICATORY QUESTION:
Stockholders of Ruby International v Lim) What if the issuance involves common shares, but what we have are
preferred shares?
ILLUSTRATION: • If they have the same characteristics of shares, you don’t have to
10,000 ACS look whether it is preferred or common. You take a look at how
100 par per share much is their total shareholdings. For example, the 5000 shares
5,000 already issued are common, and the 5000 additional issuance are preferred, but
There is a move to issue the remaining 5,000 shares all the same characteristics, it is still 20%, 20%, 40%, 20%. Same
characteristics, no need to distinguish.
Current Shareholdings:
A 1,000 MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION VS.
B 1,000 MIGUEL LIM, ET. AL.
C 2,000 FACTS: Ruby Industrial Corporation (RUBY) is a domestic corporation
D 1,000 engaged in glass manufacturing. Reeling from severe liquidity
Total subscribed: 5,000 problems beginning in 1980, RUBY filed on December 13, 1983 a
petition for suspension of payments with the Securities and
Exchange Commission (SEC).

Answer: On December 20, 1983, the SEC issued an order declaring RUBY
1. If A owns 1,000 shares, his pre-emptive right is 20% of the under suspension of payments and enjoining the disposition of its
newly issued 5,000 shares or 1,000 shares. properties pending hearing of the petition, except insofar as
necessary in its ordinary operations, and making payments outside
Equation: of the necessary or legitimate expenses of its business. On August 10,
1,000 shares 1984, the SEC Hearing Panel created the management committee
x 5,000 (to be issued shares) = 1,000
5,000 already issued (MANCOM) for RUBY, composed of representatives from Allied
shares
shares Leasing and Finance Corporation (ALFC), Philippine Bank of
Communications (PBCOM), China Banking Corporation (China Bank),
2. If the additional 5,000 shares are to be purchased by E, a new Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and RUBY
person coming into the corporation (a new stockholder), represented by Mr. Yu Kim Giang.
rules:
• If the Articles is silent, meaning it does not expressly The MANCOM was tasked to perform the following functions: (1)
prohibit and it does not expressly allow, as a general undertake the management of RUBY; (2) take custody and control
rule the stockholders can exercise their pre-emptive over all existing assets and liabilities of RUBY; (3) evaluate RUBYs
rights. As a rule, the existing shareholders must first be existing assets and liabilities, earnings and operations; (4) determine
given the opportunity to purchase the new shares to be the best way to salvage and protect the interest of its investors and
issued before selling it to third persons, it must first be creditors; and (5) study, review and evaluate the proposed
offered to stockholders in proportion to their rehabilitation plan for RUBY.
shareholdings, hence:
Subsequently, two (2) rehabilitation plans were submitted to the
A – 1,000 shares; 20% SEC: the BENHAR/RUBY Rehabilitation Plan of the majority
B – 1,000 shares; 20% stockholders led by Yu Kim Giang, and the Alternative Plan of the
C – 2,000 shares; 40% minority stockholders represented by Miguel Lim (Lim).
D – 1,000 shares; 20%
Plan 1 (BENHAR/RUBY): Benhar International, Inc. (BENHAR) — a Pre-emptive right under Sec. 39 of the Corporation Code refers to the
domestic corporation engaged in the importation and sale of vehicle right of a stockholder of a stock corporation to subscribe to all issues
spare parts which is wholly owned by the Yu family and headed by or disposition of shares of any class, in proportion to their respective
Henry Yu, who is also a director and majority stockholder of RUBY — shareholdings. The right may be restricted or denied under the
shall lend its P60 million credit line in China Bank to RUBY, payable articles of incorporation, and subject to certain exceptions and
within ten (10) years. Moreover, BENHAR shall purchase the credits limitations. The stockholder must be given a reasonable time within
of RUBY's creditors and mortgage RUBY's properties to obtain credit which to exercise their preemptive rights. Upon the expiration of said
facilities for RUBY. Upon approval of the rehabilitation plan, BENHAR period, any stockholder who has not exercised such right will be
shall control and manage RUBY's operations. For its service, BENHAR deemed to have waived it.
shall receive a management fee equivalent to 7.5% of RUBY's net
sales. The validity of issuance of additional shares may be questioned if
done in breach of trust by the controlling stockholders. Thus, even if
Plan 2 (Alternative/Minority): On the other hand, the Alternative the pre-emptive right does not exist, either because the issue comes
Plan of RUBY's minority stockholders proposed to: (1) pay all RUBY's within the exceptions in Section 39 or because it is denied or limited
creditors without securing any bank loan; (2) run and operate RUBY in the articles of incorporation, an issue of shares may still be
without charging management fees; (3) buy-out the majority shares objectionable if the directors acted in breach of trust and their
or sell their shares to the majority stockholders; (4) rehabilitate primary purpose is to perpetuate or shift control of the corporation,
RUBY's two plants; and (5) secure a loan at 25% interest, as against or to “freeze out” the minority interest.
the 28% interest charged in the loan under the BENHAR/RUBY Plan.

Both plans were endorsed by the SEC to the MANCOM for SALE OR OTHER DISPOSITION OF ASSETS
evaluation. In 1988, SEC approved BENHAR/RUBY Plan. Section 39. Sale or Other Disposition of Assets. — Subject to the
provisions of Republic Act No. 10667, otherwise known as the
Meanwhile, BENHAR started to pay off secured creditors of RUBY and "Philippine Competition Act," and other related laws, a corporation
executed deeds of assignments of credit and mortgage rights in favor may, by a majority vote of its board of directors or trustees, sell,
of BENHAR. These were done despite the TRO and injunction and lease, exchange, mortgage, pledge, or otherwise dispose of its
even before the SEC Hearing Panel. property and assets, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds, or other
AFLC and Lim moved to nullify the deeds of assignment in favor of instruments for the payment of money or other property or
BENHAR and cite the parties in contempt for willfull violation of SEC consideration, as its board of directors or trustees may deem
order on suspension of payments. They also charged that in paying expedient.
of FEBTC debts, it was given undue preference over the other
creditors of Ruby. SEC nullified the deeds of assignments, upon A sale of all or substantially all of the corporation's properties and
appeal SEC En Banc denied appeal for BENHAR et al, CA affirmed SEC assets, including its goodwill, must be authorized by the vote of the
ruling nullifying the deeds. stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
On the other hand, it appears that even during the pendency of members, in a stockholders' or members' meeting duly called for
appeals, BENHAR and Ruby have performed other acts in pursuance the purpose.
of BENHAR/RUBY Plan approved by SEC (even if there was an
injunction). In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
Lim received a notice of stockholder’s meeting signed by Mr sufficient authorization for the corporation to enter into any
Magtalas the “designated secretary” of Ruby and stating the matters transaction authorized by this section.
to be taken up in said meeting which includes extention of Ruby’s
corporate term for another 25 years and election of directors. At the The determination of whether or not the sale involves all or
scheduled stockholder’s meeting, Lim together with other minority substantially all of the corporation's properties and assets must be
stockholders appeared in order to put on record their objections on computed based on its net asset value, as shown in its latest
the validity of the holding thereof and the matters taken therein. financial statements. A sale or other disposition shall be deemed
Specifically, they questioned the percentage of stockholders present to cover substantially all the corporate property and assets if
in the meeting which the majority claimed stood at 74.75% of Ruby. thereby the corporation would be rendered incapable of continuing
Lim also argued that a majority of the stockholders claiming to be the business or accomplishing the purpose for which it was
74.75% of Ruby increased their shares to 75.75% by subscribing from incorporated.
the unissued shares of the authorized capital stock as “capital
infusion”. Written notice of the proposed action and of the time and place for
the meeting shall be addressed to stockholders or members at their
Accordingly, Lim said that the extension of corporate term and places of residence as shown in the books of the corporation and
increase in capital stock were done in violation CA and without deposited to the addressee in the post office with postage prepaid,
compliance to legal requirements of Corporation Code. served personally, or when allowed by the bylaws or done with the
consent of the stockholder, sent electronically: Provided, That any
RULING: dissenting stockholder may exercise the right of appraisal under the
Supreme Court ruled that the preemptive right of the shareholders conditions provided in this Code.
were violated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease, exchange, mortgage, Yu alleged that he dealt with Sangil, who used MADCI's corporate
pledge, or other disposition of property and assets, subject to the personality to defraud him.
rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members. Sangil alleged that Yu dealt with MADCI as a juridical person;
that he did not benefit from the sale of shares; that the return of Yu's
Nothing in this section is intended to restrict the power of any money was no longer possible because its approval had been blocked
corporation, without the authorization by the stockholders or by the new set of officers of MADCI, which controlled the majority of
members, to sell, lease, exchange, mortgage, pledge, or otherwise its board of directors; that MADCI failed to develop the golf course
dispose of any of its property and assets if the same is necessary in because its properties were taken over by YIL after he allegedly
the usual and regular course of business of the corporation or if the violated the MOA. The lands of MADCI were eventually sold to YICRI
proceeds of the sale or other disposition of such property and for a consideration of P9.3 million, which was definitely lower than
assets shall be appropriated for the conduct of its remaining their market price.
business.
MADCI claimed that it was Sangil who defrauded Yu invoked the
Board of Directors approval only Memorandum of Agreement (MOA) entered into by MADCI, Sangil
• Voting requirement: Board resolution by a majority vote of the and petitioner Yats International Ltd. (YIL) wherein Sangil undertook
Board of Directors in a meeting where there is a quorum. to redeem MADCI proprietary shares sold to third persons or settle
• Instances: in full all their claims for refund of payments claimed that Sangil
a) A sale of all or substantial all of the assets of the should be ultimately liable to refund the payment for shares
corporation, provided, that it is in the regular course of purchased
business of the corporation.
b) It is not in a regular course of business but it is a sale of Yu filed an Amended Complaint, impleaded YIL, Y-I Leisure Phils., Inc.
NOT all of substantial all of the assets of the corporation. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he
discovered in the Registry of Deeds of Pampanga that, substantially,
Board of Directors and Stockholder approval all the assets of MADCI, consisting of 120 hectares of land located in
Magalang, Pampanga, were sold to YIL, YILPI and YICRI. The transfer
• Voting requirement: was done in fraud of MADCI's creditors, and without the required
1. Board resolution by a majority vote of the Board of Directors in a approval of its stockholders and board of directors under Section 40
meeting where there is a quorum. of the Corporation Code. Yu also alleged that Sangil even filed a case
2. Stockholders vote representing at least two-thirds (2/3) of the
in Pampanga which assailed the said irregular transfers of lands.
outstanding capital stock, or at least two-thirds (2/3) of the
members, in a stockholders' or members' meeting duly called for YIL, YILPI and YICRI alleged that they only had an interest in MADCI
the purpose. in 1999 when YIL bought some of its corporate shares pursuant to
• Instance/s: the MOA. This occurred two (2) years after Yu bought his golf and
a) A sale of all or substantially all of the assets of the country club shares from MADCI that as a mere stockholder of
corporation MADCI, YIL could not be held responsible for the liabilities of the
- A sale or other disposition shall be deemed to cover corporation as to the transfer of properties from MADCI to YILPI and
substantially all the corporate property and assets if subsequently to YICRI, they averred that it was not undertaken to
thereby the corporation would be rendered incapable defraud MADCI's creditors and it was done in accordance with the
of continuing the business or accomplishing the MOA. In fact, it was stipulated in the MOA that Sangil undertook to
purpose for which it was incorporated. settle all claims for refund of third parties.

Y-I LEISURE VS. YU The President and CEO of YILPI and YICRI, and managing director of
FACTS: This case involves a complaint for collection of sum of money YIL, Denny On Yat Wang (Wang) testified that YIL was an investment
and damages with prayer for preliminary attachment against MADCI company engaged in the development of real estates, projects,
and its president Rogelio Sangil (Sangil) to recover his payment for leisure, tourism, and related businesses that YIL subscribed to the
the purchase of golf and country club shares. shares of MADCI because it was interested in its golf course
Mt. Arayat Development Co., Inc.(MADCI) was a real estate development project in Pampanga. Thus, he signed the MOA on
development corporation. Respondent James Yu (Yu) was a behalf of YIL and he paid P31.5 million to subscribe to MADCI's
businessman, interested in purchasing golf and country club shares. shares, subject to the fulfillment of Sangil's obligations; that the MOA
stipulated that MADCI would execute a special power of attorney in
Sometime in 1997, MADCI offered for sale shares of a golf and his favor, empowering him to sell the property of MADCI in case of
country club located in the vicinity of Mt. Arayat for the price of default in the performance of obligations; that due to Sangil's
P550.00 per share. Relying on the representation of MADCI's brokers subsequent default, a deed of absolute sale over the lands of MADCI
and sales agents, Yu bought 500 golf and 150 country club shares for was eventually executed in favor of YICRI, its designated company;
a total price of P650,000.00 which he paid by installment with that, aside from its lands, MADCI had other assets in the form of loan
fourteen (14) Far East Bank and Trust Company (FEBTC) checks. advances of its directors

Upon full payment of the shares to MADCI, Yu visited the supposed ISSUES:
site of the golf and country club and discovered that it was non- 1. Whether fraud must exist in the transfer of all the corporate assets
existent. In a letter, Yu demanded from MADCI that his payment be in order for the transferee to assume the liabilities of the transferor.
returned to him. MADCI recognized that Yu had an investment of No.
P650,000.00, but the latter had not yet received any refund. Yu filed 2. Whether or not the petitioners indeed became a continuation of
with the RTC above-said complaint. In his transactions with MADCI, MADCI’s business. Yes
RULING: petitioners. No evidence existed that MADCI subsequently acquired

1. No. Fraud is not an essential consideration. Under the Nell other lands for its development projects. Thus, MADCI, as a real
doctrine (Nell v Pacific Farms Inc.) the general rule is that the transfer estate development corporation, was left without any property to
of all the assets of a corporation to another shall not render the latter develop eventually rendering it incapable of continuing the business
liable to the liabilities of the transferor, except when: or accomplishing the purpose for which it was incorporated. Section
a) Where the purchaser expressly or impliedly agrees to assume 40 must apply.
such debts; Article 2047, NCC: When a person binds himself
solidarily with the principal debtor, then a contract of suretyship The MOA cannot prejudice respondent Yu. CA correctly ruled that
is produced. Necessarily, the corporation which expressly or there was novation of its provision. Since it was done without
impliedly agrees to assume the transferor's debts shall be liable securing the consent of respondent, the agreement cannot prejudice
to the same. him and MADCI is still its debtor and given that there was transfer to
b) Where the transaction amounts to a consolidation or merger of the petitioners, then the petitioners shall be liable.
the corporations; Sections 76 to 80, Corporation Code: If the
transfer of assets of one corporation to another amounts to a Petition is denied.
merger or consolidation, then the transferee corporation must
take over the liabilities of the transferor. TO BE LIABLE UNDER THE BUSINESS ENTERPRISE RULE,
c) Where the purchasing corporation is merely a continuation of REQUIREMENTS:
the selling corporation, and transferee purchases not only the 1. The transferor Corporation sells all or substantially all its
assets of the transferor, but also its business thus the assets to another entity; and
transferor is merely left with its juridical existence, devoid of 2. The transferee corporation will continue the business of the
its industry and earning capacity. transferor corporation.
d) Where the transaction is entered into fraudulently in order to
escape liability for such debts; Article 1388, NCC: whoever Under Sec. 39, when a corporation sells all or substantially all its assets
acquires in bad faith the things alienated in fraud of creditors, and the Corporation can no longer continue its operations, the
shall indemnify the latter for damages suffered. presumption that the transferee corporation will now be the one to
continue the business of the corporation.
Thus, if there is fraud in the transfer of all the assets of the transferor
corporation, its creditors can hold the transferee liable. This REASON FOR THE RULE: To avoid a situation where the creditors can
exception contemplates the “business-enterprise transfer” where no longer go after the assets of the corporation because it has already
the transferee coproration’s interest goes beyond the assets of the transferred the assets to another entity. FOR THE PROTECTION OF
transferor’s assets and its desires to acquire the latter’s business CREDITORS.
enterprise including its goodwill. The transferee here actually
purchases not only the assets but the business itself that the Ways to transfer a Corporate Business
transferor is merely left with its juridical existence. The proper
provision of law that is contemplate by this exception (business- 1. Share Purchase Agreement (SPA)
enterprise transfer) is Section 40 refers to the sale, lease, exchange
or disposition of all or substantially all of the corporation's assets, EXAMPLE: A owning all the shares of B Corporation, if A wants to
including its goodwill. The sale under this provision does not transfer the business of B Corp, A can enter into a SPA with C, with that,
contemplate an ordinary sale of all corporate assets; the transfer C now becomes the owner of B corp.
must be of such degree that the transferor corporation is rendered
incapable of continuing its business or its corporate purpose. A sale Is there a change in entity in B Corporation? No. the corporation has
or other disposition shall be deemed to cover substantially all the the power of succession and its identity is separate and distinct from
corporate property and assets if thereby the corporation would be the stockholders. Here, there is no change in the Entity, only the
rendered incapable of continuing the business or accomplishing the stockholders. There is no change or transfer of liability because B
purpose for which it was incorporated. Corporation continues to exist only that it is C and no longer A that
owns all the shares in the corporation.
However not every transfer of the entire corporate assets would
qualify under Section 40, it does not apply: if the sale of the entire LABOR CODE: in case of transfer of shares, the employee of the
property and assets is necessary in the usual and regular course of Corporations continues to be its employees. No termination of
business of corporation, or if the proceeds of the sale or other employment because the corporation continues to exist.
disposition of such property and assets will be appropriated for the
conduct of its remaining business. Thus, the litmus test to determine 2. Asset Purchase (AP)
the applicability of the Section would be the capacity of the
corporation to continue its business after the sale of all or There is no change in its stockholders but you are taking away the
substantially all of its assets. assets of B corporation and giving it to C. (Related to the above
example) B corporation continues to be owned by A.
The purpose of the business-enterprise transfer is to protect the
creditors by allowing them a remedy. Rule on Asset Purchase in terms of transfer of Liability (Nell Doctrine)

2. Yes. Based on the factual findings, the Court is convinced that General Rule: The purchaser only acquires the assets, liabilities remain
MADCI indeed had assets consisting of 120 hectares of landholdings with the Corporation.
in Magalang, Pampanga, to be developed into a golf course, pursuant
to its primary purpose. Because of its alleged violation of the MOA, Exception:
however, MADCI was made to transfer all its assets to the
1. when there is an agreement that the purchaser will assume the Fractional Share – it refers to a share less than one full share of
liability; equity.
2. when the transaction amounts to a merger or consolidation;
3. Transferee Corporation is merely a continuation of the business of ILLUSTRATION
the corporation; When the stockholder has 250 shares and the corporation issues stock
4. Transaction is fraudulently entered into to escape liability. dividends, so 250 X 25% ownership, that is 62.5, so the share will now
be 112.5. The .5 shares is the fractional share, the corporation will now
rd
Where does Section 39 fall? 3 exception. Rule is called BUSINESS acquire the .5 shares.
ENTERPRISE RULE.
• To collect or compromise an indebtedness to the
Agreement that the transferor will assume the liability corporation, arising out of unpaid subscription, in a
An agreement where the transferor retains the liability is a valid delinquency sale, and to purchase delinquent shares
agreement but it is only enforceable between the transferor and sold during said sale; and
transferee. The creditors not being a party to their agreement, are not • To pay dissenting or withdrawing stockholders entitled
bound by such. to payment for their shares under the provisions of this
Code.
If the transferee assumes the liability, such is binding to the creditors. Note: The list is NOT exclusive. There can be other legitimate purposes
that may be allowed.
If the transferor expressly assumes liability, such is not binding to the
creditors. The creditors can still go after the transferee, but of course POWER TO INVEST CORPORATE FUNDS
the transferee has the recourse to go after the transferor based on Section 41. Power to Invest Corporate Funds in Another
their agreement. Corporation or Business or for Any Other Purpose. — Subject to the
provisions of this Code, a private corporation may invest its funds
POWER TO ACQUIRE OWN SHARES in any other corporation, business, or for any purpose other than
Section 40. Power to Acquire Own Shares. — Provided that the the primary purpose for which it was organized, when approved by
corporation has unrestricted retained earnings in its books to cover a majority of the board of directors or trustees and ratified by the
the shares to be purchased or acquired, a stock corporation shall stockholders representing at least two-thirds (2/3) of the
have the power to purchase or acquire its own shares for a outstanding capital stock, or by at least two-thirds (2/3) of the
legitimate corporate purpose or purposes, including the following members in the case of nonstock corporations, at a meeting duly
cases: called for the purpose. Notice of the proposed investment and the
(a) To eliminate fractional shares arising out of stock dividends; time and place of the meeting shall be addressed to each
(b) To collect or compromise an indebtedness to the corporation, stockholder or member at the place of residence as shown in the
arising out of unpaid subscription, in a delinquency sale, and books of the corporation and deposited to the addressee in the
to purchase delinquent shares sold during said sale; and post office with postage prepaid, served personally, or sent
electronically in accordance with the rules and regulations of the
(c) To pay dissenting or withdrawing stockholders entitled to
Commission on the use of electronic data message, when allowed
payment for their shares under the provisions of this Code.
by the bylaws or done with the consent of the stockholders:

Provided, That any dissenting stockholder shall have appraisal right
Applicability: Section 40 applies to all shares other than redeemable
as provided in this Code: Provided, however, That where the
shares because there is a specific provision on redeemable shares. One
investment by the corporation is reasonably necessary to
of the rule on redeemable shares is that it does not require the
accomplish its primary purpose as stated in the articles of
existence of Unrestricted Retained Earnings (URE).
incorporation, the approval of the stockholders or members shall

not be necessary.
Requirements for a Corporation to acquire its own shares

1. There must be unrestricted retained earnings.
General rule: A corporation cannot engage in a business outside its

Primary Purpose.
2. Voting required is only a majority of the directors present in a
Exception: The corporation can if they amend their Articles of
meeting where there is a quorum
Incorporation and include the activity as part of its primary purpose.
• Determine first if there is a quorum to constitute a valid
meeting. If there is no quorum in the first place, there is Requirements for a corporation to invest its funds in another
no need for voting because the meeting is invalid. Corporation or Business
• If there is already a quorum to have a valid meeting, the

voting will now depend on the actual number of
PURSUING PRIMARY PURPOSE
directors present. The vote needed is a majority vote of
• Approval of the Majority of the BOD
the directors present in a meeting where there is a

quorum to be a valid corporate act.
PURSUING SECONDARY PURPOSE (SECTION 42)

• There must be approval by a majority of the board of
Atty: The quorum requirement is segregated from the voting
directors
requirement.
• The approval of the board must be ratified by the
3. It must be for a legitimate purpose stockholders representing at least 2/3 of the outstanding
capital stock at a stockholder’s meeting duly called for that
• To eliminate fractional shares arising out of stock
purpose.
dividends;

• Amendment of the Primary Purpose in the Articles of Accumulated profits of a corporation in its previous operations. It
Incorporation includes all income accumulated all throughout the years during which
the corporation was in operation.
Note: Failure to amend the AOI’s primary purpose, that activity will be
considered as ULTRA VIRES, it being not part of the primary purpose of So, if the corporation has been experiencing losses, there will be no
the corporation. retained earnings. Rather, there will be deficits. Retained earnings can
only exist if the corporation has been operating at a profit.
POWER TO DECLARE DIVIDENDS
Section 42. Power to Declare Dividends. – The board TYPES OF RETAINED EARNINGS
of directors of a stock corporation may declare • RESTRICTED RETAINED EARNINGS – in general, it is restricted
dividends out of the unrestricted retained earnings if it is not available for dividend declaration
which shall be payable in cash, property, or in stock • UNRESTRICTED RETAINED EARNINGS – if available for
to all stockholders on the basis of outstanding stock dividend declaration
held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the RESTRICTING RETAINED EARNINGS
unpaid balance on the subscription plus costs and 1. Appropriated by its Board of Directors for corporate expansion
expenses, while stock dividends shall be withheld projects or programs.
from the delinquent stockholders until their unpaid
subscription is fully paid: Provided, further, That no EXAMPLE:
stock dividend shall be issued without the approval If the Board of directors says that out of the 50 million retained
of stockholders representing at least two-thirds (2/3) earnings, we are going to allocate 15 million for a future expansion,
of the outstanding capital stock at a regular or special meeting duly that will make your 15 million a restricted retained earnings.
called for the purpose. Therefore, out of the 50 million, 15 million cannot be declared as
dividends.
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred percent (100%) of their paid-in capital stock, 2. Covered by a restriction for dividend declaration under a loan
except: (a) when justified by definite corporate expansion projects agreement.
or programs approved by the board of Directors; or (b) when the
corporation is prohibited under any loan agreement with financial Contractual Covenants - If, for example, there is a loan agreement,
institutions or creditors, whether local or foreign, from declaring and the creditor expressly provides that the corporation cannot
dividends without their consent, and such consent has not yet been declare dividends out of a certain amount of its retained earnings.
secured; or (c) when it can be clearly shown that such retention is That portion that is restricted under the contract, becomes
necessary under special circumstances obtaining in the restricted retained earnings.
corporation, such as when there is need for special reserve for
probable contingencies. 3. Required to be retained under special circumstances obtaining in
the corporation such as when there is a need for special reserve for
TYPES OF DIVIDENDS (PRO-CA-ST) probable contingencies.
1. Property Dividends
2. Cash Dividends EXAMPLE
3. Stock Dividends When a corporation acquires treasury shares, it is required to
restrict a portion of its retained earnings, in the same amount as the
General Rule: The Board of Directors has the discretion to declare treasury shares that they acquired. That portion becomes restricted
dividends. retained earnings. It cannot be available for dividend declaration.
Exception: In case of stock dividends, the decision of the board is
subject to the approval of the stockholders. If the corporation has been experiencing losses, such that it has zero
or negative retained earnings, then it cannot declare dividends at
Requirements for the declaration of dividends all. So, there has to be unrestricted retained earnings for a
CASH AND PROPERTY DIVIDENDS corporation to declare dividends.
1. Existence of unrestricted retained earnings;
2. Majority vote of the Board of Directors present in a meeting Declaring dividends from the Capital - paid-up capital
where there is a quorum.
General Rule: Dividends CANNOT be distributed out of the capital. It
STOCK DIVIDENDS violates the trust fund doctrine. Under the trust fund doctrine, you
1. Existence of unrestricted retained earnings. cannot return capital to the stockholders unless all the creditors have
2. Majority vote of the Board of Directors present in a meeting been paid first.
where there is a quorum.
3. Approval of stockholders representing at least two-thirds Exceptions: (exclusive exceptions)
(2/3) of the outstanding capital stock at a regular or special 1. If the dividend is A LIQUIDATING DIVIDEND – it is distributed
meeting duly called for the purpose. during a liquidation of a corporation.

RETAINED EARNINGS Here, the trust fund doctrine no longer applies because the
corporation is already being liquidated. Which means that before
you can even distribute your liquidating dividends, you have to
pay your creditors first. Whatever is left, can be distributed as off, because the right to receive the dividends remains with
dividends. the stockholder as of the record date.

2. When the corporation is a WASTING ASSET CORPORATION – a 3. Payment Date
type of corporation where the corporation has a limited life Date when the dividends are actually paid by the corporation. When a
because its assets are consumed during the operation of the corporation declares dividends, it will normally say what is the record
corporation and it’s not replenished. date and what is the payment date.

EXAMPLES If the corporation’s resolution for the declaration of dividends is silent
• Mining – if a corporation is created to mine a certain area, as to the record date, the record date is considered the same as the
that area once the minerals are gone, the corporation’s declaration date.
purpose no longer exists. So slowly, as the minerals are
consumed, the assets of the corporation are being depleted. Declaration of dividends
In that sense, the corporation is allowed to return capital to General Rule: The directors of the corporation cannot be compelled to
its stockholder. Because, the idea is that the corporation is declare dividends because it is discretionary. Dividends are not
only for a limited period, as long as the assets are existing. liabilities of the corporation, until declared.
Once the assets are depleted, then the corporation can
return capital to the stockholders. Exception: Limitation under Section 42 where it prohibits corporations
from retaining unrestricted retained earnings in excess of one hundred
Relevant dates when it comes to dividend declaration percent (100%) of their paid-up capital. Take note, not subscribed but
1. Declaration date the paid-up capital.
Before the declaration date, the dividends are not a liability of the
corporation. In fact, the corporation is not obliged to declare dividends, Note: Violations of this will render the corporation liable for penalties
even if it has unrestricted retained earnings. The BOD cannot be with the SEC as well as with the BIR for improperly accumulated
compelled to declare dividends. Dividends do not become a liability of earnings tax. If the corporation don’t declare dividends, it will be
the corporation unless and until it is actually declared. The moment of penalized both by the SEC and BIR.
declaration is the time that the corporation now recognizes the
liability. LIABILITIES FOR VIOLATION OF SECTION 42
Penalized by both the Securities and Exchange Commission and the
2. Record date Bureau of Internal Revenue
This refers to the date to determine who are the stockholders entitled
to receive dividends. The stockholders of record as of the record date
are the stockholders who will be receiving the dividends. HOW TO AVOID LIABILITY FROM SECTION 42

Before the record date, the stocks are considered sold at DIVIDENDS Restrict the dividend/earning by—
ON. Meaning, before the record date, you are also selling with it the (1) Declaring it necessary for future expansion
right to receive the dividends, which means that there is actually a (2) Entering into a loan covenant which provides that the
premium on the price of those shares because they carry with it the dividend declaration is restricted
right to receive dividends. (3) For any other special circumstances

When we sell the stocks after the record date, normally we call it as In all these three instances, the dividends will be considered as
DIVIDENDS OFF, because even if you sell shares or transfer ownership, restricted and will not form part of the prohibition.
the person who was the owner as of the record date will be the one
entitled to receive the dividends. The record date is important to POWER TO ENTER INTO MANAGEMENT CONTRACT
determine who is receives the dividends. Section 43. Power to Enter into Management Contract. — No
corporation shall conclude a management contract with another
EXAMPLE: corporation unless such contract is approved by the board of
directors and by stockholders owning at least the majority of the
Declaration date March 10 outstanding capital stock, or by at least a majority of the members
Record date March 30 in the case of a nonstock corporation, of both the managing and the
managed corporation, at a meeting duly called for the purpose:
• A is holder of the share on declaration date. On March 15, A Provided, That (a) where a stockholder or stockholders
sells the shares to B, that is still considered as dividends on. representing the same interest of both the managing and the
• B sells the shares to C on March 25, still considered as managed corporations own or control more than one-third (1/3) of
dividends on. the total outstanding capital stock entitled to vote of the managing
• On March 30, the record date, if C is still the owner of the corporation; or (b) where a majority of the members of the board
shares by that time, C is the stockholder entitled to the of directors of the managing corporation also constitute a majority
dividends. of the members of the board of directors of the managed
• If on April 5, C sells the shares to D. It still C who is entitled to corporation, then the management contract must be approved by
receive dividends. the stockholders of the managed corporation owning at least two-
• The sale from A to B to C is still dividends on. It carries with it thirds (2/3) of the total outstanding capital stock entitled to vote,
the right to receive dividends. They are sales before the or by at least two-thirds (2/3) of the members in the case of a
record date. Sales after the record date is already dividends nonstock corporation.

These shall apply to any contract whereby a corporation UNIVERSITY OF MINDANAO, INC. VS. BANGKO SENTRAL NG
undertakes to manage or operate all or substantially all of the PILIPINAS, ET AL.
business of another corporation, whether such contracts are called FACTS: University of Mindanao (UM) is an educational institution.
service contracts, operating agreements or otherwise: Provided, For the year 1982, its Board of Trustees was chaired by Guillermo B.
however, That such service contracts or operating agreements Torres. His wife, Dolores P. Torres, sat as University of Mindanao's
which relate to the exploration, development, exploitation or Assistant Treasurer.
utilization of natural resources may be entered into for such
periods as may be provided by pertinent laws or regulations. Guillermo B. Torres and Dolores P. Torres incorporated and operated
two (2) thrift banks: (1) First Iligan Savings & Loan Association, Inc.
No management contract shall be entered into for a period longer (FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI).
than five (5) years for any one (1) term. Guillermo B. Torres chaired both thrift banks. He acted as FISLAI's
President, while his wife, Dolores P. Torres, acted as DSLAI's
Management Contract President and FISLAI's Treasurer.
• An agreement whereby one undertakes to manage or
operate all or substantially all of the business of another, Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas issued
whether such contracts are called service contracts, a P1.9 million standby emergency credit to FISLAI. There were three
operating agreements, or otherwise. promissory notes. All these promissory notes were signed by
• Contemplates a situation where the contract is between two Guillermo B. Torres, and were co-signed by either his wife, Dolores
corporations. P. Torres, or FISLAI's Special Assistant to the President Ramos, Jr.
• Maximum term is 5 years, subject to renewal.
On May 25, 1982, University of Mindanao's Vice President for
APPROVING AUTHORITY Finance, Saturnino Petalcorin, executed a deed of real estate
• General Rule: Approval of the Board of Directors and by mortgage over University of Mindanao's property in Cagayan de Oro
Stockholders owning at least majority of the outstanding City in favor of Bangko Sentral ng Pilipinas. There was allegedly
capital stock of both the managing and managed corporation executed on University of Mindanao’s behalf. Proof of the authority
at a meeting duly called for the purpose. to execute the REM was a Secretary’s Certificate showed by
Saturnino Petalcorin authorizing him to represent the University of
• Exception: Approved by the Stockholders of the managed
corporation owning at least 2/3 of the total outstanding Mindanao to transact, transfer, convey, lease, mortgage, or
capital stock entitled to vote in the following instances: otherwise hypothecate any or all of the following properties situated
a. Where a stockholder or stockholders representing the at Cagayan de Oro and Iligan City and authorizing further Mr.
Petalcorin to sign any or all documents relative thereto.
same interest of both the managing and the managed

corporations own or control more than 1/3 of the total
outstanding capital stock entitled to vote of the FISLAI, DSLAI, and Land Bank of the Philippines entered into a
managing corporation; or Memorandum of Agreement intended to rehabilitate the thrift
b. Where a majority of the members of the board of banks, which had been suffering from their depositors' heavy
withdrawals. Among the terms of the agreement was the merger of
directors of the managing corporation also constitute a
majority of the members of the board of directors of the FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later
managed corporation. became known as Mindanao Savings and Loan Association, Inc.
(MSLAI). MSLAI failed to recover from its losses and was liquidated.
Bangko Sentral ng Pilipinas sent a letter to University of Mindanao,
ULTRA VIRES ACTS
informing it that the bank would foreclose its properties if MSLAI's
Section 44. Ultra Vires Acts of Corporations. — No corporation shall
total outstanding obligation of P12,534,907.73 remained unpaid.
possess or exercise corporate powers other than those conferred

by this Code or by its articles of incorporation and except as
In its reply, University of Mindanao denied that University of
necessary or incidental to the exercise of the powers conferred.
Mindanao's properties were mortgaged. It also denied having

received any loan proceeds from Bangko Sentral ng Pilipinas, which
Ultra Vires Act
prompted them to file for nullification and cancellation of mortgage.
One not within the express, implied, and incidental powers of the
corporation conferred by the Corporation Code or articles of University of Mindanao also alleged that Aurora de Leon's
incorporation. An ultra vires act means simply an act which is beyond certification was anomalous. It never authorized Saturnino
the conferred powers of a corporation or the purposes or objects for Petalcorin to execute real estate mortgage contracts involving its
which it is created as defined by the law of its organization. properties to secure FISLAI's debts. There was no board resolution to
that effect. Thus, the mortgages executed by Saturnino Petalcorin
CONSEQUENCE OF AN ULTRA VIRES ACT were unenforceable. It never ratified the execution of the mortgage
Merely voidable which may be enforced by performance, ratification contracts. Moreover, as an educational institution, it cannot
or estoppel. (De Leon) mortgage its properties to secure another person's debts. The
execution of the mortgage contract was ultra vires. As an educational
AS DISTINGUISHED FROM ILLEGAL ACT institution, it may not secure the loans of third persons. Securing
Void and cannot be validated. An illegal corporate act, on other hand, loans of third persons is not among the purposes for which petitioner
is an act which is contrary to law, morals, good customs, public order, was established.
or public policy (Art. 1306, Civil Code.) and, therefore, per se illicit.
Bangko Sentral argued that petitioner's act of mortgaging its
properties to guarantee FISLAI's loans was consistent with
petitioner's business interests, since petitioner UM was presumably
a FISLAI shareholder whose officers and shareholders interlock with TITLE V - BY-LAWS
FISLAI. It also argued that it merely relied on the regularity of the By- laws may be defined as the rules of action adopted by a corporation
Secretary Certificate authorizing Petalcorin. (or association) for its internal government and for the government of
ISSUE: Whether petitioner University of Mindanao is bound by the its stockholder or members and those having the direction,
real estate mortgage contracts executed by Saturnino Petalcorin. management and control of its affairs in their relation to the
RULING: corporation and as among themselves, including rules for routine
matters such as calling meetings and the like. It is not an essential
Corporations are artificial entities granted legal personalities upon requisite for the existence of the corporation
their creation by their incorporators in accordance with law. Unlike
natural persons, they have no inherent powers. Third persons Because what gives life to a corporation is the issuance of certificate of
dealing with corporations cannot assume that corporations have incorporation, failure to adopt by laws does not invalidate its existence
powers. It is up to those persons dealing with corporations to because its existence is derived from authority given pursuant to the
determine their competence as expressly defined by the law and issuance of articles of incorporation.
their articles of incorporation. A corporation may exercise its powers
only within those definitions. Corporate acts that are outside those ADOPTION OF BY-LAWS
express definitions under the law or articles of incorporation or those Section 45. Adoption of By-laws. –For the adoption of by- laws by
"committed outside the object for which a corporation is created are the corporation, the affirmative vote of the stockholders
ultra vires. The only exception to this, rule is when acts are necessary representing at least a majority of the outstanding capital stock, or
and incidental to carry out a corporation's purposes, and to the of at least a majority of the members in case of non-stock
exercise of powers conferred by the Corporation Code and under a corporations, shall be necessary. The bylaws shall be signed by the
corporation's articles of incorporation. This exception is specifically stockholders or members voting for them and shall be kept in the
included in the general powers of a corporation under Section 36 of principal office of the corporation, subject to the inspection of the
the Corporation Code: “To exercise such other powers as may be stockholders or members during office hours. A copy thereof, duly
essential or necessary to carry out its purpose or purposes as stated certified by a majority of the
in its articles of incorporation. (Emphasis supplied)” directors or trustees and countersigned by the secretary of the
corporation, shall be filed with the commission and attached to the
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.[78] stated the original articles of incorporation.
test to determine if a corporate act is in accordance with its
purposes: Notwithstanding the provisions of the preceding paragraph, by-laws
It is a question, therefore, in each case, of the logical relation of the may be adopted and filed prior to incorporation; in such case, such
act to the corporate purpose expressed in the charter. If that act is by-laws shall be approved and signed by all the incorporators and
one which is lawful in itself, and not otherwise prohibited, is done for submitted to the Commission, together with the articles of
the purpose of serving corporate ends, and is reasonably tributary to incorporation.
the promotion of those ends, in a substantial, and not in a remote
and fanciful, sense, it may fairly be considered within charter powers. In all cases, by-laws shall be effective only upon the issuance by the
The test to be applied is whether the act in question is in direct and commission of a certification that the by-laws are in accordance with
immediate furtherance of the corporation's business, fairly incident this code.
to the express powers and reasonably necessary to their exercise. If
so, the corporation has the power to do it; otherwise, not. The commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and
In the case, Petitioner does not have the power to mortgage its loan association, trust company, insurance company, public utility,
properties in order to secure loans of other persons. As an educational institution, or other special corporations governed by
educational institution, it is limited to developing human capital special laws, unless accompanied by a certificate of the appropriate
through formal instruction. It is not a corporation engaged in the government agency to
business of securing loans of others. Securing FISLAI's loans by the effect that such bylaws or amendments are in
mortgaging petitioner's properties does not appear to have even the accordance with law.
remotest connection to the operations of petitioner as an
educational institution. Securing loans is not an adjunct of the TIME AND PROCEDURE FOR THE ADOPTION OF BY-LAWS:
educational institution's conduct of business. It does not appear that
securing third-party loans was necessary to maintain petitioner's 1) PRE-INCORPORATION
business of providing instruction to individuals. Therefore, the
presumption that the execution of mortgage contracts was within Submitted or filed before the SEC together with the articles of
petitioner's corporate powers does not apply. Securing third-party incorporation. (this is the one required now in practice, you cannot
loans is not connected to petitioner's purposes as an educational incorporate without it.)
institution. Moreover, regardless of the number of shares that
petitioner had with FISLAI, DSLAI, or MSLAI, securing loans of third REQUIREMENTS:
persons is still beyond petitioner's power to do. It is still inconsistent 1. Approved and signed by ALL INCORPORATORS
with its purposes under the law and its articles of incorporation. 2. Submitted to the SEC together with the AOI

Acts of an officer that are not authorized by the board of Additional requirements for banks and other special corporation:
directors/trustees do not bind the corporation unless the accompanied by a certificate of the appropriate government agency to
corporation ratifies the acts or holds the officer out as a person with the effect that such bylaws or amendments are in accordance with law
authority to transact on its behalf.
2) POST-INCORPORATION Exchange Commission. It necessarily follows that failure to file the
by-laws within that period does not imply the demise of the
Basically, everything that you need to do post incorporation in order to corporation. By-laws may be necessary for the government of the
commence transaction of business. corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related
Requirements: statutes. There are in fact cases where by-laws are unnecessary to
1. Affirmative vote and must be signed by the stockholders corporate existence or to the valid exercise of corporate powers,
representing at least a majority of the outstanding capital thus:
stock/members in case of non-stock.
2. Duly certified by the majority of the directors/trustees Although the Corporation Code requires the filing of by-laws, it
3. Filed to the SEC, to be attached to the original AOI does not expressly provide for the consequences of the non-filing
of the same within the period provided for in Section 46.

NOTE: LOYOLA GRAND CASE MAY NOT BE APPLICABLE ANYMORE However, under by Presidential Decree No. 902-A, the pertinent
SINCE UNDER THE REVISED CORPORATION CODE, THE 1 MONTH provisions on the jurisdiction of the SEC of which state: SEC. 6. In
REQUIREMENT WAS REMOVED order to effectively exercise such jurisdiction, the Commission shall
possess the following powers:
LOYOLA GRAND VILLAS HOMEOWNER ASSOCIATION,
INC.,PETITIONER,VS. HON. COURT OF APPEALS, HOME INSURANCE (l) To suspend, or revoke, after proper notice and hearing, the
AND GUARANTY CORPORATION, EMDEN ENCARNACION AND franchise or certificate of registration of corporations, partnerships
HORATIO AYCARDO, RESPONDENTS. or associations, upon any of the grounds provided by law, including
Facts: the following:
LGVHAI was organized on February 8, 1983 as the association of
homeowners and residents of the Loyola Grand Villas. For 5. Failure to file by-laws within the required period;
unknown reasons, however, LGVHAI did not file its corporate by-
laws. Even under the foregoing express grant of power and authority,
THERE CAN BE NO AUTOMATIC CORPORATE DISSOLUTION SIMPLY
There was an inquiry about the status of LGVHAI. Atty. Joaquin A. BECAUSE THE INCORPORATORS FAILED TO ABIDE BY THE REQUIRED
Bautista, the head of the legal department of the HIGC, informed FILING OF BY-LAWS EMBODIED IN SECTION 46 OF THE
that LGVHAI had been automatically dissolved for two CORPORATION CODE. THERE IS NO OUTRIGHT DEMISE OF
reasons. First, it did not submit its by-laws within the period CORPORATE EXISTENCE. PROPER NOTICE AND HEARING ARE
required by the Corporation Code and, second, there was non-user CARDINAL COMPONENTS OF DUE PROCESS IN ANY DEMOCRATIC
of corporate charter because HIGC had not received any report on INSTITUTION, AGENCY OR SOCIETY. In other words, the
the associations activities. incorporators must be given the chance to explain their neglect or
omission and remedy the same.
Petitioner contends that, since Section 46 uses the word must with
respect to the filing of by-laws, noncompliance therewith would CONSEQUENCES OF FAILURE TO ADOPT BY LAWS
result in self-extinction either due to non-occurrence of a (THIS MAY NOT BE APPLICABLE PURSUANT TO THE REVISED CORPO
suspensive condition or the occurrence of a resolutory condition CODE. But this was not discussed by Atty after the revision)
under the hypothesis that (by) the issuance of the certificate of
registration alone the corporate personality is deemed already Non-filing of the by- laws on time will not result in the automatic
formed. It asserts that the Corporation Code provides for a dissolution of the corporation. Such consequence is not provided in the
gradation of violations of requirements. Hence, Section 22 Corporation Code.
mandates that the corporation must be formally organized and
should commence transactions within two years from date of 1. Pursuant to Section 6(i, 5) of Pres. Decree No. 902-A(see Sec.19), the
incorporation. Otherwise, the corporation would be deemed failure to file a code of by-laws within one (1) month from the date of
dissolved. On the other hand, if the corporation commences incorporation with the SEC shall render the corporation liable to the
operations but becomes continuously inoperative for five years, revocation of its registration.
then it may be suspended or its corporate franchise revoked.
2. There must, first of all, be a hearing to determine the existence of
the ground, and assuming such finding, the penalty is not necessarily
Issue: WON, the failure to file LGVHAI’s by-laws within the period revocation but may only be revocation.
prescribed by Sec. 46 of the Corporation Code had the effect of
automatically dissolving the said corporation. 3.Under the rules and regulations of the Commission, the failure may
be merely with the imposition of an administrative fine.
Ruling: NO.
Section 46 reveals the legislative intent to attach a directory, and EFFECT OF FAILURE TO ADOPT BY-LAWS:
not mandatory, meaning for the word must in the first sentence

thereof. Note should be taken of the second paragraph of the law • Only gives a ground to penalize the Corporation and not an
which allows the filing of the by-laws even prior to automatic dissolution or termination of its franchise.
incorporation. This provision in the same section of the Code rules • The penalty is not found in the Corporation Code.
out mandatory compliance with the requirement of filing the by- • Basis of the penalty: Section 6 of P.D. 902-A with respect to
laws within one (1) month after receipt of official notice of the the power of the Securities and Exchange Commission to
issuance of its certificate of incorporation by the Securities and suspend or revoke a corporation’s registration.
• Under this law, it is still a requirement that the corporation

is accorded with due process which is satisfied by due notice WHY BY-LAWS CANNOT PROVIDE THE MANNER OF VOTING OF THE ELECTION OF BOARD
and hearing. Therefore, still not automatic suspension or OF DIRECTORS?
revocation. VOTING FOR ELECTION OF DIRECTORS IS NOT THE SAME AS THE VOTING FOR OTHER
MATTERS BY THE STOCKHOLDERS. VOTING FOR OTHER MATTER OR APPROVAL BY THE
CONTENTS OF BY-LAWS STOCKHOLDER REQUIREMENT IS BASED FROM THE NUMBER OF SHARES. IF THE LAW OR
Section. 46. Contents of By-laws. –A private corporation may THE BY-LAWS ALLOW FOR THE MAJORITY THEN BASE IT FROM THE OUTSTANDING CAPITAL
provide the following in its by-laws: STOCK. IF IT REQUIRES 2/3 VOTES, THEN YOU JUST NEED TO GET THE APPROVAL OF THE
a. The time, place and manner of calling and conducting regular or HOLDERS OF THE 2/3 OF OUTSTANDING CAPITAL STOCK. TAKE POPULATION AS A WHOLE.
special meetings of the directors or trustees; THAT’S ORDINARY RATIFICATION OR APPROVAL BY STOCKHOLDERS.
b. The time and manner of calling and conducting regular or special
meetings and mode of notifying of the stockholders or HOWEVER, VOTING FOR ELECTION OF DIRECTORS IS NOT THE SAME. THIS REQUIRES
members thereof; CUMULATIVE VOTING OF STOCKHOLDERS. MEANING, YOUR VOTE IS COUNTED BY THE
c. The required quorum in meetings of stockholders or members NUMBER OF VACANCIES IN THE BOARD MULTIPLIED BY THE NUMBER OF SHARES IN THE
and the manner of voting therein; CORPORATION.
d. The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes; EXAMPLE
e. The form for proxies of stockholders and members and the THERE ARE 5 VACANCIES AND YOU HAVE 100 SHARES, THE CORPORATION GIVES THE
manner of voting them; STOCKHOLDER 500 VOTES ALLOWED. FOR ORDINARY MATTER, YOU CAN ONLY VOTE 100
f. The directors’ or trustees’ qualifications, duties, and OR THE NUMBER OF VOTES THAT YOU HAVE. FOR ELECTION OF DIRECTORS, ITS
responsibilities, the guidelines for settling the compensation of CUMULATIVE OR THE NUMBER OF VACANCIES MULTIPLIED THE NUMBER OF SHARES YOU
directors’ or trustees’ and officers, and the maximum number HAVE.
of other board representations hat an independent director or
trustee may have which shall, in no case, be more than the number THE BY-LAWS CANNOT PROVIDE FOR ANY OTHER MANNER OF VOTING IN THE ELECTION
prescribed by the commission; OF DIRECTORS, OTHER THAN WHAT IS PROVIDED IN THE LAW WHICH IS CUMULATIVE
g. The time for holding the annual election of directors or trustees VOTING. IT HAS TO COMPLY WITH THE CORPORATION CODE.
and the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of office of THEREFORE, BY-LAWS SHOULD NOT BE CONTRARY TO THE PROVISIONS OF THE
all officers other than directors or trustees; CONSTITUTION, THE CORPORATION CODE, OTHER SPECIAL LAWS, AND THE ARTICLES OF
INCORPORATION.
i. The penalties for violation of the by-laws; In the case of stock
corporations, the manner of issuing stock certificates; and
j. Such other matters as may be necessary for the proper or IF THERE IS A CONFLICT BETWEEN THE BY-LAWS AND CONSTITUTION, THE
convenient transaction of its corporate affairs for the promotion of CORPORATION CODE, OTHER SPECIAL LAWS, AND THE ARTICLES OF INCORPORATION,
good governance and anti-graft and corruption measures. SUBSTANTIVE LAWS WILL PREVAIL.
An arbitration agreement may be provided in the by-laws pursuant
to section 181 of this code. GRACE CHRISTIAN HIGH SCHOOL VS. CA
Facts: In 1968, when the by-laws of the Grace Village Association
Inc. was adopted, it states that the director shall be elected every
The time and manner of calling and conducting regular or special year and shall serve for one year. An amendment was made in 1975
meetings of the stockholders or members in the by-laws making the representative of Grace Christian High
School as permanent Director of the Association. This draft was
• The by-laws does not provide for the place of the meeting for never presented to the general membership for approval. In 1990,
Stockholders or Members because the Articles of Mr. James Tan, the principal of the said school was informed by the
Incorporation has provided for it which is the principal place association that “it was the sentiment that all directors should be
of business. elected by members of the association”.
• It is different with the Board of Directors that they can hold
there meeting anywhere. A suit for mandamus in the HIGC was brought by the school to
compel the board of directors of the association to recognize its
The required quorum in meetings of stockholders or members and right to a permanent seat in the board.
the manner of voting therein
SEC: practice of allowing unelected members in the board was
• The by-laws may provide for quorum but it must not be less contrary to the existing by-laws of the association and to the
than what is required in the corporation code. Therefore, it Corporation Code.
cannot be less than 50% + 1. If the by-laws does not provide
for the quorum, the default is what is Stated in Section 25 of Moreover, the said by-laws which made the School representative
the Corporation Code which refers to the “majority holding as permanent director of the board was merely a proposal and
the outstanding capital stock”. It is counted by shares and never been ratified by its members.
not by the number of persons.
SC: There was no valid amendment of the association’s by-laws
because there was a failure to comply with the requirement of its
• Majority is counted as 50% + 1
existing by-laws and the Corporation Code pertaining to the
NOTE: manner of voting of board of directors. It is worthy to note that the
If it is more than the majority it is called as Super Majority quorum proposed amendment to the by-laws was never approved by the
holders of the association representing majority of the outstanding
capital stock as required by the provisions of the law and its own bound by the by-laws of a corporation, CBC is not bound by that
by-laws. Further, the law provides that the position must be specific requirement of the by-laws.
elected. Petitioner has not acquired
a vested right despite its long and continued “practice” since If Chinabank was notified by the bank when he applied for the
practice, no matter how long continued, cannot give rise to any registration of the pledge Effect: it would make a difference , since
vested right if its contrary to law. he would have prior knowledge.

DISCUSSION OF THE CASE: In this case, the notice given by the country club came in too late,
since they only notified CB only after the pledge has aldready been
In order to be elected as a director, you need to be a stockholder or foreclose, they did not notify upon the registration of the pledge.
in order for you to be a trustee, you need to be a member. You
cannot be elected as a director or a trustee when you are not a Therefore, Chinabank is not bound by the by-law for being a third
stockholder or a member of a corporation. The representative of person without prior knowledge.
Grace Christian High School in this case is not a member of the
village association. He just sits in the board as a representative of
Grace Christian School. This is not allowed under the law. Even if it CEBU MACTAN MEMBERS INC V TSUKAHARA
was provided in the by-laws and the latter is approved by the SEC, Facts: On February 1994, the CMMCI President, purportedly on
that by-laws cannot be contrary to the Corporation Code. Clearly, behalf of CMMCI, obtained a loan amounting to P6,500,000 from
the latter should prevail. Tsukahara. As payment for the loan, CMMCI issued seven
postdated checks of CMMCI payable to Tsukahara. On 13 April
This case was worse because the by-laws giving the principal a 1994, Sugimoto, again purportedly on behalf of CMCI, obtained
permanent seat in the board was never approved by the SEC. Even another loan amounting to P10,000,000 from Tsukahara. Sugimoto
if it was approved, the Corporation Code requirement will still executed and signed a promissory note in his capacity as CMMCI
prevail. By laws, cannot put a requirement that is contrary to the President and Chairman, as well as in his personal capacity. Upon
provisions of the Corporation Code. maturity, the checks were presented for payment but the same
were dishonored by PNB, the drawee bank. After several failed
Moreover, even the fact that it has been practiced from 1975 to attempts to collect the loan Tsukahara filed a case for collection of
1990s , that’s not mean that you have a vested right to the position sum of money against CMMCI and Sugimoto with the Regional Trial
because the law gives a specific qualification on who can be Court.
considered as directors or trustees. If you do not fall within the
requirement of the law then you cannot be elected as director or ISSUE: WHETHER CMMMI’S PRESIDENT CAN BIND THE
trustee even if it is provided in the by-laws. CORPORATION EVEN THOUGH IT ACTED WITHOUT AUTHORITY
FROM THE BOARD, BUT UNDER THE AUTHORITY FROM THE
CORPORATION’S BYLAWS
Persons bound by the By-Laws HELD:
1. Corporation The Supreme Court ruled that the CMMCI President is given the
2. Directors power under CMMCI’s by-laws to borrow money, execute
3. Board of Trustees contracts, and sign and indorse checks and promissory notes, in the
4. Stockholders name and on behalf of CMMCI.
ARTICLE III
Persons not bound by the By-Laws Officers
1. Any person who has no actual knowledge of the corporation 2. President. The President shall be elected by the Board of
2. Employees of the corporation Directors from their own number. He shall have the following
CHINABANK V CA powers and duties . . .
c. Borrow money for the company by any legal means whatsoever,
FACTS: Calapatia pledged his VGCCI stocks to Chinabank (CBC). CBC
including the arrangement of letters of credit and overdrafts with
informed VGCCI and asked the latter to record it in its books to
any and all banking institutions;
which the latter acceded. Calapatia obtained a loan from CBC
d. Execute on behalf of the company all contracts and agreements
secured by the pledge agreement. He failed to pay thus CBC
which the said company may enter into;
extrajudcially foreclosed the mortgage which resulted in CBC as the
e.Sign, indorse, and deliver all checks, drafts, bill of exchange,
highest bidder. VGCCI refused to transfer the stock in the name of
promissory notes and orders of payment of sum of money in the
CBC due to Calapatia’s unsettled accounts (unpaid monthly dues).
name and on behalf of the corporation
Instead, VGCCI sent a demand letter to Calapatia and later on

informed the latter of the termination of his membership to the
With such powers expressly conferred under the corporate by-laws,
sale of his stocks which was also conducted by VGCCI. CBC
the Supreme Court ruled that the CMMCI president, in exercising
protested such sale.
such powers, need not secure a resolution from the company’s

board of directors:
VGGCCI STATED THAT UNDER ITS BY-LAWS, A member cannot sell

his shares if there are unpaid obligations to the country club.
“Thus, given the president’s express powers under the CMMCI’s by-

laws, Sugimoto, as the president of CMMCI, was more than
ISSUE: WHETHER CBC IS BOUND BY VGCCI’S BYLAWS
equipped to enter into loan transactions on CMMCI’s behalf.

Accordingly, the loans obtained by Sugimoto from Tsukahara on
HELD:
behalf of CMMCI are valid and binding against the latter, and
Since China bank is not among those enumerated by law as being
CMMCI may be held liable to pay such loans.”
of two corporations which are in competition with SMC. SMC

A corporate officer may represent and bind the corporation in therefore has a right to protect its interest that is why the
transactions with third persons to the extent that the authority to stockholders can validly amend the by-laws. (The corporation has
do so has been intentionally, incidentally or impliedly conferred the authority to provide for qualifications.)
upon him, or by apparent powers as corporation has caused
persons dealing with its officer or agent to believe that it has What is the ground in order to render the qualifications and
conferred. disqualifications valid?
IT MUST BE REASONABLE.
Discussion: In this case, the Supreme Court mentioned that reasonableness is a
question of whether or not the provisions in the by-laws are applied
The corporation, its stockholders and officers are bound by its by- without qualification. SC held that the provision is reasonable
laws. The third person therefore have the right to rely on the because it applies to all, it does not apply to a specific person. So any
provision or authority in the by-laws. The corporation, when it provision in the by- laws which provides for qualification and
provides for certain authority in its by-laws (which is it is allowed disqualifications of directors in the election of directors is a valid
to do) is bound by such authority. When the corporation provide provision provided that it applies to all and not just to a specific
for certain authorities for its officers in its by-laws, it cannot person.
thereafter retract and say later on that it is not what they intend to
so long as such authority is expressly provided in the by-laws and AMENDMENT OF BY-LAWS
so long as it is not contrary to laws and public policy. Ordinarily, any Section 47. Amendment to by-laws –A MAJORITY
transaction entered into by the corporation should be done by the OF the board of directors or trustees, and the owners of at least a
board of directors, so supposedly without the approval of the board majority of the outstanding capital stock, or at least a majority of
of directors the corporation cannot transact business. In this case the members of a non-stock corporation, at a regular or special
there was no approval by the board of directors it was just the meeting duly called for the purpose, may
president himself who signed the documents, however such is still amend or repeal THE by-laws or adopt new by-laws. The owners of
binding to the corporation because it is expressly provided in their two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3)
by-laws. of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal the by-
GOKONGWEI JR. V SEC laws or adopt new bylaws: Provided, That any power delegated to
Facts: In this case petitioner Gokongwei is a stockholder of San the board of directors or trustees to amend or repeal the by-laws
Miguel Corporation. He filed a case for the declaration of nullity of or adopt new by-laws shall be considered as revoked whenever
the amended by-laws of respondent corporation because he allege stockholders
that the said amendment made by the stockholders is done to owning or representing a majority of the outstanding
prejudice him because at that time, he was qualified to be elected as capital stock or a majority of the members in shall so vote at a
a board of director. The respondent on the other hand contended regular or special meeting.
that Gokongwei cannot successfully impugn the amendment of the
by-laws because they discovered that Gokongwei, although he was a Whenever the by-laws are amended or new by-laws are adopted,
stockholder of San Miguel, he was also at the same time a controlling the corporation shall file with the commission such amended or
stockholder of UFC AND CFC who are also stockholders of San Miguel new by-laws and, if applicable, the stockholders’ or members’
Corporation and in that instance they discovered that these two resolution authorizing the delegation of the power to amend
corporations which are controlled by Gokongwei, are also engaged and/or adopt new by-laws, duly certified under oath by the
in businesses in competition with San Miguel. Taking from this, in corporate secretary and a majority of the directors or trustees.
most of the meetings that they had, the stockholders voted against
the election of Gokongwei in fact in one meeting the stockholders The amended or new by-laws shall only be effective upon the
voted 80% against Gokongwei and in another meeting 90% against issuance by the Commission of a certification that the same is in
him. accordance with this Code and other relevant laws.

Discussion: AMENDMENT OF BY LAWS CAN BE DONE IN TWO (2) MODES:
What was Gokongwei fighting against?
He was fighting against the amendment of the by-laws because the 1. DIRECT METHOD – done by the vote of majority of the board
amendment will disqualify him from being elected as a Board of and the owners of at least the majority of the outstanding
Director. The amendment provides for a ground to disqualify a capital stock
nominee from election to the board. Under the proposed Requirements:
amendment of San Miguel, it provides that a nominee who holds a a. Vote of the Majority of the Board of
competing interest or conflicting interest against the corporation Directors/trusees
may not be elected as a director. b. Vote of the stockholders owning at least majority
of the Outstanding capital stock
In this case, the voting of the Justices were tied. They dismissed the
question on the validity of the by-laws for failure to acquire the 2. INDIRECT METHOD – this is when the power to amend the
necessary votes. However it mentioned in the decision that the by-laws are delegated to the Board alone.
stockholders can amend the by-laws because as a rule when a Requirements:
stockholders enters into corporation it submits to the idea that the a. The power to amend/repeal the by-laws must be
decisions are controlled by the majority and in this case he cannot delegated to the board by the owners of the 2/3 of
acquire any vested right to the position and that by virtue of the fact the outstanding capital stock to the board.
that he has antagonistic claims or being the controlling stockholder
b. After the delegation, the power to amend/repeal on the adequacy of the corporation’s internal controls or risk
the by-laws is now solely lodged in the board. management systems, and a statement to fall external audit and
NOTE: non-audit fees;
To revoke the delegation of the power to amend/repeal the by-laws, (e) An explanation of the dividend policy and the fact of payment
ownly the vote of the stockholders owning a majority of the outsanding of dividends or the reasons for nonpayment thereof;
capial stock is needed. (f) Director or trustee profiles which shall include, among others,
their qualifications and relevant experience, length of service in the
corporation, trainings and continuing education attended, and
DIFFERENCE BETWEEN THE TWO MODES: their board representations in other corporations;
(g) A director or trustee attendance report, indicating the
•
ST
1 mode is approved by both the BOD and Stockholders; 2
nd attendance of each director or trustee at each of the meetings of
mode is only to be approved by BOD. the board and its committees and in regular or special stockholder
•
st
In the 1 mode the stockholders actually approve what’s in meetings;
the amended by law. First the BOD then the Stockholders (h) Appraisals and performance reports for the board
nd
approve. In the 2 mode, the stockholders do not actually and the criteria and procedure for assessment;
see what’s in the amended by-laws because the (i) A director or trustee compensation report prepared in
stockholder’s approval comes first (approval to delegate to accordance with this Code and the rules the Commission may
the BOD the power to amend the by-laws). prescribe;
(j) Director disclosures on self-dealings and related party
TITLE VI - MEETINGS transactions; and/or
KINDS OF MEETINGS (k) The profiles of directors nominated or seeking election or
SECTION 48. Kinds of Meetings. — Meetings of directors, trustees, reelection.
stockholders, or members may be regular or special. A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting of
MEETINGS OF STOCKHOLDERS AND MEMBERS stockholders or members.
Special meetings of stockholders or members shall be held at any
SECTION 49. Regular and Special Meetings of Stockholders or
time deemed necessary or as provided in the bylaws: Provided,
Members. — Regular meetings of stockholders or members shall be
however, That, at least one (1) week written notice shall be sent to
held annually on a date fixed in the bylaws, or if not so fixed, on any
all stockholders or members, unless a different period is provided
date after April 15 of every year as determined by the board of
in the bylaws, law, or regulation.
directors or trustees: Provided, That written notice of regular
A stockholder or member may propose the holding of a special
meetings shall be sent to all stockholders or members of record at
meeting and items to be included in the agenda.
least twenty-one (21) days prior to the meeting, unless a different
Notice of any meeting may be waived, expressly or impliedly, by
period is required in the by-laws, law, or regulation: Provided,
any stockholder or member: Provided, That, general waivers of
further, That written notice of regular meetings may be sent to all
notice in the articles of incorporation or the bylaws shall not be
stockholders or members of record through electronic mail or such
allowed: Provided, further, that attendance at a meeting shall
other manner as the Commission shall allow under its guidelines.
constitute a meeting for the express purpose of objecting to the
At each regular meeting of stockholders or members, the board of
transaction of any business because the meeting is not lawfully
directors or trustees shall endeavor to present to stockholders or
called or convened.
members the following:
Whenever for any cause, there is no person authorized or the
(a) The minutes of the most recent regular meeting which shall
person authorized unjustly refuses to call a meeting, the
include, among others:
Commission, upon petition of a stockholder or member on a
(1) A description of the voting and vote tabulation procedures used
showing of good cause therefor, may issue an order, directing the
in the previous meeting;
petitioning stockholder or member to call a meeting of the
(2) A description of the opportunity given to stockholders or
corporation by giving proper notice required by this Code or the
members to ask questions and a record of the questions asked and
bylaws. The petitioning stockholder or member shall preside
answers given;
thereat until at least a majority of the stockholders or members
(3) The matters discussed and resolutions reached;
present have chosen from among themselves, a presiding officer.
(4) A record of the voting results for each agenda item;

(5) A list of the directors or trustees, officers and
Unless the bylaws provide for a longer period, the stock and
stockholders or members who attended the meeting; and
transfer book or membership book shall be closed at least twenty
(6) Such other items that the Commission may require in the
(20) days for regular meetings and seven (7) days for special
interest of good corporate governance and the protection of
meetings before the scheduled date of the meeting.
minority stockholders;
In case of postponement of stockholders’ or members’ regular
(b) A members’ list for non-stock corporations and,for stock
meetings, written notice thereof and the reason therefor shall be
corporations, material information on the current stockholders,
sent to all stockholders or members of record at least two (2) weeks
and their voting rights;
prior to the date of the meeting, unless a different period is
(c) A detailed, descriptive, balanced and comprehensible
required under the bylaws, law or regulation.
assessment of the corporation’s performance, which shall include
The right to vote of stockholders or members may be exercised in
information on any material change in the corporation’s business,
person, through a proxy, or when so authorized in the bylaws,
strategy, and other affairs;
through remote communication or in absentia. The Commission
(d) A financial report for the preceding year, which shall include
shall issue the rules and regulations governing participation and
financial statements duly signed and certified in accordance with
voting through remote communication or in absentia, taking into
this Code and the rules the Commission may prescribe, a statement
account the company’s scale, number of shareholders or members,
structure, and other factors consistent with the protection and (a) principal office of the corporation as set forth in the articles
promotion of shareholders’ or members’ meetings. of incorporation

PLACE AND TIME (b) if not practicable, in the city or municipality where the
Section 50. Place and Time of Meetings of Stockholders or principal office of the corporation is located: Provided, That
Members. – Stockholders’ or members’ meetings, whether regular any city or municipality in Metro Manila, Metro Cebu, Metro
or special, shall be held in the principal office of the corporation as Davao, and other Metropolitan areas shall, for purposes of
set forth in the articles of incorporation, or, if not practicable, in the this section, be considered a city or municipality.
city or municipality where the principal office of the corporation is
located:
Provided, That any city or municipality in Metro Manila, Metro written notice of regular meetings -
Cebu, Metro Davao, and other Metropolitan areas shall, for Ø shall be sent to all stockholders or members of record at
purposes of this section, be considered a city or municipality. least twenty-one (21) days prior to the meeting unless the
Notice of meetings shall be sent through the means of by-laws provide for a longer period
communication provided in the bylaws, which notice shall state the
time, place and purpose of the meetings. SPECIAL MEETINGS OF STOCKHOLDERS
Each notice of meeting shall further be accompanied by the WHEN
following: Ø Any time as deemed necessary
(a) The agenda for the meeting;
(b) A proxy form which shall be submitted to the corporate WHERE
secretary within a reasonable time prior to the meeting; (a) principal office of the corporation as set forth in the articles
(c) When attendance, participation, and voting are allowed by of incorporation
remote communication or in absentia, the requirements and
procedures to be followed when a stockholder or member elects (b) if not practicable, in the city or municipality where the
either option; and principal office of the corporation is located: Provided, that
(d) When the meeting is for the election of directors any city or municipality in Metro Manila, Metro Cebu, Metro
or trustees, the requirements and procedure for nomination and Davao, and other Metropolitan areas shall, for purposes of
election. this section, be considered a city or municipality.
All proceedings and any business transacted at a
meeting of the stockholders or members, if within the Written notice of special meetings
powers or authority of the corporation, shall be valid Ø at least one (1) week before the meeting unless a different
even if the meeting is improperly held or called: period is provided in the bylaws, law, or regulation.
Provided, That all the stockholders or members of the corporation
are present or duly represented at the meeting and not one of them SIMNY G. GUY, VS. GILBERT G. GUY,
expressly states at the beginning of the meeting that the purpose G.R. No. 184068. April 19, 2016.
of their attendance is to object to the transaction of any business (Attorney’s lecture):
because the meeting is not lawfully called or convened. The issue in this case was that the Stockholders did not receive the
notice but it was sent. There was a question W/N the meeting was
NOTE: Please check the rest of Section 49 of the Revised Corporation valid. The Supreme Court ruled that the law and the by-laws of the
Code. There is a long list of what is to be presented in meetings. It was corporation are unambiguous, it only require the sending of notices
not discussed in class. and nothing therein state that it should be received by the SHs.
To send in Corporation Code is different from Remedial Law in terms
KINDS OF MEETINGS of filing or sending of petitions/ documents which requires receipt,
REGULAR here it does not.
• DIRECTORS OR TRUSTEES’ REGULAR MEETING In this case, the president was able to prove that notices were sent
to all SHs, so the SC upheld the validity of the meeting even if some
• STOCKHOLDER OR MEMBERS’ REGULAR MEETING SHs were not able to receive the notice.
‘Depositing in the mail of the notice is sufficient as part of sending.
SPECIAL Receipt is not required.” Thus, the corporation need not show that
• DIRECTORS OR TRUSTEES’ REGULAR MEETING the notice was received unless the by-laws of that corporation
specifically requires.
• STOCKHOLDER OR MEMBERS’ REGULAR MEETING
FACTS: GCI is a family-owned corporation of the Guy family .
MEETINGS OF STOCKHOLDERS/MEMBERS
On 10 September 2004, Paulino Delfin Pe and Benjamin Lim

(stockholders of record of GCI) informed Simny that they had
REGULAR MEETINGS OF STOCKHOLDERS
received a notice dated 31 August 2004 calling for the holding of a
WHEN special stockholders' meeting on 7 September 2004.
Ø Annually On 30 September 2004, Simny, for himself and on behalf of GCI and
Ø On a date fixed in the by-laws, Grace Guy Cheu, filed a Complaint against respondents for the
a. or if not so fixed, on any date after April 15 of every "Nullification of Stockholders' Meeting. He argued on the following
year, as determined by the board of directors or grounds:
trustees (1) there was no previous notice to Simny and Cheu; (2) the meeting
WHERE was not called by the proper person; and (3) the notices were not
issued by the person who had the legal authority to do so.
Gilbert argued that the meeting on was legally called and held; that Macrohon and Paulino T. Lim (Bernas Group) were among the
the notice of meeting was signed by the authorized officer of GCI and Members of the Board of Directors and Officers of the corporation
sent in accordance with the by-laws of the corporation whose terms were to expire either in 1998 or 1999.

ISSUE: Whether or not the notice of the stockholders' meeting was Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea and
properly sent in compliance with law and the by-laws of the Alex Y. Pardo (Cinco Group) are the members and stockholders of the
corporation? corporation who were elected Members of the Board of Directors
and Officers of the club during the 17 December 1997 Special
HELD: YES. Special meetings of stockholders or members shall be Stockholders Meeting.
held at any time deemed necessary or as provided in the by-laws: Alarmed with the rumored anomalies in handling the corporate
Provided, however, that at least one (1) week written notice shall be funds, the MSC Oversight Committee (MSCOC), composed of the
sent to all stockholders or members, unless otherwise provided in past presidents of the club, demanded from the Bernas Group, who
the by-laws. Notice of any meeting may be waived, expressly or were then incumbent officers of the corporation, to resign from their
impliedly, by any stockholder or member. respective positions to pave the way for the election of new set of
The Court finds that the provisions under Sec. 50 of the Corporation officers. Resonating this clamor were the stockholders of the
Code and the by-laws of GCI are clear and unambiguous. They do not corporation representing at least 100 shares who sought the
admit of two or more meanings, nor do they make reference to two assistance of the MSCOC to call for a special stockholders meeting
or more things at the same time. The provisions only require the for the purpose of removing the sitting officers and electing new
sending/mailing of the notice of a stockholders' meeting to the ones. Pursuant to such request, the MSCOC called a Special
stockholders of the corporation. Sending/mailing is different from Stockholders’ Meeting and sent out notices to all stockholders and
filing or service under the Rules of Court. Had the lawmakers members stating therein the time, place and purpose of the
intended to include the stockholder's receipt of the notice, they meeting. For failure of the Bernas Group to secure an injunction
would have clearly reflected such requirement in the law. Absent before the Securities Commission (SEC), the meeting proceeded
that requirement, the word "send" should be understood in its plain wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus
meaning: Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr. and Paulino T.
‘Depositing in the mail of the notice is sufficient as part of sending. Lim were removed from office and, in their place and stead, Jovencio
Receipt is not required.” Thus, the corporation need not show that F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio
the notice was received unless the by-laws of that corporation G. Villarosa, Armando David, Norberto Maronilla, Regina de Leon-
specifically requires. Herlihy and Claudio B. Altura, were elected.
Aggrieved by the turn of events, the Bernas Group initiated an action
WHO CAN CALL THE MEETING? before the Securities Investigation and Clearing Department (SICD)
1. Any person designated in the by-laws; or of the SEC docketed as SEC Case No. 5840 seeking for the nullification
of the 17 December 1997 Special Stockholders Meeting on the
2. In the absence of that provision or in case of refusal of the said ground that it was improperly called. Citing Section 28 of the
person to call the meeting, then the stockholder may petition Corporation Code, the Bernas Group argued that the authority to call
the SEC to order the calling of the meeting. So, the SEC will issue a meeting lies with the Corporate Secretary and not with the MSCOC
an order directing the petitioning stockholder to call the meeting which functions merely as an oversight body and is not vested with
to call the meeting of the corporation. the power to call corporate meetings. For being called by the
persons not authorized to do so, the Bernas Group urged the SEC to
BERNAS VS. CINCO declare the 17 December 1997 Special Stockholders’ Meeting,
G.R. No. 163356-57, July 10, 2015 - cited provisions based on Old including the removal of the sitting officers and the election of new
Corporation Code ones, be nullified.
(Atty’s lecture:)
Here is a case of an Oversight Committee calling for a meeting to For their part, the Cinco Group insisted that the 17 December 1997
overthrow the current directors or officers of the corporation. Special Stockholders’ Meeting is sanctioned by the Corporation Code
In this case, the SC held that the meeting was improperly called, IOW and the MSC by-laws. In justifying the call effected by the MSCOC,
void. The Oversight Committee did not have the authority to call the they reasoned that Section 25 of the MSC by-laws merely authorized
meeting. It ruled that it could have been allowed if the stockholders the Corporate Secretary to issue notices of meetings and nowhere
did not have any options but its by-laws and the law provided the does it state that such authority solely belongs to him. It was further
option. One contention in this case was that the sitting officers, of asseverated by the Cinco Group that it would be useless to course
course, would not call a meeting to oust themselves. The SC said that the request to call a meeting thru the Corporate Secretary because
it may be true but they were not left without any recourse because he repeatedly refused to call a special stockholders’ meeting despite
they can always go to the SEC and petition the SEC for the calling of demands and even filed a suit to restrain the holding of a special
the meeting. Hence, the meeting in this case was invalid for it was meeting.
called for by people who were not authorized to do it and
consequently, the election held was also invalid.) ISSUE: W/N the meeting was validly called?
Ruling: No. The Special Stockholders' Meeting called by the Oversight
FACTS: Makati Sports Club (MSC) is a domestic corporation duly Committee cannot have any legal effect. The removal of the Bernas
organized and existing under Philippine laws for the primary purpose Group, as well as the election of the Cinco Group, effected by the
of establishing, maintaining, and providing social, cultural, assembly in that improperly called meeting is void, and since the
recreational and athletic activities among its members. Cinco Group has no legal right to sit in the board, their subsequent
acts of expelling Bernas from the club and the selling of his shares. at
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. the public auction, are likewise invalid.
Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T.
The Corporation Code laid down the rules on the removal of the say, the MSCOC is neither empowered by law nor the MSC by-laws
Directors of the corporation by providing, inter alia, the persons to call a meeting and the subsequent ratification made by the
authorized to call the meeting and the number of votes required for stockholders did not cure the substantive infirmity, the defect having
the purpose of removal, thus: set in at the time the void act was done. The defect goes into the very
Textually, only the President and the Board of Directors are authority of the persons who made the call for the meeting. It is apt
authorized by the by-laws to call a special meeting. In cases where to recall that illegal acts of a corporation which contemplate the
the person authorized to call a meeting refuses, fails or neglects to doing of an act which is contrary to law, morals or public order, or
call a meeting, then the stockholders representing at least 100 contravenes some rules of public policy or public duty, are, like
shares, upon written request, may file a petition to call a special similar transactions between individuals, void.They cannot serve as
stockholder's meeting. basis for a court action, nor acquire validity by performance,
In the instant case, there is no dispute that the 17 December 1997 ratification or estoppel. The same principle can apply in the present
Special Stockholders' Meeting was called neither by the President case. The void election of 17 December 1997 cannot be ratified by
nor by the Board of Directors but by the MSCOC. While the MSCOC, the subsequent Annual Stockholders' Meeting.
as its name suggests, is created for the purpose of overseeing the A distinction should be made between corporate acts or contracts
affairs of the corporation, nowhere in the by-laws does it state that which are illegal and those which are merely ultra vires. The former
it is authorized to exercise corporate powers, such as the power to contemplates the doing of an act which are contrary to law, morals
call a special meeting, solely vested by law and the MSC by-laws on or public policy or public duty, and are, like similar transactions
the President or the Board of Directors. between individuals, void: They cannot serve as basis of a court
The board of directors is the directing and controlling body of the action nor acquire validity by performance, ratification or estoppel.
corporation. It is a creation of the stockholders and derives its power Mere ultra vires acts, on the other hand, or those which are not
to control and direct the affairs of the corporation from them. The illegal or void ab initio, but are not merely within the scope of the
board of directors, in drawing to itself the power of the corporation, articles of incorporation, are merely voidable and may become
occupies a position of trusteeship in relation to the stockholders, in binding and enforceable when ratified by the stockholders. The 1 7
the sense that the board should exercise not only care and diligence, December 1997 Meeting belongs to the category of the latter, that
but utmost good faith in the management of the corporate affairs. is, it is void ab initio and cannot be validated.
The underlying policy of the Corporation Code is that the business
and affairs of a corporation must be governed by a board of directors IMPROPERLY CALLED MEETINGS
whose members have stood for election, and who have actually been Improperly called meetings can be considered valid provided:
elected by the stockholders, on an annual basis. Only in that way can 1. ALL the stockholders attend or duly represented during that
the continued accountability to shareholders, and the legitimacy of meeting.
their decisions that bind the corporation's stockholders, be assured. 2. not one of those stockholders attended just for the purpose
The shareholder vote is critical to the theory that legitimizes the of objecting to the calling or holding of the meeting.
exercise of power by the directors or officers over the properties that
they do not own. Even if the meeting is improperly held or improperly called, all
Even the Corporation Code is categorical in stating that a corporation transactions all resolutions approved during the stockholders’ meeting
exercises its powers through its board of directors and/or its duly can still be considered as valid provided that ALL the stockholders
authorized officers and agents, except in instances where the attend or duly represented during that meeting.
Corporation Code requires stockholders' approval for certain specific The new amendment added a new caveat, provided that not anyone
acts (Section 23, Old Code). of those stockholders attended just for the purpose of objecting to the
A corporation's board of directors is understood to be that body calling or holding of the meeting.
which (1) exercises all powers provided for under the Corporation so even if the stockholders are duly represented or are present, but
Code; (2) conducts all business of the corporation; and (3) controls one of them was there just to object the calling or the holding of the
and holds all the property of the corporation. Its members have been meeting then you cannot apply the exception that the meeting is still
characterized as trustees or directors clothed with fiduciary valid even if it’s improperly held or called provided all the stockholders
character.25 are present or duly represented.
It is ineluctably clear that the fiduciary relation is between the
stockholders and the board of directors and who are vested with the METHODS OF ATTENDING MEETING:
power to manage the affairs of the corporation. The ordinary trust 1. IN PERSON
relationship of directors of a corporation and stockholders is not a 2. BY PROXY
matter of statutory or technical law. It springs from the fact that 3. IN ABSENTIA – remote communication
directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders. Previously under the old Corporation Code they can attend in person
Equity recognizes that stockholders are the proprietors of the or by proxy but now the new law has added a third form of attendance
corporate interests and are ultimately the only beneficiaries thereof. which is through remote communication or in absentia, provided that
Should the board fail to perform its fiduciary duty to safeguard the in these two the vote shall be received before the corporation finishes
interest of the stockholders or commit acts prejudicial to their the tallying of the votes
interest, the law and the by-laws provide mechanisms to remove and
replace the erring director. QUORUM IN MEETINGS
Relative to the powers of the Board of Directors, nowhere in the SECTION 51. Quorum in Meetings. — Unless otherwise provided in
Corporation Code or in the MSC by-laws can it be gathered that the this Code or in the bylaws, a quorum shall consist of the
Oversight Committee is authorized to step in wherever there is stockholders representing a majority of the outstanding capital
breach of fiduciary duty and call a special meeting for the purpose of stock or a majority of the members in the case of nonstock
removing the existing officers and electing their replacements even corporations.
if such call was made upon the request of shareholders. Needless to
constitute a quorum for the transaction of corporate business
STOCK CORPORATIONS (unless the articles of incorporation or the bylaws provide for a
Based on the number of outstanding capital stocks (so long as it is greater majority). If the intention of the lawmakers was to base the
subscribed and outstanding) quorum in the meetings of stockholders or members on their
NONSTOCK CORPORATIONS absolute number as fixed in the articles of incorporation, it would
Based on actual living members with the right to vote have expressly specified so. Otherwise, the only logical conclusion is
DISCUSSION: that the legislature did not have that intention.
Ordinarily, the quorum of the stockholders is majority of the In stock corporations, shareholders may generally transfer their
outstanding capital stock or majority of members in case of non- stock shares. Thus, on the death of a shareholder, the executor or
corporations. In ordinary approval by the stockholders you just need administrator duly appointed by the Court is vested with the legal
to look at the outstanding 50% plus one (1) of the outstanding capital title to the stock and entitled to vote it.
stock meaning you don’t include treasury shares. On the other hand, membership in and all rights arising from a
But there are certain instances where two-thirds (2/3) vote is required nonstock corporation are personal and non-transferable, unless the
so those are exceptions to the rule that quorum is majority because in articles of incorporation or the bylaws of the corporation provide
those instances where 2/3 vote is required you don’t use 50% plus one otherwise. In other words, the determination of whether or not
(1) the required vote is 2/3. "dead members" are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of
LEE TAN VS SYCIP, G.R. NO. 153468, AUGUST 17, 2006 incorporation or bylaws.
Facts: Petitioner Grace Christian high school is a non-stock, non- Under the By-Laws of GCHS, membership in the corporation shall,
profit educational institution composed of 15 regular members who among others, be terminated by the death of the member. Section
are ALL members of the board of trustees. 91 of the Corporation Code further provides that termination
An annual stockholder’s meeting was held and during that time, 4 extinguishes all the rights of a member of the corporation, unless
members were already deceased effectively making both the Board otherwise provided in the articles of incorporation or the bylaws.
of Trustees (BOT) and Members(shareholders) membership only 11. Applying Section 91 to the present case, we hold that dead members
During the meeting, only 7 members attended with their respective who are dropped from the membership roster in the manner and for
proxies. When the meeting was sought to be convened, Atty. Pacis the cause provided for in the By-Laws of GCHS are not to be counted
objected arguing that there was no quorum (50% plus 1). in determining the requisite vote in corporate matters or the
Quorum if based on total member composition (15) - 8 requisite quorum for the annual members' meeting. With 11
Quorum if based on remaining alive members(11) - 6 remaining members, the quorum in the present case should be 6.
In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, Therefore, there being a quorum, the annual members' meeting,
and Judith Tan were voted to replace the four deceased member- conducted with six members present, was valid.
trustees. Filling of Vaccancies in the BOT
Issue: WON there was quorum in the meeting held. Under Sec. 29 of the corporation code, trustees may fill vacancies in
Held: YES, THERE WAS QUORUM, hence the meeting was valid. the board, provided that those remaining still constitute a quorum.
In the absence of an express charter or statutory provision to the The phrase "may be filled" in Section 29 shows that the filling of
contrary, the general rule is that every member of a nonstock vacancies in the board by the remaining directors or trustees
corporation, and every legal owner of shares in a stock corporation, constituting a quorum is merely permissive, not mandatory.
has a right to be present and to vote in all corporate meetings. Corporations, therefore, may choose how vacancies in their
Conversely, those who are not stockholders or members have no respective boards may be filled up — either by the remaining
right to vote. Voting may be expressed personally, or through proxies directors constituting a quorum, or by the stockholders or members
who vote in their representative capacities. Generally, the right to be in a regular or special meeting called for the purpose.
present and to vote in a meeting is determined by the time in which While a majority of the remaining corporate members were present,
the meeting is held. however, the "election" of the four trustees cannot be legally upheld
Section 52 of the Corporation Code states: "Section 52. Quorum in for the obvious reason that it was held in an annual meeting of the
Meetings. —Unless otherwise provided for in this Code or in the by- members, not of the board of trustees.
laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the REGULAR AND SPECIAL MEETINGS OF BOD/ TRUSTEES
members in the case of non-stock corporations." Section 52. Regular and Special Meetings of Directors or Trustees;
Stock Corporations Quorum — Unless the articles of incorporation or the bylaws
The right to vote is inherent in and incidental to the ownership of provides for a greater majority, a majority of the directors or
corporate stocks. Only stock actually issued and outstanding may be trustees as stated in the articles of incorporation shall constitute a
voted. Under Section 6 of the Corporation Code, each share of stock quorum to transact corporate business, and every decision reached
is entitled to vote, unless otherwise provided in the articles of by at least a majority of the directors or trustees constituting a
incorporation or declared delinquent under Section 67 of the Code. quorum, except for the election of officers which shall require the
The intention of the lawmakers was to base the quorum mentioned vote of a majority of all the members of the board, shall be valid as
in Section 52 on the number of outstanding voting stocks. a corporate act.
Nonstock Corporations Regular meetings of the board of directors or trustees of every
In nonstock corporations, the voting rights attach to membership. 39 corporation shall be held monthly, unless the bylaws provide
Members vote as persons, in accordance with the law and the bylaws otherwise.
of the corporation. Each member shall be entitled to one vote unless Special meetings of the board of directors or trustees may be held
so limited, broadened, or denied in the articles of incorporation or at any time upon the call of the president or as provided in the
bylaws. bylaws.
Section 25 of the Code specifically provides that a majority of the Meetings of directors or trustees of corporations may be held
directors or trustees, as fixed in the articles of incorporation, shall anywhere in or outside of the Philippines, unless the bylaws
provide otherwise. Notice of regular or special meetings stating the
date, time and place of the meeting must be sent to every director Majority of the directors or trustees stated in the Articles of
or trustee at least two (2) days prior to the scheduled meeting, Incorporation.
unless a longer time is provided in the bylaws. A director or trustee
may waive this requirement, either expressly or impliedly. - For there to be a valid corporate act:
Directors or trustees who cannot physically attend or vote at board GENERAL RULE:
meetings can participate and vote through remote communication Decision reached by at least a majority of Directors or Trustees
such as videoconferencing, teleconferencing, or other alternative present in a meeting where there is a quorum shall be a valid
modes of communication that allow them reasonable vote.
opportunities to participate. Directors or trustees cannot attend or EXCEPTION
vote by proxy at board meetings. In election of officers, the vote required is a majority of ALL the
A director or trustee who has a potential interest in any related Board of Directors.
party transaction must recuse from voting on the approval of the
related party transaction without prejudice to compliance with the WHO SHALL PRESIDE AT MEETINGS
requirements of Section 31 of this Code. SECTION 53. Who Shall Preside at Meetings. — The chairman or,
in his absence, the president shall preside at all meetings of the
REGULAR MEETINGS OF THE BOARD OF DIRECTORS/TRUSTEES directors or trustees as well as of the stockholders or members,
WHEN unless the bylaws provide otherwise.
Ø Monthly
Ø unless the by-laws provide otherwise There is a slight revision here from the old law so now, it is the
WHERE Chairman or in his absence the President shall preside at the meeting
Ø anywhere in or outside of the Philippines, unless the bylaws of the stockholders as well as the board of directors.
provide otherwise Before it is used to be the President now it is the Chairman and only if
his absent it is the President.
notice of regular board meetings -
Ø at least two (2) days prior to the scheduled meeting, unless PLEDGE/ MORTGAGE SHARES
a longer time is provided in the bylaws SECTION 54. Right to Vote of Secured Creditors and Administrators.
— In case a stockholder grants security interest in his or her
SPECIAL MEETINGS OF THE BOARD OF DIRECTORS/TRUSTEES shares in stock corporations, the stockholder-grantor shall have
WHEN the right to attend and vote at meetings of stockholders, unless
Ø anytime upon the call of the President, rr as provided in the the secured creditor is expressly given by the stockholder-grantor
by-laws such right in writing which is recorded in the appropriate
corporate books.
WHERE Executors, administrators, receivers, and other legal
Ø anywhere in or outside of the Philippines, unless the bylaws representatives duly appointed by the court may attend and vote
provide otherwise in behalf of the stockholders or members without need of any
written proxy.

It is the pledgor or the mortgagor who has the right to vote if the
Notice of special board meetings pledgee or mortgagee wants to have that right then the right must be
Ø at least two (2) days prior to the scheduled meeting, unless recorded in the Stock and Transfer Book of the corporation otherwise
a longer time is provided in the bylaws. it is still the pledgor or mortgagor being the stockholder has the right
to vote.
It can be anywhere within or even outside the Philippines unless the For legal representatives they can attend without a need of a written
bylaws provide otherwise proxy.
So the rule for the place of holding the meetings for is more lenient in
the case of the BOD because the presumption is the BOD will go to VOTING TRUST AGREEMENTS
wherever place the meeting will be held and in fact it is normally the SECTION 58. Voting Trusts. — One or more stockholders of a
corporation who pays the travel expenses of the BOD and they got paid stock corporation may create a voting trust for the purpose of
to attend the meetings so it can be held anywhere in the Philippines conferring upon a trustee or trustees the right to vote and other
unlike stockholders who has to pay for their own expenses when they rights pertaining to the shares for a period not exceeding five (5)
will attend the meeting the corporation will not pay for their expenses years at any time: Provided, That in the case of a voting trust
so it is always fix for the stockholders. specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5) years but
Atty: The presumption is that the director will go to the place wherever shall automatically expire upon full payment of the loan. A voting
the meeting is held. This is because it is the Corporation who pays for trust agreement must be in writing and notarized, and shall
the meeting of the board and even the corporation will pay the specify the terms and conditions thereof.
directors if they attend the meeting. Unlike for the stockholders that A certified copy of such agreement shall be led with the
they pay for their own expenses for the meetings. That is the reason corporation and with the Commission; otherwise, the agreement
why the meeting of the stockholders is always fixed. is ineffective and unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be cancelled
QUORUM IN BOARD MEETINGS and new ones shall be issued in the name of the trustee or
- Quorum: trustees, stating that they are issued pursuant to said agreement.
The books of the corporation shall state that the transfer in the period or within a longer period stipulated in the contract of
name of the trustee or trustees is made pursuant to the voting subscription.
trust agreement. No pre-incorporation subscription may be revoked
The trustee or trustees shall execute and deliver to the after the articles of incorporation is submitted to the
transferors, voting trust certificates, which shall be transferable Commission.
in the same manner and with the same effect as certificates of
stock. Rule for Pre-incorporation Subscription
The voting trust agreement led with the corporation shall be • Irrevocable for a period of six months, unless all of
subject to examination by any stockholder of the corporation in the other subscribers consent to the revocation, or the
the same manner as any other corporate book or record: corporation fails to incorporate within the same period or
Provided, That both the trustor and the trustee or trustees may within a longer period stipulated in the contract of
exercise the right of inspection of all corporate books and records subscription.
in accordance with the provisions of this Code. • No pre-incorporation subscription may be revoked after the
Any other stockholder may transfer the shares to the same articles of incorporation is submitted to the Commission
trustee or trustees upon the terms and conditions stated in the
voting trust agreement, and thereupon shall be bound by all the CONSIDERATION FOR STOCKS
provisions of said agreement. SEC. 61. Consideration for Stocks. – Stocks shall not
No voting trust agreement shall be entered into for purposes of be issued for a consideration less than the par or
circumventing the laws against anti-competitive agreements, issued price thereof. Consideration for the issuance of
abuse of dominant position, anticompetitive mergers and stock may be:
acquisitions, violation of nationality and capital requirements, or (a) Actual cash paid to the corporation;
for the perpetuation of fraud. (b) Property, tangible or intangible, actually received
Unless expressly renewed, all rights granted in a voting trust by the corporation and necessary or convenient for its
agreement shall automatically expire at the end of the agreed use and lawful purposes at a fair valuation equal to
period. The voting trust certificates as well as the certificates of the par or issued value of the stock issued;
stock in the name of the trustee or trustees shall thereby be (c) Labor performed for or services actually rendered
deemed cancelled and new certificates of stock shall be reissued to the corporation;
in the name of the trustors. (d) Previously incurred indebtedness of the corporation;
The voting trustee or trustees may vote by proxy or in any (e) Amounts transferred from unrestricted retained
manner authorized under the bylaws unless the agreement earnings to stated capital;
provides otherwise. (f) Outstanding shares exchanged for stocks in the
Here, you need to cancel the original certificate and instead you need event of reclassification or conversion;
to have a voting trust certificate issued in favor of the trustee. The (g) Shares of stock in another corporation; and/or
voting trust certificate will allow the trustee to vote on the shares. (h) Other generally accepted form of consideration.

TITLE VII- STOCKS AND STOCKHOLDERS Where the consideration is other than actual cash, or
2 ways to become a stockholder consists of intangible property such as patents or
1. SUBSCRIPTION – purchasing unissued stocks copyrights, the valuation thereof shall initially be
2. ASSIGNMENT – purchasing issued stocks determined by the stockholders or the board of
directors, subject to the approval of the Commission.
SUBSCRIPTION Shares of stock shall not be issued in exchange for
SEC. 59. Subscription Contract. – Any contract for the acquisition of promissory notes or future service. The same
unissued stock in an existing corporation or a corporation still to be considerations provided in this section, insofar as
formed shall be deemed a subscription within the meaning of this applicable, may be used for the issuance of bonds by
Title, notwithstanding the fact that the parties refer to it as a the corporation.
purchase or some other contract.
The issued price of no-par value shares may be fixed
Subscription is an offer to acquire a specified number of unissued in the articles of incorporation or by the board of
shares of an existing corporation or one still to be formed. directors pursuant to authority conferred by the
articles of incorporation or the bylaws, or if not so
Types of subscriptions fixed, by the stockholders representing at least a
1. Pre-incorporation subscription – subscription before the majority of the outstanding capital stock at a meeting
corporation is incorporated duly called for the purpose.
2. Post-incorporation subscription – subscription after the
corporations incorporated The amount of the consideration should not be less than the par value
or the issued price of the shares. If it is less, it becomes a WATERED
PRE-INCORPORATION SUBSCRIPTION STOCK.
SEC. 60. Pre-incorporation Subscription. –
A subscription of shares in a corporation still to be LIABILITY FOR WATERED STOCKS
formed shall be irrevocable for a period of at least six SEC. 64. Liability of Directors for Watered Stocks. –
(6) months from the date of subscription, unless all of A director or officer of a corporation who:
the other subscribers consent to the revocation, or the
corporation fails to incorporate within the same
(a) consents to the issuance of stocks for a consideration less than its
par or issued value; Printwell amended the complaint in order to implead as defendants
(b) consents to the issuance of stocks for a consideration other than all the original stockholders and incorporators who have remaining
cash, valued in excess of its fair value; or unpaid subscriptions to BMPI. defendants filed a consolidated
(c) having knowledge of the insufficient consideration, does not file a answer averring that BMPI had a separate personality from those of
written objection with the corporate secretary, shall be liable to the its stockholders
corporation or its creditors, solidarily with the stockholder concerned
for the difference between the value received at the time of issuance Issue: Whether the stockholders can be liable to the creditors for
of the stock and their unpaid subscriptions
the par or issued value of the same
Ruling:
When director or officer liable The petitioner is liable pursuant to the trust fund doctrine for the
a. If the consideration is cash, and the officer/director consents corporate obligation of BMPI by virtue of her subscription being still
to the issuance of stocks for a consideration less than its par unpaid. Printwell, as BMPIs creditor, had a right to reach for Halley’s
or issued value; unpaid subscription in satisfaction of its claim.
b. If the consideration is other than cash, and the a stockholder is personally liable for the financial obligations of the
officer/director consents to the issuance of stocks for a corporation to the extent of his unpaid subscription. In view of the
consideration valued in excess of its fair value; or petitioners’ unpaid subscription being worth P262,500.00, she was
c. If having knowledge of the insufficient consideration, does liable up to that amount.
not file a written objection with the corporate secretary
Atty’s Discussion on the case:
Liability The extent of her liability is only up to the full amount of the
stockholder’s unpaid subscription. It’s the same as to the other
The officer/director who falls under the enumeration above shall
stockholders – They are liable only up to the extent of their unpaid
be solidarily liable with the stockholder concerned, to the
subscription. It is not prorated per stockholder. It is to the exact peso
corporation and or its creditors, for the difference between the
amount of the unpaid subscription.
value received at the time of issuance of the stock and the par or
The unpaid subscription constitutes a fund to which creditors can
issued value of the same.
look into for the fulfillment of the corporation’s obligation to them.

That is the trust fund doctrine
TRUST FUND DOCTRINE
This doctrine, first enunciated by the Supreme Court in the
QUESTIONS:
case of Philippine Trust Co. vs. Rivera (144 Phil. 469 [1923].), holds that
1. Two stockholders. The unpaid subscription is 250K each. Amount
the assets of the corporation as represented by its capital stock are
payable to creditor is 20K. If the creditor decides to sue only one of the
"trust funds" to be maintained unimpaired and to be used to pay
corporate creditors in the sense that there can be no stockholders, can said stockholder cannot demand that it be prorated
distribution of such assets among the stockholders without provision among them, considering that they have the same unpaid
being first made for the payment of corporate debts and that any such subscription? Can the stockholder demand that the liability be 10K for
each?
disposition of it is a fraud on the creditors of the corporation who
extend credit to the corporation on the faith of its outstanding capital
stock and, therefore, void. NO. It doesn’t matter that the payable is only 20K because your liability
is 250K. The whole amount of your subscription is owed to the
corporation. The stockholder cannot say that “dili pwede nga ako ra
As between the stockholders and the creditors, the creditors have
preference over the assets of the corporation. And the unpaid imu paninglan”, just because wala gipaninglan ang uban does not make
subscription of the stockholders is considered as assets of the the obligation void. In the same way, you can’t say that it is “okay ra
mag cheat because others are also cheating.” Ang dili pwede, dili
corporation. They are receivables. So, even without going through
pwede.
piercing the veil, the stockholders, really, are liable for their unpaid

subscription. it is just like any other asset of the corporation that
creditors can go after. 2. Under the trust fund doctrine, what is the liability of the subscribers?
Direct or not to the creditors of the corporation?
Supposedly, the liability of the subscriber is only to the corporation
When you have an unpaid subscription, your true creditor is the
because it is an asset of the corporation. But in rare instances, the
corporation. It owns the accounts receivables. It’s just that the
courts allow that the creditor can collect directly from the subscribers.
creditors can look into the unpaid subscription for the fulfillment of
The creditors have to implead the corporation because the obligation
their obligation. Under normal circumstances, the creditors don’t go
is supposedly to the corporation. You have to establish that.
directly at the stockholders. They go after the corporation. If the
corporation does not have sufficient funds, that’s the time they go SECOND MODE OF TRANSFERRING STOCKS
after the receivables, which is the unpaid subscription. SEC. 62. Certificate of Stock and Transfer of Shares. – The capital
stock of corporations shall be divided into shares for which
HALLEY VS PRINTWELL - G.R. NO. 157549 certificates signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of
Facts: Halley was an incorporator and original director of Business
Media Philippines, Inc. (BMPI). BMPI commissioned Printwell for the the corporation shall be issued in accordance with the bylaws.
printing of magazines Philippines For that purpose, Printwell
extended 30-day credit accommodations to BMPI. BMPI paid only Shares of stock so issued are personal property and may be
P25,000.00 therefore, Printwell sued BMPI for the collection of the transferred by delivery of the certificate or certificates indorsed by
unpaid balance of P291,342.76 in the RTC. the owner, his attorney-in-fact, or any other person legally
authorized to make the transfer.
amount to a restriction on the right of Ting Ping to have the stocks

No transfer, however, shall be valid, except as between the parties, transferred to his name, which is not sanctioned by law.
until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the In a sale of shares of stock, physical delivery of a stock certificate is
transfer, the number of the certificate or certificates, and the one of the essential requisites for the transfer of ownership of the
number of shares transferred. stocks purchased. The delivery contemplated in Section 63, however,
pertains to the delivery of the certificate of shares by the transferor
The Commission may require corporations whose securities are to the transferee, that is, from the original stockholder named in the
traded in trading markets and which can reasonably demonstrate certificate to the person or entity the stockholder was transferring
their capability to do so to issue their securities or shares of stocks the shares to, whether by sale or some other valid form of absolute
in uncertificated or scripless form in accordance with the rules of conveyance of ownership.
the Commission.No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the books of the "Shares of stock may be transferred by delivery to the transferee of
corporation. the certificate properly indorsed. Title may be vested in the
transferee by the delivery of the duly indorsed certificate of stock."
Two ways to transfer shares
1. Deliver the stock certificate with an intention to transfer Nevertheless, to be valid against third parties and the corporation,
ownership duly indorsed; or the transfer must be recorded or registered in the books of
2. Execute a Deed of Assignment for the shares corporation. Upon registration of the transfer in the books of the
corporation, the transferee may now then exercise all the rights of a
Transfer meaning secondary, it is not the unissued shares anymore. stockholder, which include the right to have stocks transferred to his
Pertains to issued shares. You are buying from issued stocks of a name.
corporation.
Atty G: The delivery of the stock certificate duly indorsed is a mode
Effect of transferring ownership. It is only required if you are going to
transfer ownership. However, delivery of stock certificate is not
It merely transfers the ownership of the shares to the transferee or the
required in the registration of the transfer in the Stock and Transfer
assignee, being now the owner of the shares. There is already a valid
Book. Delivery is important to transfer ownership, hence it is
transfer of ownership. However, it does not make the transferee or
necessary. But once that is done, the transferee only needs to have
assignee a stockholder yet.
the transfer registered in the Stock and Transfer Book.

HOW ONE BECOMES A STOCKHOLDER
Is the issuance of a new certificate necessary to make Ting Ping a
The registration of the transfer makes one a stockholder, regardless of
stockholder?
the issuance or non-issuance of a new certificate.
NO. What makes the transferee a stockholder is the registration of

the transfer of the shares in the Stock and Transfer Book. Hence, it is
TENG VS. SEC, GR NO. 184332, FEBRUARY 17, 2016
not the issuance of the new stock certificate that makes one a
Facts: This case originated from the case of TCL Sales Corp v. CA. stockholder.
Respondent Ting Ping purchased shares of TCL Sales Corporation
(TCL) from Chiu, his brother Teng Ching Lay (President and F & S VELASCO VS. MADRID, GR NO. 208844, NOVEMBER 10, 2015
operations manager of TCL), and Maluto. Teng Ching died. Ting Ping,
Facts: F&S Velasco Company, Inc. (FSVCI)was duly organized and
to protect his shareholdings with TCL, requested petitioner Teng
registered as a corporation with its incorporators: Spouses Francisco
(TCL's Corporate Secretary), to enter the transfer in the Stock and
and Simona Velasco, their daughter Angela Madrid whose husband
Transfer Book of TCL for the proper recording of his acquisition. He
is Dr. Rommel Madrid (respondent), and Saturnino Velasco
also demanded the issuance of new certificates of stock in his favor.
(petitioner). Spouses Velasco died, thus, their daughter Angel
TCL and Teng refused despite repeated demands. Ting Ping filed
inherited their shares thereby giving her control of 70.82%, who was
mandamus with the SEC which was granted. SEC issued a writ of
also then the Chairman of the BOD. She however later on died
execution. Teng argued that prior to registration of stocks in the
intestate and w/o issue, thus, Madrid executed an Affidavit of Self-
corporate books, it is mandatory that the stock certificates are first
Adjudication which includes the shares owned by his wife Angela.
surrendered because a corporation will be liable to a bona fide
holder of the old certificate if, without demanding the said
Without registration on the corporate book of such transfer, Madrid
certificate, it issues a new one. On the other hand, Ting Ping argued
called for a meeting for the Re-Organization of the BOD, to which
that Section 63 of the Corporation Code does not require the
meeting, other respondents (Madrid Group) was given one share,
surrender of the stock certificate to the corporation, nor make such
and such group took over the BODs. At the same time, Velasco also
surrender an indispensable condition before any transfer of shares
had a meeting for the election of the President and Vice-P of the
can be registered in the books of the corporation. The only limitation
BOD. Thus, two separate meetings. Later on, Velasco petitioned with
imposed by Section 63 is when the corporation holds any unpaid
the RTC to declare null and void Madrid’s meeting.
claim against the shares intended to be transferred.
RTC: Declared both meetings null and void. Velasco’s meeting lacks

quorom; while the estate of Angela was not yet settled, thus, Madrid
Issue: Whether or not the surrender of the certificates of stock is a
only has an inchoate right of the 70.82%. Madrid appealed, but
requisite before registration of the transfer may be made in the
Velasco did not.
corporate books and for the issuance of new certificates in its stead.
CA: Madrid’s meeting was valid as the Affidavit executed was

sufficient to transfer the 70.82% shares to Madrid. Further ruled the
Held: NO. To compel Ting Ping to deliver to the corporation the
creation of a Management Committee in view of the conflicting
certificates as a condition for the registration of the transfer would
interests between the two.
2. NO. Such extraordinary remedy requires the concurrence of two

Issue: elements: (a) Dissipation, loss, wastage or destruction of assets or
1. WON Madrid’s meeting is legal and valid. other properties; and (b) Paralyzation of its business operations
2. WON a Management Committee should be created. which may be prejudicial to the interest of the minority stockholders,
parties- litigants or the general public. This is because appointed
Ruling: management committees will immediately take over the
1. NO. It is true that the RTC already recognized Madrid as the sole management of the corporation and exercise the management
heir of Angela to the exclusion of others (sister of Angela for failure powers specified in the law. This may have a negative effect on the
to appeal in a separate case), thus death of Angela immediately operations and affairs of the corporation with third parties, as
transferred the 70.82% ownership of shares to him, and he can persons who are more familiar with its operations are necessarily
compel issuance of certificates of stock in his favor. However, this dislodged from their positions in favor of appointees who are
does no ipso facto afford him the rights accorded to such majority strangers to the corporation's operations and affairs. The CA merely
ownership of FSVCI’s shares. Sec. 63 of the Corporation Code based its directive on the finding that there is a conflicting interest
provides that: between the two groups. However, absent any actual evidence from
the records showing such imminent danger, the CA's findings have
Xxx No transfer, however, shall be valid, except as between the no legal or factual basis to support the appointment/constitution of
parties, until the transfer is recorded in the books of the corporation a Management Committee for FSVCI. Accordingly, the CA erred in
showing the names of the parties to the transaction, the date of the ordering the creation of a Management Committee in this case.
transfer, the number of the certificate or certificates and the number
of shares transferred. SCRIPLESS TRADING
Thus, all transfers of shares of stock must be registered in the “The Commission may require corporations whose securities are traded
corporate books in order to be binding on the corporation. in trading markets and which can reasonably demonstrate their
Specifically, this refers to the Stock and Transfer Book as provided for capability to do so to issue their securities or shares of stocks in
under Sec. 74. uncertificated or scripless form in accordance with the rules of the
Commission” – excerpt from Section 62 of the Revised Corporation
An owner of shares of stock cannot be accorded the rights pertaining Code of the Philippines.
to a stockholder — such as the right to call for a meeting and the
right to vote, or be voted for — if his ownership of such shares is not “Scrip”
recorded in the Stock and Transfer Book. until registration is A duly signed stock certificate
accomplished, the transfer, though valid between the parties, cannot
be effective as against the corporation. The purpose of registration, Scripless Trading
therefore, is two-fold: to enable the transferee to exercise all the Transfer of ownership of shares without actually delivering stock
rights of a stockholder, including the right to vote and to be voted certificates is done through BOOK ENTRIES
for, and to inform the corporation of any change in share ownership
so that it can ascertain the persons entitled to the rights and subject This kind of trading is usually done when the stocks are listed in the
to the liabilities of a stockholder. Records are bereft of any showing Stock Exchange.
that the transfer of Angela's shares of stock to Madrid had been
registered in FSVCI's Stock and Transfer Book. Rationale
For convenience of buying and selling securities. To strictly follow to
Further, be it noted also that submission of a GIS of a corporation
the traditional way of transferring shares (delivery of actual
before the SEC is pursuant to the objective sought by Section 26 40
certificates), the stock market will not survive because the transactions
of the Corporation Code which is to give the public information,
will take from days to months.
under sanction of oath of responsible officers, of the nature of

business, financial condition, and operational status of the company,
How Done
as well as its key officers or managers, so that those dealing and who
intend to do business with it may know or have the means of The Corporation that intends to trade shares in the Stock Exchange
knowing facts concerning the corporation's financial resources and must—
business responsibility. The contents of the GIS, however, should not
be deemed conclusive as to the identities of the registered 1. Deliver all their securities on their shares to the Philippine
stockholders of the corporation, as well as their respective Depository and Trust Corporation (PDTC).
ownership of shares of stock, as the controlling document should be 2. The shares in the book of PDTC will now be assigned or given
the corporate books, specifically the Stock and Transfer Book. As to the brokers who purchased the shares
between the General Information Sheet and the corporate books, it 3. Stock and Transfer Agent records the stocks in the Stock and
is the latter that is controlling. Transfer Book and issues the Stock Certificates of the
Corporation.
Since as reflected in the Stock and Transfer book Madrid only has
4.16% in view of the non- registration of the transfer, Madrid’s Take Note: The entity recorded in the Stock and Transfer Book will be
Meeting is null and void. And considering that RTC’s decision of PDTC, the holder of the share under the Stock and Transfer Book.
Velasco’s Meeting’s nullity, the FSVCI’s BOD at the time of Angela’s
death should be reconstituted, and Angela’s vacant seat should be 4. In turn, PDTC will make entries their own records (BOOK
filled. Such BODs should only act in a hold-over capacity until their ENTRIES)
successors are elected and qualified.
Uplifting of Shares
If the shares are desired to be kept for a long time without intent to - Right to vote if he has a voting share
trade it, the shares can be uplifted by— - He has the right to dividends when the
corporation declare such
1. Requesting the PDTC to take out the shares from their
custody and record it in the Stock and Transfer Book under NOTE: Atty. made mention of the rule in Oblicon that generally a
the name of the purchaser (Corporation/Stockholder) contract is revocable when it is not consummated. We apply the same
2. Stock and Transfer Agent will issue the shares to that person logic here in a sense that when a subscriber pays for his subscription
pre-incorporation, it is given with the condition that it shall be used for
If later on you decide to sell it, the stock certificate should be returned the formation of the corporation. The failure of such event to happen
to the Stock and Transfer Agent, which will again take time. would allow the subscriber to revoke his subscription but this is subject
to the period provided in Sec.60 that the corporation is given 6 months
Take Note: This is the delay and complication that Scripless Trading to comply with its obligation. And once the corporation files its articles
avoids. of incorporation then it is as if it had complied with its obligation thus,
making the subscription irrevocable (contract is consummated).
Key Points on Scripless Trading For post-incorporation subscription, it is akin to a valid and binding
1. There is only one owner—PDTC, the listed stockholder in the contract already perfected hence, it is irrevocable. The subscription
books of the Corporation. now becomes a part of the capital stock of the corporation hence, the
2. PDTC will have its own list of brokers who hold the shares for corporation cannot allow such subscriptions to be revoked without
their clients prejudicing its interests and that of its stockholders. The corporation
3. Brokers will have their own list of their own clients as well now must comply with its obligations to its stockholders (eg.
distribution of dividends, allowing them to exercise their rights as
Ownership of stocks traded through Scripless Trading stockholders).
Legal Owner – PDTC; Beneficial Owner – Client of the Brokers
Difference between a Stock and Stock Certificate

Voting during Elections STOCK CERTIFICATE OF STOCK
The beneficial owner should ask for a certification from the broker that
ownership interest in the mere evidence of your
he is the owner of this certain number of shares; that certification (NOT
corporation ownership interest
a stock certificate) should be brought by the beneficial owner during
the election; akin to proxy allowing to vote shares.
Intangible Tangible
REVOCATION OF SUBSCRIPTIONS
merely represent the number of
Rule for Pre-incorporation Subscription shares or ownership in a
• GR: Irrevocable for a period of six months corporation
o The 6 months irrevocability is counted from the
date of subscription.
• EXC: unless
o all of the other subscribers consent to the you acquire stocks whether you can only be acquired upon full
revocation, or pay it or not payment
o the corporation fails to incorporate within the
same period or within a longer period stipulated in Certificate of Stock as defined in Anna Teng vs SEC
the contract of subscription.
• EXC to EXC: Irrevocable after the articles of incorporation is A certificate of stock is a written instrument signed by the proper
submitted to the Commission. officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of
Rule on Post-incorporation Subscription shares of its stock. It is prima facie evidence that the holder is a
shareholder of a corporation.
Under Post Incorporation the law is silent as to the revocability or
irrevocability of the subscription but actually it is irrevocable. The A certificate, however, is merely a tangible evidence of ownership
moment a subscriber subscribes in a post incorporation even if he did of shares of stock. It is not a stock in the corporation and merely
not pay yet the subscription he becomes a stockholder and he cannot expresses the contract between the corporation and the
anymore revoke his subscription. And since he is already a stockholder stockholder.
he can now enjoy the rights of a stockholder.
The shares of stock evidenced by said certificates, meanwhile, are
BASIS: regarded as property and the owner of such shares may, as a
RIGHTS OF UNPAID SHARES, NONDELINQUENT general rule, dispose of them as he sees fit, unless the corporation
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of has been dissolved, or unless the right to do so is properly
subscribed shares not fully paid which are not delinquent shall have all restricted, or the owner's privilege of disposing of his shares has
the righst of a stockholder. been hampered by his own action

Rights of a stockholder The moment you subscribe post-incorporation you already enjoy all
- He may check the corporate books the benefits of being a stockholder with the exception that you are not
yet issued with a stock certificate if you have not yet fully paid your • If cash/property dividend - the corporation will off-set the
subscription. payment of the unpaid subscription from the stockholder’s
share in the dividend.
Time to pay your subscription ( 2 instances) • If stock dividend - the stockholder’s share in the dividend is
1. When there is a date fixed in a subscription contract withheld by the corporation until the subscription is fully
2. If you receive a call from the company demanding you to pay the paid.
remaining balance
DELINQUENCY SALE
The call is only required when there is no date fixed for the payment Section. 67. Delinquency Sale. — The board of directors may, by
of the shares. It is the Board of Directors who will make the call by resolution, order the sale of delinquent stock and shall specifically
resolutions of the BOD in a meeting when there is a quorum approved state the amount due on each subscription plus all accrued interest,
by majority of the directors present in the meeting. and the date, time and place of the sale which shall not be less than
thirty (30) days nor more than sixty (60) days from the date the
PAYMENT OF BALANCE OF SUBSCRIPTION stocks become delinquent.
Section 66. Payment of Balance of Subscription. — Subject to the
provisions of the subscription contract, the board of directors may, Notice of the sale, with a copy of the resolution, shall be sent to
at any time, declare due and payable to the corporation unpaid every delinquent stockholder either personally, by registered mail,
subscriptions and may collect the same or such percentage thereof, or through other means provided in the bylaws. The same shall be
in either case, with accrued interest, if any, as it may deem published once a week for two (2) consecutive weeks in a
necessary. newspaper of general circulation in the province or city where the
principal office of the corporation is located.
Payment of unpaid subscription or any percentage thereof,
together with any interest accrued, shall be made on the date Unless the delinquent stockholder pays to the corporation, on or
specified in the subscription contract or on the date stated in the before the date specified for the sale of the delinquent stock, the
call made by the board. Failure to pay on such date shall render the balance due on the former's subscription, plus accrued interest,
entire balance due and payable and shall make the stockholder costs of advertisement and expenses of sale, or unless the board of
liable for interest at the legal rate on such balance, unless a directors otherwise orders, said delinquent stock shall be sold at a
different interest rate is provided in the subscription contract. The public auction to such bidder who shall offer to pay the full amount
interest shall be computed from the date specified, until full of the balance on the subscription together with accrued interest,
payment of the subscription. If no payment is made within thirty costs of advertisement and expenses of sale, for the smallest
(30) days from the said date, all stocks covered by the subscription number of shares or fraction of a share. The stock so purchased
shall thereupon become delinquent and shall be subject to sale as shall be transferred to such purchaser in the books of the
hereinafter provided, unless the board of directors orders corporation and a certificate for such stock shall be issued in the
otherwise. purchaser's favor. The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise be entitled
How to call to the issuance of a certificate of stock covering such shares.
A call is made by a resolution of the Board of Director’s in a meeting
where there is a quorum and approved by majority of the Director’s Should there be no bidder at the public auction who offers to pay
present in a meeting. the full amount of the balance on the subscription together with
accrued interest, costs of advertisement, and expenses of sale, for
Effect of failure to pay after a call or upon the lapse of the date the smallest number of shares or fraction of a share, the
specified in the subscription contract: corporation may, subject to the provisions of this Code, bid for the
The Board of Directors may issue another board resolution declaring same, and the total amount due shall be credited as fully paid in
said subscriptions delinquent. the books of the corporation. Title to all the shares of stock covered
by the subscription shall be vested in the corporation as treasury
EFFECT OF DELINQUENCY shares and may be disposed of by said corporation in accordance
Section. 70. Effect of Delinquency. — No delinquent stock shall be with the provisions of this Code.
voted for, be entitled to vote, or be represented at any
stockholder's meeting, nor shall the holder thereof be entitled to Procedure
any of the rights of a stockholder except the right to dividends in 1. Board resolution declaring the subscription delinquent
accordance with the provisions of this Code, until and unless 2. The sale must be made not less than 30 days but not more than
payment is made by the holder of such delinquent stock for the 60 days from the date the stock became delinquent.
amount due on the subscription with accrued interest, and the 3. Notice together with the resolution must be made to all
costs and expenses of advertisement, if any. delinquent stockholders personally, registered mail, or through
other means authorized.
Effects of Delinquency 4. Publication once a week for two consecutive weeks in a
• The stockholder will remain to be a stockholder but the exercise of newspaper of general circulation.
any of the stockholder’s right is suspended, except the right to 5. Before the sale, the stockholder may stop the delinquency sale by
dividends. paying the unpaid subscription, interest, cost of advertisement,
and expenses.
• The distribution of share in the dividend by a delinquent shareholder
6. Failure of the stockholder to pay, the delinquent stock shall be
shall be applied in the following manner:
sold at a public auction.

ILLUSTRATION: “DELINQUENT STOCK”
Total subscription - 20,000 shares valued at 1,000,000
THE FIRST TWO REQUIREMENTS ALONE WILL BE SUFFICIENT AS FAR AS THE PARTIES ARE
Total paid - 10,000 shares valued at 500,000 CONCERNED TO TRANSFER OWNERSHIP. HOWEVER, AS TO THIRD PERSON AND THE
CORPORATION, THE TRANSFEREE IS NOT YET A STOCKHOLDER. IT IS ONLY WHEN THE
Total unpaid - 10,000 shares valued at 500,000
THIRD REQUIREMENT IS COMPLIED WITH THAT THE TRANSFEREE OR ASSIGNEE BECOMES
In this case, the entire subscription of 20,000 shares are considered A STOCKHOLDER.
delinquent stock. This is because of the Principle of Indivisibility of
Subscription. Thus, a delinquent stock shall refer not only to the the THIS IS EVEN WITHOUT A STOCK CERTIFICATE AS LONG AS THE TRANSFER IS RECORDED IN
unpaid subscription but includes the paid subscription. THE STOCK AND TRANSFER BOOK.

7. The winning bidder is determined by the bidder who is willing to TENG VS. SEC
pay for the smallest number of shares or fraction of a share. NO NEED TO SURRENDER THE ORIGINAL STOCK CERTIFICATE FOR THE TRANSFEREE TO
BECOME A STOCKHOLDER. THE TRANSFEREE BECOMES A STOCKHOLDER THE
MOMENT HIS NAME IS REGISTERED IN THE STOCK AND TRANSFER BOOK. THE
ILLUSTRATION: “THE SMALLEST NUMBER OF SHARES OR FRACTION OF
TRANSFEREE IS ONLY REQUIRED TO SURRENDER THE ORIGINAL STOCK CERTIFICATE TO
A SHARE”
THE CORPORATION FOR THE ISSUANCE OF A NEW ONE.

Bidder A - 2,000 shares valued at 10,000; 5 pesos/share
LOST OR DESTROYED CERTIFICATES
Bidder B - 1,500 shares value at 10,000; 6.67 pesos/share
Bidder C - 1,000 shares value at 10,000; 10 pesos/share SEC. 72. Lost or Destroyed Certificates. – The following procedure
shall be followed by a corporation in issuing new certificates of
In this case Bidder C should be declared the highest bidder because he stock in lieu of those which have been lost, stolen or destroyed:
is the bidder who is willing to pay the smallest number of shares or
fraction of a share. This means that the highest bidder must be the (a) The registered owner of a certificate of stock in a corporation or
bidder who is willing to pay the highest amount per share. such person’s legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the circumstances as
8. Upon payment of the highest bidder, the stock so purchased shall to how the certificate was lost, stolen or destroyed, the number of
be transferred to such purchaser in the books of the corporation shares represented by such certificate, the serial number of the
and a certificate for such stock shall be issued in the purchaser's certificate and the name of the corporation which issued the same.
favor. The owner of such certificate of stock shall also submit such other
9. The remaining shares, if any, shall be credited in favor of the information and evidence as may be deemed necessary;
delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares. After verifying the affidavit and other information and evidence
with the books of the corporation, the corporation shall publish a
ILLUSTRATION: Based on the illustration above 1,000 shares out of the notice in a newspaper of general circulation in the place where the
10,000 delinquent shares shall be given to Bidder C. The remaining corporation has its principal office, once a week for three (3)
9,000 shares shall be given to the delinquent subscriber. consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The
10. If there is no bidder, the corporation is authorized to purchase the notice shall state the name of the corporation, the name of the
shares and shall form part of the treasury shares. registered owner, the serial number of the certificate, the number
EFFECT: If the bidder is the corporation there will be no shares given to of shares represented by such certificate, and shall state that after
the stockholder. Applying the illustration above all the 10,000 the expiration of one (1) year from the date of the last publication,
delinquent shares shall pertain to the corporation. This shall form part if no contest has been presented to the corporation regarding the
of the treasury shares. certificate of stock, the right to make such contest shall be barred
and the corporation shall cancel the lost, destroyed or stolen
COURT ACTION TO RECOVER UNPAID SUBSCRIPTION certificate of stock in its books. In lieu thereof, the corporation shall
Section 69. Court Action to Recover Unpaid Subscription. — issue a new certificate of stock, unless the registered owner files a
Nothing in this Code shall prevent the corporation from collecting bond or other security as may be required, effective for a period of
through court action, the amount due on any unpaid subscription, one (1) year, for such amount and in such form and with such
with accrued interest, costs and expenses. sureties as may be satisfactory to the board of directors, in which
case a new certificate may be issued even before the expiration of
the one (1) year period provided herein. If a contest has been
ASSIGNMENT: 2ND MODE OF ACQUIRING SHARES presented to the corporation or if an action is pending in court
regarding the ownership of the certificate of stock which has been
THIS IS A SECONDARY TRANSFER SINCE SHARES ARE ALREADY ISSUED. YOU ACQUIRED THE lost, stolen or destroyed, the issuance of the new certificate of
SHARES FROM THE OWNERS OF THE SHARES NOT FROM THE ISSUER ANYMORE. stock in lieu thereof shall be suspended until the court renders a
final decision regarding the ownership of the certificate of stock
PROCEDURE FOR ASSIGNMENT which has been lost, stolen or destroyed.
1. DELIVERY OF THE STOCK CERTIFICATE TO THE TRANSFEREE
2. THE STOCK CERTIFICATE MUST BE INDORSED BY THE Except in case of fraud, bad faith, or negligence on the part of the
ASSIGNOR/TRANSFEROR. corporation and its officers, no action may be brought against any
3. THE TRANSFER OR ASSIGNMENT IN THE TRANSFEREE’S NAME MUST BE corporation which shall have issued certificate of stock in lieu of
REGISTERED IN THE STOCK AND TRANSFER BOOK
those lost, stolen or destroyed pursuant to the procedure above- (g) The minutes of all meetings of stockholders or members, or of
described. the board of directors or trustees. Such minutes shall set forth
in detail, among others; the time and place of the meeting
Issuance of New Stock Certificate held, how it was authorized, the notice given, the agenda
GR: There is a one year waiting period before the issuance of New therefor, whether the meeting was regular or special, its
Stock certificate. Which would give the chance for the transferee or object if special, those present and absent, and every act done
assignee to object to the declaration of lost or destroyed certificates. or ordered done at the meeting. Upon the demand of a
director, trustee, stockholder or member, the time when any
If they do not object , the certificate will be issued after one year. director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar
EXC: the owner will give a bond or security which will be valid for 1 demand, the yeas and nays must be taken on any motion or
year. That will now allow the issuance of the new certificate of stocks proposition, and a record thereof carefully made. The protest
before the lapse of 1 year. of a director, trustee, stockholder or member on any action or
proposed action must be recorded in full upon their demand.

Deed of Assignment of shares ( transfer w/o Stock Certificate) Corporate records, regardless of the form in which they are stored,
1. If there is a stock certificate , transfer will be done by delivery and shall be open to inspection by any director, trustee, stockholder or
endorsement and then you record if in the stock and transfer book , if member of the corporation in person or by a representative at
no stock certificate transfer can still be done by deed of assignment reasonable hours on business days, and a demand in writing may
of shares. be made by such director, trustee or stockholder at their expense,
for copies of such records or excerpts from said records. The
How : (basically just like a deed of sale) inspecting or reproducing party shall remain bound by
a. Execute the deed of assignment confidentiality rules under prevailing laws, such as the rules on
b. Have it recorded in the Stock and Transfer book as well trade secrets or processes under Republic Act No. 8293, otherwise
known as the "Intellectual Property Code of the Philippines," as
TN: amended, Republic Act No. 10173, otherwise known as the "Data
-if not recorded = merely valid between the parties to the deed and Privacy Act of 2012," Republic Act No. 8799, otherwise known as
NOT against the corporation & third person "The Securities Regulation Code," and the Rules of Court.
-mere execution of the deed does not make you a Stockholder but its
the recording in the stock and transfer book A requesting party who is not a stockholder or member of record,
or is a competitor, director, officer, controlling stockholder or
Assignment of Subscription Rights otherwise represents the interests of a competitor shall have no
right to inspect or demand reproduction of corporate records.

1. Although generally, the law says that you cannot transfer shares
Any stockholder who shall abuse the rights granted under this
where there is an unpaid subscription but in practice , you can
section shall be penalized under Section 158 of this Code, without
transfer shares by deed of assignment of subscription rights. What
prejudice to the provisions of Republic Act No. 8293, otherwise
happens is that you assign your rights to the subscription. You don’t
known as the “Intellectual Property Code of the Philippines," as
assign the shares because you are not allowed.
amended, and Republic Act No. 10173, otherwise known as the

"Data Privacy Act of 2012.”
2. The Principle of Indivisibility still exist when you assign your rights
Any officer or agent of the corporation who shall refuse to allow
to the subscription. Meaning, you assign the subscription as a whole.
the inspection and/or reproduction of records in accordance with

the provisions of this Code shall be liable to such director, trustee,
TITLE VIII- CORPORATE BOOKS AND RECORDS
stockholder or member for damages, and in addition, shall be guilty
BOOKS TO BE KEPT; STOCK TRANSFER AGENT
of an offense which shall be punishable under Section 161 of this
Section 73. Books to be Kept; Stock Transfer Agent . — Every
Code: Provided, That if such refusal is made pursuant to a
corporation shall keep and carefully preserve at its principal office
resolution or order of the board of directors or trustees, the liability
all information relating to the corporation including, but not limited
under this section for such action shall be imposed upon the
to:
directors or trustees who voted for such refusal: Provided, further,

That it shall be a defense to any action under this section that the
(a) The articles of incorporation and bylaws of the corporation
person demanding to examine and copy excerpts from the
and all their amendments;
corporation's records and minutes has improperly used any
(b) The current ownership structure and voting rights of the
information secured through any prior examination of the records
corporation, including lists of stockholders or members, group
or minutes of such corporation or of any other corporation, or was
structures, intra-group relations, ownership data, and
not acting in good faith or for a legitimate purpose in making the
beneficial ownership;
demand to examine or reproduce corporate records, or is a
(c) The names and addresses of all the members of the board of
competitor, director, officer, controlling stockholder or otherwise
directors or trustees and the executive officers;
represents the interests of a competitor.
(d) A record of all business transactions;

(e) A record of the resolutions of the board of directors or trustees
If the corporation denies or does not act on a demand for inspection
and of the stockholders or members;
and/or reproduction, the aggrieved party may report such denial or
(f) Copies of the latest reportorial requirements submitted to the
inaction to the Commission. Within five (5) days from receipt of
Commission; and
such report, the Commission shall conduct a summary investigation
and issue an order directing the inspection or reproduction of the (11) upon demand of a director, trustee,
requested records. stockholder, or member, the protest on any action
or proposed action
Stock corporations must also keep a stock and transfer book, which
shall contain a record of all stocks in the names of the stockholders o The mere certification of the Corporate Secretary gives the Minutes
alphabetically arranged; the installments paid and unpaid on all probative value, the signatures of the directors is not necessary.
stocks for which subscription has been made, and the date of o Minutes of the meeting of the BOD may be proof of the existence of
payment of any installment; a statement of every alienation, sale a contract (considered as a written contract for the purposes of
or transfer of stock made, the date thereof, by and to whom made; extinctive prescription under Article 1144(1) of the New Civil Code)
and such other entries as the bylaws may prescribe. The stock and
transfer book shall be kept in the principal office of the corporation Stock and Transfer Book; Contents
or in the o ce of its stock transfer agent and shall be open for
(1) All stocks in the name of the stockholders alphabetically arranged
inspection by any director or stockholder of the corporation at
(2) installments paid and unpaid on all stocks for which subscription
reasonable hours on business days.
has been made and the date of any installment

A stock transfer agent or one engaged principally in the business of (3) statement of every alienation, sale or transfer of stock made, the
registering transfers of stocks in behalf of a stock corporation shall date thereof, by and to whom made
be allowed to operate in the Philippines upon securing a license (4) such other entries as the bylaws may prescribe
from the Commission and the payment of a fee to be fixed by the
Commission, which shall be renewable annually: Provided , That a • The Stock and Transfer Book shall be kept in the principal office of
stock corporation is not precluded from performing or making the corporation or in the office of its stock transfer agent.
transfers of its own stocks, in which case all the rules and • Only the Corporate Secretary is duly authorized to make entries on
regulations imposed on stock transfer agents, except the payment the stock and transfer book. Entries made by the Chairman or
of a license fee herein provided, shall be applicable: Provided, President are invalid.
further, That the Commission may require stock corporations which • Serves as the best evidence of the transactions that must be entered
transfer and/or trade stocks in secondary markets to have an or stated therein. However, the entries are considered prima facie
independent transfer agent. evidence only and may be subject to proof of the contrary.
• Stock and transfer book is the primary evidence of being a
Corporate Books stockholder, but if the corporation refuses to produce it, other
1. Records of all business transactions i.e. accounting books, ledgers, evidences may be presented (Insigne vs. Abra GR 2040089);
and journals
2. Minutes book for Stockholders - minutes of the meetings of the
stockholders Inspection of Corporate Records
3. Minutes book for Directors and Trustees - minutes meetings of the Open to inspection by any director, trustee, stockholder or member of
Board of Directors and Trustees the corporation in person or by a representative at reasonable hours
4. Stock and Transfer Book on business days, and a demand in writing may be made by such
Corporate Records director, trustee, or stockholder at their expense, for copies of such
1. Charter documents - Articles of Incorporation, Bylaws, and records or excerpts from said records.
it’s amendments.
2. Reports filed with the SEC - general information sheets (GIS), The inspecting or reproducing party shall remain bound by
and all other reports required under the Securities confidentiality rules under prevailing laws, such as the rules on trade
Regulation Code (SRC) secrets or processes under Intellectual Property Code of the
Philippines, Data Privacy Act of 2012, and The Securities Regulation
Book of Minutes; Contents Code.
(1) date and time of meeting
(2) place of holding the meeting The right to inspect covers all the books of the corporation, including
(3) how the meeting was authorized the journal, ledger, financial statements, income tax returns, vouchers,
(4) the fact that notice was given receipts, contracts and all papers pertaining to the operation of the
(5) whether the meeting was regular or special corporation which are of interest to its stockholders.
(6) if the meeting is special, object must be stated
(7) those present and absent There are matters that are not covered by the right to inspect. For
(8) every act done or ordered done at the meeting instance, a corporation engaged in manufacturing goods can keep
(9) upon demand of a director, trustee, stockholder secret the formula or process which is not generally well known.
or member, the time when any director, trustee,
stockholder or member entered or left the meeting Requisites for Exercise of Right
must be noted in the minutes 1. must be exercised at reasonable hours on business days
(10) upon demand of a director, trustee, 2. has not improperly used any information he secured through any
stockholder or member, a carefully made record of previous examination
the yeas and nays must be taken on any motion or 3. demand is made in good faith or for a legitimate purpose
proposition
Who Cannot Inspect
A requesting party that is not a stockholder or member of record, or is Upon determination of probable cause, the RTC concluded that
a competitor, director, officer, controlling stockholder or otherwise respondents were at most withholding the stock and transfer books
represents the interest of a competitor. and that refusing inspection to such is not punishable under the
Corporation code as opposed to refusal to inspect other corporate
records thus the case was dismissed against respondent.
Liability for refusal to allow inspection or production of records
Issue: WON refusal to inspect the stock and transfer books is
Who can be held liable? punishable under the Corporation Code?
Any officer or agent of the corporation who shall refuse to allow the
inspection or production of records shall be liable Ruling: Yes. Such refusal is a violation of Section 74 of the
Any director who allows or approves the refusal shall also be guilty of Corporation Code to which Section 144 provides for the penalty.
an offense punishable under Section 161 of the Corporation Code. However, a criminal action based on the violation of a stockholder’s
right to examine or inspect the corporate records and the stock and
Liability for Unjust Refusal of Inspection transfer book of a corporation under the second and fourth
2. Damages paragraphs of Section 74 of the corporation code - such as Criminal
3. Liability under Section 161 of the Revised Corporation Code, a fine Case No. 89724 — can only be maintained against corporate officers
or any other persons acting on behalf of such corporation.
of:

₱ 10,000 to ₱ 200,000.
The problem with the petitioners' complaint and the evidence that
₱ 20,000 to ₱ 400,000 (if injurious to public interest)
they submitted during preliminary investigation is that they do not

establish that respondents were acting behalf of STRADEC. Quite the
Note: Under the Old Code, the penalty was criminal in nature. In contrary, the scenario painted by the complaint is that the
addition to the administrative fees and civil liability the penalty also
respondents are merely outgoing officers of STRADEC who, for some
included imprisonment.
reason, withheld and refused to turn-over the company records of

STRADEC. It clearly suggest that respondents are neither in relation
VIOLATION OF DUTY; PENALTIES to STRADEC.
Section 161. Violation of Duty to Maintain Records, to Allow Their
Inspection or Reproduction; Penalties. — The unjustified failure or In other words, petitioners are not actually invoking their right to
refusal by the corporation, or by those responsible for keeping and inspect the records and the stock and transfer book of STRADEC
maintaining corporate records, to comply with Sections 45, 73, 92, under the second and fourth paragraphs of Section 74. What they
128, 177 and other pertinent rules and provisions of this Code on seek to enforce is the proprietary right of STRADEC to be in
inspection and reproduction of records shall be punished with a possession of such records and book. Such right, though certainly
fine ranging from Ten thousand pesos (P10,000.00) to Two hundred legally enforceable by other means, cannot be enforced by a criminal
thousand pesos (P200,000.00), at the discretion of the court, taking prosecution based on a violation of the second and fourth
into consideration the seriousness of the violation and its paragraphs of Section 74. That is simply not the situation
implications. When the violation of this provision is injurious or contemplated by the second and fourth paragraphs of Section 74 of
detrimental to the public, the penalty is a fine ranging from Twenty the Corporation Code.
thousand pesos (P20,000.00) to Four hundred thousand pesos
(P400,000.00).
Note: The SC agreed that refusal to allow inspection is subject to a

criminal liability. However, the case was still dismissed because the
The penalties imposed under this section shall be without prejudice
person who refused to show the corporate books was not an officer of
to the Commission's exercise of its contempt powers under Section
157 hereof. a corporation, because the liability is criminal in nature it is construed
strictly. Therefore, only an officer or a director of a corporation that
YUJUICO V QUIAMBAO can be held liable.
Facts: Strategic Alliance Development Corporation (STRADEC) is a
That is no longer applicable because under the amended corporation
domestic corporation operating as a business development and
code, the refusal to allow inspection or reproduction is now only
investment company. During the annual stockholder's meeting of
STRADEC, petitioner Aderito Z. Yujuico was elected as president and subject to civil liability under Section 161, and no longer criminal in
chairman of the company. Yujuico replaced respondent Cezar T. nature.
Quiambao, who had been the president and chairman of STRADEC

since 1994. With Yujuico at the helm, STRADEC appointed petitioner
IF THE CORPORATION OR ITS OFFICERS REFUSE TO ALLOW A
Bonifacio C. Sumbilla as treasurer and one Joselito John G. Blando as
STOCKHOLDER TO INSPECT, IS A CASE THE ONLY OPTION OF THE
corporate secretary. Blando replaced respondent Eric C. Pilapil the
STOCKHOLDER?
previous corporate secretary of STRADEC.

Subsequently, a criminal case was filed by petitioners against NEW PROVISION UNDER SEC. 73 OF THE REVISED CORPORATION CODE:
respondents and one Giovanni T. Casanova alleging that Quiambao
refused for the turnover of the corporate records of the company, “If the corporation denies or does not act on a demand for inspection
particularly the accounting files, ledgers, journals and other records and/or reproduction, the aggrieved party may report such denial or
of the corporation's business as well as its stock and transfer books. inaction to the Commission. Within five (5) days from receipt of such
Initially, it was agreed to be deposited in a safety box in BPI but the report, the Commission shall conduct a summary investigation and
same resulted to the refusal of respondents. issue an order directing the inspection or reproduction of the
requested records.”
Answer: It is the primary record, so absent any other showing, it is
Remedy of Party Refused Inspection; Summary Investigation the STB which should determine whether or not a person is a SH. But
Aggrieved party may report such denial or inaction to the Commission. if the person can present other evidence as basis of his stockholdings,
then he is not precluded from bringing up that evidence in order to
Within five (5) days from the receipt of such report, the Commission support his contention that he is a SH.
shall conduct a Summary Investigation and issue and order directing
the inspection or reproduction of the requested records. In this case, the corporation refused to present the STB. The reason
of such refusal is that they said that based on the STB, he is not a SH,

but they refused to show the STB. (medyo namilosopo sad).
Defenses for Refusal

(1) person demanding to examine and copy SC said: Well just because you say that they are not listed in the STB,
excerpts from the corporation's records and we cannot just take your word for it because the STB is not the only
minutes has improperly used any information proof that a person is a SH. Besides, there is a rule under Rules of
secured through any prior examination of the Court that “an evidence willfully suppressed would be adversed if
records or minutes of such corporation or of any produced”.
other corporation
(2) person demanding to examine was not acting in STB is not the only source of proof that a person is a SH.
good faith or for a legitimate purpose in making
the demand to examine or reproduce corporate The below portion is lifted from Gaviola Notes of Batch Invictus
records
(3) person demanding is a competitor, director, officer, controlling In this case, the company claimed that petitioner is not a Stockholder
stockholder or otherwise represents the interests of a competitor. however, it failed to present the Stock and Transfer Book.

TERELAY VS. YULO SC: You cannot deny the right to inspect so long as the name of the
THE STOCKHOLDER WHO WANTED TO INSPECT THE RECORD ONLY OWNED 0.001% OF SH is in the STB. And if the name is not in the STB, the corporation
THE OUTSTANDING STOCK OF THE CORPORATION. THE OFFICERS WERE SAYING , “YOU should present the STB because non-presentation thereof would
KNOW YOUR STOCKHOLDINGS IS TOO INSIGNIFICANT FOR US TO GRANT YOU THE RIGHT mean that there is no valid ground to deny.
TO INSPECT”.
The stock certificate is one of the proofs of ownership, but it is not the
ACCORDING TO SC, SUCH CONTENTION IS NOT VALID. THE 0.001% OWNERSHIP DOES only proof. The STB is the best evidence in proving whether or not a
NOT JUSTIFY THE REFUSAL TO ALLOW THE STOCKHOLDER THE RIGHT TO INSPECT OR TO person is a SH.
REPRODUCE BECAUSE AS LONG AS YOU OWN, 1 SHARE OF STOCK EVEN OUT OF
MILLIONS, YOU ARE CONSIDERED AS A STOCKHOLDER, AND THE LATTER HAS A RIGHT In this case, the SEC also allowed other evidences to prove ownership
TO INSPECT AND REPRODUCE THE BOOKS OF THE CORPORATION. IT IS GRANTED TO ALL like the SEC’s certificate of subscription, the receipts of subscription,
STOCKHOLDERS AND NO DISTINCTION TO ALL OWNERSHIP. and their elction as directors (because they cannot be elcted directors
if they are not SHs).
Jurisprudential Principles (Terelay citing Ballantine) – Additional
Information IN RELATION TO MADRID CASE
Justified purpose for inspection In this case, SC said that General Information Sheet (GIS) is not
(1) To ascertain the financial condition of the sufficient to show the records of the stockholders.
company or the propriety of dividends;
(2) the value of the shares of stock for sale or The husband presented the GIS but the SC said, well between the STB
investment; and the GIS, the STB will prevail. But of course, the GIS can also be
(3) whether there has been mismanagement; considered as a secondary source. It is not the primary source. The
(4) in anticipation of shareholders' meetings to primary source will always be the STB. However, other documents
obtain a mailing list of shareholders to solicit can be used to show that a person is a SH of the corporation. Same
proxies or influence voting; ruling in the Insigne case.
(5) to obtain information in aid of litigation with
the corporation or its officers as to corporate STOCK & TRANSFER BOOK VS GIS
transactions. Stock & Transfer book as a Primary Source
Stock & transfer book is still the primary source in determining
Unjustified purpose whether a person is a stockholder or not, but GIS can also serve as a
secondary source and other documents can still be shown that a
(1) Obtaining of information as to business secrets or to aid a
person is a stock holder of a Corporation.
competitor;

(2) to secure business "prospects" or investment or advertising

lists;
ADDITIONAL INFORMATION (NOT DISCUSSED BY ATTY.)
(3) to find technical defects in corporate transactions in order to

bring "strike suits" for purposes of blackmail or extortion.
RIGHT TO FINANCIAL STATEMENT

INSIGNE VS. ABRA VALLEY SECTION 74. Right to Financial Statements. — A corporation shall
furnish a stockholder or member, within ten (10) days from receipt
This is basically an issue of “is the STB the only basis to determine
of their written request, its most recent 1nancial statement, in the
whether or not a person is a stockholder (SH) of a corporation?”

form and substance of the 1nancial reporting required by the Secondary or extrinsic evidence may be introduced to reconstitute its
Commission. contents. The new stock and transfer book should be presented to the
SEC for registration, accompanied by a sworn statement executed by
At the regular meeting of stockholders or members, the board of any responsible officer setting forth the circumstances attending the
directors or trustees shall present to such stockholders or members loss.
a 1nancial report of the operations of the corporation for the
preceding year, which shall include 1nancial statements, duly Stock Transfer Agent
signed and certi1ed in accordance with this Code, and the rules the Engaged principally in the business of registering transfers of stock in
Commission may prescribe. behalf of a stock corporation shall be allowed to operate in the
Philippines upon securing a license from the Commission and payment
However, if the total assets or total liabilities of the corporation are of a fee to be fixed by the Commission, which should be renewed
less than Six hundred thousand pesos (P600,000.00), or such other annually.
amount as may be determined appropriate by the Department of

Finance, the 1nancial statements may be certi1ed under oath by
Transfer by Corporation
the treasurer and the president.
a stock corporation is not precluded from performing or making

transfers of its own stocks, in which case all the rules and regulations
When Recent Financial Statement Furnished
imposed on stock transfer agents, except the payment of a license fee
Within ten (10) days from from receipt of the written request of
herein provided, shall be applicable.
stockholder or member, in the form and substance of the financial
The Commission may require stock corporations which transfer and/or
reporting required by the Commission
trade stocks in secondary markets to have an independent transfer

agent.
Presentation of Financial Report

The board of directors or trustees shall present to such stockholders or TITLE IX- MERGER AND CONSOLIDATION
members a financial report of the operations of the corporation for the DEFINITION
preceding year, which shall include financial statements, duly signed
SEC. 75. Plan of Merger or Consolidation. - Two (2) or more
and certified in accordance with this Code, and the rules the
corporations may merge into a single corporation which shall be one
Commission may prescribe
of the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.
When Certified under Oath
If the total assets or liabilities of the corporation are less than Six The board of directors or trustees of each corporation ,
Hundred Thousand Pesos (₱600,000.00) or such other amount as may party to the merger or consolidation, shall approve a plan of merger
be determined appropriate by the Department of Finance or consolidation setting forth the following:

Submission to the Commission (a) The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent corporations;
SECTION 177. Reportorial Requirements of Corporations. — (b) The terms of the merger or consolidation and the mode
Except as otherwise provided in this Code or in the rules of carrying the same into effect;
issued by the Commission, every corporation, domestic or ( c) A statement of the changes , if any in the articles of
foreign, doing business in the Philippines shall submit to the incorporation of the surviving corporation in case of merger; and, in
Commission: case of consolidation , all the statements required to be set forth in
the articles of incorporation for corporations organized under this
Code; and
4. Annual financial statements audited by an independent
(d) Such other provisions with respect to the proposed
certified public accountant: Provided, That if the total
merger or consolidation as are deemed necessary or desirable
assets or total liabilities of the corporation are less than

Six hundred thousand pesos (P600,000.00), the financial
Merger
statements shall be certified under oath by the
corporation's treasurer or chief financial officer; and 1. A + B = A or B
5. A general information sheet 2. Meaning 2 corporations combined, one is dissolved then the other
becomes the surviving corporation

Corporations vested with public interest must also submit the
Consolidation
following:
1. A + B = C

2. When two corporations combined they form an entirely new
(1) A director or trustee compensation report; and corporation. When A & B consolidate, non of the combining
(2) A director or trustee appraisal or performance report and the corporation survive, what is created in its place is a new corporation.
standards
or criteria used to assess each director or trustee. Requirements

The reportorial requirements shall be submitted annually and within 1. Creation of “Plan of Merger and Consolidation “ by the Board of
such period as may be prescribed by the Commission. each corporation
- this is the first document that the corporation needs to create
Loss of Stock and Transfer Book - the plan should specify what will happen to the surviving
corporation or the newly created corporation
EXCEPTION
2. Approval of Majority vote of each of the BOD or trustees of such Any merger or acquisition in excess of 1 Billion pesos
plan
- the plan of merger or consolidation shall be approved by majority - additional Requirement of Notice to Philippine Competition
vote of each of the board of the concerned corporations at separate Commission
meetings - PCC has power to deny or disallow the merger or acquisition

3. Approval of such plan by 2/3 Stockholders and Members Effects of merger or consolidation
What is needed as an affirmative vote of stockholders representing • The Constituent corporations shall become a single
2/3 of the outstanding capital stock of each corporation in the case of corporation;
stock corporaitons or member in case of non-stock corporation. • The separate existence of the constituents shall cease
EXCEPT that of the surviving corporation ( in merger) or the
Amendments: majority of the board approval & vote of the consolidated corporation (in consolidation)
stockholders representing at least 2/3 of the outstanding capital • The surviving or the consolidated corporation shall possess
stock. (same approval ) all the rights, privileges , immunities and powers and shall
be subject to all duties and liabilities of a corporation;
TN: merger & consolidation is a ground for Appraisal Right for any • All liabilities of the constituents shall pertain to the surviving
dissenting stock holders or the consolidated corporation.

4. Execution of Articles of Merger or Consolidation • Merger: the constituent corporations becomes a single
Articles of Merger or Articles of Consolidation shall be:
entity.
a)executed by each of the constituent corporation
• Consolidation: there is a now a consolidated corporation.
b) Signed by the President or Vice President
o The separate existence of constituent corporations
c) AND Certified by the Secretary or assistant secretary
cease except the surviving or consolidated

corporation. So automatically the non-surviving or
5. Submission of the Articles to SEC for approval
the non-consolidated corporation will be
Four copies of the Articles of Merger or Consolidation (together with
dissolved.
favorable recommendation of a pertinent government agency in
o The surviving or consolidated corporation will now
certain cases) shall be submitted to the SEC for approval.
possess all the rights, privileges, immunities and

powers, and shall be subject to the duties and
6. Issuance by SEC of Certificate of merger
liabilities of a corporation organized under this
The SEC shall issue certificate of merger if it is satisfied that the
code.
merger or consolidation of the corporations concerned is not

inconsistent with the provisions of this code and existing laws.
ATTY:

So meaning, the new corporation need not be registered again with
EFFECTIVITY OF MERGER OR CONSOLIDATION
the SEC. Automatically upon approval of the merger or consolidation
SEC. 78. Effectivity of Merger or Consolidation . - The articles of that new corporation whether it’s the surviving corporation or a
merger or of consolidation , signed and certified as required by this consolidated corporation possesses all the powers of a corporation
Code, shall be submitted to the Commission for its approval ; under this code. The surviving corporation or the consolidated
Provided, That in case of merger or Consolidation of banks or banking corporation shall also possess all the rights, privileges, immunities and
institutions, loan associations, trust companies, insurance companies franchises of the constituent corporation and all the properties and
, public utilities , educational institutions , and other special receivables including subscriptions and other interest of the
corporations governed by special laws , the favorable constituent corporation shall be deemed transferred to the surviving
recommendation of the appropriate government agency shall first be or consolidated corporation. The surviving corporation or the
obtained. If the Commission is satisfied that the merger or consolidated corporation shall also be responsible for all the liabilities
consolidation of the corporations concerned is consistent with the and obligations of the constituent corporation. Under the NELL
provisions of this code and existing laws, it shall issue a certificate DOCTRINE, merger and consolidation is one of the ways in which
approving the articles and plan of merger or of consolidation , at liabilities are passed to the new corporation.
which time the merger or consolidation shall be effective.
Prohibitions under Philippine Competition Act
If, upon investigation , the Commission has reason to
1. Anti- competitive Agreements;
believe that the proposed merger or consolidation is contrary to or
2. Abuse of Dominant Positions;
inconsistent with the provisions of this Code or existing laws, it shall
3. Anti-competitive mergers and acquisitions.
set a hearing to give the corporations concerned the opportunity to

be heard. Written notice of the date, time , and place of hearing shall
Anti- competitive Agreements
be given to each constituent corporation at least two (2) weeks
before said hearing. The Commission shall thereafter proceed as • Horizontal Agreements - these are agreements between
provided in this Code. parties who are similarly situated meaning a supplier of a
certain commodity entering into an agreement of a supplier
Effectivity of Merger & Consolidation of the same commodity.
GENERAL RULE • Vertical Agreements - this is when a supplier or producer
Takes effect only upon the approval of the SEC. of a certain goods will enter into an agreement with the
TN: no approval of the SEC no valid merger or consolidation
supplier of the raw materials for the production of that
goods. It is vertical because it goes up the supply chain or it 2. Abuse of Dominant position – it is basically a situation
goes down the supply chain. where a company is in a dominant position, menaing
50% or more of the market share is considered as
ATTY: Horizontal or vertical agreements are not prohibited, they dominant. Being in the dominant position is not illegal
become prohibited only when they become agreements between per se so in the same way that being an insider is not
competitors that restrict competition as to the price component illegal. What is illegal is when you abuse your dominant
thereof or as to the other terms or trade, so let’s say for , an agreement position. In such a way that you do predatory pricing to
between Globe and Smart that they will now charge P5 per text impose barriers to entry or discriminate in price and
message so they fix the price and no one can go against them because you do tying and bundling.
they are the major players in the market. So if they agree, people will
normally have no choice because you are either a Globe or a Smart EXAMPLE FOR PREDATORY PRICING:
subscriber. So wala kay choice but to pay up, if ang Globe lang ang mag-
increase sa price and Smart does not, people will go to Smart but if they If you are the go to supplier for that particular market, you can get
both agree then the market has no choice. So any agreement that will control in the sense that because you have more customers, pwede
restrict competition as to the price component so meaning wala na kay nimo paubsan imo price because you exchange volume for the price.
choice because that is the essence of competition, giving the public a
choice kung kinsa imong source of your goods or services. So any But if you do it in such a way that you will now edge out your
agreement which restricts a choice for the public in terms of price or competitors because you are doing predatory pricing nga dili na
any other terms or trade, that can be considered as an anti-competitive maapas saimo competitors so they have to close down because if they
agreement. follow your pricing malugi na sila. That’s not allowed.

What else is considered as an anti-competitive agreement? If you fix
the price in an auction or you try to do bid manipulation that is also EXAMPLE FOR TYING AND BUNDLING:
prohibited.
Suppliers that have a product which is dominant in the market, and
BID MANIPULATION then they have ancillary products that they tie to their main product
It can be cover bidding, bid suppression, bid rotation, market i.e. printer, if the producer of the printer will create a printer na dili ka
allocation and other forms of bid manipulation. makagamit ug any other ink except ang ink na ilang gi produce, that is
an abuse of dominant position.
- Cover bidding – it is when the participants to an auction will
agree to basically pad their bid price in order to allow one Tying and bundling: bundling of your ancillary product with your main
competitor to win. product.
- Bid suppression – is when they agree that the competitor will
not submit their bid to allow whoever is participating to win. Another example: Apple products, there are certain applications that
- Bid Rotation – similar to cover bidding and bid suppression will only apply to their phones. But not illegal because people have the
except that the parties agree that for this bidding, ikaw options. But what if you have no other options or all the other phones
makadaog, for the second bidding, ako na sad. So you agree will be inferior to their phones. In that case, that would be considered
or fix who will win per bidding/auction. as an abuse of dominant power.

Those are considered as manipulative practices, which are considered You have a product that is dominant or preferred in the market
as anti-competitive agreement and prohibited under the Competition meaning more than 50% of the market share and then you tie up other
Act. products to it. Such that you can’t use any other products created by
the suppliers except kadtong imo lang.
- Any other agreement which would have the effect of
restricting or preventing competition such as: Merger or acquisition that exceeds 1b

1. Setting, limiting or controlling production markets, Any merger or acquisition which exceeds 1 billion pesos (the
technical development, investment dividing, or sharing transaction value). Are prohibited from consummating their agreement
the market. for 30 days after providing notice to the Philippine Competition
Commission (PCC).
So if the competitors agree nga sige akong area ang Luzon so
don’t come in here but I don’t go to Visayas and Mindanao. Effect of failure to comply with the notice requirement to the PCC:
So Luzon is your monopoly, that’s not allowed.
1. Transaction will be considered as void; and
Setting, limiting or controlling production - This can be in 2. Penalty of 1%-5% of the value of the transaction.
the form of a vertical agreement where you have an
agreement with the supplier that any raw material that they
produce will only be supplied to you or to lessen the UPON NOTIFICATION TO THE PCC, THE COMMISSION MAY:
production of that raw material so that your competitors will
now not have any materials for production, so any 1. OUTRIGHT PROHIBIT THE IMPLEMENTATION OF THE
agreement which restricts competition is considered as anti- AGREEMENT
competitive agreement and not allowed under the
Competition Act.
Just like what it did with the acquisition by Globe of the San competition, will not be considered as disadvantageous. Because
Miguel cell sites. (a case pending in the SC) This case would rule if if that other party actually goes bankrupt, it’s the same effect,
the PCC can be granted such power to prohibit certain because the surviving competitor will still be the sole source in the
transaction. market.

It is a very far reaching power that was granted to the PCC TITLE X- APPRAISAL RIGHT
Appraisal Right
2. MODIFY OR ADD SOME PORTIONS IN THE CONTRACT It is the right of the stockholder to compel the corporation to purchase
his/her share. Appraisal right is strictly construed because it violates
The PCC can add or modify some portions in the contract. If the and is actually an exception to the trust fund doctrine.
parties do not agree to the proposed changes, then, the PCC can
deny the merger/acquisition TRUST FUND DOCTRINE:
All assets and capital of the corporation is a trust fund to be held for
3. PROHIBIT THE IMPLEMENTATION OF THE AGREEMENT the benefit of its creditors . So, a stockholder cannot just withdraw
UNLESS AND UNTIL THE PERTINENT PARTY/PARTIES ENTER his shares/stockholdings. The exception is if it is pursuant to the
INTO LEGALLY ENFORCEABLE AGREEMENT SPECIFICIED BY exercise of appraisal right.
THE COMMISSION
EXERCISE OF APPRAISAL RIGHT; WHEN
If the commission finds out that there are anti-competitive terms SEC. 80. When the Right of Appraisal May Be
in the transaction, then the commission can take out those terms. Exercised. – Any stockholder of a corporation shall have the right to
dissent and demand payment of the
NOTE: In the second one, PCC adds or modifies; but, in the third one, fair value of the shares in the following instances:
the PCC removes some portions to make the agreement legally (a) In case an amendment to the articles of incorporation has the
enforceable. effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect superior
NOT ALL MERGERS OR ACQUISITIONS WHICH RESTRICT to those of outstanding shares of any class, or of extending or
COMPETITION SHOULD BE INVALIDATED shortening the term of corporate existence;
The law provides that there are certain mergers/acquisition that even (b) In case of sale, lease, exchange, transfer, mortgage, pledge
though are anti-competitive can still be allowed. or other disposition of all or substantially all of the corporate
property and assets as provided in this Code;
(c) In case of merger or consolidation; and
GENERAL RULE: ANTI-COMPETITIVE MERGERS/ACQUISITIONS ARE (d) in case of investment of corporate funds for any purpose
PROHIBITED other than the primary purpose of the corporation

EXCEPTIONS:
(a) In case an amendment to the articles of
1. IF THERE COULD BE GAINS IN EFFICIENCY BROUGHT ABOUT incorporation has the effect of changing or restricting the
BY THE COMBINATION, AND THAT GAIN IN EFFICIENCY IS rights of any stockholder or class of shares, or of
MORE THAN ANY ADVERSE EFFECT OF THE LIMITATION ON authorizing preferences in any respect superior to those of
COMPETITION outstanding shares of any class, or of extending or
shortening the term of corporate existence;
If, for example, 2 competitors will combine. With the - If you look at the provision on amendment of the articles, it
combination, the new company will be producing double the also expressly provides there that any amendment is subject
volume of what they ordinarily produce before the merger. The to appraisal right of the stockholders
production has doubled because the assets of the two
competitors have been combined. And also, with that double (b) In case of sale, lease, exchange, transfer,
production, the production cost became less. (greater production, mortgage, pledge or other disposition of all or
lesser cost. Meaning, economy of scale) substantially all of the corporate property and assets as
provided in this Code;
If it can be shown that that economy of scale resulting from (c) In case of merger or consolidation;
greater efficiency in production will redound to the benefit of the (d) In case of investment of corporate funds for any purpose
public, shown by reduced prices of the goods, then that other than the primary purpose of the corporation
combination can be allowed. - Technically, if you invest funds in another corporation, as
discussed before, you amend your articles.
So, if there are certain efficiencies created by the combination
which efficiencies will be shown to be of greater benefit than the EXERCISE OF APPRAISAL RIGHT; HOW
disadvantage of restricting competition, then the
SEC. 81. How Right is exercised. – The dissenting stockholder who
merger/acquisition can be allowed.
votes against a proposed corporate

action may exercise the right of appraisal by making
2. IF THE OTHER PARTY IS FACED WITH ACTUAL OR IMMINENT
a written demand on the corporation for the payment
FINANCIAL FAILURE of the fair value of shares held within thirty (30) days

from the date on which the vote was taken: Provided,
If a corporation is about to go bankrupt and is acquired by its
That failure to make the demand within such period
competitor. In this case, then, the combination, even if it restricts
shall be deemed a waiver of the appraisal right. corporate action and the fair value should be the value of the
If the proposed corporate action is implemented, the shares THE DAY BEFORE THE ACTUAL VOTING ON THE
corporation shall pay the stockholder, upon CORPORATE ACTION.
surrender of the certificate or certificates of stock
representing the stockholder’s shares, THE FAIR APPLICATION OF THE RULE
VALUE THEREOF AS OF THE DAY BEFORE THE This is most applicable in publicly listed corporations because the
VOTE WAS TAKEN, excluding any appreciation or corporate action will normally be published by the issuer corporation.
depreciation in anticipation of such corporate action. So, it can affect the price of the shares.
If, within sixty (60) days from the approval of the
corporate action by the stockholders, the Example:
withdrawing stockholder and the corporation cannot You acquire another subsidiary. If the market deems that acquisition
agree on the fair value of the shares, it shall be to be advantageous to the corporation, it can result to an increase in
determined and appraised by three (3) disinterested the shares. If the market deems that acquisition to be disadvantageous
persons, one of whom shall be named by the to the corporation, it can result to a decrease in the price of shares.
stockholder, another by the corporation, and the third Being a dissenting stockholder, the stockholder who wants to exercise
by the two (2) thus chosen. The findings of the his appraisal rights, should be immune from any of those fluctuations.
majority of the appraisers shall be final, and their He cannot benefit nor can he be disadvantaged of any change in the
award shall be paid by the corporation within thirty (30) days after price brought about by the action which he dissented from.
such award is made:
Provided, That no payment shall be made to any TWO THINGS TO REMEMBER IN THE SECOND PARAGRAPH OF
dissenting stockholder unless the corporation has SECTION 81:
unrestricted retained earnings in its books to cover 1. If the proposed action does not push through, then the appraisal
such payment: Provided, further, That upon right is terminated
payment by the corporation of the agreed or 2. The fair market value of the share should be on the day before the
awarded price, the stockholder shall forthwith vote was taken.
transfer the shares to the corporation.
- Within the period of 60 days from the approval of the
Manner of exercising appraisal right corporate action, if the parties cannot agree how much is the
1. VOTE AGAINST THE CORPORATE ACTION value of the shares, then there needs to be an appraisal by 3
- It can only be exercised by a stockholder who actually disinterested persons.
dissented or voted against that particular corporate action,
where the right is allowed. Meaning, if you, a stockholder, Who determines
voted to approve the amendment in the articles, you cannot One will be named by the stockholder.
exercise appraisal right. The other will be named by the corporation.
The third one will be named by the two representatives.
2. MAKE A WRITTEN DEMAND ON THE CORPORATION WITHIN
30 DAYS AFTER THE DATE ON WHICH THE VOTE ÂWAS - Basically, this will be an independent appraisal committee to
TAKEN FOR THE FAIR VALUE OF YOUR SHARES determine the value of the shares. The findings of this
- Failure to make that demand shall be deemed a waiver of the appraisers will be final and the award shall be paid by the
appraisal right. Appraisal right is strictly construed against corporation within 30 days after the award is made. The
the stockholder, being violative of the trust fund doctrine. stockholder and the corporation cannot anymore question
on the value given by the appraisers.
3. SUBMIT THE STOCK CERTIFICATE TO THE CORPORATION
WITHIN 10 DAYS AFTER DEMANDING PAYMENT Last but not the least, appraisal right can only be granted if there is
unrestricted retained earnings in the books of the corporation. - It is
- So that there can be an annotation on the stock certificate not sufficient that there is only retained earnings. It should be
that he is a dissenting stockholder, and the shares/stocks are unrestricted retained earnings. Meaning, you don’t take into account
dissenting shares. Failure to do so shall terminate his the retained earnings that has been restricted for corporate expansion,
appraisal right at the option of the corporation. So, even if retained earnings that has been restricted for certain contractual
you have dissented and thereafter notified, but you failed to provisions, and retained earnings that has been restricted for
surrender the stock certificate, appraisal right is terminated. contingencies or any other valid restriction of retained earnings. They
are not included in the determination.
Under Sec. 81, Paragraph 2: “If the proposed corporate action is
implemented, the corporation shall pay the stockholder, upon The exercise of appraisal right is very strict that the failure to comply
surrender of the certificate or certificates of stock with one requirement automatically terminates the appraisal right
representing the stockholder’s shares, the fair because this is an exception to the trust fund doctrine.
value thereof as of the day before the
vote was taken, excluding any appreciation or GR: The corporation is not allowed to give back the capital
depreciation in anticipation of such corporate action.” contribution of a stockholder because that capital contribution is
- It means that if the corporation does not push through with considered as a trust fund in favor of the creditors.
the action where the stockholder dissented, appraisal right is
also terminated. So, the appraisal right can only be pursued EXC: The exercise of appraisal right.
if the corporation actually pushes through with the
EFFECT AND TERMINATION OF RIGHT SEC. 84. Who Bears Costs of Appraisal. – The costs and expenses of
SEC. 82. Effect of Demand and Termination of Right. appraisal shall be borne by the corporation, unless the fair value
– From the time of demand for payment of the fair value of a ascertained by the appraisers is approximately the same as the
stockholder’s shares until either the abandonment of the corporate price which the corporation may have offered to pay the
action involved or the purchase of the said shares by the stockholder, in which case they shall be borne by the latter. In the
corporation, all rights accruing to such shares, including voting and case of an action to recover such fair value, all costs and expenses
dividend rights, shall be suspended in accordance with the shall be assessed against the corporation, unless the refusal of the
provisions of this Code, except the right of such stockholder to stockholder to receive payment was unjustified.
receive payment of the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of the said shares NOTATION ON CERTIFICATES; RIGHTS OF TRANSFEREE
within thirty (30) days after the award, the voting and dividend SEC. 85. Notation on Certificates; Rights of Transferee. – Within ten
rights shall immediately be restored. (10) days after demanding payment for shares held, a dissenting
stockholder shall submit the certificates of stock representing the
- All rights accruing to the shares, including voting and shares to the corporation for notation that such shares are
dividend rights shall be suspended. No more voting right, dissenting shares. Failure to do so shall, at the option of the
right to inspect, or right to dividends during the period where corporation, terminate the rights under this Title. If shares
you notified that you want to exercise your appraisal right. represented by the certificates bearing such notation are
- The only right remaining with the stockholder will be the transferred, and the certificates consequently cancelled, the rights
right to receive the fair value of his shares. of the transferor as a dissenting stockholder under this Title shall
- But if the dissenting stockholder is not paid with the fair cease and the transferee shall have all the rights of a regular
value of his shares within 30 days after the award, all his stockholder; and all dividend distributions which would have
rights will be restored until he is actually paid. accrued on such shares shall be paid to the transferee.

CESSATION OF RIGHT TO PAYMENT
SEC. 83. When Right to Payment Ceases. – No demand for payment
under this Title may be withdrawn unless the corporation consents
thereto. If, however, such demand for payment is withdrawn with
the consent of the corporation, or if the proposed corporate action
is abandoned or rescinded by the corporation or disapproved by
the Commission where such approval is necessary, or if the
Commission determines that such stockholder is not entitled to the
appraisal right, then the right of the stockholder to be paid the fair
value of the shares shall cease, the status as the stockholder shall
be restored, and all dividend distributions which would have
accrued on the shares shall be paid to the STOCKHOLDER.

When right to payment ceases
1. Demand for payment is withdrawn with the consent of the
corporation
2. proposed corporate action is abandoned or rescinded by the
corporation
3. proposed corporate action is disapproved by the Commission
where sun approval is necessary
4. Commission determines that such stockholder is not entitled to the
appraisal right
5. failure to make a written demand within the 30-day period provided
6. the shares are transferred by the dissenting shareholder
7. the dissenting shareholder failed to submit the stock certificate
within 10 days from demand

Effect
When the right of said stockholder to be paid the fair value of his shares
ceased in the cases enumerated above, his status as a stockholder
shall be restored, and all dividend distributions which would have
accrued on the shares shall be paid to the stockholder.

TAKE NOTE: Appraisal Right is not an inherent right of a stockholder,
because upon being one, there is an understanding that the
stockholder does not have a say in a corporation and will be subject to
the whims of the majority of the stockholders.

(NOT DISCUSSED BY ATTY. G)
WHO BEARS COSTS OF APPRAISAL

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Corporation

Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

separate and distinct. However, there are circumstances to show

stock as provided by existing laws shall be allowed or permitted to

If the Commission finds that the submitted documents and FACTS:

Principle: Corporation by Estoppel

The election must be by ballot if requested by any voting

An independent director is a person who, apart from shareholdings

section shall be construed to repeal the other causes for dissolution

There are powers, although not expressly provided in the Articles of

Reporting Required under SECTION 35 (G)

• If the shares are diluted it has the effect of reducing the .

RULING: petitioners. No evidence existed that MADCI subsequently acquired

• Under this law, it is still a requirement that the corporation

of two corporations which are in competition with SMC. SMC

amount to a restriction on the right of Ting Ping to have the stocks

2. NO. Such extraordinary remedy requires the concurrence of two

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