FRATERNAL ORDER OF UTOPIA

ATENEO DE MANILA UNIVERSITY

SCHOOL OF LAW
ARIS S. MANGUERA

PHILIPPINE CORPORATE LAW

Commercial Law Review

OUTLINE 1.2 Advantages and disadvantages of the Corporate

Form
(1) Nature of Corporations
(2) Formation and Organization of Corporations CLV
(3) The Corporate Entity ADVANTAGES DISADVANTAGES
(4) Powers of Corporation (1) Strong Personality (1) Abuse of Corporate Management
(5) Stockholders (2) Centralized Management (2) Abuse of Limited liability feature
(6) Board of Directors (3) Limited Liability to the (3) High cost of maintenance
(7) Officers investors (4) Double Taxation
(8) Meetings (4) Free Transferability of Units of (5) Lack of Personal Element
(9) Books and Records Investments
(10) Mergers and Consolidations
(11) Non-Stock Corporations
(12) Close Corporations Sundiang (page 249)
(13) Educational Corporations ADVANTAGES DISADVANTAGES
(14) Religious Corporations (1) The capacity to act as a legal unit; (1) More complicated in formation and
(15) Dissolution (2) Limitation of, or exemption from, management;
(16) Foreign Corporations individual liability of shareholders; (2) Higher cost of formation and
(3) Continuity of Existence operation;
(4) Transferability of Shares; (3) Lack of personal element;
(5) Centralized management of BoD; (4) Greater governmental control and
1. NATURE OF CORPORATIONS and
(6) Standardized method of
regulation;
(5) Management and control are separate
organization, and finance (Salonga, from ownership;
1.1 Concept of the corporation Phil. Law on Private Corps, 3rd ed., Stockholders have little voice in the
page 9.) conduct of business
Sec. 2. Corporation defined.
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties Advantages:
expressly authorized by law or incident to its existence. 1) Strong Legal Personality
- The corporation has a legal capacity to act and contract as a
distinct unit in its own name; and it has continuity of existence.

I sweat, I bleed, I soar… A-1

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
A corporation’s creation, organization, management and
dissolution are standardized as they are governed by a general
incorporation law.
- A corporation is an entity separate and distinct from its
stockholder. While not in fact and in reality a person, the law
treats the corporation as though it were a person by process of
fiction or by regarding it as an artificial person distinct and
separate from its individual stockholders. (Remo vs. IAC)
- Stockholders vs. Register of Deeds
The transfer of corporate assets to the stockholder is not in the
nature of a partition but is a conveyance from one party to
another.
2) Centralized Management
- A corporation’s management is centralized in the board of
director’s. A corporation presents a more stable and efficient
system of governance and dealings with third parties, since
management prerogatives are centralized in its board of
directors.
- As can be gleaned from Sec 23 of Corporation Code, it is the
board of directors or trustees which exercises almost all the
corporate powers in a corporation. (Firme vs. Bukal)
- The exercise of the corporate powers of the corporation rest in
the Board of Directors save in those instances where the
Corporation Code requires stockholder’s approval for certain
specific acts. (Great Asain Sales Center vs. CA)
3) Limited Liability to Investors- The liability in a corporation is limited to their
shares.
- Provided by jurisprudence only
- Simple division between “naked title” and “beneficial title” gives
rise to limited liability.
- Peculiar only between the shareholders and a corporation
- Underlying Principle: Principle of Relativity
- CLV’s formula: Strong Juridical Personality + Centralized
Management= Limited Liability
- CLV: There are ways to circumvent the law to make the
shareholder liable for more than his actual share (ex. The
chairman makes himself joint debtor for a loan)
- When a person invest its property in the corporation, he
abdicates his “jus” of ownership
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
- One of the advantages of the corporation is the limitation of an
investor’s liability to the amount of investment, which flows
from the legal theory that a corporate entity is separate and
distinct fro its stockholders. (San Juan vs. CA)
- It is hornbook law that corporate personality is a shield against
personal liability of its officers- a coporate officer and his
spouse cannot be personally liable under a trust receipt where
he entered into and signed the contract clearly in his official
capacity. (Consolidated Bank vs. CA)
- Obligations incurred by the corporation acting through its
directors, officers and employees, are its sole liabilities.
(Malayang Samahan vs. Ramos)
CLV Class Notes
Q: Is a corporation in our jurisdiction given the feature of limited liability?
A: No. The feature of limited liability is given to the stockholder and not to
the corporation.
Q: Is limited liability a normal run of things?
A: No. It is only there because it comes with the separate juridical
personality
Q: If limited liability as shown in the corporation setting is good for the
investors, does it mean that delectus personarum is a bad thing?
A: No. It is good in a way, since person are bound by the contracts they
enter into.
4) Free Transferability of Units of Investments
- As a general rule, the shares of stocks can be transferred
without the consent of other stockholders. This places more
liquidity in the corporate setting and encourages investors to
channel their investments through corporate vehicles.
- Authority granted to corporations to regulate the transfer of its
stock does not empower the corporation to restrict the right of
a stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to
be followed in effecting transfer (Thomson vs. CA)
5) Advantages as registered Entity-
- Corporations enjoy perpetual succession under its corporate
name and in an artificial form; it has the capacity to take and
grant property, and contract obligations; it can sue and be sued
in its corporate name as a juridical person; it has the capacity
to receive and enjoy common grants of privileges and
A-2
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
immunities; and its stockholders or members generally have no
personal liability beyond their shares.
Disadvantages of Corporate Form
1) Abuse of Corporate Management- In a practical sense, investors have
very little voice over the conduct of business of the corporation.
2) Abuse of limited liability feature- Limited liability feature has tended to
increase transaction cost by the parties being forced to enter into
contractual schemes skirting the limited liability of the corporation when it
is a party to a transaction. Limited liability hits innocent people.
3) High cost of maintenance- Complicated and Costly Formation and
Maintenance. There is a greater degree of governmental control and
supervision.
4) Double Taxation- The profits if the corporation which are already
subjected to corporate income tax when declared and distributed as
dividends to the stockholders are again subjected to the further income
tax. Dividends received by individuals from domestic corporations are
subject to final 10% tax fro income earned on or after January 1, 1998
(Section 24(B)(2), 1997 NIRC). Inter-corporate dividends between
domestic corporations, however, are not subject to any income tax (Sec.
27 (D)(4), 1997 NIRC). In addition, there is re-imposition of the 10%
“improperly accumulated earnings tax” for holding companies (Sec 29,
1997 NIRC)
5) Lack of Personal Element- This has spawned corporate irresponsibility.
1.3 Differentiated from partnerships and other
business organizations
1) SOLE PROPRIETORSHIP- Here, it is the owner who controls the
business while in a corporation, it is the Board of Directors.
2) PARTNERSHIPS- The most important distinction between a partnership
and a corporation is their legal capacities. A corporation has a stronger legal
capacity. Enabling it to continue despite death, insolvency or withdrawal of
any of its stockholders or members. Limited Liability is a main feature in a
corporate setting, whereas partners are liable personally foe partnership
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
debts. Generally, every partner is an agent of the partnership and by his sole
act, he can bind the partnership whereas in a corporation, only the Board of
Directors or its agents can bind the corporation.
Here are the features of a partnership:
Delectus Personarum
- Selection of Partners; No outsider can come in without the
consent of all partners
- Prevents the development of any market for units of ownership
because of no assurance that buyers would be able to become
partners
- Mutual Representation
- Power to Dissolve
Mutual Agency
- Each partner can legally bind the business enterprise
- Business may be undermined by act of one foolish partner
Unlimited Liability
Community of Interest
- Co-ownership of capital or property
CLV Class Notes
Q: How does contractual management of a corporation compare with
the management of a partnership?
A: Every partner, in the absence of a stipulation in the articles of
partnership, binds the partnership as every partner is an agent of the
others. In a corporation, only the Board of Directors and not the
stockholders can bind the corporation.
CLV: The principle in constitutional law that delegated power cannot
be delegated further has no application in a corporate setting because
a corporation is not a product of political text- it is a product of
business. A corporate setting is best described as hierarchal and fiat.
Just because the BoD are to be elected by the stockholders does not
mean that the former derives its power from the latter. The powers of
the BoD is original, said powers are not delegated by the stockholder.
The powers are vested by law (and Articles of Incorporation). The BoD
sit on the board not as representatives of the stockholders but
because they are directors.
Q: What are the 2 types of partnerships?
A: Regular and joint venture
Q: Can a corporation be a partner in a regular partnership?
A: No, because a partner must be a natural person. It is against public
policy for corporation to be a partner in a regular partnership.
A-3
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Q: Why did the legislature put such limited liability as an attribute of a
corporation? If the feature of limited liability costs money then why not
take it out? Why not leave it up to the investors who can decide if they
want limited liability or not?
A: Even though limited liability will cost a lot of money, borrowing
makes a lot more sense. If I have 100M, it would be foolish to put all
my eggs in one basket(if the basket falls, all eggs break). So I merely
out 10M in one corp and then borrow the 90M while the rest of my
money I put somewhere else. If the corporation fails, I do not lose all
my 100 M. But if the corps succeeds and I get to pay my creditor, I
retain the 10M plus profits acquired from the 90M paid up loan. This is
the concept of Leveraging, using other people’s money to make a
profit for yourself. This is why borrowing is an integral part of corporate
life and it is up to the creditors to make a diligent appraisal of the credit
standing of the corp.
Q: What is the main distinction between a corporation and a
partnership?
A: A corporation is intermingling of corporation law and contract law.
Partnership is purely contractual relationship and so every time a
partner dies, the contract is actually distinguished.
Q: What is a corporation law all about?
A: It is all about jurisprudence actually built around the 4 attributes of a
corporation.
Q: Does a Defective Incorporation result into a Partnership?
A: No. First, both corporate and partnership relationship are
fundamentally contractual relationships created by the co-venturers.
(so, yung intention is controlling)Second, there are important
differences between a corporation and the partnership.(i.e. Limited
liability, centralized management, easy transferability of units of
ownership)
Summary of the doctrinal pronouncement in PIONEER INSURANCE
case:
a) Parties who intended to participate or actually participate in the
business affairs of the proposed corporation would be considered as
partners under a de facto partnership, and would be liable for
partnership obligations.
b) Parties who took no part except to subscribe for stock in a proposed
corporation, do not become partners with other subscribers who
engaged in the business under the name of pretended corporation,
are not liable for action foe settlement of the alleged partnership
contribution.
Q: Why are we taking up Pioneer? Why were not they liable?
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
A: Because Pioneer shows us that for a person to be liable as a
partner, he should have actively participated in the conduct of the
business, the SC held in this case that to be able to be held liable the
person should possess powers of management business, the SC held
in this case this case that to be able to be held liable the person should
possess powers of management.
Q: In cases where there is a defective attempt to form a corporation,
which is the prevailing rule, a partnership inter se is created or a
corporation by estoppel?
A: It depends wholly on the extent of the participation of the party who
claim is being mind. In PIONEER, there was no intent on the other
parties to enter into a partnership but a corporation. As to Cervantes
and Bormacheco, they cannot be considered to have entered into a
partnership inter se, since there was no intention to do so ans to be
held liable as such.
But if it were Cervantes or Bormacheco, who entered into the contracts
using the corporate name and actively participated in the activities of
the corporation, then they are to be held liable as partners.
Lim Tong Lim vs. Phil. Fishing Gear Industries
- Q: What is the difference between Pioneer and Lim Tong Lim?
A: In Pioneer, the SC stopped when it declared that to be
liable, you have to possess powers of management. In Lim, it
continues its pronouncement by saying that you have
beneficial ownership over the business, then you are also
liable as a partner
CLV: Pioneer caseactors who knew of corporation’s non-
existence are liable as general partners while actors who did
not know are liable as limited partners, passive investors are
not liable. Lim Even passive investors should be held liable
provided they benefited from such transactions.
3) BUSINESS TRUST- It is simply a deed of trust which is easier and less
expensive to constitute for it is not bound by any legal requirements. It does
not have separate juridical personality, and is mainly governed by
contractual doctrines and common law principles on trust. Trust relationship
centered upon properties, and which places naked tile in the trustor and the
beneficial title in the beneficiary.
CLV Class Notes
Q: What is the difference of a Business Trust and a corporation?
A-4
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
A: The relationship in a business trust is essentially a trust relationship.
The business trust does not have a personality which is apart from the
trustor of the trustee/beneficiary. The concept of a separate juridical
personality is absent from a business trust.
4) JOINT VENTURES
- Its legal concept is of common law origin. It is a form of
partnership and should thus be governed by the law of
partnerships.
- Joint venture is an association of persons or companies jointly
undertaking some commercial enterprise; generally, all
contribute assets and share risks. It requires a community of
interest in the performance of the subject matter, a right to
direct and govern policy in connection therewith, and duty,
which may be altered by agreement to share both in profit and
losses. (Kilosbayan vs. Guingona)
CLV Class Notes
Q: What is the difference between a joint venture and a partnership?
A: A joint venture is by law a partnership because it follows the same
definition as having two or more persons binding themselves together
under a common fund with the intention of dividing the profits between
themselves. Therefore, every joint venture is a partnership. The
distinction between the two is a joint venture is for a limited purpose
only while a partnership involves an arrangement or an on-going
concern.
Q: Is it possible for a joint partnership not be a partnership?
A: Yes, when the joint venture forms a corporation, it hen becomes a
joint venture corporation.
Q: Is the requirement of registration needed in a partnership required
in a joint venture?
A: No. Only in a partnership is registration required. (Art 1772)
5) COOPERATIVES
- It is a duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to
achieve lawful common social or economic end, making
equitable contributions to the capital required and accepting a
fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles. It
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
has a juridical personality distinct from its members and has a
limited liability feature. Cooperatives are governed by
principles of democratic control where the members in primary
cooperatives have equal voting rights in a one-member-one-
vote principle. The general assembly in full membership
exercises all the rights and performs all the obligations of the
cooperative. They are under the supervision and control of the
Cooperative Development Authority. (Primary objective: SELF
HELP)
- Cooperatives are established to provide a strong social and
economic organization to ensure that the tenant-farmers will
enjoy on a lasting basis the benefits of agrarian reforms.
(Corpuz vs. Grospe)
6) SOCIEDAD ANONIMAS
- A sociedad anonima was considered a commercial partnership
where upon the execution of funds and personal property,
become a juridical person- an artificial being, invisible,
intangible, and existing only in contemplation of law- with
power to hold, buy, and sell property, and to sue and be sued-
a corporation- not a general co-partnership nor a limited co-
partnership… The inscribing of its articles of agreement in the
commercial register was not necessary to make it a juridical
person- a corporation. Such inscription only operated to show
that it partook of the form of a commercial corporation, (Mead
vs. McCullough)
- The sociedades anonimas were introduced in the Philippine
jurisdiction on 1 December 1888 with the extension to
Philippine territorial application of Articles 151 to 159 of the
Spanish Code of Commerce. Those articles contained the
features of limited liability and centralized management
granted to a juridical entity. But they were more similar to the
English joint stock companies than the modern commercial
corporations. (Benguet vs Pineda)
- Our corporation law recognizes the difference between
sociedades anonimas and corporations and will not apply legal
provisions pertaining to the latter to the former.(Phil Product vs.
Primateria Societe Anonyme)
7) CUENTAS EN PARTICIPACION
A-5
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
- A cuentas en particiapacion as a sort of an accidental
partnership constituted in such manner that its existence was
only known to those who had an interest in the same, there
being no mutual agreement between the partners, and without
a corporate name indicating to the public in some way that
there were other people besides the one who ostensibly
managed and conducted the business, governed under Article
239 of the Code of Commerce. Those who contract with the
person under whose name the business of such partnership of
cuentas en participacion is conducted, shall have only a right
of action against such person and not against the other person
interested, and the latter, on the other hand, shall have not
right of action against third person who contracted with the
manager unless such manager formally transfers his rights to
them. (Bourns vs. Carman)
1.4 Government Regulation of Corporations
Basis: Section 2 of Corp Code; Theory of Concession
Theory of Concession: Looks at a corporation as a creature of the
State within the control of the latter. This theory is essentially
followed in the Philippines.
A corporation is an artificial being created by operation of
law. It owes it life to the state its birth being purely dependent
on its will. Corporate by-laws must yield to judicial orders. As a
matter of fact, a corporation, once it comes into being, comes
more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action
to enforce its right. Correlatively, it is not immune from judicial
control in those instances, where a duty under the law as
ascertained in an appropriate legal proceeding is cast upon it.
(Tayag v. Benguet Consolidation)
To organize a corporation that could claim a juridical
personality of its own and transact business as such, is not a
matter of absolute right but a privilege which may be enjoyed
only under such terms as the State may deem necessary to
impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry,
5 SCRA 645 (1962)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
“It is a basic postulate that before a corporation may
acquire juridical personality, the State must give its consent
either in the form of a special law or a general enabling act,”
and the procedure and conditions provided under the law for
the acquisition of such juridical personality must be complied
with. Although the statutory grant to an association of the
powers to purchase, sell, lease and encumber property can
only be construed the grant of a juridical personality to such an
association . . . nevertheless, the failure to comply with the
statutory procedure and conditions does not warrant a finding
that such association acquired a separate juridical personality,
even when it adopts sets of constitution and by-laws.
International Express Travel & Tour Services, Inc. v. Court of
Appeals, 343 SCRA 674 (2000).
Since all corporations, big or small, must abide by the
provisions of the Corporation Code, then even a simple family
corporation cannot claim an exemption nor can it have rules
and practices other than those established by law. Torres v.
Court of Appeals, 278 SCRA 793 (1997).
Catindig Class Notes
Q: How does government regulate corporations?
A: From creation to dissolution
xxx
Homeowner’s HLURB
Condos SEC
Cooperative Bureau of Cooperative Development
1.5 Kinds of Corporations
(a) Stock
(b) Non-Stock
(c) De Facto
(d) Corporation by estoppel
(e) Close
(f) Educational
(g) Religious; Sole and Aggregate
(h) Special Charter
(i) Foreign
A-6
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(j) GOCC
(k) Homeowner’s Association
(a) Stock
Sec. 3. Classes of corporations.
Corporations formed or organized under this Code may be stock or
non-stock corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on the
basis of the shares held are stock corporations. All other corporations
are non-stock corporations.
(b) Non-stock
Sections 3 and 87.
Sec. 87. Definition.
For the purposes of this Code, a non-stock corporation is one where
no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of this
Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized,
subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title. (n)
• See page 902 of CLV’s Commercial Law Reviewer (2007).
• In spite of the existence of capital stock, a corporation may
be considered a non-stock corporation for purpose of
taxation. (CIR v. Club Filipino)
• Mere realization of profits does not make a corporation a
stock corporation. (Collector v. UV)
(c) De facto
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Sec. 20. De facto corporations
The due incorporation of any corporation claiming in good faith to be
a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to
which such corporation may be a party. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding.
Nature of the Doctrine
• De facto corporation is formed also in accordance with law. It
falls short of the requirements provided by law. Such is
awarded a separate juridical personality, it may thus enter
into contracts, it may sue and be sued. (note: third parties
may sue the corporation, incorporators may sue but the
corporation cannot sue) Only the actors will be held liable. In
proceeding against such, compliance with due process must
be had.
• The doctrine of de facto corporation applies as to the first
level relationship (as between the State and corporations)
and also to the third level of relationship.
Elements: (Arnold v. Piccio)
(1) Valid Law under which it is incorporated
(2) Attempt in good faith to incorporate
(3) Assumption of corporate powers
(1) Valid Law under which it is incorporated
• If the constitutionality of the statue is raised for the first time
in an action wherein it is sought to prevent future incurring of
rights and obligations, it will be proper to permit collateral
attack; where the constitutionality of the statue is raised for
the first time in litigation seeking enforcement of contracts or
transaction which have been fully or partially consummated,
collateral attack on the juridical personality of the corporation
should not be permitted, since the corporation should be
treated as a de facto corporation. Courts, however, through
A-7
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
jurisprudence, arrived at the same result as that upheld by
such minority opinion, holding that a corporation organized
under a statute subsequently declared unconstitutional may
nevertheless be considered a corporation by estoppel, where
there have been previous dealing between the parties on a
corporate basis.
(2) Attempt in good faith to incorporate- colorable compliance.
• The Corporation must have filed its Articles of Incorporation
and the SEC duly issued a Certificate of Incorporation. (The
incorporators must have been aware of the issuance of the
certificate of incorporation by the SEC for such good faith to
exist.) (Mere intent is not sufficient)
(3) Assumption of corporate powers: Minimum requirement:
Election of BoD.
Rationale
• To prevent any party from raising the defect of authority as a
means to avoid fulfillment of a contract or a transaction
entered into.
• To protect the enforceability of corporate dealings and
contracts, to allow the public to take at reasonable face value
the authority of the corporation to enter into valid and binding
contracts.
• The doctrine is meant to apply to extra –corporate dealings
and not to intra-corporate relationship
CLV Class Notes
Q: If a member of a public deals with a corporation knowing its defect,
will the de facto doctrine apply?
A: Yes, because (a) juridical personality cannot be subject to collateral
attack (b) No juridical entity, no separate liability
CLV: The de facto doctrine was formulated to safeguard the security of
commercial transactions whenever they involve the corporation.
Parties dealing with said corporation are secured by the fact that the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
transactions entered into with said corporations may be sued upon and
they can recover. That is why aside from the other two requisites there
must be a set of officers or directors because the principle that a
corporation can only act through its officers.
Catindig Class Notes
Sir: Once there is a certificate issued, there is no de facto corporation.
So for me the concept is merely historical.
(d) Corporation by estoppel
Sec. 21. Corporation by estoppel
All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in
fact no corporation.
CLV Class Notes
Q: What is minimum requirement for a corporation by estoppel to
exist?
A: There must be an innocent party who believes that a corporation
exists (believes in good faith) because of representations.
Catindig Class Notes
Q: Is a corporation by estoppel a corporation?
A: No. (See definition in Section 2)
The parties are the one made liable-ASM.
Q: How does government regulate corporations?
A: From creation to dissolution
xxx
Homeowner’s HLURB
Condos SEC
A-8
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Cooperative Bureau of Cooperative Development
UP Class Notes
COMMENT: The doctrine is founded on principles of equity and is
applied n order to prevent injustice and unfairness to third persons vis-
à-vis the corporation (or vice versa as in par. 2 Section 21). In this
case the International Express Travel seeks to enforce a valid contract;
it is the Federation and Henri Kahn who wish to do it injustice by trying
to evade responsibility thereon. In the last point, the CA possibly tried
to apply paragraph 2 Section 21, albeit mistakenly.
Nature of Doctrine
• An admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as
against the person relying thereon.
• Founded on principles of equity and designed to prevent
injustice and unfairness, the doctrine applies when persons
assume to form a corporation and exercise corporate
functions and enter into business relations with third persons.
Where no third person is involved in the conflict, there is no
corporation by estoppel. A failed consolidation therefore
cannot result in a consolidated corporation by estoppel.
Lozano v. De Los Santos, 274 SCRA 452 (1997)
• A party cannot challenge the personality of the plaintiff as a
duly organized corporation after having acknowledged same
when entering into the contract with the plaintiff as such
corporation for the transportation of its merchandise. Ohta
Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).1
• A person who accepts employment in an unincorporated
charitable association is estopped from alleging its lack of
1
The same principle applied in Compania Agricole de Ultramar v.
Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership
which required registration in the registry under the terms of the Code of
Commerce).
juridical personality. Christian Children’s Fund v. NLRC, 174
SCRA 681 (1989).
• One who deals with an organization which is not duly
incorporated is not estopped to deny its corporate existence
when his purpose is not to avoid liability. Int’l Express Travel
v. Court of Appeals, 343 SCRA 674 (2000).
• Under the law on estoppel including that under Sec. 21 of
Corporation Code, those acting on behalf of an ostensible
corporation and those benefited by it, knowing it to be without
valid existence, are held liable as general partners. Lim
Tong Lim v. Philippine Fishing Gear Industries, Inc., 317
SCRA 728 (1999).
Two Levels
(1) With Fraud
(2) Without Fraud
• When the incorporators represent themselves to be officers
of the corporation which was never duly registered with the
SEC, and engage in the name of the purported corporation in
illegal recruitment, they are estopped from claiming that they
are not liable as corporate officers under Sec. 25 of
Corporation Code which provides that all persons who
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all the
debts, liabilities and damages incurred or arising as a result
thereof. People v. Garcia, 271 SCRA 621 (1997); People v.
Pineda, G.R. No. 117010, 18 April 1997 (unpub).
(1) With Fraud
• Actor is liable as a general partner for debts, damages and
liabilities incurred. “Corporation” cannot set up as defense
that corp actually does not exist.
• Veil will be pierced to make corporators liable.

I sweat, I bleed, I soar… A-9

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• If corporation sues the other party, it cannot resist obligation
by saying that no corp exist.
(2) Without Fraud
• Actors are liable as limited partner.
• Corporation by estoppel applies to save the contract but
juridical entity is then broken down to make actors liable.
Note: Both in bad faith: Corporation by estoppel does not apply.
(Pari Delicto Doctrine, or the contract is recissible)
(e) Close
Sec. 96. Definition and applicability of Title.
A close corporation, within the meaning of this Code, is one whose
articles of incorporation provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock exchange
or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is
not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
Jack’s Lecture
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
CLOSE CORPORATIONS
This is a new title, made in recognition of the fact that the
overwhelming majority of the corporations are family corps. In many family
corporations here, the set-up is such that the husband is the president, the
wife is the treasurer, but it is the wife who is actually running the corp. The
husband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp.
Has a technical meaning in the law. For it to be a close corp., the articles
must provide that it cannot have more than 20 stockholders. There should
be restrictions on the transfer of the shares, like usually it will be provided
that if a stockholder wants to sell his share, he must first offer it to the other
stockholders. Only if they are not willing to buy can he offer it to an outsider.
Or it may also provide that if no stockholder is willing to buy the shares, then
he must offer it to the corporation before offering to an outsider.
The corporation shall not be listed in any stock exchange. The law
says that the mere fact that a corp. is controlled by another corp. does not
make it a close corp. The articles must contain the features mentioned in the
law. But corps. Engaged in mining, oil companies, stock exchanges, banks,
insurance companies, public utilities, schools, and corps. vested with public
interest are not allowed to be close corps. Because they're engaged in lines
of business vested with public interest and so they should be subject to
regulation and close scrutiny. The law says the articles may provide for
classification of shares and qualifications for owning them. For example, you
have three brothers who form a close corp. So they may provide: a) we will
classify these shares into class a, class b, class c. Only the members of the
family of the first brother can own class a shares. Only members of 2 nd
brother can own class b shares, and class c shares can be owned only by
members of the 3rd brother; b) we will have nine (9) directors, and 3 will be
elected by holders of class a shares; c) can provide for a greater quorum or
voting requirements. It can be provided that you will need three fourths (3/4)
majority to approve any action by the board, any action by the stockholder.
Why? Because each group would want to be protected for otherwise if the
two groups combine they can get anything approved, like there would be two
thirds. And so the third group would want to be protected; d) the articles may
provide that if it's the stockholders and not the board who will manage the
affairs and that there is no need for formal meetings, if the stockholders will
be the directors, then they will be subject to the same liabilities as directors.
• See page 706-736 of CLV’s textbook or page 909 of CLV’s
Commercial Law Reviewer (2007).
(f) Educational
A-10
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Sec. 106. Incorporation
Educational corporations shall be governed by special laws and by
the general provisions of this Code. (n)
Sec. 107. Pre-requisites to incorporation
Except upon favorable recommendation of the Ministry of Education
and Culture, the Securities and Exchange Commission shall not
accept or approve the articles of incorporation and by-laws of any
educational institution. (168a)
Sec. 108. Board of trustees
Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples
of five (5).
Unless otherwise provided in the articles of incorporation on the by-
laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the number and term
of directors shall be governed by the provisions on stock
corporations. (169a)
• See page 917 of CLV’s Commercial Law Reviewer (2007).
(g) Religious: sole and aggregate
Sec. 109. Classes of religious corporations
Religious corporations may be incorporated by one or more persons.
Such corporations may be classified into corporations sole and
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
religious societies.
Religious corporations shall be governed by this Chapter and by the
general provisions on non-stock corporations insofar as they may be
applicable. (n)
Sec. 110. Corporation sole
For the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect
or church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
Sec. 111. Articles of incorporation
In order to become a corporation sole, the chief archbishop, bishop,
priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities and
Exchange Commission articles of incorporation setting forth the
following:
1. That he is the chief archbishop, bishop, priest,
minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and
do not forbid it;
3. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, he is charged with the
administration of the temporalities and the management
of the affairs, estate and properties of his religious
denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister, rabbi
of presiding elder is required to be filled, according to
the rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5. The place where the principal office of the
A-11
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

corporation sole is to be established and located, which sect or church represented by the corporation sole: Provided, That in
place must be within the Philippines. cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned
The articles of incorporation may include any other provision not
represented by such corporation sole regulate the method of
contrary to law for the regulation of the affairs of the corporation. (n)
acquiring, holding, selling and mortgaging real estate and personal
Sec. 112. Submission of the articles of incorporation property, such rules, regulations and discipline shall control, and the
intervention of the courts shall not be necessary. (159a)
The articles of incorporation must be verified, before filing, by affidavit
or affirmation of the chief archbishop, bishop, priest, minister, rabbi or Sec. 114. Filling of vacancies
presiding elder, as the case may be, and accompanied by a copy of
The successors in office of any chief archbishop, bishop, priest,
the commission, certificate of election or letter of appointment of such
minister, rabbi or presiding elder in a corporation sole shall become
chief archbishop, bishop, priest, minister, rabbi or presiding elder,
the corporation sole on their accession to office and shall be
duly certified to be correct by any notary public.
permitted to transact business as such on the filing with the
From and after the filing with the Securities and Exchange Securities and Exchange Commission of a copy of their commission,
Commission of the said articles of incorporation, verified by affidavit certificate of election, or letters of appointment, duly certified by any
or affirmation, and accompanied by the documents mentioned in the notary public.
preceding paragraph, such chief archbishop, bishop, priest, minister,
During any vacancy in the office of chief archbishop, bishop, priest,
rabbi or presiding elder shall become a corporation sole and all
minister, rabbi or presiding elder of any religious denomination, sect
temporalities, estate and properties of the religious denomination,
or church incorporated as a corporation sole, the person or persons
sect or church theretofore administered or managed by him as such
authorized and empowered by the rules, regulations or discipline of
chief archbishop, bishop, priest, minister, rabbi or presiding elder
the religious denomination, sect or church represented by the
shall be held in trust by him as a corporation sole, for the use,
corporation sole to administer the temporalities and manage the
purpose, behalf and sole benefit of his religious denomination, sect or
affairs, estate and properties of the corporation sole during the
church, including hospitals, schools, colleges, orphan asylums,
vacancy shall exercise all the powers and authority of the corporation
parsonages and cemeteries thereof. (n)
sole during such vacancy. (158a)
Sec. 113. Acquisition and alienation of property
Sec. 115. Dissolution
Any corporation sole may purchase and hold real estate and personal
A corporation sole may be dissolved and its affairs settled voluntarily
property for its church, charitable, benevolent or educational
by submitting to the Securities and Exchange Commission a verified
purposes, and may receive bequests or gifts for such purposes. Such
declaration of dissolution.
corporation may sell or mortgage real property held by it by obtaining
an order for that purpose from the Court of First Instance of the The declaration of dissolution shall set forth:
province where the property is situated upon proof made to the
1. The name of the corporation;
satisfaction of the court that notice of the application for leave to sell
or mortgage has been given by publication or otherwise in such 2. The reason for dissolution and winding up;
manner and for such time as said court may have directed, and that it
3. The authorization for the dissolution of the
is to the interest of the corporation that leave to sell or mortgage
corporation by the particular religious denomination,
should be granted. The application for leave to sell or mortgage must
sect or church;
be made by petition, duly verified, by the chief archbishop, bishop,
priest, minister, rabbi or presiding elder acting as corporation sole, 4. The names and addresses of the persons who are to
and may be opposed by any member of the religious denomination, supervise the winding up of the affairs of the

I sweat, I bleed, I soar… A-12

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
corporation.
Upon approval of such declaration of dissolution by the Securities
and Exchange Commission, the corporation shall cease to carry on
its operations except for the purpose of winding up its affairs. (n)
Sec. 116. Religious societies
Any religious society or religious order, or any diocese, synod, or
district organization of any religious denomination, sect or church,
unless forbidden by the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an
affirmative vote at a meeting called for the purpose of at least two-
thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and
estate by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or
religious order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious
denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their
written consent or have voted to incorporate, at a duly convened
meeting of the body;
3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church
of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines;
and
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
6. The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or
district organization to serve for the first year or such other period as
may be prescribed by the laws of the religious society or religious
order, or of the diocese, synod, or district organization, the board of
trustees to be not less than five (5) nor more than fifteen (15). (160a)
• See page 918 of CLV’ Commercial Law Reviewer (2007).
(h) Special charter
Sec. 4. Corporations created by special laws or charters
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them
or applicable to them, supplemented by the provisions of this Code,
insofar as they are applicable.
(i) Foreign
Sec. 123. Definition and rights of foreign corporations
For the purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to
do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this
Code and a certificate of authority from the appropriate government
agency. (n)
• See page 799 of CLV’s textbook or page 946 of CLV’s
Commercial Law Reviewer.
(j) GOCC
• Government’s majority shares does not make an entity a
public corporation. National Coal Co., v. Collector of Internal
Revenue, 46 Phil. 583 (1924).
A-13
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• A corporation is created by operation of law under the
Corporation Code while a government corporation is normally
created by special law referred to often as a charter. Bliss
Dev. Corp. Employees Union v. Calleja, 237 SCRA 271
(1994).
• The test to determine whether a corporation is government
owned or controlled, or private in nature is simple. Is it
created by its own charter for the exercise of a public
function, or by incorporation under the general corporation
law? Those with special charters are government
corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission, and
are compulsory members of the GSIS. Camparedondo v.
NLRC, 312 SCRA 47 (1999)
• While public benefit and public welfare may be attributable to
the operation of the Bases Conversion and Development
Authority (BCDA), yet it is certain that the functions it
performs are basically proprietary in nature—the promotion of
economic and social development of Central Luzon,
particularly, and the country’s goal for enhancement.
Therefore, the rule that prescription does not run against the
State will not apply to BCDA, it being said that when title of
the Republic has been divested, its grantees, although
artificial bodies of its own creation, are in the same category
as ordinary persons. Shipside Inc. v. Court of Appeals, 352
SCRA 334 (2001).
• Although Boy Scouts of the Philippines does not receive any
monetary or financial subsidy from the Government, and its
funds and assets are not considered government in nature
and not subject to audit by the COA, the fact that it received a
special charter from the government, that its governing board
are appointed by the Government, and that its purpose are of
public character, for they pertain to the educational, civic and
social development of the youth which constitute a very
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
substantial and important part of the nation, it is not a public
corporation in the same sense that municipal corporation or
local governments are public corporation since its does not
govern a portion of the state, but it also does not have
proprietary functions in the same sense that the functions or
activities of government-owned or controlled corporations, is
may still be considered as such, or under the 1987
Administrative Code as an instrumentality of the Government,
and it employees are subject to the Civil Service Law. Boy
Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
• But being a GOCC makes it liable for laws and provisions
applicable to the Government or its entities and subject to the
control of the Government. Cervantes v. Auditor General, 91
Phil. 359 (1952).
• Beyond cavil, a GOCC has a personality of its own, distinct
and separate from that of the government, and the
intervention in a transaction of the Office of the President
through the Executive Secretary does not change the
independent existence of a government entity as it deals with
another government entity. PUP v. Court of Appeals, 368
SCRA 691 (2001).
• The doctrine that employees of GOCCs, whether created by
special law or formed as subsidiaries under the general
corporation law are governed by the Civil Service Law and
not by the Labor Code, has been supplanted by the 1987
Constitution. The present doctrine in determining whether a
GOCC is subject to the Civil Service Law is the manner of its
creation, such that government corporations created by
special charter are subject the Civil Service Law, while those
incorporated under the general corporation law are governed
by the Labor Code. PNOC-Energy Development Corp. v.
NLRC, 201 SCRA 487 (1991); Davao City Water District v.
Civil Service Commission, 201 SCRA 593 (1991).
A-14
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• Section 31 of Corporation Code (Liability of Directors and
Officers) is applicable to corporations which have been
organized by special charters since Sec. 4 of Corporation
Code renders the provisions supplementarily applicable to all
corporations, including those with special or individual
charters, such as cooperatives organized under P.D. 269, so
long as those provisions are not inconsistent with such
charters. Benguet Electric Cooperative, Inc. v. NLRC, 209
SCRA 55 (1992).
• Water districts can validly exists as corporate entities under
PD 198, and provided they are government-owned or
controlled, and their board of directors and other personnel
are government employees subject to civil service laws and
anti-graft laws. Feliciano v. Commission on Audit, 419 SCRA
363 (2004).
(k) Homeowner’s Associations (Section 4 and 26 of
RA 8763, March 7, 2000)
Republic Act No. 8763 (March 7, 2000)
Section 4. Home Guarantee Corporation. The Home Insurance and
Guarantee Corporation is hereby renamed as the Home Guarantee
Corporation, hereinafter refereed to as the Corporation, which shall
have its principal office in Metropolitan Manila and shall exist for a
period of 50 years from December 15, 2000. The Corporation may
establish such offices, agencies, subsidiaries, or branches anywhere
in the Philippines as its operations would require and its Board of
Directors would determine.
Section 26. Powers over Homeowners Associations. The powers,
authorities and responsibilities vested in the Corporation with respect
to homeowners association under Republic Act No. 580, as amended
by Executive Order No. 535 is hereby transferred to the Housing and
Land Use Regulatory Board (HLURB).
Subject to existing laws, the HLURB is hereby authorized to create
additional positions and augment its present budget as may be
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
needed for the operation and maintenance of the newly created unit
or office as a consequence of the transfer of functions and powers.
Pending the approval of the HLURB Revised Staffing Organizational
Plan and release of budgetary allocations thereof, the Corporation
shall extend technical, operational, and administrative assistance to
the HLURB as may be mutually deemed necessary to ensure smooth
turnover of functions. However, such assistance shall not extend
beyond a period of 1 year from the date of effectivity of this Act.
• Registration is made before the HLURB.
1.6 Cases
Lozano v. delos Angeles and Anda (June 19, 1997)
• The doctrine of corporation by estoppel cannot override
jurisdictional requirements- jurisdiction is fixed by law and
cannot be acquired through or waived, enlarged or
diminished by, any act or omission of the parties, and neither
can it be conferred by the acquiescence of the court.
• Corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness, and
where there is no third person involved and the conflict arises
only among those assuming the form of a corporation, who
know that it has not been registered, there is no corporation
by estoppel.
International Express Travel v. CA (October 19, 2000)
(1) The Federation has no juridical personality. Indeed, R.A.
3135 and P.D. No. 604 recognized the juridical existence
of national sports association. This may even be gleaned
from the powers and functions granted to these
association. However, these laws only provided the
manner by which these entities may acquire juridical
personality. The corporate status of these associations
does not automatically take place. These laws actually
requires that before an entity be considered as a
A-15
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

national sports association such must recognized by the

accrediting organization (i.e. PAAF). This fact of
recognition, however the President of the Federation
failed to substantiate.
(2) The President must be held liable in accordance with the
principle that any person acting or purporting to act on
behalf of a corporation which has no valid existence
assumes such privileges and obligations and become
personally liable for contracts entered into or for other
acts performed as such agent.
(3) The doctrine of corporate estoppel is not applicable. It is
only applied to a third party when he tries to escape
liability on a contract from which he has benefited. In the
case at bar, the petitioner is not trying to escape liability
but rather is the one claiming it.

I sweat, I bleed, I soar… A-16

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
2. FORMATION AND ORGANIZATION OF
CORPORATIONS
(Page 617 of CLV’s Commercial Law Reviewer)
2.1 Who may form a corporation?
Sec. 10. Number and qualifications of incorporators
Any number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are residents
of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of a stock corporation
must own or be a subscriber to at least one (1) share of the capital
stock of the corporation.
2.2 Steps in formation of a corporation
(a) Promotion
CLV Class Notes
PROMOTER’S CONTRACT CORP BY ESTOPPELDE FACTO or
DE JUREDISSOLUTION
Q: In order to reach the level of corporation by estoppel, what is the
essential ingredient of such doctrine?
A: Where there is a representation that a corporation exists when in fact
there is none and at least one party thought there was a corporation.
Who are promoters?
• “Promoter” is a person who, acting alone or with others,
takes initiative in founding and organizing the business or
enterprise of the issuer and receives consideration therefor.
(Sec. 3.10, Securities Regulation Code [R.A. 8799])
CLV Class Notes
Q: Differentiate a promoter from an incorporator.
A: A promoter begins or initiates the formation of a corporation while
an incorporator is one of the initial members of the SH’s
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
CLV: The definition of promoter is important to determine the liability
for promoter’s contract. Before you can make a promoter liable, you
must be able to determine who is the promoter. He must be the one
who takes initiative on the founding and organization of the business
venture which eventually ends up as the corporation being organized.
Q: At the promoter’s stage there is no juridical personality until SEC
issues the certificate of Incorporation. Until the certificate is issued, the
stage of the de facto corporation has not yet been reached. Prior to the
de facto corporation stage, what then is the status of the contract
entered into by a promoter for and in behalf of the person or agent who
had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has
not given consent to the authority of the person or agent who had
undertaken the transaction.
Q: How can ratification be done?
A: Ratification can be done in two ways:
(1)express ratification- a mere board resolution making the corporation
liable by accepting the contract and
(2) implied ratification- by accepting of benefits.
Q: What is the effect of promoter’s contract on the corp and other
contracting parties?
A: As to the corp, it is voidable, as to other contracting parties, it is
valid and enforceable
Catindig: Promotion is not a necessary stage!
Nature of Pre-incorporation Agreements
• Under Sec 60 any contract for the acquisition of unissued
stock in a corporation still to be formed shall be deemed a
subscription within the meaning of the Corporation Code.
• Under Sec 61, a subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period
of 6 mos. from the date of subscription, unless all of the other
subscriber consent to the revocation, or unless the
incorporation of said corporation fails to materialize within
said period or within a longer period as may be stipulated in
the contract of subscription. However, no pre-incorporation
A-17
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

subscription may be revoked after the submission of the

articles of incorporation to SEC. What should be contained in the Articles of Incorporation?
(a) Corporate Name
• Secs 60 and 61 have effectively adopted in our jurisdiction a (b) Primary Purpose
fused version of both “contract theory” and the “offer theory” (c) Secondary Purpose or purposes
in defining the nature of pre-incorporation subscription (d) Principal Office
agreements. (e) Term
o Offer Theory- construes subscription agreement as only (f) Incorporators
continuing offers to proposed corporations, which offer (g) Incorporating directors
does not ripen into a contract until accepted by the (h) Capital
corporation when organized. The obvious result of the (i) Classification of shares
offer theory is that it allows withdrawal of subscriber at (j) Subscribers
least before the corporation comes into existence and (k) Treasurer-in-trust
accepts the offer. (l) Special provisions

o Contract Theory- A subscription agreement among (a) Corporate Name

several persons to take shares in a proposed corporation
becomes a binding contract and is irrevocable from time
of subscription, unless cancelled by all parties before
acceptance by the corporation.
• Subscription agreements are “special contracts” in the sense
that they go beyond what we would term as ordinary
contracts. Although subscription agreements are contracts
between the subscriber and the corporation, they are at the
same time deemed to be contracts among the stockholders of
the corporation.
Sec. 18. Corporate name
No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of
incorporation under the amended name.
SEC MEMO CIRCULAR NO. 14-2000

Theories on Liabilities for Promoter’s Contracts To: All Concerned

• Without ratification by a corporation after its due
incorporation, a contract entered into in behalf of a
corporation yet to be organized or still in the process of
incorporation is void as against the corporation (Cagayan
Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223
[1937])
Subject: Revised Guidelines in the Approval of Corporate and
Partnership Names
In implementing Section 18 of the Corporation Code of the Philippines (BP
68), the following revised guidelines in the approval of corporate and
partnership names are hereby adopted for the information and guidelines of all
concerned:

1. The corporation name shall contain the word “Corporation” or its

(b) Drafting of Articles of Incorporation abbreviation “Corp.” or “Incorporated” or “Inc.”

I sweat, I bleed, I soar… A-18

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
The partnership name shall contain the word “Company” or “Co.”.
For limited partnerships, the word “Limited” or “Ltd.” shall be
included. In case of professional partnerships, the word “Company”
need not be used.
2. Terms descriptive of a business in the name shall be indicative of
the primary purpose. If there are two (2) descriptive terms, the first
shall refer to the primary purpose and the second shall refer to one
of the secondary purposes.
3. The name shall not be identical, misleading or confusingly similar to
one already registered by another corporation or partnership with
the Commission or a sole proprietorship registered with the
Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different
from the name of the company already registered.
4. Business or trade name of any firm which is different from its
corporate or partnership name shall be indicated in the articles of
incorporation or partnership of the said firm
5. Trade name or trademark duly registered with the Intellectual
Property Office cannot be used as part of a corporate or partnership
name without the consent of the owner of such trademark or trade
name
6. If the name or surname of a person is used as part of a corporate
or partnership name, the consent of the said person or his heirs
must be submitted, except if that person is a stockholder, member,
or partner of a declared national hero. If such person cannot be
identified or is non-existent, an explanation for the use of such
name shall be required
7. The meaning of the initials in the name shall be disclosed in writing
by the registrant
8. The name containing a term descriptive of a business different from
the business or a registered company whose name also bears
similar terms(s) used by the former may be allowed
9. The name should not be patently deceptive, confusing, or contrary
to existing laws
10. The name which contains a word identical to a word in a registered
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
name shall not be allowed if such word is coined or has already
been appropriated by a registered firm, regardless of the number of
the different words in the proposed name, unless there is consent
from the registered firm or this firm is one of the stockholders of
partners of the entity to be registered
11. The name of an internationally known foreign corporation, or one
similar to it may not be used by a domestic corporation without the
consent of the former
12. The term “Philippines” when used as part of the name of a
subsidiary corporation shall be in parenthesis: i.e. “(Philippines)” or
“(Phil.)”
13. The following names shall not be used as part of a corporate or
partnership name:
a. As provided by special laws:
i. “Finance”, “Financing”, of “Finance and Investment”
by corporations or partnerships not engaged in the
financing business (R.A. No. 5980, as amended)
ii. “Engineer”, “Engineering”, or “Architects” as part of
the corporate name (R.A. No. 546 and R.A. No.
1582)
iii. “Bank”, “Banking”, “Banker”, “Building and Loan
Association”, “Trust Corporation”, “Trust Company”,
or words of similar import by corporations or
associations not engaged in a banking business
(R.A. No. 337, as amended)
iv. “United Nations” in its full or abbreviated form cannot
be part of a corporate or partnership name (R.A. No.
226
v. “Bonded” for corporations or partnerships with
unlicensed warehouse (R.A. No. 245)
b. As a matter or policy:
i. “Investments” by corporations or partnerships not
organized as investment house company or holding
company
ii. “National” by all stock corporations and partnerships
iii. “Asean”, “Calabarzon”, and “Philippines 2000”
A-19
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
14. The name of a dissolved firm shall not be allowed to be used by
other firms within three (3) years after the approval of the dissolution
of the corporation by the Commission, unless allowed by the last
stockholders representing at least a majority of the outstanding
capital stock of the dissolved firm
15. Registrant corporations or partnerships shall submit al letter of
undertaking to change their corporate or partnership name in case
another person of firm has acquired a prior right to the use of the
said name or the name is deceptively or confusingly similar to the
one already registered, unless his undertaking is already included
as one of the provisions of the articles of incorporation or
partnership of the registrant
These guidelines hall take effect fifteen (15) days after publication in a
newspaper of general circulation
• See page 293 of CLV’s book for Guidelines in Corporate
Name (SEC Memorandum No. 14, series of 2000.)
• Parties organizing a corporation must choose a name at
their peril; and the use of a name similar to one adopted by
another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure the exercise of its
corporate functions, regardless of intent, may be prevented
by the corporation having a prior right. Ang Mga Kaanib sa
Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay
Dristo Jesus, 372 SCRA 171 (2001).
• Similarity in corporate names between two corporations
would cause confusion to the public especially when the
purposes stated in their charter are also the same type of
business. Universal Mills Corp. v. Universal Textile Mills Inc.,
78 SCRA 62 (1977).
• Section 18 of Corporation Code expressly prohibits the use
of a corporate name which is “identical or deceptively or
confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws.” The policy
behind the foregoing prohibition is to avoid fraud upon the
public that will occasion to deal with the entity concerned, the
evasion of legal obligations and duties, and the reduction of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
difficulties of administration and supervision over
corporations. Industrial Refractories Corp. v. Court of
Appeals, 390 SCRA 252 (2002); Lyceum of the Philippines v.
Court of Appeals, 219 SCRA 610, 615 (1993).
• A corporation has no right to intervene in a suit using a
name, not even its acronym, other than its registered name,
as the law requires and not another name which it had not
registered. Laureano Investment and Dev. Corp. v. Court of
Appeals, 272 SCRA 253 (1997).
• There would be no denial of due process when a corporation
is sued and judgment is rendered against it under its
unregistered trade name, holding that “[a] corporation may be
sued under the name by which it makes itself known to its
workers.” Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279
SCRA 312 (1997).
• A corporation may change its name by the amendment of its
articles of incorporation, but the same is not effective until
approved by the SEC. Philippine First Insurance Co. v.
Hartigan, 34 SCRA 252 (1970).
• A change in the corporate name does not make a new
corporation, and has no effect on the identity of the
corporation, or on its property, rights, or liabilities. Republic
Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).
Jack’s Lecture
CORPORATE NAME
No corporation name may be allowed if it is identical or
deceptively or confusingly similar to that of any existing corp. And
that the way the jurisprudence has developed, the name will not
be allowed if it uses a dominant word in the name of another
corporation, and they are engaged in the same line of business.
Well, you have, for example, the case of UNIVERSAL TEXTILE
MILLS and somebody formed another corporation: UNIVERSAL
MILLS. The dominant word is universal, and they both engage in
the same line of business.
You know, the Telephone Directory is not owned by PLDT. That is
prepared by the General Telephone Directory Corporation. PLDT
A-20
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
is the one which merely collects the payment from the advertisers
in the yellow pages. But they don't own/publish that directory.
Now, there was this bunch of swindlers who formed a corporation:
GENERAL DIRECTORY. They would start contacting advertisers
in the yellow pages: "Ay, binago na ho 'yung set-up. Ngayon ho,
we will collect the payment directly. So, we will send our
collector…" You file a crim case against them for estafa, and
they'll say: "NO! We are printing or own directory." And they will
show it… and it is a thin directory. We filed a complaint with the
SEC and the SEC ordered them to change their name because it
is confusingly similar with General Telephone Directory.
There was this Philippine corporation that wanted the name
"Standard Phillips Corporation". Court said: that is part of the
name of Phillips Electrical Lamps, Phillips export. Phillips is the
dominant word… and both of them manufacture electrical
appliances.
On the other hand, the Court has said that Lyceum of the Phils.
cannot prevent other schools from using LYCEUM because
lyceum is a generic name. It means a school. Like UNIVERSITY,
UE cannot prevent others from using university as part of their
name because it's a generic name. So Lyceum of the Phils.
cannot have an exclusive right to use lyceum because it is a
generic term for schools.
The same way Ateneo is a spanish word which means school.
But I think what has happened is the reverse… it is a generic term
that has acquired secondary meaning. You can prevent another
school from using that.
Well, you have this case of Carlos Valdes, the accountant, a very
controversial character (Jack's side-story omitted ). His son left
his company and formed the VALDES CONSULTANTS. Valdes
objected to that, because it was a confusingly similar name. But
the SEC said: "Eh, magkaiba naman kayo ng line of business…
you are in accounting, your son set up a consultancy firm. And
your clients are sophisticated big men. They know that the two
are different." So the SEC allowed that.
Now, the existence of a corporation begins at the time
when you get your certification, issued by the SEC. That is when
existence begins.
There are many limitations found in the law. As for
example, you are not a bank, you cannot use bank as part of your
name; you are not a financing company, you cannot use
financing.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
And the law prohibits the use of United Nations as part
of the business name of any company. The general Bonded
Warehouse Act says, if you are not a bonded warehouse, you
cannot use that as part of your name. The SEC issued a memo
circular in 1987, it was updated 2002, which says, you cannot use
certain name as part of your… like engineering, architecture… as
part of the corporate name because you cannot practice a
profession. Or, it says there you cannot use calabarzon or
national as part of your corporate name. Also you cannot use
Philippines 2000 as part of your corporate name.
Or any which consists of similar words… 'coz you know
the records are computerized, when you apply, they will check.
And the one who verifies will list down all the names which are
similar to what you have. Now, you could be allowed to use that if
you add your line of business, and you add another word which
signifies that you are engaged in a different line of business. Like
for example, you have a Golden Pawnshop Incorporated, and you
have somebody running a restaurant… so, Golden Restaurants
Incorporated. The SEC will allow that.
(b) Primary Purpose
Sec. 14. Contents of the articles of incorporation
All corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation in any
of the official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except
as otherwise prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a corporation
has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose
and which is/are he secondary purpose or purposes:
Provided, That a non-stock corporation may not include
a purpose which would change or contradict its nature
as such;
A-21
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• The best proof of the purpose of a corporation is its articles
of incorporation and by-laws. The articles of incorporation
must state the primary and secondary purposes of the
corporation, while the by-laws outline the administrative
organization of the corporation, which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose.”
Therefore, the Court brushed aside the contention that the
corporations were organized to illegally avoid the provisions
on land reform and to avoid the payment of estate taxes, as
being prohibited collateral attack. Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).
(c) Secondary Purpose
(d) Principal Office
Sec. 14. Contents of the articles of incorporation
xxx The place where the principal office of the corporation is to be
located, which must be within the Philippines; xxx
• Place of residence of the corporation is the place of its
principal office. Clavecilla Radio System v. Antillon, 19 SCRA
379 (1967)
• The residence of its president is not the residence of the
corporation because a corporation has a personality separate
and distinct from that of its officers and stockholders. Sy v.
Tyson Enterprises, Inc., 119 SCRA 367 (1982).
UP Class Notes
Must be within RP so that service of summons may be easily made;
establishes the residence of the corporation which is important in
determining the venue of actions by or against the corporation (SEC
Circular No. 3 dated February 16, 2006)
(e) Term
Sec. 11. Corporate term
A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said
period is extended. The corporate term as originally stated in the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
articles of incorporation may be extended for periods not exceeding
fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no
extension can be made earlier than five (5) years prior to the original
or subsequent expiry date(s) unless there are justifiable reasons for
an earlier extension as may be determined by the Securities and
Exchange Commission.
• Not exceeding 50 years
• No extension of term can be effected once dissolution stage
has been reached, as it constitutes new business. Alhambra
Cigar v. SEC, 24 SCRA 269 (1968).
UP Class Notes
Shall exist for a period not exceeding 50 years from the date of
incorporation; may be extended for period not exceeding 50 years by
an indefinite number of amendments (meaning that the corporation
can virtually live forever); no extension can be made earlier than 5
years before the expiry date unless there are justifiable reasons for the
earlier extension
(f) Incorporators
Sec. 10. Number and qualifications of incorporators.
Any number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are residents
of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of a stock corporation
must own or be a subscriber to at least one (1) share of the capital
stock of the corporation.
• Therefore, a member can no longer exist as incorporator in a
stock corporation.
(g) Incorporating Directors
Sec. 14. Contents of the articles of incorporation
xxx
7. The names, nationalities and residences of persons who shall act
as directors or trustees until the first regular directors or trustees are
A-22
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

the subscription must be paid. You can form a subsidiary where 5

duly elected and qualified in accordance with this Code; individuals will subscribe to 1 share each to qualify for the board
xxx —you must own at least 1 share to be an incorporator, the rest of
the shares will be subscribed by the holding corporation and that
will satisfy the 25-25 rule, because that holding corporation paid
for the subscription. In computing 25-25 rule, subscriptions made
(h) Capital by a corporation will be included. Corporations can be
subscribers, only that they can not be incorporators.
(i) Authorized (Sec. 12) (iii) Paid-up (Sec. 13)
(ii) Subscribed (Sec. 13) (iv) Paid-in surplus
(iii) Paid-up (Sec. 13) • Paid in excess of par value
(iv) Paid-in surplus (v) Outstanding
(v) Outstanding
• Owned by parties other than the corporation itself
(vi) Issued
(vi) Issued
(i) Authorized • Legally, it is synonymous with outstanding shares.
Sec. 12. Minimum capital stock required of stock corporations
Stock corporations incorporated under this Code shall not be required (i) Classification of Shares
to have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions (i) Common (Sec. 6)
of the following section.
(ii) Preferred (Sec. 6)
(ii) Subscribed (iii) Par Value and No par value shares (Sec. 6)
• Contractually enforceable. (iv) Founder’s shares (Sec. 7)
Sec. 13. Amount of capital stock to be subscribed and paid for the (v) Redeemable (Sec. 8)
purposes of incorporation (vi) Treasury (Sec. 9)
At least twenty-five percent (25%) of the authorized capital stock as (vii) Convertible
stated in the articles of incorporation must be subscribed at the time (viii) Participating
of incorporation, and at least twenty-five (25%) per cent of the total Sec. 6. Classification of shares
subscription must be paid upon subscription, the balance to be
The shares of stock of stock corporations may be divided into classes
payable on a date or dates fixed in the contract of subscription
or series of shares, or both, any of which classes or series of shares
without need of call, or in the absence of a fixed date or dates, upon
may have such rights, privileges or restrictions as may be stated in
call for payment by the board of directors: Provided, however, That in
the articles of incorporation: Provided, That no share may be
no case shall the paid-up capital be less than five Thousand
deprived of voting rights except those classified and issued as
(P5,000.00) pesos.
"preferred" or "redeemable" shares, unless otherwise provided in this
Jack’s Lecture Code: Provided, further, That there shall always be a class or series
25-25 RULE of shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as
When you form a corporation, at least 25% of the may be provided for in the articles of incorporation: Provided,
authorized capital stock must be subscribed and at least 25% of
however, That banks, trust companies, insurance companies, public

I sweat, I bleed, I soar… A-23

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value.
The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
(i) Common (Sec. 6)
• 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 preference or advantage in
that respect over other stockholder or class of
stockholders except preferred stockholders. (Page 84 of
De Leon (2006)
(ii) Preferred (Sec. 6)
• One with a stated par value which entitles the holder
to certain preferences over the holders of common
stock. Page 84 of De Leon (2006)
UP Class Notes
Shares that carry a preferential claim either to dividend or assets but
usually carries no voting rights; only shares that can be deprived of
voting rights
Jack’s Lecture
PREFFERED SHARES
Preferences given to preferred shares should not
violate the law. You can not provide that holder of preferred
shares will be paid ahead of the creditors of the corporation, and
you can not issue preferred shares with no par value shares. It
must be noted that preferred shares must have par value. The
preferred shares may be given preference in the distribution of
dividends. If the profits are not enough to give everybody
dividends, the holders of preferred shares get a first crack before
the holders of the common shares get anything. Or they may
have preference in the distribution of the assets in case of
liquidation.
A-24
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
NO PAR VALUE SHARES
There are limitations on the power to classify shares of
stocks. Banks, trust companies, insurance companies, public
utilities, building and loan associations are not allowed to issue no
par value shares.
When a corporation has no par value shares, no
amount will be mentioned. Unlike corporations with par value
shares, for ex., the Authorized Capital Stock (ACS) of the
corporation shall be P1M consisting of 10,000 shares with a par
value of P100 each, if you have a corporation with no par value
shares, it will simply be, the ACS of the corporation consists of
10,000 no par value shares---no amount is mentioned. That's
why these banks, trust companies, etc. are not allowed to have no
par value shares because these are enterprises which are
required by law to have a minimum paid-up capital - so that you
can easily see right away - has it met the minimum paid-up
capital, because if its shares have no par value - you cannot see if
it has satisfied the required minimum paid-up capital.
(iii) Par Value and No par value shares (Sec. 6)
• Par value share is one with a specific money value fixed
in the articles of incorporation and appearing in the
certificate stock.
• No par value share is one without any stated value
appearing on the face of the certificate of stock. In other
words, it is a stock which does not state how much
money it represents.
Jack’s Lecture
STATED VALUE (NO PAR VALUE SHARE)
No par value shares must also have a stated value.
When you form a corporation with no par value shares, the
articles of incorporation states, the authorized capital stock shall
consist of, for example, 10,000 no par value shares. Those
shares will also be given a stated value, so the director says, `ok,
the stated value we will issue initially upon incorporation, will be
P5.00. We will have 3,000 shares and that will be subscribed with
a stated value of P5.00. Now, the business was good, they are
raking in the money, so the director decided to declare a stock
dividend---`we will have a stock dividend with a stated value of
P300.00 each. Business was again good---the director again
declared stock dividend, this time with a stated value of
P10,000.00 each. So pwedeng magbago-bago ang stated value.
And those shares would be equal irrespective of the difference in
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
the stated value. So, if you hold a stockholder's meeting, the one
whose no par value share with stated value of P10,000 will have
one(1) vote, same as the one who has a stated value of P5.00. If
the corporation declares a dividend and says, `we will pay
P100.00 per share---the one with stated value of P10,000 will get
P100, and the one with P5.00 will get the same. They are all
equal irrespective of the stated value. (jack said this is useful for
estate planning. Here's a father, he forms a corporation where his
children will subscribe to no par value with stated value of P5
each, after that, he transfers all the properties to the corporation -
the children who subscribed with a stated value of P5 each, they
probably own P20,000 each with a stated value of P5. Then , the
father would transfer his properties there and get - say, 10,000
shares with a stated value of P10,000 each. Suppose you now
dissolve the corporation and distribute the properties by way of
liquidating dividends. The children will get the bulk of the
properties. You could keep the properties there. This is the way
the father could dilute his transfer of properties.)
(iv) Founder’s shares (Sec. 7)
Sec. 7. Founders' shares
Founders' shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed by the owners
of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the
Securities and Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the Securities
and Exchange Commission.
Jack’s Lecture
FOUNDER'S SHARES
They may be given certain rights not enjoyed by the
owner of other stocks but if they are given the exclusive right to
vote, that will be valid for 5 years only. Like this Baguio Country
Club, they used to have only 100 shares. They said we should
broaden our membership in order to raise more money to improve
the facilities and to expand. The articles were amended and
those 100 shares were converted to founder's shares. They
created 2,000 common shares which were then sold to the public.
But this was the scheme: Each owner of 1 founder share
subscribed to 20 shares, 20 common shares at par value, and
then he turned around and sold the 5 shares at P60,000 each.
The price was computed in such a way that what you will get from
A-25
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
selling 5 shares would be enough to pay for the 20 shares that
you have subscribed. So, at the end of exercise, you will have 15
shares without shelling out any money because the price you will
get from selling 5 shares will cover everything. These founder's
shares, for 5 years, they have exclusive voting rights. After 5
years, everybody has the same rights.
• Founders’ shares have been defined as “shares issued to
the organizers and promoters of a corporation in
consideration of some supposed right or property. Such
shares usually share in the profits only after a certain
percentage has been paid upon the common stock, but are
often given special privileges over other stocks as to voting
and as to division of profits in excess of a minimum dividend
on the common stock.
UP Class Notes
Shares given to the original incorporators; may be given certain rights
and privileges not enjoyed by owners of other classes of shares;
where the exclusive right to vote and be voted for in the election of
directors is granted, such right to vote shall be for a limited period not
exceeding 5 years subject to the SEC approval
(v) Redeemable (Sec. 8)
Sec. 8. Redeemable shares
Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. They may be
purchased or taken up by the corporation upon the expiration of a
fixed period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such other terms
and conditions as may be stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate of stock
representing said shares.
Jack’s Lecture
REDEEMABLE SHARES
Redeemable shares may be issued by the
corporation when it is expressly provided in the articles of
incorporation. Terms and conditions affecting redeemable shares
are required to be provided for in the articles of incorporation and
to be stated on the certificate o stock. Upon maturity of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
redeemable shares, they should be paid by the corporation even
if the latter has no unrestricted retained earnings.
• Redeemable or callable shares, usually preferred, which by
their terms are redeemable at a fixed date or at the option of
either the issuing corporation or the stockholder or both at a
certain redemption price.
Catindig Class Notes
Q: Pedro needs 1M. Juan has 1M. Juan wants to invest with
conditions.(a) 5 year period (b) Dividends 10% annually
What do you do?
A:
(a) Issue redeemable shares
(b) Provide that it will be given at a rate 10% per annum
Q: What if Juan wish to be a holder of common stock:
A: Give him with convertability feature.
Tip: Always indicate conversion ratio.
Q: What are the special advantages of redeemable shares?
A:
(1) Redeemability;
(2)They should be paid by the corporation even if there is no
unrestricted retained earnings;
(3) If the corporation is not liquid, it can borrow for the purpose.
(vi) Treasury (Sec. 9)
Sec. 9. Treasury shares
Treasury shares are shares of stock which have been issued and
fully paid for, but subsequently reacquired by the issuing corporation
by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price
fixed by the board of directors.
• Treasury shares are share which have been lawfully issued
by the corporation and fully paid for and later reacquired by
either purchase, redemption, donation, forfeiture and other
lawful means.
Jack’s Lecture
TREASURY SHARES
A-26
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Then you have these treasury shares. These are
shares which have been fully issued and fully paid for but
subsequently re-acquired by the issuing corporation by purchase,
redemption, donation, or some other lawful means. Like for
instance if a stockholder (SH) defaulted when a call was made for
SH to pay their unpaid subscription, and SH failed to pay… and
so shares sold at public auction and the corporation acquired it.
Now the SC has said that treasury shares are in
limbo… they are not outstanding, but neither are they cancelled.
They have already been issued. Now when the corporation re-
acquires them, they are not cancelled, but they are not
outstanding… so in the meantime, they are frozen.. they are in
limbo. They cannot vote, they cannot receive dividends. The only
thing you can do with them is to re-issue them. That is the only
thing you can do.
Well, you have this case (sorry! can't understand the
case title)… There is this law office: Rossell Carascosso Anda
(RCA), used to be the biggest law firm in Asia… it was the
retained counsel of all the big companies like Shell, Caltex, SMC,
Bank of America, Citibank… Now, Reese (I spell it as I hear it )
one of the controlling stockholders of the Manila Trading and
Supply Company, wanted to transfer the shares to his friends
without any tax consequence. So what was the bright scheme
concocted by this RCA?
Reese executed a Trust Agreement (TA). He appointed
the Law Office (RCA) as trustee and transferred to the law office
his shares of stocks. The TA included stock dividends. Upon the
death of Reese the corporation was supposed to buy the shares...
but in the meanwhile, the trustees would have the right to vote the
shares of stocks… and as I said stock dividends are also covered
by that. So what happened? Reese died. The corporation bought
the shares. The remaining SH were the friends of Reese. Then
the corporation now turns around and declares the shares as
stock dividends of existing SH… stock dividends have no tax
consequence…. So the remaining SH, all friends of Reese would
acquire the shares without paying a single centavo… because the
corporation bought the shares, and they said: "treasury shares
yan eh!" So the corporation now declared it as a stock dividend,
and so the remaining SH got it — they got the shares of Reese
without paying anything…
Now the Court said: "NO! These are not treasury
shares!" why? Because the TA provided that the trustees would
vote the shares and that it also provided that the trust would
include stock dividends that may be declared. So these shares of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Reese which were acquired by the corporation had these 2
features: they could vote and they could receive stock dividends.
These are inconsistent with the nature of treasury shares…
because a treasury share is not outstanding although it is not
cancelled for it can be re-issued. The only thing you can do with it
is to re-issue it. Now, when the Board re-issued it, they can sell it
at any reasonable price… because you don't have to sell it for its
par value as its minimum, because remember, it is unissued…
remember, when you're going to sell or offer for subscription, part
of the authorized but unissued share, the corporation must sell at
least at par value. Otherwise that would be watered stock. But in
the case of treasury shares, that has already been paid for by the
original SH, so the corporation already got the money equivalent
to the par value. So when the corporation re-issues that, suppose
they offer it for sale, they can fix any price. It can even be less
than par value, let's say the book value is less than the par value.
Now if the corporation decides to declare that as dividend it will
not be declared as stock dividend, it will be declared as property
dividend. Because that is property owned by the corporation you
declare stock dividends from the authorized but unissued
shares… but these are shares (treasury) which have already
been issued but acquired by the corp. So they are properties
belonging to the corporation. So if the corporation distributes
them, as dividends, they will be property dividend, not stock
dividend.
(vii) Convertible
• Convertible share is share which is convertible or
changeable by the stockholder form one class to another
class (such as from preferred to common) at a certain price
and within a certain period. (Page 86 of De Leon, 2006)
(viii) Participating
Catindig Class Notes
Participating shares impinges upon the rights of the common shares
to the residual corporate assets—hence, participating shares not
usually issued.
(j) Subscribers
Sec. 14. Contents of the articles of incorporation
xxx
8. If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the number of
A-27
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

shares into which it is divided, and in case the share are par
Documents accompanying the Articles
value shares, the par value of each, the names, nationalities
(See page 733 of CLV’s Commercial Law Review Book, 2007)
and residences of the original subscribers, and the amount Sec. 15. Forms of Articles of Incorporation
subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be Unless otherwise prescribed by special law, articles of incorporation
stated; of all domestic corporations shall comply substantially with the
following form:
xxx
(k) Treasurer in Trust
• The person elected by the subscribers as Treasurer of the
corporation at the time of the incorporation who is named as
such in the AoI and who has been authorized to receive for
and in the name of the corporation, all subscriptions, fees,
contributions or donations paid of given by the subscribers or
members. (UP Reviewer)
• Not a regular treasurer
• The treasurer who signs the treasurer’s affidavit in Section
15

(l) Special Provisions

(i) Expanded pre-emptive rights

• Pre-emptive right is the stockholder’s right to
SUBSCRIBE to all issues or disposition of shares of
any class in proportion of his stockholdings.
• See Section 39 Pre-emptive right includes re-
issuance of TS.
• See page 832 of CLR (2007)
(ii) Right of First Refusal
• See page 673 of CLV’s Commercial Law Reviewer
Old Edition
Catindig Class Notes
Tip: Right to first refusal should be accompanied by:
(1) time to get approval and
(2) Right to assign.
(iii) High quorum and/ or high voting requirements

I sweat, I bleed, I soar… A-28

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

ARTICLES OF INCORPORATION xxx

OF .

__________________________ NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the
total subscription as follows:
(Name of Corporation)
Name of Subscriber Amount Subscribed Total Paid-In
KNOW ALL MEN BY THESE PRESENTS:
xxx
The undersigned incorporators, all of legal age and a majority of whom are residents of the
Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the (Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7,
laws of the Republic of the Philippines; 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state
the amount of capital or money contributed or donated by specified persons, stating the names,
AND WE HEREBY CERTIFY: nationalities and residences of the contributors or donors and the respective amount given by
each.)
FIRST: That the name of said corporation shall be ".............................................., INC. or
CORPORATION"; TENTH: That ............ has been elected by the subscribers as Treasurer of the Corporation to act
as such until his successor is duly elected and qualified in accordance with the by-laws, and that
SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is
as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the
more than one purpose, indicate primary and secondary purposes);
corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers
THIRD: That the principal office of the corporation is located in the City/Municipality or members.
of ............................................., Province of .................................................., Philippines;
ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino
FOURTH: That the term for which said corporation is to exist is ................ years from and after the citizens shall provide the following):
date of issuance of the certificate of incorporation;
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than
FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as the required percentage of the capital stock as provided by existing laws shall be allowed or
follows: permitted to recorded in the proper books of the corporation and this 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 Incorporation,
xxx this ................... day of .............................., 19 ........... in the City/Municipality
SIXTH: That the number of directors or trustees of the corporation shall be .............; and the of ........................................, Province of ................................................., Republic of the
names, nationalities and residences of the first directors or trustees of the corporation are as Philippines.
follows: ............................................ .............................................
NAME NATIONALITY RESIDENCE ............................................ .............................................
xxx ................................................
SEVENTH: That the authorized capital stock of the corporation is ............ (P......................) (Names and signatures of the incorporators)
PESOS in lawful money of the Philippines, divided into ............... shares with the par value
of ................................... (P.......................) Pesos per share. SIGNED IN THE PRESENCE OF:

(In case all the share are without par value): ............................................ .............................................

That the capital stock of the corporation is ........................... shares without par value. (In case (Notarial Acknowledgment)
some shares have par value and some are without par value): That the capital stock of said
corporation consists of ........................ shares of which ....................... shares are of the par value
of .............................. (P.....................) PESOS each, and of which ................................ shares are
without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has
been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed

I sweat, I bleed, I soar… A-29

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

TREASURER'S AFFIDAVIT
3. That the Treasurer's Affidavit concerning the amount
REPUBLIC OF THE PHILIPPINES ) of capital stock subscribed and/or paid if false;
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF ) 4. That the percentage of ownership of the capital stock
I, ...................................., being duly sworn, depose and say: to be owned by citizens of the Philippines has not been
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such complied with as required by existing laws or the
until my successor has been duly elected and qualified in accordance with the by-laws of the Constitution.
corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the
authorized capital stock of the corporation has been subscribed and at least 25% of the total No articles of incorporation or amendment to articles of incorporation
subscription has been paid, and received by me, in cash or property, in the amount of not less than of banks, banking and quasi-banking institutions, building and loan
P5,000.00, in accordance with the Corporation Code. associations, trust companies and other financial intermediaries,
....................................... insurance companies, public utilities, educational institutions, and
(Signature of Treasurer) other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality
of .................................. Province of .........................................., this ............. day recommendation of the appropriate government agency to the effect
of ........................., 19 ........; by ............................................ with Res. Cert. No. ..................... that such articles or amendment is in accordance with law.
issued at ................. on ......................, 19 ..........

NOTARY PUBLIC
(c) Filing of Articles of Incorporation and payment of
My commission expires on ..........................., 19 ........ fees
Doc. No. ...............; UP Class Notes
Page No. ...............;
Book No. ..............; AOI and required attachments must be filed with the SEC; filing fees
Series of 19..... (7a) required here are 10% of 1% of the authorized capital stock

Sec. 17. Grounds when articles of incorporation or amendment

may be rejected or disapproved (d) Examination and Approval or rejection of AoI by
The Securities and Exchange Commission may reject the articles of
SEC (Sec. 17)
incorporation or disapprove any amendment thereto if the same is not • When the proposed articles show that the object is to
in compliance with the requirements of this Code: Provided, That the organize a barrio into a separate corporation for the purpose
Commission shall give the incorporators a reasonable time within of taking possession and having control of all municipal
which to correct or modify the objectionable portions of the articles or property within the incorporated barrio and administer it
amendment. The following are grounds for such rejection or exclusively for the benefit of the residents, the object is
disapproval: unlawful and the articles can be denied registration. Asuncion
1. That the articles of incorporation or any amendment v. De Yriarte, 28 Phil. 67 (1914).
thereto is not substantially in accordance with the form
prescribed herein; • It is well to note that, if a corporation’s purpose, as stated in
the Articles of Incorporation, is lawful, then the SEC has no
2. That the purpose or purposes of the corporation are
authority to inquire whether the corporation has purposes
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations; other than those stated, and mandamus will lie to compel it to

I sweat, I bleed, I soar… A-30

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
issue the certificate of incorporation.” Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).
UP Class Notes
Rejection is not preferred; a defective AOI may be returned by the
SEC which shall give the incorporators a reasonable time to correct or
modify the objectionable portions without the necessity of filing the
same again; Grounds for rejection or disapproval:
--Not substantially in the form prescribed by the Code
-- Purposes are patently unconstitutional or are contrary to law,
morals, etc.
--Treasurer’s affidavit is false
--Percentage of ownership of capital stock has not been complied with
-- AOI of banks and other financial institutions must be filed together
with a recommendation of the appropriate government agency (i.e.
BSP) to the effect that such AOI is in accordance with the law
(e) Issuance of Certificate of Incorporation
When does corporate existence commence?
Sec. 19. Commencement of corporate existence
A private corporation formed or organized under this Code
commences to have corporate existence and juridical personality and
is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal;
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the
name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation
is sooner dissolved in accordance with law.
2.3 Cases
Castillo v. Balinghasay
• Section 6 of the Corp Code expressly prohibits the
deprivation of voting rights, except as to “preferred” and
“redeemable” shares.
• Section 148 of the Corp Code expressly provides that it shall
apply to corporation in existence at the time of the effectivity
of the Code.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
J.G. Summit Holdings v. CA
• The agreement of co-shareholders to mutually grant the right
of first refusal to each other, by itself, does not constitute a
violation of the provisions of the Constitution limiting land
ownership to Filipinos and Filipino corporations;
• If the foreign shareholdings of a landholding corporation
exceeds 40%, it is not the foreign stockholder’s ownership of
the shares which is adversely affected but the capacity of the
corporation to own land—that is, the corporation becomes
disqualified to own land.
• See page 833 of CLV’s CLR, 2007
P.C. Javier & Sons v. CA
• A change in the corporate name does not make a new
corporation, whether effected by a special act or under a
general law.
Catindig Class Notes
Catindig: This case (PC Javier) is not entirely correct insofar as it says
that there is no law or rule requiring notice for change of name.
A change in corporate name is reflected in the General Information
Sheet.
Hyatt v. Goldstar
• The residence or domicile of a juridical person is fixed by
“law creating or recognizing” it.
2.4 Internal Organization of the corporation
(a) Adoption and Approval of By-laws
Sec. 46. Adoption of by-laws
Every corporation formed under this Code must, within one (1) month
after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a
code of by-laws for its government not inconsistent with this Code.
For the adoption of by-laws by the corporation the affirmative vote of
the stockholders representing at least a majority of the outstanding
A-31
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
capital stock, or of at least a majority of the members in case of non-
stock corporations, shall be necessary. The by-laws shall be signed
by the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours. A copy thereof, duly
certified to by a majority of the directors or trustees countersigned by
the secretary of the corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles
of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-
laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law. (20a)
Sec. 47. Contents of by-laws
Subject to the provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private corporation may
provide in its by-laws for:
1. The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or
members and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing
stock certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
(21a)
Sec. 48. Amendments to by-laws
The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at
least a majority of the members of a non-stock corporation, at a
regular or special meeting duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The owners of two-thirds
(2/3) of the outstanding capital stock or two-thirds (2/3) of the
members in a non-stock corporation may delegate to the board of
directors or trustees the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a
majority of the members in non-stock corporations, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws
in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors
or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code. (22a
and 23a)
A-32
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
BY-LAWS
• Intramural contract for intra-corporate relationship
• Is not binding on extra-corporate parties (except if third
parties have prior notice of the by laws)
• Intended to regulate internal matters
• Cannot contravene the charter or the laws
• See page 745 of CLV’s CLR, 2007.
Nature and Functions of By-Laws
• As the “rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among
themselves in their relation to it,” by-laws are indispensable to
corporations. These may not be essential to corporate birth
but certainly, these are required by law for an orderly
governance and management of corporations. Loyola Grand
Villas Homeowners v. CA, 276 SCRA 681 (1997).
Common law Limitations on By-Laws
(1) By-Laws cannot be contrary to law and charter
(2) By-Laws cannot be unreasonable or contrary to the nature of By-
Laws
(3) By-Laws cannot discriminate
By-Laws cannot be contrary to law and charter
• A by-law provision granting to a stockholder permanent seat
in the Board of Directors is contrary to the provision in
Corporation Code requiring all members of the Board to be
elected by the stockholders. Even when the members of the
association may have formally adopted the provision, their
action would be of no avail because no provision of the by-
laws can be adopted if it is contrary to law. Grace Christian
High School v. Court of Appeals, 281 SCRA 133 (1997).
By-Laws cannot be unreasonable or contrary to the nature of By-
Laws
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• Authority granted to a corporation to regulate the transfer of
its stock does not empower the corporation to restrict the right
of a stockholder to transfer his shares, but merely authorizes
the adoption of regulations as to the formalities and
procedure to be followed in effecting transfer. Thomson v.
Court of Appeals, 298 SCRA 280 (1998).
• By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are
always subject to the charter of the corporation. Rural Bank
of Salinas, Inc. v. CA, 210 SCRA 510 (1992).
(b) Election of Directors
Sec. 24. Election of directors or trustees
At all elections of directors or trustees, there must be present, either
in person or by representative authorized to act by written proxy, the
owners of a majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. The election
must be by ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote shall have
the right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or where the by-laws are silent, at the
time of the election; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he
may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the
total number of votes cast by him shall not exceed the number of
shares owned by him as shown in the books of the corporation
multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws, members of
corporations which have no capital stock may cast as many votes as
there are trustees to be elected but may not cast more than one vote
for one candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from
time to time but not sine die or indefinitely if, for any reason, no
A-33
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
election is held, or if there not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding capital stock, or
if there be no capital stock, a majority of the member entitled to vote.
Sec. 26. Report of election of directors, trustees and officers
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities and residences of the directors,
trustees, and officers elected. Should a director, trustee or officer die,
resign or in any manner cease to hold office, his heirs in case of his
death, the secretary, or any other officer of the corporation, or the
director, trustee or officer himself, shall immediately report such fact
to the Securities and Exchange Commission.
• The SEC has issued the rule requiring the filing of the
General Information Sheet. (Monfort Hermanos Agricultural
Dev. Corp v. Monfort III)
• When the names of some of the directors who signed the
board resolution does not appear in the General Information
Sheet filed with the SEC, then there is doubt whether they
were indeed duly elected members of the Board legally
constituted to bring suit in behalf of the Corporation. (Monfort
Hermanos Agricultural Dev. Corp v. Monfort III)
(c) Commencement of businesss
Sec. 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation
If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two
(2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission
Catindig Class Notes
Upon issuance of the certificate of incorporation, the corporation must
begin operation by holding organization meeting of the Board. In such
meeting the following will be done:
(1) Election of officers
(2) Adoption of resolution closing “the account”
(3) Adoption of resolution opening a new account
(4) Designating the authorized representative (signatories)
Continuous operation
General Information Sheet must be file to SEC continuously for five
years and Audited Financial Statements
Reconciling par. 1 and par. 2:
Catindig: Deemed dissolved but can be revived if the parties
(incorporators) in good faith ask the SEC to confirm the status of the
corporation as not de-registered or in good standing. The parties must
have a good explanation.
• “Organize” involves the election of officers, providing for
the subscription and payment of the capital stock, the
adoption of by-laws, and such other steps as are
necessary to endow the legal entity with the capacity to
transact the legitimate business for which the corporation
was created. “Organization” relates merely to the
systematization and orderly arrangement of the internal
and managerial affairs and organs of the corporation.
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711.
2.5 Cases
Loyola Grand Villas Homeowners v. CA
• By-laws may be necessary for the “government” of the
corporation but these are subordinate to the Articles of
Incorporation as well as the Corporation Code and related
statutes.
• Failure to file the by-laws within the period required by law
by no means tolls the automatic dissolution of a corporation.
A-34
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Catindig Class Notes
The remedy should have been the inclusion of the word “preferred”
Sawadjaan v. CA
• A corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such.
• Obiter: By its failure to submit its by-laws on time, the AIIBP
may be considered a de facto corporation whose right to
exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporations may
be a party.
2.6 Amendment of Articles of Incorporation and By-
laws
Sec. 16. Amendment of Articles of Incorporation
Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two-thirds (2/3) of the members if it
be a non-stock corporation.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the
stockholders or members, shall be submitted to the Securities and
Exchange Commission.
The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with
the said Commission if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation.
Sec. 17. Grounds when articles of incorporation or amendment
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
may be rejected or disapproved
The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not
in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time within
which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or
disapproval:
1. That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount
of capital stock subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock
to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the
Constitution.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan
associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and
other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
Sec. 48. Amendments to by-laws
The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at
least a majority of the members of a non-stock corporation, at a
regular or special meeting duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The owners of two-thirds
(2/3) of the outstanding capital stock or two-thirds (2/3) of the
members in a non-stock corporation may delegate to the board of
directors or trustees the power to amend or repeal any by-laws or
A-35
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

adopt new by-laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a
majority of the members in non-stock corporations, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws
in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors
or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code. (22a
and 23a)

I sweat, I bleed, I soar… A-36

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
3. THE CORPORATE ENTITY
3.1 Distinct Personality
(a) Doctrine of separate juridical personality (Page 677
of CLV’s Commercial Law Review Book, 2007)
Catindig Class Notes:
Q: What are the implications of the doctrine?
A: (1) Limited Liability
(2) Contractual Obligation
(3) Non-liability for crime committed by officers
(4) Liability for Torts
(5) Entitlement for damages (in general)
(6)Exercise of corporate powers (e.g. power to sue, to acquire
properties etc) etc.
D. Applications:
MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND
DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS
A. Sources: Sec. 2 of Corp Code; Article 44, Civil Code
B. Purpose: To effectively pursue business endeavors
C. Importance of Protecting Main Doctrine:
- The separate juridical personality of the corporation, has
features that has made it most attractive to businessmen; right
of succession, limited liability, centralized management, and
generally free-transferability of shares of stock. The strong
juridical personality of the corporation facilitates and preserves
the “going concern value” of the underlying business
enterprise, saves transaction costs, and prevents disruption of
the value because of investors who withdraw or who are
deceased. Undermining the separate juridical personality of the
corporation, necessarily dilutes any or all of its attributes.
- A corporation, upon coming into existence, is invested by law
with a personality separate and distinct from those persons
composing it as well as from any other legal entity to which it
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
may be related. This separate and distinct personality is,
however, merely a fiction created by law for conveyance and to
promote the ends of justice. LBP v. Court of Appeals, 364
SCRA 375 (2001).
- One of the advantages of a corporate form of business
organization is the limitation of an investor’s liability to the
amount of the investment. This feature flows from the legal
theory that a corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of a
corporate veil may be used only for legitimate purposes. On
equitable considerations, the veil can be disregarded when it is
utilized as a shield to commit fraud, illegality or inequity; defeat
public convenience; confuse legitimate issues; or serve as a
mere alter ego or business conduit of a person or an
instrumentality, agency or adjunct of another corporation.
aSan Juan Structural v. Court of Appeals, 296 SCRA 631
(1998).
(a) Majority Equity Ownership and Interlocking
Directorship:
- Ownership of a majority of capital stock and the fact that
majority of directors of a corporation are the directors of
another corporation creates no employer-employee
relationship with the latter's employees. aDBP v. NLRC, 186
SCRA 841 (1990)
- Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. Sunio v. NLRC , 127 SCRA
390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164
(1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina
Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996);
Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000).
- Mere substantial identity of incorporators of two corporations
does not necessarily imply fraud, nor warrant the piercing of
the veil of corporate fiction. In the absence of clear and
convincing evidence to show that the corporate personalities
A-37
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
were used to perpetuate fraud, or circumvent the law, the
corporations are to be rightly treated as distinct and separate
from each other. Laguio v. NLRC, 262 SCRA 715 (1996).
- Having interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy
considerations. Velarde v. Lopez, 419 SCRA 422 (2004);
Sesbreno v. Court of Appeals, 222 SCRA 466 (1993).
(b) Being Corporate Officer:
- Being an officer or stockholder of a corporation does not by
itself make one's property also of the corporation, and vice-
versa, for they are separate entities, and that shareholders are
in no legal sense the owners of corporate property which is
owned by the corporation as a distinct legal person. Good
Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). (The
Shareholders and members are covered by the main doctrine
but the actors (officers) are not. They are covered by agency)
- The mere fact that one is president of the corporation does not
render the property he owns or possesses the property of the
corporation, since that president, as an individual, and the
corporation are separate entities. Cruz v. Dalisay, 152 SCRA
487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).
- It is hornbook law that corporate personality is a shield against
personal liability of its officers—a corporate officer and his
spouse cannot be made personally liable under a trust receipt
where he entered into and signed the contract clearly in his
official capacity. Intestate Estate of Alexander T. Ty v. Court of
Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust
Corp. v. Court of Appeals, 356 SCRA 671 (2001).
(c) Dealings Between Corporation and Stockholders:
- The fact that the majority stockholder had used his own money
to pay part of the loan of the corporation cannot be used as the
basis to pierce. “It is understandable that a shareholder would
want to help his corporation and in the process, assure that his
stakes in the said corporation are secured.” LBP v. Court of
Appeals, 364 SCRA 375 (2001).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
- Use of a controlling stockholder’s initials in the corporate name
is not sufficient reason to pierce the corporate veil, since by
that practice alone does it mean that the said corporation is
merely a dummy of the individual stockholder. A corporation
may assume any name provided it is lawful, and there is
nothing illegal in a corporation acquiring the name or as in this
case, the initials of one of its shareholders. LBP v. Court of
Appeals, 364 SCRA 375 (2001).
- The mere fact that a stockholder sells his shares of stock in the
corporation during the pendency of a collection case against
the corporation, does not make such stockholder personally
liable for the corporate debt, since the disposing stockholder
has no personal obligation to the creditor, and it is the inherent
right of the stockholder to dispose of his shares of stock
anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405
(1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
- Just because two foreign companies came from the same
country and closely worked together on certain projects would
the conclusion arise that one was the conduit of the other, thus
piercing the veil of corporate fiction. Marubeni Corp. v. Lirag,
362 SCRA 620 (2001).
- The creation by DBP as the mother company of the three
mining corporations to manage and operate the assets
acquired in the foreclosure sale lest they deteriorate from non-
use and lose their value, does not indicate fraud or wrongdoing
and will not constitute application of the piercing doctrine. DBP
v. Court of Appeals, 363 SCRA 307 (2001).
- The facts that two corporations may be sister companies, and
that they may be sharing personnel and resources, without
more, is insufficient to prove that their separate corporate
personalities are being used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Padilla v. Court of
Appeals, 370 SCRA 208 (2001). [CLV: In past decisions,
such situation would generally warrant alter-ego piercing.]
(d) On Privileges Enjoyed:
- The tax exemption clause in the charter of a corporation
cannot be extended to nor enjoyed by even its controlling
A-38
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
stockholders. Manila Gas Corp. v. Collector of Internal
Revenue, 62 Phil. 895 (1936).
(e) Obligations and Debts:
- Corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder's debt or credit that of the
corporation. Traders Royal Bank v. Court of Appeals, 177
SCRA 789 (1989).
- A corporation has no legal standing to file a suit for recovery of
certain parcels of land owned by its members in their individual
capacity, even when the corporation is organized for the
benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72
SCRA 347 (1976).
- Stockholders have no personality to intervene in a collection
case covering the loans of the corporation since the interest of
shareholders in corporate property is purely inchoate. Saw v.
CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors
Corp. v. Court of Appeals, 309 SCRA 72 (1999).
- The majority stockholder cannot be held personality liable for
the attorney’s fees charged by a lawyer for representing the
corporation. Laperal Dev. Corp. v. Court of Appeals, 223
SCRA 261 (1993).
- Even when the foreclosure on the corporate assets was
wrongful done, stockholders have no standing to recover for
themselves moral damages; otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of
part of the corporation’s assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. APT
v. Court of Appeals, 300 SCRA 579 (1998).
- The obligations of a stockholder in one corporation cannot be
offset from the obligation of the stockholder in a second
corporation, since the corporation has a separate juridical
personality. CKH Industrial and Dev. Corp v. Court of Appeals,
272 SCRA 333 (1997).
Catindig Class Notes
Q: Do SHs have insurable interest over corporate assets?
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
A: None, because corp assets are owned by the corp and not by the
SHs.
(b) Piercing the veil of corporate fiction (Page 682 of
CLV’s Commercial Law Review Book, 2007)
Jack’s Lecture
Whenever the law creates a legal device, the objective of
the law is justice and fairness—if you use that device to perpetrate
fraud---the law will not allow that---so you have the doctrine of
piercing the veil of corporate fiction
When the separate juridical personality of a corporation is
used to defeat public convenience, to justify wrong, to protect fraud,
to commit a crime, its separate juridical personality will be
disregarded.
A. Source of Incantation
The notion of corporate entity will be pierced or disregarded and the
individuals composing it will be treated as identical if the corporate entity is
being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a business conduit for the sole
benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP
v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
B. Nature of Doctrine (aTraders Royal Bank v. Court of Appeals, 269
SCRA 15 [1997])
- Piercing does not mean that corporation is absolved of
liabilities. Corporation continues to be liable but piercing just
includes the officers/actors liable.
- When the legal fiction of separate corporate personality is
abused, such as when the same is used for fraudulent or
wrongful ends, the courts have not hesitated to pierce the
corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).
- Piercing the veil of corporation fiction is warranted only in
cases when the separate legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime,
such that in the case of two corporations, the law will regard
the corporation as merged into one. Velarde v. Lopez, 419
SCRA 422 (2004).
A-39
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
- The legal fiction of separate corporate existence is not at all
times invincible and the same may be pierced when employed
as a means to perpetrate a fraud, confuse legitimate issues, or
used as a vehicle to promote unfair objectives or to shield an
otherwise blatant violation of the prohibition against forum-
shopping. While it is settled that the piercing of the corporate
veil has to be done with caution, this corporate fiction may be
disregarded when necessary in the interest of justice. Rovels
Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
(a) Equitable Remedy:
- The doctrine of piercing the corporate veil is an equitable
doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for
wrongful purposes. aPNB v. Ritratto Group, Inc., 362 SCRA
216 (2001).
(b) Remedy of Last Resort:
- Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. aUmali v.
Court of Appeals, 189 SCRA 529 (1990).
Umali Doctrines:
(1) Piercing remedy is a last resort
(2) Intention must to make the corp officers personally liable
(c) Purpose of Piercing:
- Piercing is not allowed unless the remedy sought is to make
the officer or another corporation pecuniarily liable for
corporate debts (?). Umali v. CA, 189 SCRA 529 (1990);
aIndophil Textile Mill Workers Union-PTGWO v. Calica, 205
SCRA 697 (1992). (Umali is a fraud case, Indophil is an alter
ego case)
- Piercing is not available when personal obligations of an
individual are to be enforced against the corporation (?)
Robledo v. NLRC, 238 SCRA 52 (1994).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
- “The rationale behind piercing a corporation’s identity in a
given case is to remove the barrier between the corporation
from the persons comprising it to thwart the fraudulent and
illegal schemes of those who use the corporate personality as
a shield for undertaking certain proscribed activities. However,
in the case at bar, instead of holding certain individuals or
person responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation which is
being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned
upside down because of its erroneous invocation.”
aFrancisco Motors Corp. v Court of Appeals, 309 SCRA 72
(1999).
- Piercing doctrine is meant to prevent fraud, and cannot be
employed when the net result would be to perpetrate fraud or a
wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal,
91 Phil. 786 (1952).
- The theory of corporate entity was not meant to promote unfair
objectives or otherwise, nor to shield them. Villanueva v. Adre,
172 SCRA 876 (1989).
(d) Basis Must Be Clear Evidence:
- To disregard the separate juridical personality of a corporation,
it is elementary that the wrongdoing cannot be presumed and
must be clearly and convincingly established. The organization
of the corporation at the time when the relationship between
the landowner and the developer were still cordial cannot be
used as a basis to hold the corporation liable later on for the
obligations of the landowner to the developer under the mere
allegation that the corporation is being used to evade the
performance of obligation by one of its major stockholders.
Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315
(1999).
- The mere assertion by a Filipino litigant against the existence
of a “tandem” between two Japanese corporations cannot be
the basis for piercing, which can only be applied by showing
wrongdoing by clear and convincing evidence. Marubeni Corp.
v. Lirag, 362 SCRA 620 (2001).
A-40
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
- To disregard the separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established. It
cannot be presumed. In this case, the Court finds that the
Remington failed to discharge its burden of proving bad faith
on the part of Marinduque Mining and its transferees in the
mortgage and foreclosure of the subject properties to justify the
piercing of the corporate veil. DBP v. Court of Appeals, 363
SCRA 307 (2001).
- The party seeking for the piercing of the corporate veil has the
burden of presenting clear and convincing evidence to justify
the setting aside of the separate corporate personality rule.
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244
(2002).
- Application of the doctrine of piercing the corporate veil should
be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of its rights.
The wrongdoing must be clearly and convincingly established;
it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application. PNB v.
Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
(e) Not Applicable to Theorizing:
- Piercing of the veil of corporate fiction is not allowed when it is
resorted under a theory of co-ownership to justify continued
use and possession by stockholders of corporate properties.
aBoyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
- The piercing doctrine cannot be availed of to dislodge from
SEC’s jurisdiction a petition for suspension of payments filed
under P.D. 902-A, on the ground that the petitioning individuals
should be treated as the real petitioners to the exclusion of the
petitioning corporate debtor. “The doctrine of piercing the veil
of corporate fiction heavily relied upon by the petitioner is
entirely misplaced, as said doctrine only applies when such
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.” Union Bank v. Court of
Appeals, 290 SCRA 198 (1998).
(f) Applicable to “Third-Parties”:
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
- That respondents are not stockholders of the sister
corporations does not make them non-parties to this case,
since it is alleged that the sister corporations are mere alter
egos of the directors-petitioners, and that the sister
corporations acquired the properties sought to be reconveyed
to FGSRC in violation of directors-petitioners’ fiduciary duty to
FGSRC. The notion of corporate entity will be pierced and the
individuals composing it will be treated as identical if the
corporate entity is being used as a cloak or cover for fraud or
illegality; as a justification for a wrong; or as an alter ego, an
adjunct, or a business conduit for the sole benefit of the
stockholders. aGochan v. Young, 354 SCRA 207 (2001).
(g) Piercing is a power belonging to the court and cannot be
assumed improvidently by a sheriff (?). Cruz v. Dalisay,
152 SCRA 482 (1987).
(i) When applied
Instances when doctrine applied. ((Page 28 of De Leon, 2006)
(1) Where a corporation functions for the
benefit of a single person who has
complete control over the funds and the
said person is the sole owner thereof.
(2) Where the corporation is merely an
instrumentality, an adjunct, business
conduit or alter ego of another corporation.
(3) Where a subsidiary company is created by
a parent company merely as an agency of
the latter.
(4) Where it appears that a corporation is
merely a business conduit of its president.
(5) Where a domestic corporation is
controlled by aliens.*
(6) Where a corporation is dissolved and its
assets are transferred to another
corporation to avoid a financial liability of
the first corporation to its employees, both
firms being owned and controlled by the
A-41
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
same persons with the result that the
second corporation should be considered
a continuation and successor of the first.
(7) Where all the stockholders or members of
a corporation acting as individuals instead
of formal corporate action, enter into an
illegal, act.
(8) Where a corporation is formed by a seller
of a certificate of public convenience for
the purpose of evading his individual
contract. (Villa Rey)
(9) Where a corporation is organized by an
insolvent debtor to defraud his creditors
(10)Where a corporation is organized as a
device in order to evade an outstanding
legal or equitable obligation.
(11)When corporate fiction is used to shield a
violation of the prohibition against forum
shopping or to avoid a judgment credit, or
to avoid payment of higher taxes, or to
avoid inclusion of corporate asserts as
part of the estate of the decedent, or to
confuse legitimate issues.
Test: (Page 695 of CLV’s Commercial Law Review Book, 2007)
(1) Control, not mere majority or complete stock control, but
complete dominion, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust acts in contravention
of plaintiff’s legal rights; and
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(3) The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of. (Heirs of Ramon Durano
v. Uy) (See Child Learning Center v. Tagario, 2005)
Catindig Class Notes:
You don’t apply the control test in all cases. Normally, you would apply
the control test… (di nia tinuloy yung statement)
(Dean Sundiang implies that the control test is used in piercing the
veil of corp fiction on the ground that the corp is a mere alter ego.
(See page 240 of JRS)
Q: Here are the facts:
(1) 100% ownership
(2) Same BoD
(3) Same officers
(4) Same accounting department
Is there basis for piercing?
A: None. Facts are insufficient to apply piercing because no misuse of
corporate fiction for fraud, crime or injustice.
Factors that will justify the application of the treatment of the
doctrine of the piercing of the corporate veil: (Page 696 of CLV’s
Commercial Law Review Book, 2007)
(1) The parent corporation owns all or most of
the capital stock of the subsidiary.
(2) The parent and subsidiary corporations
have common directors or officers.
(3) The parent corporation finances the
subsidiary.
(4) The parent corporation subscribes to all
the capital stock of the subsidiary or
otherwise causes its incorporation.
(5) The subsidiary has grossly inadequate
capital.
(6) The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation.
A-42
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(7) In the papers of the parent corporation or
in the statements of its officers, the
subsidiary is described as a department of
division of the parent corporation, or its
business of financial responsibility is
referred to as the present corporation’s
own.
(8) The parent corporation uses the property
of the subsidiary as its own.
(9) The directors or executives of the
subsidiary do not act independently in the
interest of the subsidiary but take their
orders form parent corporation.
(10)The formal legal requirements of the
subsidiary are not observed.
(ii) When not applied
- Piercing is not available when personal obligations of an
individual are to be enforced against the corporation (?)
Robledo v. NLRC, 238 SCRA 52 (1994).
- Piercing is not allowed unless the remedy sought is to make
the officer or another corporation pecuniarily liable for
corporate debts
- Piercing doctrine is meant to prevent fraud, and cannot be
employed when the net result would be to perpetrate fraud or a
wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal,
91 Phil. 786 (1952).
- Piercing of the veil of corporate fiction is not allowed when it is
resorted under a theory of co-ownership to justify continued
use and possession by stockholders of corporate properties.
aBoyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
- The piercing doctrine cannot be availed of to dislodge from
SEC’s jurisdiction a petition for suspension of payments filed
under P.D. 902-A, on the ground that the petitioning individuals
should be treated as the real petitioners to the exclusion of the
petitioning corporate debtor. “The doctrine of piercing the veil
of corporate fiction heavily relied upon by the petitioner is
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
entirely misplaced, as said doctrine only applies when such
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.” Union Bank v. Court of
Appeals, 290 SCRA 198 (1998).
- Piercing is unavailable to those within the intra-corporate
relationship
- Piercing is unavailable to a non-victim
- See Page 579 of CLV’s Commercial Law Review Book, Old
edition)
Catindig Class Notes
Tip:
If the question is a piercing problem, be guided by the following:
(1) Is there injury?
(2) Is there fraud, injustice?
(3) Pay attention if it is a labor case. In labor cases, courts are more
lenient in applying the doctrine of piercing the corporate veil
because of the policy in favor of labor.
(iii) Consequences when veil is pierced
• Application of the doctrine to a particular case does not deny the
corporation of legal personality for any and all purposes, but only for
the particular transaction or instance, or the particular obligation for
which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil.
496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La
Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738
(2001).
AREAS where piercing is allowed
a. Fraud Piercing
b. Alter-ego Piercing
c. Equity cases
Rundown on Piercing Application: This Court pierced
the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the
decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives to cover up an
otherwise blatant violation of the prohibition against forum
shopping. Only is these and similar instances may the veil
A-43
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

be pierced and disregarded. PNB v. Andrada Electric & against the central is used to raise
Engineering Co., 381 SCRA 244 (2002). corporate doctrine. Those technicalities
(i) Fraud Piercing: officers or whose acts and (-To warrant
stockholders or actuations directly application of piercing
o When corporate entity used to commit fraud or do a vice versa violate this central to make corporate
wrong
(3) The corporate doctrine, make officer or stockholder
o Most restricted one because the SC has required that entity has been themselves liable for the corp
allegations of fraud must clearly be proven to make a used in the personally liable debts or obligations,
stockholder or officer liable for corporate debts and perpetration of for having evidence must be
that piercing is available only when there is a claim for the fraud or in themselves cast shown that such offer
recovery against such stockholders or officers. the justification away the or stockholder was
of wrong, or to protective responsible for the
escape personal characteristic of corporate act, and the
(ii) Alter-ego Piercing:
liability limited liability of stage can only cone
o When corporate entity merely a farce since the (* Piercing must be separate juridical during the hearing of
corporation is merely the alter ego, business conduit, the remedy of last personality. the merits)
or instrumentality of a person or another entity. resort)) (2) Others who deal
o This tend to have a wider leeway in their applications with the corp may (Corporations which
and even without intending to do malice or just by treat the interest have been used as
being practical in costing by taking shortcuts such as of both the instruments for
housing together under closely inter-related controlling acquisition or as
operations two or more corporate businesses. stockholder and being depositaries of
(iii) Equity Cases: the corp as the products, of ill-gotten
same wealth, need not be
o When piercing the corporate fiction is necessary to (3) Piercing in alter impleaded a separate
achieve justice or equity. ego may prevail parties to cases for
Rules in Piercing on the ground of: even no monetary they are res of the
Fraud Alter Ego Equity claims are sought action.)
(1) There must be (1) Even if the -When no fraud or against the
fraud or evil controlling alter ego stockholders or
motive. stockholder of circumstances can be officers of the
(2) The main action managing officer culled by the Court to corporation.
must seek intends to do no warrant piercing (4) When the
enforcement of evil, the use of -When the corp fiction underlying
pecuniary claims the corporation as is used to confuse business
pertaining to the an alter ego is in legitimate issues enterprise does
corporations direct violation of -When the corp fiction not really change

I sweat, I bleed, I soar… A-44

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
and only the
medium is
changed.
3.2 Cases
De Leon v. NLRC (May 30, 2001)
• When the concept of separate legal entity is used to defeat
public convenience, justify wrong, protect fraud or defend
crime the law will regard the corporation as an association of
persons, or in cases of two corporations, merge them into
one.
• In this case, the Labor Arbiter was correct in applying the
piercing doctrine to hold the all respondents liable for unfair
labor practice and illegal termination of employment.
• (Case digest at page 707 of CLV’s Commercial Law Review
Book)
Lipat v. Pacific Banking (April 30, 2003)
• This is a case of alter ego doctrine or instrumentality rule.
Catindig Class Notes
Transfer per se is not illegal. IF the transfer is for the purpose of
defrauding creditors… Fraudulent transfer of assets refers to the
transfer of substantial assets.
Pamplona Plantation v. Tinghil (Feb 3, 2005)
• In this case, the corporations have basically the same
incorporators and directors and headed by the same official.
Both use only one office and one payroll and are under one
management.
Mobilia Products Inc. v. Umezawa (March 4, 2005)
• The bare fact that the respondent was the president and
general manager of the petitioner corporation when the
crimes charged were allegedly committed and was then a
stockholder thereof does not itself deprive the court a quo of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
its exclusive jurisdiction over the crimes charged. The
property of the corporation is not the property of the
stockholders or members or of its officers who are
stockholders.
Jardine Davies v. JRB Realty Inc. (July 15, 2005)
• The existence of interlocking directors, corporate officers
and shareholders is not enough justification to pierce the veil
of corporate fiction, in the absence of fraud and other public
policy considerations.
Mendoza v. Banco Real Development Bank (September 16,
2005)
• The veil will be lifted when the corporation is used by any of
the directors, officers or employees as a cloak or cover for
fraud or illegality or injustice. (Gala v. Ellice Corp)
• Here, it is found that TVI is Mendoza and Yotoko’s mere
alter ego or business conduit. They control the affairs of TVI.
They transferred the assets to TVI to FGT.
• Here, the fraud was committed by petitioners to the prejudice
of respondent bank.
Child Learning Center Inc. v. Tagario (November 25, 2005)
• The absence of the following elements prevents piercing the
corporate veil:
(1) Control/Complete dominion
(2) Such control must have been used by the defendant to
commit fraud or wrong in contravention of the plaintiff’s legal
right
(3) Control and breach of duty must proximately cause the injury
or unjust loss complained of.
D.R. CATV Services v. Ramos (December 9, 2005)
• Here, the sheriff overstepped his authority when he attaches
the property of a corporation which had not been adjudged a
A-45
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

debtor. (Even if the judgment-debtor is a stockholder and
president of the corporation.)
Apex Mining Corporation Inc v. Southeast Mindanao Gold
Mining Corp (June 23, 2006)
• The doctrine of piercing the veil cannot be used as a vehicle
to commit prohibited acts because these acts are the ones
which the doctrine seeks to prevent.
• In this case, the assignment of the permit in favor of SEM is
utilized to circumvent the condition of non-transferability of
the exploration permit. To allow SEM to avail itself of this
doctrine and to approve the validity of the assignment is
tantamount to sanctioning illegal act which is what the
doctrine precisely seeks to forestall.
3.3 Is a corporation entitled to moral damages?
It depends. Generally, NO. If arising from libel, slander, or moral
defamation, then a claim for damages may be made.
- A corporation, being an artificial person, cannot experience
physical sufferings, mental anguish, fright, serious anxiety,
wounded feelings, moral shock or social humiliation which are
the basis for moral damages under Art 2217 of the Civil Code.
However, a corporation may have good reputation which, if
besmirched, may be a ground for the award of moral damages.
(Mambulao vs. PNB, APT vs. CA)
- A corporation, being an artificial person and having existence
only in legal contemplation, has no feelings, emotions nor
senses, therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills,
sorrows, and grief of life- all of which cannot be suffered by an
artificial person. (Prime White Cement vs. IAC,1993)
- The statement in People vs. Manero and Mambulao vs. PNB,
that a corporation may recover moral damages if it “has a good
reputation that is debased, resulting in social humiliation” is an
obiter dictum. Recovery of a corporation would be under
Articles 19, 20, 21 of the Civil Code, but which requires a clear
proof of malice or bad faith. (ABS-CBN vs. CA,1999)
- An educational corporation’s claim for moral damages arising
from libel falls under Article 2219(7) of the Civil Code, which
expressly authorizes the recovery of moral damages in cases
of libel, slander or nay other form of defamation, and does not
qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person can validly complain for libel or
any other form of defamation and claim for moral damages.
( Filipinas Broadcasting Network v. Ago Medical and
Educational Center, 448 SCRA 413, 2005)
3.4 Corporate Liabilites
A Corporation as a person is:
Entitled to:
- Equal Protection Clauses
- Unreasonable Searches and Seizure
- Damages under Arts. 19, 20. 21
Not entitled to:
- Privilege against Self-incrimination
- Moral Damages (except in cases of liblel, slander etc)
Liable for:
- Torts
- Civil wrongs
Not liable for:
- Criminal liability
(a) Contractual
• The general rule is that obligations incurred by a corporation,
acting through its authorized agents are its sole liabilities.
(Page 15 of De Leon, 2006)
(b) For Torts
YES!!!
CLV Class Notes
Q: When is a corporation liable for tort?
A: When:
(a) the act committed by an officer or agent
(b)under express direction of authority from the stockholders or
members acting as a body or through the BoD.

I sweat, I bleed, I soar… A-46

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Q: How can authority given to the agent of the corporation be
determined?
A: Either by: (a) such direction by the corporation is manifested, by its
BoD adopting a resolution to such effect (b) by having taken
advantage of such tortuous act, the corporation through its board, has
expressly or impliedly ratifies such an act or estopped from impugning
the same.
Q: What is a derivative suit?
A: Since, the act of the board is essentially that of the corporation and
therefore corporate assets cannot escape enforcement of the award of
damage to the tort victim. As a remedy, the stockholders may institute
a derivative suit against the responsible members and officers for the
damages suffered by the corporation as a result of the tort suit.
Catindig Class Notes
Q: Pedro uses corp vehicle. He did not go straight home but went to
Marikina to visit friends. On the way home, he collided with another
vehicle. Is the corporation liable?
A: Corporation cannot be held liable. (under the principle of agency, an
agent acting outside the scope of authority…)
Tip:
Minor deviation  Corp liable
Major Deviation Corp not liable
Pag happy happy hour not essential need
- The act of the board is essentially that of the corporation
since the board is the embodiment of the very power and
prerogatives of a corporation.
- Not every tortuous act committed by an officer can be
ascribed to the corporation as its liability. Only when the
corporation has expressly directed the commission of
such tortuous act, would the damages resulting
therefrom be imputable to the corporation. Direction by
the corporation is manifested either by the BoD adopting
a resolution to such effect, or ratification or estoppel.
- PNB vs. CA
A corporation is civilly liable in the same manner as natural
person for torts, because the rules governing the liability of a
principal or master for a tort committed by an agent or servant
are the same whether the principal or master be a natural
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
person or a corporation, and whether the servant or agent be a
natural or artificial person.
CLV Class Notes
CLV: It is clear from the ruling of the Court in this case that not every
tortuous act committed by an officer can be ascribed to the corporation
as its liability, for it is reasonable to presume that in granting of
authority by the corporation to its agent, such a grant did not include a
direction to commit tortuous acts against third parties. Only when the
corporation has expressly directed the commission of such tortuous
act would the damages resulting therfrom be ascribable to the
corporation. And such a direction by the corporation, is manifested
either by its board adopting a resolution to such effect, as in this case,
or having taken advantage of such a tortuous act the corporation,
through its board, expressly or impliedly ratifies an act or is estopped
from impugning such an act.
- Our jurisprudence is wanting to the definite scope of “corporate
tort”. Essentially, “tort” consists in the violation of a right given
or the omission of a duty imposed by law; a breach of legal
duty. The failure of the corporate employer to comply with the
law-imposed duty under the Labor Code to grant separation
pay to employees in case of cessation of operations
constitutes tort and its stockholder who was actively engaged
in the management or operation of the business should be held
personally liable. (Naguiat vs. NLRC)
(c) For Crimes
NO!!!
- The trust receipts law recognizes the impossibility of imposing
the penalty of imprisonment on a corporation, hence, if the
entrustee is a corporation, the law makes the officers or
employees or other persons responsible for the offense liable
to suffer the penalty of imprisonment. (Ong vs. CA)
- No criminal suit can lie against an accused that is a
corporation. (Times vs. Reyes)
- When a criminal statue forbids the corporation itself from doing
an act, the prohibition extends to the board of directors, and
each director separately and individually (People vs.
Concepcion)
- While it is true that a criminal case can only be filed against the
officers and not against the corporation itself, it does not follow
that the corporation cannot be a real party-in-interest for the
A-47
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

purpose of bringing a civil action for malicious prosecution for

the damages incurred by the corporation for the criminal
proceedings brought against its officer. (Cometa vs. CA)
- It has been held that the existence of the corporate entity does
not shield from prosecution the corporate agent who knowingly
and intentionally causes the corporation to commit the crime.
The corporation engaged in unlawful business naturally aids
and abets in the carrying on of such business and will be
prosecuted as principal if, with knowledge of the business, its
purpose and effect, he consciously contributes his efforts to its
conduct and promotion (illegal recruitment in this case),
however slight his contribution may be. (Exec. Sec. vs. CA)

Catindig Class Notes

If a particular offense is not made applicable to a corporation, then the
corporation cannot be made liable.
ASM: Parang I remember in CLV class, that this should not be the
reason for non-liability of corporation for crimes.

CLV Class Notes

Corporations cannot be held criminally liable because:

(1) The veil of corporate fiction cannot be used to avoid penalty
imposable for committing an offense
(2) Difficulty if not impossibility of imposing penal sanctions.
(3) Criminal intent as an essential ingredient of a crime would be
missing.

CLV Class Notes

Q: Why be liable for torts but not on crimes?

A: Because in tort, negligence is the basis. And as humans, we are not
perfect; it is reasonable to believe that negligence may probably
happen but it is reasonable to believe that malice is [not] committed.

I sweat, I bleed, I soar… A-48

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
4. POWERS OF CORPORATIONS
(Page 793 of CLV’s Commercial Law Review Book, 2007)
• Underlying Theory on Power of Corporation. Precisely
because the corporation is such a prevalent and dominant
factor in the business life of the country, the law has to look
carefully into the exercise of powers by these artificial
persons it has created. (Reynoso v. CA, 2000)
• Meaning of powers of a corporation. The term powers of
corporation has reference to the corporation’s capacity or
right under its charter and laws to do certain things (De Leon
2006 at 310 citing 6 Fletcher 230)
• Distinguished from its “franchise”. Primary franchise is
the right to exist as an entity for the purpose of doing the
things embraced within its powers and from its secondary
franchise. Secondary franchise is the right granted to an
existing corporation to use public property for a public use,
with private profit. (De Leon 2006 at 310 citing 6-A Fletcher
431)
• Distinguished from “objects” of a corp. A corporation
exercises its powers for the purpose of attaining its objects.
Thus, the power to issue promissory notes is a power and not
an object of a corporation. (De Leon 2006 at 310 citing 6-A
Fletcher 431)
• Classification of corporate powers:
(1) Expressed
(2) Implied
(3) Inherent
(1) Expressly granted or authorized by law
o Corporation Code (Secs 36, 37-44; see 11,37,16,46-
48,62 and 76-81)
o Articles of Incorporation
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(2) Those that are necessary to the exercise of the express
or incidental powers (Section 236(110, 45) (or implied)
(3) Those incidental to its existence (Sections 2, 45) (or
inherent)
• Implied powers are those powers which are reasonably
necessary to execute the express powers and to accomplish
or carry our the purposes for which the corporation was
formed. [These implied powers are expressly recognized by
Section 36(11).] (Nakakalito na ba? Hahaha)
• The purpose or purposes for which for which the corporation
was created, as stated in its articles of incorporation, by
defining the scope of corporate business or enterprise, in
effect, delimit its implied powers. (De Leon 2006 at 313)
• Classification of implied powers:
(1) Acts in the usual course of business2
(2) Acts to protect dents owing to a corporation3
(3) Embarking in different business
(4) Acts in part or wholly to protect or aid employees4
(5) Acts to increase business5
Express v. Implied Powers
Expressed Implied
Have to do largely with the main Have to do largely with the
business, objects and purposes means and methods of attaining
of the corporation. those objects and purposes.
2
Examples: Borrowing money, making ordinary contracts, executing
promissory notes, acquiring personal property for use in connection with the
business etc. Key: All acts necessary to run a business under ordinary
circumstances.
3
It is generally held that a corporation may temporarily conduct an outside
business to collect a debt out of its profits. See Section 36(11).
4
See Section 36(10).
5
A corporation may conduct contests or sponsor radio or television
programs, or promote fairs and other gatherings to advertise and increase its
business.
A-49
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Determined by the language of May change according to time, 1. To sue and be sued in its corporate name;
the corporate charter and the place, and surrounding
applicable law. circumstances. 2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate of
The test is whether the powers The test is whether they are fairly
incorporation;
are found in the words of the incidental to the (former) and
charter of the law reasonably necessary to carry 3. To adopt and use a corporate seal;
them out in the furtherance of the 4. To amend its articles of incorporation in accordance with the
corporation’s business. provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy,
Incidental or inherent power and to amend or repeal the same in accordance with this
• Powers which a corporation can exercise by the mere fact of Code;
its being a corporation or powers which are necessary to 6. In case of stock corporations, to issue or sell stocks to
corporate existence and are, therefore impliedly granted. subscribers and to sell stocks to subscribers and to sell
(See Section 36 (11)). treasury stocks in accordance with the provisions of this Code;
• As powers inherent in the corporation as legal entity, they and to admit members to the corporation if it be a non-stock
exist independently of the express powers. (See Section 45) corporation;
• These incidental powers are expressly recognized by 7. To purchase, receive, take or grant, hold, convey, sell, lease,
Sections 2 and 45. pledge, mortgage and otherwise deal with such real and
• Some of the powers enumerated in Section 36 are incidental personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the
powers which can be exercised by a corporation even in the corporation may reasonably and necessarily require, subject to
absence of an express grant. the limitations prescribed by law and the Constitution;
• Examples of incidental powers are: the power of succession;
8. To enter into merger or consolidation with other corporations
to sue and be sued; to have a corporate name; to purchase as provided in this Code;
and hold real and personal property; to adopt and use a
corporate seal; to contract; to make by-laws; etc. 9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
• Every corporation has implied or incidental power to
similar purposes: Provided, That no corporation, domestic or
establish branch offices here or abroad as the need or foreign, shall give donations in aid of any political party or
exigency of the business of the corporation may require. candidate or for purposes of partisan political activity;
(SEC Opinion, May 17, 1990)
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or
4.1 In General necessary to carry out its purpose or purposes as stated in the
Sec. 36. Corporate powers and capacity articles of incorporation.
Every corporation incorporated under this Code has the power and
capacity: • Section 36 of the Corporation Code enumerates some of the

I sweat, I bleed, I soar… A-50

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
express powers of corporations (many of which even if not
expressly provided for by law would constitute implied powers
of every entity. (Page 794 of CLV’s CLR, 2007)
• Section 36 enumerates 10 powers that a corporation enjoys
in addition to the special powers that may be provided for in
the purpose clause of the articles of incorporation, which
would also constitute express powers. (Page 795 of CLV’s
CLR, 2007)
• Sources of powers of express powers of a corporation:
(Page 795 of CLV’s CLR, 2007)
(1) Those provided in the law (Corporation Code)
(2) The Purpose clause of the AoI.
• Section 45 recognizes also implied powers of every
corporate entity emanating from its express powers. 6
• The rule is that in each case it is a question of the logical
relation of the act to the corporate purpose expressed in the
charter. IF the act is one which lawful in itself, and not
otherwise, and is reasonably tributary to the promotion of
those end, in a substantial and not in a remote and fanciful
sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in
direct and immediate furtherance of the corporation’s
business, fairly incidental to the express powers and
reasonably necessary to their exercise. If so, the
corporation has the power to do it, otherwise, no.
(Montelibano v. Bacolod Murcia Milling Co, 1962 cited in
(Page 795 of CLV’s CLR, 2007)
To sue and be sued in its corporate name
6 •
No corporation…shall possess or exercise any corporate powers except
those conferred by this Code or by its Articles of Incorporation and except
such as necessary or incidental to the exercise of the powers so
conferred.”
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• This power (Section 36(1)) is an incident to corporate
existence. . (De Leon 2006 at 319)
• As a rule, suits are to be brought by or against the
corporation in his own name.
• Corporation de facto may sue or be sued but a corporation
which has been dissolved after the expiration of 3-year
winding-up period ceases to exist de jure or de facto.
• Under Sec. 36 of Corporation Code, in relation to Sec. 23,
where a corporation is an injured party, its power to sue is
lodged with its Board of Directors. A minority stockholder who
is a member of the Board has no such power or authority to
sue on the corporation’s behalf. Tam Wing Tak v. Makasiar,
350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352
SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002);
United Paragon Mining Corp v. CA, 2006)
• Where the corporation is real party-in-interest, neither
administrator or a project manager could sign the certificate
against forum-shopping without being duly authorized by
resolution of the Board of Directors (Esteban, Jr. v. Vda. de
Onorio, 360 SCRA 230 [2001]), nor the General Manager
who has no authority to institute a suit on behalf of the
corporation even when the purpose is to protect corporate
assets. (Central Cooperative Exchange Inc. v. Enciso, 162
SCRA 706 [1988]).
• When the power to sue is delegated by the by-laws to a
particular officer, such officer may appoint counsel to
represent the corporation in a pre-trial hearing without need
of a formal board resolution. Citibank, N.A. v. Chua, 220
SCRA 75 (1993).
For counsel to sign the certification for the corporation, he
must specifically be authorized by the Board of Directors. BPI
Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles
A-51
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Shipyard Corp. v. CA, 415 SCRA 573 (2003). Metro Drug
Distribution Inc. v. Narciso, (2006).
Power to adopt and use a corporate seal
• A seal is a device (as an emblem, symbol, or word) used to
identify or replace the signature of an individual or
organization and to authenticate (as under common law)
written matter purportedly emanating from such individual or
organization. It may refer also to the impression of such a
device on documents like certificates of stocks. . (De Leon
2006 at 323)
• Any seal adopted and used by the corporation may be
altered by it at pleasure. Where a corporation adopts a seal
for a special occasion, different from its corporate seal, the
seal adopted is the corporate seal only for that time or
occasion. . (De Leon 2006 at 323)
• A seal is not required for the validity of any corporate act.
Under Section 63, certificates of stock issued by corporations
are required to be sealed with the seal of the corporation.
Nevertheless, the use of a corporate seal in certificates of
stock must be deemed merely directory rather than
mandatory.
• A corporation may exist even without a seal.
• The presence of a seal establishes, prima facie, that the
instrument to which it is affixed is the act of the corporation.
(18 Am Jur 2d)
Power to acquire and convey property
• This power (Section 36(7)) which is also expressly conferred
under the law has always been regarded as an incident to
every corporation. A corporation need properties or assets to
carry on its business. (De Leon 2006 at 323)
• The power under Section 36(7) is qualified by the phrase “as
the transaction of the lawful business of the corporation may
reasonably and necessary require.” (De Leon 2006 at 324)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• Property obtained by a corporation which is foreign to the
purposes for which it was organized is an unlawful
acquisition. (De Leon 2006 at 324)
• The transfer or sale of shares owned by a corporation in
another corporation requires approval by the board of
directors of the seller corporation and while a corporation is
expressly empowered by Section 36(&) to dispose corporate
assets, such power is subject to the provisions of Section 40.
(De Leon 2006 at 325)
• The right or power of private corporations to deal in real as
well as personal property is also subject to limitations or
restrictions prescribed by special laws and the Constitution.
(De Leon 2006 at 325)
Power to acquire shares or securities
• Section 36(7) authorizes a private corporation to acquire
shares or securities of other corporations. Such an act does
not need the approval of the stockholders if done in
pursuance of the purpose or purposes of the corporation as
stated in its articles of incorporation. But when the purpose is
done solely for investment, the approval of the stockholders
as required by Section 42 is necessary. (De Leon 2006 at
326)
• Power to acquire shares in other corporation is subject to
specific limitations established by the Code, special laws and
the Constitution. (De Leon 2006 at 326)
• When a corporation subscribes to the capital stock of
another corporation, it is required, as a rule, to pay its
subscription in full. This is based upon the fact that while a
corporation has an unlimited capacity to contract obligations,
it has only a limited capacity to pay. (SEC Opinion, July 13,
1961)
• A corporation may purchase its own stock, however, only
when it has “unrestricted retained earnings” to cover the
shares to be purchased or acquired. (De Leon 2006 at 327)
A-52
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Sell Land and Other Properties
• When the corporation’s primary purpose is to market,
distribute, export and import merchandise, the sale of land is
not within the actual or apparent authority of the corporation
acting through its officers, much less when acting through the
treasurer. Likewise Articles 1874 and 1878 of Civil Code
requires that when land is sold through an agent, the agent’s
authority must be in writing, otherwise the sale is void. San
Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty &
Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385
(2002); Firme v. Bukal Enterprises and Dev. Corp., 414
SCRA 190 (2003).
Power to contribute to charity
• Section 36(9) expressly vests in business corporations the
authority to contribute for purely charitable purposes.
• Basis: Section 36(9) gives recognition to the growing
tendency to regard charitable gifts as within the scope of
corporate authority. It is based on the modern view that
business corporations are not organized solely as profit-
making enterprises but also as economic and social
institutions with corresponding public responsibility to aid in
the betterment of economic and social conditions in the
community in which such corporation are doing business.
• Limitations: The limitation under the code is that the
donations are: (a) the amount thereof must be reasonable;
and (b) the donations must not be in aid of any political party
or candidate or for purposes of partisan political activity.
Provide Gratuity Pay for Employees
• Such powers are expressly permitted by the Code on the
theory that such activities promote better relations between
the corporation and its employees. (19 Am Jur 2d)
• Providing gratuity pay for employees is an express power of
a corporation under the Corporation Code, and cannot be
considered to be ultra vires to avoid any liability arising from
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
the issuance of resolution granting such gratuity pay. Lopez
Realty v. Fontecha, 247 SCRA 183, 192 (1995).
Borrow Funds
• The power to borrow money is one of those cases where
even a special power of attorney is required under Art. 1878
of Civil Code. There is invariably a need of an enabling act of
the corporation to be approved by its Board of Directors.
• The argument that the obtaining of loan was in accordance
with the ordinary course of business usages and practices of
the corporation is devoid of merit because the prevailing
practice in the corporation was to explicitly authorize an
officer to contract loans in behalf of the corporation. China
Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
Catindig Class Notes
Q: What is the catch-all provision as regards powers of corporations?
A: Si Cris vinerbatim yung Section 36(11), haha. Yeah, that’s the right
answer.
4.2 Specific Powers
(a) To extend or shorten corporate term (Section 37
compare with Section 81)
Sec. 37. Power to extend or shorten corporate term
A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members in case of
non-stock corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That in
case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this
code. (n)
A-53
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Sec. 81. Instances of appraisal right
Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Requirements for extending or shortening corporate life:
(1) Majority vote of the BoD/T
(2) Ratification in a meeting by 2/3 of outstanding capital stock
(b) To increase or decrease capital stock (Section 38)
or 2/3 of the members, as the case may be.
• The extension or shortening of corporate life actually
requires the amendment of the articles of incorporation.
But whereas, in general amendments of the articles can be
made by written assent of the stockholder or members,
without need of meeting, in the case provided for under
Section 37, a meeting must be duly called for the purpose.
(Page 816 of CLV’s CLR, 2007)
• De Leon: Section 37 grants appraisal right to a dissenting
stockholder (right of the stockholder in the cases provided by
law to demand payment of the fair value of his shares) “in
case of extension of corporate term.” Such right should also
be available to a dissenting stockholder if the corporate term
is shortened as it is expressly recognized in Section 81(1).
(Page 333 of De Leon, 2006) But wait, CLV has a different
opinion.
• CLV: The appraisal right should not be triggered when it
comes to shortening of corporate life, because there is really
no violation of the original contractual intent since. Therefore,
the inclusion of the case of shortening of corporate life under
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Section 81 should not prevail over the specific provision
under Section 37. (Page 237 of CLV’s Textbook)
• CLV: The exercise of appraisal rights rightly belongs to a
case of extension of corporate term because extension
actually novates the corporate contract with each
shareholder, which now seeks to extend the corporate
relationship beyond the original term provided for in the
articles of incorporation. (Page 237 of CLV’s Textbook)
• Note that the appraisal right applies only to a stockholder of
a stock corporation. (Page 333 of De Leon, 2006)
• In case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right to have his
shares bought back at fair value by the corporation. (Page
236 of CLV’s Textbook)
Sec. 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness
No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a
majority vote of the board of directors and, at a stockholder's meeting
duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written
notice of the proposed increase or diminution of the capital stock or of
the incurring, creating, or increasing of any bonded indebtedness and
of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is to be considered, must
be addressed to each stockholder at his place of residence as shown
on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
• Nature of Power. The power to increase or decrease capital
stock is not an inherent of the corporation, not only because it
touches item expressly required to be provided for in the
articles of incorporation, but also the capital stock of a
A-54
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
corporation is governed by common law doctrines, such as
the trust fund doctrine and pre-emptive rights.
Limitations on the power
• As a general rule, a corporation cannot lawfully decrease its
capital stock if such decrease will have the effect of relieving
existing subscribers from the obligation of paying for their
unpaid subscriptions without a valuable consideration for
such release, as such an act of the corporation constitutes an
attempted withdrawal of so much capital upon which
corporate directors are entitled to rely. (Phil Trust Co. v.
Rivera, 1923)
• Requirements:
(1) Majority vote of the members of the BoD
(2) Ratification by 2/vote of the outstanding capital stock, in a
meeting duly called for that purpose with notice
previously given
(3) Certificate of said corporate act shall be signed by
majority of the members of the Board and the Chairman
and Secretary of the stockholders’ meeting
(4) Certificate must be accompanied by the Treasurer’s
Affidavit certifying compliance with the 25%-25%
requirements as to stock corporation. (Page 817 of CLV’s
CLR, 2007)
• The corporation must submit proof to the SEC that such
decrease will not prejudice the rights of creditors. (SEC
Opinion no. 05-10, July 12, 2005)
• A corporation cannot issue stock in excess of the amount
limited by its articles of incorporation; such issue is ulra vires
and the stock so issued is void even in the hands of a bona
fide purchaser for value
• A reduction or increase of the capital stock can take place
only in the manner and under the conditions prescribed by
law.
• An over-issued stock is also known as spurious stock. An
issue of stock by a corporation in excess of the amount
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
prescribed or limited by its articles of incorporation is ultra
vires and the stock so issued Is void even in the hands of a
bona fide purchaser for value. (18 Am Jur 2d 757)
• Unauthorized increase of capital stock. An attempted
unauthorized increase of capital stock amounts to an over-
issue and such stock is absolutely void and cannot be
validated by application of the doctrine of estoppel.
• No appraisal right in Decrease in Capital Stock. The
decrease to of the capital stock of a corporation should not
trigger the exercise of the appraisal right for precisely, the
decrease of capital stock would result in returning part of the
investments of the stockholders who dissented. (Page 241 of
CLV’s Textbook)
• The non-granting of appraisal right to dissenting
stockholders in case of increase of capital stock may be
rationalized on two grounds:
(1) The increase in capital stock does not prevent any
stockholder, including a dissenting stockholder from
opting out of the contractual relationship by simply
selling his shares in the corporation to any interested
buyer.
(2) The grant of appraisal right in case of increase of
capital stock would defeat the very purpose for which
the power is exercised, i.e., to raise funds for the
operation or even survival of the corporate business.
(Page 241 of CLV’s Textbook)
• Implied Policy under Section 38. The policy embodied in
Section 38 of the Corporation Code therefore, although it
recognizes that an increase in authorized capital stock
redefines the contractual relations in the corporate setting as
it requires the approval of stockholders owning or
representing two-thirds (2/3) of the OCS, does not include the
appraisal right on the part of dissenting stockholders, in the
sense that every stockholder should come into the corporate
setting fully aware that the expediencies of corporate life may
require that eventually, the corporation may need to increase
capitalization to fund its operations or expansions, and needs
A-55
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
to look primarily into its equity investors to fund the same.
(Page 243 of CLV’s Textbook)
• Despite the board resolution approving the increase in
capital stock and the receipt of payment on the future issues
of the shares from the increased capital stock, such funds do
not constitute part of the capital stock of the corporation until
approval of the increase by SEC. Central Textile Mills, Inc. v.
National Wages and Productivity Commission, 260 SCRA368
(1996).
• A reduction of capital to justify the mass layoff of employees,
especially of union members, amounts to nothing but a
premature and plain distribution of corporate assets to
obviate a just sharing to labor of the vast profits obtained by
its joint efforts with capital through the years, and would
constitute unfair labor practice. Madrigal & Co. v. Zamora,
151 SCRA 355 (1987).
• The Corporation Code contains no prohibition for a
corporation to increase its authorized capital stock even if the
same has not yet been fully subscribed. (Page 336 of De
Leon, 2006)
• Necessity of new subscription for increase. An increase
in the authorized capital stock cannot be lawfully
accomplished without an actual increase in the assets of the
corporation and additional subscriptions except when such
increase is for the purpose of effecting a stock dividend
previously authorized. (Page 337 of De Leon, 2006)
• Subscriptions and payments based on additional amount by
which capital is increased. The SEC has construed the
phrase to mean the additional amount by which the capital
stock is increased.
• Of such increased capital. It is opined that this refers to the
total subscription (not to individual subscriptions) and
regardless of class. Thus, when the corporation has several
classes of shares, the 25% subscription requirement may be
applied only to one class of shares or it may be applied only
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
to one class of shares or it may distribute it to all classes of
shares, equally or unevenly. (SEC Opinon, April 11, 1995)
• No treasurer’s affidavit is required to be attached in case of
decrease of capital stock. (Page 341 of De Leon, 2006)
• Ways of increasing (decreasing) authorized capital
stock:
(1) Increasing the number of shares authorized to be issued
without increasing the par value thereof.
(2) By increasing the par value of each share without
increasing the number thereof
(3) By increasing both number of shares authorized to be issued
and the par value thereof. (Page 341 of De Leon, 2006)
Increase by way of stock dividends.
• (Stock dividends are ordinarily declared out of the authorized
but unissued shares of the corporation.) (Page 342 of De
Leon, 2006)
• A corporation may increase its capital stock by way of stock
dividends without touching its unissued shares as long as
there as long as there are sufficient retained earnings to
cover the increase.
• (If the proposed stock dividend would result in the issuance
of shares of stock in excess of the corporation’s authorized
capital stock, the over-all issue is null and void. Such dividend
declaration may be validly done provided that the corporation
simultaneously increases its capital stock and applies the
proposed stock dividends as full payment of the subscriptions
to the capital stock increase.) (SEC Opinion, July 30, 1969)
Catindig Class Notes
Q: Can the SHs in one meeting do all of these three, done sequentially?
Item 1: Increase the authorized capital stock? 1M 5M
Item 2: Decrease ? 5M 2M
Item 3: Then Increase again? 2M 5M
A: Yes. There is nothing in the Code which prohibits such action. There is this
decision by Justice Campos, the Citibank case.
(1) It must be done sequentially;
(2) File 3 amended AoI with the SEC and SEC will approved it sequentially.
(Alam na nila yun.)
A-56
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(3) BoD delegated approval of certain transaction to an Executive Committee
(Deins ko lam relevance nito-ASM)
This process is called RECAPITALIZATION; when the corp is in a deficit
situation.
(c) To incur, create or increase bonded indebtedness
(Section 38)
• “Bond” is a security representing denominated units of
indebtedness issued by a corporation to raise money or
capital obliging the issuer to pay the maturity value at the end
of a specified period which should not less than 360 days,
where applicable, payment of interest on stipulated dates.
(SEC Interim Guidelines for the Registration of Bonds) (Page
243 of CLV’s Textbook)
• SEC has limited the term “bonded indebtedness” to cover
only indebtedness of the corporation which are secured by
mortgage on real or personal property. Debentures are
issued on the basis of the general credit of the corporation
and are not secured by collaterals, and therefore do not
constitute bonded indebtedness and will not require approval
of the stockholders. (Page 243 of CLV’s Textbook)
• A corporate bond is an obligation to pay a definite sum of
money at a future time at a fixed rate of interest. (Page 347 of
De Leon, 2006)
• Nature of Power: The power to incur or create liabilities is
an inherent power on the part of business corporations, since
it is presumed that they would need to incur or create
liabilities as part of the normal operations of the business and
the pursuit of the purpose of the corporation.
• Particular Requirements of SEC. Under the SEC Interim
Guidelines, an application for registration and issuance of
bonds can only be filed by the issuing corporation which has
a minimum net worth of P25M at the time of the filing of the
application, and must have been in operation for 3 years. In
addition, it must fulfill the financial ratios mandated by the
SEC in the Interim Guidelines. An issuing corporation must
also execute and submit a Trust Indenture with a trustee bank
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
and an Underwriting Agreement, together with the printed
prospectus and titles covering the securities for the bonded
indebtedness. (Page 244 of CLV’s Textbook)
• Note that no appraisal right is granted to dissenting
stockholders when the corporation either validly incurs,
creates or increases bonded indebtedness since, the granting
of such appraisal right under such circumstances would
drains the corporation of financial resources contrary to the
purpose for which the power is exercised to raise funds for
corporate affairs. (Page 245 of CLV’s Textbook)
• Note:
(1) Where a corporation increases capital stock,
stockholders are entitled to a pre-emptive right to
subscribe to a sufficient number of shares in order to
maintain their previous relative voting power.
(2) Dissenting stockholders cannot exercise the right of
appraisal in this case. (Page 818 of CLV’s CLR, 2007)
Catindig Class Notes
Q: What are subordinated debts?
A: Debts used as capital
(d) To deny pre-emptive rights (Section 39)
Sec. 39. Power to deny pre-emptive right
All stockholders of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is
denied by the articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend to shares to
be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be issued in
good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously
contracted debt.
• A pre-emptive right is the shareholder’s right to subscribe to
all issues or disposition of shares or any class in proportion to
A-57
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
his present stockholdings, the purpose being to enable the
shareholder to retain his proportionate control in the
corporation and to retain his equity in the retained earnings
and also in the net assets in the event of dissolution. (Page
832 of CLV’s CLR, 2007)
• Whenever a capital stock of a corporation is increased and
new shares of stocks are issued, the new issue must be
offered first to the stockholders who are such at the rime the
increase was made in proportion to their existing
shareholdings and on equal terms with other holders of the
original stocks before subscriptions are received from the
general public. For example, if a stockholder with pre-emptive
right owns 20% of the outstanding shares of the corporation,
he may subscribe 20% of any shares of stock issued by the
corporation. This principle is known as the right of pre-
emption or pre-emptive right of stockholders (Page 355 of De
Leon, 2006)
• The rule [on pre-emption] aims to safeguard the right of
stockholder to preserve unaltered and unimpaired his
proportionate influence and interest in the corporation and the
relative value of his holdings. (Page 356 of De Leon, 2006)
(e) To sell or otherwise dispose of corporate assets
(Section 40)
Sec. 40. Sale or other disposition of assets
Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets,
including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or in case of non-stock corporation, by the vote of at least to two-
thirds (2/3) of the members, in a stockholder's or member's meeting
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
duly called for the purpose. Written notice of the proposed action and
of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets
be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section. (28 1/2a)
Jack’s Lecture
In non-stock corporations where there are no members
with voting rights, the vote of at least a majority of the trustees in
office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
In the sale, lease, exchange, mortgage or disposition of
all or substantially all of the properties or assets of the corpration,
you need approval not only of the majority of the Board but also of
at least 2/3 of the stockholders. According to the law, the test of
whether the sale covers all or substantially all of the assets of the
corporation is this: will the corporation be capable of continuing
A-58
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
its business or accomplishing its purpose. For example, Jollibee
must have more than 400 stores all over the country. If they sell 5
stores, you don’t have to get stockholder approval.
You have a case where the assets of a corporation
were foreclosed and the only remaining asset of the corporation
was the right of redemption and they sold it. The Court said you
need stockholder approval.
I don’t know whatever happened to this but you have
that property in Commonwealth Avenue owned by the Islamic
Directorate. The Muslim countries in the Middle East donated
money for the Muslims to acquire that property. When Martial
Law was declared, the Board of Trustees fled to the Middle East
and a bunch of people who were not directors sold that property
to Iglesia Ni Cristo. The Supreme Court said the sale was not
valid because the people who sold it were not the elected
directors and secondly, that was the only property of that
corporation and therefore, stockholder approval was required.
A corporation can acquire its own shares but it is
required that it should have unrestricted retained earnings, as a
rule. Remember that we said the assets of a corporation
constitute a trust fund to answer for its obligations to its creditors.
If you allow a corporation when it has no retained earnings, in
effect, it is returning the investment of its stockholders. Thus, that
will prejudice the creditors.
• The property of the corporation is not the property of
the stockholders or members, and as such, may not be sold
without the express authority from the board of directors.
(Litonjua v. Eternity Corp, 2006)
• Disposition of properties in the regular course of the
business does not need approval by or authority of
stockholders or members. (Page 819 of CLV’s CLR, 2007)
• Any disposition of corporate asset or property,
which is not in the usual course of business of the
corporate, would be within the covered transactions
under Section 40 which would require stockholders’ or
members’ approval, even when practically, the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
corporation is an entity is till capable of pursuing its
charter purpose. (Page 250 of CLV’s Textbook)
Catindig Class Notes
Q: (2 Kats were asked here, hehe) ABC Corp is a Property Devt Corp.
It sells property (100 lots) to a manufacturing corporation. Tell whether
approval of the following will be enough: (a)BoD only’(b)Stockholders
only (c) Both.
A:
(a) BoD only Yes, if the corporation after the sale decides or has
the intention to continue its business.
(b) SHs only No, because the corp acts thru its BoD
(c)Both Yes, if there is no intention to continue business.
Note:
If the sale is in accordance with the primary purpose of the
corporation then only BoD approval is needed. Otherwise, SH
approval is necessary. Conisder also the intention to continue the corp
business.
Nature of Power
• The exercise of the power to sell or dispose of all or
substantially all of the assets of the corporation is deemed to
undermine the contractual relationship of the corporation and
its stockholders. (Page 246 of CLV’s Textbook)
• The exercise of such a power really affects the business
enterprise level of corporate set-up. (Page 246 of CLV’s
Textbook)
• A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby
the corporation would be rendered incapable if:
(1) Continuing the business;
(2) Accomplishing the purpose for which it was
incorporated.
• A corporation by the action of its board of directors or
trustees supported by the vote of shareholders or members
may sell, lease exchange, mortgage, pledge, or otherwise
dispose of all or substantially all of all of its property, and
assets including its good will. The requisites for the validity
of such sale, etc. are as follows:
A-59
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(2) The sale etc. must be approved by the board of directors
or trustees;
(3) The action of the board of directors or trustees must be
authorized by the vote of stockholding representing 2/3
of the outstanding capital stock including holders of non-
voting shares or 2/3 of the members as the case may
be; and
(4) The authorization must be done at a stockholders’ or
members’ meeting duly called for that purpose after
written notice.
• Aside form the requirements of Section 40 , the sale
of all or substantially all of the corporate assets of property
may require compliance with the Bulk Sales Law. (Page 251
of CLV’s Textbook)
• Effect of non-compliance. Sale by Board of
Trustees of the only corporate property without compliance
with Sec. 40 of Corporation Code requiring ratification of
members representing at least two-thirds of the membership,
would make the sale null and void. Islamic Directorate v.
Court of Appeals, 272 SCRA 454 (1997); Peña v. CA, 193
SCRA 717 (1991).
• The disposition of the assets of a corporation shall
be deemed to cover substantially all the corporate property
and assets, if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the
purposes for which it was incorporated. Such a sale or
disposition must be understood as valid only if it does not
prejudice the creditors of the assignor, which necessarily
implies that the assignee assumes the debts of the assignor.
(Caltex Inc. v. PNOC, 2006)
Appraisal Right.
• Any dissenting stockholder may exercise his
appraisal right in case of sale of all or substantially all of the
corporate assets or property. (Page 252 of CLV’s Textbook)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• The appraisal right is accorded to dissenting
stockholders as a matter of equity and fairness since they
should be allowed to plough their investments into ventures
they feel they could get a better return rather with a
corporation that is no longer capable of pursuing the
business. (Page 252 of CLV’s Textbook)
• It should be noted that the exercise of the appraisal
right of any stockholder is predicate on the “sale or other
disposition of all or substantially all” of the corporate assets.
Any disposition which does not involve all or substantially all
of the corporate assets, does not require the approval of the
stockholders or members and would not entitle any
dissenting stockholder to exercise his appraisal right. (Page
366 of De Leon, 2006)
(f) To acquire own shares (Section 41)
Sec. 41. Power to acquire own shares
A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the corporation
has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the provisions
of this Code. (n)
• The enumeration is by no means exclusive since other
purposes, which have legitimate business objectives, are
acceptable to justify a stock corporation purchasing or
acquiring its own shares. (Page 253 of CLV’s Textbook)
A-60
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• A corporation’s right to purchase its shares is subject to the
following limitations:
(1) That its capital is not thereby impaired
(2) That it be for a legitimate and proper corporate purpose
(3) That thee shall be unrestricted retained earnings to purchase
the same and its capital is not thereby impaired
(4) That the corporation acts in good faith and without prejudice
to the rights of creditors and stockholders
(5) That the conditions of corporate affairs warrant it. (SEC
Opinions)
Catindig Class Notes
Q: Can a corporation acquire its own share?
A: No. the general rule is that the corporation has no right to acquire its
own share unless permitted by legitimate corporate purposes.
Q: Is acquisition of own shares the only way to eliminate fractional
shares?
A: No. The BoD may allow the SH to round-up or to pay the
corporation to get 1 whole share. If the SH refuses to buy, the BoD
may provide that the corporation shall buy the fractional part of the SH.
Q: Can redeemable shares once redeemed be revived?
A: No. Same is true with regard to convertible shares (e.g. preferred to
common, preferred disappears)
Example: There are 5 incorporators. 1 died and survived by his widow.
Can the corp buy the shares from the widow? For what good corporate
purpose?
(1) The corp can exercise its right of first refusal (applies to
transferors thru succession)
(2) In the Minutes, to help the widow to liquidate her shares
of stock. (good reputation of the corporation). If all signed the
Minutes, no one can complain afterwards.
(g) To invest corporate funds in another corporation
or business (Section 42)
Sec. 42. Power to invest corporate funds in another corporation or
business or for any other purpose
Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of non-stock corporations, at a stockholder's or
member's meeting duly called for the purpose. Written notice of the
proposed investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not
be necessary. (17 1/2a)
Jack’s Lecture
Under Section 42, the corporation can invest its funds
in another corporation but it is with the same purpose, you only
need approval by the Board, you don’t need stockholder approval.
This is why the Court has said SMC can buy a brewery in Hong
Kong without need of getting stockholder approval because that
is consistent with the primary purpose of the corporation.
In the same way that the Court has said that Mau Sugar
Central could buy a company that manufactures sugar bags. It
doesn’t have to get SH approval because that is related to its
primary purpose. Because you need sugar bags to pack the
sugar that it is selling.
• Rationale of Rule. The law presumes that when
stockholders invest, or members join a corporation, it is with
the primary expectation that the corporation, through its
board, will only pursue the primary purpose indicated in the
articles of incorporation, and if the board feels that it is
propitious to pursue a secondary purpose, then it would do so
only if the stockholders or members have had a chance to
evaluate an decide upon such diversion of corporate funds
A-61
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
from the primary business of the corporation. ((Page 256 of
CLV’s Textbook)
• The term “funds” in Section 42 includes any corporate
property to be used in furtherance of the business. Thus, idle
corporate property may be temporarily leased to make it
productive in the absence of express restrictions in the
articles of incorporation or by-laws and the leasing is not used
as a scheme to prejudice corporate directors, subject to the
requirements of Section 42.
• A non-stock, non-profit foundation may invest its funds in or
subscribe to shares of another domestic corporation. The
term “funds” as used in Section 42 include “donations”
received by the corporation from other entities. However, its
power to invest is limited by its articles of incorporation. (SEC
Opinion No. 54, Nov. 3 , 2003)
• A secondary purpose. The other purposes for which funds
may be invested without amending the article of incorporation
must be among those enumerated in the articles of
incorporation. In order to legally engage in any of its
secondary purposes, the corporation must comply with
Section 42.
• Not among the secondary purposes. A corporation is not
allowed to engage in a business distinct form those
enumerated in the articles of incorporation without amending
the purpose clause of said articles to include the desired
business activity among its secondary purposes.
• Incident to primary purpose. A corporation may invest its
funds in another business which is incident or auxiliary to its
primary purpose as stated in its articles of incorporation
without the approval of the stockholders or members as
required under Section 42. Even holders of no-voting
members, as the case may be, are entitled to vote on the
matter. In such a case, a dissenting stockholder shall have no
appraisal right. (Page 376-378 of De Leon, 2006)
• All corporations, whatever may be their primary purposes,
are deemed to have the power to invest corporate funds in
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
another corporation or business, as a means of obtaining the
best returns of their investible funds. (Page 257 of CLV’s
Textbook)
Catindig Class Notes
Q: Can a cement corporation with excess cash put up a power
plant/generator? Build a road?
A: Yes, if there is insufficient power in the cement factory for that will
further the primary business.
C: Business means your own business. (Can be your secondary
purpose)
Q: A corporation is engaged in mining. It makes no much money and
decides to engage in commercial fishing. What kinds of approval
needed?
A: If within the secondary purpose BoD + SHs
If outside secondary purpose BoD+SHs+ SEC
(h) To declare dividends (Section 43)
Sec. 43. Power to declare dividends
The board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance
on the subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
A-62
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
such as when there is need for special reserve for probable
contingencies. (n)
• A stock corporation exists to make profit and to distribute a
portion of the profits to its stockholders.
• A dividend is that part or portion of the profits of a
corporation set aside, declared and order by the directors to
be paid ratably to the stockholders on demand or at a fixed
time. It is a payment to the stockholders of a corporation as a
return upon their investment. It is a characteristic of a
dividend that all stockholders of the same class share in it in
proportion to the respective amounts of stock which they
hold.
• Stock dividend is the amount that the corporation transfers
from its surplus profit account to its capital account. It is the
same amount that can loosely be termed as the “trust fund” of
the corporation. NTC v. CA, 311 SCRA 508 (1999).
• The power granted to stockholders to demand from the
Board the declaration of dividends under Section 43 is one for
the few instances under the Code where the stockholders
themselves exercise a primary power, instead of the usual
ratificatory vote on action taken primarily by the board of
directors. (Page 260 of CLV’s Textbook)
• Dividends payable out of unrestricted retained earnings.
Under the law, dividends other than liquidating dividends
(which are not really dividends as they are from caoital) may
be declared and paid out “the unrestricted retained earnings”
of the corporation.
• The capital or capital stock which may not be impaired or
depleted by the dividends is not the entire net assets of the
corporation; rather, it is the legal capital of the corporation in
the strict sense, referring to that portion of the net assets
directly or indirectly contributed by the stockholders as
consideration for the stocks issued to them upon the basis of
their par or issued value.
Jack’s Lecture
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Most common types; cash, property, stock dividends.
Only the board approval is needed to declare cash dividends but
the corporation must have retained earnings. Now when the
corporation declares cash dividends and it has no retained
earnings this is illegal and SH must return what they received and
in fact directors will be made liable.
You have that Philbanking Corporation case before
which became bankrupt because it kept declaring dividends at the
time it was incurring losses and the justification: “Eh you see we
have always been declaring dividends regularly and if we stop
now there might be a bank run.” Well you tell me now, katwiran
ba yan ng taong matino? They attacked the CB for closing
Philbanking.
Assuming it has retained earnings, once cash dividends
have been declared they cannot be revoked because you can use
that to manipulate the price. For example they declare that 25%
cash dividend so the price moves up. The directors sell their
shares then they revoke the declaration so the price goes down
they buy back the shares.
In the case of property dividends you only need board
approval but in the case of stock dividends you need the approval
of the stockholders. Now, a stock dividend has no taxable
consequence because it is the same pie but you are slicing it into
more pieces.
For instance, here is somebody whose shares
represent 10% of the net worth of the corp. The corp declared a
100% stock dividend. What will happen? He will still own 10 % of
the net worth of the corporation. The book value of his original
share plus his stock dividend will be the same. It is only when he
sells and makes a profit will there be a taxable consequence.
And because of that even if a stock dividend has been declared it
can still be revoked because it’s the same pie only your slicing it
in more pieces so even if you declare it you can revoke as long as
the stock certificates have not yet been distributed.
The SEC has said that paid-in surplus cannot be
declared as dividends whether stock or cash. For instance, here
is a corp that made a public offering. The par value of the shares
is 10 pesos per share but they offer to the public for 16 pesos so
the buyers will be paying 6 pesos more. Now, that paid in surplus
cannot be declared as a stock or cash dividend because
according to the SEC you can only declare dividends from
earnings from operations. That paid in surplus was not from
operations
A-63
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Itong si Agbayani sabi it cannot be declared but the
SEC said it can be declared, subject to certain qualifications. One
of the tricks for window dressing the financial statement is when
the value of the corp is negative you have your real property re-
appraised.
Now, the appraisal will increase the value of the
property and that wipes out your negative value that’s why
normally your external auditor will put a footnote in your financial
statement for several years indicating that there has been a re-
evaluation. Now, according to Agbayani it cannot be declared
but the SEC says it can be declared subject to certain conditions.
The property must be subject to depreciation so if it is land you
cannot declare a dividend. It must be subject to depreciation and
then you charge depreciation allowance and you have retained
earnings then you can declare that as dividends.
1. Treasury shares, if they are declared, should be considered
property, not stock dividends. Now the law provides (taken
from a decree issued before) that if the surplus profits
exceed 100% of the paid-in capital, you must declare
dividends whether cash or stock otherwise you will be fined
by the SEC. That is one of the rackets of SGV. “O, mataas
na yung retained earnings nyo, lagpas ng 100% mumultahan
kayo ng SEC, you have to declare dividends.” So at the end
of the year in your financial statement wala na yan and of
course because of that, they will have to prepare a long-form
report kasi hindi na kasali sa fiscal year and siyempre
tatagain ka for the long-form report.\ Justified by definite
corporate expansion projects approved by the board. For
instance you get a franchise from abroad there will be a
development schedule. For instance they will tell you to
(i) Cash
open so many outlets within 5 years so when Dunkin Donuts
first opened they were required to open 5 outlets within 5
years so the company was not declaring any dividends.
Whatever retained earnings they were accruing were being
used to put up other outlets. We have this client who owned
a heavy mix (?) plant and said that the present plant cannot
cope with our volume of business. We have to put up a
bigger plant so they purchased a parcel of land in the
CALABARZON and they will need 100 million to put up the
new plant so they are not declaring any dividends. But it has
to be definite in fact, the SEC will ask for copies of the Board
Resolution showing the definite expansion plans. The Board
Resolution is sufficient of course, you can’t be showing the
same resolution for 5 years in a row. Kung hindi gumagalaw
yung financial statement or hindi gumagalaw yung assets,
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
ano ba yan? In this case, the SEC must look in. Like this
fellow Henry Ng of Unimart, he doesn’t declare dividends
and he’s always saying “expansion” I don’t know how he’s
getting away with it!
2. If the corporation is prohibited by a loan agreement from
declaring dividends without the consent of the creditors or
when the consent has not been obtained. Well, usually if it’s
a big loan the creditor will require that as a condition and
they will make sure the corp has enough funds to pay
3. Special circumstances there is a need to build up reserves
for contingencies (ex. There is a strike and the union filed a
case for unfair labor practice because many employees were
terminated so they said if we lose we will be made to pay
backwages and that will amount to a hefty amount so we
better start building reserves
Now the dividends will be given to the Stockholder (SH)
of record. If the SH sells his shares but the transfer has not been
recorded in the books of the corporation, it goes to the seller but
he will have to deliver that to the buyer. That is between him and
the buyer because remember it is the books that are controlling.
Usually when the corporation declares a dividend it will say
“resolve that the corporation declare a cash div of 25% on Feb 25
to SH of record as of Feb 15 2002 and for this purpose the books
of the corporation be closed at the end of business hours on Feb
15 and will be open again at 8:00 am of Feb 26 2002”.
• Dividend payable in cash
• As soon as cash dividends are publicly declared, the
stockholders have the right to their pro rata shares.
• It is the declaration of the dividends which creates both the
dividends itself and the right of the stockholders to demand
and receive it. (Page 406, De Leon, 2006 citing SEC Opinion,
October 9, 1992)
• Can be declared by mere Board resolution from unrestricted
earnings. (Page 246 of CLV’s CLR, 2007)
• Revocable before announcement to the shareholders. (Page
836 of CLV’s CLR, 2007)
Catindig Class Notes
A-64
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Q: IN 2006, X Corp has URE of 100T. The amount is not enough to
cover cash dividends to all SHs. Here, no declaration of dividends
during the 1st quarter. Only in June, the corp acquired 4 M. So
4M+100T income in URE. Could the corp declare a cash dividend of
3.1 M.
A: No. 3.1 M is stil part of capital or it is not yet par of URE. To issue
cash dividends of 3.1M might violate the trust fund doctrine.
(ii) Stock
• It is dividend payable in unissued or increased or additional
shares of the corporation instead of in cash or in property out
of the unrestricted retained earnings of the corporation. A
stock dividend may be declared only to the extent of the
maximum number of shares authorized in the articles of
incorporation.
• Declaration may be revoked prior to actual issuance. (Page
836 of CLV’s CLR, 2007)
Catindig Class Notes
Q: What are dividends?
A: It refers to return of investment. It is what a SH would want their
Board to declare.
Q: if a corp has treasury shares, can it decide to give the shares to
SHs?
A: Yep, it could be property dividends being assets of a corporation.
(Si Ina yata nagrecit nito)
(vi) Limitation on retention of surplus profits
(iii) Property
• It is dividend distributed to the stockholders in the form of
property, real or personal, such as warehouse receipts, or
shares of stock of another corporation.
(iv) Interim
Catindig Class Notes
Q: Is this your first time to hear “interim” What do you mean by
interim?
A: It means “temporary” di ba. Declaration of interim dividends is not
prohibited by law.
(v) Record Date
• Record date is fixed by the board of directors for
determination of stockholders entitled to vote; if it does not do
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
so, such date shall be the date of the notice of meeting.
(Page 484 of De Leon, 2006)
• There is no hard and fast rule describing the interval of time
between the date of the declaration of dividends, the date of
record of stockholders entitled thereto, and the date of
payment, the same being left to the sound and judicious
discretion of the directors. (SEC Opinion, April 11, 1962)
• It is customary for the directors to fix the time for payment of
a dividend. But a corporation cannot discriminate among the
shareholders as to the time of payment of dividends.
• If no time is fixed by the resolution declaring a dividend, it is
payable on demand, and if the resolution declares that it shall
be payable at such time as the board of directors may direct
and the board fixes no time, the law implies that it shall be
paid within a reasonable time.
Catindig Class Notes
Record date must be a current or prospective date, never a past date.
Q: Why not a past date for record date?
A: Because of the problem of asymmetric information. In sales of
stock, price is the primary consideration. And price is determined by
information. If record date is ante-dated, the seller might be prejudiced
because in setting the price it did not consider the benefit of dividends.
• Stock corporations are prohibited from retaining surplus
profits in excess of 100% of their paid-in capital stock except
when justified by any of the reasons mentioned. (Section
43(2)) Of the requirement which is mandatory is violated, the
corporation may be compelled by the SEC to declare
dividends to its stockholders.
• The prohibition on retention of profits provided in Section 43
is applicable to all stock corporations.
• There may be some question as to whether or not the
retention of profits is justified by the “reasonable needs of the
business”. Suffice it to say that the policy of the law to
A-65
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
encourage and force the distribution of dividends curtails the
discretionary power of directors to retain corporate earnings.
• Section 29 of the Tax Code imposes a 10% surtax on
corporations improperly accumulating profits or surplus, in
addition to other income taxes imposed on corporations. The
purpose is to prevent individual taxpayer from avoiding the
progressive rates of income tax by employing the corporate
form for the accumulation of taxable income. (Page 397, De
Leon, 2006)
• Note: No dividends can be declared out of capital, except
liquidating dividends distributed at dissolution. (Section 122)
• Note: Dividends (whether cash or stock) can be declared
only out of the unrestricted retained earnings, although stock
dividends may be issued out of premium surplus (since in the
latter case, it is nothing but a book-entry procedure). (Page
837 of CLV’s CLR, 2007)
Catindig Class Notes
Q: How does a corporation prove that the exceptions apply to them as
regards retained profits in excess of 100%?
A: BoD issues a RESOLUTION approving corporation expansion (for
example). BoD creates a reserve. Excerpts of MINUTES of the Board
Resolution may be shown to the SEC.
Q: What are those legal provisions as regards retention of surplus
profits?
A:
(1) Section 43
(2) Tax Code, Section 29
(i) To enter into management contracts (Section 44)
Sec. 44. Power to enter into management contract
No corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the
board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members
in the case of a non-stock corporation, of both the managing and the
managed corporation, at a meeting duly called for the purpose:
Provided, That (1) where a stockholder or stockholders representing
the same interest of both the managing and the managed
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation;
or (2) where a majority of the members of the board of directors of
the managing corporation also constitute a majority of the members
of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period longer than
five years for any one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all
or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into for
such periods as may be provided by the pertinent laws or regulations.
(n)
Jack’s Lecture
A corporation can enter into a management contract.
What the law really does here is to regulate management
contracts. Mgt contracts can be necessary at times. Like here is
a mining company whose directors and officers don’t know
anything about mining. They can enter into a contract with a
corporation which has technical expertise to manage its mines.
You have that case of Nielson & Co. vs. Lepanto where
Lepanto entered into a managment contract with Nielson & Co. to
manage its mines. When the war broke out, the Japs took over
the mines of Lepanto. (Yamashita must have been there.) After
the war, Nielson wanted to continue the contract because there
was a stipulation there that if the contract is interrupted, it will be
extended. Lepanto did not agree. Nielson & Co. sued. The
contract provided that they would be provided a certain
percentage of the gross income as their management fee. In
addition, Nielson & Co. would get a certain percentage of the
stock dividends that will be declared. Lepanto lost in the SC in
December 1966. The award reached about 30 Million pesos.
(That case was handled by Ike Bello (for Lepanto) who was
devastated by the decision.) Lepanto went to our office which
A-66
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

drafted a motion for reconsideration. One of the arguments
raised was that a management contract is a contract of agency.
Therefore, it can be terminated at any time. But the Court
rejected that argument. The Court said that a management
contract is a contract for lease of services. It does not involve a
representation so you cannot terminate it at any time. The Court,
however, eliminated the award for stock dividend. It said that
Nielson & Co. was not a stockholder and only a stockholder can
be given stock dividends.
The law tries to regulate management contracts
because it has been used too often to _______ money for the
corporation. When Soriano was still managing PAL, he was a
minority stockholder but he had this compania which had a
management contract. So Soriano & Co. was getting a
percentage of the gross income of PAL. Everytime PAL would
buy or sell anything, it had a commission. When Toda(?) took
over PAL, he did the same thing with his Rubicon which had a
management contract. That’s why when Mr. Fred Ramos of
National Bookstore was questioning this/ was waging a proxy fight
against Soriano III in Atlas Mines, that was an issue he raised.
He said that Atlas Mining had a management contract with
Soriano Compania which was charging a fee based on the gross
income. This was a time when Atlas was incurring losses. In
fact, later, Atlas Mining closed.
This is why the laws says that a management contract
should be approved by majority of the Board, by majority of the
stockholders, of both the managed and managing corporation.
And if a stockholder of the managed corporation owns more than
1/3 of the managing corporation, the management contract must
be approved by at least 2/3 of the stockholders of the managed
corporation.
A management contract should not be valid for more
than 5 years for any one term. You can just keep renewing it
provided, that it is not for more than 5 years at any one time.
• Management Contract is an agreement which a corporation
delegates the management of its affairs to another
corporation for a certain period of time. (Page 423 of De
Leon, 2006)
• Rationale for Ratification Requirements on Part of
Managed Corporation. The rationale for the ratificatory
requirement under Section 44 of the managed corporation is
that such a management contract is a deviation form the
principle under Section 23 that the corporate affairs shall be
managed by the board of directors, and thereby a departure
from such an agreement would require the approval of the
stockholders under the principle that it would vary the
contractual corporate arrangements, by allowing basically an
outsider to involve itself in the management of corporate
affairs. (Page 263 of CLV’s Textbook)
• Rationale for Ratification Requirements on Part of
Managing Corporation. That the management arrangement
is a deviation form the principle also that the board of
directors in the managing corporation assumed office with the
understanding that they would devote their time and
resources for the affairs of the corporation. (Page 263 of
CLV’s Textbook)
• The ratificatory procedure should not therefore be applicable
to a corporation that is organized primarily as a management
company, and its entering into a management contract is
clearly within the primary purpose of the corporation and in
accordance with the contractual understanding with the
stockholders of such managing corporation. (Page 263 of
CLV’s Textbook)
• Cases not covered by Section 44. When it comes to a
management contract entered into by the managed
corporation under the definition of Section 44, not with
another corporation but with a partnership or an
individual, the same would not be covered by and thereby
need not comply with the ratificatory requirements of Section
44. (Page 263 of CLV’s Textbook)
• A management contract cannot delegate entire supervision
and control over the officers and business of a corporation to
another as this will contravene Section 23. The board cannot

I sweat, I bleed, I soar… A-67

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
surrender or abdicate its power and duty of supervision and
control for otherwise, it becomes a mere instrumentality of the
management company. (Ballantine, page 136)
Catindig Class Notes
Tip: Large corporation use SPA system of ExeCom for efficiency.
Other modes:
(1) SPA system
(2) Exe Com
(3) Combination of both
(4) Management Contract
4.3 Additional material: SEC Opinion No. 51, series of
2003 addressed to Atty. Liezl Z. Paras re issuance of
stock dividends out of paid-in surplus
SEC Opinion No. 51
Q: May a corporation issue stock dividends to be paid from its paid-in
surplus?
A: Yes. As a rule in corporate practice, additional paid-in surplus has
two general uses—to wipe off deficits during re-organization and as
payment for issuance of stock dividends.
Basic in corporate law is the rule that paid-in surplus cannot be
issued as cash or property dividends because it would, in effect,
result in a return of capital which is prohibited under Section 43 of the
Corporation Code. However, in the case of issuance of stock
dividends, the same may be sourced from the corporation’s paid-in
surplus because that would only involve a reclassification of one
capital account to another.
(The declaration of stock dividends from paid-in surplus was allowed
taking into consideration that when a corporation converts the
premium or contributed surplus into capital by issuing to its
stockholders shares of stock representing their respective
participation, it actually parts with nothing but merely transfers the
surplus capital account and issues shares of stock to represent the
same.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
It would be different when the property dividend is declared out of
additional paid-in capital. Under this situation, the capital of the
corporation represented by the additional paid-in capital is reduced to
the extent of the property dividend declared. This is not allowable
since this will involve return of capital to stockholders.)
Rule: The capital surplus or additional paid-in capital can only be
declared as stock dividends but not as cash or property dividends.
4.4 Implied Powers
• Section 45 recognizes also implied powers of every
corporate entity emanating from its express powers. 7
• Implied powers are those powers which are reasonably
necessary to execute the express powers and to accomplish
or carry our the purposes for which the corporation was
formed. [These implied powers are expressly recognized by
Section 36(11).] (Nakakalito na ba? Hahaha)
• The purpose or purposes for which for which the corporation
was created, as stated in its articles of incorporation, by
defining the scope of corporate business or enterprise, in
effect, delimit its implied powers. (De Leon 2006 at 313)
• Classification of implied powers:
(6) Acts in the usual course of business8
(7) Acts to protect dents owing to a corporation9
(8) Embarking in different business
7
No corporation…shall possess or exercise any corporate powers except
those conferred by this Code or by its Articles of Incorporation and except
such as necessary or incidental to the exercise of the powers so
conferred.”
8
Examples: Borrowing money, making ordinary contracts, executing
promissory notes, acquiring personal property for use in connection with the
business etc. Key: All acts necessary to run a business under ordinary
circumstances.
9
It is generally held that a corporation may temporarily conduct an outside
business to collect a debt out of its profits. See Section 36(11).
A-68
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

(9) Acts in part or wholly to protect or aid employees10 • A mining company has no power to engage in real estate
(10)Acts to increase business 11 development. Heirs of Antonio Pael v. Court of Appeals, 372 SCRA
587 (2001).
Express v. Implied Powers • An officer who is authorized to purchase the stock of another
Expressed Implied corporation has implied power to perform all other obligations
Have to do largely with the main Have to do largely with the arising therefrom such as payment of the shares of stock. Inter-Asia
business, objects and purposes means and methods of attaining Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
of the corporation. those objects and purposes.
Determined by the language of May change according to time,
4.5 Ultra Vires Acts
the corporate charter and the place, and surrounding Sec. 45. Ultra vires acts of corporations
applicable law. circumstances. No corporation under this Code shall possess or exercise any
The test is whether the powers The test is whether they are fairly corporate powers except those conferred by this Code or by its
are found in the words of the incidental to the (former) and articles of incorporation and except such as are necessary or
charter of the law reasonably necessary to carry incidental to the exercise of the powers so conferred. (n)
them out in the furtherance of the
corporation’s business. Ultra vires refers to an act outside or beyond corporate powers, including
those that may ostensibly be within such powers but are, by general or
• When the articles expressly provide that the purpose of the special laws, prohibited or declared illegal. (Twin Towers Condo v. CA, 2003
corporation was to “engage in the transportation of person by water,” cited in CLV’s CLR, 2007)
such corporation cannot engage in the business of land
transportation, which is an entirely different line of business, and, for Note: If the contract is ultra vires but has been completely
which reason, may not acquire any certificate of public convenience performed by both parties, it can no longer be set aside. If
to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc., it has been performed by one party and the other party
5 SCRA 809 (1962). doesn’t comply, if he is sued, he cannot raise the defense
that the contract is ultra vires because having benefited
• A corporation whose primary purpose is to generate electric power from the performance of that contract, he will be in
has no authority to undertake stevedoring services to unload coal estoppel to raise that defense.
into its pier since it is not reasonably necessary for the operation of
its power plant. NPC v. Vera, 170 SCRA 721 (1989). ULTRA VIRES ACTS:
• A corporation organized to engage as a lending investor cannot (1) Acts done beyond the powers of the corporation as
engage in pawbroker. Philipinas Loan Co. v. SEC, 356 SCRA 193 provided for in the law or its articles of incorporation;
(2001). (2) Acts or contracts entered into in behalf of the
corporation by persons who have no corporate
authority; and
10 (3) Acts or contracts which are per se illegal as being
See Section 36(10).
11 contrary to law.
A corporation may conduct contests or sponsor radio or television
programs, or promote fairs and other gatherings to advertise and increase its
business.

I sweat, I bleed, I soar… A-69

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(1) Acts done beyond the powers of the corporation as provided for in
the law or its articles of incorporation;
Montelibano Test:
o If the act is one which is lawful in itself
o The act in question is not in direct and immediate
furtherance of the corporation’s business, and is not
fairly incident to the express powers and reasonably
necessary to their exercise.
(2) Acts or contracts entered into in behalf of the corporation by
persons who have no corporate authority; and
(3) Acts or contracts which are per se illegal as being contrary to law.
- The act is illegal per se
- Harden Test:
o Even when acts are illegal per se, when only public or
government policy is at stake and no private wrong is
committed, the courts will the parties as they are, in
accordance with their original contractual
expectations.
For Acts or contracts which are not per se illegal:
General Rule:
In the absence of an authority from the board of directors, no person, not
even the officers of the corporation, can validly bind the corporation.
Exceptions:
(1) Doctrine of Ratification or Estoppel- Acts of contracts which are not
per se illegal can be validated. Even when the contract entered into in
behalf of the corporation is outside the usual powers of the corporate
officer, the corporation’s ratification of the contract and acceptance of
the benefits have made such contract binding upon the corporation.
Note: Ratification that would bind the corporation would have to come from
the board of directors or a properly authorized representative.
Ratification can never be made on the part of the corporation by the
same persons who wrongfully assume the power to make the contract,
but the ratification must be by the officers as governing body having
authority to make such contract.
(2) Doctrine of Apparent Authority- If a corporation knowingly permits one
of its officers, or any other agent to act within the scope of an apparent
authority, it holds him out to the public possessing the power to do so
those acts; and thus, the corporation will, as against anyone who has in
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
good faith dealt with it through such agent, be estopped from denying
the agent’s authority.
Note:
Existence of apparent authority must be ascertained through: (a)
general manner in which the corporation holds out an officer or agent as
having the power to act or in, other words, the apparent authority to act in
general, with which it clothes him; or (b) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether
within or beyond of his ordinary powers.
If the corporation desires to set up the defense that the contract
was executed by one not authorized as agent, it must plead such fact.
(Ramirez Doctrine) However, once the corporation has discharged its
burden under the Ramirez Doctrine, then the burden of proof now shifts to
the contracting party to show that indeed by previous acts and actuations,
the acting officer had been clothed by the corporation with apparent authority
for the public to take such authority at face value. (Yao Ka Sin-Timely
Repudiation Doctrine)
CLV Class Notes
Q: Can two corporations form a partnership?
A: No. If two corporations try to form a partnership, none would
be created thereby. (Tuason v. Bolanos) The reason behind the
rule that corps cannot validly enter into a partnership is because
in the partnership all the other partner can bind the partners
under the “mutual agency” principle which would be violative of
the principle of of “centralized management” under Section 23 of
Corp Code which provides that only the BoD can bind the
corporation. (Page 801 of CLV’s CLR,2007)
Q: Can 2 corporations enter in a joint venture?
A: Yes. Corporations have legal capacity to form a joint venture,
i.e., one with a limited purpose and duration.
Q: What makes a project or undertaking a “joint venture”?
A: What makes a project or undertaking a joint venture to
authorize the corporation to be a co-venturer therein is the very
nature and essence of the undertaking that limits it to a particular
project which allows the board of directors of the participating
corporation to properly evaluate all the consequences and likely
liabilities to which the corporation would be held liable for.( Page
267 of CLV’s Textbook)
A-70
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Q: Bakit pede sa joint venture and hindi sa partnership?

A: In a joint venture, being for a particular project undertaking,
when the BoD of a corp evaluate the risks and responsibilities
involved, they can more or less exercise their own business
judgment in determining the extent by which the corp would be
involved in the project and the likely liabilities incurred. Unlike in
an ordinary partnership arrangement which may expose the
corporation to any and various liabilities and risks which cannot
be evaluated and anticipated by the board. (Page 267 of CLV’s
Textbook)
Catindig Class Notes
Q: X corp has several VPs. BoD approved issuance of corporate credit
card to VPs. The credit company required X Corp to guarantee the
card obligation of the VPs. X corp is not in the business of issuing
guaranties or sureties. Can X Corp without violating Section 45
guarantee the card obligations?
Tip: Consider the primary purpose of the corporation. (Try to relate to
the primary purpose of the corp, if you could then there is no ultra
vires)

Q: Employees applied for limited credit facilities with a grocery store

nearby the corp. Can the corp guarantee 50% of the obligations?
A: YES. (Such guarantee will improve the morale of the employees.
Employees with high-morale are good for the business.)

I sweat, I bleed, I soar… A-71

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
5. STOCKHOLDERS
5.1 Subscription to shares
(a) How do you acquire shares in a company?
In a corporation, a person may become a shareholder:
(1) By subscription contract with an existing corporation for the
acquisition of unissued shares.
(2) By purchase from the corporation of treasury shares.
(3) By transfer from a previous stockholder of the outstanding
shares or existing subscription. (De Leon p. 510, 2006)
• (I’m not sure if isasama dito yung “making a stock dividend”
and assignment -ASM (p528 of De Leon,2006))
• Catindig: Remember the modes of acquiring ownership like
succession.
What is a share?
• Shares of stock issued by the corporation “are personal
property and may be transferred by delivery of the certificate
or certificates indorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer.”
(Section 63)
• Shares of Stock therefore are properties and have intrinsic
pecuniary value. (page 362 of CLV’s Textbook)
Jack’s Lecture
§ 60 [Subscription contract] simply defines what is a
subscription agreement and § 61[Pre-incorporation subscription]
says a subscription for shares of stock of a corporation still to be
formed shall be irrevocable for at least 6 months unless all the
subscribers agree or the incorporation fails to materialize. §62
[Consideration for stocks] mentions that consideration may be
paid… It says here that stock should not be issued for a
consideration less than the par value, or if it is a no-par value
share, less than the stated value and the consideration possible
may be actual cash which is the most common consideration. Or
property. Payment made in the form of property, the SEC will
require an appraisal. Usually, the property given will be land so
they will require an appraisal. And then, labor actually rendered
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
already, in other words, past services. Then, previous debt. So
when debt has been converted into equity. Then amount
transferred from unrestricted retained earnings to capital. That is
what happens when the corporation declares a stock dividend. A
bookkeeping entry will be made and the amount corresponding to
the stock dividend will be debited from unrestricted retained
earnings and transferred to capital. Then outstanding shares
exchanged for stocks in the event of reclassification or
conversion. For instance, a preferred share is given the option to
be exchanged for common shares. When you surrender, you’ll be
given common shares. Or say, the corporation decided to change
the par value from P100 to P10. So they say, you know, it’s very
hard to sell the shares in the stock market because the price is
too high. P100! Stockholders will be asked to surrender their
stock certificates. In return, they will be given new stock
certificates with the par value of P10. Or when you have a
merger, stockholders of the absorbed corporation will surrender
their shares and in exchange they will be given shares in the
surviving corporation. And also, it is illegal to issue shares where
the consideration is a promissory note. A promise to pay for future
services.
Now the stock certificate will be signed by the
President, or in his absence the Vice-President, and
countersigned by the Secretary (§63; Certificate of stock and
transfer of shares). That’s why in one case…you have this Torres
case… a retired Judge who was the controlling stockholder in a
corporation. And his nephew to whom he had given shares of
stock turned out to be recalcitrant and rambunctious so he
decided to regain control of the corporation by giving shares to
other nephews. And what did he do? He was the president of the
corporation and he simply posted entries in the stock and transfer
book. O, one share to this fellow, another share to that… The
court said that that is not valid. That is not the way to…and
besides, he is the president, not the corporate secretary. He is not
supposed to handle the stock and transfer book.
Catindig Class Notes
Q: How to become a SH?
A: (1) Subscribing to new shares
(2) Purchase of previously issued shares;
(3) Succession
Q: What are the advantages to the corp pf having subscription
agreements?
A: The corp can set a date for payment of balance. No need for a call
in this case.
A-72
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Catindig: 99% of the time, subscription does not have subscription
agreement.
Tip: For incorporation, it is advisable to pay in cash to avoid delay due
to valuation.
C: In case of additional issuance of shares (after incorporation), the
SEC would take the word of the corporation, anyway the transaction
will appear on the Balance Sheet.
(b) What is subscription? (Section 60)
Sec. 60. Subscription contract
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract. (n)
Sec. 72. Rights of unpaid shares
Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder. (n)
• Subscription is an offer to acquire a specified number of
unissued shares of an existing corporation or one still to be
formed. (Page 512 of De Leon, 2006)
• Subject Matter. There can be a subscription only with
reference to stock which has never been issued. (Page
511 of De Leon, 2006)
• The Code prohibits the distinction between the sale unissued
stock or subscription of such stock; all contracts for the
subscription or sale of unissued stock shall be governed
solely by the rules pertaining to subscription agreement.
(Page 859 of CLV’s CLR, 2007)
• However, (a) Transfer for consideration of treasury shares is
a sale by the corporation; (b) A transfer of fully paid shares by
a shareholder to a third person is a sale. (Page 860 of CLV’s
CLR, 2007)
• Note: The purpose of removing all contracts dealing with
unissued shares form the coverage of “sale” is to exclude
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
them from the operations of ordinary contract principles, such
as rescission by reason of breach, waiver, condonation or
mutual withdrawal and the effects of the happening and non-
happening of conditions, to ensure that subscription due
thereon will be paid for the protection of corporate creditors
under the trust fund doctrine. (Page 860 of CLV’s CLR, 2007)
• Nevertheless, a subscription agreement is a species of the
genus sale in that it involved the transfer of ownership to a
property right (share) for a valuable consideration. (Page 862
of CLV’s CLR, 2007)
(c) What are pre-incorporation subscriptions?
(Section 61)
Sec. 61. Pre-incorporation subscription
A subscription for shares of stock of a corporation still to be formed
shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be
stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the
articles of incorporation to the Securities and Exchange Commission.
(n)
• When properties were assigned pursuant to a pre-
incorporation subscription agreement, but the corporation
fails to issue the covered shares, the return of such properties
to the subscriber is a direct consequence of rescission and
does not amount to corporate distribution of assets prior to
dissolution. On Yong v. Tiu, 375 SCRA 614 (2002).
(d) What could be the consideration for stocks?
Sec. 62. Considering for stocks
A-73
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Stocks shall not be issued for a consideration less than the par or
issued price thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange for promissory notes
or future service.
The same considerations provided for in this section, insofar as they
may be applicable, may be used for the issuance of bonds by the
corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority
conferred upon it by the articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
the purpose. (5 and 16)
• The word issue as used in Section 62 refers to the original
issue, that is, when the stock first passes from the corporation
to the hands of stockholder. (Page 528 of De Leon, 2006)
• A treasury stock therefore may be sold for reasonable price
fixed by the BoD even for less than the par or issued value
thereof. (Section 9)
• When consideration is agreed upon is either cash or
property, it is not necessary for the subscription agreement to
be valid that the same must be delivered at perfection, for a
subscription agreement is a consensual (not real) contract,
being a species of genus sale. (Page 863 of CLV’s CLR,
2007)
• The terms “actually…paid” and “actually received” in Section
62 is meant to indicate that eventually the consideration must
be paid and cannot be given as a discount or amount to
watered stock. (Page 863 of CLV’s CLR, 2007)
• Stock dividends are in the nature of shares of stock, the
consideration for which is the amount of unrestricted retained
earnings converted into equity in the corporation’s books.
Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998). 12
(i) How is the issue price of no-par shares fixed?
(Section 62)
12
The basis for determining the documentary stamps due on stock dividends
declared would be their book value as indicated in the latest audited
financial statements of the corporation, and not the par value thereof.
Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379
SCRA 423 (2002).
A-74
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

• The issued price of no-par value shares may be fixed: (ii) If the consideration for shares is other than cash,
(1) In the AoI how is the value thereof determined? (Section 62)
(2) By the BoD pursuant to authority conferred upon it by • Where consideration is other than actual cash, or consists of
the AoI or the by-laws; intangible property such as patents or copyrights, the
(3) In the absence thereof by the stockholders at a valuation thereof shall initially be determined by the
meeting duly called for the purpose representing at incorporators or the BoD, subject to the final approval of the
least a majority of the outstanding capital stock. SEC. (Page 864 of CLV’s CLR, 2007)
• Change in the value of issued shares. The stated value of • If the consideration is other than actual cash, its value must
the issued no par value shares cannot be changed anymore be worth the value of the stocks issued. (True Value Rule)
in view of Section 6 (par 3).(De Leon, p 536, 2006) Hence, the need of the approval of the valuation by the
• Change in the value of unissued shares. Any change in commission.(Page 531 of De Leon, 2006)
value of no par value shares shall apply only to unissued Receivables.
portion of the capital stock of the corporation. (SEC Opinion, • They may be accepted as payment for shares subject to the
July 31, 1979) following conditions:
• See Page 294 of JRS (1) The SEC is able to verify the existence and collectibility of
Catindig Class Notes
the receivables;
Q: Difference of Par value and no par value shares (2) The shares to be issued will be held in escrow until actual
Par Value Share No Par Value payment or collection of the receivables. (SEC Opinion No.
Floor Price Par Value Not less than P5 05-11, July 14, 2005)
Ceiling No Ceiling No Ceiling Property
The corp
normally sells (1) Necessary or proper in carrying pm the corporate business.
them at par The property which a corporation may accept in exchange
value and not at for its stock must be of a kind which the corporation may
book value lawfully acquire and hold in carrying out the purposes of its
In both cases, the Bod has discretion to
sell at prices higher than floor price.
incorporation, and which is necessary or proper for it to own
in carrying on its business.
Book Value [Paid up capital + Paid in Surplus + Retained (2) Possesses ascertainable pecuniary value. The property
Earnings] / [total number of Outstanding shares] must be of substantial nature, having pecuniary value
capable of ascertainment (at a fair valuation equal to the par
Book Value ≠ Fair Value
Book value fluctuates because Retained Earnings also changes or issued value of the stock issued), and must be something
real and tangible as distinguished from something
Q: What is the disadvantage of No-par? constructive and speculative.
A: Its in the record keeping. There are different price for each shares. (3) Capable of being transferred and applied to payment of
debts. It must be of such character that it can be delivered to
the corporation, instead of being merely communicated to its
officers or employees, and it must be actually transferred to

I sweat, I bleed, I soar… A-75

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
the corporation and capable of being transferred by the
corporation. It must also be such as is capable of being
applied to the payment of debts and of distribution among
the stockholders. (Page 532 of De Leon, 2006)
Services
• A corporation is allowed to receive as payment for its stocks
labor performed for or services actually rendered to the
corporation provided the transaction is in good faith and no
fraud is perpetrated upon other stockholders and creditors.
Satisfaction of Previously incurred indebtedness
• Section 62(4) expressly allows the set-off or satisfaction of
previously incurred indebtedness of a corporation by the
issuance of its shares of stock where conflicting rights of
creditors are not involved.
Profits
• If stocks are issued in consideration of profits earned by the
corporation, but not distributed among the stockholders, such
issue is called stock dividends. (Page 536 of De Leon, 2006)
(e) Preemptive right of stockholders
• A pre-emptive right is the shareholder’s right to subscribe to
all issues or disposition of shares or any class in proportion to
his present stockholdings, the purpose being to enable the
shareholder to retain his proportionate control in the
corporation and to retain his equity in the retained earnings
and also in the net assets in the event of dissolution. (Page
832 of CLV’s CLR, 2007)
• Stock Transactions covered by right. Section 39 has
widened the coverage of pre-emptive right which now
includes re-issuance of treasury shares because of the use of
the words “disposition of shares”, which would cover the
following instances:
(1) Increase in the Authorized Capital Stock;
(2) Opening for subscription the unissued portion of existing
capital stock; and
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(3) Disposition of treasury shares (Page 832 of CLV’s CLR,
2007)
• Pre-emptive right not available:
(1) Shares to be issued to comply with laws requiring stock
offering or minimum stock ownership by the public;
(2) Shares issued in good faith in exchange for property needed
for corporate purposes;
(3) Shares issued in payment of previously contracted debts;
(4) IN case the right is denied in the AoI. (Section 39; (Page 832
of CLV’s CLR, 2007))
• Whenever a capital stock of a corporation is increased and
new shares of stocks are issued, the new issue must be
offered first to the stockholders who are such at the rime the
increase was made in proportion to their existing
shareholdings and on equal terms with other holders of the
original stocks before subscriptions are received from the
general public. For example, if a stockholder with pre-emptive
right owns 20% of the outstanding shares of the corporation,
he may subscribe 20% of any shares of stock issued by the
corporation. This principle is known as the right of pre-
emption or pre-emptive right of stockholders (Page 355 of De
Leon, 2006)
• The rule [on pre-emption] aims to safeguard the right of
stockholder to preserve unaltered and unimpaired his
proportionate influence and interest in the corporation and the
relative value of his holdings. (Page 356 of De Leon, 2006)
5.2 Trust Fund Doctrine
TRUST FUND DOCTRINE
Nature of Doctrine: Ong Yong v. Tiu, 401 SCRA 1 (2003).
- “The assets of the Corporation to the extent of its capital stock
represent a Trust Fund for the protection of the creditor’s
claim”
o During the life of the corporation, no assets may be
returned to the stockholders when there are
outstanding obligations
A-76
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
o Dividends can only be declared out of __restricted
retained earnings
o The corporation is without authority to repurchase its
own shares of stock, except in instances mandated by
law
o The corporation cannot waive or condone
subscriptions receivables
o The corporation cannot reduce its capital stock to the
prejudice of the creditors. (there are exceptions)
o Upon insolvency, all subscriptions receivables
automatically become due and payable
o Upon dissolution, all assets of the corporation shall
first be applied for the payment of all its obligations
Under the trust fund doctrine, the capital stock, property
and other assets of the corporation are regarded as equity in
trust for the payment of the corporate creditors. Comm. of
Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
The “trust fund” doctrine considers the subscribed capital
stock as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction.
Until the liquidation of the corporation, no part of the
subscribed capital stock may be turned over or released to the
stockholder (except in the redemption of the redeemable
shares) without violating this principle. Thus dividends must
never impair the subscribed capital stock; subscription
commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as
the consideration therefore. NTC v. Court of Appeals, 311
SCRA 508 (1999).
The requirement of unrestricted retained earnings to cover
the shares is based on the trust fund doctrine which means
that the capital stock, property and other assets of a
corporation are regarded as equtiy in trust for the payment of
corporate creditors. The reason is that creditors of a
corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Boman Environmental
Dev. Corp. v. CA, 167 SCRA 540 (1988).
5.3 Case
Philippine Trust Co. v. Rivera (1923)
• The resolution releasing the shareholders from their
obligation to pay 50 per centum of their respective
subscriptions was an attempted withdrawal of so much capital
from the fund upon which the company’s creditors were
entitled ultimately to rely and, having been effected without
compliance with the statutory requirements, was wholly
ineffectual.
Catindig Class Notes
Q: A corporation has 5M Unrestricted Retained Earnings, it then
donated 3M to typhoon victims with BoD approval. “A”, a stockholder
filed a suit seeking to enjoin or annul the donation. Is the suit valid?
A: Yes. The donation is unreasonable.
5.4 Issuance of Certificate of Stock (Section 64)
Sec. 64. Issuance of stock certificates
No certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in
case of delinquent shares), if any is due, has been paid. (37)
• Certificate of stock is a written evidence of the shares of
stock but it is not the share itself. (Lincoln Philippines Life v.
CA)
• See page 864 of CLV’s CLR
Jack’s Lecture
It says here (§64; Issuance of stock certificates) that
no stock certificate shall be issued until the full amount of the
subscription has been paid because, it said, a subscription
contract is indivisible. So until the entire consideration is paid, the
stockholder shall not be entitled to a stock certificate. That’s why
that old Baltazar case is wrong. Where Justice Paredes said
that… let’s say you subscribed to 1000 shares and you paid only
A-77
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

25% of the price, the stockholder has the option. He can either • A subscriber must first totally pay his subscription before a
spread out that partial payment equally among the 1000 shares
so each share will be partially paid or he can apply that as full
certificate of stock covering shares subscribed and paid for
payment for 250 shares and then ask the corporation to issue could be issued to him. (CLV’s Textbook 400)
stock certificates to him for 250 shares. That is wrong because •
the subscription agreement is indivisible.
(c) Additional material: SEC Opinion No. 05-02 dated
Catindig Class Notes
Q: Is the issuance of Certificate of Stock, in case of transfer January 31, 2005 re Bearer Certificates.
MINISTERIAL?
A: Yes.
SEC Opinion
Catindig: Not exactly true.
(1) Tax Code on capital gains tax Payment thereof is necessary.
The Corp Sec must be shown the certificate authorizing the
transfer as issued by the BIR. (Except in case of nominee
(1share; usually, no capital gains tax realized))
(2) Payment of tax due on the transfer of shares
Note: Upon issuance of Certificate of Stock to a NOMINEE always
make a DEED OF TRUST. Prepare Minute first and have it signed
before issuing a Secretary’s Certificate
(3) Section 15, 11th paragraph
(4) Right of First Refusal
(5) Payment of Documentary stamps

Q: Where can you a get a stock certificate?

A: From the National Bookstore. (Haha)

(a) Formalities for Issuance

• The certificate of stock must be signed by the President or
Vice-President and countersigned by the corporate secretary
or the assistant secretary otherwise it is not deemed issued.
(Bitong v. CA)
• Pay attention to Section 15(11).
(b) Right of a stockholder to a certificate
• Under Section 63 of the Corp Code, every stockholder has a
right to have a proper certificate issued to him by the
corporation upon demand, as soon as he has complied with
the conditions under Section 64 of the Corp Code (CLV’s
Textbook 404)
(d) Lost or Stolen Certificates (Section 73)
Sec. 73. Lost or destroyed certificates
The following procedure shall be followed for the issuance by a
corporation of new certificates of stock in lieu of those which have
been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or
his legal representative shall file with the corporation an affidavit
in triplicate setting forth, if possible, the circumstances as to how
the certificate was lost, stolen or destroyed, the number of
shares represented by such certificate, the serial number of the
certificate and the name of the corporation which issued the
same. He shall also submit such other information and evidence
which he may deem necessary;
2. After verifying the affidavit and other information and evidence

I sweat, I bleed, I soar… A-78

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
with the books of the corporation, said corporation shall publish a
notice in a newspaper of general circulation published in the
place where the corporation has its principal office, once a week
for three (3) consecutive weeks at the expense of the registered
owner of the certificate of stock which has been lost, stolen or
destroyed. The notice shall state the name of said corporation,
the name of the registered owner and the serial number of said
certificate, and the number of shares represented by such
certificate, and that after the expiration of one (1) year from the
date of the last publication, if no contest has been presented to
said corporation regarding said certificate of stock, the right to
make such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of
stock, unless the registered owner files a bond or other security
in lieu thereof as may be required, effective for a period of one
(1) year, for such amount and in such form and with such
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: Provided, That if a
contest has been presented to said corporation or if an action is
pending in court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed, the issuance of
the new certificate of stock in lieu thereof shall be suspended
until the final decision by the court regarding the ownership of
said certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described.
(R. A. 201a)
• While Sec. 73 of Corporation Code appears to be
mandatory, the same admits exceptions, such that a
corporation may voluntarily issue a new certificate in lieu of
the original certificate of stock which has been lost without
complying with the requirements under said section. It would
be an internal matter for the corporation to find measures in
ascertaining who are the real owners of stock for purposes of
liquidation. It is well-settled that unless proven otherwise, the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
“stock and transfer book” is the best evidence to establish
stock ownership. (SEC Opinion, dated 28 January 1999,
addressed to Ms. Ma. Cecilia Salazar-Santos).
• A corporation may actually not heed the procedure under
Section 73 of the Corp Code in accordance with SEC Opinion
but by doing so, it cannot avail of the “free and harmless”
clause provided in Section 73. (CLV’s textbook at 410)
Jack’s Lecture
Now if a stock certificate was lost, to get a new one, the
stockholder must execute an affidavit explaining the
circumstances under which the stock certificate was lost. (§73;
Lost or destroyed certificates). And then, notice of the loss will
be published once a week for 3 consecutive weeks in a paper of
general circulation. And then after 1 year from the date of the last
publication, he can get a new stock certificate. But the stockholder
might want to get the stock certificate right away. For instance, he
might be applying for a loan and intends to use the shares of
stock as collateral for the loan. So he cannot wait for a year. He
will be allowed to get the stock certificate but he will be required to
post an indemnity bond equal to the value of the shares listed in
the stock market. The stock and transfer agent will say, “Ok, you
just give a bond equal to the value of the shares in the stock
market.” If it is not listed in the stock market, well you can use the
book value which appears on the latest audited financial
statement.
Catindig Notes
Section 73
Q: Is the corporation required to verify the accuracy of all the facts in
the affidavit?
A: No. What is verified is that the SH is indeed a SH and not an
impostor. Check the signature cards.
Section 73(2)
(1) Verify if the affiant is really the stockholder of record. Use the
signature card.
(2) Form: Notarial requirements; CTC+ Government issued ID with
picture
(3) Address
(4) Prepare the notice. Newspaper of G.C.
(5) Original copy of the publisher’s affidavit.
Replacement Certificate
(1) Indicate that it is a replacement certificate;
A-79
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(2) Same stock number
5.5 Transfer of shares (Section 63)
Sec. 63. Certificate of stock and transfer of shares
The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and
the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation. (35)
How are shares of stocks transferred?
• If represented by a certificate, the following must be
complied with:
(1) Delivery of the certificate
(2) Indorsement by the owner or his agent
(3) To be valid to third parties, the transfer must be
recorded in the books of the corporation.
• If not represented by the certificate (such as when the
certificate has not yet been issued or where for some reason
is not in the possession of the stockholder.
(1) By means of a deed of assignment
(2) Such is duly recorded in the books of corporation.
(See page 297 of JRS for illustrative problems)
• See page 876 of CLV’s CLR, 2007
Jack’s Lecture
Now the stock certificate will be signed by the
President, or in his absence the Vice-President, and
countersigned by the Secretary (§63; Certificate of stock and
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
transfer of shares). That’s why in one case…you have this Torres
case… a retired Judge who was the controlling stockholder in a
corporation. And his nephew to whom he had given shares of
stock turned out to be recalcitrant and rambunctious so he
decided to regain control of the corporation by giving shares to
other nephews. And what did he do? He was the president of the
corporation and he simply posted entries in the stock and transfer
book. O, one share to this fellow, another share to that… The
court said that that is not valid. That is not the way to…and
besides, he is the president, not the corporate secretary. He is not
supposed to handle the stock and transfer book.
TRANSFER OF SHARES OF STOCK
It says here, shares of stock are personal property and
they may be transferred by delivery of stock certificates endorsed
by the owner or his attorney in fact. So you need two things: an
indorsement of the stock certificate plus delivery. That’s why you
have that case of Razon where Mr. Vicente Chuidian wanted to
regain shares of stock which he claimed belonged to his father in
E. Razon. And Razon said “No, this does not belong to your
father. It actually belongs to me.” Well, the stock certificates were
actually in his possession. The court said there was no
indorsement so he cannot claim that the stock certificate
belonged to him. On the other hand, the court said that where the
stock certificate was endorsed but it was not delivered, then the
shares of stock represented by the stock certificates had not been
transferred to the buyer.
And the court says it is a ministerial obligation of the
corporation to transfer the shares of stock to the name of the
buyer. So even if a case has been filed for the rescission of the
sale, the corporation still has to transfer the stock certificates.
There was a case where the seller sold the shares of stock and
he was paid. And a new stock certificate was issued to the buyer.
And then the corporate secretary says that, “Well, the old stock
certificate has not been endorsed.” So the buyer returned it to the
seller and told him, “Will you please endorse it so that it can be
cancelled.” But the seller did not and refused to return the stock
certificate. So the corporation declared it as cancelled. The court
said that the cancellation was valid because actually he has sold
and it and he has been paid. It was just delivered to him for him to
endorse and he unjustifiably refused to return the stock certificate.
And therefore the corporation can consider it as cancelled.
Now, no transfer shall be valid except as between the
parties until the transfer is recorded in the books of the
corporation. Why? If the selling stockholder has a creditor and in
A-80
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

the books of the corporation the shares are still in his name, the
creditor can attach and levy on the shares.
Now, although it has been said that shares of stock are
personal property and are quasi-negotiable because to transfer
them, the seller can simply sign at the back and deliver it they’re
not like negotiable instruments. That’s why if the indorsement of
the stockholder was forged even if it was an indorsement in blank,
the buyer shall not acquire any right to the share of stock. Now if
the one who forged it was an employee or officer of the
corporation who was precisely in charge of the stock, the records
or the stock certificates, then the corporation will be responsible
for his act. Like you know, you are required to be a stockholder of
PLDT to get a telephone line. Many people do not claim their
stock certificates so they are there in the vault of PLDT. I have
one case where an employee there who was in charge of their
custody forged the indorsement of some stock and sold them in
the stock market. So the buyer would get good title, the
corporation will be liable. So what will happen? The buyer will get
good title and the seller will also have to be recognized. And it
would be PLDT who would bear the loss. But remember
whenever there will be an over-issuance of the shares,
irrespective of good faith, the buyer cannot acquire title. If there is
over-issuance, the owner of the shares of stock whose signature
was forged must be recognized as still the owner and the remedy
of the buyer would simply be to sue PLDT for damages. Likewise
if the indorsement was forged… somebody stole the stock
certificate, forged the indorsement and because of that, the
corporation issued a stock certificate to that forger so he now has
a stock certificate in his name and he goes around and sells that
to somebody who bought that in good faith, he will be protected
because he has the right to rely on that stock certificate in the
name of the seller. So what will happen, both the original owner
whose stock was stolen and that buyer, para ‘tong Torens title,
will be recognized. But again if this will result in over-issuance, it
is the original owner who will be recognized and the remedy of
that buyer will be to simply sue the corporation for damages.
Now the law says no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the
books of the corporation. In other words, if there is an unpaid
subscription and there’s a call (?). So first of all, the SEC has said
that a subscription contract is an indivisible contract. And
therefore the stockholder, if he subscribed to 1000 shares cannot
say, “I will sell 500 and then retain 500.” No. The contract is
indivisible. So it must be all or nothing. If he wants to sell, he must
sell the entire 1000 shares. Now if he does that, he must get the
approval of the board because remember he still owes the
corporation for his unpaid subscription and therefore if he will sell
the shares, in effect he will be substituting somebody for him as
debtor for the unpaid subscription. And when there is substitution
of debtors, that is novation and you need the consent of the
creditor- the corporation. Now you have this case of China Bank
which I mentioned earlier where China Bank foreclosed the
pledge on the proprietary shares of Valley Golf Club. When it
asked Valley Golf Club to register the shares in its name, Valley
Golf Club refused. It said that this stockholder has unpaid
obligations. He has not paid his monthly dues, he has not paid his
bills and under the by-laws, Valley Golf Club has a lien on the
stock certificate for his proprietary share for his unpaid claim. And
Valley Golf Club argued under §63 that it can’t be transferred in
the books in the name of China Bank because we have these
claims which are not paid. The Court said no. The unpaid claim
mentioned here refers to the subscription price. It does not refer
to amounts due the corporation arising from other transactions. It
only refers to payment due under the subscription agreement.
• Under Sec. 63 of Corporation Code, the sale of stocks shall
not be recognized as valid unless registered in the books of
the corporation insofar as third persons, including the
corporation, are concerned—as between the parties to the
sale, the transfer shall be valid even if not recorded in the
books of the corporation. Batangas Laguna Tayabas Bus
Co. v. Bitanga, 362 SCRA 635 (2001).
• A transferee has no right to intervene as a stockholder in
corporate issue on the strength of the transfer of shares
allegedly executed by a registered stockholder. It is explicit
under Sec. 63 that the transfer must be registered to affect
the corporation and third persons. Magsaysay-Labrador v.
CA, 180 SCRA 266 (1989).
• The purpose of registration is two-fold: to enable the
transferee to exercise all the rights of a stockholder, including
the right to vote and to be voted 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 to the
liabilities of a stockholder. Until challenged in a proper

I sweat, I bleed, I soar… A-81

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
proceeding, a stockholder of record has a right to participate
in any meeting; his vote can be properly counted to determine
whether a stockholders’ resolution was approved, despite the
claim of the alleged transferee. On the other hand, a person
who has purchased stock, and who desires to be recognized
as a stockholder for the purpose of voting, must secure such
a standing by having the transfer recorded on the corporate
books. Until the transfer is registered, the transferee is not a
stockholder but an outsider. Batangas Laguna Tayabas Bus
Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
• A bona fide transfer of shares, not registered in the
corporate books, is not valid as against a subsequent lawful
attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not. All
transfers not so entered on the books of the corporation are
absolutely void; not because they are without notice or
fraudulent in law or fact, but because they are made so void
by statute. Garcia v. Jomouad, 323 SCRA 424 (2000).
• Pursuant to Sec. 63, a transfer of shares of stock not
recorded in the stock and transfer book is non-existent as far
as the corporation is concerned. As between the corporation
on the one hand, and its shareholders and third persons on
the other, the corporation looks only into its books for the
purpose of determining who its shareholders are. Ponce v.
Alsons Cement Corp., 393 SCRA 602 (2002).
• Section 63 contemplates no restriction as to whom the
stocks may be transferred. It does not suggest that any
discrimination may be created by the corporation in favor of,
or against a certain purchaser. The owner of shares, as
owner of personal property, is at liberty, under said section to
dispose them in favor of whomever he pleases, without
limitation in this respect, than the general provisions of law.
Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• The only limitation imposed by Sec. 63 is when the
corporation holds any unpaid claim against the shares
intended to be transferred. A corporation, either by its board,
its by-laws, or the act of its officers, cannot create restrictions
in stock transfers, because “Restrictions in the traffic of stock
must have their source in legislative enactment, as the
corporation itself cannot create such impediment. By-laws
are intended merely for the protection of the corporation, and
prescribe relation, not restriction; they are always subject to
the charter of the corporation.” Rural Bank of Salinas v. CA,
210 SCRA 510 (1992).
5.6 Cases
Sunset View Condominium Corporation v. Campos (1981)
• Ownership of a unit is a sine qua non to being a shareholder
in the condominium corporation. It follows that a purchaser of
a unit who is not yet the owner thereof for not having fully
paid the full purchase price is not a shareholder.
• By necessary implication, the “separate interest” in a
condominium, which entitles the holder to become
automatically a shareholder in the condominium corporation,
as provided in Section of the Condominium Act, can be no
other than ownership of a unit. This is so because nobody
can be a shareholder unless he is the owner of a unit and
when he ceases to be the owner, he also ceases
automatically to be a shareholder.
• (The subject matter of this case are under the jurisdiction of
the regular courts because the private respondents are “not
shareholders” of the condominium corporation.
Razon v. IAC (1992)
• The indorsement of the certificate of stock is a mandatory
requirement of law for an effective transfer of a certificate of
stock.
A-82
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• The assertion that the petitioner did not require an
indorsement of the certificate of stock in view of his intimate
friendship with Chuidian cannot overcome the failure to follow
the procedure required by law.
• Catindig. This question was asked in the bar. But for me this
is not a good case because..
Rural Bank of Salinas v. CA (1992)
• Section 5(b) of PD NO. 902-A grants to the SEC the original
and exclusive jurisdiction to hear and decide cases involving
intracorporate controversies.
• An intra-corporate controversy has been defined as one
which arises between a stockholder and the corporation.
There is no distinction, qualification, nor any exception
whatsoever.
• A corporation cannot create restrictions in stock transfer
• The right of a transferee/assignee to have stocks transferred
to his name is an inherent right.
• Corporation’s obligation to register is ministerial.
BLTB v. Bitanga, 2001
• A transfer of shares is not valid unless recorded in the books
of the corporation.
• A person who has purchased stock, and who desires to be
recognized as a stockholder for the purpose of voting, must
secure such a standing by having the transfer recorded on
the corporate books-until the transfer is registered, the
transferee is not a stockholder but an outsider.
• Dissenting Opinion by Panganiban: Under Section 63 of the
Corp Code, the sale of the stocks shall not be recognized as
valid unless registered in the books of the corporation, but
only insofar as third persons, including the corporation are
concerned- as between the parties to the sale, the transfer
shall be valid even if not recorded in the books of the
corporation…Therefore, that as between the parties to the
sale, the transfer shall be valid even if not recorded in the
books of corporation.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• CLV: I agree with the dissenting opinion of Justice Puno:
“The rule [Section 63] is intended to protect the interest of the
corporation and theird persons who may be prejudiced by the
transfer of the shares of stocks. It follows therefore that as
between the parties to the sale, the transfer shall be valid
even if not recorded in the books of corporation.”
• Catindig: I’m not satisfied with the decision because…
• Catindig: to know who are the SH, only look at the STB.
Rural Bank of Lipa v. CA (2001)
• The rule is that the delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of
shares from the lawful owner to the transferee.
• Requirements to have a valid transfer of stocks:
(1) There must be a delivery of stock certificate
(2) The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to
make the transfer, and
(3) To be valid against third parties, the transfer must be
recorded in the books of the corporation.
Ponce v. Alsons Cement (2002)
• Pursuant to the Corporation Code, a transfer of shares of
stock not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is
concerned.
• A corporate secretary may not be compelled to issue stock
certificates without registration.
Republic v. Estate of Hans Menzi (2005)
• A stock certificate is merely a tangible evidence of ownership
of shares of stock-its presence or absence does not affect the
right of the registered owner to dispose of the shares covered
by the stock certificate
• The delivery of a duly indorsed stock certificate is sufficient
to transfer ownership of shares of stock in stock corporations;
A-83
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
The absence of a deed of assignment is not a fatal flaw which
renders the transfer invalid.
5.7 Could the transfer of shares be restricted
(Section 98)
Sec. 98. Validity of restrictions on transfer of shares
Restrictions on the right to transfer shares must appear in the articles
of incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person.
• (Atty. Catindig talks of right to purchase shares instead of
option to purchase shares)
Catindig Class Notes
Section 98
Tag-along provision
e.g. Class A and B shares
One holder of Class A shares wants to sell his shares. All holders of
Class A shares must also sell for the transaction to push through.
Mutual Fund Shares
(1) Transferability of shares;
(2) Right of holder to sell back the shares to the company at any
time.
Settlement Account
-where proceeds, investments are deposited
5.8 Cases
Lim Tay v. CA (1998)
• The registration of shares in a stockholder’s name, the
issuance of stock certificates, and the right to receive
dividends fall within the jurisdiction of the SEC.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• The controversy “among stockholders, partners, associates
themselves” is intracorporate in nature and falls within the
jurisdiction of SEC.
• Petitioner’s status as a mere pledge does not, under civil
law, entitle him to ownership of the subject shares
• Petitioner’s possession of the stock certificates came about
because they were delivered to him pursuant to the contracts
of pledge. His possession as a pledge cannot ripen into
ownership by prescription.
Roxas v. CA (1992)
• An officers’ power as an agent of the corporation must be
sought from the statute, charter, the by-laws or in a
delegation of authority of such officer, from the acts of the
board of directors, formally expressed or implied from a habit
or custom of doing business.
Garcia v. Jomouad (2000)
• All transfer of shares should be entered on the books of the
corporation , and all transfers of shares not so entered are
invalid as to attaching or execution creditors of the assignors,
as well as the corporation and to subsequent purchasers in
good fait, and indeed, as to all persons interested, except the
parties to such transfer.
• The entry in the minutes of the meeting of the Club’s BoD
noting the resignation of a proprietary member does not
constitute compliance with Section 63 of the Corporation
Code.
5.9 Unpaid Subscriptions
Jack’s Lecture
Now, the unpaid portion of the subscription, as a rule,
does not earn interest unless the by-laws provide for interest
(§66; Interest on unpaid subscription). And if the by-laws
specify what is the interest, that is what will apply. But if it does
not state what will be the interest, then it will be the legal rate.
A-84
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Now, so long as the stockholder is not delinquent, he is
entitled to exercise all the rights of a stockholder so he can vote
his shares and if there are dividends declared, he will receive the
dividends. (§72; Rights of unpaid shares).
Now when will the payment of the balance fall due?
(§67; Payment of balance of subscription). In two cases. First,
if the subscription agreement stipulates that he should pay for the
balance of the subscription on certain dates. Secondly, if a call
was made. If the director said, “We need more working capital”
and so it made a call. Now a call must be uniform. You must
make a call on everybody. Otherwise, if you will allow the board to
single out some stockholders and they want to get rid of some
stockholder who is questioning so many actions of the board, then
they will make a call for his share only. And then if he does not
pay, they will sell his shares and get rid of him. It has to be
uniform. Now, so if a call is made and a stockholder fails to pay,
let’s say the directors say, “Ok, we are making a call on 25% of
the subscription” and he fails to pay, the law says the entire
balance of his subscription will become due. Although the call was
only for 25%, if he fails to pay, the entire balance including the
75% will fall due. And so if within 30 days from the date payment
should have been made, he has still not paid, that is now
delinquent. And once the shares are delinquent, he will lose the
rights of a stockholder. (§71; Effect of delinquency) He cannot
vote his shares, he cannot receive any dividends and if there is
any stock dividend, the delivery of the stock certificate will be
withheld and any cash dividend will be applied in payment of his
subscription.
So once the stocks are delinquent, then the corporation
will now pass… the board will now pass a new resolution ordering
that the shares be sold, which should not be less than 30 days or
more than 60 days from the date the shares became delinquent.
(§68; Delinquency sale) And notice of the sale should be sent to
the stockholder and that should be published once a week for 2
weeks in a newspaper of general circulation. So if the stockholder
still fails to pay, well, the shares will be sold at public auction. The
auction will be the Dutch method of auction, In other words, the
price is fixed. The auctioneer will say, “Gentlemen, we have here
1000 shares which are delinquent and the balance of the
subscription is P75,000. How many shares am I offered for
P75,000?” Somebody says, “7,500”. Somebody else says, “6000.”
“5500.” The one who is willing to get the least number of shares
for that price will be the one who will win the bid. And as a result
of that, the subscription will now be fully paid and the rest will be
given to the delinquent stockholder because he is now fully paid.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
If there is no bidder, the corporation can bid. Now, until the
corporation makes a call, the payment of the subscription is not
due unless the subscription agreement contains a stipulation as to
when it is to be paid. That’s why in one case, an employee of a
corporation filed a case and got a judgment against the employer
but he was also a stockholder. And the employer argued that it
should not be ordered to satisfy the judgment because…since this
employee has an unpaid subscription, the balance of the
subscription should be set-off against the judgment in his favor.
The court said, “No, for compensation to take place, both debts
must be due.” And the payment for the subscription is not yet due
because no call has been made.
Now that unpaid portion of the subscription is an asset
because it is a receivable. And creditors can sue the stockholders
for the unpaid subscription if the corporation has no assets. Now
normally, the plaintiff will sue first the corporation and then if the
corporation… and if he gets a judgment and it cannot be
satisfied…there is a sheriff’s return…unsatisfied…then he can
now sue the stockholders for the unpaid amount of their
subscription. Now if, at the time the case was being filed against
the corporation, the corporation is already insolvent and cannot
pay, then the creditor can already include the stockholders as
defendants in that action. Well, I had a case before, when Miriam
Defensor was still a judge. Our client was a foreign company
which sold chemicals to a company here. It was a good project
but the problem was they put in too little capital and instead the
borrowed massively and so it was the interest payments that was
killing them. Now, our client filed a case and they compromised
and agreed to pay in installments over a period of 2 years but
then they failed to pay. So now I sued the stockholders for their
unpaid subscription and the case was assigned to then Judge
Miriam Defensor Santiago. Defense of stockholders: payment.
They said we have already paid for our subscription. And they
submitted receipts to prove that they had paid for their
subscriptions. But you see, when the printing press prints the
receipts, it must first get approval from the Bureau of Internal
Revenue. So they will get approval and say we are printing these
official receipts with these serial numbers and it is only after you
get approval that you can print and the number of the permit and
the date of its issuance will be printed at the bottom of the
receipts. Now these receipts were obviously forged because they
were dated something like February but the date of the issuance
of the permit by the BIR for printing was dated June. So they were
obviously fabricated. That’s why in a moment of lucidity, Judge
Miriam Defensor Santiago held the defendants liable.
A-85
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Now if the owner of the shares want to question the
sale, the law requires he must first pay the party who paid for his
shares of stock with legal interest. And he must file the case
within 6 months from the date of the sale. (§69; When sale may
be questioned).
Now the corporation can decide to sue instead on the
unpaid subscription. (§70; Court action to recover unpaid
subscription). Why? Because if, for example, a corporation is
incurring losses, if you sell that at public auction, nobody will buy.
Because the value of the corporation is negative. So if the
corporation decides to buy it also, it won’t (?) make sense. So
they would probably, in such a case, choose to sue instead the
stockholder for payment of the balance of his subscription.
(a) Is interest due on unpaid subscriptions? (Section
66)
Sec. 66. Interest on unpaid subscriptions
Subscribers for stock shall pay to the corporation interest on all
unpaid subscriptions from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be deemed to be the legal rate.
(37)
(b) Do unpaid shares have rights? (Section 72)
Sec. 72. Rights of unpaid shares
Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder. (n)
(c) How do you collect unpaid subscriptions?
What are the remedies of corporations to enforce payment of
stocks?
(1) Extra-judicial sale at public auction.
(2) Judicial Action
(3) Collection from cash dividends and withholding of stock
dividends.(See page 304 of JRS)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
What does the term unpaid claim mean (for purposes of
declaring the shareholder delinquent)?
It refers to any unpaid subscription, and not to any indebtedness
which a subscriber of stockholder may owe the corporation arising
from any other transaction.
(i) When is a call necessary? (Section 67)
Sec. 67. Payment of balance of subscription
Subject to the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof, in either case
with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the
call made by the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the stockholder liable
for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is
made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise. (38)
• Call is a declaration by the board of directors that the unpaid
subscriptions are due and payable to the corporation. (JRS at
305)
• The word “call” is capable of three meanings, namely: (a) a
resolution of the BoD for the payment of unpaid subscriptions;
(b) notification of such resolution made on the stockholders;
or (c) the time when subscriptions become payable. (CLV’s
Textbook 392)
• A call is necessary if no time to make payment is stated in
the subscription agreement. (JRS at 305)
• A call is not necessary if:
(1) there is a time fixed in the agreement for payment
A-86
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(2) if the corporation becomes insolvent (JRS at 305)
• Notice of call is necessary to bind the stockholders. (JRS at
305)
(ii) Could the corporation resort to court action?
(Section 70)
Sec. 70. Court action to recover unpaid subscription
Nothing in this Code shall prevent the corporation from
collecting by action in a court of proper jurisdiction the amount
due on any unpaid subscription, with accrued interest, costs
and expenses. (49a)
(d) How do shares become delinquent? (Section 67)
Sec. 67. Payment of balance of subscription
Subject to the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof, in either case
with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the
call made by the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the stockholder liable
for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is
made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise. (38)
(e) What is the effect of delinquency? (Section 71)
Sec. 71. Effect of delinquency
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
No delinquent stock shall be voted for be entitled to vote or to
representation at any stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of this Code, until
and unless he pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if any. (50a)
Effect of Deliquency:
(1) Deprives the stockholder the right:
a) To be voted for; or
b) To be entitled to vote; or
c) To representation at any stockholders’ meeting
(2) Deliquent stockholder shall not be entitled to any of the rights of
a stockholder but he shall still be entitled to receive dividends.
(3) Deliquent stocks shall be subject to delinquency sale
Note: If the delinquent stockholder is a director, he shall continue to
be a director but he cannot run for re-election. (JRS at 307)
(f) What is a delinquency sale and how is it
conducted? (Section 68)
Sec. 68. Delinquency sale
The board of directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, 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 stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to
every delinquent stockholder either personally or by registered mail.
The same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the
province or city where the principal office of the corporation is
located.
Unless the delinquent stockholder pays to the corporation, on or
before the date specified for the sale of the delinquent stock, the
balance due on his subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the board of directors
otherwise orders, said delinquent stock shall be sold at public auction
A-87
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
to such bidder who shall offer to pay the full amount of the balance on
the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of
shares or fraction of a share. The stock so purchased shall be
transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the delinquent stockholder
who shall likewise be entitled to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public auction who offers to pay the
full amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the same, and the
total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and
may be disposed of by said corporation in accordance with the
provisions of this Code.
Procedure for collection and delinquency sale:
(1) Call whenever required must be made by the Board
(2) Notice of call- the stockholders are given notice of the board
resolution by the corporate secretary, either personally or by
registered mail.
(3) If the stockholders concerned do not pay within thirty (30) days
from the date specified in the contract of subscription or in the
call, all the stocks covered by the subscription shall be
declared delinquent and shall be subject to sale under Section
68.
(4) Notice of delinquency served on the subscribers either
personally or registered mail and publication in a newspaper of
general circulation in the province or the city where principal
office is located once a week for two consecutive weeks.
Notice shall state the amount due on each subscription plus
accrued interest, and the date, time and place of the sale
which shall not be less than 30 days nor more than 60 days
form the date the stocks become delinquent.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(5) Sale—such number of shares as may be necessary to pay the
amount due on subscription, plus interest and other amounts
due, will be sold at public auction.
The highest bidder is the person offering to pay the full amount
of the balance on the subscription and other amount that are
due for the smallest number of shares or fraction of a share.
Catindig Class Notes
The Certificate of Stock representing the stock dividends are
considered civil fruits of the delinquent shares. Hence, the buyer of the
Dshares shall own the certificate of stocks representing the stock
dividends.
(g) Could a sale of delinquent shares be questioned?
(Section 69)
Sec. 69. When sale may be questioned
No action to recover delinquent stock sold can be sustained upon the
ground of irregularity or defect in the notice of sale, or in the sale
itself of the delinquent stock, unless the party seeking to maintain
such action first pays or tenders to the party holding the stock the
sum for which the same was sold, with interest from the date of
sale at the legal rate; and no such action shall be maintained unless it
is commenced by the filing of a complaint within six (6) months from
the date of sale. (47a)
Catindig Class Notes
Yes, a sale of delinquent shares may be questioned provided there is
tender…
5.10 Case
Apodaca v. NLRC (1989)
• Unpaid subscriptions are not due and payable until a call is
made by the corporation for payment through a board
resolution.
• An obligation arising from non-payment of stock
subscriptions to a corporation cannot be offset against a
money claim of an employee against the employer.
A-88
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
5.11 Voting Rights
What are the basic rights of shareholders?
(1) Direct or indirect participation in management;
(2) Voting rights (Section 6)
(3) Right to remove directors (Section 28)
(4) Proprietary rights:
(i) right to dividends
(ii) appraisal right (Section 81)
(iii) right to issuance of stock certificate for fully paid shares
(Section 64)
(iv) Proportionate participation in distribution of assets in liquidation
(Section 188-119)
(v) Right to transfer of stocks in corporate books (Section 63)
(vi) Pre-emptive right (Section 39)
(5) Right to inspect books and records (Section 74)
(6) Right to be furnished with the most recent financial
statement/financial report (Section 74,75)
(7) Right to recover stocks unlawfully sold for delinquent
payment of subscription;
(8) Right to file individual suit, representative suit, and derivative
suits.(Page 298 of JRS)
Manner of Voting
(1) Directly (in person)
(2) Indirectly, through a representative
(a) by means of proxy (Sections 55, 56, 58 and 89 par. 2)
(b) by a trustee under a voting trust agreement (Sec 59)
(c) by executors, administrators, receivers, or other legal
representatives duly appointed by the court. (Section
55(2))
*Voting may be either straight or cumulative (See Section 24)
(a) Pledgors and Mortgagors (Section 55)
Sec. 55. Right to vote of pledgors, mortgagors, and administrators
In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at
meetings of stockholders, unless the pledgee or mortgagee is
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
expressly given by the pledgor or mortgagor such right in writing
which is recorded on the appropriate corporate books. (n)
• When shares are pledged by means of endorsement in
blank and delivery of the covering certificates to a loan, the
pledgee does not become the owner thereof simply by the
failure of the registered stockholder to pay his loan.
Consequently, without proper foreclosure, the lender cannot
demand that the shares be registered in his name. Lim Tay
v. Court of Appeals, 293 SCRA 634 (1998).
(b) Executors, receivers and administrators (Section
55)
Sec. 55. Right to vote of pledgors, mortgagors, and administrators
Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy. (27a)
• Although the Rules of Court, while permitting an executor or
administrator to represent or to bring suits on behalf of the
deceased, do no prohibit the heirs from representing the
deceased. When no administrator has been appointed, there
is all the more reason to recognize the heirs as the proper
representatives of the deceased. Gochan v. Young, 354
SCRA 207 (2001).
(c) Joint owners of stock (Section 56)
Sec. 56. Voting in case of joint ownership of stock
In case of shares of stock owned jointly by two or more persons, in
order to vote the same, the consent of all the co-owners shall be
necessary, unless there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any other person to vote
such share or shares: Provided, That when the shares are owned in
an "and/or" capacity by the holders thereof, any one of the joint
owners can vote said shares or appoint a proxy therefor. (n)
Catindig Class Notes
A-89
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Q: In “AND shares”, can each joined owners vote for half of the total
shares?
A: No.
Gen. Rule: Consent of all needed is needed in joint ownership.
(d) ITF shares
• “In trust for”
• Even when it is shown that the registered owner of shares of
stock holds the share in trust for the benefit of the principal, it
is necessary nevertheless that the trustee must still endorse
the stock certificate to validate the cancellation of her share
and to have the transfer recorded in the books of the
corporation in favor of the principal or another trustee. (Bitong
v. CA)
(e) And/or shares
• Anyone of the joint owners can vote said shares or appoint a
proxy therefore.
(f) Treasury shares (Section 57)
Sec. 57. Voting right for treasury shares
Treasury shares shall have no voting right as long as such shares
remain in the Treasury. (n)
(g) Non-voting shares (Section 6)
Sec. 6. Classification of shares
The shares of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in
the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, further, That there shall always be a class or series
of shares which have complete voting rights. Any or all of the shares
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
xxx
Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
(h) Proxies (Section 58)
Sec. 58. Proxies
Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in writing, signed
by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy,
it shall be valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5) years at
any one time. (n)
A-90
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Jack’s Lecture
Now, as I said before, a stockholder can vote by proxy.
But if he gave a later proxy, the later proxy will prevail over the
earlier proxy. If you cannot tell which one is later because they
don’t have dates, well, neither can vote. Or if the stockholder
personally showed up at the stockholders’ meeting, then he is
personally present, then the proxy will lose the right to vote
because the proxy is just an agent and agency can be revoked at
any time. However if the proxy is coupled with an interest, then it
cannot be revoked. For instance, if you have a bank which loaned
a substantial amount of money and it required this borrower to
pledge his shares of stock as collateral and to give a proxy until
the loan is fully paid, then he cannot revoke the proxy because it
is coupled with an interest.
• Proxy refers to the formal written authority given by the
owner or holder of the stock, who has a right to vote it, or by a
member, as principal to another person, as agent, to exercise
the voting rights of the former. (Page 490 of De Leon, 2006)
• The term also refers to the holder of authority or the person
authorized by an absent stockholder or member to vote for
him at a stockholders’ or members’ meeting. (Page 490 of De
Leon, 2006)
• Purpose of use of proxy:
(1) Presence of quorum in meetings
(2) Exercise of right to vote though absent
(3) Voting and management control
Catindig Class Notes
Q: Can the Corporate Secretary refuse to recognize a proxy sent thru
email?
A: Yes, unless the corporation adopts a policy to receive proxy email
thru internet.
(i) Voting Trust (Section 59)
Sec. 59. Voting trusts
One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a loan agreement,
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the
terms and conditions thereof. A certified copy of such agreement
shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be canceled and new ones shall be
issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or trustees
is made pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both
the transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of
said agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed canceled
and new certificates of stock shall be reissued in the name of the
transferors.
The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise. (36a)
Jack’s Lecture
A-91
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

A stockholder can create a voting trust. What will happen is that as President of the corporation. A,B, and C were elected. A was not
the share of stock under his name will be cancelled and will be elected President because C voted for another person. Can A or B or
issued in the name of the trustee. The VTA is valid only for 5 other members of the pool file a suit against C for breach of contract?
years. But, if this was imposed as a condition in a loan, it will be A: No. The direction of business belongs to the Board of Directors and
valid for a longer period because the lender imposed that not to the SHs. The stipulation is void if it is meant to control the
condition to protect his interest especially if it is a big exposure. discretion of the Directors.
The bank will want to know what is happening so they will insist
that a bank officer should be given a voting trust and sit in the
Board to find out what’s happening. If the loan is for 10 years it Distinction between proxy and voting trust
can be for 10 years but if the loan is paid, automatically the VTA Proxy VTA
will lapse even if the 10 year period has not yet expired because Legal Title No legal title Acquires legal title
the voting trust is merely to protect the interest of the bank. Revocability Revocable unless coupled Irrevocable if validly
These are different devices to accumulate votes, the proxies, the with interest. executed BUT such SH
trusts. You can also have a pooling agreement where 2 or more can revoke if there’s a
SH sign an agreement that they will vote their shares together, in
the same way.
breach of fiduciary
obligation
(j) Pooling agreement Extent of Can only act at a specified Not limited to any
• Pooling agreement refers to agreement between 2 or more Power SHs’ or members; meeting particular meeting
shareholders to vote their shares in the same way or as a When to vote Absence of the owner Even when the owner is
unit. (Page 502 of De Leon, 2006) present
• See Section 100 Capacity to be Cannot be voted as a Can be voted as a
a director director unless he is also a director.
UP Class Notes
Para 1: SH agreements in general. Pre-incorporation agreements
SH of record (owns other Considered as the SH of
among SHs remain effective even after incorporation if so intended shares) record in the books of the
and even if not reflected in AOI, except for matter required by the corp
Code to appear in the AOI Subject Matter Voting rights Shares+Voting rights
Duration Usually shorter but cannot Usually longer but cannot
Para 2: Refers to pooling and voting agreements in particular. There is exceed 5 years exceed 5 years except in
no reason for denying the SHs other than those in close corporations loan agreeements
the right to enter into voting or pooling agreements to protect their
interests, as long as no wrong or fraud is committed or is intended to
be committed on other SHs or parties Proxy v. Trustee v. Pooling and Agreements
Proxy Trustee Pooling Agreements
Para 3: gives close corporations freedom to operate as a partnership Based on law on Based on law on trust Based on Contract law
between and among the SHs, but remaining as a corporation insofar agency
as third persons are concerned. Note: SHS who are parties assume Principal-agent Trustee-beneficiary Consensual
liabilities of directors
Proxy cannot exceed The only limit to this Merely an agreement to
delegated authority authority: must be for vote in the same way
benefit of trustee
Catindig Class Notes (fiduciary obligation)
Q: A,B,C,D, and E entered in pooling agreement so as to elect A,B, Must be in writing Must be in writing and No formalities required
and C as directors. Those elected as directors would then vote for A notatrized

I sweat, I bleed, I soar… A-92

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Copy must be filed with Copy must be file with Merely a contract
the corp secretary the SEC between SH’s Q: How about via e-mail?
Transfer of legal title to A: As it is, voting by e-mail alone is not adequate because a user-
trustee participant’s role in such cases is passive considering that his access
Regular voting rights. Absolute voting rights, Owner still exercises to the entire proceedings is limited to the information in print
Another penson subject only to fiduciary voting rights transmitted through the internet.
exercise voting rights duty. Another person
only for a specific exercises voting rights
meeting (unless continuously.
otherwise provided)
(b) SEC Memo Circular No. 4 series of 2004, March
Proxy cannot be a Trustee can be a 17, 2004
director director
Revocable at will, in Irrevocable as long as Revocable by consent SEC Memo Circ No. 4 Series of 2004
any manner no misconduct or fraud or mutual termination. If
Except when coupled unilateral termination, xxx
with an interest liable for damages (b) Stockholders shall have the right to vote at all stockholders’
Maximum of 5 years at Maximum 5 years at a meetings in person or by proxy. The stockholder may deliver, in
a time time (unless person or by mail, his proxy vote directly to the corporation.
coterminous with loan)
xxx
SEC can pass on validity
(g) If the stockholder intends to designate several proxies, the
number of shares of stock to be represented by each proxy shall be
5.12 Additional Materials specifically indicated in the proxy form. If some of the proxy forms do
(a) SEC Opinion No. 26 to Ms. Jaycel Sato re Voting not indicate the number of shares, the total shareholding of the
by Trustees through the internet, March 22, 2003 stockholder shall be tallied and the balance thereof, if any, shall be
allotted to the holder of the proxy form without the number of shares.
If all are in blank, the stocks shall be distributed equally among the
SEC Opinion No. 26 proxies. The number of persons to be designate as proxies may be
Q: May a trustee vote through the internet? limited by the By-laws.
A: Yes, provided that the internet medium to be used is akin or
similar (i.e., video streaming with voice packet or video over the
internet) to the one being used in video-conferencing or tele- 5.13 Appraisal right
conferencing, where a participant can see or hear the actual
proceedings of a board meeting and actively participate in the • Appraisal right refers to the right to withdraw form the
deliberation of the board. corporation and demand payment of the fair value of his
However, it should be emphasized that participation of directors in shares after dissenting from certain corporate acts involving
meetings through teleconferencing and video conferencing may be fundamental changes in corporate structure. (Section 81)
deemed acceptable only when adequate safeguards have been • Upon demand, all rights accruing to the shares shall be
accordingly set in place. Meetings of this nature should be properly
recorded and the appropriate tapes and discs properly stored for suspended. (Section 83)
safekeeping.

I sweat, I bleed, I soar… A-93

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(a) Instances of appraisal right (Section 81 & Section
37)
Sec. 81. Instances of appraisal right
Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Sec. 37. Power to extend or shorten corporate term
A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members in case of
non-stock corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That in
case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this
code. (n)
Instances where it may be exercised: (Sundiang)
(1) Extension or reduction of corporate term (Section 37 and 81)*
(2) Change in the rights of stockholders, authorize preferences
superior to those stockholders, or restrict the right of any
stockholder (Sections 37 and 81)
(3) Corporation authorized the board to invest corporate funds in
another business or purpose.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(4) Corporation decides to sell or dispose of all or substantially all
assets of corporation (Section 81)
(5) Merger or consolidation (Section 81)
• De Leon: Section 37 grants appraisal right to a dissenting
stockholder (right of the stockholder in the cases provided by
law to demand payment of the fair value of his shares) “in
case of extension of corporate term.” Such right should also
be available to a dissenting stockholder if the corporate term
is shortened as it is expressly recognized in Section 81(1).
(Page 333 of De Leon, 2006) But wait, CLV has a different
opinion.
• CLV: The appraisal right should not be triggered when it
comes to shortening of corporate life, because there is really
no violation of the original contractual intent. Therefore, the
inclusion of the case of shortening of corporate life under
Section 81 should not prevail over the specific provision
under Section 37. (Page 237 of CLV’s Textbook)
• CLV: The exercise of appraisal rights rightly belongs to a
case of extension of corporate term because extension
actually novates the corporate contract with each
shareholder, which now seeks to extend the corporate
relationship beyond the original term provided for in the
articles of incorporation. (Page 237 of CLV’s Textbook)
• Catindig: if the shortening of the corporate term is not
intended to dissolving a corporation, Section 81 governs.
Otherwise, Section 37 governs because the SH will get more
if he remains a SH until liquidation.
Catindig Class Notes
Q: X corporation decided to shorten its corporate term (from 50 to 10
years). One of the SHs voted against the reduction of the corporate
term. Can the dissenting SH exercise appraisal right?
A: Yes under Section 81.
Q: X corporation decided to shorten its corporate term (from 50 to
3months). One of the SHs voted against the reduction of the corporate
term. Can the dissenting SH exercise appraisal right?
A: No, Section 37 governs because the SH will get more if he remains
a SH until liquidation.
A-94
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Catindig: Shortening of corporate term is a way of dissolving a
corporation. When the corporation is dissolved and shares are
common, the said shares have residual rights. After payment of debts,
everything left goes to the SHs. The liquidating dividends may be
greater than the fair value.
(b) Requirements for a successful exercise of
appraisal right (Section 82 and 86)
Sec. 82. How right is exercised
The appraisal right may be exercised by any stockholder who shall
have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the proposed
corporate action is implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the certificate or certificates of
stock representing his shares, the fair value thereof as of the day
prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action
was approved by the stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3) disinterested persons, one
of whom shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their award shall be paid
by the corporation within thirty (30) days after such award is made:
Provided, That no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings
in its books to cover such payment: and Provided, further, That upon
payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the corporation. (n)
Sec. 86. Notation on certificates; rights of transferee
Within ten (10) days after demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock
representing his shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do so shall, at the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
option of the corporation, terminate his rights under this Title. If
shares represented by the certificates bearing such notation are
transferred, and the certificates consequently canceled, the rights of
the transferor as a dissenting stockholder under this Title shall cease
and the transferee shall have all the rights of a regular stockholder;
and all dividend distributions which would have accrued on such
shares shall be paid to the transferee. (n)
Rules for exercise of appraisal right
(1) The stockholder must be a dissenting stockholder- he voted
against the proposed action.
(2) The stockholder must make a written demand on the
corporation within 30 days after the vote was taken.
(3) The proposed action is any one of the instances enumerated
above (b)
(4) The price to be paid is the fair value of the shares on the date
before the vote was taken
(5) The fair value shall be agreed upon but in case there is no
agreement within 60 days from the date the vote was taken,
the fair value shall be determined by a majority of the 3
disinterested persons one of whom shall be named by the
stockholder another by the corporation and the third by the two
who were chosen.
(6) The right of appraisal is extinguished when:
a) He withdraws the demand with corporation’s consent
(consent of the corporation is necessary)
b) The proposal action is abandoned
c) The SEC disapproves the action (Section 84) (JRS at 304)
Catindig Class Notes
Appraisal
Q: Can the corp and SH just appoint one appraiser?
A: Yep, the Code does not prohibit this.
Notation
Q: Why is there a need for notation?
A: To avoid a moral hazard… that the SH might sell shares already
subject to exercise of appraisal rigts.
Q: Is one share sufficient to file a derivative suit?
A: Yes provided the other requisites are present.
A-95
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(c) Effect of demand (Section 83)
Sec. 83. Effect of demand and termination of right
From the time of demand for payment of the fair value of a
stockholder's shares until either the abandonment of the corporate
action involved or the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the provisions of this
Code, except the right of such stockholder to receive payment of the
fair value thereof: Provided, That if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored. (n)
(d) Cost of appraisal (Section 85)
Sec. 85. Who bears costs of appraisal
The costs and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have
offered to pay the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair value, all costs
and expenses shall be assessed against the corporation, unless the
refusal of the stockholder to receive payment was unjustified. (n)
(e) Notation on stock certificate(s) of dissenting
stockholder (Section 86)
Sec. 86. Notation on certificates; rights of transferee
Within ten (10) days after demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock
representing his shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do so shall, at the
option of the corporation, terminate his rights under this Title. If
shares represented by the certificates bearing such notation are
transferred, and the certificates consequently canceled, the rights of
the transferor as a dissenting stockholder under this Title shall cease
and the transferee shall have all the rights of a regular stockholder;
and all dividend distributions which would have accrued on such
shares shall be paid to the transferee. (n)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
5.14 Derivative Suits
(a) Definition
• A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress
wrongs committed against the corporation, for which the
directors refuse to sue. It is a remedy designed by equity and
has been the principal defense of the minority shareholders
against abuses by the majority. Western Institute of
Technology, Inc. v. Salas, 278 SCRA 216 (1997).
• Derivative action- those brought by one or more
stockholders/members in the name and on behalf of the
corporation to redress wrongs committed against it, or
protect/vindicate corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be sued has control
of the corporation.
Requisites of Derivative Actions:
(1) The party bringing suit should be a shareholder as of the
time of the act or transaction complained of;
(2) He has exhausted intra-corporate remedies; and
(3) The cause of action actually devolves on the
corporation, the wrongdoing or harm having been
caused to the corporation and not to the particular
stockholder bringing the suit. (JRS at 300)
(4) Acts must be brought in the name of the corporation.
(Jack)
(But wait, just make use of the Requisites provided by
the Supreme Court, in 5.14(b) of this reviewer)
Jack’s Lecture
Now the stockholders are also allowed to file a
derivative suit for redress of wrongs committed by the
management. There are four requisites for the filing of a derivative
suit. First, there must exist a cause of action which calls for this
remedy. Example, the directors are mismanaging the affairs of the
A-96
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
corporation. On the other hand, remember you have the business
judgment rule. The court will not set aside the decisions and
actions of the board unless they have acted in bad faith, illegally
or with gross negligence. Even if the decisions may have resulted
in losses, the court will not second-guess the board. So they must
have committed mismanagement, or fraudulently disposed of their
properties…Like in one case, you have two families who were
stockholders of this corporation. One family was the one
managing it and this family was siphoning the funds and
transferring it to their own bank account. A derivative suit can be
filed. Or the example given in your book is like that Republic Bank
case. Republic Bank was being investigated by the Monetary
Board, so what did it do? It got Caderno, the former governor of
Central Bank as consultant. It was obvious that the purpose was
to take advantage of his influence. So this is a case of influence
peddling and so that contract could be assailed. Or in the old
days, when you still have this import control. You cannot import
unless you have a dollar allocation. One company sold its dollar
allocation. You sell your dollar allocation, that’s illegal. You won’t
get another dollar allocation again. So that could be the basis of a
derivative suit. Then the stockholder must exhaust all remedies
within the corporation by applying for redress from the board or
from the stockholders unless this is excused. Well, the court has
said, well, if the directors are mismanaging, to appeal to them
would be useless since they are the very ones committing the
wrong you are complaining about. Or the case of San Miguel,
where you have probably around 20,000 stockholders around the
world. It would be too unrealistic and too cumbersome to require a
stockholder to appeal first to the stockholders and ask for a
stockholders’ meeting. Third, the plaintiff must have been such at
the time of the act complained of. If he was not yet a stockholder
at the time of the act complained of, he cannot sue unless they
are still being continued after he became a stockholder. That’s
why you have this case of Nora Bitong, she filed a derivative suit
against Apostol and these other people in the Philippine Daily
Inquirer but actually she was just a dummy of Juan Ponce Enrile
who was the actual owner of the shares. Now the court said that
since she was not really the owner of the shares, she could not
file a derivative suit. And moreover, the shares issued in her
name were antedated to make it appear that she became a
stockholder before the action she was questioning occurred. The
court said she cannot file a derivative suit questioning those
transactions. Then the action must be brought in the name and
for the benefit of the corporation because the cause of action you
are asserting belongs to the corporation, that’s why the plaintiff
will be the corporation. Well there was this recent case of Atty.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Hilda Lim. Where she…they had a family corporation and the
board passed a resolution saying that to pay for her legal services
to the corporation, she should be given shares of stock from the
authorized but unissued as payment for her legal services.
Another stockholder questioned that and claimed that this violated
his right to pre-emption. Well, that was his claim. Well, Hilda Lim
argued that he could not file that case because…the SC had
issued a TRO restraining him from acting in behalf of the
corporation and he was filing a derivative suit. The court said no,
the cause of action he is enforcing is his own right because he
claims that he had a right of pre-emption. So this was not a right
belonging to the corporation so this was not a derivative suit.
Now, this derivative suit is allowed precisely to enable a minority
to protect its rights against a majority. That’s why the majority
cannot dismiss a derivative suit filed by the minority. In the case
of San Miguel Corporation, the court said it is not the mere fact…
that former dean Eduardo de los Angeles owned only a few
shares of San Miguel is not a ground to dismiss the case that he
filed because the cause of action he is ascertaining pertains to
San Miguel Corporation, not to himself. Therefore the fact that he
only owned a few shares, which are insignificant, is not relevant.
What happened was that Mr. Andres Soriano III bought 2
corporations. He bought them for himself and he used the funds
of San Miguel Corporation. And since the cause of action a
stockholder is ascertaining in a derivative suit pertains to the
corporation, the proceeds of the case should accrue to the
corporation. If a court awards damages, that should go to the
corporation, not to the stockholder who filed the derivative suit.
And whatever judgment is rendered in that case will be binding on
the corporation. You cannot have another stockholder filing
another derivative suit. That’s why the court has to be careful if it
approves any compromise. And if the stockholder wins, he is
entitled to be reimbursed for the expenses and attorney’s fees he
incurred in prosecuting that case for the benefit of the corporation.
• Under the Corporation Code, where a corporation is an
injured party, its power to sue is lodged with its board of
directors or trustees. But an individual stockholder may be
permitted to institute a derivative suit in behalf of the
corporation in order to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or
when a demand upon them to file the necessary action would
be futile because they are the ones to be sued, or because
A-97
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
they hold control of the corporation. In such actions, the
corporation is the real-party-in-interest while the suing
stockholder, in behalf of the corporation, is only a nominal
party. (Filipinas Port Services, Inc. v. Go (2007)
• The whole purpose of the law authorizing a derivative suit is
to allow the stockholders/member to enforce rights which are
derivative (secondary) in nature, i.e., to enforce a corporate
cause of action. (R.N. Symaco Trading Corp. v. Santos
(2005)
• Where corporate directors have committed a breach of trust
either by their fraud, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy
the wrong, a stockholder may sue on behalf of himself and
other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong done directly to the
corporation and indirectly to the stockholders. It is a settled is
the doctrine that in a derivative suit, the corporation is the real
party in interest while the stockholder filing suit for the
corporation’s behalf is only nominal party. The corporation
should be included as a party in the suit. Hornilla v. Salunat,
405 SCRA 220 (2003).
Who may bring the suit
• Since the ones to be sued are the directors/officers of the
corporation itself, a stockholder, like petitioner Cruz, may
validly institute a derivative suit to vindicate the alleged
corporate injury, in which case Cruz is only a nominal party
while Filport is the real-party-in-interest. (Filipinas Port
Services, Inc. v. Go (2007)
• Under Section 36 of the Corporation Code, read in relation to
Section 23, where a corporation is an injured party, its power
to sue is lodged with its board of directors or trustees. An
individual stockholder is permitted to institute a derivative suit
in behalf of the corporation wherein he holds stocks in order
to protect to vindicate corporate rights, whenever officials of
the corporation refuse to sue, or are the ones to be sued, or
hold the control of the corporation. In such actions, the suing
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
stockholder is regarded as a nominal party, with the
corporation as the real party in interest. (Chua v. CA, 2004)
• In the absence of a special authority from the Board of
Directors to institute a derivative suit for and in behalf of the
corporation, the president or managing director is disqualified
by law to sue in her own name. The power to sue and be
sued in any court by a corporation even as a stockholder is
lodged in the Board that exercises its corporate powers and
not in the president or officer thereof. Bitong v. Court of
Appeals, 292 SCRA 503 (1998).
• A minority stockholder and member of the board has no
power or authority to sue on the corporation’s behalf. Nor can
we uphold this as a derivative suit, since it is required that the
minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all
other stockholders similarly situated who may wish to join him
in the suit. There is no showing that petitioner has complied
with the foregoing requisites. Tam Wing Tak v. Makasiar,
350 SCRA 475 (2001).
• The relators must be stockholders both at time of occurrence
of the events constituting the cause of action and at the time
of the filing of the derivative suit. Gochan v. Young, 354
SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911).
• A minority stockholder can file a derivative suit against the
president for diverting corporate income to his personal
accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73
(1991).
• A lawyer engaged as counsel for a corporation cannot
represent members of the same corporation’s board of
directors in a derivative suit brought against them. To do so
would be tantamount to representing conflicting interests,
which is prohibited by the Code of Professional
Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003).
Exhaustion of Intra-corporate remedies.
A-98
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• A derivative suit to question the validity of the foreclosure of
the mortgage on corporate assets can be filed without prior
demand upon the Board of Directors where the legality of the
constitution of the Board lies at the center of the issues. DBP
v. Pundogar, 218 SCRA 118 (1993).
Nature of Relief
• In a derivative suit, any monetary benefits under the decision
of the court shall pertain to the corporation and not to the
stockholders or members. (R.N. Symaco Trading Corp. v.
Santos, 2005)
• The allegations of injury to the relators can co-exist with
those pertaining to the corporation, and does not disqualify
them from filing a derivative suit on behalf of the corporation.
It merely gives rise to an additional cause of action for
damages against the erring directors. Gochan v. Young, 354
SCRA 207 (2001).
• In a derivative action, the real party in interest is the
corporation itself, not the shareholders who actually instituted
it. A suit to enforce preemptive rights in a corporation is not a
derivative suit, and therefore a temporary restraining order
enjoining a person from representing the corporation will not
bar such action, because it is instituted on behalf and for the
benefit of the shareholder, not the corporation. Lim v. Lim-
Yu, 352 SCRA 216 (2001).
• Appointment of receiver can be an ancillary remedy in a
derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966)
• Where corporate directors have committed a breach of trust
either by their frauds, ultra vires acts or negligence, and the
corporation is unable or unwilling to institute suit to remedy
the wrong, a stockholder may sue on behalf of himself and
other stockholders and for the benefit of the corporation , to
bring about a redress of the wrong done directly to the
corporation and indirectly to the stockholders. This is what is
known as a derivative suit, and settled is the doctrine that in a
derivative suit, the corporation is the real party in interest
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
while the stockholder filing for the corporation’s behalf is only
nominal party. The corporation should be included as a
party in the suit. (Hornilla v. Salunat, 2003)
•
(b) Requisites (See Rule 8, Section 1, SC Interim Rules of
Procedure for Intra-Corporate Controversies effective April 1, 2002)
Rule 8, Section 1. Derivative Action
A stockholder or member may bring an action in the name of a
corporation or association , as the case may be provided, that:
(1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and the time the action
was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he
desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit[s] is not a nuisance or harassment suit.
In case of nuisance of harassment suit, the court shall forthwith
dismiss the case.
Catindig Class Notes
Q: Is Requisite # 3 a good policy?
C: No.
5.15 Case
Francis Chua v. Ca (2004)
• A derivative action is a suit by a shareholder to enforce a
corporate cause of action; the corporation is necessary party
to the suit.
• Not every suit filed in behalf of the corporation is a derivative
suit.
A-99
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
6. BOARD OF DIRECTORS
6.1 Board of Directors (Section 23 et seq)
Sec. 23. The board of directors or trustees
Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held
by the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in
his name on the books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members
thereof. a majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
• “Board of Directors” is the body which (1) exercises all
powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and
holds all property of the corporation. Its members have been
characterized as trustees or directors clothed with a fiduciary
character. It is clearly separate and distinct from the
corporate entity itself. Hornilla v. Salunat, 405 SCRA 220
(2003).
• A corporation is an artificial being and can only exercise its
powers and transact its business through the instrumentalities
of its Board of Directors, and through its officers and agents,
when authorized by resolution or by its by-laws.
Consequently, when legal counsel was clothed with authority
through formal board resolution, his acts bind the corporation
which must be held bound the actuations of its counsel of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
record. De Liano v. Court of Appeals, 370 SCRA 349
(2001).
• “The physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a
special act of the board of directors.” Firme v. Bukal
Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside
Inc. v. Court of Appeals, 352 SCRA 334 (2001).
• Rationale for Centralized Management Doctrine. The
concentration in the board of the powers of control of
corporate business and appointment of corporate officers and
managers is necessary for efficiency in large organization.
(Filipinasl Port Service v. Go, 2007)
• Board Must Act as a Body. A corporation, through its
Board of Directors, should act in the manner and within the
formalities prescribed by its charter or by the general law.
Thus, directors must act as a body in a meeting called
pursuant, otherwise, any action taken therein may be
questioned by any objecting director or shareholder. Be that
as it may, jurisprudence tells us that an action of the board of
directors during a meeting, which was illegal for lack of
notice, may be ratified either expressly, by the action of the
directors in subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct. Lopez Realty v.
Fontecha, 247 SCRA 183 (1995).
• Effect of “Bogus” Board.The acts or contracts effected by
a bogus board would be void pursuant to Art. 1318 of Civil
Code because of the lack of “consent”. Islamic Directorate of
the Philippines v. Court of Appeals, 272 SCRA 454 (1997).
• As can be gleaned form Section 23 of Corporation Code, “it
is the board of directors or trustees which exercises almost all
the corporate powers in a corporation” (Firme v. Bukal, 2003)
Consequently under the doctrine of centralized management,
it cannot be said that the Board act as agents of the
stockholders, since their source of power is originally vested
A-100
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
by law and not delegated by the stockholders. (Page 754 of
CLV’s CLR, 2007)
• The exercise of the corporate powers of the corporation
rests in the BoD save in those instances where the
Corporation Code requires stockholders’ approval for certain
specific acts. (Great Asian Sales Center v. CA, 2002)
Consequently, there can be no valid contract that can be
enforced on behalf of the corporation over an alleged sale of
a parcel land, when there is no showing that there was
approval of the purchase by the Board of Directors, which
exercise almost all the corporate powers in a corporation.
Firme v. Bukal, 2003) (Page 754 of CLV’s CLR, 2007)
• Principle on delegation of Board Power. Under Section 23
of the Corporation Code, the power and the responsibility to
decide whether the corporation should enter into a contract is
lodged in the Board, subject to the articles of incorporation,
by laws, or relevant provisions of law. However, just as a
natural person may authorize another to do certain acts for
and on his behalf, the BoD may validly delegate some of its
functions and powers to officers, committees or agents. The
authority of such individuals to bring the corporations is
generally derived form law, corporate by-laws or authorization
form the board, either expressly or impliedly by habit, custom
or acquisence in the general course of business. (People’s
Aircargo v. CA, 1998) (Page 757 of CLV’s CLR, 2007)
Duties in General: (UP Reviewer)
DUTY VIOLATION UNDER Section 31
Obedience Willfully and knowingly vote for or assent to
patently unlawful acts of the corporation
Diligence Guilty of gross negligence or bad faith in
directing the affairs of the corporation
Loyalty Acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees
Director Responsibilities (Corp Gov Reviewer***)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Duties of Directors
• Duty of Obedience (Section 26/31 of Corp Code)
• Duty of Diligence (Section 31 of Corp Code)
• Duty of Loyalty (Section 31 of Corp Code)
• Duty of Care
• Duty of Disclosure
• Duty of “extra care”
Specific Duties and Responsibilities of a Director (Corp Gov
Reviewer)
(SEC Code of CG)***
(1) To conduct fair business transactions with the corporation
(2) To devote time and attention necessary
(3) To act judiciously
(4) To exercise judgment
(5) To have a working knowledge of the law, corp rules and
industry developments.
(6) To observe confidentiality
(7) To keep the company’s control environment
*** (SEC Code of CG is applicable only to __________)
(a) Authority (Section 24)
Sec. 24. Election of directors or trustees
At all elections of directors or trustees, there must be present, either
in person or by representative authorized to act by written proxy, the
owners of a majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. The election
must be by ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote shall have
the right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or where the by-laws are silent, at the
time of the election; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he
may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same principle
A-101
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

among as many candidates as he shall see fit: Provided, That the

total number of votes cast by him shall not exceed the number of
shares owned by him as shown in the books of the corporation
multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws, members of
corporations which have no capital stock may cast as many votes as
there are trustees to be elected but may not cast more than one vote
for one candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from
time to time but not sine die or indefinitely if, for any reason, no
election is held, or if there not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding capital stock, or
if there be no capital stock, a majority of the member entitled to vote.
• See Page 240 of De Leon for Illustration and computation.
(b) Requirements for election of director
Qualifications of Directors: (JRS p. 276)
(1) Stock Corp.-must own at least one (1) share capital
stock of the corporation in his own name;
Non-stock Corp.-must be a member.
He must be a stockholder in his own right. It must be
a legal title and not beneficial title. Example: the
stockholder-trustor in a voting trust agreement
cannot be a director because he has beneficial title;
the trustee can be elected as director because he
has legal title.
(2) A majority of the directors/trustees must be residents
of the Philippines. (Sec. 23)
(3) He must not have been convicted by final judgment
of an offense punishable by imprisonment for a
Director Independence (Corp Gov Reviewer)
period exceeding six (6) years or a violation of the
Corporation Code, committed within five (5) years
before the date of his election (Section 27)
(4) He must be of legal age.
(5) He must possess other qualifications as may be
prescribed in the by-laws of the corporation. For
example, the percentage of equity participation of
foreigners with respect to nationalized activities must
be complied with or he must not be a director in a
competing corporation.
• Peña v. CA, 193 SCRA 717 (1991) - a purported director
whose name did not appear in the General Information sheet
filed on behalf of the corporation in the SEC was deemed not
qualified to act as a member of the Board.
• Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979) - The bylaws of
the corporation can provide other qualifications and
disqualifications in addition to those provided in the
Corporation Code.
• The Board may provide for additional qualifications of a
director (SEC Code of CG)
*** (SEC Code of CG is applicable only to __________)
• It is clearly deducible from Section 23 that only natural
persons can be elected as directors or trustees and they must
be elected from among the stockholders or members.
However, a corporation which owns shares of stock or is a
corporate member in another corporation can designate by
board resolution its officer or representative to sit in the
latter’s board and thus qualifying him to be elected as director
or trustee. A contrary rule would create a situation where
there would be no board as where all the stockholders or
members are corporation or juridical persons. The
appointment must be recorded in the corporate books. (SEC
Opinion No. 05-06, June 8, 2005)
• It is vitally important that a number of board be independent
from management (SEC Code of CG, Section II)***

I sweat, I bleed, I soar… A-102

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• Listed and public companies shall have at least 2
independent directors or 20% of the board which ever is
lesser. (SRC Section 38)***
• Independent director shall mean a person other than an
officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with
the corporation, which would intervene with the exercise of
independent judgment in carrying out the responsibility of a
director. (SRC Section 38)***
Degrees of Removal (Corp Gov Reviewer)
• Not related by blood or marriage to the controlling
shareholder
• Not related as a fiend or social relation of the controlling
shareholder
• Not a supplier nor engaged in any business transaction with
the company
• Does not derive an income as a board director that
constitutes the majority of his or her income. (see SRC Rule
38.1)***
(i) Qualifying share (Section 24)
• A director must own at least one share of stock. Peña v. CA,
193 SCRA 717 (1991); Detective & Protective Bureau, Inc. v.
Cloribel, 26 SCRA 255 (1969).
• Beneficial ownership under voting trust arrangement no
longer qualifies (Lee v. CA, 205 SCRA 752 [1992]).
(ii) Residence (Section 24)
• A majority of the directors/trustees must be residents of the
Philippines. (Sec. 23)
(iii) Nationality
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• There is no citizenship requirement demanded of the
members of BoD.
(1) In corporations not organized under the Code, citizenship
requirements are established.
o Thus, in case of domestic banks, the General
Banking Act requires that at least two-thirds of the
members of the BoD must be citizens of the
Philippines. (Section 13 of RA No. 337).
o For rural banks, registered investment companies
and private development banks, all the members of
the BoD must be citizens of the Philippines. (Section
4 of RA 720, as amended by RA 1097; Section 4 of
RA 4093)
(2) Under the Constitution, aliens may not be elected as directors
of corporation engaged in business or industries which are
totally or partially nationalized business or industries.
(iv) Disqualifications (Section 27)
Sec. 27. Disqualification of directors, trustees or officers
No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer
of any corporation.
Disqualifications:
Corporation Code
• must not have been convicted of a crime punishable by
imprisonment of exceeding six (6) years
• must not have committed any violation of the Corporation
code within five (5) years prior to his election
General Banking Law of 2000
• Except in rural banks, no appointive or elective public official,
whether fulltime or part-time shall at the same time serve as
officer of any private bank, save in cases where such service
is incident to financial assistance provided by the government
or GOCCs to the bank or unless otherwise provided under
A-103
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
existing laws
SEC Code of CG***
(a) Any person who has been finally convicted by a competent
judicial or administrative body of the following crimes:
(i) Involving purchase or sale of securities;
(ii) Arising out of the person’s conduct as an underwriter,
broker, dealer, investment adviser, principal distributor.
Mutual fund dealer, principal distributor, mutual fund
dealer, futures commission merchant, commodity trading
advisor, floor broker; and
(iii) Arising out of his relationship with a bank, quasi-bank,
trust company, investment house or as an affiliated
person of any one of them
(b) Any person who, by reason of any misconduct, is
permanently or temporarily enjoined by order, judgment or
decree by the SEC or any court or other administrative body
from:
(i) acting as underwriter, broker, dealer, investment adviser,
principal distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or a
floor broker;
(ii) acting as a director or officer of a bank, quasi-bank, trust
company, investment house, investment company or an
affiliated person of any of them;
(iii) engaging in or continuing any conduct or practice in
connection with any such activity or willfully violating
laws governing securities, and banking activities (but
also includes when covered by an effective interim
order); such person is also disqualified when he is
currently subject to an effective order of a self-regulatory
organization suspending or expelling him from
membership or participation or from associating with a
member or participant of the organization
(c) Any person finally convicted judicially or administratively of an
offense involving moral turpitude, fraud, embezzlement,
theft, estafa, counterfeiting, misappropriation, forgery,
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
bribery, false oath, perjury or other fraudulent act of
transgressions.
(d) Any person finally found by SEC or a court or other
administrative body to have willfully violated, or willfully
aided, abetted, counseled, induced or procured the violation
of, any provision of the Securities and Regulation Code, or
any other law administered by SEC or Corporation Code, or
any rule, regulation or order of SEC or BSP, or by a foreign
court or equivalent financial regulatory of similar acts.
(e) Any person judicially declared to be insolvent.
(f) Any person finally found guilty by a foreign court or equivalent
regulatory authority of acts, violations or misconduct similar
to any of the acts, violations or misconduct listed in
paragraphs (a) to (e) hereof.
(g) Any affiliated person who is ineligible, by reason of
paragraphs (a) to (e) hereof to serve or act in the capacities
listed in those paragraphs.
(h) Conviction by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of
Corporation Code, committed within five (5) years prior to the date of
his election or approval.
(c) How elected (Section 24)
Stockholders have the option to adopt any of the following:
(1) Straight voting- every stockholder “may vote such number
of shares for as many persons as there are directors” to be
elected;
(2) Cumulative Voting for One Candidate- a stockholder is
allowed to concentrate his votes and “give one candidate as
many votes as the number of directors to be elected
multiplied by the number of his shares shall equal”;
(3) Cumulative Voting by Distribution- a stockholder may
cumulate his shares by multiplying also the number of
directors to be elected and distribute the same among as
many candidates as he shall see fit.
A-104
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Note: Cumulative voting is not available in non-stock
corporations. (JRS)
Manner of Election:
(1) In any form; or
(2) By ballot when requested by any voting stockholder or
member;
(3) Voting may be in person or by proxy. (Page 764 of CLV’s
CLR, 2007)
Catindig Class Notes
Q: When is the BoD elected?
A: The general rule is the BoD is elected in an annual meeting except if the cause of
vacancy is due to removal or if there is no more quorum in the BoD to be able to fill in
the vacancy in which case a director may be lected in a special meeting.
Q: Can the number of the BoD be less than 5?
A: Yep.
C: According to the SEC, there can be rounding up. I think there should be no
rounding up because election of foreign BoD is merely a privilege.
(d) How removed (Section 28)
Sec. 28. Removal of directors or trustees
Any director or trustee of a corporation may be removed from office
by a vote of the stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the intention
to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal
of directors or trustees, or any of them, must be called by the
secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary,
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
the call for the meeting may be addressed directly to the stockholders
or members by any stockholder or member of the corporation signing
the demand. Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by
publication or by written notice prescribed in this Code. Removal may
be with or without cause: Provided, That removal without cause may
not be used to deprive minority stockholders or members of the right
of representation to which they may be entitled under Section 24 of
this Code.
Requisites for Removal: (Page 278 of JRS)
(1) It must be take place either at a regular meeting or special
meeting of the stockholders or members called for the
purpose;
(2) There must be previous notice to the stockholders or
members of the intention to remove;
(3) The removal must be by a vote of the stockholders
representing 2/3 of Outstanding Capital Stock or 2/3
members.
(4) The director may be removed with or without cause unless he
was elected by the minority, in which case, it is required that
there is cause for removal. (Section 28)
Catindig Class Notes
Q: Can directors be removed at anytime?
A: Yes if with cause and even without cause if the director does not
represent the minority…
Q: Can the SH who owns 40% and has 2 nominees get rid of the 2
nominees without action from the Board?
A: Yes, because of agency.
Q: How?
A: Cause the shares to be transferred.
Q: Are directors entitled to compensation?
A: General rule is they are not entitled to compensation except when
provided by bylaw or by a vote of SHs representing majority of OCS.
(e) How vacancy filled (Section 29)
Sec. 29. Vacancies in the office of director or trustee
Any vacancy occurring in the board of directors or trustees other than
A-105
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term of his
predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in
the number of directors or trustees shall be filled only by an election
at a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the
meeting
Filling of vacancies in the Board: (Page 279 of JRS)
(1) By stockholders or members – if vacancy results because of:
(i) removal;
(ii) expirations of term;
(iii) the ground is other than removal or expiration of term
(e.g., death, resignation, abandonment) where the
remaining directors do not constitute a quorum;
(iv) increase in the number of directors.
(2) By board if remaining directors constitute a quorum—case
not reserved to stockholders or members.
(f) How compensated (Section 30)
Sec. 30. Compensation of directors
In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as
such directors, except for reasonable per diems: Provided, however,
That any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding
year.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Director Compensation
• Corp Code: Section 30
• Compensation must be sufficient to attract and retain
directors needed to run the company successfully. (SEC
Code of CG)***
• Corporations may establish a formal and transparent
procedure for developing a policy on executive remuneration
and for fixing the remuneration packages of individual
directors, if any. (SEC Code of CG)***
• No director should be involved in deciding his or her own
remuneration (SEC Code of CG)***
• Compensation may be linked with corporation and individual
performance.
(g) Matters requiring Board of Directors’ action
• As can be gleaned from Section 23 of Corporation Code, “it
is the board of directors or trustees which exercises almost all
the corporate powers in a corporation” (Firme v. Bukal, 2003)
(h) Liability
(i) In General (Section 31)
Sec. 31. Liability of directors, trustees or officers
Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation.
A-106
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
A director is liable if he:
(1) Willfully and knowingly vote for and assent to patently
unlawful, acts of the corporation;
(2) Is guilty of gross negligence or bad faith in directing the
affairs of the corporation; or
(3) Will acquire any personal or pecuniary interest in conflict of
duty. (Secs 31 and 34)
(ii) Business Judgment rule
• BJR: Unless otherwise provided in the Code, all corporate
powers and prerogatives are vested directly in the BoD.
Consequently, the rule has two consequences:
(1) The resolution, contracts, and transactions of the
Board, cannot be overturned or set aside by the
stockholders or members and not even by the courts
under the principle that business of the corporation
has been left to the hands of the Board; and
(2) Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the
exercise of their business judgment.
(iii) Doctrine of corporate opportunity
Exceptions:
(a) When the Corporation Code expressly
provides otherwise;
(b) When the Directors or officers acted
with fraud, gross negligence or in bad
faith; and
(c) When Directors or officers act against
the corporation in conflict of interest
situation. (Page 759 of CLV’s CLR,
2007)
• No court can, as an integral part of resolving the issues
between squabbling stockholders, order the corporation to
undertake certain corporate acts, since it would be in violation
of the business judgment rule. Ong Yong v. Tiu, 401 SCRA
1 (2003).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• Directors and officers who purport to act for the corporation,
keep within the lawful scope of their authority and act in good
faith, do not become liable, whether civilly or otherwise, for
the consequences of their acts, which are properly attributed
to the corporation alone. Benguet Electric Cooperative, Inc.
v. NLRC, 209 SCRA 55 (1992).
• See also Page 774 of CLV’s CLR, 2007
UP Class Notes
Reason for this tile is that nobody would want to be a director if he is
liable for a wrong decision. Not liable for mistakes and errors provided
they acted in good faith and with due care and prudence. (UP-Elective
Class Reviewer at 36)
Catindig Class Notes-Ateneo
Q: What matters require BoD action? What are the exceptions?
A: All corporate powers except such delegated to Executive
Committee, SPAs etc.
Q: Are directors liable for wrong decision resulting to losses to the
corporation?
A: No unless…
• If there is presented to a corporate officer or director a
business opportunity which:
(a) Corporation is financially able to undertake;
(b) From its nature, is in line with corporation’s business
and is of practically advantage to it; and
(c) One in which the corporation has an interest or a
reasonable expectancy.
By embracing the opportunity, the self-interest of the officer
or director will be brought into conflict with that of his
corporation. Hence, the law does not permit him to seize the
opportunity even if he will use his own funds in the venture.
• If he seizes the opportunity thereby obtaining profits to the
expense of the corporation, he must account all the profits by
refunding the same to the corporation unless the act has
been ratified by a vote of the stockholders owning or
A-107
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
representing at least two-thirds (2/3) of the outstanding
capital stock. (Page 279 of JRS’ RCL, 2006)
• Sections 31 and 34 contain the doctrine of corporate
opportunity. In case of such conflict-of-interests , and the
director acts against the good of the corporation, he shall be
accountable for the profits he obtained, even if he had risked
his own funds. (Page 783 of CLV’s CLR, 2007)
Class Notes
Pedro is a director of X Corporation which is engaged in hog
business. Pedro was sent on a convention abroad. On that trip, Pedro
knew about a new breed of hogs available abroad which is more
profitable. Pedro proposed to the BoD to buy the new breed of hogs.
After one and a half year, the BoD have not made any decision yet
because of the financial condition of the corp. Pedro told Hans about
this and Hands said they would create a new hog corp and import the
hogs. Could Pedro engage in the same business as the corporation?
Could this business import the new breed of hogs? What would be
your advice to avoid trouble?
Ans: Pedro could not engage in the business of importing the hogs
because of his position and he came across the information because
the corporation sent him to the convention.
Alternative Answer: One and a half year is a very long time. You
could tell Pedro to write a letter to the corporation and disclose that he
would engage in hog business.
(iv) Dealings with the corporation (Section 32)
Sec. 32. Dealings of directors, trustees or officers with the
corporation
A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and reasonable under
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.
Class Notes
Q: Pedro owns ABC Corp (Manpower services). He proposed to
supply janitors, security guards and clerks at 5% below market
charges to X Corp of which he is a director. Could X Corp. enter into
such contract?
Ans: Yes, Pedro is a self-dealing director. To ensure that the contract
is not voided, the following requirements must concur:
(1) The contract must be fair and reasonable;
(2) BoD quorum even without the presence of Pedro;
(3) Vote of Pedro is not needed for approval;
(4) If X Corp is a bank, there must be a minutes on the meeting and a
copy of the minutes must be sent to the BSP.
Note: There should also be full disclosure of the adverse interest.
Catindig: Actually, you could enter into it but risk that a BoD or
stockholder will contest it. (UP-Elective Class Reviewer at 36)
(v) Contracts between corporation with interlocking
directors (Section 33)
Sec. 33. Contracts between corporations with interlocking
directors
Except in cases of fraud, and provided the contract is fair and
reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other
the corporation or corporations is merely nominal, he shall be subject to
A-108
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
• The rule under Sec. 33 of Corporation Code allowing
annulment of contracts between corporations with interlocking
directors resulting in the prejudice to one of the corporation,
has no application to cases where fraud is alleged to have
been committed to third parties. DBP v. Court of Appeals,
363 SCRA 307 (2001).
(vi) Disloyalty (Section 34)
Sec. 34. Disloyalty of a director
Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must
account to the latter for all such profits by refunding the same, unless
his act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock.
This provision shall be applicable, notwithstanding the fact that the
director risked his own funds in the venture.
• Relate with Section 31
• Section 34 applies only to a director and not to a trustee or
officer as in the case of Section 31, and the implication is that
only a ratificatory vote of the stockholders would allow a
director who violates his duty of loyalty to keep the profits
form the venture; while for trustees or officers who violate
such duties, it is within the business judgment of the Board to
ratify the act.
The following are more common situations involving such
conflict of interest:
(1) Self-dealing director (Section 32)
(2) Fixing compensation of directors and officers (Section 30)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(3) Interlocking directors (Section 33)
(4) Seizing corporate opportunity; Disloyalty (31,34)
(5) Using inside information (SRC Sections 3.8, 23.2, 61, 71.2)
(vii) Watered Stocks (Section 65)
Sec. 65. Liability of directors for watered stocks
Any director or officer of a corporation consenting to the issuance of
stocks for a consideration less than its par or issued value or for a
consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not forthwith express
his objection in writing and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued
value of the same. (n)
Jack’s Lecture
Now under §65 [Liability of directors for watered
stocks], we’ve mentioned this before, an officer or director who
agrees to the issuance of watered stock or such officer who,
having knowledge of it, does not file with the corporate secretary
his written objection, will be liable if a stock is watered. In other
words, the stockholder paid less than the par value or the stated
value for the shares of stock and then he was issued a stock
certificate. When the corporation receives less consideration than
the par value of a par value share or the stated value if it is a no-
par value share… that is called watered stock. Because
remember, cattle is called stock. And in the old days of the wild,
wild west, when the cowboys would bring their cattle to the market
to be sold, they will make the cattle eat salt so the cattle will be
very thirsty. And then along the way, they will pass by a stream.
And so the cattle are very thirsty and so they will drink a lot of
water. So when they arrive at the market, the cattle will be very
heavy because of the water. So when the cattle is weighed by the
buyer, the cattle is heavy and he will pay the price for that weight
but what he is paying for - water. He is not getting his money’s
worth. That cattle which is full of water which is being sold for a
heavier weight – watered stock. That’s why shares of stock where
the corporation did not get its money’s worth came to be called
watered stock.
A-109
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• Watered stocks are shares issued and fully-paid when in fact
the consideration agreed to and accepted by the directors of
the corporation was something known to be much less than
the par value or issued value of the shares. (Page 882 of
CLV’s CLR, 2007)
• The term has also been defined as stocks issued by a
corporation for which it has in fact intentionally or knowingly
received or agreed to receive nothing at all from them or less
thatn their par value either in money, or in property or in
service. (Page 882 of CLV’s CLR, 2007)
• Note that the “water” in the stock refers to the difference
between the fair market value at the same time of the
issuance of the stock (not at the time of discovery of the
inadequate consideration or at the time of demand for
payment) and the par or issued value of said stock.
Subsequent in increase in the value of the property used in
paying the stock does not do away with the “water” in the
stock. The existence of such “water” is determined at the time
of the issuance of the stock. (Page 882 of CLV’s CLR, 2007)
UP Class Notes
All directors are liable for issuance of watered stocks unless the
director files a written objection with the corporate secretary.
(i) Executive Committee (Section 35)
Sec. 35. Executive committee
The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be
appointed by the board. Said committee may act, by majority vote of
all its members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a majority
vote of the board, except with respect to: (1) approval of any action
for which shareholders' approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal of by-laws or
the adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is not so
amendable or repealable; and (5) a distribution of cash dividends to
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
the shareholders.
• Excutive Committee is a “governing body” which functions as
the board itself. Thus, membership therein shall be governed
by the same law/ rules applicable to the board of directors as
provided in Section 35. (SEC Opinion, June 3, 1998)
• Section 35 recognizes an already existing corporate practice
in the Philipoines dictated by necessity owing to the growing
complexities of modern business, whereby the board of
directors delegates to an executive committee composed of
some members of the board corporate powers to assure
prompt and speedy action and solution to important matters
without the need for a board meeting, especially where such
meetings cannot be readily be held. Thus, the committee
directly manages the operations of the corporation between
meetings of the board, thereby reducing the work load of the
latter. (Page 305 of De Leon, 2006)
6.3 Cases
Lee v. CA (1992)
• Every director must own at least one share of the capital of
the corporation of which he is a director which share shall
stand in his name on the books of the corporation.
• Any director which ceases to be the owner of at least one
share of the capital stock of the corporation of which he is a
director shall thereby cease to be a director.
• A voting trust agreemen results in the separation of the
voting rights of a stockholder from his other rights such as the
right to receive dividends and other rights to which a
stockholder may be entitled until the liquidation of the
corporation.
Uichico v. NLRC (1997)
A-110
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

• In labor cases, particularly, corporate directors and officers
are solidary liable with the corporation for the termination of
employment of corporate employees done with malice or in
bad faith.
Western Institute of Technology v. Salas (1997)
• Members of the board may receive compensation, in
addition to reasonable per diems, when they render services
to the corporation in a capacity other than as
directors/trustees.
• 2 ways by which members of the board can be granted
compensation apart from reasonable per diems:
(1) When there is a provision in the by-laws fixing their
compensation; and
(2) When the stockholders representing a majority of the
outstanding capital stock at a regular or special
stockholders’ meeting agree to give it to them.
Catindig Class Notes
Q: Normally, what are the functions of the Chairman of the Board?
A: He presides over board meetings.
Q: Does he perform functions outside the context of a board meeting?
What are those functions?
A: No, except when the Board ask him to perform other functions.
6.3 Additional Material: SEC Opinion No/ 31, series of
2003, dated May 26, 2003 to Mr.Jose Oscar M. Salazar
re who would be elected director in a condominium
corporation.
SEC Opinion
Summary:
Only those persons under whose names the Condominium certificate
of Titles are issued are considered as members of the condominium
corporation.
As a general rule, members of the BoD in a condominium corporation
must be elected form the general stockholders of the said
corporation, who are comprised of unit owners.
An exception to this rule is in the case of corporate unit
owner/member of a condominium corporation. An officer or a duly
authorized agent or trustee who has been designated by the
corporate unit owner/member of the corporation as its
representative for the express purpose of qualifying him as director
may be eligible to be elected as director.

C: Western case has a failure of analysis. Chairman and Vice- SEC Opinion
Chairman performs functions related to that of the BoD hence should
not ___________. Whole Document
05-26-2003
Mr. Jose Oscar M. Salazar
Litonjua v. Eternity Corp (2006) May 26, 2003
• The general principles of agency govern the relation SEC OPINION NO. 31-03
between the corporation and its officers or agents, subject to
the articles of incorporation, by-laws, or relevant provisions of Mr. Jose Oscar M. Salazar
Bormaheco Condominium
law. Metropolitan Avenue, 1205 Makati City
• Any sale of real property of a corporation by a person
purporting to be an agent thereof but without written authority Dear Mr. Salazar,
form the corporation is null and void. This pertains to your letter dated May 19, 2003 requesting opinion on the
following queries:

I sweat, I bleed, I soar… A-111

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
1.Whether an attorney-in-fact or representative of a unit owner in a
condominium corporation qualifies as a director therein especially if such
attorney-in-fact is unanimously elected as director of the corporation;
2. Whether the surviving spouse of a deceased member of a condominium
corporation qualifies as a director therein where there were no judicial
proceedings to settle the estate of the deceased and neither was there an
extra-judicial partition awarding the unit to the surviving spouse; and,
3. What remedy/ies is/are available to prevent the aforementioned persons
from acting as director if the aforementioned persons are not qualified if the
Board of Directors/Officers of the condominium corporation continue to
recognize said persons to perform the duties of a director?"
[1] Anent your first query, please take note that in this jurisdiction, the
qualifications of directors/trustees, pursuant to the Corporation Code, are as
follows.
(1) He must own at least one (1) share of the capital stock of the
corporation in his own name, and if he ceases to own at least one
share in his own name, he automatically ceases to be a director. For
non-stock corporations, only members of the corporation can be
elected to sit in the board of trustees. (Section 23);
(2) A majority of the directors/trustees must be residents of the Philippines.
(Section 23);
(3) He must not have been convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years, or a
violation of the Corporation Code, committed within five (5) years
prior to the date of his election. (Section 27);
(4) He must not have substantial interest in a competing corporation.
(Gokongwei vs. SEC, SCRA 336);
(5) Only natural persons can be elected directors/trustees; and,
(6) Other qualifications as may be prescribed in the by-laws of the
corporation. (Section 47[5]).
From the foregoing, it is unequivocally required that board members, whether
as directors or trustees, must be elected from among the holders of stock or
from the general membership of the corporation in cases of non-stock
corporation.
Ownership in a condominium corporation is conferred only upon full payment
of the purchase price of the unit. We quote the pertinent portion of the
decision of the Supreme Court, in the case entitled Sunset View Condominium
vs. Campos, Jr. , which reads as follows:
"The private respondents, therefore, who have not fully paid the
purchase price of their units and consequently not owners of their units
are not members or shareholders of the petitioner condominium
corporation."
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Similarly, Presidential Decree No. 957 (Regulating the Sale of Subdivision
Lots and Condominiums, Providing Penalties For Violations Thereof),
provides:
"SECTION 25. Issuance of Title — The owner or developer shall
deliver the title of the lot or unit to the buyer upon full payment of the
lot or unit . . . "(emphasis supplied)
Verily, membership in a condominium corporation is evidenced by the
Certificate of Title issued upon full payment of the unit. Accordingly, only those
persons under whose names the Condominium Certificate of Titles (CCTs)
are issued are considered as members of the condominium corporation.
The foregoing is even strengthened by Section 10 of Republic Act No. 4726,
otherwise known as the Condominium Act, which provides that:
". . . Membership in a condominium corporation, regardless of whether
it is a stock corporation or non-stock corporation, shall not be
transferable separately from the condominium unit of which it is
appurtenance . . ."
Therefore, as a general rule, members of a board of directors in a
condominium corporation must be elected from the general stockholders of
the said corporation, who are comprised of unit owners. In the same light, the
by-laws cannot validly provide that even third parties or non-stockholder or
non-members of the corporation can be elected to the board of
directors/trustees. By-laws cannot prevail over the express provision of law
requiring members of the board to be stockholders or members of the
corporation.
Nevertheless, the aforementioned general rule admits of certain exceptions,
as in the case of corporate unit owner/member of a condominium corporation.
In one Opinion , the Commission stated that, "in the case of a condominium
corporation where all the members thereof are corporate members or juridical
persons, an officer or duly authorized agent or trustee who has been
designated by a corporate unit owner/member of a condominium corporation
as its representative for the express purpose of qualifying him as director, may
be eligible to be elected as director. While a corporation cannot act by itself,
being a juridical person, it can act through its officers or authorized agent or
representative who has been duly designated in a Board Resolution.
[2] Relative to your second query, this Commission previously opined that
under Articles 74 and 75 of the Family Code, spouses are given the freedom
to choose which property regime may govern them during the marriage. The
Law provides:
"Article 74.The property relations between husband and wife shall be
governed in the following order:
1. By marriage settlements executed before the marriage;
2. By the provisions of this Code; and,
3. By the local customs.
Article 75.The future spouse may, in the marriage settlements, agree upon the
regime of absolute community, conjugal partnership of gains, complete
A-112
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

separation of property, or any other regime. In the absence of marriage Very truly yours,
settlements, or when the regime agreed upon is void, the system of absolute (SGD.) VERNETTE UMALI-PACO
community of property as established in this Code shall govern." General Counsel
Thus, unless the spouses agree upon a different system of property relations,
the property relations between the husband and the wife shall be governed by
the system of absolute community of property. Assuming therefore, that the
husband and wife failed to agree on what property regime to adopt, the
condominium unit may be deemed as a community property and shall be
governed by the rules on "co-ownership" pursuant to Article 90 of the Family
Code, which provides:
"Section 90. The provisions on co-ownership shall apply to the
absolute community property between the spouses in all matters not
provided for in this Chapter." (emphasis supplied)
Accordingly, the spouses, who are co-owners of a condominium unit, shall be
recorded as one member. However, if the condominium unit is, among the
excluded properties under Section 92 of the Family Code or where the
spouses have chosen a different marriage settlement other than the system of
absolute community property, the law on co-ownership shall not apply.
Therefore, when doubtful and in order to determine true ownership of the
condominium unit, the corporation may inquire into the property regime
governing marriage.

[3] With regard your last query, it should be stressed that most modern
statutes allow the removal of directors by the shareholders/members of a
corporation, with or without cause and irrespective of tenure. Such is the
mandate contained in Section 28 of the Corporation Code when it provides
that "any director or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing two-thirds (2/3) of the
outstanding capital stock, or if a corporation be a non-stock corporation, by a
vote of two-thirds (2/3) of the members entitled to vote: . . ."
Section 23 incorporates the so-called inherent power of "amotion" by a
corporation. "Amotion" is the power to remove directors, officers and trustees
prior to the expiration of their term. The underlying reason for such provision
is that the stockholders/members shall be the ultimate masters, not the
directors to make the corporate government responsible to the owners.
Moreover, the stockholders should feel free to remove directors at anytime
that they have lost their trust and confidence in them, whether or not they can
prove cause of such loss.
Hence, the Corporation Code explicitly allows removal of directors/trustees
without cause, except a removal that would effectively deprive minority
stockholders/members of the right of representation to which they may be
entitled by virtue of the rule on cumulative voting.
However, please be advised that the foregoing cited authorities do not restrain
or preclude judicial interpretation and application of the law on the actual facts,
should the issue raised herein be litigated in the proper court.
Please be guided accordingly.

I sweat, I bleed, I soar… A-113

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
7. OFFICERS
7.1 Corporate Officers
Who are the corporate officers of a corporation?
• The Corporate Officers are:
o The President (who shall be and director)
o Treasurer (who may not be a director)
o Corporate Secretary (who shall be a resident and
citizen of the Philippines
o And such other officers as may be provided in the by-
laws. (page 283 of JRS, 2006)
• An officer’s removal is a corporate act, and if such removal
occasions an intra-corporate controversy, its nature is not
altered by the reason or wisdom, or lack thereof, with which
the Board of Directors might have in taking such action.
Perforce, the matter would come within the area of corporate
affairs and management, and such a corporate controversy
would call for SEC adjudicative expertise, not that of NLRC.
De Rossi v. NLRC, 314 SCRA 245 (1999).
• When the by-laws provide for the position of
“Superintendent/ Administrator,” it is clearly a corporate
officer position and issues of reinstatement would be within
the jurisdiction of the SEC and not the NLRC. Ongkingco v.
NLRC, 270 SCRA 613 (1997).
• When the by-laws provides that one of the powers of the
Board is “[t]o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other
officers as it may deem necessary and prescribe their powers
and duties,” then such specifically designated positions
should be considered “corporate officers”. The determination
of the rights and the concomitant liability arising from any
ouster from such positions, would be intra-corporate
controversy subject to SEC’s jurisdiction. Tabang v. NLRC,
266 SCRA 462 (1997).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
•
The fact that “Comptroller” is not mentioned in the by-laws
does not undermine the appointment to such position since
under Sec. 25 of Corporation Code, the Board of Directors is
authorized to appoint such other officers as it may deem
necessary. In this case the by-laws provided “and such other
officers as the Board of Directors may from time to time does
fit to provide for. Said officers shall be elected by majority
vote of the Board of Directors.” By-laws may and usually do
provide for such other officers, and that where a corporate
office is not specifically indicated in the roster of corporate
offices in the by-laws of a corporation, the Board of Directors
may also be empowered under the by-laws to create
additional officers as may be necessary. Nacpil v.
International Broadcasting Corp., 379 SCRA 653 (2002).
Coverage of “Corporate Officer” for purpose of determining
extent of business judgment of the Board to fire or hire:
• For purposes of determining who is a corporate “officer”
falling within the business judgment power of the Board of
Directors to determine whom to hire and to fire, it should
cover only:
(1) The officers provided by the corporation law, namely the
president, treasurer and secretary; and
(2) Those provided for in the by-laws of the corporation.
Catindig Class Notes
Q: Who are the basic set of officers?
A: President, Secretary and Treasurer
Q: Who are the by-laws officers of a corporation?
A: If the by-laws provides that the BoD may create positions and
provide for their function. The officers elected to such positions are
bylaws officers. But the by-laws should be amended to reflect the
office created.
Q: Why is the determination whether an officer is a bylaw officer or a
management officer important?
A: As regards intracorporate dispute. Bylaws officers are under the
SEC while non-by-laws officers are under the NLRC
Q: Who are management officers?
A-114
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
A: Those not mentioned in the by-laws and not elected by the BoD.
Their positions are created by the management.
UP Class Notes
How do you elect Chairman and Vice-Chairman if the bylaws does
not provide for it?
(1) By laws must give power to the BoD to create other positions and
provide for their functions;
(2) Amend the Bylaws if there is no such provision;
What to do if you want to hire a foreigner?
Working Visa and Understudy is more expensive, so you make them
officers.
Catindig: If you want get rid of your President, do not elect him as
director or take away his nominal share.
(a) Minimum set of officers (Section 25)
Sec. 25. Corporate officers, quorum
Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote by proxy at board
meetings.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(b) Qualifications (Section 25)
• The Corporate Officers are:
o The President (who shall be a director)
o Treasurer (who may not be a director)
o Corporate Secretary (who shall be a resident and
citizen of the Philippines
o And such other officers as may be provided in the by-
laws. (page 283 of JRS, 2006)
• Note: Any two (2) or more positions may be held
concurrently by the same person.
• Except: No one shall act as President and Secretary or as
President and Treasurer, at the same time.
(c) Disqualifications (Section 27)
Sec. 27. Disqualification of directors, trustees or officers
No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer
of any corporation.
7.2 Authority
Rule on Corporate Officer’s Power to Bind Corporation
• An officer’s power as an agent of the corporation must be
sought from the statute, charter, the by-laws or in a
delegation of authority to such officer, from the acts of the
board of directors formally expressed or implied from a habit
or custom of doing business. Vicente v. Geraldez, 52 SCRA
210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470
(1992).
President.
A-115
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
• People’s Aircargo v. Court of Appeals, 297 SCRA 170
(1998).
• It is the Board of Directors, not the President, that exercises
corporate powers. It must be emphasized that the basis for
agency is representation and a person dealing with an agent
is put upon inquiry and must discover upon his peril the
authority of the agent. Safic Alcan & Cie v. Imperial
Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
• A corporation may not distance itself from the acts of a
senior officer: "the dual roles of Romulo F. Sugay should not
be allowed to confuse the facts." R.F. Sugay v. Reyes, 12
SCRA 700 (1961).
• The President is considered as the corporation’s agent, and
as such, his knowledge of the repeal of a resolution in
another juridical person in which his corporation has an
interest, is ascribed to his principal under the theory of
imputed knowledge. Rovels Enterprises, Inc. v. Ocampo, 392
SCRA 176 (2002).
Corporate Secretary
• In the absence of provisions to the contrary, the corporate
secretary is the custodian of corporate records—he keeps the
stock and transfer book and makes proper and necessary
entries therein. It is his duty and obligation to register valid
transfers of stock in the books of the corporation; and in the
event he refuses to comply with such duty, the transferor-
stockholder may rightfully bring suit to compel performance.
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
• Although the corporate secretary’s duty to record transfers of
stock is ministerial, he cannot be compelled to do so when
the transferee’s title to said shares has no prima facie validity
or is uncertain. More specifically, a pledgor, prior to
foreclosure and sale, does not acquire ownership rights over
the pledged shares and thus cannot compel the corporate
secretary to record his alleged ownership of such shares on
the basis merely of the contract of pledge. Mandamus will not
issue to establish a right, but only to enforce one that is
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
already established. Lim Tay v. Court of Appeals, 293 SCRA
634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA
35 (2001).
• A sale that fails to comply with Sec. 40 of Corporation Code,
cannot be invalidated when the buyer relies upon a
Secretary’s Certificate confirming authority. A secretary’s
certificate which is regular on its face can be relied upon by a
third party who does not have to investigate the truths of the
facts contained in such certification; otherwise business
transactions of corporations would become tortuously slow
and unnecessarily hampered. Esguerra v. Court of Appeals,
267 SCRA 380 (1997).
Corporate Treasurer
• A corporate treasurer’s function have generally been
described as “to receive and keeps funds of the corporation,
and to disburse them in accordance with the authority given
him by the board or the properly authorized officers.” Unless
duly authorized, a treasurer, whose power are limited, cannot
bind the corporation in a sale of its assets, which obviously is
foreign to a corporate treasurer’s function. San Juan
Structural v. Court of Appeals, 296 SCRA 631, 645 (1998).
• A corporate treasurer whose negligence in signing a
confirmation letter for rediscounting of crossed checks,
knowing fully well that the checks were strictly endorsed for
deposit only to the payee’s account and not to be further
A-116
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
negotiated, may be personally liable for the damaged caused
the corporation. Atrium Management Corp. v. Court of
Appeals, 353 SCRA 23 (2001).
Service of Summons on Corporations
Prevailing Rule:
• Section 11, Rule 14 of the 1997 Rules of Civil Procedure
uses the term “general manager” and unlike the old provision
in the Rules of Court, it does not include the term “agent”.
Consequently, the enumeration of persons to whom
summons may be served is “restricted, limited and exclusive”
following the rule on statutory construction expressio unios
est exclusion alterius. Therefore, the earlier cases that uphold
service of summons upon a construction project manager; 13 a
corporation’s assistant manager;14 ordinary clerk of a
corporation;15 private secretary of corporate executives; 16
retained counsel;17 officials who had charge or control of the
operations of the corporation, like the assistant general
manager;18 or the corporation’s Chief Finance and
Administrative Officer;19 no longer apply since they were
decided under the old rule that allows service of summons
upon an agent20 of the corporation. E.B. Villarosa & Partners
Co., Ltd. v. Benito, 312 SCRA 65 (1999).
Catindig Class Notes
13
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
14
Gesulgon v. NLRC, 219 SCRA 561 (1993).
15
Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295
(1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988).
16
Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); also
Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999).
17
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).
18
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
19
Far Corporation v. Francisco, 146 SCRA 197 (1986).
20
Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA
86 (1982).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Q: What are the sources of the powers of officers?
A:
(1) As provided in the by-laws
(2) Those which the BoD may assign or delegate
(3) Provided by laws
(4) Those inherent in the position
(5) Customary (with respect to the corporation/industry)
(6) Incidental
(a) Actual, express or implied
• Inherent authority or power of an officer or agent is taken to
mean that authority to act and bind the corporation which the
officer has by reason of his office, although it may not be
sanctioned by express authority.
• Express authority of an officer or agent includes every
power or authority expressly conferred upon him by law and
the by-laws of the corporation.
• Implied authority of an officer or agent of a corporation
includes all such incidental authority as is necessary, usual,
and proper to effectuate the main authority expressly
conferred.
(b) Apparent or ostensible
• Apparent authority is naturally the same as and based
upon the same principle as authority by estoppel.
In the absence of an authority from the board of directors, no person,
not even the officers of the corporation, can validly bind the
corporation.
Exceptions:
(1) Doctrine of Ratification or Estoppel- Acts of contracts which are not
per se illegal can be validated. Even when the contract entered into in
behalf of the corporation is outside the usual powers of the corporate
officer, the corporation’s ratification of the contract and acceptance of
the benefits have made such contract binding upon the corporation.
Note: Ratification that would bind the corporation would have to come from
the board of directors or a properly authorized representative.
A-117
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Ratification can never be made on the part of the corporation by the
same persons who wrongfully assume the power to make the contract,
but the ratification must be by the officers as governing body having
authority to make such contract.
(2) Doctrine of Apparent Authority- If a corporation knowingly permits one
of its officers, or any other agent to act within the scope of an apparent
authority, it holds him out to the public possessing the power to do so
those acts; and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying
the agent’s authority.
Note:
Existence of apparent authority must be ascertained through: (a)
general manner in which the corporation holds out an officer or agent as
having the power to act or in, other words, the apparent authority to act in
general, with which it clothes him; or (b) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether
within or beyond of his ordinary powers.
If the corporation desires to set up the defense that the contract
was executed by one not authorized as agent, it must plead such fact.
(Ramirez Doctrine) However, once the corporation has discharged its
burden under the Ramirez Doctrine, then the burden of proof now shifts to
the contracting party to show that indeed by previous acts and actuations,
the acting officer had been clothed by the corporation with apparent authority
for the public to take such authority at face value. (Yao Ka Sin-Timely
Repudiation Doctrine)
UP Class Notes: Pedro went to bank. Ana is the manager of the bank.
Ana told Pedro that BSP required higher collateral and told him to
increase his collateral for his loan. SMC shares were given by Pedro to
Ana. Ana was about to go to Canada, and before she left, she sold
Pedro’s SMC shares. Could Pedro sue the bank?
Ans: Yes. Ana is clothed with authority as officer to act in behalf of the
bank. (UP-Elective Class Reviewer at 39)
Q: If teller? A: Agency case. (Id.)
7.3 Liability
(a) Liability in general (Section 31)
Sec. 31. Liability of directors, trustees or officers
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation.
• Generally, officers or directors under the old corporate name
bear no personal liability for acts done or contracts entered
into for the corporation, if duly authorized. Republic Planters
Bank v. Court of Appeals, 216 SCRA 738 (1992).
• Corporate officers who entered into and signed contracts on
behalf of the corporation in their official capacities cannot be
made personally liable thereunder in the absence of
stipulation to that effect, due to the personality of the
corporation being separate and distinct from the persons
composing it. Western Agro Industrial Corp. v. Court of
Appeals, 188 SCRA 709 (1990); Rustan Pulp & Paper Mills,
Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v.
Walter Bull and Co., 84 Phil. 164 (1949).
• A president cannot be held solidarily liable personally with
the corporation absent evidence of showing that he acted
maliciously or in bad faith. EPG Constructions Co. v. CA, 210
SCRA 230 (1992).
• The finding of solidary liability among the corporation, its
officers and directors would patently be baseless when the
decision contains no allegation, finding or conclusion
regarding particular acts committed by said officers and
director that show them to have been individually guilty of
A-118
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
unmistakable malice, bad faith, or ill-motive in their personal
dealings with third parties. When corporate officers and
directors are sued merely as nominal parties in their official
capacities as such, they cannot be held liable personal for the
judgment rendered against the corporation. NPC. v. Court of
Appeals, 273 SCRA 419 (1997); Emilio Cano Enterprises,
Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals,
215 SCRA 120 (1992).
• An officer-stockholder who signs in behalf of the corporation
to a fraudulent contract cannot claim the benefit of separate
juridical entity: “Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape
liability under the said contract by using the corporate entity
theory. This is one instance when the veil of corporate entity
has to be pierced to avoid injustice and inequity.” Paradise
Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).
• While the limited liability doctrine is intended to protect the
stockholder by immunizing him from personal liability for the
corporate debts, a corporate officer may nevertheless divest
himself of this protection by voluntarily binding himself to the
payment of the corporate debts. Toh v. Solid Bank Corp.,
408 SCRA 544 (2003).
• Labor. Corporate officers cannot be held personally liable
for damages on account of the employees dismissal because
the employer corporation has a personality separate and
distinct from its officers who merely acted as its agents.
Malayang Samahan ng mga Mangagagawa sa M.
Greenfields v. Ramos, 357 SCRA 77 (2001).
• Only the responsible officer of a corporation who had a hand
in illegally dismissing an employee should be held personally
liable for the corporate obligations arising from such act.
Maglutac v. NLRC, 189 SCRA 767 (1990); reiterated in
Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182
SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247
(1997); and for the separate juridical personality of a
corporation to be disregarded as to make the highest
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
corporate officer personally liable on labor claims, the
wrongdoing must be clearly and convincingly established. Del
Rosario v. NLRC, 187 SCRA 777 (1990).
• Corporate officers are not personally liable for money claims
of discharged employees unless they acted with evident
malice and bad faith in terminating their employment.
AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996);
Nicario v. NLRC, 295 SCRA 619 (1998).
• A corporation, being a juridical entity, may act only through
its directors, officers and employees and obligations incurred
by them, acting as corporate agents, are not theirs but the
direct accountabilities of the corporation they represent. Brent
Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).
• In labor cases, corporate directors and officers are solidarily
liable with the corporation for the termination of employment
of corporate employees done with malice or in bad faith. In
this case, it is undisputed that the corporate officers have a
direct hand in the illegal dismissal of the employees. They
were the one, who as high-ranking officers and directors of
the corporation, signed the Board Resolution retrenching the
employees on the feigned ground of serious business losses
that had no basis apart from an unsigned and unaudited
Profit and Loss Statement which, to repeat, had no
evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA
35 (1997).
• Since a corporation is an artificial person, it must have an
officer who can be presumed to be the employer, being the
“person acting in the interest of the employer”—the
corporation, in the technical sense only, is the employer. The
manager of the corporation falls within the meaning of an
“employer” as contemplated by the Labor code, who may be
held jointly and severally liable for the obligation of the
corporation to its dismissed employees. NYK International
Knitwear Corp. Phil. V. NLRC, 397 SCRA 607 (2003).
A-119
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(b) Dealings with the corporation (Section 32)
Sec. 32. Dealings of directors, trustees or officers with the
corporation
A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.
Catindig Class Notes
Q: Pedro owns ABC Corp (Manpower services). He proposed to
supply janitors, security guards and clerks at 10% below market
charges to X Corp of which he is a director. Could X Corp. enter into
such contract?
Ans: Yes, Pedro is a self-dealing director. To ensure that the contract
is not voided, the following requirements must concur:
(1) The contract must be fair and reasonable;
(2) BoD quorum even without the presence of Pedro;
(3) Vote of Pedro is not needed for approval;
(4) If X Corp is a bank, there must be a minutes on the meeting and a
copy of the minutes must be sent to the BSP.
Note: There should also be full disclosure of the adverse interest.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Catindig: Actually, you could enter into it but risk that a BoD or
stockholder will contest it
7.4 Cases
Tramat Mercantile v. CA (1994)
• It should only be the corporation, not the person acting for
and its behalf, that property could be made liable under the
questioned transaction.
• Personal liability of a corporate director, trustee or officer
along (although no necessarily) with the corporation may so
validly attach, as a rule, only when:
(1) He assents:
(a) to a patently unlawful act of the corporation, or
(b) for bad faith or gross negligence in directing its affairs
(c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
(2) He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable with
the corporation; or
(4) He is made, by specific provision of law to personally answer
for his corporate action.
People’s Aircargo v. CA (1998)
• Apparent authority is derived not merely from practice. Its
existence may be ascertained through:
(1) The general manner in which the corporation holds out an
officer or agent as having the power to act or, other words,
the apparent authority to act in general, with which it clothes
him; or
(2) The acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.
A-120
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

It requires presentation of evidence of similar act(s)

executed either in its favor or in favor of other parties. It is
not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the
power to bind the corporation.
• Even if a certain contract is outside the usual power of the
president, the corporation’s ratification of the same and
acceptance of benefits make it binding.
• (Private respondent should not be faulted for believing that
Punsalan’s conformity to the contract in dispute was also
binding on the corporation.
• Catindig: Quantity does not determine if there is apparent
authority. (UP-Elective Class Reviewer at 40)

Rural Bank of Milaor v. Ocfemia (2000)

• A bank is liable to innocent third parties where
representation is made in the course of its normal business
by an agent even though such agent is abusing her authority.
• Concurring opinion by J Vitug: A corporation may be held in
estoppel from denying as against innocent third persons the
authority of its officers or agents who have been clothed by it
with ostensible or apparent authority.

I sweat, I bleed, I soar… A-121

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
8. MEETINGS
8.1 Meetings of the stockholders and the Board of
Directors
(a) Kinds (Section 49)
Sec. 49. Kinds of meetings
Meetings of directors, trustees, stockholders, or members may be
regular or special. (n)
Kinds of stockholders’/members’ meeting:
(1) Regular or those held annually on a date fixed in the by-laws,
or if not fixed, on any dare in April of every year as
determined by the BoD or trustees. It is held principally for
the purpose of electing another set of directors or trustees;
or
(2) Special or those held at any time deemed necessary or as
provided in the by-laws.
Kinds of directors’/trustees’ meeting:
(1) Regular or those held by the board monthly, unless the by-
laws provide otherwise; or
(2) Special or those held by the board at any time upon the call
of the president or as provided in the by-laws.
Requisites for a valid meeting of stockholders or members:
(1) It must be held at a proper place (Section 51)
(2) It must be held at the stated date and at the appointed time or
at a reasonable time thereafter; (Section 51)
(3) It must be called by the proper person (Section 50)
(4) There must be a previous notice. (Secs 50,51)
(5) There must be a quorum (Section 52)
Requisites for board meeting:
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Under Section 25, the validity of a corporate act is predicated on the
presence of the following requisites:
(1) Meeting of the directors or trustees duly assembled as a
board, i.e., as a body in a lawful meeting;
(2) Presence of the required quorum;
(3) Decision of the majority of the quorum or, in other cases, a
majority of the entire board; and
(4) Meeting at the place, time, and manner provided in the by-
laws. (Page 266 De Leon, 2006)
Catindig Class Notes
Q: Where should SH meeting be held?
A: In the place where the principal office of the corp is located unless
where all the SHs agree to hold the meeting elsewhere.
SEC New Rule
Principal Office=Principal Place of Business
Q: Why do the SHs hold their meeting at the principal office?
A:
(1) For Convenience
(2) To prevent mischief by management.
Q: Can the SHs not meet at all?
A: No. They are required to meet for the purpose of electing the BoD.
Tip: In making by-laws, do not put specific date for the meeting. You
can place “last Friday of May” and place that if the last Friday is a
holiday, then the meeting shall be held at the next working day.
Q: What is the quorum required?
A: As what the By-laws provide. (Pede nga less than majority)
Q: Who presides?
A: Whoever is authorized by the By-laws. If the person authorized is
absent, the SH present may designate any one of them to preside.
(b) When and where held (Sections 50, 51 and 53)
Sec. 50. Regular and special meetings of stockholders or
members
Regular meetings of stockholders or members shall be held annually
on a date fixed in the by-laws, or if not so fixed, on any date in April of
every year as determined by the board of directors or trustees:
Provided, That written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks prior to the
A-122
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any
time deemed necessary or as provided in the by-laws: Provided,
however, That at least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
Whenever, for any cause, there is no person authorized to call a
meeting, the Secretaries and Exchange Commission, upon petition of
a stockholder or member on a showing of good cause therefor, may
issue an order to the petitioning stockholder or member directing him
to call a meeting of the corporation by giving proper notice required
by this Code or by the by-laws. The petitioning stockholder or
member shall preside thereat until at least a majority of the
stockholders or members present have been chosen one of their
number as presiding officer. (24, 26)
Sec. 51. Place and time of meetings of stockholders or members
Stockholders' or members' meetings, whether regular or special, shall
be held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of
the stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation
are present or duly represented at the meeting. (24 and 25)
Sec. 53. Regular and special meetings of directors or trustees
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or trustees may be held at
any time upon the call of the president or as provided in the by-laws.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the by-laws provide
otherwise. Notice of regular or special meetings stating the date, time
and place of the meeting must be sent to every director or trustee at
least one (1) day prior to the scheduled meeting, unless otherwise
provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. (n)
• See page 468 of De Leon for illustration
• If the meeting is held at an unauthorized place or without
proper notice and not all the stockholders or members are
present, those who have a right to complain may take steps
to set aside any action taken at such meetings even though
majority of the stockholders or members were present in the
absence of waiver, estoppel, or ratification. (Page 468 of De
Leon, 2006)
• The proper place of the holding of stockholders’ or members’
meeting is that provided in Section 51. This is mandatory.
(Page 467of De Leon, 2006)
Catindig Class Notes
Q: “Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
otherwise.” Is monthly mandatory?
A: No, its directory.
(c) Notice required (Sections 50 and 53)
• Notice is the writing informing the stockholders or members
of the meeting. (Page 469of De Leon, 2006)
Requisites of notice of meeting:
(1) It must be issued by one who has authority to issue it;
(2) It must be in writing;
(3) It must state the date, time and place of the meeting, unless
otherwise provided in the by-laws
(4) It must state the business to be transacted thereat;
(5) It must be sent at a certain time before the scheduled
meeting as fixed by law, unless a different period is required
by the by-laws.
A-123
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(6) Further, the notice must comply with any of the other
requirements prescribed by the law of the by-laws of the
corporation. (See Section 77, 118)
• The CALL for a meeting is exercised by the person who has
the power to call the meeting. It may consist of direction to
the secretary of the corporation to notify the stockholders or
members of the meeting.
(d) Quorum required (Sections 25 and 52)
Sec. 25. Corporate officers, quorum
Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote by proxy at board
meetings.
Sec. 52. Quorum in meetings
Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of
the outstanding capital stock or a majority of the members in the case
of non-stock corporations. (n)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• Quorum is such a number of the membership of a collective
body as is competent to transact its business or do any other
corporate act. (Page 268 of De Leon, 2006)
• See page 476 of De Leon for matters in which the law
requires minimum number of votes.
(e) Who presides (Section 54)
Sec. 54. Who shall preside at meetings
The president shall preside at all meetings of the directors or trustee
as well as of the stockholders or members, unless the by-laws
provide otherwise. (n)
(f) Who could attend and vote (Section 25 and 58)
Sec. 25. Corporate officers, quorum
Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote by proxy at board
meetings.
Sec. 58. Proxies
A-124
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in writing, signed
by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy,
it shall be valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5) years at
any one time. (n)
• In a board meeting, an abstention is presumed to be counted
as an affirmative vote insofar as it may be construed as an
acquiescence in the action of those who voted affirmatively;
but such presumption, being merely prima facie would not
hold in the face of clear evidence to the contrary. Lopez v.
Ericta, 45 SCRA 539 (1972).
• Until challenged successfully in proper proceedings, a
registered stockholder has a right to participate in any
meeting, and in the absence of fraud the action of the
stockholders’ meeting cannot be collaterally attacked on
account of such participation, even if it be shown later on that
the shares had been previously sold (but not recorded). Price
and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933).
• The sequestration of shares does not entitle the government
to exercise acts of ownership over the shares; even
sequestered shares may be voted upon by the registered
stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991).
• The right to vote sequestered shares of stock registered in
the names of private individuals or entities and alleged to
have been acquired with ill-gotten wealth shall, as a rule, be
exercised by the registered owner. The PCGG may, however,
be granted such voting right provided it can (1) show prima
facie evidence that the wealth and/or the shares are indeed
ill-gotten; and (2) demonstrate imminent danger of dissipation
of the assets, thus necessitating their continued sequestration
and voting by the government until a decision, ruling with
finality on their ownership, is promulgated by the proper court.
Nevertheless, the foregoing "two-tiered" test does not apply
when the funds that are prima facie public in character or, at
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
least, are affected with public interest. Inasmuch as the
subject UCPB shares in the present case were undisputably
acquired with coco levy funds which are public in character,
then the right to vote them shall be exercised by the PCGG.
In sum, the "public character" test, not the "two-tiered" one,
applies. Republic v. Cocofed, 372 SCRA 462 (2001).
Instances When Stockholders Entitled to Vote:
- Election of directors and trustees (Sec. 24).
- Amendment of articles of incorporation (Sec. 16).
- Investment in another business or corporation
(Secs. 36 and 42).
- Merger and consolidation (Sec. 72).
- Increase and Decrease of capital stock (Sec. 38).
- Adoption, amendment and repeal of by-laws (Sec.
48).
- Declaration of stock dividends (Sec. 43).
- Management contracts (Sec. 44).
- Fixing of consideration of no par value shares
(Sec. 62).
(g) Agenda
• There are certain matters of importance which the law
requires to be taken up at meetings of stockholders or
members called expressly for the purpose. It is, therefore,
necessary that the notice should state the purpose for which
the meeting is called.
• See page 470 of De Leon.
Catindig Class Notes
If not a regular item in the Agenda, then must specify the matter or
item in the notice
When Board Meeting is Unnecessary
A-125
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

• Unless the bylaws provide otherwise, any action by the

directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
(1) Before or after such action is taken, written consent
thereto is signed by all the directors; or
(2) All the stockholders have actual or implied knowledge of
the action and made no prompt objection thereto in
writing; or
(3) The directors are accustomed to take informal action with
the express or implied acquiescence of al the
stockholders; or
(4) All the directors have express or implied knowledge of
the action in question, and none of them makes prompt
objection thereto in writing.
Note: if a directors’ meeting is held without a proper call
or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with
the Secretary of the corporation after having knowledge
thereof. (Page 915 of CLV’s CLR, 2007)

I sweat, I bleed, I soar… A-126

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
8.2 Additional material: SEC Memo Circ. No. 15 series
2001, Nov. 20, 2001 re: Board meetings through
teleconferencing or videoconferencing
SEC MEMORANDUM CIRCULAR NO. 15-01
TO All Concerned
SUBJECT Board Meeting Through Teleconferencing or
Videoconferencing (Tele/Video Conferencing)
In relation to Section 16 of the Electronic Commerce Act (R.A. 8792) and
Section 25 of the Corporation Code of the Philippines (BP68) the following are
the guidelines for the conduct of teleconferencing and videoconferencing (i.e.
conferences or meetings through electronic medium or telecommunications
where the participants who are not physically present are located at different
local or international places) of the Board of Directors for the information and
guidance of all concerned:
1.The Secretary of the meeting shall assume the following responsibilities:
a. to safeguard the integrity of the meeting via tele/videoconferencing
b. to find good tele/videoconference equipment/facilities
c. to record the proceedings and prepare the minutes of the meeting
d. to store for safekeeping and mark the tape recording/s and/or other
electronic recording mechanism as part of the records of the corporation
2.The Secretary shall send out the notices of the meeting to all directors in
accordance with the manner of giving notice as stated in the corporate by-
laws.
3. The notice shall include the following:
a. Inquiry on whether the director will attend physically or through
tele/videoconferencing;
b. Contact number/s of the Secretary and office staff whom the director
may call to notify and state whether he shall be physically present or
attend through tele/videoconferencing;
c. Agenda of the meeting;
d. All documents to be discussed in the meeting, including attachments,
shall be numbered and duly marked by the Secretary in such a way that
all the directors, physically or electronically present, can easily follow,
refer to the documents and participate in the meeting.
4. If the director chooses tele/videoconferencing, he shall give notice of at
least five days prior to the scheduled meeting to the Secretary. The latter shall
be informed of his contact number/s. In the same way, the Secretary shall
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
inform the director concerned of the contact number/s he will call to join the
meeting. The Secretary shall keep the records of the details, and on the date
of the scheduled meeting, confirm and note such details as part of the minutes
of the meeting.
5. In the absence of an arrangement, it is presumed that the director will
physically attend the Board meeting.
6. At the start of the scheduled meeting, a roll call shall be made by the
Secretary. Every director and participant shall state, for the record, the
following:
a. Full Name
b. Location
c.For those attending through tele/videoconferencing, he shall confirm
that:
i. he can completely and clearly hear the others who can clearly hear
him at the end of the line
Ii state whether he has received the agenda and all the materials for the
meeting
iii. specify type of device used
Thereafter, the Secretary shall confirm and note the contact numbers being
used by the directors and participants not physically present. After the roll call,
the Secretary may certify the existence of a quorum.
7. All participants shall identify themselves for the record, before speaking and
must clearly hear and/or see each other in the course of the meeting. If a
person fails to identify himself, the Secretary shall quickly state the identity of
the last speaker. If the person speaking is not physically present and the
Secretary is not certain of the identity of the speaker, the Secretary must
inquire to elicit a confirmation or correction.
If a motion is objected to and there is a need to vote and divide the Board, the
Secretary should call the roll and note the vote of each director who should
identify himself.
If a statement of a director/participant in the meeting via
tele/videoconferencing is interrupted or garbled, the Secretary shall request
for a repeat or reiteration, and if need be, the Secretary shall repeat what he
heard the director/participant was saying for confirmation or correction.
8. The Secretary shall require all the directors who attended the meeting,
whether personally or through tele/videoconferencing, to sign the minutes of
the meeting to dispel all doubts on matters taken up during the meeting.
These guidelines shall take effect fifteen (15) days after publication in two (2)
newspapers of general circulation.
Mandaluyong City, Philippines.
November 20, 2001.
A-127
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

(SGD.) LILIA R. BAUTISTA

Chairperson

• It should be emphasized that participation of directors in meetings

through teleconferencing and video conferencing may be deemed
acceptable only when adequate safeguards have been accordingly
set in place. Meetings of this nature should be properly recorded
and the appropriate tapes and discs properly stored for safekeeping.
(SEC Opinion No. 26, March 22, 2003)
• In the Philippines, teleconferencing and video-conferencing
of members of the BoD of private corporations is a reality in
light of RA 8792. The SEC Memorandum Circular No. 15,
providing the guidelines to be complied with related to such
conferences. (Expertravel & Tours v. CA, 2005)

I sweat, I bleed, I soar… A-128

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
9. BOOKS AND RECORDS
9.1 What books and records must a corporation
keep? (Section 74)
Sec. 74. Books to be kept; stock transfer agent
Every corporation shall keep and carefully preserve at its principal
office a record of all business transactions and minutes of all
meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of
holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or member, the time
when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar demand, the
yeas and nays must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be
recorded in full on his demand.
The records of all business transactions of the corporation and the
minutes of any meetings shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, writing, for a copy of
excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such
director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under
Section 144 of this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of directors or trustees,
the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action under this section that
the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock
and transfer book", in which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, and by
and to whom made; and such other entries as the by-laws may
prescribe. The stock and transfer book shall be kept in the principal
office of the corporation or in the office of its stock transfer agent and
shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as
may be fixed by the Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded from performing
or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable. (51a and 32a; B. P.
No. 268.)
Jack’s Lecture
Section 74 - Books to be kept; stock transfer agent. -
Corporations are required to keep records of all business
transactions and minutes of the meetings of the stockholders and
directors and upon demand, any stockholder or director can
inspect the corporate records and obtain copies at their own
expense. So stockholders are given this right of inspection so that
they will be properly informed and will be able to exercise their
right as stockholders intelligently. The right of directors to inspect
the corporate records is broader than that of stockholders
because they are the ones involved in the management of the
corporation so they would need information to be able to make
decisions wisely. The directors and stockholders have the right to
examine the records at reasonable hours on business days. The
corporation cannot limit the right to inspect on specific days only.
If the right of inspection is denied, the officers responsible for the
withholding of the records are criminally liable under section 144
A-129
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
and will also be liable for damages. There are reasons given in
the code for not allowing inspection, but the right exists as
concurred by law; therefore, the burden is on the corporation to
show that a stockholder or director is not entitled to be allowed to
inspect the records of the corporation.
Case of Gokongwei vs. SEC
The Court said Gokongwei had the right to examine the
record of San Miguel International. San Miguel Corporation was
arguing that that is a separate corporation. But the court said it is
a wholly-owned subsidiary corporation so its capital gained from
San Miguel Corporation, and therefore Gokongwei as stockholder
of San Miguel Corporation had the right to examine the records of
San Miguel International.
What are the grounds for not allowing inspection?
1. If the person demanding to examine the records has
improperly used any information secured for prior
examination For example, a stockholder who was earlier
allowed to examine the records made use of insider trading.
So he was able to buy shares because of information that
became available to him which was not available to others.
2. If he is not acting in good faith. For example, a stockholder
who wants to get information on the business plans of the
corp. because he's a stockholder of another competing
corp., and so he will pass on the info. to that other corp. Or
for example a stockholder would want to know the formula of
Coca-Cola.
3. It is not being exercised for a legitimate purpose.
Case of Ramon Gonzales - He filed a petition for
mandamus to examine the records of certain transactions entered
into by the Philippine National Bank. He filed it as a taxpayer. His
petition was denied. So what he did was he bought one share. He
said that since he is now a stockholder, he has the right to
examine the records of those transactions which he earlier
wanted to see. The Court denied his petition because it said he
was not exercising his right of inspection properly. This right is
given to stockholders in order to protect their investment of the
corp. But that is not the situation here. He earlier tried to see the
records and when that wasn't allowed he bought one share, and
he's using that as justification for looking into the records. He
bought the one share to be able to look and pry into the records,
because he was earlier denied access to the records. So he's not
exercising the right to protect his investment.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Catindig Class Notes
Q: What are the 2 corporate books?
A: STB and Minutes Book
Q: What are the other books?
A: Those required by the Tax Code
Q: Who keeps the STB?
A: The Corporate Secretary.
Tip: If you are a corp sec, do not leave it in the corp. Keep it with you to exercise
lawyer’s lien.
What books are required to be maintained by the corporation?
(1) Books of minutes of stockholders meetings;
(2) Book of minutes of board meetings;
(3) Record or Book of all business transactions;
(4) Stock and transfer book.
What are the contents of the stock and transfer book?
(1) All stocks in the name of the stockholders alphabetically
arranged;
(2) Amount paid and unpaid on all stocks and the date of
payment of any installment;
(3) Alienation, sale or transfer of stocks;
(4) Other entries as the by-laws may prescribe;
STB
• A stock and transfer book is which records the names and
addresses of all stockholders arranged alphabetically, the
installments paid and unpaid on all stock for which
subscription has been made, and the date of payment
thereof, a statement of every alienation, sale or transfer of
stock made the date thereof and by and to whom made, and
such other entries as may be prescribed by law. A stock and
transfer book, like other corporate books and record, is not in
any sense a public record, and thus is not exclusive evidence
A-130
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
of the matters and things which ordinarily are or should be
written therein. (Lanuza v. CA, 2005)
• You buy and register STB with SEC
• What is the probative value of the stock and transfer
book? The stock and transfer book is the best evidence of
the transactions that must be entered or stated therein.
However, the entries are considered prima facie evidence
only and may be subject to proof to the contrary. (Bitong v.
CA)
9.2 Case
Torres v. CA (1997)
Who are authorized to make entries in the stock and transfer book?
• The corporate secretary is the officer who is duly authorized
to make entries on the stock and transfer book. Hence,
entries made by the Chairman or President are invalid.
(Torres Jr. v. CA)
9.3 Who may inspect corporate books and records
and what is the extent of this right? (Section 74)
Persons given right to inspect corporate books:
(1) Any director, trustee, or stockholder or member;
(2) Voting trust certificate holder;
(3) Stockholder of a sequestered company
(4) Beneficial owner of shares. (Page 621 of De Leon, 2006)
What are the requirements for the exercise of the right of
inspection?
(1) It must be exercised at reasonable hours on business days;
(2) The stockholder has not improperly used any information he
secured through any previous examination;
(3) Demand is made in good faith or for legitimate purpose
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
The right to inspect corporate books and records:
• Is exercisable through agents and representatives, otherwise
it would often be useless to the stockholder who does not
know corporate intricacies. W.G. Philpotts v. Philippine
Manufacturing Co., 40 Phil. 471 (1919).
• Cannot be denied on the ground that the director is on
unfriendly terms with the officers of the corporation whose
records are sought to be inspected. Veraguth v. Isabela
Sugar Co., 57 Phil. 266 (1932).
• Although it includes the right to make copies, does not
authorize bringing the books or records outside of corporate
premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
• Does not include the right of access to minutes until such
minutes have been written up and approved by the directors.
Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
• Cannot be limited to a period of ten days shortly prior to the
annual stockholders’ meeting, as such would be an
unreasonable restriction and violates the legal provision
granting the exercise of such right “at reasonable hours.”
Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924).
• Limitation: The only express limitations on the right of
inspection under Sec. 74 of Corporation Code are: (a) it
should be exercised at reasonable hours on business days;
(b) the person demanding the right to examine and copy
excerpts from the corporate records and minutes has not
improperly used any information secured through any
previous examination of records; and (c) the demand is made
in good faith or for a legitimate purpose. Africa v. PCGG, 205
SCRA 39 (1992).
UP CLASS NOTES
SH’s right to copy of the minutes does not come into effect until they
ask for a copy.
Financial records must be furnished to the SH: an audited financial
statements which must be audited by the auditor, signed by the BoD,
secretary and treasurer; 2. annual report- report on overall condition,
plans and programs of the corporation. The two reports can be merged
in a single document but the legal requirement is only to furnish
financial statement.
A-131
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Gokongwei v. SEC (1979)

Catindig Class Notes • A stockholder has the power to inspect the corporate books
Q: Who are allowed to inspect corporate books? of a controlled subsidiary of the mother corporation of which
A:
(1) Stockholders or members
he is the stockholder.
(2) Their Agents

Tip: If the SEC requires you to submit Minutes, only give them the
excerpts thru the Sec Certificate and not the Minutes.

9.4 What is a stock transfer agent? (Section 74)

• A stock and transfer agent is one who is engaged in the
business of registering transfers of stocks in behalf of a stock
corporation. He must be licensed by the SEC and must pay
the required fees.

9.5 What is a stockholder’s right to financial

statements and reports? (Section 75)
Sec. 75. Right to financial statements
Within ten (10) days from receipt of a written request of any
stockholder or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance sheet as of
the end of the last taxable year and a profit or loss statement for said
taxable year, showing in reasonable detail its assets and liabilities
and the result of its operations.
At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and
certified by an independent certified public accountant.

However, if the paid-up capital of the corporation is less than

P50,000.00, the financial statements may be certified under oath by
the treasurer or any responsible officer of the corporation. (n)

9.6 Case

I sweat, I bleed, I soar… A-132

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
10. MERGERS AND CONSOLIDATIONS
• Page 896 of CLV’s CLR.
• Merger is one where a corporation absorbs the other and
remains in existence whole the others are dissolved.
• Consolidation is one where a new corporation is created,
and consolidating corporations are extinguished.
• Note: Approval of the SEC is required (JRS at 308)
• A consolidation is the union of two or more existing entities
to form a new entity called the consolidated corporation. A
merger, on the other hand, is a union whereby one or more
existing corporations are absorbed by another corporation
that survives and continues the combined business. Since a
merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law
authorizing them. PNB v. Andrada Electric & Engineering Co.,
381 SCRA 244 (2002).
Jack’s Lecture
Section 76 deals with mergers and consolidations. In
merger, one corp. is absorbed by another as the surviving
corporation. In consolidation, a new corp. is formed which will
absorb two or more existing corporations. In case of merger or
consolidation, the directors of all the corporations involved must
approve a plan of merger or consolidation. They state there what
is the name of the corp., who will be the constituents, what are the
terms of the consolidation or merger. Example, when Philippine
Guaranty Company used to be an insurance company owned by
the Ayalas, it was merged with FGU Insurance Corporation.
Recently, FGU Insurance Corporation was merged with this
Mitsubishi Mitomo then changed them to BPI and S Insurance
Corporation. For example, when FGU Corp. was merged with
Phil. Guaranty, they drew up a plan of merger. They said this is
what will happen: the authorized capital stock of FGU will be
increased and stockholders of Phil. Guaranty will surrender the
shares of stock in Phil. Guaranty in return for shares of stock of
FGU. It could then probably be provided in the merger how the
directors will be distributed between the two constituent
companies and how the officers will be distributed; or regarding
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
retrenchment, for example if there are two heads of the legal
dept., one will have to go; what you will pay to those who will not
be maintained, etc.; what will be the interim arrangement while
the merger has not yet been approved by the SEC; and if for
some reason the merger is disapproved by the SEC, how will you
unwind the transaction.
The merger or consolidation will have to be approved
by majority of .the directors of the corporation involved and at
least two thirds (2/3) of the stockholders. And the merger of
consolidation will take effect upon the approval by the SEC. If it
involves a corp. engaged in a line of business regulated by
another agency like banks, insurance companies, then SEC will
refer that to the regulatory agency for comment. And upon merger
or consolidation, there will be only one surviving corporation, the
existence of the separate will cease, the surviving corp. will
acquire all the rights, portfolio of business, properties, privileges,
and powers of the constituent corporations; at the same time it will
also assume the liabilities and obligations of the absorbed
corporations. There was a case where this Associated Bank and I
think this Philman Bank which were merged. They were probably
still using the old forms. One borrower obtained a loan and the
promissory note he signed was still in the name of the bank which
was absorbed and which has ceased to exist. When he was being
sued, he invoked that as his defense. He said that the promissory
note is in the name of the absorbed bank. The one suing him, he
said, is another bank. The Court said that is the surviving bank,
and sine the two banks were merged, it is entitled to sue to
recover the payment even if the promissory note was issued in
the name of the bank which was absorbed.
10.1 What is a “constituent corporation”? A
“consolidated corporation”? (Section 76)
Sec. 76. Plan or merger of consolidation
Two or more corporations may merge into a single corporation which
shall be one of the constituent corporations or may consolidate into a
new single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to merge or
A-133
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
consolidate, hereinafter referred to as the constituent
corporations;
2. The terms of the merger or consolidation and the mode of
carrying the same into effect;
3. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of merger;
and, with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the
articles of incorporation for corporations organized under this
Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable. (n)
• A constituent corporation refers to a party to a merger or
consolidation. (UP-Elective Class Reviewer at 44)
• A consolidated corporation is the outcome of the union of
two or more existing corporation to form a new corporation.
(Id.)
• Q:What corporate approvals are required?
• A: Plan of merger or consolidation shall contain the
following:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
(3) Statement of changes, if any, in the present AoI of the
surviving corporation or the AoI of the new corp to be formed in
case of consolidation.
10.2 What corporate approvals are required? (Section
77)
Sec. 77. Stockholder's or member's approval
Upon approval by majority vote of each of the board of directors or
trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such
meetings shall be given to all stockholders or members of the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
respective corporations, at least two (2) weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall
state the purpose of the meeting and shall include a copy or a
summary of the plan of merger or consolidation. The affirmative vote
of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members in the case of
non-stock corporations shall be necessary for the approval of such
plan. Any dissenting stockholder in stock corporations may exercise
his appraisal right in accordance with the Code: Provided, That if
after the approval by the stockholders of such plan, the board of
directors decides to abandon the plan, the appraisal right shall be
extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the
respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation. (n)
• Submission of Financial Statements Requirements: For
applications of merger, the audited financial statements of the
constituent corporations (surviving and absorbed) as of the
date not earlier than 120 days prior to the date of filing of the
application and the long-form audit report for absorbed
corporation(s) are always required. Long form audit report for
the surviving corporation is required if it is insolvent. (SEC
Opinion 14, s. of 2002, 15 November 2002).
10.3 What is a plan of merger or consolidation
(Section 76)
• They state there what is the name of the corp., who will be
the constituents, what are the terms of the consolidation or
merger. (Jack)
A-134
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
10.4 What are articles of merger or consolidation
(Section 78)
Sec. 78. Articles of merger or consolidation
After the approval by the stockholders or members as required by the
preceding section, articles of merger or articles of consolidation shall
be executed by each of the constituent corporations, to be signed by
the president or vice-president and certified by the secretary or
assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in
the case of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting
for and against such plan, respectively. (n)
10.5 What are the effects of a merger
consolidation (Section 80)
Sec. 80. Effects or merger or consolidation
The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation
which, in case of merger, shall be the surviving corporation
designated in the plan of merger; and, in case of consolidation,
shall be the consolidated corporation designated in the plan of
consolidation;
2. The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and powers and shall be subject to all
the duties and liabilities of a corporation organized under this
Code;
4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and
franchises of each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever account,
including subscriptions to shares and other choses in action, and
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
all and every other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested
in such surviving or consolidated corporation without further act or
deed; and
5. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought
by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation.
The rights of creditors or liens upon the property of any of such
constituent corporations shall not be impaired by such merger or
consolidation. (n)
• Effects. (See codal or page 308 of JRS)
UP Class Notes
Due diligence work-know your husband/wife before marrying her.
or Date of effectivity of merger or consolidation is the issuance of the
certificate of merger or consolidation by the SEC.
• When the procedure for merger/consolidation prescribed
under the Corporation Code are not followed, there can be no
merger or consolidation, and corporate separateness
between the constituent corporations remains, and the
liabilities of one entity cannot be enforced against another
entity. PNB v. Andrada Electric & Engineering Co., 381
SCRA 244 (2002).
• It is settled that in the merger of two existing corporations,
one of the corporations survives and continues the business,
while the other is dissolved and all its rights, properties and
liabilities are acquired by the surviving corporation. The
surviving corporation therefore has a right to institute a
collection suit on accounts of one of one of the constituent
corporations. Babst v. Court of Appeals, 350 SCRA 341
(2001).
A-135
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
11. NON-STOCK CORPORATIONS
• Definition: A non-stock corporation is one organized for an
eleemosynary purpose and where no part of its income is
distributable to its members, trustees, or officers, subject to
the provisions on dissolution. (Page 902 of CLV’s CLR) (See
page 302 of JRS)
• A non-stock corporation may only be formed or organized for
charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic or other similar
purposes. It may not engage in undertakings such as the
investment business where profit is the main or underlying
purpose. Although the non-stock corporation may obtain
profits as an incident to its operation such profits are not to be
distributed among its members but must be used for the
furtherance of its purposes. People v. Menil, G.R. 115054-
66, 12 September 1999 [unrep.])
• The incurring of profit or losses does not determine whether
an activity is for profit or non-profit, and the courts will
consider whether dividends have been declared or its
members or that is property, effects or profit was ever used
for personal or individual gain, and not for the purpose of
carrying out the objectives of the enterprise. Manila
Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
• Non-Applicability of the Nationalization Laws. A foreigner
may be member or an officer of a non-stock corporation.
Save for the position of the Secretary, who must be a Filipino
citizen and a resident of the Philippines, the prohibition of
foreign citizens becoming officers in corporations engaged in
business does not apply to the activities of a non-stock
corporation which do not fall within the coverage of a
nationalized industry or area of business reserved by law
exclusively to Filipino citizens. (SEC Opinion No. 12, series of
2002, 21 November 2002).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Conversion of Non-Stock Corporation to Stock Corporation
• The conversion of a non-stock educational institution into a
stock corporation is not legally feasible, as it violates Sec. 87
of Corporation Code that no part of the income of a non-stock
corporation may be distributable as dividends to its members,
trustees or officers. “Thus, the Commission has previously
ruled that a non-stock corporation cannot be converted into a
stock corporation by a mere amendment of the Articles of
Incorporation. For purposes of transformation, it is
fundamental that the non-stock corporation be dissolved first
under any of the methods specified Title XIV of the
Corporation Code. Thereafter, the members may organize as
a stock corporation directed to bring profits or pecuniary gains
to themselves. (SEC Opinion dated 24 February 2003; SEC
Opinion dated 10 December 1992).
• In the event of dissolution of a non-stock corporation, its
assets shall be distributed in accordance with the rules as
provided for under Secs. 94 and 95 of Corporation Code.
Unless, it is so provided in the Articles of Incorporation or By-
Laws, the members are not entitled to any beneficial or
vested interest over the assets of the non-stock corporation.
In other words, non-stock, non-profit corporations hold their
funds in trust for the carrying out of the objectives and
purposes expressed in its charter. (SEC Opinion dated 24
February 2003; SEC Opinion dated 13 May 1992).
JACK’S LECTURE
NON-STOCK CORPORATIONS
For a corporation to be non-stock, it must have no shares of stock
and it must not be authorized to declare dividends.
The law mentions the different purposes for which a non-stock corp.
may be organized:
1. They may be organized for charitable purposes (Suspicio de San
Jose, Tahanang Walang Hagdanan).
2. A religious order can incorporate as a non-stock corp. for the
management of its properties.
A-136
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

3. Educational: many of the religious sectarian schools are action because under the by-laws, if a member wants to question his
organized as non-stock corporations (Ateneo de Manila, La suspension by the board, he must appeal to the members. He has
Salle) not exhausted the intra-corporate remedy provided by the by-laws.
So it was premature. But the SEC dismissed on the ground that it
4. Others: Professional (bar associations, accountants, engineers),
has no jurisdiction, that it should be filed in the RTC. Motion for
Cultural, Fraternal, Literary, Scientific, Social, Civic Service, or
Reconsideration in the RTC granted. Petition for prohibition by the
similar purposes ( Chambers of Commerce).
club in the CA was granted. Eventually Quisumbing just sold his
The right to vote may be limited, broadened, or denied in the share.
articles or the by-laws, but unless the right is limited, broadened or
Non-stock corporations may have more than fifteen (15) directors.
denied, each member will be entitled to vote. A member may vote by
You may even have 21. Ex. In alumni associations if you want to
proxy unless that is prohibited in the by-laws. For instance, the
broaden representation in the board. You can provide that only one
country clubs. Usually they will have different kinds of members.
third (1/3) of the directors would be elected every year so the terms
They will usually provide that whoever is the President of the Phils.
every three years would be staggered, to allow for continuity in
and the mayor of the place are honorary members, and they can
policies. But you can provide that everybody will be elected every
use the Philippines. After the honorary members, there are the
year. If you do not provide for such, then 1/3 will be elected every
regular members, and these are those who own a proprietary share.
year.
But it's expensive to run and maintain a country club. So to broaden
the base of people to whom they can collect monthly dues, they
sometimes create these associate members. These are members
who do not have a proprietary share but they will be allowed to
11.1 Distinguish non-stock corporations from stock
make use of the playing rights of one who owns a proprietary share corporations as to:
provided they pay also monthly dues. And usually the by-laws will Non-Stock Stock
provide that only those who own proprietary shares can vote. So the Purpose Eleemosynary Purposes Any legal purpose
honorary members and these associate members are given only
Distribution of Income No part of its income is Stock Corporation may
playing rights and are not allowed to vote. Voting by mail or others
distributable as dividends distribute dividends;
means like by fax may be allowed. But membership is non-
to its members, trustees,
transferrable. If somebody owns a proprietary share in a country
or officers, subject to the
club, if he dies and his share is inherited by his son, the son does
provisions of this Code on
not automatically become a member. He has to apply for
dissolution
membership. If he's disapproved, he cannot make use of the
Scope of Right to Vote No share may be deprived
facilities. If he has a reputation for not getting along with others, Each member entitled to
of voting rights except
quarrelsome, they wouldn't want to have such person as member. one vote unless limited,
those classified as
The only thing he can do to that share is that he can sell it, mortgage denied or broadened by
preferred or redeemable
it, but he cannot be a member if he's not accepted. Membership AoI or BL.
shares. (Section 6)
shall be terminated in the manner and for causes provided in the
articles or by-laws. For example, a case of loyalty to the
organization. Like for instance, a member of the Manila Yacht Club, Voting by Proxy AoI or bylaws may Voting by proxy is a right
organizes a competing regatta in Subic to compete with the regatta prohibit the voting by of a stockholder. (Section
there, so that's his loyalty. Or where a member playing golf would proxy 24)
make a game terrible for everybody: they use their temper, they
throw the club, etc. The country club could suspend him as what Voting by mail Voting by mail or other Voting by mail is not
was done in the case of Norberto Quisumbing for picking a fight with similar means may be allowed
a caddy. He sued for moral damages in the RTC, but the RTC authorized by the by-laws
dismissed it because it's an intra-corporate dispute and should be of the non-stock
filed in the SEC, which he did. The country club filed a motion to corporation with the
dismiss because they said the complaint does not state a cause of approval of and under

I sweat, I bleed, I soar… A-137

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

such conditions which satisfied.

or vested interest over the
may be prescribed by the
assets of the non-stock
SEC.
corporation unless it is so
provided in the AoI or BL.
Transferability of Non-transferable, unless In a stock corp, rights and
(SEC Opinion, Feb 23,
interest the articles of shares are transferable.
2003)
incorporation or the by- The right to vote may be
laws otherwise provide. transferred by proxy or
voting trusts. Shares of
stock are personal (a) Purposes (Section 88)
property and may be Sec. 88. Purposes
transferred by delivery of
the certificate or Non-stock corporations may be formed or organized for charitable,
certificates endorsed by religious, educational, professional, cultural, fraternal, literary,
the owner or his attorney- scientific, social, civic service, or similar purposes, like trade,
in-fact or other person industry, agricultural and like chambers, or any combination thereof,
legally authorized to make
subject to the special provisions of this Title governing particular
the transfer.
Note: No transfer shall be classes of non-stock corporations. (n)
valid, except as between
the parties, until the
• Stock corporations may be formed or organized for any
transfer is recorded in the purpose as long as it is not contrary to law. (UP-Elective
books of the corporation. Class Reviewer at 44)
(Sec 63)
Governing Board In stock corporation, the
Number: May be more
Number and Term
than 15
number of directors shall (b) Distribution of Income (Section 87)
not be less than five nor Sec. 87. Definition
Term: 3 years. more than 15. As to term.
BoD shall hold office for 1 For the purposes of this Code, a non-stock corporation is one
year until their successors where no part of its income is distributable as dividends to its
are elected and qualified. members, trustees, or officers, subject to the provisions of this Code
(Section 23) on dissolution: Provided, That any profit which a non-stock
Place of meetings Must be held in the city or corporation may obtain as an incident to its operations shall,
At any place within the
municipality where the
Philippines
principal office of the
whenever necessary or proper, be used for the furtherance of the
corporation is located, and purpose or purposes for which the corporation was organized,
if practicable in the subject to the provisions of this Title.
principal office of the
The provisions governing stock corporation, when pertinent, shall be
corporation. Note: Metro
Manila shall be considered applicable to non-stock corporations, except as may be covered by
a city of municipality. specific provisions of this Title. (n)
(Section 51)
Distribution of Assets Assets are distributed to
• Stock Corporation may distribute dividends; the BoD may
See Section 94 below declare dividends out of the unrestricted retained earnings
the stockholders of the
The members are not corporation after claims which shall be payable in cash, property or stock. (UP-
entitled to any beneficial of the creditors are Elective Class Reviewer at 44)

I sweat, I bleed, I soar… A-138

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(c) Scope of right to vote (Section 89)
Sec. 89. Right to vote
The right of the members of any class or classes to vote may be
limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or denied,
each member, regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-
laws, a member may vote by proxy in accordance with the provisions
of this Code. (n)
Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which
may be prescribed by, the Securities and Exchange Commission.
(g) Governing board number and term (Section 92)
• Stock corporation- No share may be deprived of voting
rights except those classified as preferred or redeemable
shares. (Section 6)
(d) Voting by proxy (Section 89)
• Non-stock Corp- AoI or bylaws may prohibit the voting by
proxy
• Stock Corp- Voting by proxy is a right o f a stockholder.
(Section 24)
(e) Voting by mail (Section 89)
• Non-stock corporation- Voting by mail or other similar
means may be authorized by the by-laws of the non-stock
corporation with the approval of and under such conditions
which may be prescribed by the SEC.
• Stock corp- Voting by mail is not allowed (UP-Elective
Class Reviewer at 44)
(f) Transferability of interest or membership (Section
90)
Sec. 90. Non-transferability of membership
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Membership in a non-stock corporation and all rights arising
therefrom are personal and non-transferable, unless the articles of
incorporation or the by-laws otherwise provide. (n)
• In a stock corp, rights and shares are transferable. The right
to vote may be transferred by proxy or voting trusts. Shares
of stock are personal property and may be transferred by
delivery of the certificate or certificates endorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. Note: No transfer shall be
valid, except as between the parties, until the transfer is
recorded in the books of the corporation. (Sec 63) (UP-
Elective Class Reviewer at 45)
Sec. 92. Election and term of trustees
Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of non-stock corporations, which may be
more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired
period.
No person shall be elected as trustee unless he is a member of the
corporation.
Unless otherwise provided in the articles of incorporation or the by-
laws, officers of a non-stock corporation may be directly elected by
the members. (n)
• In stock corporation, the number of directors shall not be
less than five nor more than 15. As to term. BoD shall hold
office for 1 year until their successors are elected and
qualified. (Section 23) (UP-Elective Class Reviewer at 45)
A-139
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(h) Election of officers (Section 92)
• Non-stock corp- Officers may be directly elected by the
members unless otherwise provided in the AoI or bylaws.
• Stock Corp- Only the BoD elect the corporate officers (UP-
Elective Class Reviewer at 45)
(i) Place of meetings (Section 93)
Sec. 93. Place of meetings
The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is
located: Provided, That proper notice is sent to all members
indicating the date, time and place of the meeting: and Provided,
further, That the place of meeting shall be within the Philippines. (n)
• Stock corp- Must be held in the city or municipality
where the principal office of the corporation is located,
and if practicable in the principal office of the corporation.
Note: Metro Manila shall be considered a city of
municipality. (Section 51) (UP-Elective Class Reviewer at
45)
(j) Distribution of assets in case of dissolution
(Section 94)
Sec. 94. Rules of distribution
In case dissolution of a non-stock corporation in accordance with the
provisions of this Code, its assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made
therefore;
2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of
the dissolution, shall be returned, transferred or conveyed in
accordance with such requirements;
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon a
condition requiring return, transfer or conveyance by reason of
the dissolution, shall be transferred or conveyed to one or more
corporations, societies or organizations engaged in activities in
the Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted pursuant
to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs,
if any, shall be distributed in accordance with the provisions of
the articles of incorporation or the by-laws, to the extent that the
articles of incorporation or the by-laws, determine the distributive
rights of members, or any class or classes of members, or
provide for distribution; and
5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of distribution
adopted pursuant to this Chapter. (n)
• Stock Corp- Assets are distributed to the stockholders
of the corporation after claims of the creditors are
satisfied.
11.2 Additional material: SEC Opinion letter, dated
February 24, 2003 to Ms. Benedicta Bello re
Conversion of non-stock educational institution into
a stock corporation.
SEC Opinion dated February 24, 2003
Firstly, the conversion of a non-stock educational institution into a
stock corporation is not legally feasible. Pursuant to Section 87 of
the Corporation Code, no part of the income of a non-stock
corporation may be distributable as dividends to its members,
trustees or officers. Thus, the Commission has previously ruled that
a non-stock corporation cannot be converted in to a stock corporation
by a mere amendment of the Articles of Incorporation. For purposes
A-140
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

of transformation, it is fundamental that the non-stock corporation be

dissolved first under any of the methods specified under Titled XIV of
the Corporation Code. Thereafter, the members may organize as a
stock corporation directed to bring profits or pecuniary gains to
themselves.
Secondly, in the event of dissolution of a non-stock corporation such
as your school, its assets shall be distributed in accordance with the
rules as provided for under Sections 94 and 95 of the Corporation
Code. Unless, it is so provided in the Articles of Incorporation or By-
Laws, the members are not entitled to any beneficial or vested
interest over the assets of the non-stock corporation. In other words,
non-stock, non-profit corporations hold their funds in trust for the
carrying out of the objectives and purposes expressed in its charter.

I sweat, I bleed, I soar… A-141

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
12. CLOSE CORPORATIONS
Jack’s Lecture
This is a new title, made in recognition of the fact that
the overwhelming majority of the corporations are family corps. In
many family corporations here, the set-up is such that the
husband is the president, the wife is the treasurer, but it is the
wife who is actually running the corp. The husband is just the
nominal figurehead. Ex. Tesoro Handicraft. A close corp. Has a
technical meaning in the law. For it to be a close corp., the articles
must provide that it cannot have more than 20 stockholders.
There should be restrictions on the transfer of the shares, like
usually it will be provided that if a stockholder wants to sell his
share, he must first offer it to the other stockholders. Only if they
are not willing to buy can he offer it to an outsider. Or it may also
provide that if no stockholder is willing to buy the shares, then he
must offer it to the corporation before offering to an outsider.
The corporation shall not be listed in any stock
exchange. The law says that the mere fact that a corp. is
controlled by another corp. does not make it a close corp. The
articles must contain the features mentioned in the law. But corps.
engaged in mining, oil companies, stock exchanges, banks,
insurance companies, public utilities, schools, and corps. vested
with public interest are not allowed to be close corps. Because
they're engaged in lines of business vested with public interest
and so they should be subject to regulation and close scrutiny.
The law says the articles may provide for classification of shares
and qualifications for owning them. For example, you have three
brothers who form a close corp. So they may provide:
a) we will classify these shares into class a, class b,
class c. Only the members of the family of the first brother can
own class a shares. Only members of 2 nd brother can own class b
shares, and class c shares can be owned only by members of the
3rd brother;
b) we will have nine (9) directors, and 3 will be elected
by holders of class a shares;
c) can provide for a greater quorum or voting
requirements. It can be provided that you will need three fourths
(3/4) majority to approve any action by the board, any action by
the stockholder. Why? Because each group would want to be
protected for otherwise if the two groups combine they can get
anything approved, like there would be two thirds. And so the third
group would want to be protected;
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
d) the articles may provide that if it's the stockholders
and not the board who will manage the affairs and that there is no
need for formal meetings, if the stockholders will be the directors,
then they will be subject to the same liabilities as directors.
For restrictions for the transfer of shares to be binding on third
parties, they have to appear in the articles of incorporation, in the
by-laws, and must be printed at the back of the stock certificate.
So you can just put there for example, subject to the restrictions in
article 10 of the articles of incorporation. It is up to the prospective
buyer to look into the articles to find out what are those
restrictions. The laws says that the stockholders may enter into
pre-incorporation agreement before they incorporate, and that
pre-incorporation agreement will remain binding even after they
have incorporated because that agreement will lay down the
modus vivendi after they have incorporated. Example, it could be
agreed that each family will have 3 directors, the president can
come from one family, the general manager from another family,
the treasurer from the 3rd family, and then every year they will
rotate the position. They may also agree on how the shares will
be voted. Like 3 directors may be elected only by class a shares,
3 by class b, and 3 by class c shares. And unless the by-laws
provide otherwise, action of the directors without need of a
meeting will be valid if all the directors sign a written consent. Or if
the stockholders have actual or implied knowledge but do not
object in writing. Or if the directors are used to taking informal
action, or the directors all have express or implied knowledge of
the action taken and none of them objects. The law says that in
close corps., there is right of pre-emption to call issuances of
shares even if the shares have been issued for property or
payment for past services or payment to convert debt to equity.
When you have these close corporations with everybody having a
veto power, like you are required 3/4 majority a the quorum of the
board, 3/4 majority for quorum in a stockholders meeting, you
could be paralyzed by inaction. And so the law provides for
remedies for that. The SEC can arbitrate. It can cancel or alter
any provision in the articles or by-law. They can cancel for
example the greater quorum requirement. Or they may alter,
prohibit or cancel any resolution or action of the corporation,
directors, stockholders, or officers. They may direct or prohibit the
action taken by any one of those mentioned . Or it may require
the purchase of the shares of any stockholder by the corporation
or by other stockholders even if there are no retained earnings. In
fact usually in a corporation like this, it's advisable that you put a
buy-out provision. You anticipate. Everybody has a right to veto.
You''ll be paralyzed inaction, and such is intolerable, then you'll
have to put there a buy-out provision, that in case you have this
A-142
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
continuing deadlock then a stockholder can demand to buy out
the shares of another stockholder. And you can put there a
formula on what would be the valuation, like regarding the book
value of something. Suppose they cannot agree who will buy
whom, they can provide that the one who's willing to pay the
higher price will be the one who will prevail. Or dissolving the
corporation, that will be an extreme case; granting other reliefs as
the circumstances may warrant, or appointing a provisional
director. The law says that the provisional director is supposed to
be an impartial person, an outsider who is not a stockholder or a
creditor. He will have the rights of a duly elected director. He can
vote. He's the tiebreaker.
• Concept. Convergence of ownership and management.
Superiority of contractual intent on proprietary matters
pursued in juridical vehicle. (CLV)
• The concept of a close corporation organized for the
purpose of running a family business or managing family
property has formed the backbone of Philippine
commerce and industry. Through this device, Filipino
families have been able to turn their humble, hard-earned
life savings into going concerns capable of providing
them and their families with a modicum of material
comfort and financial security as a reward for years of
hard work. A family corporation should serve as a reward
for years of hard work. A family corporation should serve
as a rallying point for family unity and prosperity, not as a
flashpoint for familial strife. It is hoped that people
reacquaint themselves with the concepts of mutual aid
and security that are the original driving forces behind the
formation of family corporations and use these tenets in
order to facilitate more civil, if not more amicable,
settlements of family corporate disputes. Gala v. Ellice
Agro-Industrial Corp., 418 SCRA 431 (2003).
• Rationale. Implementing vehicle of contractual
understanding on sharing of control, risks and benefits in
the business enterprise. (CLV) (It’s like an incorporated
partnership)
• Jack Tip: Provide for a buy-out provision with valuation.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
12.1 What are the requirements for the formation of a
close corporation? (Section 96)
Sec. 96. Definition and applicability of Title
A close corporation, within the meaning of this Code, is one whose
articles of incorporation provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock exchange
or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is
not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
Requirements for close corporations:
(1) The AoI must state that the number of stockholders shall not
exceed 20;
(2) The AoI must contain restriction on the transfer of issued
stock (which must appear in the AoI, By-laws and Certificate
of Stock)
o Restriction on the transfer must not be more onerous
than granting the existing SH or corporation the
option to purchase shares;
(3) The stocks cannot be listed in the stock exchange nor
publicly offered.
A-143
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Note:
There can be classification of There are no classification of
• The corporation is not a close corporation even if the directors into one or more BoD.
shares belong to less than twenty if not all the requisites classes.
are present. The three requisites must concur. (JRS at
318) The AoI may provide that all There are no classification of
officers of employees shall be BoD.
• A corporation shall not be deemed a close corporation elected by the SHs
when at least 2/3 of its voting stock or voting rights is Meetings No meeting of stockholders The directors or trustees shall
owned or controlled by another corporation which is not a need be called to elect not act individually nor
directors; unless the by-laws separately but as a body in a
close corporation. (UP Class Notes at 46)
provide otherwise, any action by lawful meeting.
the director of the close
12.2 What entities may not be organized as a close corporation without a meeting See Sections 50,51
shall nevertheless be deemed
corporation? (Section 96) valid if :
1. Before or after such action
The following cannot be a close corporation: is taken, written consent
(1) Mining companies; thereto is signed by all the
directors; or
(2) Oil companies;
(3) Stock exchanges; 2. All the stockholders have
(4) Banks; actual or implied
knowledge of the action
(5) Insurance companies; and make no prompt
(6) Public Utility; objection thereto in writing;
(7) Educational institutions; or
(8) Other corporation declared to be vested with public interest. 3. The directors are
accustomed to take
informal action with the
12.3 Distinguish a close corporation from a regular express or implied
corporation as to: acquiescence of all the
stockholders; or
Close Corporation Regular Corporation
Management AoI of close corporation may BoD 4. All the directors have
provide that the business of the express or implied
corporation shall be managed knowledge of the action in
by the SHs rather than by a question and none of them
board of directors; unless the makes prompt objection
context clearly requires thereto in writing
otherwise. The AoI may provide for a No share may be deprived of
Voting
classification of directors into voting rights, except preferred
The SHs shall be deemed to be SHs are separate and distinct one or more classes, each of and redeemable shares.
directors for the purpose of from directors which may be voted for and
applying the provisions of the elected solely by a particular There shall always be a
Code. class of stock. class/series of shares which

I sweat, I bleed, I soar… A-144

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
AoI may provide for greater
voting requirements in meetings
of SHs or directors than those
provided by the Code.
Quorum AoI may provide for a greater
quorum requirement in
meetings than those provided in
the Code.
Board AoI may provide for a There are no classification of
Authority classification of directors into
one or more classes, each of
whom may be voted for an
elected solely by a particular
class of stock, business of
corporation maybe managed by
the SHs rather than the BoD.
Restrictions on AOI may provide for a
transfer of classification of shares or rights
shares and the qualifications for owning
or holding the same and
restriction on their transfers as
they may be stated therein;
restrictions must appear in the
AOI and the by-laws as well as
the certificates of stock,
otherwise, the same shall not be
binding on a purchaser in good
faith; restrictions shall not be
more onerous than granting the
existing SHS or the corporation
the option to purchase the
shares of the transferring SH
with such reasonable terms,
conditions, or period stated. At
the end of the period, without
the SH or corporation exercising
the option to purchase, the
transferring SH may sell his
shares to pay third persons
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
have COMPLETE VOTING
RIGHTS
Each share shall be EQUAL
in all respects to every share
unless otherwise prvided by
AoI
For BoD, the AoI or By-laws
can provide for a greater
majority in quorum.
For stockholders, the AoI can
provide for a different
percentage in quorum.
See Section 52
BoD.
See Section 23,24
ARIS S. MANGUERA
Pre-emptive Extends to all stocks to be Limitations on the exercise of
right issued, including re-issuance the pre-emptive right:
of treasury shares, whether for 1. Such pre-emptive right
money, property, or personal shall not extend to shares to
services, or in payment of be issued on compliance with
corporate debts, unless the laws requiring stock offerings
AOI otherwise provides or minimum stock ownership
by the public.
2. Shall not extend to shares
to be issued in good faith with
the SHs approval in
exchange or in payment of
previously contracted debt.
3. Shall not take effect if
denied in the AoI or
amendment thereto.
See Section 39
Resolution of Withdrawal right Appraisal right
deadlocks Arbitration
When, as a result of such
deadlock the business and the
affairs of the corporation can no
longer be conducted to the
advantage of the SHs generally,
the SEC, upon written petition of
any SH, shall have the power to
arbitrate the dispute. (Other
remedies: appointment of a
provisional director by the SEC,
the SEC can compel the
purchase or sale of shares,
SEC can dissolve the
corporation, SEC can cancel or
alter any provision in the AOI or
by-laws; SEC can cancel, alter,
or enjoin or prohibit any act or
acts or resolution of the BOD,
SHs, or officers)
See Section 104
(a) Management (Section 97)
Sec. 97. Articles of incorporation
A-145
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each of
whom may be voted for and elected solely by a particular class
of stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide
that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of
directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders
of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
The articles of incorporation may likewise provide that all
officers or employees or that specified officers or employees
shall be elected or appointed by the stockholders, instead of by
the board of directors.
(b) Meetings (Section 101)
Sec. 101. When board meeting is unnecessary or improperly
held
Unless the by-laws provide otherwise, any action by the directors of a
close corporation without a meeting shall nevertheless be deemed
valid if:
1. Before or after such action is taken, written consent thereto is
signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action
in question and none of them makes prompt objection thereto in
writing.
If a director's meeting is held without proper call or notice, an action
taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge
thereof.
(c) Voting (Section 97)
Sec. 97. Articles of incorporation
The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each of
whom may be voted for and elected solely by a particular class
of stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
xxx
The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
(d) Quorum (Section 97)
Sec. 97. Articles of incorporation
The articles of incorporation of a close corporation may provide:
A-146
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
xxx
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
(e) Board Authority (Section 97)
Sec. 97. Articles of incorporation
xxx
The articles of incorporation of a close corporation may provide that
the business of the corporation shall be managed by the stockholders
of the corporation rather than by a board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders
of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
(f) Restrictions on transfer of shares (Section 98)
Sec. 98. Validity of restrictions on transfer of shares
Restrictions on the right to transfer shares must appear in the articles
of incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(g) Pre-emptive Right (Section 102)
Sec. 102. Pre-emptive right in close corporations
The pre-emptive right of stockholders in close corporations shall
extend to all stock to be issued, including reissuance of treasury
shares, whether for money, property or personal services, or in
payment of corporate debts, unless the articles of incorporation
provide otherwise.
(h) Resolution of deadlocks (Section 104)
Sec. 104. Deadlocks
Notwithstanding any contrary provision in the articles of incorporation
or by-laws or agreement of stockholders of a close corporation, if the
directors or stockholders are so divided respecting the management
of the corporation's business and affairs that the votes required for
any corporate action cannot be obtained, with the consequence that
the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally, the
Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make
such order as it deems appropriate, including an order: (1) canceling
or altering any provision contained in the articles of incorporation, by-
laws, or any stockholder's agreement; (2) canceling, altering or
enjoining any resolution or act of the corporation or its board of
directors, stockholders, or officers; (3) directing or prohibiting any act
of the corporation or its board of directors, stockholders, officers, or
other persons party to the action; (4) requiring the purchase at their
fair value of shares of any stockholder, either by the corporation
regardless of the availability of unrestricted retained earnings in its
books, or by the other stockholders; (5) appointing a provisional
director; (6) dissolving the corporation; or (7) granting such other
relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or
affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a
receiver of the corporation and does not have the title and powers of
A-147
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
a custodian or receiver. A provisional director shall have all the rights
and powers of a duly elected director of the corporation, including the
right to notice of and to vote at meetings of directors, until such time
as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement
between him and the corporation subject to approval of the
Commission, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional
director and the corporation.
• In case of irreconcilable disputes among the directors or
shareholders, the SEC may be asked to intervene and
the SEC may perform such action that may be necessary
under the circumstances including the appointment of a
provisional director who, as an impartial person will have
all the powers of a duly elected director (not a receiver).
(JRS at 319)
12.4 What is a provisional director? (Section 104)
• A provisional director is an impartial person who is
neither a stockholder nor a creditor of the corporation or
of any subsidiary or affiliate of the corporation, whose
further qualifications, if any maybe determined by the
SEC; he is not a receiver and does not have the title and
powers of a custodian or receiver but rather has all the
powers of a duly elected director.
• He’s a tie-breaker. (Jack)
12.5 Compare the appraisal right of a stockholder of
a regular corporation with the withdrawal right of a
stockholder of a close corporation (Section 105)
Sec. 105. Withdrawal of stockholder or dissolution
corporation
In addition and without prejudice to other rights and remedies
available to a stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said corporation to
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
purchase his shares at their fair value, which shall not be less than
their par or issued value, when the corporation has sufficient assets
in its books to cover its debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of acts of the
directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are
being misapplied or wasted.
UP Class Notes
Appraisal right in regular corporations can be opted by the dissenting
stockholder only in cases where the fundamental change in the
corporate structure or operations is involved, whereas a SH of a close
corporation may, for any reason, compel the said corporation to
purchase his shares at their par value, when the corporation has
sufficient assets in its books to cover his debts and liabilities exclusive
of capital stock. (In Appraisal Right, fair value of shares is given but in
Withdrawal Right, the fair value given cannot be less than the par or
issued value of the shares; In Appraisal Right, there must be present
unrestricted retained earnings in the books of the corporation)
12.6 Case
San Juan Structural and Steel Fabricators v. CA (1998)
• The corporation is not a close corporation even if the
shares belong to less than twenty if not all the requisites
are present.
of
A-148
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Unless otherwise provided in the articles of incorporation on the by-

13 . EDUCATIONAL CORPORATIONS
Jack’s Lecture
For educational corporations, where the trustees
should be divided into multiples of five. So you should have
five, ten, or fifteen trustees if they are organized as non-
stock corporation. And unless otherwise provided in the
articles of incorporation or by-laws, the terms of the
trustees should be five years, and every year only one fifth
(1/5) is elected, again to provide for continuity in policies.
But you can provide that they will all be elected instead for
a term of one year, so every year, everybody has to be
elected.
laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the number and term
of directors shall be governed by the provisions on stock
corporations. (169a)

13.1 Incorporation (Section 106)

Sec. 106. Incorporation
Educational corporations shall be governed by special laws and by
the general provisions of this Code. (n)

13.2 Pre-requisites to incorporation (Section 107)

Sec. 107. Pre-requisites to incorporation
Except upon favorable recommendation of the Ministry of Education
and Culture, the Securities and Exchange Commission shall not
accept or approve the articles of incorporation and by-laws of any
educational institution. (168a)

13.3 Board of Trustees (Section 108)

Sec. 108. Board of trustees
Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples
of five (5).

I sweat, I bleed, I soar… A-149

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
14. RELIGIOUS CORPORATIONS
Jack’s Lecture
There are three (3) ways by which a religious organization can
provide for the administration of its properties:
1. by forming a non-stock corporation
2. by corporation sole
3. by religious aggregate or society
Corporation sole may constitute of one person only so
the head of a religious sect would incorporate himself for the
purpose of administering the properties of a religious sect. To
incorporate what you will file with the SEC is an affidavit. The
affidavit will state that the affiant is the head of a religious
denomination or sect and would want to become a corporation
sole. and the rules of his religion allow him to incorporate as a
corporation sole and that he is charged with the administration of
its properties and in fact he will be required to submit an inventory
and the manner in which the successor will be chosen and the
place where he will hold his office.
The Roman Catholic Archbishop of Manila is a
corporation sole so if Cardinal Sin dies the new archbishop will
simply submit his appointment and he need not incorporate again
because the corporation is different from the occupant of the
position. The Iglesia ni Kristo is incorporated as a corporation
sole.
The court has held in Roman Catholic Apostolic Adm.
of Davao, Inc. v. Land Registration Commission that although the
Bishop was a foreigner, he could register a parcel of land in his
name because he is a mere administrator the property really
belongs to the faithful and since they are Filipinos they could
register the land in the administrator’s name.
Under the law if a corporation sole wants to dispose of
or mortgage real property, he has to get authorization from the
Regional Trial Court unless the rules of the religious sect allow
him to dispose of or mortgage real property and that is usually the
case.
The last is the religious aggregate or religious society. It
can incorporate for the purpose of managing its properties and
the articles would indicate that the members constitute a religious
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
order or society and that at least 2/3 of the members have agreed
to incorporate, that the rules allow them to incorporate they desire
to incorporate to manage their properties in the place where
located. The recollects are incorporated to manage their
properties, they are the single biggest bloc of stockholder of San
Miguel Corporation.
14.1 Classes of religious corporations (Section 109)
Sec. 109. Classes of religious corporations
Religious corporations may be incorporated by one or more persons.
Such corporations may be classified into corporations sole and
religious societies.
Religious corporations shall be governed by this Chapter and by the
general provisions on non-stock corporations insofar as they may be
applicable. (n)
(a) Corporation Sole
• Corporation sole is a special form of corporation
usually associated with the clergy and consists of one
person only and his successors, who are incorporated by
law to give some legal capacities and advantages;
• Nationality A corporation sole does not have any
nationality but for purposes of applying our nationalization
laws, nationality is determined not by the nationality of its
head but by the nationality of the members constituting
the sect in the Philippines even if it is headed by the
Pope. (Roman Catholic Apostolic Church v. LRC, 1957)
• Effect of Separation of Members. Members of the sect
who left and who formed a separate religious group are
not entitled to any right to vote over the properties of their
former sect. (Canete v. CA, 1989)
• Dissolution. By filing a verified declaration of
dissolution. (JRS at 323)
•
(i) Who may form and for what purpose (Section 110)
A-150
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
Sec. 110. Corporation sole
For the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect
or church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
(ii) How formed (Section 111 and Section 112)
Sec. 111. Articles of incorporation
In order to become a corporation sole, the chief archbishop, bishop,
priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities and
Exchange Commission articles of incorporation setting forth the
following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of his religious denomination, sect or church
and that he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his
becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and
properties of his religious denomination, sect or church within
his territorial jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is
required to be filled, according to the rules, regulations or
discipline of the religious denomination, sect or church to
which he belongs; and
5. The place where the principal office of the corporation sole is to
be established and located, which place must be within the
Philippines.
The articles of incorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation. (n)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Sec. 112. Submission of the articles of incorporation
The articles of incorporation must be verified, before filing, by affidavit
or affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by a copy of
the commission, certificate of election or letter of appointment of such
chief archbishop, bishop, priest, minister, rabbi or presiding elder,
duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange
Commission of the said articles of incorporation, verified by affidavit
or affirmation, and accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop, priest, minister,
rabbi or presiding elder shall become a corporation sole and all
temporalities, estate and properties of the religious denomination,
sect or church theretofore administered or managed by him as such
chief archbishop, bishop, priest, minister, rabbi or presiding elder
shall be held in trust by him as a corporation sole, for the use,
purpose, behalf and sole benefit of his religious denomination, sect or
church, including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (n)
(iii) Need for by-laws
• No need for by-laws since the business is conducted by
only one man.
(iv) Power to acquire and alienate property (Section
113)
Sec. 113. Acquisition and alienation of property
Any corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent or educational
purposes, and may receive bequests or gifts for such purposes. Such
corporation may sell or mortgage real property held by it by obtaining
an order for that purpose from the Court of First Instance of the
province where the property is situated upon proof made to the
satisfaction of the court that notice of the application for leave to sell
or mortgage has been given by publication or otherwise in such
manner and for such time as said court may have directed, and that it
is to the interest of the corporation that leave to sell or mortgage
A-151
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
should be granted. The application for leave to sell or mortgage must
be made by petition, duly verified, by the chief archbishop, bishop,
priest, minister, rabbi or presiding elder acting as corporation sole,
and may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole: Provided, That in
cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of
acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations and discipline shall control, and the
intervention of the courts shall not be necessary. (159a)
(v) Filling of vacancies (Section 114)
Sec. 114. Filling of vacancies
The successors in office of any chief archbishop, bishop, priest,
minister, rabbi or presiding elder in a corporation sole shall become
the corporation sole on their accession to office and shall be
permitted to transact business as such on the filing with the
Securities and Exchange Commission of a copy of their commission,
certificate of election, or letters of appointment, duly certified by any
notary public.
During any vacancy in the office of chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any religious denomination, sect
or church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of
the religious denomination, sect or church represented by the
corporation sole to administer the temporalities and manage the
affairs, estate and properties of the corporation sole during the
vacancy shall exercise all the powers and authority of the corporation
sole during such vacancy. (158a)
(vi) Dissolution (Section 115)
Sec. 115. Dissolution
A corporation sole may be dissolved and its affairs settled voluntarily
by submitting to the Securities and Exchange Commission a verified
declaration of dissolution.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious denomination,
sect or church;
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by the Securities
and Exchange Commission, the corporation shall cease to carry on
its operations except for the purpose of winding up its affairs. (n)
(b) Religious societies or corporations aggregate
(Section 116)
Sec. 116. Religious societies
Any religious society or religious order, or any diocese, synod, or
district organization of any religious denomination, sect or church,
unless forbidden by the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an
affirmative vote at a meeting called for the purpose of at least two-
thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and
estate by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or
religious order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious
denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their
written consent or have voted to incorporate, at a duly convened
meeting of the body;
A-152
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

provide for a term of existence of religious corporations, whether classified as

3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is
not forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or
church of which it forms a part;
a corporation sole or a corporation aggregate. As such, the law intends that
religious organizations may exist perpetually (SEC Opinion dated Dec. 10,
1981). Moreover, where the Articles of Incorporation does not provide for a
term of existence, it shall be understood that the intention is for the
corporation to exist for an indefinite period (SEC Opinion dated Oct. 23, 1995)

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

district organization desires to incorporate for the administration of
its affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the
Philippines; and
6. The names, nationalities, and residences of the trustees elected
by the religious society or religious order, or the diocese, synod, or
district organization to serve for the first year or such other period
as may be prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district organization, the
board of trustees to be not less than five (5) nor more than fifteen
(15). (160a)

14.2 Case
Long v. Basa (2001)
• Since in matters purely ecclesiastical the decisions of
the proper church tribunals are conclusive upon the civil
tribunals, then a church member who is expelled from the
membership by the church authorities, or a priest or
minister who is by them deprived of his sacred office, is
without remedy in the civil courts. Long v. Basa, 366
SCRA 113 (2001).

14.3 Additional Material: SEC Opinion No. 04-45, Nov.

28, 2004 to Ferrer and Ferrer Law Office re term of
existence of religious corporation.
SEC Opinion No. 04-45, (Nov. 28, 2004)
Re: Term of Existence of Religious Corporations

Section 116 (as well as Sec. 160 of the former Corporation Law) does not

I sweat, I bleed, I soar… A-153

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
15. DISSOLUTION
Dissolution of a corporation is the extinguishment of the
franchise of a corporation and termination of its corporate
existence.
Modes of Dissolution:
(1) Voluntary Dissolution
(2) Involuntary Dissolution
(3) Shortening of term; and
(4) Expiration of term (JRS at 311)
(5) Failure to organize and commence business within
two years from the date of issuance of certificate of
incorporation;
(6) Legislative Dissolution (CLV’s CLR at 936)
Effects of Dissolution:
(1) Transfer of Legal title to corporate property;
(2) The corporation ceases as a body corporate to continue the
business for which it was established;
(3) Continuation of a body corporation (the corporation
continues as a body corporate for 3 years for purposes of
winding up or liquidation)
(4) After the expiration of the 3 year winding up period, the
corporation ceases to exist for all purposes. (JRS at 314).
• The termination of the life of a juridical entity does not by
itself cause the extinction or diminution of the rights and
liability of such entity, since it is allowed to continue as a
juridical entity for 3 years for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property, and to
distribute its assets. Republic v. Tancinco, 394 SCRA 386
(2002).
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• A board resolution to dissolve the corporation does not
operate to so dissolve the juridical entity. For dissolution to be
effective “[t]he requirements mandated by the Corporation
Code should have been strictly complied with.” Vesagas v.
Court of Appeals, 371 SCRA 509, 516 (2002).
• A corporation cannot extend its life by amendment of its
articles of incorporation effected during the three-year
statutory period for liquidation when its original term of
existence had already expired, as the same would constitute
new business. Alhambra Cigar & Cigarette Manufacturing
Company, Inc. v. SEC, 24 SCRA 269 (1968).
• When the period of corporate life expires, the corporation
ceases to be a body corporate for the purpose of continuing
the business for which it was organized. PNB v. Court of First
Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992).
Jack’s Lecture
DISSOLUTION
There are different ways to dissolve a corporation one
is voluntarily and the other involuntarily, under the law there are
three provisions governing voluntary dissolution. The first one is if
no creditors are affected. In all the methods of voluntary
dissolution, you need a resolution approved by a majority of
directors and a resolution approved by at least 2/3 of the
stockholders In Section 118, where no creditors are affected the
directors and the stockholders pass the resolution dissolving the
corporation and that will be filed in the SEC for approval. In a
case where a suit was filed and the corporation said, we have
already been dissolved and they submitted a board resolution, the
SC held that it is not enough to dissolve a corporation.
The Second one, is under Section 119 where creditors
are affected. Here the board and the stockholders will approve the
dissolution but a petition will be filed signed by the majority of the
directors and verified by the president, secretary or one of the
directors which will indicate the claims of creditors. That will be
set for hearing and not less than thirty (30) days nor more than
sixty (60) days after the entry of the issuance of the order and a
copy of the order will be published once a week for three
consecutive weeks in a newspaper of general circulation and that
will also be posted for three weeks in three public places like the
A-154
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
bulletin board of a municipal hall, post office, the plaza and then
the SEC will set that for hearing and determine w/n the
corporation should be dissolved.
The third one you will just shorten the corporate life and
this is the simplest and fastest way of dissolving the corporation
voluntarily like when Ford Philippines decided to close its
subsidiary they simply amended the articles of corporation that
the corporation will exist until December 31, 1978.
The SEC will require to get a tax clearance from the
BIR and the stockholders will be required to sign an undertaking
that they will answer for the claim of the creditors to the extent of
the liquidating dividends they will receive.
Then you can have a involuntary dissolution. This could
be done by filing a quo warranto case under rule 66 of the ROC
on the ground mentioned there or a corporation can be dissolved
for certain violation of the corporation code as mentioned in the
Corporation Code or PD 902-A and also a minority stockholder
may file a petition to dissolve the corporation where the majority is
mismanaging the assets of the corporation, dissipating its assets,
and fraudulently disposing of its properties and a receiver may be
appointed in an action for involuntary dissolution.
The SC held in the leading case of El Hogar Filipino, 50
Phil. 399(1927) the first corporation organized under the
Corporation Act, the government filed a case to dissolve that
corporation and invoked 17 grounds, the SC denied the petition.
Building and loans association like banks are required to dispose
of within 5 years of any properties they foreclosed they disposed
of the properties after 6 years but they exerted their best efforts,
they hired real estate brokers, they advertised in newspapers but
they just could not find buyers, they acquired this land and
building, the SC held that it is not illegal, that they leased the
space that they did not need for their office, that is not illegal they
are maximizing their property, that they provide a provision in the
by-laws that stockholders can be compelled to surrender their
shares, to be bought out well the court said that that is void but
that is not sufficient ground to dissolve the corporation. In other
words the court is saying that you do not dissolve a
corporation for every infraction, the infraction must be
serious, because dissolution is imposing the death penalty
upon the corporation.
The Court said the employees of a railroad are required
to wear uniform indicating their positions in their nameplate, now
tell me if one employee did not have such a nameplate you are
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
going to dissolve a corporation because that is a legal
requirement? It has to be a serious violation!
But in one case, the SC dissolved a corporation which
was engaging in banking without authorization from the monetary
board, it was accepting deposits from the public, the court
considered that as a serious violation.
When a minority stockholder files a case and asks to
dissolve the corporation, the court said that that is a harsh remedy
unless the situation is really beyond redemption you should not
impose that remedy.
The corporation has three years after it should have
been dissolved for the purpose of winding up its affairs. The SEC
has said the three year period should be counted from the time
the dissolution was approved by the SEC even if the directors and
stockholders pass a resolution dissolving the corporation that is
not effective until it has been approved by the SEC.
For three years , the corporation will continue to exist it
will no longer be a going concern but only for the purpose of
winding up that is why the SC has said that the corporation
cannot for example renew its contract of lease because it is no
longer a going concern.
During the three year period, it should devote its time
prosecuting and defending law suits, winding up its affairs
disposing its properties so they can be used to pay off its creditors
and to distribute balance to the stockholders.
There are two ways of providing for the winding up of its
affairs under the law. This is voluntary either the directors
themselves may take care of winding up the affairs of the
corporation or they may appoint a trustee like when Ford
Philippines decided to close its subsidiary here one of the last
acts of the BOD was to pass a resolution appointing Ricardo
Romulo as trustee vesting upon him legal title to all the assets of
Ford Philippines to be used to pay off its creditors and to dispose
of its properties of Ford Philippines. to distribute the balance as
liquidating dividends.
Supposed to be, this was the rule before if any case
is not finished within the three year period, the case will be abated
whether the corporation is plaintiff or whether it is defendant but
recent jurisprudence has rendered that obsolete. That rule is
applicable if it is the directors winding up the corporation. if the
corporation is under receivership, it is the receiver who may wind
up the affair of the corporation. But if it is the trustee, that will not
apply, the trust will subsist until the affairs of the corporation are
A-155
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
wound up and until any creditor can sue the trustee provided that
the applicable prescriptive period has not yet lapsed. So if his
cause of action is based on a written contract he has ten (10)
years to sue the trustee.
The Court has said that the remedy there if the three
years will end and there are still pending cases, is for the board to
appoint a trustee but more recent jurisprudence has fashioned a
practicable solution to that the lawyer handling the cases may be
considered as trustee of the corporation and therefore the cases
will not be abated but should continue.
In one case, the SC held that the directors may be
considered as trustees after three years so that they can continue
to wind up the affairs of the corporation and in effect the three
year period has become ineffectual.
15.1 What are the various methods of dissolving
corporations?
(a) Voluntary
(i) Requirements where no creditors are affected
(Section 118)
Sec. 118. Voluntary dissolution where no creditors are affected
If dissolution of a corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution
duly adopted by the affirmative vote of the stockholders owning at
least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members of a meeting to be held upon call of
the directors or trustees after publication of the notice of time, place
and object of the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal office of said
corporation is located; and if no newspaper is published in such
place, then in a newspaper of general circulation in the Philippines,
after sending such notice to each stockholder or member either by
registered mail or by personal delivery at least thirty (30) days prior to
said meeting. A copy of the resolution authorizing the dissolution
shall be certified by a majority of the board of directors or trustees
and countersigned by the secretary of the corporation. The Securities
and Exchange Commission shall thereupon issue the certificate of
dissolution. (62a)
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
• When a corporation is contemplating dissolution, it must
submit tax return on the income earned by it from the
beginning of the year up to the date of its dissolution and
pay the corresponding tax due. BPI v. Court of Appeals,
363 SCRA 840 (2001).
(ii) Requirements where creditors are affected
(Section 119)
Sec. 119. Voluntary dissolution where creditors are affected
Where the dissolution of a corporation may prejudice the rights of any
creditor, the petition for dissolution shall be filed with the Securities
and Exchange Commission. The petition shall be signed by a
majority of its board of directors or trustees or other officers having
the management of its affairs, verified by its president or secretary or
one of its directors or trustees, and shall set forth all claims and
demands against it, and that its dissolution was resolved upon by the
affirmative vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-thirds (2/3) of
the members at a meeting of its stockholders or members called for
that purpose.
If the petition is sufficient in form and substance, the Commission
shall, by an order reciting the purpose of the petition, fix a date on or
before which objections thereto may be filed by any person, which
date shall not be less than thirty (30) days nor more than sixty (60)
days after the entry of the order. Before such date, a copy of the
order shall be published at least once a week for three (3)
consecutive weeks in a newspaper of general circulation published in
the municipality or city where the principal office of the corporation is
situated, or if there be no such newspaper, then in a newspaper of
general circulation in the Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in three (3) public places in
such municipality or city.
Upon five (5) day's notice, given after the date on which the right to
file objections as fixed in the order has expired, the Commission shall
proceed to hear the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the material
A-156
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
allegations of the petition are true, it shall render judgment dissolving
the corporation and directing such disposition of its assets as justice
requires, and may appoint a receiver to collect such assets and pay
the debts of the corporation. (Rule 104, RCa)
(b) Involuntary (Section 121)
Sec. 121. Involuntary Dissolution
A corporation may be dissolved by the Securities and Exchange
Commission upon filing of a verified complaint and after proper notice
and hearing on the grounds provided by existing laws, rules and
regulations. (n)
Grounds for Involuntary Dissolution:
(1) Failure to organize and commence business within 2 years
from incorporation;
(2) Continuously inoperative for 5 years
(3) Continuance of business not feasible as found by the
management committee or rehabilitation receiver;
(4) Fraud in procuring Certificate of Registration/
(5) Serious Misrepresentation
(6) Failure to file reports (JRS at 313)
(7) Refusal to adopt or approve by laws (PD 902-A)
(8) Ultra vires- mala prohibita, but too numerous infractions,
which are persistent despite SEC warnings. (CLV’s CLR at
939)
(a) Quo Warranto (Republic v. Bisaya Land Transportation Co.,
81 SCRA 9 [1978]; Republic v. Security Credit & Acceptance
Corp., 19 SCRA 58 [1967]; Government v. El Hogar Filipino, 50
Phil. 399 [1927]).
(b) Expiration of Term
(c) Shortening of Corporate Term (Sec. 120)
UP Class Notes
Dissolution takes effect upon its approval of the SEC. However, if
the petition contains a date of dissolution earlier than the date of SEC
approval, dissolution takes effect on this date since SEC approves of it
anyway.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
(d) Non-user of Charter and Continuous Inoperation (Sec.
22)
• “Organize” involves the election of officers, providing for
the subscription and payment of the capital stock, the
adoption of by-laws, and such other steps as are
necessary to endow the legal entity with the capacity to
transact the legitimate business for which the corporation
was created. “Organization” relates merely to the
systematization and orderly arrangement of the internal
and managerial affairs and organs of the corporation.
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711.
• The failure to file the by-laws does not automatically
operate to dissolve a corporation but is now considered
only a ground for such dissolution. Chung Ka Bio v.
Intermediate Appellate Court, 163 SCRA 534 (1988).
(f) Demand of Minority Stockholders for Dissolution.
Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
• Corporate dissolution due to mismanagement of majority
stockholder is too drastic a remedy, especially when the
situation can be remedied such as giving minority
stockholders a veto power to any decision. Chase v.
Buencamino, 136 SCRA 365 (1985).
(c) Shortening of corporate term (Section 120)
Sec. 120. Dissolution by shortening corporate term
A voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions
of this Code. A copy of the amended articles of incorporation shall be
submitted to the Securities and Exchange Commission in accordance
with this Code. Upon approval of the amended articles of
incorporation of the expiration of the shortened term, as the case may
be, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation. (n)
• SEC Internal rules require the following:
A-157
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(1) Notice of the dissolution to be published in a newspaper of
general circulation for 3 consecutive weeks;
(2) List of corporate creditors, with their consent to the
shortening of corporate term;
(3) Submission by majority stockholders/principal officers an
Undertaking to personally answer for any outstanding
corporate obligations of the corporation; and
(4) Latest financial statements which must not be earlier than
the date of the stockholders’ meeting approving amendment
to the articles of incorporation, and a BIR clearance on the
tax liabilities of the corporation.(SEC Opinion, July 5, 1979)
15.2 What is liquidation? (Section 122)
Sec. 122. Corporate liquidation
Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it
was established.
At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors
and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable
to any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)
Liquidation is a process by which all the assets of the
corporation are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the stockholders.
UP Class Notes
What is liquidation? Process of converting corporate assets /
properties into cash for proper distribution to persons entitled thereto.
It begins on the day after the approval of the SEC of the dissolution. In
the meantime, where a petition for dissolution has already been
submitted, but the SEC has not yet approved, the BOD may make
advances to the SHs and other persons-in-interest.
Methods of Liquidation
• Liquidation, in corporation law, connotes a winding up or
settling with creditors and debtors. It is the winding up of a
corporation so that assets are distributed to those entitled to
receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss. PVB
Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).
• There can be no doubt that under Secs. 77 and 78 of
Corporation Law, the Legislature intended to let the
shareholders have the control of the assets of the corporation
upon dissolution in winding up its affairs. The normal method
of procedure is for the directors and executive officers to have
charge of the winding up operations, though there is the
alternative method of assigning the property of the
corporation to the trustees for the benefit of its creditors and
shareholders. “While the appointment of a receiver rests
within the sound judicial discretion of the court, such
discretion must, however, always be exercised with caution
and governed by legal and equitable principles, the violation
of which will amount to its abuse, and in making such
appointment the court should take into consideration all the
A-158
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
facts and weigh the relative advantages and disadvantages of
appointing a receiver to wind up the corporate business.”
China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933)
• There is nothing in Sec. 122 which bars an action for the
recovery of the debts of the corporation against the liquidator
thereof, after the lapse of the said three-year period. “Is
immaterial that the present action was filed after the
expiration of the three years . . . for at the very least, and
assuming that judicial enforcement of taxes may not be
initiated after said three years despite the fact that actual
liquidation has not terminated and the one in charge thereof
is still holding the assets of the corporation, obviously for the
benefit of all the creditors thereof, the assessment
aforementioned, made within the three years, definitely
established the Government as a creditor of the corporation
for whom the liquidator is supposed to hold assets of the
corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418
(1972).
(a) Who may undertake the liquidation of a is authorized and empowered to convey all of its property to
corporation?
(1) The BoD;
(2) The chosen liquidator who acts as a trustee (3 year winding
up period not applicable)
(3) Creditors (acting as receiver) who petitioned for the
declaration of bankruptcy of the corporation. (3 year winding
up period not applicable.) (UP Class notes at 49)
(4) By management committee or rehabilitation receiver. (JRS at
314)
(b) For how long may the liquidation of a corporation
may be undertaken?
• Every corporation whose corporate existence has been
terminated in any manner shall nevertheless be continued as
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
a body corporate for 3 years after its dissolution. (UP Class
Notes at 49)
Jack’s Lecture
The Court has said that the remedy there if the three
years will end and there are still pending cases, is for the board to
appoint a trustee but more recent jurisprudence has fashioned a
practicable solution to that the lawyer handling the cases may be
considered as trustee of the corporation and therefore the cases
will not be abated but should continue.
In one case, the SC held that the directors may be
considered as trustees after three years so that they can continue
to wind up the affairs of the corporation and in effect the three
year period has become ineffectual.
(c) What could and should be done during the period
of liquidation?
• Prosecuting and defending suits by or against it and
enabling it to settled and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was
established; anytime during the 3 year period, the corporation
trustees for the benefit of SHs and other persons in interest.
(d) What happens if an asset cannot be distributed?
• Any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be
escheated to the city or municipality where such asset is
located. (UP Class Notes at 49)
Who are liable after dissolution and winding up?
• Although a corporate officer is not liable for corporate
obligations, such as claims for wages, however, when such
corporate officer [ceases] corporate property to apply to his
own claims against the corporation, he shall be liable to the
extent thereof to corporate liabilities, since knowing fully well
that certain creditors had similarly valid claims, he took
A-159
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

advantage of his position as general manager and applied the

corporation's assets in payment exclusively to his own claims. Reburiano v. CA (1999)
De Guzman v. NLRC, 211 SCRA 723 (1992). • The board of directors may be permitted to complete the
• If the 3-year extended life has expired without a trustee or corporate liquidation by continuing as “trustees” by legal
receiver having been designated, the Board of Directors implication.
itself, following the rationale of the decision in Gelano, may • Since the law specifically allows a trustee to manage the
be permitted to so continue as “trustees” to complete affairs of the corporation in liquidation, any supervening fact,
liquidation; and in the absence of a Board, those having such as the dissolution of the corporation, repeal of a law, or
pecuniary interest in the assets, including the shareholders any other fact of similar nature would not serve as an
and the creditors of the corporation, acting for and in its effective bar to the enforcement of such right.
behalf, might make proper representations with the
appropriate body for working out a final settlement of the
corporate concerns. Clemente v. Court of Appeals, 242
SCRA 717 (1995).
• In Gelano case, the counsel of the dissolved corporation was
considered a trustee. In the later case of Clemente v. Court of
Appeals, the Board of Directors was permitted to complete
the corporate liquidation by continuing as “trustees”. Under
Sec. 145 “No right of remedy in favor or against any
corporation . . . shall be removed or impaired either by the
subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part
thereof.” This provision safeguards the rights of a corporation
which is dissolved pending litigation. Reburiano v. Court of
Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette
Corp., 384 SCRA 48 (2002).

15. 3 Cases
Clemente v. CA (1995)
• Corporation continues to be a body corporate for 3 years
after its dissolution for purposes of prosecuting and defending
suits by and against it and for enabling it to settle and close
its affairs.
• The termination of the life of a juridical entity does not by
itself cause the extinction or diminution of the rights and
liabilities of such entity nor those of its owners and creditors.

I sweat, I bleed, I soar… A-160

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
16. FOREIGN CORPORATIONS
Foreign corporation- corporation formed, organized or existing
under any law other than those of the Philippines, and whose laws
allow Filipino citizens and corporations to do business in its own
country or state. (Section 123)
Jack’s Lecture
Section 123 defines what is a foreign corporation, one
formed, organized, or existing under any laws other than those of
the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state. Note the
element of reciprocity is included in the definition of a foreign
corporation as an ingredient of a foreign corporation.
We said that a corporation is an artificial person, it has
a juridical personality by legal fiction. So it has personality
because of the law under which it was incorporated and since it
exists only because of the law under which it was incorporated, if
it wishes to participate in the economic processes of another
country, it must get permission from that other country also and it
will get permission by getting a license to do business and our
code now requires reciprocity so normally like if it is an American
corporation it will submit a certification from the Secretary of State
of that particular state under which it was incorporated like New
York, California because the Secretary of State is the custodian of
the laws and he will certify that under the laws of New York,
Filipinos are allowed to do business in New York.
There are different ways by which a foreign corporation
can establish its presence here. one is by setting a branch office,
another is by setting up subsidiary, for tax purposes there are no
trade-offs because a branch and a subsidiary are taxed in the
same way but a subsidiary may be beneficial in the sense that it
limits the exposure of the mother company to its subscription
instead of risking all the assets of the mother company. Another is
the regional headquarters which does not do business, it is just a
coordinating and communication center. Foreign companies are
setting up regional headquarters here because it has subsidiaries
in Southeast Asia or licensees and franchisees and its function is
to supervise and coordinate with those subsidiaries or franchisees
so normally a regional headquarter would have a one room
office here probably with country manager and secretary, a
telephone, computer and fax machine.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
If a foreign corporation wants to do business here it has
to appoint a resident agent who may be a corporation, partnership
or individual, if individual he must be of good moral character,
sound financial standing, although his only function is to receive
summonses in behalf of the corporation.
16.1 What constitutes doing business in the
Philippines (See Section 3(d) RA 7042 as amended)
RA 7042, Section 3[d]
The phrase “doing business” shall include soliciting orders, services
contracts, opening offices, whether called “liaison” offices or
branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period or periods totaling one hundred eighty (180) days or more;
participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and
any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization: Provided,
however, that the phrase “doing business” shall not be deemed to
include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or
officer to represent its interest in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account;
When is a foreign corporation doing business?
American jurisprudence makes a distinction. When you
talk of foreign corporation doing business you will ask for what
purpose are we trying to determine whether or not a foreign
corporation is doing business.
Is it for the purpose of determining whether or not it can
be sued? If that is the purpose, to determine its amenability to the
jurisdiction of the courts they apply a liberal interpretation, the
USSC says minimal contact that would satisfy the requirements of
due process is sufficient. In fact the different states have these
long-arm statutes by which state the instances when a foreign
A-161
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
corporation may be sued. There is one state Georgia has this
provision that if a foreign corporation commits a tort, it will be
considered to be doing business and can be sued. The USSC has
said times have changed now the means of communications are
very rapid so that if you have a representative here he can quickly
communicate with the home office so it can take steps to defend
itself.
On the other hand, if you are talking of determining
whether a foreign corporation is doing business for the purpose of
prosecuting officers criminally, that is penal, it must be strictly
construed.
In the middle is the question of whether or not the
foreign corporation is doing business and therefore is taxable as a
resident foreign corporation.
So many decisions have been handed down to
determine whether the foreign corporations are doing business
but there are three principal guidelines.
1. Transactions must not be isolated. Transactions must be
habitual like in the Mentholatum case. In the Amsterdam
case where a foreign shipping company it has a vessel
which roam around going to places where they can find
cargo and they just pass by here in 1963, the court said that
it is an isolated transaction and not doing business here.
In one case, a foreign corporation bought copra, seller
failed to deliver and they negotiated and they agreed to give him
more time still he failed to deliver then they negotiated again and
he was given more time still he failed to deliver and finally the
foreign corporation filed suit, the seller claimed doing business
without a license, the SC said no that is an isolated transaction.
The better rule(according to Jack) is that that is buying that is not
doing business you do not make profit from buying that is settled
in American jurisprudence. You make profit from selling not from
buying.
In the Hang lung bank case, the SC said that it is not
doing business here so it can sue.
However, an isolated transaction which indicates an
intention to habitually do business may constitute doing business.
If the foreign corporation leased space for example at the Luneta
Hotel and they sent their officers here. There was indication of
their intention to do business.
2. It must involve a substantial portion of the business of
the primary purpose of the corporation. In one case,
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
there was a foreign shipping company which pass by here
and hired a Filipino a cook in one of its vessels, the SC held
that that is not doing business hiring a cook is not a
substantial portion of its business its business is transporting
passengers and cargo.
3. If the contract is consummated abroad then the foreign
corporation is not doing business here. In the case of
Columbia Pictures vs. CA, Columbia Pictures filed a case
because its films were being pirated here and it was argued
that it was doing business without a license, the SC said no
because the contracts are consummated abroad. In the
Avon Plc case, the Court said that a foreign insurance
company which accepted reinsurance is not doing business
here because the contract is executed abroad.
What constitutes doing business in the Philippines for foreign
corporations?
• Under the continuity test, doing business implies a
continuity of commercial dealings and arrangements, and
contemplates to some extent the performance of acts or
works or the exercise of some functions normally incident to
and in progressive prosecution of, the purpose and object of
its organization.
• Under the substance test, a foreign corporation is doing
business in the country if it is continuing the body or
substance of the enterprise of business for which it was
organized. (JRS at 315)
How do we determine whether a foreign corp is doing business
in the Philippines? (Based on Justice Aquino’s outline)
• There is no general rule or governing principle that holds for
the determination of whether or not a foreign juridical entity is
doing business in the Philippines to enable our court to
acquire jurisdiction over it. When such foreign corporation
however participates in a bidding process, its mere
participation manifests an intention to engage in business in
the Philippines, therefore participating in the bidding process
is “doing business” in this jurisdiction. More directly put,
when a foreign corporation performs acts for which it
A-162
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
was created, regardless of volume, it is doing business.
(European Resources v. Ingenieuburo Birkahn, 2004)
Does an “isolated transaction” by a foreign corporation qualify
as “doing business” in the Philippines?
• It depends. If a single or isolated transaction is incidental
and casual transaction, it cannot qualify as “doing business”
since it lacks the element of CONTINUITY. However, where a
single or isolated transaction is not merely incidental or
casual but indicates the foreign corporation’s intention to do
other business in the Philippines, said single act or
transaction constitutes “doing business” in the Philippines.
(JRS at 315)
16.2 Requirements for the establishment of a branch
(Section 123)
Sec. 123. Definition and rights of foreign corporations
For the purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to
do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this
Code and a certificate of authority from the appropriate government
agency. (n)
(a) Documentary Requirements (Section 125)
Sec. 125. Application for a license
A foreign corporation applying for a license to transact business in
the Philippines shall submit to the Securities and Exchange
Commission a copy of its articles of incorporation and by-laws,
certified in accordance with law, and their translation to an official
language of the Philippines, if necessary. The application shall be
under oath and, unless already stated in its articles of incorporation,
shall specifically set forth the following:
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
1. The date and term of incorporation;
2. The address, including the street number, of the principal office
of the corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept
summons and process in all legal proceedings and, pending
the establishment of a local office, all notices affecting the
corporation;
4. The place in the Philippines where the corporation intends to
operate;
5. The specific purpose or purposes which the corporation intends
to pursue in the transaction of its business in the Philippines:
Provided, That said purpose or purposes are those specifically
stated in the certificate of authority issued by the appropriate
government agency;
6. The names and addresses of the present directors and officers
of the corporation;
7. A statement of its authorized capital stock and the aggregate
number of shares which the corporation has authority to issue,
itemized by classes, par value of shares, shares without par
value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate
number of shares which the corporation has issued, itemized
by classes, par value of shares, shares without par value, and
series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or
appropriate in order to enable the Securities and Exchange
Commission to determine whether such corporation is entitled
to a license to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for license shall be a duly executed
certificate under oath by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that the laws of
the country or state of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an
existing corporation in good standing. If such certificate is in a foreign
A-163
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
language, a translation thereof in English under oath of the translator
shall be attached thereto.
The application for a license to transact business in the Philippines
shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation, showing
to the satisfaction of the Securities and Exchange Commission and
other governmental agency in the proper cases that the applicant is
solvent and in sound financial condition, and setting forth the assets
and liabilities of the corporation as of the date not exceeding one (1)
year immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in
addition to the above requirements, comply with the provisions of
existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange
Commission without previous authority from the appropriate
government agency, whenever required by law. (68a)
(b) Deposit Requirement (Section 126)
Sec. 126. Issuance of a license
If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and
other special laws, rules and regulations, the Commission shall issue
a license to the applicant to transact business in the Philippines for
the purpose or purposes specified in such license. Upon issuance of
the license, such foreign corporation may commence to transact
business in the Philippines and continue to do so for as long as it
retains its authority to act as a corporation under the laws of the
country or state of its incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled in accordance with this
Code or other special laws.
Within sixty (60) days after the issuance of the license to transact
business in the Philippines, the license, except foreign banking or
insurance corporation, shall deposit with the Securities and Exchange
Commission for the benefit of present and future creditors of the
licensee in the Philippines, securities satisfactory to the Securities
and Exchange Commission, consisting of bonds or other evidence of
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
indebtedness of the Government of the Philippines, its political
subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares
of stock in domestic corporations registered in the stock exchange, or
shares of stock in domestic insurance companies and banks, or any
combination of these kinds of securities, with an actual market value
of at least one hundred thousand (P100,000.) pesos; Provided,
however, That within six (6) months after each fiscal year of the
licensee, the Securities and Exchange Commission shall require the
licensee to deposit additional securities equivalent in actual market
value to two (2%) percent of the amount by which the licensee's
gross income for that fiscal year exceeds five million (P5,000,000.00)
pesos. The Securities and Exchange Commission shall also require
deposit of additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%) percent of
their actual market value at the time they were deposited. The
Securities and Exchange Commission may at its discretion release
part of the additional securities deposited with it if the gross income of
the licensee has decreased, or if the actual market value of the total
securities on deposit has increased, by more than ten (10%) percent
of the actual market value of the securities at the time they were
deposited. The Securities and Exchange Commission may, from time
to time, allow the licensee to substitute other securities for those
already on deposit as long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the
Philippines, the securities deposited as aforesaid shall be returned,
upon the licensee's application therefor and upon proof to the
satisfaction of the Securities and Exchange Commission that the
licensee has no liability to Philippine residents, including the
Government of the Republic of the Philippines. (n)
(c) Appointment of resident agent (Section 128)
Sec. 128. Resident agent; service of process
The Securities and Exchange Commission shall require as a
condition precedent to the issuance of the license to transact
business in the Philippines by any foreign corporation that such
corporation file with the Securities and Exchange Commission a
A-164
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

written power of attorney designating some person who must be a 16.3 Permitted areas of investment (see Sixth
resident of the Philippines, on whom any summons and other legal Regular Foreign Investment Negative List (Lists A
processes may be served in all actions or other legal proceedings
against such corporation, and consenting that service upon such
and B) annexed to EO No. 389 dates Nov. 30, 2004)
resident agent shall be admitted and held as valid as if served upon
the duly authorized officers of the foreign corporation at its home The 6th Regular Foreign Investment Negative List took effect in January 8,
office. Any such foreign corporation shall likewise execute and file 2005. The list does not include banking and other financial institutions, which
with the Securities and Exchange Commission an agreement or are governed and regulated by the General Banking Law of 2000, and other
stipulation, executed by the proper authorities of said corporation, in laws administered by the BSP.
form and substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree, List A
in consideration of its being granted by the Securities and Exchange
Commission a license to transact business in the Philippines, that if List A. Foreign ownership is limited by mandate of the Constitution and
at any time said corporation shall cease to transact business in the specific laws.
Philippines, or shall be without any resident agent in the Philippines
on whom any summons or other legal processes may be served, No foreign equity
then in any action or proceeding arising out of any business or
1.Mass Media Except recording (Art. XVI, Sec. 11 of the Constitution;
transaction which occurred in the Philippines, service of any
Presidential Memorandum dated May 4, 1994)
summons or other legal process may be made upon the Securities
and Exchange Commission and that such service shall have the 2.Practice of all professions
same force and effect as if made upon the duly-authorized officers of
the corporation at its home office." a. Engineering
b. Medicine and allied professions
Whenever such service of summons or other process shall be made c. Accountancy
upon the Securities and Exchange Commission, the Commission d. Architecture
shall, within ten (10) days thereafter, transmit by mail a copy of such e. Criminology
summons or other legal process to the corporation at its home or f. Chemistry
principal office. The sending of such copy by the Commission shall g. Customs Brokerage
be necessary part of and shall complete such service. All expenses h. Environmental Planning
incurred by the Commission for such service shall be paid in advance i. Forestry
j. Geology
by the party at whose instance the service is made. k. Interior Design
In case of a change of address of the resident agent, it shall be his or l. Landscape Architecture
its duty to immediately notify in writing the Securities and Exchange m. Law
n. Librarianship
Commission of the new address. (72a; and n)
o. Marine Deck Officers
p. Marine Engine Officers
q. Master Plumbing
r. Sugar Technology
s. Social Work
t. Teaching
u. Agriculture
v. Fisheries

I sweat, I bleed, I soar… A-165

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
(Art. XII, Section 14 of the Constitution, Sec. 1 of R.A. No.
5181)
3.Retail Trade Enterprises w/ a paid up capital of less than US $
2,500,00; Sec. 5 of RA 8762
4. Cooperatives (Ch III, Art. 26, RA 6938)
5.Private Security Agencies (Sec. 4, RA 5487)
6.Small Scale Mining (Sec. 3, RA 7076)
7.Utilization of Marine Resources in archipelagic waters, territorial
sea, and exclusive economic zone as well as small scale
utilization of natural resources in rivers, lakes, bays, and
lagoons (Art. XII, Sec.2 Constitution
8.Ownership, operation, and management of cockpits (Sec. 5 of PD
499)
9.Manufacture, repair, stockpiling and/or distribution of nuclear
weapons (Art. II Sec 8 of the Constitution)
10. Manufacture, repair, stockpiling, and/or distribution of
biological, radiological, chemical weapons and anti-personnel
mines (various treaties to which the Philippines is signatory,
and conventions supported by the Philippines)
11. Manufacture of firecrackers and other pyrotechnic devices
(Sec. 5 of RA 7183)
Up to 20% Foreign Equity
12. Private radio communications network (RA 3846)
Up to 25% Foreign Equity
13. Private recruitment, whether for local or overseas employment
(Art. 27 of PD 442)
14. Contracts for the construction and repair of locally funded
public works (Sec. 1 of Commonwealth Act No. 541, LOI No.
630, except:
a. Infrastructure / development projects covered in RA
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
7718, and
b. Projects which are foreign funded or assisted or
required to undergo international competitive bidding
(Sec. 2 [a] of RA 7718)
15. Contracts for construction of defense-related structures (Sec.
1 of CA 541)
Up to 30% Foreign Equity
16. Advertising (Art. XVI, Sec. 11 Constitution)
Up to 40% Foreign Equity
17. Exploration, development, utilization of natural resources (Art.
XII, Sec. of the Constitution)
18. Ownership of Private Lands (Art. XII Sec. 7 Constitution, Ch. 5
Sec. 22 of CA 141, Sec. 4 of RA 9182)
19. Operation and management of public utilities (Art. XII Sec. 11
Constitution, Sec. 16 of CA 146)
20. Ownership / establishment and administration of educational
institutions (Art. XIV Sec. 4 of the Constitution)
21. Culture, production, milling, processing, trading, except
retailing or rice and corn and acquiring, by barter, purchase, or
otherwise, rice and corn and the by-products thereof (Sec. 5 of
PD 194; Sec. 15 of RA 8762)
22. Contracts for the supply of materials, goods, and commodities
to government owned or controlled corporation, company,
agency, or municipal corporations (sec. 1 of RA 5183)
23. Project proponent and facility operator of a BOT Project
requiring a public utilities franchise (Art. XII Sec. 11
Constitution, Sec. 2[a] of RA 7718)
24. Operation of deep-sea commercial fishing vessels (Sec. 27 of
RA 8550)
25. Adjustment Companies (Sec. 323 of PD 612 as amended by PD
1814)
A-166
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
26. Ownership of condominium units where the common areas in
the condominium project are co-owned by the owners of the
separate units or owned by a corporation (Sec. 5 of RA 4726)
Up to 60% Foreign Equity
27. Financing Companies regulated by the SEC (Sec. 6 RA 5980 as
amended by RA 8556)
28. Investment houses regulated by the SEC (Sec. 5 of PD 129 as
amended by RA 8366)
List B
List B: Foreign ownership is limited for reasons of security, defense, risk of
health, and morals, and protection of small and medium scale enterprises
Up to 40% Foreign Equity
1.Manufacture, repair, storage, and/or distribution of products
and/or ingredients requiring PNP clearance
Telescopic sights, sniper scope, and other similar devices.
However, the manufacture or repair of these items may be
authorized by the Chief of the PNP to non-Philippine nationals;
provided that a substantial percentage of the output as determined
by the said agency is exported. Provided further that the extent of
foreign equity ownership allowed shall be specified in the said
authority / clearance (RA 7042 as amended by RA 8179)
2.Manufacture, repair, storage, and/or distribution of products
requiring Department of National Defense (DND) clearance:
a. Guns and ammunition for warfare
b. Military ordinance and parts thereof (torpedoes, depth
charges, bombs, grenades, missiles)
c. Gunnery, bombing, and fire control systems and
components
d. Guided missiles systems and components
e. Tactical aircraft (fixed and rotary winged), parts and
components thereof
f. Space vehicles and component systems
g. Combat vessels (air, land, naval) and auxiliaries
h. Weapons repair and maintenance equipment
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
i. Military communications and equipment
j. Night vision and equipment
k. Simulated content radiation devices, components, and
accessories
l. Armament training devices
m. Others as may be determined by the Secretary of the
DND
However, the manufacture or repair of these items may
be authorized by the Secretary of the DND to non-
Philippine nationals; provided that a substantial
percentage of the output, as determined by the said
agency, is exported. Provided further that the extent of
the foreign equity ownership allowed shall be specified in
the said authority/clearance (RA 7042 as amended by RA
8179)
3.Manufacture and distribution of dangerous drugs (RA 7042 as
amended by RA 8179)
4.Sauna and steam bathhouses, massage clinics and other like
activities regulated by law because of risks posed to the public
health and morals (RA 7042 as amended by RA 8179)
5.All forms of gambling, i.e. race track operation (RA 7042 as
amended by RA 8179)
6.Domestic market enterprises with paid in equity capital of less
than the equivalent of US $ 200,000 (RA 7042 as amended by
RA 8179)
7.Domestic market enterprises which involve advanced technology
or employ at least 50 direct employees with paid in equity
capital of less than the equivalent of US $ 100,000 (RA 7042 as
amended by RA 8179)
16.4 Laws applicable to foreign corporations licensed
to transact business in the Philippines (Section 129)
Sec. 129. Law applicable
Any foreign corporation lawfully doing business in the Philippines
A-167
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide
for the creation, formation, organization or dissolution of corporations
or those which fix the relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to each other or to
the corporation. (73a)
UP Class Notes
1. This is limited to Filipino citizens save in cases prescribed by law
2. Full foreign participation is allowed for retail trade enterprises: (a)
with paid-up capital of US $ 2,500,000 or more provided that
investments for establishing a store is not less than US $ 830,000; or
(b) specializing in high end or luxury products, provided that the paid-
up capital per store is not less than US $ 250,000 (Sec. 5 of RA 8762)
3. Domestic investments are also prohibited (Art. II Sec. 8 Constitution;
Conventions & Treaties to w/c the Philippines is signatory
4. Full foreign participation is allowed through financial or technical
assistance agreement w/ the President (Art. XII Sec. 2 Constitution)
5. Full foreign participation is allowed provided that within the 30 year
period from start of operation, the foreign investor shall divest a
minimum of 60% of their equity to Filipino citizens (Sec. 5 PD 194;
NFA Council Resolution No. 193 s. 1998)
6. No foreign national may be allowed to own stock financing
companies or investment houses unless the country of which he is a
national accords the same reciprocal rights to Filipinos (Sec. 6 of RA
5980 as amended by RA 8556; PD 129 as amended by RA 8366)
16.5 Consequences of doing business in
Philippines without a license (Section 133)
Sec. 133. Doing business without a license
No foreign corporation transacting business in the Philippines without
a license, or its successors or assigns, shall be permitted to maintain
or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be
sued or proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
laws. (69a)
Suability of Foreign Corporations: (CLV’s CLR at 947)
Doing business in the Philippines May sue and can be sued in the
with a license Philippines
Doing business in the Philippines Cannot sue, but may be sued in the
without license Philippines
Not doing business in the May sue
Philippines, on isolated transactions May be sued (Facilities Mgt v. dela
Osa, 1979)
Jack’s Lecture
If a foreign corporation is being sued, the summons
must be served on the resident agent. The corporation is also
required to file with the SEC a power of attorney or resolution
which says that if it has no resident agent it agrees that the
summons be served with the SEC which will forward the
summons and the complaint to the foreign corporation. If no
resident agent and any officer who will be in the Philippines may
be served with summons.
Section 133 says that if the foreign corporation will be
doing business without a license it cannot sue or intervene in any
action in court or administrative agency.
The SC had said that if a foreign corporation is doing
business here without a license, a contract it entered into is valid,
it is not rendered void so the court said the legislature made a
judgment call that imposing penal sanctions and denying access
to the courts are sufficient penalties for doing business without a
license. The legislature did not provide that the contract it entered
into is void. Although the foreign corporation did not have license
to do business when it entered into in that contract, it could sue if
the later on it acquired a license to do business.
If a foreign corporation is not doing business it can sue
because it is not required to get a license but it can not be sued
because it has no presence here it will violate due process.
In the farm machinery case, the court made an obiter
dictum that a foreign corporation not doing business can be sued,
the reasoning of Justice Makasiar, if the foreign corporation not
doing business can sue, then it should also be allowed to be sued
is wrong because that will violate due process because it has no
presence here. Our courts cannot acquire jurisdiction over it. The
A-168
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
remedy is to make the action an action quasi in rem you attach its
property serve it summons.
If the corporation is doing business whether or not it is
licensed it can be sued, the law says that if it is doing business
but it has no license it cannot sue.
If a foreign corporation is suing it must alleged either
that it is not doing business or it is doing business but it is
licensed because a plaintiff must indicate in the complaint that it
has the legal capacity to sue. In the case of a foreign corporation
it must show it is either not doing business or it doing business
and it is licensed.
However, in the Merrill Lynch case, the court said that if
a foreign corporation is doing business without a license, it the
other party was aware of it, it can not claim that the plaintiff
cannot sue, he will be in estoppel having benefited from the
contract. Except in two cases, the SC has followed this most of
the subsequent cases.
Other than in cases of isolated transactions, may a foreign
corporation not doing business in the Philippines sue?
Yes
• To protect its reputation, corporate name and goodwill (Sec
3 of RA 8293)
• For infringement of trademark or trade-name, unfair
competition or false description of products and infringement
of patent. (Section 160 RA 8293) (Handbook of Conflict of
Laws at 148)
16.6 Merger or consolidation involving licensed
foreign corporation (Section 132)
Sec. 132. Merger or consolidation involving a foreign corporation
licensed in the Philippines
One or more foreign corporations authorized to transact business in
the Philippines may merge or consolidate with any domestic
corporation or corporations if such is permitted under Philippine laws
and by the law of its incorporation: Provided, That the requirements
on merger or consolidation as provided in this Code are followed.
I sweat, I bleed, I soar…
Service, Sacrifice, Excellence
ARIS S. MANGUERA
Whenever a foreign corporation authorized to transact business in
the Philippines shall be a party to a merger or consolidation in its
home country or state as permitted by the law of its incorporation,
such foreign corporation shall, within sixty (60) days after such
merger or consolidation becomes effective, file with the Securities
and Exchange Commission, and in proper cases with the appropriate
government agency, a copy of the articles of merger or consolidation
duly authenticated by the proper official or officials of the country or
state under the laws of which merger or consolidation was effected:
Provided, however, That if the absorbed corporation is the foreign
corporation doing business in the Philippines, the latter shall at the
same time file a petition for withdrawal of it license in accordance with
this Title. (n)
16.7 Revocation of license and issuance of certificate
of revocation (Section 134 and 135)
Sec. 134. Revocation of license
Without prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the Philippines
may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by
this Code;
2. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to
submit to the Securities and Exchange Commission a statement
of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or
consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation
pursuant to this Title;
A-169
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

6. Failure to pay any and all taxes, imposts, assessments or 3. The petition for withdrawal of license has been published once a
penalties, if any, lawfully due to the Philippine Government or week for three (3) consecutive weeks in a newspaper of general
any of its agencies or political subdivisions; circulation in the Philippines.
7. Transacting business in the Philippines outside of the purpose or
purposes for which such corporation is authorized under its
license;
8. Transacting business in the Philippines as agent of or acting for
and in behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in
the Philippines. (n)
We are what we repeatedly do.
Sec. 135. Issuance of certificate of revocation
Excellence then, is not an act, but a habit.
-Aristotle
Upon the revocation of any such license to transact business in the
Philippines, the Securities and Exchange Commission shall issue a
corresponding certificate of revocation, furnishing a copy thereof to
the appropriate government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the
corporation at its registered office in the Philippines a notice of such
revocation accompanied by a copy of the certificate of revocation. (n)

The secret of living a life of excellence is

merely a matter of thinking thoughts of
16.8 Withdrawal of foreign corporation (Section 136) excellence
Sec. 136. Withdrawal of foreign corporations -Living Above Mediocrity
Subject to existing laws and regulations, a foreign corporation
licensed to transact business in the Philippines may be allowed to
withdraw from the Philippines by filing a petition for withdrawal of
license. No certificate of withdrawal shall be issued by the Securities
and Exchange Commission unless all the following requirements are
met;
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due
to the Philippine Government or any of its agencies or political Excellence is Being
subdivisions have been paid; and -Marsius Tigris

I sweat, I bleed, I soar… A-170

Service, Sacrifice, Excellence
 FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

I sweat, I bleed, I soar… A-171

Service, Sacrifice, Excellence