A PDF

CORPORATION
LAW REVIEWER (2013-2014)
ATTY. JOSE MARIA G. HOFILEA
CORPORATION
LAW
Finals Reviewer
BECAUSE SHARING IS LOVING
A new command I give you: Love one another.
As I have loved you, so you must love one another
By this everyone will know that you are my disciples,
if you love one another.
John 13: 34-35

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CORPORATION)LAW)REVIEWER)(201332014))
)))ATTY.)JOSE)MARIA)G.)HOFILEA))
HISTORICAL*BACKGROUND*
The!corporate!form!has!been!around!for!around!100!years!and!
has!established!a!manner!in!which!business!has!been!conducted!
that!makes!it!an!attractive!medium.!
!
I.* Philippine* Corporate* Law 1 *A?sort?of* codification* of* American*
!
III.*The*Corporation*Code*(Batas*Pambansa*Bilang*68)*
Why* Drawn:* When!attention!was!drawn!to!the!fact!that!there!

was!no!entity!in!Spanish!law!corresponding!to!the!notion!of!the!
American!corporation,!the!Philippine!Commission!enacted!the!
Purpose:! To" introduce" the" American" corporation" in" the"
Philippines)as)the)standard)commercial)entity)and)to)hasten)the)
day$ when$ the$ sociedad$ annima$ of$ the$ Spanish$ law$ would$ be$
obsolete.! The! statute! is! a! sort! of! codification! of! American!
Corporate( Law.( Harden( v.( Benguet( Consolidated( Mining,( 58(
Phil.(141((1933).(
When!the!Americans!came!over,!they!noted!that!whatever!was!
in! place! at! that! time! were! unfamiliar! with! them.! As! such,! they!
caused!the!adoption!of!the!first!corporation!law.(
effective!on!1!April!1906.!!
1
!The! whole! body! of! statutory! and! jurisprudential! rules! pertaining! to!
corporations!is!referred!to!as!"Corporate!Law"!to!differentiate!it!from!the!old!
statute!known!as!"The!Corporation!Law,"!or!Act!No.!1459.!
As! of! date,! the! Securities! and! Exchange! Commission! (SEC)! has!
proposed!that!a!new!Corporation!Code!be!adopted!since!it!has!
been!30!years!since!B.P.!Blg.!68!has!been!implemented.!
Although! we! have! a! Corporation! Code! that! provides! for!

statutory!principles,!since!Philippine!Corporate!Law!comes!from!
the! U.S.! common! law! system,! Philippine! Corporate! Law! is!
essentially,! and! continues! to! be,! a! common! law! system! and!
subject!to!developments!in!commercial!developments,!much!of!
which! can! be! expected! to! happen! in! the! world! of! commerce,!
and! some! expressed! jurisprudential! rules! that! try! to! apply! and!
The! first! corporate! statute,! the! 1906! Corporation! Law! became!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Provided!for!a!chapter!on!close!corporations.2!
!
IV.*Proper*Treatment*of*Philippine*Corporate*Law*
*
II.*The*Corporation*Law*(Act*No.*1459)*
The!current!Corporation!Code!of!the!Philippines!took!effect!on!1!
May!1980,!!
o Adopting!various!corporate!doctrines!enunciated!by!the!
Supreme!Court!under!the!old!Corporation!Law;!!
o Clarified! the! obligations! of! corporate! directors! and!
officers;!!
o Expressed! in! statutory! language! established! principles!
and!doctrines;!and!!
Corporation!Law!(Act!No.!1459).!
It! had! pieceQmeal! amendments! during! its! 74Qyear! history,! but!

became!antiquated!and!not!adapted!to!the!changing!times.!
Corporate*Law*
A! little! more! detailed! in! certain! aspect.! This! is! very!

similar!to!the!later!law!B.P.!Blg.!68!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!Corporation!Code!applies!even!to!corporations!organized!under!the!old!
Corporation!Law.!Castillo!v.!Balinghasay,!440!SCRA!442!(2004).!
)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))
!
adopt! corporate! principles! into! the! changing! concepts! and!
mechanism!of!the!commercial!world.!
)
CONCEPTS(
(
I.(Definition((Section(2;(Articles(44(3),(45,(46,(and(1775,(Civil(Code)(
(
Section(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(
expressly(authorized(by(law(or(incident(to(its(existence.((2)(
(
CIVIL(CODE(
Article(44.(The(following(are(juridical(persons:((
1.(The(State(and(its(political(subdivisions;((
(
2.( Other( corporations,( institutions( and( entities( for( public( interest( or(
purpose,(created(by(law;(their(personality(begins(as(soon(as(they(have(
Partnerships( and( associations( for( private( interest( or( purpose( are(

governed( by( the( provisions( of( this( Code( concerning( partnerships.( (36(
and(37a)((
(
Article(46.((
Juridical(persons(may(acquire(and(possess(property(of(all(kinds,(as(well(
as( incur( obligations( and( bring( civil( or( criminal( actions,( in( conformity(
with(the(laws(and(regulations(of(their(organization.((38a)((
(
Article(1775.((
Associations(and(societies,(whose(articles(are(kept(secret(among(the(
members,(and(wherein(any(one(of(the(members(may(contract(in(his(
own(name(with(third(persons,(shall(have(no(juridical(personality,(and(
shall(be(governed(by(the(provisions(relating(to(coWownership.((1669)(
(
been(constituted(according(to(law;((
(
3.( Corporations,( partnerships( and( associations( for( private( interest( or(
purpose( to( which( the( law( grants( a( juridical( personality,( separate( and(
distinct(from(that(of(each(shareholder,(partner(or(member.((35a)((
(
Article(45.((
Juridical(persons(mentioned(in(Nos.(1(and(2(of(the(preceding(article(are(
governed(by(the(laws(creating(or(recognizing(them.((
(
Private( corporations( are( regulated( by( laws( of( general( application( on(
the(subject.((
(
)
Juridical)persons)are)those)who)have)an)identity)granted)to)it)by)
law)with)powers)granted)and)subject)to)the)law.))
o As)such,)they)can)own)property)and)conduct)business)as)
well)as)sue)and)be)sued.)
o Juridical) capacity) !) the) capacity/ability) to) enter) into)
legal)relations)and)be)bound)by)them.)
A)corporation)is)an:)
o
o
o
Artificial) being) !) essentially) means) that) it) has) a)

fictional)existence.)
Created) by) operation) of) law) !) absence) of) the) law)
would)mean)that)a)corporation)cannot)exist.)
Invested) by) law) upon) coming) into) existence) with) a)
personality) separate) and) distinct) from) the) persons)
composing)it,)and)from)any)other)legal)entity)to)which)it)
!
may)be)related.)PNB$v.$Andrada$Electric$&$Engineering$
Co.,$381$SCRA$244$(2002).1)
strong) legal) personality) of) the) corporation) is) an)

attribute) that) has) made) it) most) attractive) to)
businessmen)when)compared)to)other)media.4)
(d) Creature( of( Limited( Powers:) It) has) only) such) powers,)
attributes)and)properties)as)are)expressly)authorized)by)law)or)
incident)to)its)existence.)
)
II.(FOUR((4)(CORPORATE(ATTRIBUTES(BASED(ON(SECTION(2:(
(a) An( Artificial( Being:) It) has) juridical) capacity) to) contract) and)
enter)into)legal)relationships.)
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)aw)or)a)general)
enabling)act.2)
(b) Creature(of(the(Law:)It)is)created)by)operation)of)law)and)not)
by)mere)agreement.)
o There) must) first) be) an) underlying) contract) among) the)
o
The) corporation) has) the) capacity) for) continuous)

existence) despite) the) death) or) replacement) of) its)
shareholders) or) members,) for) it) has) a) personality)
separate) and) distinct) from) those) who) compose) it.) The)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)Construction)&)Dev.)Corp.)of)the)Phils.)v.)Cuenca,)466)SCRA)714)(2005);)EDSA)
ShangriGLa)Hotel)and)Resorts,)Inc.)v.)BF)Corp.,)556)SCRA)25)(2008).)
2
)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
3
A)corporation)has)no)powers)except)for)those)which)are:))
o
o
o
individuals) forming) the) corporation) upon) which) the)

state) grant) may) be) conferred.) Therefore,) you) have) an)
interGplay) of) State) grant) and) contractual) relations)
between)the)parties.)Which)principle)has)precedence)in)
resolving) conflict) would) depend) upon) the) public)
interest)or)issue)to)be)resolved.3)
(c) Strong(Juridical(Personality:)It)has)a)right)of)succession.)
As) opposed) to) a) natural) person,) who) has) the) ability) to)
exercise)any)power)and)enter)into)any)business)activity)
and)the)only)limitation)would)be)that)an)individual)has)
no) right) to) enter) into) an) act) or) transaction) that) is)
contrary)to)law,)morals)and)public)policy.5)
Expressly)conferred)on)it)by)the)Corporation)Code))
Found)in)its)charter,)and))
Those) that) are) implied) by) or) are) incidental) to) its)
existence.))
It)exercises)its)powers)through)its)Board)of)Directors)and/or)its)
duly)authorized)officers)and)agents.)Pascual$and$Santos,$Inc.$v.$
The$ Members$ of$ the$ Tramo$ Wakas$ Neighborhood$ Assn.$ Inc.,$
442$SCRA$438$(2004).6)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
5
6
)De) Liano) v.) Court) of) Appeals,) 370) SCRA) 349) (2001);) Monfort) Hermanos)
Agricultural) Dev.) Corp.) v.) Monfort) III,) 434) SCRA) 27) (2004);) United) Paragon)
Mining) Corp.) v.) Court) of) Appeals,) 497) SCRA) 638) (2006);) Cebu) Bionic) Builders)
Supply,)Inc.)v.)DBP,)635)SCRA)13)(2010).)
)
!
NOTE:( Corporations) are) products) of) relationships.) They) cannot) come)
into)force)unless)persons)agree)to)form)one,)and)unless)the)State)agrees)
and)allows)them)to)form)a)corporation.)Since)a)corporation)is)formed)by)
relationship,)it)does)not)have)a)body)of)its)own)and)as)such)requires)that)
its)actions)be)made)through)its)agents.)The)officers)of)a)corporation)are)
the)ones)who)smell,)touch)and)see)for)the)corporation)and)it)is)through)
them)that)the)corporation)reaches)out)to)the)real)world.)
)
III.(TRIWLEVEL(EXISTENCE(OF(THE(CORPORATION:(
(a) AssetsWOnly( Level:) The) corporation) is) an) aggregation) of)
Assets)and)Resources)
(b) Business( Enterprise( Level:) The) corporations) primary)
purpose)is)to)pursue)business.))
(c) Juridical( Entity( Level:) The) corporation) is) a) medium) of)
pursuing)a)business)enterprise.)
(
IV.(TRIWLEVEL(RELATIONSHIPS(IN(THE(CORPORATE(SETTING:(
(a) JURIDICAL( ENTITY( LEVEL,) which) treats) of) the) aspects) of) the)
StateGcorporation)relationship.)
(b) INTRAWCORPORATE( LEVEL,) which) considers) that) the) corporate)
setting)is)at)once)a)contractual)relationship)on)four)(4))levels:)
)
Relationship(
Governing(
Law(
Between)the)corporation)and)its)agents/representatives)to) Law)on)
act)in)the)real)world,)i.e.,)directors)and)officers)
Agency)
Between)the)corporation)and)its)shareholders)or)members) )
Between)the)shareholders)and)the)corporate)directors,)
trustees)and)officers)
Between)and)among)the)shareholders)in)a)common)
venture)
)
(c) EXTRAWCORPORATE( LEVEL,) which) views) the) relationship)
between) the) corporation) and) thirdGparties) or) outsiders,)
essentially)governed)by)Contract)Law)and)Labor)Law.)
)
Relationship(
Governing(Law(
Between)the)corporation)and)its)employees)
Labor)Law)
Between)the)corporation)and)those)it)contracts)
Contract)Laws)
and)transacts)with)
Between)the)corporation)and)the)publics)it)
affects)with)its)enterprise)
Torts)or)QuasiGDelict)
Laws)
)
V.(THEORIES(ON(THE(FORMATION(OF(CORPORATION(
(
A.(Theory(of(Concession:(Tayag$v.$Benguet$Consolidated,$26$SCRA$242$
(1968).$
)
Tayag$v.$Benguet$Consolidated$
(
Facts:( Idonah) Slade) Perkins) owned) two) stocks) certificates) under)
Benguet) Consolidated) Inc.) (a) Philippine) corporation).) Perkins) died) in)
New) York) in) 1960,) and) the) stock) certificates) were) held) in) trust) by)
County) Trust) Company) [CTC]) of) New) York,) who) was) the) domiciliary)
administrator) of) her) estate.) On) the) other) hand,) Renato) D.) Tayag) was)
appointed) ancillary) administrator) of) Perkins) properties) in) the)
Philippines.) A) dispute) arose) between) the) domiciliary) administrator) in)
New)York)and)the)ancillary)administrator)in)the)Philippines)as)to)which)
)
!
of)them)was)entitled)to)the)possession)of)the)stock)certificates.)
)
The) Court) of) First) Instance) of) Manila) ordered) CTC) to) produce) and)
deposit) the) certificates) with) Tayag,) but) the) former) refused.) Tayag) was)
able)to)have)a)court)order)issued)declaring)the)certificates)lost)and)new)
creature) without) any) existence) until) it) has) received) the) imprimatur) of)
the)State)acting)according)to)law.)It)is)logically)inconceivable)therefore)
that)it)will)have)rights)and)privileges)of)a)higher)priority)than)that)of)its)
creator.)More)than)that,)it)cannot)legitimately)refuse)to)yield)obedience)
to) acts) of) its) state) organs,) specifically) the) judiciary.) It) is) not) immune)
ones)should)be)issued)by)Benguet)Consolidated)Inc.)However,)the)latter)
refused)because)as)far)as)it)was)concerned,)the)certificates)were)not)lost)
being)in)the)possession)of)CTC.)
(
Issue:(Whether)or)not)the)lower)court)erred)in)declaring)the)certificates)
as)lost.))
(
from)judicial)control.)
)
then)its)existence)and)actions)concedes)to)the)law.$
o The) theory) of) concession,) therefore,) looks) at) a)
corporation) simply) as) a) creature) of) the) State) and) of)
limited) powers) and) capabilities,) completely) within) the)
control)of)the)State.1$
Held:( NO.)Since)there)was)a)refusal)by)the)domiciliary)administrator)in)
New) York) to) deliver) the) shares) of) stocks) of) Benguet) to) the) ancillary)
administrator) in) the) Philippines,) there) was) nothing) unreasonable) or)
arbitrary)in)considering)them)as)lost)and)requiring)the)appellant)to)issue)
new)certificates)in)lieu)thereof.)Moreover,)the)view)adopted)by)Benguet)
Consolidated) that) it) cannot) issue) new) certificates) because) doing) so)
under) the) circumstances) would) be) a) violation) of) its) byGlaws) is) fraught)
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.$ Section$ of$ Commerce$ and$ Industry,$ 5$ SCRA$ 645$
(1962).$
with)implications)at)war)with)the)basic)postulates)of)corporate)theory.)A)
corporation)is)an)artificial)being)created)by)operation)of)law.)To)assert)
that)it)can)choose)which)court)order)to)follow)and)which)to)disregard)is)
to) confer) upon) it) not) autonomy) which) may) be) conceded) but) license)
which)cannot)be)tolerated.)It)is)to)argue)that)it)may,)when)so)minded,)
overrule)the)state,)the)source)of)its)very)existence;)it)is)to)contend)that)
what) any) of) its) governmental) organs) may) lawfully) require) could) be)
ignored)at)will.)So)extravagant)a)claim)cannot)possibly)merit)approval.)
(
Doctrine:( A) corporation) as) known) to) Philippine) jurisprudence) is) a)
Theory$ of$ Concession( ! ( Since)a)corporation)is)created)by)law,)
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)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
associationnevertheless,) the) failure) to) comply) with) the)
statutory) procedure) and) conditions) does) not) warrant) a) finding)
that)such)association)acquired)a)juridical)personality,)even)when)
it) adopts) constitution) and) byGlaws.) Intl$ Express$ Travel$ &$ Tour$
Services,$Inc.$v.$CA,$343$SCRA$674$(2000).$
enterprise,)which)by)these)very)qualities)and)operations)
acquires)an)entity)of)its)own,)recognized)by)law.2$$
fiction) alone) that) creates) a) corporate) entity.) Any) State) grant)

must)presuppose)the)existence)of)consent) or)common)venture)
among)those)who)will)form)the)corporation.))
o Although)it)is)within)the)power)of)the)State)to)give)such)
grant) or) to) deny) it,) the) corporate) fiction) cannot) be)
created) unless) there) is) an) enterprise) or) group) upon)
whom)it)would)be)conferred.))
All) corporations,) big) or) small,) must) abide) by) the) provisions) of)
the)Corporation)Code;)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).$
(
B.( Theory( of( Enterprise( Entity:) BERLE,$ 47$ COLUMBIA$ LAW$ REV.$ 343$
(1947)$
Theory$ of$ Enterprise$ Entity( ! ( The) enterprise) theory) hinges)

itself) on) the) fact) that) there) can) be) no) corporate) existence)
without) persons) to) compose) it;) there) can) be) no) association)
without)associates.1$
o The)entity)commonly)known)as)"corporate)entity")takes)
its) being) from) the) reality) of) the) underlying) enterprise,)
formed)or)in)formation;)that)the)state's)approval)of)the)
corporate) form) sets) up) a) prima& facie) case) that) the)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
&Arnold&v.&Willets&&&Patterson,&Ltd.&45)Phil.)634)(1923).)
But) once) granted,) and) the) entity) acquires) juridical)

personality,) it) does) not) mean) that) the) group,) as)
distinguished) from) the) juridical) entity,) becomes) a)
creature) of) the) State,) but) actually) becomes) a) creature)
of) its) own) volition) and) maintains) either) singly) or)
collectively) their) inherent) rights) under) the) law,) which)
may) tend) to) project) to) their) business) dealings) done)
through)the)corporation.)
assets,) liabilities) and) operations) of) the) corporation) are)

those) of) the) enterprise.) But) that) where) the) corporate)
entity) is) defective,) or) otherwise) challenged,) its)
existence,)extent)and)consequences)may)be)determined)
by)the)actual)existence)and)operations)of)the)underlying)
The) theory) draws) its) vitality) from) the) fact) that) it) is) not) legal)
A) corporation) is) a) creation) of) law) and) a) creation) of) a) set) of)
relationships)between)individuals.$
o It)takes)5)people)to)form)a)corporation)and)it)is)formed)
by) the) agreement) of) the) individuals) to) establish) the)

corporation.$
Even)as)a)corporation)has)an)identity)separate)from)the)
individuals,) you) cannot) do) away) completely) with) the)
notion) that) there) are) individuals) behind) the)
corporation.$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
)Berle,)The&Theory&of&Enterprise,)47)COL.)L.)REV.)No.)3)(April,)1947).))
)
!
o
As)such,)in)cases)where)there)is)defect)in)the)corporate)
identity,)your)recourse)is)to)the)individuals.)This)is)why)
the) Supreme) Court) has) ruled) that) the) corporation) is)
entitled) to) rights) ) because) individuals) form) the)
corporation)and)these)individuals)have)rights.$
corporate) assets) and) properties.) Stockholders$ of$ F.$ Guanzon$

and$ Sons,$ Inc.$ v.$ Register$ of$ Deeds$ of$ Manila,$ 6$ SCRA$ 373$
(1962).$
party) is) already) of) advanced) age) and) in) danger) of) extinction,)
but) not) in) this) case) where) the) winning) party) is) a) corporation.)
[A]) juridical) entitys) existence) cannot) be) likened) to) a) natural)
personits) precarious) financial) condition) is) not) by) itself) a)
compelling) circumstance) warranting) immediate) execution) and)
does)not)outweigh)the)long)standing)general)policy)of)enforcing)
A) corporation) is) but) an) association) of) individuals,) allowed) to)

transact)under)an)assumed)corporate)name,)and)with)a)distinct)
legal) personality.) In) organizing) itself) as) a) collective) body,) it)
waives)no)constitutional)immunities)and)perquisites)appropriate)
to)such)a)body.)PSE$v.$Court$of$Appeals,$281$SCRA$232$(1997).$
only) final) and) executory) judgment.) Manacop$ v.$ Equitable$

PCIBank,$468$SCRA$256$(2005).$
Corporations) are) composed) of) natural) persons) and) their)

separate) corporate) personality) is) not) a) shield) for) the)
commission) of) injustice) and) inequity,) such) as) to) avoid) the)
execution)of)the)property)of)a)sister)company.)Tan$Boon$Bee$&$
Co.$v.$Jarencio,$163$SCRA$205$(1988).$
A) corporation) is) an) entity) separate) and) distinct) from) its)
partnership) where) the) death) of) a) partner) dissolves) the)

partnership.$
stockholders.) 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,$Jr.$v.$IAC,$172$
SCRA$405$(1989).$
The)transfer)of)the)corporate)assets)to)the)stockholders)is)not)in)
the)nature)of)a)partition)among)coGowners)but)is)a)conveyance)
from) one) party) to) another.) Stockholders) are) not) coGowners) of)
As) distinguished) from) a) partnership,) it) has) a) strong) legal)

personality) having) a) separate) and) distinct) personality) from) the)
members) composing) it,) unaffected) by) the) death,) resignation,)
insolvency) of) any) of) its) stockholders) or) members.) Its) creditG
worthiness) and) the) certainty) of) longGterm) contractual) dealings)
with) a) stable) person,) are) strengthened) by) such) continuity) of)
existence.1$
o A) corporation) can) survive) the) death) of) its) stockholders)
or) members) (i.e.) right) of) succession).) In) contrast) to) a)
)
VI.(ADVANTAGES(AND(DISADVANTAGES(OF(CORPORATE(FORM:(
(
A.(Four(Advantageous(Characteristics(of(Corporate(Medium:(
1. STRONG(AND(SOLEMN(JURIDICAL(PERSONALITY((Section(2)(
Execution)pending)appeal)may)be)allowed)when)the)prevailing)
The) shareholders) cannot) be) held) liable) as) an) individual) for) the)
liabilities) of) the) corporation) (see) LIMITED) LIABILITY) TO)
INVESTORS)AND)OFFICERS).$
o The)function)of)the)corporation)is)to)absorb)the)risk.)$
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1
)
!
2. CENTRALIZED(MANAGEMENT((Section(23)(
stockholders) approval) for) certain) specific) acts.) Great$ Asian$

Sales$Center$Corp.$v.$Court$of$Appeals,$381$SCRA$557$(2002).$
(
Section(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(
bind) the) corporations,) unlike) in) a) partnership) setting,) where)

each) partner) may) bind) the) partnership,) even) without) the)
knowledge)of)the)other)partners.1)
o Therefore,) in) its) legal) relationship,) 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)
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.((28a)(
(
Every(director(must(own(at(least(one((1)(share(of(the(capital(stock(of(
directors.2)
3. LIMITED(LIABILITY(TO(INVESTORS(AND(OFFICERS(
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( nonWstock( 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.(
The)exercise)of)corporate)powers)rest)in)the)Board)of)Directors,)
save) in) those) instances) where) the) Corporation) Code) requires)
It)is)hornbook)law)that)corporate)personality)is)a)shield)against)
personal) liability) of) its) officersa) 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.)Consolidated$Bank$and$Trust$Corp.$v.$Court$of$
Appeals,$356$SCRA$671$(2001).3$
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$ Enterprises$
and$Dev.$Corp.,$414$SCRA$190$(2003).$
o Management) is) lodged) essentially) with) the) board) of)
directors.$
One)of)the)advantages)of)the)corporation)is)the)limitation)of)an)
investors) liability) to) the) amount) of) investment,) which) flows)
from) the) legal) theory) that) a) corporate) entity) is) separate) and)
distinct) from) its) stockholders.) San$ Juan$ Structural$ and$ Steel$
Fabricators,$Inc.$v.$CA,$296$SCRA$631$(1998).$
Shareholders) are) not) agents) of) the) corporation,) nor) can) they)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
3
)Ever)Electrical)Manufacturing,)Inc.)(EEMI))v.)Samahang)Manggagawa)ng)Ever)
Electrical/NAMAWU)Local)224,)672)SCRA)562)(2012);)Gotesco)Properties,)Inc.)v.)
Fajardo,)692)SCRA)319)(2013).)
)
Obligations) incurred) by) the) corporation) acting) through) its)

directors,) officers) and) employees,) are) its) sole) liabilities.)
Malayang$Samahan$ng$mga$Manggagawa$sa$M.$Greenfield$v.$
Ramos,$357$SCRA$77$(2001).$
However,) the) statutorily) granted) privilege) of) a) corporate) veil)

may) be) used) only) for) legitimate) purposes.) On) equitable)
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(attorneyWinWfact(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(
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.1$
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)(
Where) the) creditor) of) the) corporation) sues) not) only) the)
company) but) also) all) stockholders) to) reach) their) unpaid)

subscription) which) appear) to) be) the) only) visible) assets) of) the)
company,)then)the)controlling)doctrine)is)that)a)stockholder)is)
personally)liable)for)the)financial)obligations)of)the)corporation)
to) the) extent) of) his) unpaid) subscription.$ Halley$ v.$ Printwell,$
Inc.$649$SCRA$116$(2011).$
4. FREEWTRANSFERABILITY( OF( UNITS( OF( OWNERSHIP( (SHARES)(
FOR(INVESTORS((Section(63)(
(
Section(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(byW
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1
)
Transfer) of) shares) is) a) matter) of) right) of) the) holder.) The)
corporation)cannot)prevent)such)transfer.)You)need)to)have)to)
exit)from)the)corporation.$
o It) is) the) inherent) right) of) the) stockholder) to) dispose) of)
his) shares) of) stock) (which) he) owns) as) any) other)
property)of)his))anytime)he)so)desires.$Remo,$Jr.$v.$IAC,$
172$ SCRA$ 405$ (1989);$ PNB$ v.$ Ritratto$ Group,$ Inc.,$ 362$
SCRA$216$(2001).$
Authority)granted)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$(1998).$
o If)the)transfer)would)cause)violations)of)the)law)(such)as)
the) ratio) requirement) for) localGforeign) holdings),) then)
!
the) corporation) may) restrict) the) right) transfer) of) the)
holders)shares.$
However,) the) system) of) free) transferability) of) the) units) of)
and)wherein)any)one)of)the)members)may)contract)in)his)own)
name)with)third)persons,)shall)have)no)juridical)personality,)and)
shall)be)governed)by)the)provisions)relating)to)coGownership.)
investments)in)the)corporate)setting)presumes)a)wellGdeveloped)
market)for)shares)of)stocks.1)
By) provision) of) law,) while) it) is) true) that) in) so) far) as) the) buyer)
and)seller)is)concerned)the)sale)(and)transfer)of)the)certificates))
is)made)by)meeting)of)the)minds,)there)is)a)provision)in)the)law)
that) before) such) sale) is) binding) to) the) whole) word) it) must) be)
recorded)in)the)books)of)the)corporation.)
5. Advantages(Over(Unregistered(Associations(
(
B.(Disadvantages(of(the(Corporate(Medium:(
Note( on( disadvantages:( Anything)can)be)abused.)Anything)can)
be))to)a)devious)mind))be)used)for)wrongdoing.)(
o To) a) large) extent,) the) corporate) medium) cannot) be)
used)to)solve)all)needs,)but)the)disadvantages)have)a)lot)
to)do)with)the)manner)in)which)it)is)being)used.(
o It)is)a)tool)to)do)business,)but)not)to)commit)illegality.(
1. ABUSE(OF(CORPORATE(MANAGEMENT;(BREACH(OF(TRUST(
A) corporation) established) in) accordance) with) the) Corporation)

Code) has) benefits) or) advantages) over) that) of) an) unregistered)
association.) These) advantages) are:) It) enjoys) 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) immunities;) and) its)

stockholders) or) members) have) generally) no) personal) liability)
beyond) the) value) of) their) shares. 2 )The) advantages) of) the)
corporation)over)unregistered)association)is)subject)to)the)rules)
pertaining)to)the)corporation)by)estoppel)doctrine.3)
There) is) ordinarily) lack) of) personal) element) in) view) of) the)
transferability) of) shares,) and) the) vesting) of) management)
powers) in) the) Board) of) Directors) who) may) be) professional)
managers.) This) has) spawned) corporate) irresponsibility) under)
the) theory) that) those) vested) with) corporate) powers) have) no)
personal) or) proprietary) stake) in) the) corporate) business)
enterprise.4(
2. ABUSE(OF(LIMITED(LIABILITY(FEATURE(
The) limited) liability) feature) of) the) corporation) has) often) been)
abused) by) business) in) order) to) avoid) having) to) provide)
adequate) protection) and) compensation) for) victims) of) the)
business)ventures)they)undertake.)
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2
)SEC) Opinion,) 26) June) 1989,) XIII) SEC) QUARTERLY) BULLETIN,) 19G20) (No.) 3,) Sept.)
1989)))
3
&See&Chapter&5&on)Corporate&Contract&Law.)
Article) 1775) of) the) Civil) Code) provides) that) associations) and)
societies,) whose) articles) are) kept) secret) among) the) members,)
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4
)
This) has) been) countered) by) the) development) of) jurisprudence)

of)the)doctrine)of)piercing)the)veil)of)corporate)fiction.)
3. HIGH(COST(OF(MAINTENANCE(OF(THE(CORPORATE(MEDIUM(
Sole) proprietorships) are) less) saddled) with) the) many)

requirements) and) regulations) which) corporations) are) often)
subjected)to)by)law.))
The) corporation) is) relatively) complicated) in) formation) and)

management.) When) compared) to) other) media) like) the) single)
proprietorship) or) the) partnership,) the) corporation) entails)
The)owner)is)in)command)of)his)whole)business)and)he)stands)
to)lose)as)much)as)he)puts)in)and)even)more)to)the)extent)of)all)
his)personal)holdings.)
relatively) high) cost) of) formation) and) operation.) There) is) a)

greater)degree)of)governmental)control)and)supervision)than)in)
other)forms)of)business)organization.1)
4. DOUBLE(TAXATION.(
Sole) proprietorships) work) well) only) for) carryingGon) simple) or)

small) business) endeavors,) and) do) not) function) well) in) cases) of)
large) enterprises) which) require) huge) capital) investments) and)
specialized)management)skills.)
Dividends) received) by) individuals) from) domestic) corporations)

are) subject) to) final) 10%) tax) for) income) earned) on) or) after) 01)
January)1998)(Section)24(B)(2),)1997)NIRC))
InterGcorporate) dividends) between) domestic) corporations,)

however,) are) not) subject) to) any) income) tax) (Section) 27(D)(4),)
(
B.( Partnerships( and( Other( Associations( (Arts.( 1768( and( 1775,( Civil(
Code)(
(
Partnership(
1997)NIRC))
There) is) reGimposition) of) the) 10%) improperly) accumulated)

earnings)tax)for)holding)companies)(Section)29,)1997)NIRC).)
Separate)and)distinct)juridical)personality)
The)withdrawal,)death)or)
insolvency)of)any)partner)would)
automatically)bring)about)the)
dissolution)of)the)partnership.)
A)corporation)has)a)stronger)legal)
personality,)enabling)it)to)continue)
despite)the)death,)insolvency)or)
withdrawal)of)any)of)its)
stockholders)or)members.)
Partners)are)liable)even)with)their)
personal)properties)
Limited)liability)of)investors)
A) sole) proprietorship) is) not) vested) with) juridical) personality) to)

file)or)defend)an)action.)Excellent$ Quality$ Apparel,$ Inc.$ v.$ Win$
MultiplebRich$Builders,$Inc.,$578$SCRA$272$(2009).$
Every)partner)is)an)agent)capable)
of)binding)the)partnership)
Only)the)Board)of)Directors)or)
constituted)agents)can)bind)the)
corporation)
(
VII.(COMPARED(WITH(OTHER(BUSINESS(MEDIA(
(
A.(Sole(Proprietorships(
Corporation(
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)
There)is)a)flexibility)that)partnerships)have)over)corporations.)
!
o
The) corporation) is) required) to) have) a) primary) purpose)

and) this) should) be) specified.) In) this) sense,) it) is) less)
flexible) than) partnerships) since) deviation) from) the)
primary)purpose)would)make)the)act)ultra)vires.)
"Can)a)Defective)Attempt)to)Form)a)Corporation)Result)at)Least)
in)a)Partnership?))
o Pioneer$ Insurance$ v.$ Court$ of$ Appeals,$ 175$ SCRA$ 668$
(1989).$
o Lim$Tong$Lim$v.$Philippine$Fishing$Gear$Industries,$Inc.,$
317$SCRA$728$(1999).$
$
Pioneer$Insurance$v.$Court$of$Appeals$
(
Facts:( Jacob) S.) Lim) was) engaged) in) the) airline) business) as) ownerG
operator) of) Southern) Air) Lines) [SAL].) He) entered) into) a) sales) contract)
with) Japan) Domestic) Airlines) [JDA]) for) the) purchase) of) 2) DCG3A) Type)
aircrafts) and) necessary) spare) parts.) Pioneer) Insurance) and) Surety)
Corporation) became) a) surety) in) behalf) of) Lim.) To) pay) for) the) aircrafts,)
Lim) used) funds) contributed) by) Bormaheco,) Francisco) and) Modesto)
Cervantes)&)Constancio)Maglana)to)a)new)corporation)proposed)by)Lim)
to) expand) his) airline) business.) The) 3) contributors) also) executed) 2)
indemnity) agreements) in) favor) of) Pioneer.) The) agreements) stipulated)
that) the) indemnitors) principally) bind) themselves) as) surety) in) favor) of)
owners)of)the)aircrafts)and)were)not)privy)to)the)chattel)mortgage)and)
so)it)cannot)be)foreclosed.)
(
Issue:( Whether) or) not) Bormaheco,) Maglana) and) the) Cervanteses) are)
liable) to) share) the) obligations) incurred) by) Lim,) as) de) facto) partners,) in)
view)of)the)failed)incorporation.)
)
Held:( NO.) Lim) never) had) the) intention) to) form) a) corporation) with) the)
respondents)despite)his)representations)to)them.)This)gives)credence)to)
the)crossGclaims)of)the)respondents)to)the)effect)that)they)were)induced)
and)lured)by)Petitioner)to)make)contributions)to)a)proposed)corporation)
which) was) never) formed) because) the) petitioner) reneged) on) their)
agreement) when) Lim) executed) the) chattel) mortgage) on) the) aircrafts)
without) the) knowledge) nor) consent) of) Bormaheco,) et) al.) The) record)
shows)that)the)petitioner)was)acting)on)his)own)and)not)in)behalf)of)his)
other) wouldGbe) incorporators) in) transacting) the) sale) of) the) airplanes)
and) spare) parts.) Therefore,) Bormaheco) et) al) cannot) be) held) liable) to)
contribute)and)share)the)obligation)with)Lim.)
(
Doctrine:(When)parties)come)together)intending)to)form)a)corporation,)
but)no)corporation)is)formed)due)to)some)legal)cause,)then:)
Pioneer.)Lim,)in)behalf)of)SAL,)also)then)executed)a)registered)deed)of)
chattel) mortgage) over) the) aircrafts) in) favor) of) Pioneer,) as) security) for)
the) latters) suretyship.) Lim) however) defaulted) on) his) subsequent)
installment) payments.) JDA) went) after) Pioneer,) the) latter) paying) 300k.)
Pioneer)then)filed)for)extrajudicial)foreclosure)of)the)chattel)mortgage.)
The) Cervanteses) and) Maglana) however) alleged) that) they) were) coG
)
General( Rule:( Parties) who) had) intended) to) participate) or)

actually) participated) in) the) business) affairs) of) the) proposed)
corporation) would) be) considered) as) partners) under) a) de) facto)
partnership,) and) would) be) liable) as) such) in) an) action) for)
settlement)of)partnership)obligations))
Exception:( Parties) who) took) no) part) except) to) subscribed) for)
stock) in) a) proposed) corporation,) do) not) become) partners) with)
other) subscribers) who) engaged) in) business) under) the) name) of)
!
the) pretended) corporation,) and) are) not) liable) for) action) for)
settlement)of)the)alleged)partnership)contribution.)
$
Lim$Tong$Lim$v.$Philippine$Fishing$Gear$Industries,$Inc.$
(
Facts:( On) behalf) of) "Ocean) Quest) Fishing) Corporation,") Antonio) Chua)
and)Peter)Yao)entered)into)a)contract)for)the)purchase)of)fishing)nets)of)
various) sizes) from) the) Philippine) Fishing) Gear) Industries,) Inc.) They)
claimed) that) they) were) engaged) in) a) business) venture) with) Petitioner)
Lim)Tong)Lim,)who)however)was)not)a)signatory)to)the)agreement.)The)
buyers,)however,)failed)to)pay)for)the)fishing)nets)and)the)floats;)hence,)
private) respondents) filed) a) collection) suit) against) Chua,) Yao) and)
Petitioner) Lim) Tong) Lim) in) their) capacities) as) general) partners.) The)
complaint) alleged) that) "Ocean) Quest) Fishing) Corporation") was) a)
nonexistent) corporation) and) attachment) was) made) on) the) fishing) nets)
on)board)F/B)Lourdes.)
(
Issue:( Whether) or) not) by) their) acts,) Lim,) Chua,) and) Yao) could) be)
would) have) been) inconceivable) for) Lim) to) involve) himself) so) much) in)
buying) the) boat) but) not) in) the) acquisition) of) the) aforesaid) equipment,)
without)which)the)business)could)not)have)proceeded.)Also,)under)the)
doctrine) of) corporation) by) estoppel,) all) those) who) benefited) from) the)
transaction) made) by) the) ostensible) corporation,) despite) knowledge) of)
its)legal)defects,)may)be)held)liable)for)contracts)they)impliedly)assented)
to)or)took)advantage)of.))
(
Doctrine:(
As)far)as)Lim)was)concerned,)there)was)a)corporate)entity)and)Lim)was)
allowing)himself)to)be)represented)as)part)of)the)corporation.)As)such,)
there)is)corporation)by)estoppel.)
)
Harmonize:( You) can) be) held) liable) as) a) partner) if) you) participated)
heavily)and)there)was)some)form)of)participation)on)your)part.)
)
C.(Joint(Ventures(
deemed)to)have)entered)into)a)partnership.)
)
Held:(YES.)From)the)factual)findings)of)both)lower)courts,)it)is)clear)that)
Chua,)Yao)and)Lim)are)partners.)In)their)Compromise)Agreement,)they)
subsequently)revealed)their)intention)to)pay)the)loan)with)the)proceeds)
of)the)sale)of)the)boats,)and)to)divide)equally)among)them)the)excess)or)
loss.) That) the) parties) agreed) that) any) loss) or) profit) from) the) sale) and)
operation) of) the) boats) would) be) divided) equally) among) them) also)
shows)that)they)had)indeed)formed)a)partnership.)Moreover,)it)is)clear)
that)the)partnership)extended)not)only)to)the)purchase)of)the)boat,)but)
also)to)that)of)the)nets)and)the)floats)in)furtherance)of)their)business.)It)
)
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) the) policy) in)
connection) therewith,) and) duty,) which) may) be) altered) by)
agreement)to)share)both)in)profit)and)losses.)Kilosbayan,$Inc.$v.$
Guingona,$Jr.,$232$SCRA$110$(1994).$
Under) Philippine) law,) a) joint) venture) is) a) form) of) partnership)

and)should)thus)be)governed)by)the)law)of)partnerships,)which)
would) then) include) the) features) of) separate) juridical)
!
personality,) mutual) agency) among) the) coGventurers,) and)
unlimited)liability.1)
(
D.(Cooperatives((Article(3,(R.A.(No.(6938)(
(
Cooperative(
Trust)relationship)is)centered)upon)properties,)and)which)places)
naked) titled) in) the) trustee,) and) beneficial) title) in) the)
beneficiary.2)
(
F.(Sociedades)Annimas(
Corporation(
where)upon)the)execution)of)the)public)instrument)in)which)its)
articles)of)agreement)appear,)and)the)contribution)of)funds)and)
personal) property,) becomes) a) juridical) person) ) an) artificial)
being,)invisible,)intangible,)and)existing)only)in)contemplation)of)
Separate)and)distinct)juridical)personality)
Limited)liability)of)investors)
Primary)objective)of)every)cooperative)is)selfGhelp:)to)
provide)goods)and)services)to)its)members)and)thus)
Organized)for)
profit)
law) ) with) power) to) hold,) buy,) and) sell) property,) and) to) sue)
and) be) sued) ) a) corporation) ) not) a) general) coGpartnership)
nor)a)limited)coGpartnership).).).)The)inscribing)of)its)articles)of)
agreement) in) the) commercial) register) was) not) necessary) to)
make) it) a) juridical) person;) such) inscription) only) operated) to)
show)that)it)partook)of)the)form)of)a)commercial)corporation.)
Mead$v.$McCullough,$21$Phil.$95$(1911).$
enable)them)to)attain)increased)income)and)savings)
Governed)by)principles)of)democratic)control)where)
the)members)in)primary)cooperatives)shall)have)equal)
voting)rights)on)a)oneGmemberGoneGvote)principle)
Centralized)
management)
Cooperatives) are) established) to) provide) a) strong) social) and)

economic) organization) to) ensure) that) the) tenantGfarmers) will)
enjoy)on)a)lasting)basis)the)benefits)of)agrarian)reforms.)Corpuz$
v.$Grospe,$333$SCRA$425$(2000).$
(
E.(Business(Trusts((Article(1442,(Civil(Code)((
A) sociedad( annima) was) considered) a) commercial) partnership)
The$ sociedades$ annimas$ were$ introduced) in) 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$ Consolidated$ Mining$ Co.$ v.$ Pineda,$ 98$
Phil.$711$(1956).$
As)compared)to)a)corporation,)a)business)trust)is)simply)a)deed)
of)trust)which)is)easier)and)less)expensive)to)constitute)for)it)is)
not)bound)by)any)legal)requirements)like)the)former.)It)does)not)
have)a)separate)juridical)personality,)and)is)mainly)governed)by)
contractual) doctrines) and) the) common) law) principles) on) trust.)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
!
The$ old$ Corporation$ Law$ recognized$ the$ difference$ between$

sociedades( annimas( and( corporations( and( the( Court( will( not(
apply) legal) provisions) pertaining) to) the) latter) to) the) former.)
Phil.$Product$Co.$v.$Primateria$Societe$Anonyme,$15$SCRA$301$
(1965).$
(
G.(Cuentas(En(Participacion(
A) cuentas& en& participacion) is) an) accidental) partnership)

constituted) in) a) 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)persons)interested,)and)the)latter,)on)
the)other)hand,)shall)have)no)right)of)action)against)third)person)
who)contracted)with)the)manager)unless)such)manager)formally)
transfers) his) right) to) them.) Bourns$ v.$ Carman,$ 7$ Phil.$ 117$
(1906).$
)
NATURE'AND'ATTRIBUTES'OF'A'CORPORATION'
'
I.'NATURE'OF'POWER'TO'CREATE'A'CORPORATION'(Section'16,'Article'
)
B.'Examples'
prohibition(on(the(formation(of(a(private(corporation(by(special(
legislative( act( which( is( not( a( GOCC,( since( NDC( was( merely(
required(to(extend(a(loan(to(the(new(corporation,(and(the(new(
stocks(of(the(corporation(were(to(be(issued(to(the(old(investors(
and( stockholders( of( the( insolvent( Agrix( upon( proof( of( their(
claims( against( the( abolished( corporation.( NDC) v.) Philippine)
Veterans)Bank,)192)SCRA)257)(1990).)
XII,'1987'Constitution)'
'
1987'CONSTITUTION'OF'THE'PHILIPPINES'
Section'16'(Article'XII)'
The' Congress' shall' not,' except' by' general' law,' provide' for' the'
formation,' organization,' or' regulation' of' private' corporations.'
GovernmentUowned' or' controlled' corporations' may' be' created' or'
established'by'special'charters'in'the'interest'of'the'common'good'and'
subject'to'the'test'of'economic'viability.'
'
A.'Main'Point'
a( special( charter,( and( it( follows( that( Congress( can( create(

corporations( with( special( charters( only( if( such( are( GOCCs.(
Feliciano)v.)Commission)on)Audit,)419)SCRA)363)(2004).)
o When(a(government(passes(a(charter(for(the(creation(of(
a( GOCC,( implicit( in( that( is( that( it( has( to( remain( as( a(
PNRC(which(was(constituted(under(a(special(law,(is(not(a(GOCC(
because( it( is( not( by( its( charter( owned( by( the( Government,(
although(it(is(intended(to(do(public(functions,(it(is(owned(by(the(
private( sector.( Consequently,( the( PNRC( Charter,( insofar( as( it(
creates( the( PNRC( as( a( private( corporation( and( grants( it(
corporate(powers,(is(void(for(being(unconstitutional.(The(other(
provisions( of( the( PNRC( Charter( remain( valid( as( they( can( be(
considered(as(recognition(by(the(State(that(the(unincorporated(
PNRC(is(the(local(National(Society(of(the(International(Red(Cross(
and(Red(Crescent(Movement,(and(thus(entitled(to(the(benefits,(
exemptions(and(privileges(set(forth(in(the(PNRC(Charter.( Liban)
Congress(cannot(enact(a(law(creating(a(private(corporation(with(
GOCC.( If( it( is( transformed( into( a( private( corporation,(

then(it(must(divest(itself(of(the(special(charter(it(holds.)
Doubts(whether(the(charter(would(be(valid(if(the(shares(
of(the(GOCC(are(allowed(to(be(sold,(but(it(is(allowed(to(
retain(its(charter.)
P.D.( 1717( creating( New( Agrix,( Inc.( violated( the( constitutional(
v.)Gordon,)593)SCRA)68)(2009).)
)
II.'CORPORATION'AS'A'PERSON:'
The(Constitution(explicitly(prohibits(the(creation(and(regulation(
by(special(laws(of(private(corporations,(except(for(governmentA
owned(or(controlled(corporations((GOCCs).(Veterans)Federation)
of)the)Philippines)v.)Reyes,)483)SCRA)526)(2006).)
)
A( corporation( is( but( an( association( of( individuals( under( an(

assumed( name( and( with( a( distinct( legal( entity.( In( organizing(
itself(as(a(collective(body(it(waives(no(constitutional(immunities(
appropriate(for(such(body.(Its(property(cannot(be(taken(without(
compensation;(can(only(be(proceeded(against(by(due(process(of(
!
law;( and( is( protected( against( unlawful( discrimination.) Bache) &)
Co.)(Phil.),)Inc.)v.)Ruiz,)37)SCRA)823)(1971).)
'
A.'Entitled'to'Due'Process'and'Equal'Protection'
follow( that( a( corporation,( vested( with( special( privileges( and(

franchises,(may(refuse(to(show(its(hand(when(charged(with(an(
abuse(of(such(privilege.(Hale)v.)Henkel,)201)U.S.)43)(1906).1)
The( due( process( clause( is( universal( in( its( application( to( all(
persons,(and(covers(private(corporations(within(the(scope(of(the(
guaranty(insofar(as(their(properties(are(concerned.(Smith)Bell)&)
Co.)v.)Natividad,)40)Phil.)136,)144)(1920).)
A( corporation( is( protected( by( the( constitutional( guarantee(

against(unreasonable(searches(and(seizures,(but(its(officers(have(
no( cause( of( action( to( assail( the( legality( of( the( seizures,(
regardless(of(the(amount(of(shares(of(stock(or(of(the(interest(of(
A( warrant( of( arrest( cannot( be( issued( against( a( corporation(

The( agents( of( the( corporation( can( question( the( validity( of(
searches( and( seizures( in( behalf( of( such( corporation.( In( such(
cases,(the(personality(of(the(officers(would(be(the(personality(of(
the(company.)
'
C.'Not'Entitled'to'Privilege'Against'Self'Incrimination'
Atty.(Hofilea(!(Jurisprudence(does(indicate(that(corporations(
are( not( entitled( to( a( right( against( selfAincrimination.( My( own(
view( is( that( the( right( against( selfAincrimination( may( ultimately(
relate( to( the( ultimate( penalty( of( crimes( i.e.( imprisonment.(
Perhaps(this(is(the(underlying(reason(of(why(corporations(have(
no(right(against(selfAincrimination.)
because(you(cannot(arrest(a(corporation.)
Corporations(may(not(be(held(criminally(liable,(but(they(may(be(
held(civilly(liable.)
o Criminal(liability(will(attach(to(a(corporation(only(when(
there( is( a( law( providing( that( such( act( constitutes(
corporate(criminal(liability.)
o They(may(be(deprived(of(their(corporate(personality(as(
penalty,(but(they(cannot(be(imprisoned.)
each(of(them(in(said(corporation(because(the(corporation(has(a(
personality( distinct( and( separate( from( those( of( said( officers.(
Stonehill)v.)Diokno,)20)SCRA)383)(1967).)
Since( a( corporation( is( made( up( of( people,( there( is( nothing( its(
agents( may( say( that( will( constitute( as( incriminating( for( the(
corporation.( However,( the( members( of( the( corporations( (e.g.(
corporate(officers)(may(invoke(this(right.)
'
B.'Unreasonable'Searches'and'Seizure'
While(an(individual(may(lawfully(refuse(to(answer(incriminating(
questions(unless(protected(by(an(immunity(statute,(it(does(not(
It(is(elementary(that(the(right(against(selfAincrimination(has(no(
application( to( juridical( persons.( Bataan) Shipyard) &)
Engineering)v.)PCGG,)150)SCRA)181)(1987).)
Due'Process'and'Equal'Protection'v.'SelfUIncrimination2'
The(denial(of(the(right(against(selfAincrimination(from(corporations(does(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
(Wilson(v.(United(States,(221(U.S.(361((1911);(United(States(v.(White,(322(U.S.(
694((1944).(
2
(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(
)
!
not(really(invite(state(authorities(into(the(premises(or(physical(privacy(of(
the(stockholders(or(members(who(compose(the(corporation;(but(would(
deny( acting( individuals( the( right( to( abuse( the( corporate( medium( as( a(
means(to(do(folly.((
(
On( the( other( hand,( to( deny( the( due( process( rights( or( right( against(
unreasonable( searches( and( seizures( to( corporations( would( actually( be(
to(invite(state(authorities(to(physically(intrude(into(corporate(premises,(
and(therefore(also(intrude(into(the(personal(and(business(privacy(of(the(
stockholders(or(members(who(compose(it.((
(
Perhaps( that( is( the( basis( for( the( difference( in( stance( by( the( Supreme(
Court( between( two( sets( of( constitutional( rights( with( respect( to(
corporations.)
)
D.'Bill'of'Rights'
Note:'The(corporation(as(an(artificial(being(is(very(close(to(a(real(person(
as(it(is(allowed(to(possess(and(exercise(many(human(rights.(
Freedom(of(Speech(!(YES.(
Right(against(double(jeopardy(!(YES.(
To(be(protected(from(ex(post(facto(laws(!(YES.(
Freedom( of( Religion( !( YES.( Where( the( corporation( is(

incorporated(for(religious(purposes.(
Right(to(information(!(YES.(
Protection(of(property(from(unjust(taking(!(YES.(
NonAimpairment(of(Contracts(!(YES.(
Right(to(be(informed(about(cases(!(YES.(
Speedy(disposition(of(cases(!(YES.(
Right(to(form(associations(!(YES.(
Freedom(of(Assembly(!(MAYBE.(Example:(can(a(corporation(be(
Right( against( Involuntary( Servitude( !( MAYBE.( What( can(

corporations(do(that(will(constitute(involuntary(servitude?((
Right(to(bail(!(NO.(
Write(of(Habeas(Corpus(!(NO.(
Right(against(excessive(fine(or(imprisonment(for(debt(!(NO.(
Right(to(Travel(!(NO.(
(
III.'Practice'of'Profession'
Corporations(cannot(engage(in(the(practice(of(a(profession(since(
they( lack( the( moral( and( technical( competence( required( by( the(
PRC.)ULEP)v.)The)Legal)Clinic,)223)SCRA)378)(1993).)
confidentiality( of( the( communications( of( the( corporations(

agents(may(involve(the(interest(of(the(corporate(entity.(
Access(to(Courts(!(YES.(
held(liable(where(its(employees(take(part(in(an(illegal(assembly(
wearing(the(corporate(shirt?(
Confidentiality/Privacy( of( Communication( !( YES.( Because( the(
A( corporation( engaged( in( the( selling( of( eyeglasses( and( which(

hires(optometrists(is(not(engaged(in(the(practice(of(optometry.(
Samahan)ng)Optometrists)v.)Acebedo)International)Corp.,)270)
SCRA) 298) (1997);) Alfafara) v.) Acebedo) Optical) Company,) 381)
SCRA)293)(2002).)
COUNTERUREVOLUTION:(Architectural(professional(
corporations(allowed(under(Rep.(Act(No.(9266.(
(
IV.'Liability'for'Torts'
1. A' corporation' must' be' held' liable' for' all' the' contracts' and'
default' that' arise' from' those' entered' into' by' its' agent' within'
)
!
the'scope'of'his'authority,'or'even'those'outside'the'scope'of'
his'authority,'by'which'has'been'ratified'by'the'corporation.'
A( corporation( is( civilly( liable( in( the( same( manner( as( natural(
persons( for( torts,( because( the( rules( governing( the( liability( of( a(
principal( for( a( tort( committed( by( an( agent( are( the( same(
whether(the(principal(be(a(natural(person(or(a(corporation,(and(
whether( the( agent( be( a( natural( or( artificial( person.( That( a(
principal( is( liable( for( every( tort( which( he( expressly( directs( or(
authorizes,( is( just( as( true( of( a( corporation( as( a( natural( person.(
PNB)v.)Court)of)Appeals,)83)SCRA)237)(1978).)
o
It( seems( clear( from( the( ruling( 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( the( 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( therefrom( 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(the(Philippine(National(Bank(case,(or(having(taken(
advantage( of( such( an( tortuous( act( the( corporation,(
through(its(board,(expressly(or(impliedly(ratifies(such(an(
act(or(is(estopped(from(impugning(such(an(act.(
Where(your(company(driver(came(into(an(accident(with(
your( car,( will( the( company( be( held( liable?( In( cases(
where(the(natural(person(who(committed(the(tort(is(an(
employee( of( the( corporation,( the( corporation( can( be(

held(liable(on(the(principle(of(agency.)
The(liability(of(the(corporation(with(regard(to(the(acts(of(
its( agents( and( employees( is( limited( to( instances( where(
they( are( negligent( in( the( performance( of( their( official(
duties.)
Atty.( Hofilea( !( the( corporation( as( an( artificial( being(

has( contact( with( the( world( through( its( employees( and(
officials.()
2. The' acting' officer' is' solidarily' liable' with' the' corporation' for'
the'damages'resulting'from'his'negligence'as'a'jointUtortfeasor'
o
Corporate) tort(!(consists(in(the(violation(of(a(right(given(or(
the(omission(of(a(duty(imposed(by(law;(a(breach(of(a(legal(duty.(
The(failure(of(the( corporate(employer(to(comply(with(the(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.(
Sergio)F.)Naguiat)v.)NLRC,)269)SCRA)564)(1997).)
While( in( theory( a( hospital( as( a( juridical( entity( cannot( practice(

medicine,( in( reality( it( utilizes( doctors,( surgeons( and( medical(
practitioners(in(the(conduct(of(its(business(of(facilitating(medical(
and( surgical( treatment.( Within( that( reality,( three( legal(
relationships(crisscross:((1)(between(the(hospital(and(the(doctor(
practicing(within(its(premises;((2)(between(the(hospital(and(the(
patient( being( treated( or( examined( within( its( premises;( and( (3)(
between( the( patient( and( the( doctor.( Regardless( of( its(
relationship( with( the( doctor,( the( hospital( may( be( held( directly(
liable( to( the( patient( for( its( own( negligence( or( failure( to( follow(
)
!
established(standard(of(conduct(to(which(it(should(conform(as(a(
corporation.(Professional)Services,)Inc.)v.)Court)of)Appeals,)611)
SCRA)282)(2010).(
(
Professional)Services,)Inc.)v.)Court)of)Appeals)
committed( within( its( premises.( PSI( committed( a( serious( breach( of( its(
corporate( duty( when( it( failed( to( conduct( an( immediate( investigation(
into(the(reported(missing(gauzes.(
(
Doctrine:' Regardless( of( its( relationship( with( the( doctor,( the( hospital(
(
Facts:' PSI( together( with( Dr.( Miguel( Ampil( and( Dr.( Juan( Fuentes,( was(
impleaded(by(Enrique(Agana(and(Natividad(Agana((later(substituted(by(
her( heirs),( in( a( complaint( for( damages( for( the( injuries( suffered( by(
Natividad( when( Dr.( Ampil( and( Dr.( Fuentes( neglected( to( remove( from(
her(body(two(gauzes(which(were(used(in(the(surgery(they(performed(on(
her( on( April( 11,( 1984( at( the( Medical( City( General( Hospital.( PSI( was(
may( be( held( directly( liable( to( the( patient( for( its( own( negligence( or(
failure( to( follow( established( standard( of( conduct( to( which( it( should(
conform(as(a(corporation.(
impleaded(as(owner,(operator(and(manager(of(the(hospital.(
'
Issue:'Whether(or(not(PSI(is(liable(for(the(negligence(of(Dr.(Ampil.(
'
Held:'YES.(For(purposes(of(allocating(responsibility(in(medical(negligence(
cases,(an(employerAemployee(relationship(exists(between(hospitals(and(
their( consultants.( The( Court( denied( the( defense( of( PSI( saying( that( the(
REVISED'PENAL'CODE'
Article' 102.' Subsidiary' civil' liability' of' innkeepers,' tavernkeepers' and'
proprietors'of'establishments.''
In'default'of'the'persons'criminally'liable,'innkeepers,'tavernkeepers,'
and'any'other'persons'or'corporations'shall'be'civilly'liable'for'crimes'
committed' in' their' establishments,' in' all' cases' where' a' violation' of'
defense( raised( by( PSI( consisted( of( a( mere( general( denial( of( control( or(
responsibility( over( the( actions( of( Dr.( Ampil.( Furthermore,( the( hospital(
was(projecting(Dr.(Ampil(as(their(agent.(As(such,(under(the(doctrine(of(
apparent(authority(PSI(was(liable(for(the(negligence(of(Dr.(Ampil.(
(
Finally,(as(owner(and(operator(of(Medical(City(General(Hospital,(PSI(was(
bound( by( its( duty( to( provide( comprehensive( medical( services( to(
Natividad(Agana,(to(exercise(reasonable(care(to(protect(her(from(harm,(
to( oversee( or( supervise( all( persons( who( practiced( medicine( within( its(
walls,( and( to( take( active( steps( in( fixing( any( form( of( negligence(
(
V.' Corporate' Criminal' Liability' (Articles' 102' and' 103,' Revised' Penal'
Code):'
'
municipal'ordinances'or'some'general'or'special'police'regulation'shall'
have'been'committed'by'them'or'their'employees.'
'
Innkeepers' are' also' subsidiarily' liable' for' the' restitution' of' goods'
taken' by' robbery' or' theft' within' their' houses' from' guests' lodging'
therein,' or' for' the' payment' of' the' value' thereof,' provided' that' such'
guests' shall' have' notified' in' advance' the' innkeeper' himself,' or' the'
person'representing'him,'of'the'deposit'of'such'goods'within'the'inn;'
and' shall' furthermore' have' followed' the' directions' which' such'
innkeeper'or'his'representative'may'have'given'them'with'respect'to'
the'care'and'vigilance'over'such'goods.'No'liability'shall'attach'in'case'
)
!
of' robbery' with' violence' against' or' intimidation' of' persons' unless'
committed'by'the'innkeeper's'employees.'
'
Article'103.'Subsidiary'civil'liability'of'other'persons.''
The' subsidiary' liability' established' in' the' next' preceding' article' shall'
insolvency.(
(
Issue:'Whether(or(not(West(Coast(can(be(held(liable(for(libel.(
'
Held:'NO.(The(courts(here(have(no(common(law(jurisdiction(or(powers.(
also'apply'to'employers,'teachers,'persons,'and'corporations'engaged'
in'any'kind'of'industry'for'felonies'committed'by'their'servants,'pupils,'
workmen,'apprentices,'or'employees'in'the'discharge'of'their'duties.'
If(they(have(any(powers(not(conferred(by(statute,(expressly(or(impliedly,(
they( would( naturally( come( from( Spanish( and( not( from( common( law(
sources.( Under( the( Spanish( criminal( law( and( procedure,( a( corporation(
could(not(have(been(proceeded(against(criminally,(and(as(such(it(could(
not( have( committed( a( crime( in( which( a( willful( purpose( or( a( malicious(
intent( was( required.( Criminal( actions( would( have( been( restricted( or(
limited,( under( that( system,( to( the( officials( of( such( corporations( and(
'
Corporations( cannot( be( held( criminally( liable( within( Philippine(

jurisdiction( since( there( is( no( law( relating( to( the( practice( and(
procedure( in( criminal( actions( whereby( a( corporation( may( be(
brought(to(court(to(be(proceeded(against(criminally.(West)Coast)
Life)Ins.)Co.)v.)Hurd,)27)Phil.)401)(1914).)
o Other( reasons:( (1)( the( impossibility( of( imposing( penal(
sanctions( on( a( corporation( and( (2)( lack( of( criminal(
never(would(have(been(directed(against(the(corporation(itself.(
(
Doctrine:' Corporations(cannot(be(indicted(criminally(because(such(acts(
require(malicious(intent,(which(a(corporation(cannot(possess.(
intent( or( malice( since( a( corporation( has( no( mind( of( its(
own.1)
)
corporation( cannot( be( held( criminally( liable( for( the( crime( of(
estafa(punished(under(the(Revised(Penal(Code(and(prior(to(the(
promulgation( of( the( Trust( Receipts( Decree( under( the( doctrine(
that(the(corporation(was([not](directly(required(by(law(to(do(an(
act(in(a(given(manner,(and(the(same(law(makes(the(person(who(
West)Coast)Life)Ins.)Co.)v.)Hurd)
'
Facts:' A(complaint(for(libel(was(filed(against(West(Coast(Life(Insurance(
Co.,(alleging(that(its(officers(John(Northcott(and(Manuel(Grey(caused(to(
be(printed(and(distributed(damaging(circulars(detrimental(to(the(Insular(
Life(Insurance(Company.(The(circulars(represent(that(Insular(Life(was(in(
a( dangerous( financial( condition( and( on( the( point( of( going( into(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
A( corporate( officer( who( signs( the( trust( receipt( in( behalf( of( the(
fails( to( perform( the( act( in( the( prescribed( manner( expressly(
liable(criminally.(Sia)v.)Court)of)Appeals,)121)SCRA)655)(1983).)
BUT:( 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) v.) Court) of) Appeals,)
401)SCRA)6478)(2003).)
)
Sia)v.)Court)of)Appeals)
'
personally( had( committed( any( fraud( or( deceit( in( connection( therewith(
or( that( he( had( personally( been( responsible( for( or( benefited( from( the(
corporations( failure( to( pay( the( bank( the( balance( due( under( the( trust(
receipt.(
(
Facts:' Jose( Sia( is( engaged( in( the( manufacturing( of( Steel( Office(
Equipment.(As(president(and(general(manager(of(Metal(Manufacturing(
of( the( Philippines,( he( obtained( delivery( of( 150( M/T( Cold( Rolled( Steel(
Sheets(under(a(Trust(Receipt(Agreement.(According(to(the(Agreement,(
he(was(obliged(to(hold(the(said(steel(sheets(in(trust(and(sell(them(then(
turn( over( the( proceeds( to( the( Continental( bank.( However,( he( failed( to(
perform( such( obligation,( and( instead( refused( to( return( the( said( cold(
Note:(If(this(case(was(decided(today,(Sia(may(be(held(liable(because(P.D.(
115(punishes(the(officers(of(a(corporation(who(violate(the(provisions(of(
the(trust(receipt.(
rolled( sheets( or( account( for( the( proceeds( thereof,( causing( damage( to(
Continental(Bank.(Sia(was(then(charged(of(estafa.'
'
Issue:' Whether(or(not(Sia(may(be(held(criminally(liable(as(an(officer(of(
the(corporation.(
'
Held:' NO.( Sia( was( never( intended( to( be( equally( liable( as( the(
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) v.) Court) of)
Appeals,)301)SCRA)459)(1999).)
corporation.(Without(being(made(so(liable(personally(as(the(corporation(
is,(there(would(then(be(no(basis(for(holding(him(criminally(liable(for(any(
violation(of(the(trust(receipt.(This(is(made(clearly(so(upon(consideration(
of( the( fact( that( in( the( violation( of( the( trust( agreement,( only( the(
corporation(benefited(and(not(Sia(personally.(
'
Doctrine:' (Concurring( Opinion( of( Justice( Teehankee)( All( of( the( acts(
involved( were( corporate( acts( with( Sia( representing( the( corporation( as(
its( president( and( general( manager.( There( is( not( the( slightest( evidence(
that( these( corporate( acts( were( unauthorized( or( that( petitioner(
)
No( criminal( suit( can( lie( against( a( corporation:( Times,) Inc.) v.)
Reyes,)39)SCRA)303)(1971).))
BUT:( A( corporation( can( be( a( realApartyAinAinterest( for( the(
When( a( criminal( statute( forbids( the( corporation( itself( from(

doing(an(act,(the(prohibition(extends(to(the(Board(of(Directors,(
and( to( each( director( separately( and( individually.( People) v.)
Concepcion,)44)Phil.)129)(1922).)
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(obviously(acts,(and(can(act,(only(by(and(through(its(
human(agents,(and(it(is(their(conduct(which(the(law(must(deter.(
The( employee( or( agent( of( a( 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.( The) Executive) Secretary) v.) Court) of) Appeals,) 429) SCRA) 81)
(2004);)People)v.)Tan)Boon)Kong,)54)Phil.)607)(1930).)
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,(
however(slight(his(contribution(may(be.(
)
The)Executive)Secretary)v.)Court)of)Appeals)
'
Facts:' The( Asian( Recruitment( Council( Philippine( Chapter,( Inc.( (ARCOA
Phil.)(filed(a(petition(for(declaratory(relief(to(declare(as(unconstitutional(
Section( 2,( paragraph( (g),( Section( 6,( paragraphs( (a)( to( (j),( (l)( and( (m),(
Section(7,(paragraphs((a)(and((b),(and(Sections(9(and(10(of(Republic(Act(
No.( 8042,( otherwise( known( as( the( Migrant( Workers( and( Overseas(
Filipinos(Act(of(1995.((
'
Issue:' Whether( or( not( Section( 6( of( R.A.( No.( 8042( which( provides( that(
employees( of( recruitment( agencies( may( be( criminally( liable( for( illegal(
recruitment(is(valid.(
'
Held:'YES.(An(employee(of(a(company(or(corporation(engaged(in(illegal(
recruitment(may(be(held(liable(as(principal,(together(with(his(employer,(
if( it( is( shown( that( he( actively( and( consciously( participated( in( illegal(
recruitment.((
(
Doctrine:( 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( a( crime.( The(
corporation(obviously(acts,(and(can(act,(only(by(and(through(its(human(
agents,(and(it(is(their(conduct(which(the(law(must(deter.(The(employee(
or( agent( of( a( corporation( engaged( in( unlawful( business( naturally( aids(
People)v.)Tan)Boon)Kong)
)
Facts:'Tan(Boon(Kong(is(the(manager(of(the(Visayan(General(Supply(Co.(
Inc.( in( Iloilo( which( was( engaged( in( the( purchase( and( sale( of( sugar,(
bayon,(copra(and(other(native(products.(In(1924,(he(filed(a(false(return(
for( the( purpose( of( taxation( thereby( failing( to( declare( the( amount( of(
200k(and(voluntarily(and(illegally(not(paying(the(Government(as(internal(
revenue( percentage( taxes( the( sum( of( P3k,( corresponding( to( 112( %( of(
said(undeclared(sales.'
'
Issue:'Whether(or(not(Tan(Boon(Kong,(as(manager(of(the(company,(may(
be(held(criminally(liable.(
'
Held:'YES.(A(corporation(can(act(only(through(its(officers(and(agents(and(
where(the(business(itself(involves(a(violation(of(law,(that(correct(rule(is(
that(all(who(participate(in(it(are(criminally(liable.(Tan(Boon(Kong,(being(
the(author(of(the(illegal(act,(must(be(held(liable.(
'
Doctrine:' For( crimes( committed( by( a( corporation,( the( responsible(
officers(thereof(would(be(personally(liable(for(the(crime.(Officer(of(the(
corporation( will( be( personally( liable( for( the( crime( only( if( it( is( directly(
prohibited( by( law,( and( not( if( the( act( was( merely( in( violation( of( the(
agreement(of(parties.(
)
If( the( crime( is( committed( by( a( corporation,( the( directors,(

officers,(employees(or(other(officers(thereof(responsible(for(the(
offense( shall( be( charged( and( penalized( for( the( crime,( precisely(
because(of(the(nature(of(the(crime(and(the(penalty(therefor.(A(
corporation(cannot(be(arrested(and(imprisoned;(hence,(cannot(
be(penalized(for(a(crime(punishable(by(imprisonment.(However,(
a(corporation(may(be(charged(and(prosecuted(for(a(crime(if(the(
imposable( penalty( is( fine.( Even( if( the( statute( prescribes( both(
fine( and( imprisonment( as( penalty,( a( corporation( may( be(
prosecuted(and,(if(found(guilty,(may(be(fined.(Ching)v.)Secretary)
of)Justice,)481)SCRA)602)(2006))
When(a(criminal(statute(designates(an(act(of(a(corporation(or(a(
crime(and(prescribes(punishment(therefor,(it(creates(a(criminal(
offense( which,( otherwise,( would( not( exist( and( such( can( be(
committed( only( by( the( corporation.( But( when( a( penal( statute(
does(not(expressly(apply(to(corporations,(it(does(not(create(an(
offense(for(which(a(corporation(may(be(punished.(On(the(other(
hand,(if(the(statute,(defines(a(crime(that(may(be(committed(by(a(
corporation( but( prescribes( the( penalty( therefor( to( be( suffered(
by( the( officers,( directors,( or( employees( of( such( corporation( or(
other(persons(responsible(for(the(offense,(only(such(individuals(
will( suffer( such( penalty.( Corporate( officers( or( employees,(
through( whose( act,( default( or( omission( the( corporation(
commits(a(crime,(are(themselves(individually(guilty(of(the(crime.(
Ching)v.)Secretary)of)Justice,)481)SCRA)602)(2006).)
)BUT'SEE:)Consolidated)Bank)v.)Court)of)Appeals,)356)SCRA)671)
(2003).)
)
)
Consolidated)Bank)v.)Court)of)Appeals)
'
Facts:'Continental(Cement(Corp(obtained(from(Consolidated(Bank(letter(
of(credit(used(to(purchase(500,000(liters(of(bunker(fuel(oil.(Respondent(
Corporation(made(a(marginal(deposit(to(petitioner.(A(trust(receipt(was(
executed( by( respondent( corporation,( with( respondent( Gregory( Lim( as(
signatory.( Claiming( that( respondents( failed( to( turn( over( the( goods( or(
proceeds,(petitioner(filed(a(complaint(for(sum(of(money(before(the(RTC(
of(Manila.(In(their(answer,(respondents(aver(that(the(transaction(was(a(
simple(loan(and(not(a(trust(receipt(one,(and(that(the(amount(claimed(by(
petitioner(did(not(take(into(account(payments(already(made(by(them.((
'
Issue:' Whether( or( not( Gregory( Lim( and( his( spouse( can( be( held(
personally(liable.(
'
Held:( NO.' Petitioner's( argument( that( respondent( Corporation( and(
respondent( Lim( and( his( spouse( are( one( and( the( same( cannot( be(
sustained.( The( transactions( sued( upon( were( clearly( entered( into( by(
respondent( Lim( in( his( capacity( as( Executive( Vice( President( of( the(
corporation.(We(stress(the(hornbook(law(that(corporate(personality(is(a(
shield( against( personal( liability( of( its( officers.( Thus,( we( agree( that(
respondents(Gregory(T.(Lim(and(his(spouse(cannot(be(made(personally(
liable(since(respondent(Lim(entered(into(and(signed(the(contract(clearly(
in(his(official(capacity(as(Executive(Vice(President.(The(personality(of(the(
corporation(is(separate(and(distinct(from(the(persons(composing(it'
'
Doctrine:' Hornbook( law( that( corporate( personality( is( a( shield( against(
personal(liability(of(its(officers'
)
The( owners( of( a( corporate( organization( are( its( stockholders(

and(they(are(to(be(distinguished(from(its(directors(and(officers.(
Stockholders,( being( basically( investors( in( the( corporation,( and(

with( the( management( of( its( business( generally( vested( in( the(
Board(of(Directors,(cannot(be(held(liable(for(the(criminal(offense(
committed(on(behalf(of(the(corporation,(unless(they(personally(
took( part( in( the( same.( Espiritu) v.) Petron) Corp.,) 605) SCRA) 245)
(2009).)
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( and( 21( of( the( Civil(
Code,( but( which( requires( a( clear( proof( of( malice( or( bad( faith.(
ABScCBN)Broadcasting)Corp.)v.)Court)of)Appeals,)301)SCRA)589)
(1999).)
Apart( from( its( sweeping( allegation( that( respondents(
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( any( other( form( of(
defamation,( and( does( not( qualify( whether( the( plaintiff( is( a(
natural( or( juridical( person.( Therefore,( a( juridical( person( can(
acts(may(be(held(criminally(liable.(Cruzvale,)Inc.)v.)Eduque,)589)
SCRA)534,)546)(2009).)
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).)
A(corporation(may(be(sued(for(moral(damages,(but(it(cannot(sue(
A( corporation,( being( an( artificial( person,( cannot( experience(
physical( sufferings,( mental( anguish,( fright,( serious( anxiety,(
wounded( feelings,( moral( shock( or( social( humiliation( which( are(
basis( for( moral( damages( under( Article( 2217( of( the( Civil( Code.(
However,( a( corporation( may( have( a( good( reputation( which,( if(
besmirched,(may(be(a(ground(for(the(award(of(moral(damages.(
Mambulao) Lumber) Co.) v.) Philippine) National) Bank,) 22) SCRA)
359)(1968);)APT)v.)Court)of)Appeals,)300)SCRA)579)(1998).)
PREVAILING'RULE:'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(griefs(of(lifeall(of(which(cannot(be(
suffered( by( an( artificial( person.( Prime) White) Cement) Corp.) v.)
IAC,)220)SCRA)103)(1993).1)
for(moral(damages((except(for(human(relations))
NONETHELESS:(Likewise,(an(educational(corporations(claim(for(
misappropriated(or(converted(its(money(placements,(petitioner(
failed( to( establish( the( particular( role( or( actual( participation( of(
each( respondent( in( the( criminal( act;( neither( was( it( shown( that(
they(assented(to(its(commission.(It(is(basic(that(only(corporate(
officers( shown( to( have( participated( in( the( alleged( anomalous(
)
VI.'Recovery'of'Moral'and'Other'Damages'
BUT:( The( statement( in( People) v.) Manero) and) Mambulao)

Lumber) Co.) v.) PNB,( that( a( corporation( may( recover( moral(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
(LBC( Express,( Inc.( v.( Court( of( Appeals,( 236( SCRA( 602( (1994);( Acme( Shoe,(
Rubber(&(Plastic(Corp.(v.(Court(of(Appeals,(260(SCRA(714((1996);(Solid(Homes,(
Inc.(v.(Court(of(Appeals,(275(SCRA(267((1997);(NPC(v.(Philipp(Brothers(Oceanic,(
Inc.,( 369( SCRA( 629( (2001);( Flight( Attendants( and( Stewards( Association( of( the(
)
!
VII.'CORPORATE'NATIONALITY:'UNDER'WHOSE'LAWS'INCORPORATED'
(Section'123)'
'
Section'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)'
the( citizenship( requirement( is( to( prevent( aliens( from( assuming(

control(of(public(utilities,(which(may(be(inimical(to(the(national(
interest.( This( specific( provision( explicitly( reserves( to( Filipino(
citizens( control( of( public( utilities,( pursuant( to( an( overriding(
economic( goal( of( the( 1987( Constitution:( to( conserve( and(
develop( our( patrimony( and( to( ensure( a( a( selfA( reliant( and(
independent( national( economy( effectively( controlled( by(
GENERAL'RULE:'The'Incorporation'Test)
o If( a( corporation( is( formed( under( the( laws( of( the(
Philippines,(then(it(is(a(domestic(corporation(regardless(
o
of(who(owns(the(company(at(that(point.)
You( look( at( the( stockholding( of( the( company( when( it(
becomes( necessary( to( comply( with( certain(
requirements(of(the(law.)
" The( national( of( whoever( owns( the( controlling(
shares( of( a( corporation( is( deemed( to( be( either(
foreign( or( domestic( depending( on( the(
"
The( 1987( Constitution( provides( for( the( Filipinization( of( public(

utilities( by( requiring( that( any( form( of( authorization( for( the(
operation(of(public(utilities(should(be(granted(only(to(citizens(of(
the( Philippines( or( to( corporation( or( associations( organized(
under( the( laws( of( the( Philippines( at( least( sixty( per( centum( of(
whose(capital(is(owned(by(such(citizens.(The(evident(purpose(of(
'
Domestic( corporations( which( are( under( the( control( of(

nationals( of( the( enemy( country( are( deemed( foreign(
enemy( corporations.( Haw) Pia) v.) China) Banking) Corp.,)
80)Phil.)604)(1948).1)
Filipinos.(We(rule(that(the(term(capital(in(Section(11,(Article(
XII(of(the(Constitution(refers(only(to(shares(of(stock(entitled(to(
vote( in( the( election( of( directors,( and( thus( in( the( present( case(
only( to( common( shares,( and( also( preferred( shares( that( are(
entitled( to( vote,( and( not( the( total( outstanding( capital( stock(
comprising( both( common( and( nonAvoting( preferred( shares.)
Gamboa) v.) Teves,) 652) SCRA) 690) (2011);) affirmed) in) Heirs) of)
nationality(of(the(controlling(owner.)
A( corporation( may( be( a( Philippine( corporation(
BUT(not(a(Philippine(national.)
Gamboa)v.)Teves,)682)SCRA)397)(2012).)
)
)
EXCEPTION:'Test'Of'Controlling'Ownership)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Philippines( v.( Philippine( Airlines,( 559( SCRA( 252( (2008);( Employees( Union( of(
Bayer(Phils.(V.(Bayer(Philippines,(Inc.,(636(SCRA(473((2010).(
(Filipinas(Compania(de(Seguros(v.(Christern,(Huenefeld(&(Co.,(Inc.,(89(Phil.(54(
(1951);(Davis(Winship(v.(Philippine(Trust(Co.,(90(Phil.(744((1952).(
)
Rachelle Anne Gutie, 11/13/13 2:36 PM

Comment [1]: Landmark!case!
!
A.'Exploitation'of'Natural'Resources'(Section'140;'Section'2,'Article'XII,'
1987'Constitution)'
'
labor' intensity' of' the' activity,' the' export' potential,' as' well' as' other'
factors' which' are' germane' to' the' realization' and' promotion' of'
business'and'industry.'
Section'140.'Stock'ownership'in'certain'corporations.'
Pursuant'to'the'duties'specified'by'Article'XIV'of'the'Constitution,'the'
'
National' Economic' and' Development' Authority' shall,' from' time' to'

time,' make' a' determination' of' whether' the' corporate' vehicle' has'
been' used' by' any' corporation' or' by' business' or' industry' to' frustrate'
the' provisions' thereof' or' of' applicable' laws,' and' shall' submit' to' the'
Batasang' Pambansa,' whenever' deemed' necessary,' a' report' of' its'
findings,' including' recommendations' for' their' prevention' or'
correction.'
'
Maximum' limits' may' be' set' by' the' Batasang' Pambansa' for'
stockholdings'in'corporations'declared'by'it'to'be'vested'with'a'public'
interest' pursuant' to' the' provisions' of' this' section,' belonging' to'
individuals' or' groups' of' individuals' related' to' each' other' by'
consanguinity'or'affinity'or'by'close'business'interests,'or'whenever'it'
is'necessary'to'achieve'national'objectives,'prevent'illegal'monopolies'
or' combinations' in' restraint' or' trade,' or' to' implement' national'
economic' policies' declared' in' laws,' rules' and' regulations' designed' to'
promote'the'general'welfare'and'foster'economic'development.'
'
In'recommending'to'the'Batasang'Pambansa'corporations,'business'or'
industries' to' be' declared' vested' with' a' public' interest' and' in'
formulating'proposals'for'limitations'on'stock'ownership,'the'National'
Economic' and' Development' Authority' shall' consider' the' type' and'
nature' of' the' industry,' the' size' of' the' enterprise,' the' economies' of'
scale,' the' geographic' location,' the' extent' of' Filipino' ownership,' the'
Section'2.'(Article'XII)'
All'lands'of'the'public'domain,'waters,'minerals,'coal,'petroleum,'and'
other' mineral' oils,' all' forces' of' potential' energy,' fisheries,' forests' or'
timber,' wildlife,' flora' and' fauna,' and' other' natural' resources' are'
owned'by'the'State.'With'the'exception'of'agricultural'lands,'all'other'
natural' resources' shall' not' be' alienated.' The' exploration,'
development,' and' utilization' of' natural' resources' shall' be' under' the'
full' control' and' supervision' of' the' State.' The' State' may' directly'
undertake' such' activities,' or' it' may' enter' into' coUproduction,' joint'
venture,' or' productionUsharing' agreements' with' Filipino' citizens,' or'
corporations'or'associations'at'least'60'per'centum'of'whose'capital'is'
owned' by' such' citizens.' Such' agreements' may' be' for' a' period' not'
exceeding'twentyUfive'years,'renewable'for'not'more'than'twentyUfive'
years,'and'under'such'terms'and'conditions'as'may'provided'by'law.'In'
cases'of'water'rights'for'irrigation,'water'supply,'fisheries,'or'industrial'
uses' other' than' the' development' of' waterpower,' beneficial' use' may'
be'the'measure'and'limit'of'the'grant.'
'
The' State' shall' protect' the' nations' marine' wealth' in' its' archipelagic'
waters,' territorial' sea,' and' exclusive' economic' zone,' and' reserve' its'
use'and'enjoyment'exclusively'to'Filipino'citizens.'
'
The' Congress' may,' by' law,' allow' smallUscale' utilization' of' natural'
resources'by'Filipino'citizens,'as'well'as'cooperative'fish'farming,'with'
)
!
priority' to' subsistence' fishermen' and' fish' workers' in' rivers,' lakes,'
bays,'and'lagoons.'
'
The' President' may' enter' into' agreements' with' foreignUowned'
corporations'involving'either'technical'or'financial'assistance'for'largeU
scale' exploration,' development,' and' utilization' of' minerals,'
petroleum,'and'other'mineral'oils'according'to'the'general'terms'and'
conditions' provided' by' law,' based' on' real' contributions' to' the'
economic' growth' and' general' welfare' of' the' country.' In' such'
agreements,'the'State'shall'promote'the'development'and'use'of'local'
scientific'and'technical'resources.'
'
The'President'shall'notify'the'Congress'of'every'contract'entered'into'
in' accordance' with' this' provision,' within' thirty' days' from' its'
execution.'
including( nonAvoting( shares,( would( be( entitled( to( vote.(

Therefore,( in( those( eight( case( enumerated( in( Section( 6,( even(
foreigners( who( hold( nonAvoting( shares( would( be( entitled( to(
vote.1(
'
B.'Ownership'of'Private'Land'(Section'7,'Article'XII,'1987'Constitution)'
'
Save' in' cases' of' hereditary' succession,' no' private' lands' shall' be'
transferred' or' conveyed' except' to' individuals,' corporations,' or'
associations'qualified'to'acquire'or'hold'lands'of'the'public'domain.'
'
'
In(order(to(exploit(natural(resources,(the(corporations(must(be(
to( ownership( of( lands( in( the( Philippinesit( is( basic( that( an(
assignor( or( seller( cannot( assign( or( sell( something( he( does( not(
own(at(the(time(the(ownership,(or(the(rights(to(the(ownership,(
are(to(be(transferred(to(the(assignee(or(buyer.(The(assignment(
by(PNCC(of(the(real(properties(to(a(nominee(to(be(designated(by(
Radstock( is( a( circumvention( of( the( constitutional( prohibition(
against( a( private( foreign( corporation( owning( lands( in( the(
of(Philippine(nationality.(
The( constitutional( provision( does( not( distinguish( between(

voting(shares(and(nonAvoting(shares.(So(that,(even(if(the(voting(
shares( are( controlled( by( Filipinos,( if( the( total( shareholdings( of(
the( company( (both( voting( and( nonAvoting)( does( not( meet( the(
minimum( 60%( Filipino( ownership( requirement( of( the(
Constitution,( such( corporation( would( still( not( be( qualified( to(
engage( in( activities( that( seek( to( exploit( our( natural( resources.(
The( broadness( of( the( constitutional( language( by( not(
distinguishing( voting( from( nonAvoting( shares( seems( to( square(
with( Section( 6( of( the( Corporation( Code,( where( in( eight(
fundamental(corporate(restructuring(or(transactions,(all(shares,(
Radstock,( a( foreign( corporation( with( unknown( owners( whose(

nationalities( are( also( unknown,( is( not( qualified( to( own( land( in(
the(Philippines,(and(therefore(also(disqualified(to(own(the(rights(
Philippines.)Strategic)Alliance)Dev.)Corp.)v.)Radstock)Securities)
Ltd.,)607)SCRA)413)(2009).)
)
'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
Note:' Atty.( Hofilea( !( the( parties( probably( knew( from( the( beginning(
that(Radstock(could(not(own(property,(and(that(is(why(they(resorted(to(
an( assignment( setAup( whereby( Radstock( has( rights( of( ownership( over(
the(property(assigned.(
)
which(is(adversely(affected(by(the(capacity(of(the(corporation(to(
own(landthat(is,(the(corporation(becomes(disqualified(to(own(
land.)J.G.)Summit)Holdings,)Inc.)v.)Court)of)Appeals,)450)SCRA)
169)(2005).)
The( registration( of( the( donation( of( land( to( an( unincorporated(
religious( organization,( whose( trustees( are( foreigners,( would(
violate( constitutional( prohibition( and( the( refusal( would( not( be(
in(violation(of(the(freedom(of(religion(clause.(The(fact(that(the(
religious( association( has( no( capital( stock( does( not( suffice( to(
escape(the(constitutional(inhibition,(since(it(is(admitted(that(its(
members( are( of( foreign( nationalityand( the( spirit( of( the(
Constitution( demands( that( in( the( absence( of( capital( stock,( the(
controlling( membership( should( be( composed( of( Filipino(
citizens.( Register) of) Deeds) of) Rizal) v.) Ung) Sui) Si) Temple,) 97)
Phil.)58)(1955).)
BUT:) A( corporation( sole( being( a( creature( prior( to( the(

constitution,( has( no( nationality.( If( a( nationality( is( sought( to( be(
determined,(the(same(depends(of(the(nationality(of(the(majority(
of( the( lay( members( and( not( on( the( nationality( of( the( sole(
corporator.)Roman)Catholic)Apostolic)Administrator)of)Davao,)
Inc.) v.) LRC) and) the) Register) of) Deeds) of) Davao,) 102) Phil.) 596)
(1957).)
(
Note:' Atty.( Hofilea( !( if( 5( years( from( now,( the( population( of( the( lay(
members( of( the( church( is( mostly( Koreans,( would( that( mean( that( the(
corporation(sole(can(no(longer(own(real(property?(
)
If(the(foreign(shareholdings(in(a(landholding(corporation(exceed(
40%,(it(is(not(the(foreign(stockholders(ownership(of(the(shares(
The(prohibition(in(the(Constitution(applies(only(to(ownership(of(
land;( it( does( not( extend( to( immovable( or( real( property( as(
defined( under( Article( 415( of( the( Civil( Code.( Otherwise,( we(
would( have( a( strange( situation( where( the( ownership( of(
immovable( property( such( as( trees,( plants( and( growing( fruit(
attached( to( the( land( would( be( limited( to( Filipinos( and( Filipino(
corporations( only.( J.G.) Summit) Holdings,) Inc.) v.) Court) of)
Appeals,)450)SCRA)169)(2005).)
'
C.'Public'Utilities'(Section'11,'Article'XII,'Constitution)'
'
No' franchise,' certificate,' or' any' other' form' of' authorization' for' the'
operation' of' a' public' utility' shall' be' granted' except' to' citizens' of' the'
Philippines'or'to'corporations'or'associations'organized'under'the'laws'
of'the'Philippines,'at'least'sixty'per'centum'of'whose'capital'is'owned'
by' such' citizens;' nor' shall' such' franchise,' certificate,' or' authorization'
be'exclusive'in'character'or'for'a'longer'period'than'fifty'years.'Neither'
shall'any'such'franchise'or'right'be'granted'except'under'the'condition'
that' it' shall' be' subject' to' amendment,' alteration,' or' repeal' by' the'
Congress' when' the' common' good' so' requires.' The' State' shall'
encourage'equity'participation'in'public'utilities'by'the'general'public.'
)
!
long(as(it(does(not(operate(them(to(serve(the(public.(There(is(a(
clear(distinction(between(operation(of(a(public(utility(and(the(
ownership( of( the( facilities( and( equipment( used( to( serve( the(
public.(Tatad)v.Garcia,)Jr.,)243)SCRA)436)(1995).)
o Note:' Atty.( Hofilea( !( The( nationality( requirement(
applies( to( anyone( who( operates( a( public( utility.( The(
The' participation' of' foreign' investors' in' the' governing' body' of' any'
public'utility'enterprise'shall'be'limited'to'their'proportionate'share'in'
its' capital,' and' all' the' executive' and' managing' officers' of' such'
corporation'or'association'must'be'citizens'of'the'Philippines.'
(
Unlike( the( provisions( on( the( exploitation( of( natural( resources,(

the( aforequoted( provisions( expressly( includes( the( place( of(
incorporation(test(and(requires(that(only(domestic(corporations(
with( at( least( 60%( of( the( capital( stock( owned( by( Filipinos( may(
own(and(operate(public(utilities(in(the(Philippines.1(
The(nationality(test(for(public(utilities(applies(not(at(the(time(of(
the( grant( of( the( primary( franchise( that( makes( a( corporation( a(
juridical(person,(but(at(the(grant(of(the(secondary(franchise(that(
authorizes(the(corporation(to(engage(in(a(nationalized(industry.)
People)v.)Quasha,)93)Phil.)333)(1953).)
The( primary( franchise,( that( is,( the( right( to( exist( as( such,( is(
vested(in(the(individuals(who(compose(the(corporation(and(not(
in(the(corporation(itself(and(cannot(be(conveyed(in(the(absence(
of(a(legislative(authority(to(do(so.(The(secondary(franchises(are(
vested( in( the( corporation( and( may( ordinarily( be( conveyed( or(
mortgaged( under( a( general( power( granted( to( a( corporation( to(
dispose( of( its( property,( except( such( special( or( secondary(
franchises(as(are(charged(with(a(public(use.)J.R.S.)Business)Corp.)
v.)Imperial)Insurance,)11)SCRA)634)(1964).)
The( Constitution( requires( a( franchise( for( the( operation( of( a(

public( utility;( however,( it( does( not( require( a( franchise( before(
one(can(own(the(facilities(needed(to(operate(a(public(utility(so(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
nationality( requirement( does( not( need( to( be( complied(

with(if(it(is(merely(setting(up(or(owning(facilities(used(to(
deliver(public(utilities.)
'
D.'Mass'Media'(Section'11(1),'Article'XVI,'1987'Constitution)'
'
Section'11.'(Article'XVI)'
1.'The'ownership'and'management'of'mass'media'shall'be'limited'to'
citizens' of' the' Philippines,' or' to' corporations,' cooperatives' or'
associations,'whollyUowned'and'managed'by'such'citizens.'
'
The' Congress' shall' regulate' or' prohibit' monopolies' in' commercial'
mass'media'when'the'public'interest'so'requires.'No'combinations'in'
restraint'of'trade'or'unfair'competition'therein'shall'be'allowed.'
'
2.'The'advertising'industry'is'impressed'with'public'interest,'and'shall'
be' regulated' by' law' for' the' protection' of' consumers' and' the'
promotion'of'the'general'welfare.'
'
Only' Filipino' citizens' or' corporations' or' associations' at' least' seventy'
per'centum'of'the'capital'of'which'is'owned'by'such'citizens'shall'be'
allowed'to'engage'in'the'advertising'industry.'
)
Rachelle Anne Gutierrez 1/21/14 6:00 PM

Comment [2]: !
Franchise!of!public!utilities!!!at!least!60%!
owned,!proportional!management!
!
Mass!Media!!!100%!owned!and!managed!
!
Advertising!!!70%!owned,!proportional!
management!
The(term("mass(media"(shall(mean(the(gathering,(transmission(
of( news,( information,( messages,( signals,( and( forms( of( written,(
oral( and( all( visual( communication( and( shall( embrace( the( print(
medium,( radio,( television,( films,( movies,( advertising( in( all( its(
phases,(and(their(business(managerial.1(!
only( 100%( Filipino( ownership( of( the( capital( stock( of( the(
corporation,(but(also(100%AFilipino(management(of(the(entity.6!
The( distinctive( features( of( any( mass( media( undertaking( is( the(
dissemination( of( information( and( ideas( to( the( public,( or( a(
portion(thereof.2(!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
(Pres.(Decree(36,(as(amended(by(Pres.(Decrees(191(and(197.((
(DOJ(Opinion(No.(120,(series(of(1982.(((
3
(Section(2,(Pres.(Decree(576;(SEC(Opinion,(24(March(1983,(addressed(to(Justice(
Manuel(Lazaro.((
2
Cable(Industry:(Cable(TV(operations(shall(be(governed(by(E.O.(
No.( 205( (s.1987).( If( CATV( operators( offer( public(
telecommunications( services,( they( shall( be( treated( just( like( a(
public(telecommunications(entity.((NTC(Memo(Circular(No.(8A9A
95)(
It(is(divided(into(the(print(media(and(the(broadcast(media;(!
o The( broadcast( media( includes( radio( and( television(
broadcasting( in( all( their( aspects( and( all( other(
cinematographic(or(radio(promotion(and(advertising.3(!
The( term( covers( any( medium( of( communication,( a(
newspaper,( radio,( motion( pictures,( or( television,(
designed(to(reach(the(masses(and(that(tends(to(set(the(
Although( the( constitutional( provision( governing( mass( media(

does( not( expressly( include( the( place( of( incorporation( test,( the(
same( shall( be( deemed( included( under( the( same( principle(
governing(exploitation(of(natural(resources.(In(fact,(the(ancillary(
control(test(for(mass(medium(under(the(Constitution(is(actually(
more(stringent(than(in(other(defined(areas,(since(it(requires(not(
'
standards,(ideals(and(aims(of(the(masses.4(The(term(has(
also(been(opined(to(include(cable(television.5!
'
The'participation'of'foreign'investors'in'the'governing'body'of'entities'
in' such' industry' shall' be' limited' to' their' proportionate' share' in' the'
capital' thereof,' and' all' the' executive' and' managing' officers' of' such'
entities'must'be'citizens'of'the'Philippines.'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
(DOJ(Opinion(163,(s.(1973;(SEC(Opinion(dated(15(July(1991,(XXV(SEC(QUARTERLY(
BULLETIN,(31((No.(4,(Dec.(1991).((
5
(The( National( Telecommunications( Commission( (NTC),( which( regulates( and(
supervises( the( cable( television( industry( in( the( Philippines( under( Section( 2( of(
Executive( Order( No.( 436,( s.( 1997,( has( provided( under( NTC( Memorandum(
Circular( No.( 8A9A95,( under( item( 920(a)( thereof( provides( that( Cable( TV(
operations(shall(be(governed(by(E.O.(No.(205,(s.(1987.(If(CATV(operators(offer(
public( telecommunications( services,( they( shall( be( treated( just( like( a( public(
telecommunications( entity.( Under( DOJ( Opinion( No.( 95,( series( of( 1999,( the(
Secretary( of( Justice,( taking( its( cue( from( Allied! Broadcasting,! Inc.! v.! Federal!
Communications! Commission,! 435( F.( 2d( 70,( considered( CATV( as( a( form( of(
mass(media(which(must,(therefore,(be(owned(and(managed(by(Filipino(citizens,(
or( corporations,( cooperatives( or( associations,( whollyAowned( and( managed( by(
Filipino(citizens(pursuant(to(the(mandate(of(the(Constitution.!
6
)
!
o
Cable( TV( is( a( form( of( mass( media( which( must,(

therefore,( be( owned( and( managed( by( Filipino( citizens,(
or( corporations,( cooperatives( or( associations,( whollyA
owned(and(managed(by(Filipino(citizens(pursuant(to(the(
mandate( of( the( Constitution.( (DOJ( Opinion( No.( 95,( s.(
1999,( citing( Allied) Broadcasting,) Inc.) v.) Federal)
citizens( of( the( Philippines,( is( considered( a( Philippine( National(

entirely.(Unchuan)v.)Lozada,)585)SCRA)421)(2009).)
o This(espouses(the(Control(Test)
)
G.'Grandfather'Rule:'
Communications)Commission,)435)F.2d)70).(
of( Filipino( equity( in( a( corporation( engaged( in( nationalized(

and/or(partly(nationalized(areas(of(activities,(provided(for(under(
the(Constitution(and(other(nationalization(laws,(is(computed,(in(
cases( where( corporate( shareholders( are( present( in( the(
Atty.( Hofilea( !( What( about( foreign( mass( media( bodies( that(

broadcast(to(the(Philippines?(Would(it(constitute(a(violation(of(
the(Constitution?(Point(is,(its(hard(to(determine(the(boundaries(
because(of(technology.(
'
E.'Advertising'Business'(Section'11(2),'Article'XVI,'1987'Constitution)1'
situation,( by( attributing( the( nationality( of( the( second( or( even(
subsequent( tier( of( ownership( to( determine( the( nationality( of(
the(corporate(shareholder.(
Only( Filipino( citizens( or( corporations( or( associations( at( least(
It(also(provides(that(the(participation(of(foreign(investors(in(the(
governing( body( of( the( entities( in( such( industry( shall( be( limited(
to( their( proportionate( share( in( the( capital( thereof,( and( all( the(
executive( and( managing( officers( of( such( entities( must( be(
citizens(of(the(Philippines.(
'
F.'Investment'Test'as'to'Philippine'Nationals'(Section'3[a]'&'[b],'R.A.'
7042,'Foreign'Investments'Act'of'1992)'
Under( Section( 3( of( the( FIA( 91,( a( corporation( organized( under(

the(laws(of(the(Philippines(of(which(at(least(60%(of(the(capital(
stock( outstanding( and( entitled( to( vote( is( owned( and( held( by(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
In( recognizing( and( applying( the( grandfather( rule,( the( SEC( has(
adopted( the( formula( of( the( Secretary( of( Justice2(to( the( effect(
that:((
o Shares( belonging( to( corporations( or( partnerships( at(
least( 60%( of( the( capital( of( which( is( owned( by( Filipino(
citizens(shall(be(considered(as(of(Philippine(nationality,(
but( if( the( percentage( of( Filipino( ownership( in( the(
corporation( or( partnership( is( less( than( 60%( only( the(
70%( of( the( capital( of( which( is( owned( by( such( citizens( shall( be(
allowed(to(engage(in(the(advertising(industry.(
The( "grandfather( rule"( is( the( method( by( which( the( percentage(
number( of( shares( corresponding( to( such( percentage(

shall(be(counted(as(of(Philippine(nationality.(.(.3(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
(DOJ(Opinion(No.(18,(s.(1989.((
(SEC( Opinion,( 23( November( 1993,( XXVIII( SEC( QUARTERLY( BULLETIN( 39( (No.( 1,(
March(1994);(SEC(Opinion,(14(April(1993,(XXVII(SEC(QUARTERLY(BULLETIN(29((No.(3,((
Sept.(1993);(SEC(Opinion,(23(March(1993,(XXVII(SEC( QUARTERLY( BULLETIN(15((No.(
3,( Sept.( 1993);( SEC( Opinion,( 6( August( 1991,( SEC( QUARTERLY( BULLETIN( 44( (No.( 4,(
Dec.( 1991);( SEC( Opinion,( 30( May( 1990,( XXIV( SEC( QUARTERLY( BULLETIN( 52( (No.( 3,(
Sept.(1990);(SEC(Opinion,(14(December(1989,(XXIV(SEC(QUARTERLY(BULLETIN(7((No.(
3
)
!
BUT'SEE:(SECAOGC(Opinion(No.(10A31,(dated(09(December(2010,(
addressed( to( Mr.( Leonardo( A.( Civil,( Chairman( of( the( Board( of(
CoAO( Small( Scale( Miners( Association,( Inc.,( penned( by( General(
Counsel(Vernette(G.(UmaliAPaco.(
The(grandfather(rule(can(only(extend(to(such(limited(as(to(those(
who( have( actual( control( of( the( affairs( of( the( corporation.(
Palting)v.)San)Jose)Petroleum)Inc.,)18)SCRA)924)(1966).)
o You( look( at( the( individual( shareholders.( Its( seeks( a(
purityAcentric(view.)
CURRENT' RULE:' At(least(60%(of(voting(shares(AND(60%(of(the(

whole(corporation(shares((voting(+(nonAvoting)(must(be(Filipino.)
o Atty.( Hofilea( !( This( current( rule( is( being( questioned(
for(its(effect(on(economic(viability(of(the(company.)
'
H.'Special'Classifications'of'Corporations'(Section'140)'
'
Section'140.'Stock'ownership'in'certain'corporations.''
Pursuant'to'the'duties'specified'by'Article'XIV'of'the'Constitution,'the'
National' Economic' and' Development' Authority' shall,' from' time' to'
time,' make' a' determination' of' whether' the' corporate' vehicle' has'
been' used' by' any' corporation' or' by' business' or' industry' to' frustrate'
the' provisions' thereof' or' of' applicable' laws,' and' shall' submit' to' the'
Batasang' Pambansa,' whenever' deemed' necessary,' a' report' of' its'
findings,' including' recommendations' for' their' prevention' or'
correction.'
'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2,(June(1990);(SEC(Opinion,(6(November(1989,(XXIV(SEC(QUARTERLY(BULLETIN((56(
(No.(1,(March(1990.((
)
CLASSIFICATIONS*OF*CORPORATIONS*
!
I.*In*Relation*to*the*State:*
of* a* portion* of* the* state.* Private* corporations* are* those* formed* for*
some* private* purpose,* benefit,* aim,* or* end,* as* distinguished* from*
public* corporations,* which* have* for* their* purpose* the* general* good*
and* welfare.* Private* corporations* are* divided* into* stock* corporations*
and* nonstock* corporations.* Corporations* which* have* a* 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* private*
corporations*are*nonstock*corporations.*
*
Public! corporations! are! those! created! for! political! purposes!

connected!with!the!public!good!in!the!administration!of!the!civil!
government.!!
*
B*QuasiPpublic*Corporation.**
There! is! a! group! of! corporations! that! seem! to! be! a! cross!
between!private!corporations!and!public!corporations,!and!they!
are!classified!as!quasi<public!corporations.!!
Water! districts! organized! under! Presidential! Decree! No.! 198,!

although! considered! as! quasi<public! corporations! and!
authorized!to!exercise!the!powers,!rights!and!privileges!given!to!
private! corporations! under! existing! laws,! are! entirely! distinct!
from! corporations! organized! under! the! Corporation! Code,! and!
not! within! the! jurisdiction! of! the! SEC.! Marilao! Water!
Consumers!Asso.!v.!IAC,!201!SCRA!437!(1991).!
*
A.*Public*Corporation*(Section*3,*Act*No.*1459).*
*
ACT*No.*1459*
Section*3.*Corporations*may*be*public*or*private.**
Public*corporations*are*those*formed*or*organized*for*the*government*
These!usually!cover!school!districts,!water!districts,!and!
the!like.1!
*
C.*Private*Corporation*(Section*3,*Act*1459).*
Private! corporations! may! be! classified! according! to! their!

purposes:!!
o The! business! corporation,! or! the! profit<seeking!
o
o
corporations!
Religious!corporations,!
Eleemosynary! corporations! or! those! organized! for!
charitable,!scientific!or!vocational!corporations!
!
D.*Distinction*between*Public*and*Private*Corporations*
*
PUBLIC*CORPORATION*
PRIVATE*CORPORATION*
Government!usually!holds!the!
controlling!interest!
Government!MAY!hold!
controlling!interest!
Created!by!its!charter!
Created!under!the!general!
corporation!law!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
)
!
Created!for!a!public!purpose!
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).!
Created!for!profit<generation!
Exists!primarily!for!the!government!of!a!
portion!of!the!state!
Subject!to!control!and!supervision!by!
the!State!or!its!agency.!
!
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!
Governments!majority!shares!does!not!make!an!entity!a!public!
corporation.!National!Coal!Co.,!v.!Collector!of!Internal!Revenue,!
46!Phil.!583!(1924).!
BUT:! being! a! GOCC! makes! it! liable! for! laws! and! provisions!
applicable!to!the!Government!or!its!entities!and!subject!to!the!
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.!PNOCOEnergy!Dev.!Corp.!v.!NLRC,!201!SCRA!
487! (1991);! Davao! City! Water! District! v.! Civil! Service!
Commission,!201!SCRA!593!(1991).!
control! of! the! Government.! Cervantes! v.! Auditor! General,! 91!

Phil.!359!(1952).!
o 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! 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!
)
The! doctrine! that! employees! of! GOCCs,! whether! created! by!
Section! 31! of! Corporation! Code! (Liability! of! Directors!

and! Officers)! is! applicable! to! corporations! which! have!
been! organized! by! special! charters! since! Section! 4! of!
Corporation!Code!renders!the!provisions!supplementary!
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).!
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).!
o 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)!
civil! service! laws! and! anti<graft! laws.! Feliciano! v.! COA,!

419!SCRA!363!(2004).!
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).!
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!
naturethe! promotion! of! economic! and! social!
development! of! Central! Luzon,! particularly,! and! the!
countrys! 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!
When!the!law!vests!in!a!government!instrumentality!corporate!
powers,! the! instrumentality! does! not! become! necessarily! a!
corporation.! A! government<owned! or! controlled! corporation!
must! be! organized! as! a! stock! or! non<stock! corporation.! The!
MIAA! is! not! a! government<owned! or! controlled! corporation!
because! it! is! not! constituted! of! capital! divided! into! shares! of!
stock,!and!neither!is!it!a!nonstock!corporation!because!it!has!no!
members.! MIAA! is! a! government! instrumentality! vested! with!
corporate! powers! to! perform! efficiently! its! government!
Beyond!cavil,!a!GOCC!has!a!personality!of!its!own,!distinct!and!
category! as! ordinary! persons.! Shipside! Inc.! v.! Court! of!

Appeals,!352!SCRA!334!(2001).!
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!
functions.! Manila! International! Airport! Authority! v.! Court! of!

Appeals,!495!SCRA!591!(2006).!
Although!PNRC!has!its!special!charter,!the!Chairman!of!PNRC!is!
not!appointed!by!the!President!or!any!member!of!the!Executive!
Branch.! Although! Camporendodo! v.! NLRC! had! ruled! that! PNRC!
is! GOCC! because! it! is! constituted! under! a! special! charter,! it!
failed! to! consider! the! definition! of! a! GOCC! as! provided! under!
Section! 2(13)! of! the! Administrative! Code! of! 1987,! which!
requires! that! a! GOCC! to! be! such! must! be! owned! by! the!
government,! and! in! the! case! of! a! stock! corporation,! at! least! a!
majority!of!its!capital!stock!must!be!owned!by!the!government.!
Liban!v.!Gordon,!593!SCRA!68!(2009).!
)
!
!
II.*As*to*Place*of*Incorporation:*
*
A.*Domestic*Corporation*
A! domestic! corporation! is! one! incorporated! under! laws! of! the!

Philippines.!!
*
B.*Foreign*Corporation*(Section*123)*
*
conditions!and!restrictions!it!deems!fit!to!impose.!1!
*
III.*As*to*Purpose*of*Incorporation:*
*
A.*Municipal*Corporation*
are!organized!for!the!purpose!of!serving!the!communal!welfare!
of!the!inhabitants!of!a!town!or!a!city.!
o Municipal! corporations! are! incorporated! to! continue!
the! existence! and! the! legal! status! of! the! town! or! city!
without! regard! to! the! coming! and! going! people! who!
inhabit!it.!!
The!objectives!of!the!statutory!provisions!prescribing!conditions!
them!by!subjecting!them!to!the!courts!of!the!state.!
Municipal! corporations,! with! respect! to! its! governmental!

functions,! i.e.,! political! subdivisions! created! by! the! legislature!
for! the! convenient! administration! of! the! government,! or! some!
aspect! of! the! government,! of! the! inhabitants! of! a! defined!
district,! remain! entirely! subject! to! the! legislative! control.! They!
Code* and* a* certificate* of* authority* from* the* appropriate* government*

agency.*(n)*
under!which!foreign!corporations!are!permitted!to!do!business!
in!a!state!other!than!that!of!their!creation:!
(a) To! place! them! on! an! equality! with! domestic!
corporations;!
(b) To! subject! them! to! inspection! so! that! their! condition!
may!be!known;!and!!
(c) To!protect!the!residents!of!the!state!doing!business!with!
Public! corporations! therefore! are! essentially! municipal!

corporation,! or! those! formed! and! organized! by! the! State! for!
government,! such! as! the! barangay,! municipality,! city! and! the!
province.! In! essence,! a! public! corporation,! being! a! mini<state,!
possesses! all! three! great! powers! of! government:! police! power,!
power!of!eminent!domain,!and!power!of!taxation.2!
Section*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*
The! state,! in! extending! to! foreign! corporations! the! privilege! of!
doing! business,! may! impose! such! privilege! with! whatever!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
)
!
o
They! are! not! operated! for! profit,! and! the! operating!

expenses! are! levied! against! the! members! through! the!
process!of!taxation.!
A!municipal!corporation!possesses!a!two<fold!character:!!
(a) Public! or! governmental! character,! in! which! it! acts! as!
agent!of!the!state!and!exercises,!by!delegation!a!part!of!
the!sovereignty!of!the!state.!
! In! their! governmental! character,! the! municipal!
corporations!are!possessed!of!and!can!exercise!
the! so<called! police! power! of! the! state,! by!
delegation!of!the!legislature.!!
! They!may!levy!taxes!for!certain!purposes!under!
limitations!imposed!by!the!law!making!body.!
(b) A!private,!corporate!or!proprietary!character,!in!which!it!
acts!as!a!private!or!business!corporation,!and!stands!for!
the! community! in! the! administration! of! its! local! affairs!
wholly!beyond!the!sphere!of!public!purposes!for!which!
its!governmental!powers!are!conferred.!
! In! their! proprietary! character,! municipal!
corporations!are!empowered!to!mortgage!their!
property!under!certain!limitations.!!
! They!can!sue!and!be!sued,!enter!into!contracts!
and! may! be! held! liable! for! damages! for! torts!
committed! by! them! in! the! exercise! of! their!
corporate!functions!as!distinguished!from!public!
and!governmental!functions.!
*
B.*Religious*Corporation*(Sections*109*and*116)*
*
Section*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* nonPstock* corporations* insofar* as* they* may* be*
applicable.*(n)*
*
Section*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* twoP
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* twoPthirds* (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;*
deprived! of! his! sacred! office,! is! without! remedy! in! the! civil!
courts.!Long!v.!Basa,!366!SCRA!113!(2001).!
*
C.* Educational* Corporations* (Sections* 106,* 107* and* 108;* Section* 25,*
B.P.*Blg.*232)**
*
Section*106.*Incorporation.**
Educational*corporations*shall*be*governed*by*special*laws*and*by*the*
general*provisions*of*this*Code.*(n)*
*
Section*107.*PrePrequisites*to*incorporation.**
Except* upon* favorable* recommendation* of* the* Ministry* of* Education*
*
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*
and*Culture,*the*Securities*and*Exchange*Commission*shall*not*accept*
or* approve* the* articles* of* incorporation* and* byPlaws* of* any*
educational*institution.*(168a)*
*
Section*108.*Board*of*trustees.*
Trustees* of* educational* institutions* organized* as* nonPstock*
corporations*shall*not*be*less*than*five*(5)*nor*more*than*fifteen*(15):*
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)*
Provided,*however,*That*the*number*of*trustees*shall*be*in*multiples*
of*five*(5).*
*
Unless* otherwise* provided* in* the* articles* of* incorporation* on* the* byP
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* onePfifth* (1/5)* of* their* number*
shall* expire* every* year.* Trustees* thereafter* elected* to* fill* vacancies,*
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!
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*byPlaws.*
*
A.*Aggregate*Corporation*
*
B.*Corporation*Sole*(Sections*110*to*115)*
*
For*institutions*organized*as*stock*corporations,*the*number*and*term*
of*directors*shall*be*governed*by*the*provisions*on*stock*corporations.*
(169a)*
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)*
*
Section*111.*Articles*of*incorporation.*
*
BATASANG*PAMBANSA*BILANG*232*
Section*25.*Establishment*of*Schools*
All* schools* shall* be* established* in* accordance* with* law.* The*
establishment*of*new*national*schools*and*the*conversion*of*existing*
schools*from*elementary*to*national*secondary*or*tertiary*schools*shall*
be* by* law:* Provided,* That* any* private* school* proposed* to* be*
established*must*incorporate*as*an*nonPstock*educational*corporation*
in* accordance* with* the* provisions* of* the* Corporation* Code* of* the*
Philippines.* This* requirement* to* incorporate* may* be* waived* in* the*
case*of*familyPadministered*prePschool*institutions.*
*
Government*assistance*to*such*schools*for*educational*programs*shall*
be*used*exclusively*for*that*purpose.*
*
D.*Charitable,*Scientific*or*Vocational*Corporations*
*
E.**Business*Corporation*
*
IV.*As*to*Number*of*Members:*
*
Section*110.*Corporation*sole.**
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*
benefit* of* his* religious* denomination,* sect* or* church,* including*

hospitals,* schools,* colleges,* orphan* asylums,* parsonages* and*
cemeteries*thereof.*(n)*
*
Section*113.*Acquisition*and*alienation*of*property.**
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)*
*
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*
Section*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.*
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*
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*
*
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,*
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)*
*
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*
Section*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.*
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*
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*
operations*except*for*the*purpose*of*winding*up*its*affairs.*(n)*
*
existed! prior! to! the! Republic.! But! if! any! nationality! is! to! be!
accorded! to! a! corporation! sole! it! is! to! be! judged! from! the!
nationality! of! the! majority! of! the! faithfuls! thereof.! Roman!
Catholic!Apostolic!Administrator!of!Davao,!Inc.!v.!LRC!and!the!
Register!of!Deeds!of!Davao!City,!102!Phil.!596![1957]).!
vacancy*shall*exercise*all*the*powers*and*authority*of*the*corporation*
sole*during*such*vacancy.*(158a)*
*
Section*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.*
*
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;*
*
A! corporation! sole! has! no! nationality! being! an! institution! that!
The!doctrine!in!Republic!v.!Villanueva,!114!SCRA!875!(1982)!and!
Republic! v.! Iglesia! ni! Cristo,! 127! SCRA! 687! (1984),! that! a!
corporation! sole! is! disqualified! to! acquire/hold! alienable! lands!
of! the! public! domain,! because! of! the! constitutional! prohibition!
qualifying! only! individuals! to! acquire! land! and! the! provision!
under!the!Public!Land!Act!which!applied!only!to!Filipino!citizens!
or!natural!persons,!has!been!expressly!overturned!in!Director!of!
Land!v.!IAC,!146!SCRA!509!(1986).1!
!
V.*As*to*Legal*Status:*
*
A.*De*Jure*Corporation*
A! corporation! has! de! jure! existence! if! there! is! a! full! or!
substantial!compliance!with!the!requirements!of!an!existing!law!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Overturning! affirmed! in! Republic! v.! Iglesia! ni! Cristo,! 127! SCRA! 687! (1984);!
Republic!v.!IAC,!168!SCRA!165!(1988).!
)
!
permitting! organization! of! such! corporation! as! by! proper!
articles! of! incorporation! duly! executed! and! filed.! Generally,! its!
juridical! personality! is! not! subject! to! attack! in! the! courts! from!
any!source.1!
*
B.*De*Facto*Corporation*(Section*20)**
irregularities.!!
o It! would! be! a! rare! case! where! a! third! persons! dealing!
with! a! corporation! is! prejudiced! by! its! recognition! as! a!
separate! entity! despite! some! minor! defects! in! its!
incorporation.! It! would! be! unfair! to! allow! a! claimant!
against! the! alleged! corporation! to! insist! on! the!
individual!liability!of!innocent!investors!merely!because!
of!some!minor!flaws!in!its!incorporation.2!
*
Section*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.*
*
Elements*of*de*facto*corporation:*
1. Valid!law!under!which!it!is!incorporated!
2. Attempt! in! good! faith! to! incorporate! (must! get! certificate! of!
incorporation)!
3. Assumption! of! corporate! powers! (must! at! least! elect! Board! of!
Directors)!
A!corporation!has!de#facto!existence!where!there!is!a!bona#fide!
attempt! to! incorporate,! colorable! compliance! with! the! statute!
and!user!of!corporate!powers.!
An! inquiry! to! the! de# facto# existence! of! a! corporation! may! be!
made!by!the!Solicitor!General!in!a!quo#warranto!proceeding.!
The!doctrine!grew!out!of!the!necessity!to!promote!the!security!
of! business! transactions! and! to! eliminate! quibbling! over!
*
C.*Corporation*by*Estoppel*(Section*21)*
*
Section*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.*
*
One*who*assumes*an*obligation*to*an*ostensible*corporation*as*such,*
cannot*resist*performance*thereof*on*the*ground*that*there*was*in*fact*
no*corporation.*
*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
Although!an!entity!may!not!be!a!corporation!de#jure!or!de#facto,!
a! particular! person! or! party! may,! by! estoppel! or! admission,! be!
precluded! from! denying! its! corporate! existence.! A! group! of!
persons! may! assume! to! do! business! as! a! corporation! without!
having! gone! far! enough! to! give! a! de# facto! existence! to! the!
entity.!
Under! certain! circumstances! and! for! certain! purposes,! either!

the! group! or! third! persons! contracting! with! the! purported!
corporation!may!be!estopped!to!deny!its!corporate!status.!
The!corporation!by!estoppel!doctrine!is!founded!on!procedural!
convenience,! avoidance! of! inquiries! into! irrelevant! formalities,!
and!fairness!to!all!parties!concerned.1!
*
D.*Corporation*by*Prescription!!
The! Roman! Catholic! Church! is! a! corporation! by! prescription,!

with! acknowledged! juridical! personality! inasmuch! as! it! is! an!
institution! which! "antedated! by! almost! a! thousand! years! any!
other! personality! in! Europe,! and! which! existed! when! Grecian!
eloquence! still! flourished! in! Antioch! and! when! idols! were! still!
worshipped!in!the!temple!of!Mecca."2!
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*nonP
stock*corporations.*
*
Section*5.*Corporators*and*incorporators,*stockholders*and*members.**
Corporators* are* those* who* compose* a* corporation,* whether* as*
stockholders* or* as* members.* Incorporators* are* those* stockholders* or*
members* mentioned* in* the* articles* of* incorporation* as* originally*
forming* and* composing* the* corporation* and* who* are* signatories*
thereof.*
*
Corporators* in* a* stock* corporation* are* called* stockholders* or*
shareholders.* Corporators* in* a* nonPstock* corporation* are* called*
members.*
*
A.*Stock*Corporation*
If!not!authorized!by!the!by<laws!to!distribute!the!dividends,!but!
it!is!a!stock!corporation,!can!a!corporation!distribute!dividends!
to!its!shareholders?!The!answer!seems!to!be!in!the!affirmative,!
since! one! of! the! expressed! powers! granted! to! stock!
corporations! under! Section! 43! of! the! Corporation! Code! is! the!
power!to!declared!dividends.!
*
VI.*As*to*Existence*of*Shares*(Sections*3*and*5):**
*
Section*3.*Classes*of*corporations.**
Corporations* formed* or* organized* under* this* Code* may* be* stock* or*
nonPstock*corporations.*Corporations*which*have*capital*stock*divided*
!
B.*NonPStock*Corporation*
*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Section*87.*Definition.**
For*the*purposes*of*this*Code,*a*nonPstock*corporation*is*one*where*no*
part* of* its* income* is* distributable* as* dividends* to* its* members,*
2
Barlin#v.#Ramirez,!7!Phil.!41!(1906).!!
)
!
trustees,* or* officers,* subject* to* the* provisions* of* this* Code* on*
dissolution:* Provided,* That* any* profit* which* a* nonPstock* 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* nonP* stock* corporations,* except* as* may* be* covered* by*
specific*provisions*of*this*Title.*(n)*
*
Section*88.*Purposes.*
NonPstock* corporations* may* be* formed* or* organized* for* charitable,*
religious,* educational,* professional,* cultural,* fraternal,* literary,*
scientific,*social,*civic*service,*or*similar*purposes,*like*trade,*industry,*
agricultural*and*like*chambers,*or*any*combination*thereof,*subject*to*
the*special*provisions*of*this*Title*governing*particular*classes*of*nonP
stock*corporations.*(n)*
*
Thus,!every!time!there!is!an!express!authorization!in!either!the!
articles! of! incorporation! or! by<laws! of! a! corporation! to! declare!
dividends,!it!is!undoubtedly!a!stock!corporation.!When!there!is!
no! express! prohibition! not! to! distribute! dividends,! it! would!
seem!that!the!corporation!is!a!non<stock!corporation.!
)
SEPARATE'JURIDICAL'PERSONALITY'AND'DOCTRINE'
OF'PIERCING'THE'VEIL'OF'CORPORATE'FICTION'
composing! it! as! well! as! from! any! other! legal! entity! to! which! it!
may!be!related,!with!the!following!consequences:!
1. The! first! consequence! of! the! doctrine! of! legal! entity! of! the!
separate! personality! of! the! corporation! may! not! be! made! to!
answer! for! acts! and! liabilities! of! its! stockholders! or! those! of!
legal! entities! to! which! it! may! be! connected! or! vice! versa.!
'
I.' MAIN' DOCTRINE:! A! Corporation! Has! A! Personality! Separate! and!
Distinct!from!its!Stockholders!or!Members.!(Sec.!2;!Article!44,!Civil!Code)!
!
General'Credit'Corp.'v.'Alsons'Dev.'and'Investment'Corp.,'513'
SCRA'225'(2007);1!
2. 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).2'
Section'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'
expressly'authorized'by'law'or'incident'to'its'existence.'
'
CIVIL'CODE'
!
B.'Applications:'
Article'44.''
The'following'are'juridical'persons:'
'
1.'The'State'and'its'political'subdivisions;'
'
2.' Other' corporations,' institutions' and' entities' for' public' interest' or'
purpose,'created'by'law;'their'personality'begins'as'soon'as'they'have'
been'constituted'according'to'law;'
'
3.' Corporations,' partnerships' and' associations' for' private' interest' or'
purpose' to' which' the' law' grants' a' juridical' personality,' separate' and'
distinct'from'that'of'each'shareholder,'partner'or'member.'(35a)'
'
A.'Importance'of'Main'Doctrine:'
A! corporation,! upon! coming! into! existence,! is! invested! by! law!

with! a! personality! separate! and! distinct! from! those! persons!
1. Majority'Equity'Ownership'and'Interlocking'Directorship:'
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).3'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!McLeod!v.!NLRC,!512!SCRA!222!(2007);!Uy!v.!Villanueva,!526!SCRA!73!(2007);!
Pantranco!Employees!Association!(PEAY!PTGWO)!v.!NLRC,!581!SCRA!598!(2009);!
Shrimp!Specialists,!Inc.!v.!FujiYTriumph!AgriYIndustrial!Corp.,!608!SCRA!1!(2009).!
2
!Martinez!v.!Court!of!Appeals,!438!SCRA!139!(2004);!Prudential!Bank!v.!Alviar,!
464!SCRA!353!(2005);!EDSA!ShangriYLa!Hotel!and!Resorts,!Inc.!v.!BF!Corp.,!556!
SCRA!25!(2008);!Siain!Enterprises,!Inc!v.!Cupertino!Realty!Corp.,!590!SCRA!435!
(2009).!
3
!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);!Secosa!v.!Heirs!of!Erwin!
Suarez!Fancisco,!433!SCRA!273!(2004);!EDSA!ShangriYLa!Hotel!and!Resorts,!Inc.!
)
entities.!Cruz'v.'Dalisay,'152'SCRA'487'(1987);'Booc'v.'Bantuas,'
354'SCRA'279'(2001).'
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! employerYemployee!
relationship!with!the!latters!employees.!DBP'v.'NLRC,'186'SCRA'
841'(1990).1!
Having!
interlocking!
directors,!
corporate!
officers!
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).4!
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).2'
2. Being'Corporate'Officer:'
Being! an! officer! or! stockholder! of! a! corporation! does! not! by!
Fancisco,'433'SCRA'273'(2004).'
The! mere! fact! that! one! is! President! does! not! render! the!
When! the! compulsory! counterclaim! filed! against! corporate!

officers! for! their! alleged! fraudulent! act! indicate! that! such!
corporate!officers!are!indispensable!parties!in!the!litigation,!the!
original!inclusion!of!the!corporation!in!the!suit!does!not!thereby!
allow!the!denial!of!a!specific!counterYclaim!being!filed!to!make!
the! corporate! officers! personally! liable.! A! corporation! has! a!
legal! personality! entirely! separate! and! distinct! from! that! of! its!
officers!and!cannot!act!for!and!on!their!behalf,!without!being!so!
authorized.! Lafarge' Cement' Phils.,' Inc.' v.' Continental' Cement'
Corp.,'443'SCRA'522'(2004).'
property! he! owns! the! property! of! the! corporation,! since! the!
president,! as! an! individual,! and! the! corporation! are! separate!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
v.! BF! Corp.,! 556! SCRA! 25! (2008);! Pantranco! Employees! Association! (PEAY
PTGWO)!v.!NLRC,!581!SCRA!598!(2009).!
1
!Also!Suldao!v.!Cimech!System!Construction,!Inc.,!506!SCRA!256!(2006);!Union!
Bank!of!the!Philippines!v.!Ong,!491!SCRA!581!(2006);!Shrimp!Specialists,!Inc.!v.!
FujiYTriumph!AgriYIndustrial!Corp.,!608!SCRA!1!(2009);!Hacienda!Luisita,!Inc.!v.!
Presidential!Agrarian!Reform!Council,!660!SCRA!525!(2011).!
2
!Also!Sesbreno!v.!Court!of!Appeals,!222!SCRA!466!(1993);!G!Holdings,!Inc.!v.!
National!Mines!and!Allied!Workers!Union!Local,!103!(NAMAWU),!604!SCRA!73!
(2010).!
3
!Bautista!v.!Auto!Plus!Traders,!Inc.!561!SCRA!223!(2008);!Prisma!Construction!&!
Dev.!Corp.!v.!Menchavez,!614!SCRA!590!(2010).!
The! President! of! the! corporation! which! becomes! liable! for! the!
accident! caused! by! its! truck! driver! cannot! be! held! solidarily!
liable!for!the!judgment!obligation!arising!from!quasiYdelict,!since!
the! fact! alone! of! being! President! is! not! sufficient! to! hold! him!
solidarily! liable! for! the! liabilities! adjudged! against! the!
corporation!and!its!employee.' Secosa' v.' Heirs' of' Erwin' Suarez'
itself!make!ones!property!also!that!of!the!corporation,!and!viceY
versa,!for!they!are!separate!entities,!and!that!shareholders!who!
are! officers! 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).3!
It!is!hornbook!law!that!corporate!personality!is!a!shield!against!
3. Dealings'Between'Corporation'and'Stockholders:'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
!Consolidated!Bank!and!Trust!Corp.!v.!Court!of!Appeals,!356!SCRA!671!(2001).!
)
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).'
corporation!they!represent.!Crisologo' v.' People,' 686' SCRA' 782'

(2012);'Heirs'of'Fe'Tan'Uy'v.'International'Exchange'Bank,'690'
SCRA'519'(2013).'
o 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.'CA,'177'SCRA'
789'(1989).'
o A! corporation! has! no! legal! standing! to! file! a! suit! for!
Use!of!a!controlling!stockholders!initials!in!the!corporate!name!
is! not! sufficient! reason! to! pierce,! since! by! that! practice! alone!
does!it!mean!that!the!said!corporation!is!merely!a!dummy!of!the!
individual!stockholder,!provided!such!act!is!lawful.!LBP'v.'Court'
of'Appeals,'364'SCRA'375'(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).'
4. On'the'Properties'of'the'Corporation:''
stockholders.! Manila' Gas' Corp.' v.' Collector' of' Internal'

Revenue,'62'Phil.'895'(1936).'
6. Obligations'and'Debts:'
)
The! majority! stockholder! cannot! be! held! personality! liable! for!

the! attorneys! fees! charged! by! a! lawyer! for! representing! the!
corporation.!Laperal'Dev.'Corp.'v.'CA,'223'SCRA'261'(1993).'
Appeals,'363'SCRA'307'(2001).'
5. On'Privileges'Enjoyed:''
The!tax!exemption!clause!in!the!charter!of!a!corporation!cannot!
be! extended! to! nor! enjoyed! even! by! the! controlling!
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!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! nonYuse! and! lose!
their!value,!does!not!indicate!fraud!or!wrongdoing!and!will!not!
constitute!application!of!the! piercing!doctrine.!DBP' v.' Court' of'
Debts! incurred! by! directors,! officers,! and! employees! acting! as!

corporate! agents! are! not! their! direct! liability! but! of! the!
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).!
A! corporate! defendant! against! whom! a! writ! of! possession! has!

been!issued,!cannot!use!the!fact!that!it!has!obtained!controlling!
equities! in! the! corporate! plaintiffs! to! suspend! enforcement! of!
the!writ,!for!they!are!separate!juridical!persons,!and!thus!their!
separate!business!and!proprietary!interests!remain.!Silverio,' Jr.'
v.'Filipino'Business'Consultants,'Inc.,'466'SCRA'584'(2005).'
!
II.'PIERCING'THE'VEIL'OF'CORPORATE'FICTION:'
'
A.' Source' of' Incantation:' U.S.' v.' Milwaukee' Refrigerator' Transit' Co.,'
142'Fed.'247'(1905).'
'
U.S.'v.'Milwaukee'Refrigerator'Transit'Co.'
'
Facts:' The!Elkins!Act!was!enacted!to!prohibit!railroads!from!giving!and!
receiving! of! unlawful! rebates.! After! the! enactment! of! the! said! Act,!
officers! of! a! brewing! company,! who! were! also! its! controlling!
stockholders,! organized! a! transit! company! named! Milwaukee!
Refrigerator!Transit,!et!al!and!became!its!officers!and!the!owners!of!all!
of!its!stock.!On!behalf!of!the!brewing!company,!the!officers!contracted!
with! the! transit! company! to! make! all! the! shipments! for! the! brewing!
company.!The!transit!company!contracted!for!shipments!with!interstate!
carriers,!where!they!would!only!pay!it!from!1/10!to!1/8!of!the!published!
corporation.'
'
Held:'NO.!The!transit!company!was!created!with!intent!to!evade!the!law!
making! the! transit! company! as! a! mere! alter! ego! of! the! brewing!
corporation,! both! being! substantially! identical! in! interest! and! control,!
and! the! brewing! company! the! ultimate! beneficiary.! It! clearly! appears!
that!the!shipper!practically!controls!the!transit!company,!and!this!shows!
a!sufficient!identity!of!interest!among!the!shareholders!of!both.!
!
Doctrine:'As!a!general!rule,!a!corporation!will!be!looked!upon!as!a!legal!
entity,! until! sufficient! reason! to! the! contrary! appears.! An! exception! to!
this! is! when! the! notion! of! legal! entity! is! used! to! defeat! public!
convenience,! justify! wrong,! protect! fraud,! defend! crime,! the! law! will!
regard! the! corporation! as! an! association! of! persons;! and,! where! one!
corporation! was! organized! and! is! owned! by! the! officers! and!
stockholders! of! another,! making! their! interests! identical,! they! may! be!
treated!as!identical!when!the!interests!of!justice!require!it.!
!
rate,! for! the! transportation,! supposedly! as! a! commission! for! obtaining!

the! business,! but! was! known! really! a! rebate! for! the! benefit! of! the!
brewing!company.!
'
Issue:' Whether! or! not! a! corporation! organized! and! owned! by! the!
officers! and! stockholders! of! another! is! in! fact! an! independent!
)
As! a! general! rule,! a! corporation! will! be! looked! upon! as! a! legal!
entity,! unless! and! until! sufficient! reason! to! the! contrary!
appears.!When!the!notion!of!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.!
Also,!the!corporate!entity!may!be!disregarded!in!the!interest!of!
justice! in! such! cases! as! fraud! that! may! work! inequities! among!
members!of!the!corporation!internally,!involving!no!rights!of!the!
public!or!third!persons.!In!both!instances,!there!must!have!been!
fraud!and!proof!of!it.!For!the!separate!juridical!personality!of!a!
corporation!to!be!disregarded,!the!wrongYdoing!must!be!clearly!
!
and!convincingly!established.!It!cannot!be!presumed.!Suldao' v.'
Cimech'System'Construction,'Inc.,'506'SCRA'256'(2006).'
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! forumY!
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).'
o 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).1!
!
B.'Objectives'and'Effect'of'the'Application'of'the'Doctrine'
Under! the! doctrine! of! piercing! the! veil! of! corporate! fiction,!
the! courts! look! at! the! corporation! as! a! mere! collection! of!
individuals!or!an!aggregation!of!persons!undertaking!business!as!
a! group,! disregarding! the! separate! juridical! personality! of! the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
corporation!unifying!the!group.!Traders'Royal'Bank'v.'Court'of'
Appeals,'269'SCRA'15'(1997).2!
!
!DBP!v.!Court!of!Appeals,!357!SCRA!626,!358!SCRA!501,!363!SCRA!307!(2001);!
Velarde!v.!Lopez,!419!SCRA!422!(2004);!R!&!E!Transport,!Inc.!v.!Latag,!422!SCRA!
698! (2004);.Secosa! v.! Heirs! of! Erwin! Suarez! Fancisco,! 433! SCRA! 273! (2004);!
Martinez!v.!Court!of!Appeals,!438!SCRA!139!(2004);!McLeod!v.!NLRC,!512!SCRA!
222! (2007);! Siain! Enterprises,! Inc! v.! Cupertino! Realty! Corp.,! 590! SCRA! 435!
(2009).!
Traders'Royal'Bank'v.'Court'of'Appeals'
'
Facts:'Central!Bank!Certificates!of!Indebtedness!(CBCIs)!under!the!name!
of! Filriters! were! transferred! by! the! Filriters! Senior! Vice! President! for!
Treasury! Alfredo! Banaria! to! PhilFinance! (a! company! which! also! owns!
90%! of! Filriters).! PhilFinace! then! entered! into! a! repurchase! agreement!
with!the!petitioner!Traders!Royal!Bank!(TRB)!wherein!PhilFinace!sold!the!
CBCIs! to! TRB! then! pay! installments! to! buy! back! the! same.! PhilFinance!
defaulted!in!its!payments!and!hence,!forfeited!the!CBCIs!in!favor!of!TRB.!
TRB!sought!to!transfer!the!CBCIs!(still!under!the!name!of!Filriters)!under!
its! name! but! was! refused! by! the! Central! Bank.! Filriters! interposed! the!
defense! of! invalidity! of! the! initial! transfer! to! Philfinance.! The! initial!
transfer! was! done! by! Banaria! without! any! board! resolution! knowledge!
or! consent! of! the! Board! of! Directors,! and! without! authority! from! the!
Insurance!Commissioner.!
!
Filriters!!!Philfinance!!!Traders!Royal!Bank!
'
Issue:'Whether!or!not!the!veil!of!corporate!entity!must!be!pierce!on!the!
basis! of! the! allegation! that! Filriters! was! 90%! owned! by! PhilFinace! and!
that!although!they!are!separate!entities!on!paper,!they!have!used!their!
corporate!fiction!to!defraud!TRB.!
'
Held:'NO.!The!corporate!separateness!between!Filriters!and!Philfinance!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!Pantranco!Employees!Association!(PEAYPTGWO)!v.!NLRC,!581!SCRA!598!(2009)!
)
!
remains,! despite! the! petitioners! insistence! on! the! contrary.! For! one,!
other!than!the!allegation!that!Filriters!is!90%!owned!by!Philfinance,!and!
the!identity!of!one!shall!be!maintained!as!to!the!other,!there!is!nothing!
else! which! could! lead! the! court! under! circumstance! to! disregard! their!
corporate!personalities.!The!fact!that!Filfinance!owns!majority!shares!in!
which!the!law!aims!to!protect!by!this!doctrine.!(Victim!Standing)!
!
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!
Filriters!is!not!by!itself!a!ground!to!disregard!the!independent!corporate!
status!of!Filriters.!
!
In!the!case!at!bar,!there!is!sufficient!showing!that!the!petitioner!was!not!
defrauded!at!all!when!it!acquired!the!subject!certificate!of!indebtedness!
from! Philfinance.! On! its! face! the! subject! certificates! states! that! it! is!
registered! in! the! name! of! Filriters.! This! should! have! put! the! petitioner!
on! notice,! and! prompted! it! to! inquire! from! Filriters! as! to! Philfinance's!
title!over!the!same!or!its!authority!to!assign!the!certificate.!As!it!is,!there!
is!no!showing!to!the!effect!that!petitioner!had!any!dealings!whatsoever!
with! Filriters,! nor! did! it! make! inquiries! as! to! the! ownership! of! the!
certificate.! Because! the! transfer! of! the! CBCIs! from! Filriters! to!
PhilFinance! was! fictitious,! PhilFinance! had! no! title! to! convey! to! TRB.!
Consequently,! the! title! of! Filriters! over! the! CBCIs! must! be! upheld! over!
the!interest!claimed!by!TRB.!
'
Doctrine:' This! doctrine! may! not! be! employed! by! a! corporation! to! be!
able! to! complete! its! claims! against! another! corporation,! and! cannot!
therefore! be! employed! by! the! claimant! who! does! not! interpose! to! be!
the!victim!of!any!wrong!or!fraud.!In!order!to!pierce!the!veil!of!corporate!
entity,!the!court!must!be!sure!that!the!corporate!fiction!was!misused!to!
such! an! extent! that! injustice,! fraud! or! crime! was! committed! upon!
another,!disregarding,!thus,!his,!her,!or!its!rights.!It!is!the!protection!of!
the!interests!of!innocent!third!persons!dealing!with!the!corporate!entity!
The!rationale!behind!piercing!a!corporations!identity!in!a!given!
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.!Francisco'Motors'Corp.'v.'
CA,'309'SCRA'72'(1999).'
'
Francisco'Motors'Corp.'v.'CA'
'
Facts:' Francisco! Motors! Corporation! (FMC)! filed! a! complaint! against!
Spouses! Gregorio! and! Librada! Manuel! to! recover! a! sum! of! money!
representing!the!balance!of!the!jeep!body!purchased,!and!an!additional!
sum! representing! the! unpaid! balance! on! the! cost! of! repair! of! the!
vehicle.! Spouses! Manuel! interposed! a! counterclaim! for! unpaid! legal!
services!by!Gregorio!Manuel,!which!was!not!paid!by!the!incorporators,!
directors! and! officers! of! the! FMC.! Manuel! alleges! that! he! represented!
members!of!the!Francisco!family!in!the!intestate!estate!proceedings!of!
the! late! Benita! Trinidad.! However,! after! the! termination! of! the!
proceedings,! his! services! were! not! paid.! Said! family! members,! he! said,!
were!also!incorporators,!directors!and!officers!of!petitioner.!
)
!
individual! hid! his! assets! in! a! corporation.! ! See! Emilio' Cano'
Enterprises'v.'CIR,'13'SCRA'291'(1965).'
'
Issue:! Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
fiction! can! be! applied! to! hold! the! company! liable! for! unpaid! legal!
services!rendered!to!its!incorporators!in!an!intestate!proceeding.'
'
business! enterprises! are! owned,! conducted! and! controlled! by!

the! same! parties,! both! law! and! equity! will,! when! necessary! to!
protect!the!rights!of!third!parties,!disregard!the!legal!fiction!that!
two! corporations! are! distinct! entitled! and! treat! them! as!
identical! or! one! and! the! same.! General' Credit' Corp.' v.' Alsons'
Dev.'and'Investment'Corp.,'513'SCRA'225'(2007).1!
o The! attempt! to! make! the! security! agencies! appear! as!
Held:' NO.! Gregorio! Manuel! his! services! were! solicited! as! counsel! for!
members! of! the! Francisco! family! to! represent! them! in! the! intestate!
proceedings!over!Benita!Trinidads!estate.!These!estate!proceedings!did!
not!involve!any!business!of!FMC.!His!move!to!recover!unpaid!legal!fees!
through!a!counterclaim!against!Francisco!Motors!Corporation,!to!offset!
the!unpaid!balance!of!the!purchase!and!repair!of!a!jeep!body!could!only!
result! from! an! obvious! misapprehension! that! FMCs! corporate! assets!
two! separate! entities,! when! in! reality! they! were! but!

one,!was!a!devise!to!defeat!the!law![i.e.,!in!this!case!to!
avoid! liabilities! under! labor! laws]! and! should! not! be!
permitted.!Enriquez' Security' Services,' Inc.' v.' Cabotaje,'
496'SCRA'169'(2006).'
1. Recent' Attempts' to' Narrow' the' Objectives' for' Availing' of'
Piercing:''
could! be! used! to! answer! for! the! liabilities! of! its! individual! directors,!
officers,! and! incorporators.! Such! result! if! permitted! could! easily!
prejudice! the! corporation.! Whatever! obligation! said! incorporators,!
directors!and!officers!of!the!corporation!had!incurred,!it!was!incurred!in!
their!personal!capacity.!In!conclusion,!FMC!cannot!be!held!responsible.!
'
Doctrine:' The! rationale! behind! piercing! a! corporations! 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.!
'
Atty.! Hofilea! !! Can! there! be! a! situation! whereby! the! Court!

will!allow!a!case!against!an!individual!to!be!a!basis!for!reaching!
the!corporations!assets?!YES.!But!not!on!the!sole!basis!that!you!
personally! dont! have! properties! to! satisfy! your! personal!
obligations.! There! may! conceivably! be! situations! wherein! the!
Another! formulation! of! this! doctrine! is! that! when! two! (2)!
Piercing!is!not!allowed!unless!the!remedy!sought!is!to!make!the!
officer! or! another! corporation! pecuniarily! liable! for! corporate!
debts.! Indophil' Textile' Mill' Workers' Union[PTGWO' v.' Calica,'
205'SCRA'697'(1992).'
'
Indophil'Textile'Mill'Workers'Union[PTGWO'v.'Calica'
'
Facts:' Indophil! Textile! and! the! petitioner! executed! a! Collective!
Bargaining! Agreement! (CBA)! whereby! the! petitioner! is! the! exclusive!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Marques!v.!Far!East!Bank!and!Trust!Co.,!639!SCRA!312!(2011);!Sarona!v.!NLRC,!
663!SCRA!394!(2012);!PNB!v.!Hydro!Resources!Contractors!Corp.,!693!SCRA!294!
(2013).!
)
!
bargaining! agent! of! all! the! rankYandYfile! employees! of! Indophil! Textile!
Mills,! Incorporated.! Later,! Indophil! Acrylic! Manufacturing! Corporation!
was!formed,!and!its!employees!also!unionized!and!executed!a!CBA!with!
the!said!corporation.!In!1990!or!a!year!after!the!workers!of!Acrylic!have!
been! unionized! and! a! CBA! executed,! the! petitioner! union! claimed! that!
the!plant!facilities!built!and!set!up!by!Acrylic!should!be!considered!as!an!
extension!or!expansion!of!the!facilities!of!respondent!Company.!
'
Issue:' Whether! or! not! Indophil! Acrylic! is! but! an! extension! of! Indophil!
Textile,! and! as! such! the! workers! of! Indophil! Acrylic! may! be! considered!
as!part!of!the!bargaining!unit!of!Indophil!Textile.!
'
Held:'NO.!The!fact!that!the!businesses!of!private!respondent!and!Acrylic!
are!related,!that!some!of!the!employees!of!the!private!respondent!are!
the! same! persons! manning! and! providing! for! auxiliary! services! to! the!
units! of! Acrylic,! and! that! the! physical! plants,! offices! and! facilities! are!
situated!in!the!same!compound,!it!is!our!considered!opinion!that!these!
facts! are! not! sufficient! to! justify! the! piercing! of! the! corporate! veil! of!
Acrylic.! Hence,! Indophil! Acrylic! not! being! an! extension! or! expansion! of!
private! respondent,! Indophil! Textile,! the! rankY! andYfile! employees! of!
Acrylic! should! not! be! recognized! as! the! bargaining! representative! of!
private!respondent.!
'
Doctrine:' We! already! emphasized! that! "the! legal! corporate! entity! is!
disregarded! only! if! it! is! sought! to! hold! the! officers! and! stockholders!
directly! liable! for! a! corporate! debt! or! obligation."! In! the! instant! case,!
petitioner!does!not!seek!to!impose!a!claim!against!the!members!of!the!
Acrylic.!
'
BUT' SEE:! La' Campana' Coffee' Factory' v.' Kaisahan' ng'

Manggagawa,'93'Phil.'160'(1953).'
'
La'Campana'Coffee'Factory'v.'Kaisahan'ng'Manggagawa'
'
Facts:' Tan! Tong! and! his! family! own! two! corporations,! namely:! La!
Campana! Gaugau! Packing! (The! Gaugau! Corporation)! and! La! Campana!
Coffee! Factory,! Inc.! (The! Coffee! Corporation).! Both! are! located! in! the!
same!office!in!Espana.!In!1951,!the!laborers!of!the!two!corporations!of!
Tan!Tong!formed!a!labor!union!named!as!Kaisahan!ng!Manggagawa!sa!
La! Compana! (The! Kaisahan).! The! 66! members! of! which! are! under! one!
payroll!of!the!two!corporations.!A!dispute!arose!between!Tan!Tong!and!
Kaisahan!when!they!could!not!agree!concerning!increased!wages!under!
the!corporate!bargaining!agreement,!and!this!was!given!to!the!Court!of!
Industrial!Relations.!!
!
Tan! Tong! now! pushes! for! the! dismissal! of! the! case! in! the! Court! of!
Industrial!Relations!for!lack!of!jurisdiction.!The!claim!that!the!number!of!
workers! in! the! La! Campana! Coffee! Factory! is! only! 14! and! the! Court! of!
Industrial!Relations!requires!that!to!have!jurisdiction!over!a!dispute,!an!
organization!must!have!at!least!31!members.!
'
Issue:' Whether! or! not! La! Campana! Gaugau! Packing! (The! Gaugau!
Corporation)! and! La! Campana! Coffee! Factory,! Inc.! (The! Coffee!
Corporation)!are!one!and!the!same,!and!therefore!the!dispute!would!be!
within!the!jurisdiction!of!the!Court!of!Industrial!Relations.!
'
Held:'YES.!It!has!been!proven!that!the!corporations!owned!by!Tan!Tong!
are!merely!one!and!the!same.!This!is!for!the!fact!that!they!are!based!in!
)
!
only! one! office,! its! goods! (gaugau! and! coffee)! are! stored! in! one! place!
and!in!one!warehouse,!delivery!trucks!indicate!deliveries!of!both!gaugau!
and! coffee.! It! is! also! stated! that! the! employees! receive! their! salaries!
from! only! one! payroll! and! from! one! Natividad! Garcia,! Tan! Tongs!
secretary.! In! this! case,! the! court! treats! the! two! companies! as! one.!
Facts:! Felix!Gochan!and!Sons!Realty!Corporation!(FGSRC)!was!registered!
under! the! SEC! on! June,! 1951! with! Felix! Gochan,! Sr.! as! one! of! the!
incorporators.!Felixs!daughter,!Alice,!is!the!mother!of!the!respondents.!
Upon!the!death!of!Alice!and!later!her!husband,!the!certificates!were!still!
under!the!name!of!John!Young!Sr.,!not!their!children.!Four!years!later,!
Therefore,!the!count!of!employees!should!be!taken!as!a!whole,!which!is!
66,! very! well! above! the! minimum! number! required! for! the! Court! of!
Industrial!Relations!to!acquire!jurisdiction.'
'
Doctrine:'The!law!treats!two!corporations!as!one,!in!a!case!filed!against!
them,! when! they! have! only! one! management,! set! of! shareholders,!
office,!and!payroll.'
the!Uys!and!the!Youngs!filed!a!complaint!against!the!directors!of!FGSRC!
with! the! SEC! alleging! that! the! directors! were! using! the! corporation! for!
fraudulent!purposes.!FGSRC!apparently!sold!some!of!its!real!properties!
to! 2! other! corporations,! with! these! corporations! having! the! same!
directors!as!FGSRC.'
'
Issue:'Whether!or!not!a!derivative!may!be!brought!by!the!Uys!in!behalf!
'
of!the!corporation!against!the!FGSRC!directors.!
'
Held:'YES.!As!the!complaint!already!avers!that!the!corporation!suffered!
damage! as! a! result! of! the! action! of! the! directors,! the! derivative! suit!
could! prosper.! The! complainants! need! not! be! stockholders! of! the! two!
other! corporations! in! order! to! make! them! parties! to! the! case.! On! the!
complaint,! it! was! stated! that! the! directors! were! using! those! 2! other!
2. Applicable'to'Third^Parties:'
That!respondents!are!not!stockholders!of!the!sister!corporations!
does!not!make!them!nonYparties!to!this!case,!since!it!is!alleged!
that!the!sister!corporations!are!mere!alter!egos!of!the!directorsY
petitioners,! and! that! the! sister! corporations! acquired! the!
properties! sought! to! be! reconveyed! to! FGSRC! in! violation! of!
directorsYpetitioners! 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.! Gochan' v.' Young,' 354'
SCRA'207'(2001).'
'
Gochan'v.'Young'
'
corporations! as! alterYegos,! and! the! Uys! and! Youngs! wanted! the! lands!
sold! to! these! two! corporations! reconveyed! in! the! name! of! FGSRC.!The!
other!two!corporations!to!whom!the!properties!were!being!transferred!
have! the! same! stockholders,! and! the! fact! that! they! were! not!
stockholders! in! those! companies! cannot! prevent! Uy! and! Young! from!
suing! them! since! FGSRC! and! those! two! companies! would! be! one! the!
same.! There! was! an! intent! to! defraud! Uy! and! Young! by! hiding! the!
properties!in!the!other!corporations.!
!
Doctrine:' The!notion!of!corporate!entity!will!be!pierced!or!disregarded!
)
!
and!the!individuals!composing!it!will!be!treated!as!identical!if,!as!alleged!
here,!the!corporate!entity!is!being!used!as!a!cloak!or!cover!for!fraud!or!
illegality;!as!a!justification!for!a!wrong;!or!as!an!alterYego,!an!adjunct,!or!
a!business!conduit!for!the!sole!benefit!of!the!stockholders.!
!
C.' Nature' of' the' Piercing' Doctrine' as' an' 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.!
PNB'v.'Ritratto'Group,'Inc.,'362'SCRA'216'(2001).!CONSEQUENTLY:!
'
PNB'v.'Ritratto'Group,'Inc.'
'
Facts:!PNB!International!Finance!Ltd.!(PNBYIFL),!a!subsidiary!company!of!
PNB,! extended! credit! to! Ritratto! and! secured! by! the! real! estate!
mortgages! on! four! parcels! of! land.! Since! there! was! default,! PNBYIFL!
(thru! PNB! as! its! attorneyYinYfact)! foreclosed! the! properties! and! were!
subject!to!public!auction.!Ritratto!Group!filed!a!complaint!for!injunction!
against!PNB!claiming!that!that!PNB!is!merely!an!alter!ego!or!a!business!
conduit!of!PNBYIFL!that!is!why!it!is!being!impleaded!in!the!case.!!
'
Issue:'Whether!or!not!PNB!is!a!mere!alterYego!of!PNBYIFL.!
'
Held:' NO.! The! contract! questioned! is! one! entered! into! between!
respondent!and!PNBYIFL.!PNB!is!a!mere!attorneyYinY!fact!for!the!PNBYIFL!
!
In! any! case,! the! parentYsubsidiary! relationship! between! PNB! and! PNBY
IFL!is!not!the!significant!legal!relationship!involved!in!this!case!since!the!
petitioner!was!not!sued!as!the!parent!company!of!PNBYIFL.!Rather,!the!
petitioner!was!sued!because!it!acted!as!an!attorneyYinYfact!of!PNBYIFL!in!
initiating! the! foreclosure! proceedings.! A! suit! against! an! agent! cannot!
without!compelling!reasons!be!considered!a!suit!against!the!principal.!
'
Doctrine:'The!Circumstance!rendering!the!subsidiary!an!instrumentality.!
It!is!manifestly!impossible!to!catalogue!the!infinite!variations!of!fact!that!
can! arise! but! there! are! certain! common! circumstances! which! are!
important! and! which,! if! present! in! the! proper! combination,! are!
controlling.!These!are!as!follows:!
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!
with!full!power!and!authority!to!foreclose!on!the!properties!mortgaged!
to!secure!their!loan!obligations!with!PNBYIFL.!In!other!words,!PNB!is!an!
agent! with! limited! authority! and! specific! duties.! It! is! not! privy! to! the!
loan!contracts!entered!into!by!respondents!and!PNBYIFL.!
)
5.
6.
7.
8.
subsidiary!or!otherwise!causes!its!incorporation.!!
The!subsidiary!has!grossly!inadequate!capital.!
The!parent!corporation!pays!the!salaries!and!other!expenses!or!
losses!of!the!subsidiary.!
The! subsidiary! has! substantially! no! business! except! with! the!
parent!corporation!or!no!assets!except!those!conveyed!to!or!by!
the!parent!corporation.!
In!the!papers!of!the!parent!corporation!or!in!the!statements!of!
its! officers,! the! subsidiary! is! described! as! a! department! or!
division! of! the! parent! corporation,! or! its! business! or! financial!
!
responsibility!is!referred!to!as!the!parent!corporations!own.!
9. The!parent!corporation!uses!the!property!of!the!subsidiary!as!its!
own.!
10. The! directors! or! executives! of! the! subsidiary! do! not! act!
independently! in! the! interest! of! the! subsidiary! but! take! their!
!
Rivera! then! approached! Modesto! Cervantes,! president! of! Bormaheco,!
and!bought!a!Caterpillar!Tractor,!which!was!also!the!chattel!mortgage!in!
favor!of!Bormaheco.!This!sale!was!secured!by!Insurance!Corporation!of!
the! Philippines,! and! reYinsured! by! an! Agreement! of! Counter! Guaranty!
orders!from!the!parent!corporation.!
11. The! formal! legal! requirements! of! the! subsidiary! are! not!
observed.!
whereby!as!security!for!the!bond!given!by!ICP,!the!Castillos!mortgaged!
to!ICP!the!4!parcels!of!land.!!
!
The!4!parcels!of!land!were!foreclosed!by!ICP!for!violation!of!the!terms!
and!conditions!of!the!Counter!Guaranty.!These!were!then!sold!by!ICP!to!
Phil.! Machinery! Parts! Manufacturing! Co.! (also! owned! by! Modesto!
Cervantes)! who! then! sent! a! letter! to! Mauricia! Castillo! asking! her! to!
!
NOTE:'
Atty.! Hofilea! !! What! level! of! control! is! necessary! for! a! subsidiary!
company!to!be!considered!as!a!mere!alterYego!of!the!parent!company?!
Domination.!The!parent!corporation!must!dominate!the!subsidiary,!and!
it!must!be!the!reason!behind!the!latters!incorporation.!
!
1. It' is' a' Remedy' of' Last' Resort:! Piercing! the! corporate! veil! is!
remedy!of!last!resort!and!is!not!available!when!other!remedies!
are! still! available.' Umali' v.' Court' of' Appeals,' 189' SCRA' 529'
(1990).'
'
Umali'v.'Court'of'Appeals'
'
Facts:'The!Castillo!family!owns!a!parcel!of!land!in!Lucena!City!which!was!
mortgaged! to! the! Development! Bank! of! the! Philippines.! For! failing! to!
pay,!the!property!was!about!to!be!foreclosed.!Santiago!Rivera,!nephew!
of!Mauricia!Castillo,!proposed!that!the!4!lots!adjacent!to!the!mortgaged!
property! be! converted! into! a! subdivision! to! raise! funds! to! redeem! the!
mortgaged! lot.! Thus,! Castillo! and! Rivera! executed! an! agreement!
whereby!Rivera!would!pay!the!Castillos!for!the!development!project.!!
vacate!the!property.!The!heirs!of!the!late!Felipe!Castillo!filed!an!action!
for!annulment!of!title!before!the!CFI!of!Quezon!contending!that!all!the!
aforementioned! transactions! are! void! for! being! entered! into! in! fraud!
and! without! the! consent! and! approval! of! the! CFI! of! Quezon! before!
whom!the!administration!proceedings!was!proceeding.!
'
Issue:' Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
entity!should!be!applied!against!the!respondentYCorporations.!
'
Held:' NO.! In! the! case! at! bar,! petitioners! seek! to! pierce! the! veil! of!
corporate! entity! of! Bormaheco,! ICP! and! PM! Parts,! alleging! that! these!
corporations!employed!fraud!in!causing!the!foreclosure!and!subsequent!
sale! of! the! real! properties! belonging! to! petitioners.! While! we! do! not!
discount! the! possibility! of! the! existence! of! fraud! in! the! foreclosure!
proceeding,! neither! are! we! inclined! to! apply! the! doctrine! invoked! by!
petitioners!in!granting!the!relief!sought.!Petitioners!are!merely!seeking!
the!declaration!of!the!nullity!of!the!foreclosure!sale,!which!relief!may!be!
)
!
3. Piercing' Doctrine' Not' Applicable' to' Theorizing' or' to'
Advance/Create' New' Rights' or' Interest:' Piercing!of!the!veil!of!
corporate! fiction! is! not! allowed! when! it! is! resorted! under! a!
theory!of!coYownership!to!justify!continued!use!and!possession!
by! stockholders! of! corporate! properties.! Boyer[Roxas' v.' Court'
of'Appeals,'211'SCRA'470'(1992).'
obtained! without! having! to! disregard! the! aforesaid! corporate! fiction!

attaching! to! respondent! corporations.! Secondly,! petitioners! failed! to!
establish! by! clear! and! convincing! evidence! that! private! respondents!
were! purposely! formed! and! operated,! and! thereafter! transacted! with!
petitioners,!with!the!sole!intention!of!defrauding!the!latter.!
!
It!must!be!noted!that!Modesto!N.!Cervantes!served!as!ViceYPresident!of!
Bormaheco! and,! later,! as! President! of! PM! Parts.! On! this! fact! alone,! it!
cannot!be!said!that!PM!Parts!had!no!knowledge!of!the!aforesaid!several!
transactions!executed!between!Bormaheco!and!petitioners.!
!
Doctrine:' The! mere! fact! that! the! businesses! of! two! or! more!
corporations!are!interrelated!is!not!a!justification!for!disregarding!their!
separate! personalities,! absent! sufficient! showing! that! the! corporate!
entity! was! purposely! used! as! a! shield! to! defraud! creditors! and! third!
persons!of!their!rights.'
'
It! is! essential! that! the! corporate! fiction! is! the! very! means! by!
which!to!defeat!public!convenience,!justify!wrong,!protect!fraud!
and!defend!crime.!Jardine''Davies,'Inc.'v.'JRB'Realty,'Inc.,'463'
SCRA'555,'565'(2005).'
2. Can' Be' Availedôf' Only' to' Prevent' Fraud:! Piercing! doctrine! is!
meant!to!prevent!fraud,!and!cannot!be!employed!when!the!net!
Boyer[Roxas'v.'Court'of'Appeals'
'
Facts:'Two!separate!ejectment!cases!were!filed!against!Guillermo!Roxas!
and!Rebecca!BoyerYRoxas,!respectively!by!the!Heirs!of!Eugenia!V.!Roxas,!
Incorporated.!The!corporation!alleges!that!both!Guillermo!and!Rebecca!
are!occupying!houses!within!a!resort!owned!by!the!corporation,!and!this!
was!only!tolerated.!!
!
In! their! answers,! Guillermo! and! Rebecca! alleged! that! they! were! also!
heirs!of!Eugenia!Roxas!and!as!such!they!have!a!share!in!the!resort,!and!
that!they!have!the!right!to!stay!in!the!property.!According!to!them,!the!
veil! of! corporate! fiction! must! be! pierced! insofar! as! it! does! not! allow!
The!theory!of!corporate!entity!was!not!meant!to!promote!unfair!
them!to!possess!the!properties!owned!by!the!corporation!even!though!
they! are! coYowners! of! the! corporation! and! its! properties! along! with!
other!stockholders.!
'
Issue:'Whether!or!not!the!corporate!veil!must!be!pierced.!
'
Held:' NO.! The! fact! that! the! corporation! was! incorporated! with! the!
estate!left!by!Eugenia!Roxas!as!capital,!and!that!Rebecca/Guillermo,!as!
objectives!or!otherwise,!nor!to!shield!them.!Villanueva'v.'Adre,'
172'SCRA'876'(1989).'
heirs! of! Roxas,! were! stockholders! of! the! company,! do! not! justify! the!
piercing! of! the! corporate! veil.! Even! if! the! former! manager! of! the!
result! would! be! to! perpetrate! fraud! or! a! wrong.' Gregorio'

Araneta,' Inc.' v.' Tuason' de' Paterno' and' Vidal,' 91' Phil.' 786'
(1952).'
'
)
!
Corporation! granted! permission! to! Rebecca/Guillermo! to! possess! the!
property,!the!Corporation!is!not!forever!bound!by!this!permission.!In!the!
absence! of! any! contract! between! the! Corporation! and!
Rebecca/Guillermo! regarding! the! length! of! their! possession,! the! Board!
may! at! any! time! revoke! the! permission! through! a! board! resolution,! as!
amended!real!estate!mortgage.!
'
Issue:! Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
fiction!was!properly!applied.'
'
what!they!did!in!the!case!at!bar.!
'
Doctrine:' Properties! registered! in! the! name! of! the! corporation! are!
owned!by!it!as!an!entity!separate!and!distinct!from!its!members.'While!
shares! of! stock! constitute! personal! property,! they! do! not! represent!
property!of!the!corporation.!A!stockholder!is!not!entitled!to!possess!any!
definite!property!of!the!corporation.!
Held:' YES.! Cupertino! presented! overwhelming! evidence! that! Siain!

Enterprises! Inc.,! and! its! affiliate! corporations! (Yuyek! and! Siain!
Transport)! had! received! the! proceeds! of! the! loan! which! was! the!
consideration! of! the! amended! real! estate! mortgage.! Moreover,! it! was!
established! in! the! lower! courts! that! Siain! Enterprises! and! Yuyek! had! a!
common!set!of!incorporators,!stockholders!and!board!of!directors,!the!
same! bookkeeper! and! accountant,! the! same! office! address! and! the!
same! majority! stockholder! which! is! Cua! Le! Leng.! Cua! Le! Leng! had! the!
unlimited! liability! to! use! Siain! Transports! funds! to! pay! the! obligations!
incurred!by!Siain!Enterprises.!Thus,!it!is!clear!that!Siain!Enterprises,!Siain!
Transport!and!Yuyek!are!characterized!by!oneness!of!operations!vested!
in!Cua!Le!Leng!alone.!Consequently,!these!corporations!were!proven!to!
be!mere!alterYegos!of!Cua!Le!Leng.!
'
BUT' SEE:! Siain' Enterprises,' Inc' v.' Cupertino' Realty' Corp.,' 590'
SCRA'435'(2009).'
'
Siain'Enterprises,'Inc'v.'Cupertino'Realty'Corp.'
'
Facts:' Siain! Enterprises! obtained! a! loan! (and! executed! a! promissory!
note)! from! Cupertino! Realty! Corporation! secured! by! a! mortgage! over!
two! parcels! of! land! and! other! machineries! and! equipment.! Another!
promissory! note! in! favor! of! Cupertino! was! executed! by! Cua! Le! Leng!
(President! of! Siain! Enterprises)! where! the! latter! was! bound! in! her!
personal! capacity.! Later,! Cupertino! instituted! foreclosure! proceedings,!
but!Siain!Enterprises!claim!that!the!amended!real!estate!mortgage!was!
null! and! void! because! it! never! received! the! P160M! loan.! The! lower!
courts!ruled!in!favor!of!Cupertino!and!applied!the!doctrine!of!piercing!
the! veil! of! corporate! fiction! to! preclude! Siain! Enterprises! from!
disavowing! the! receipt! of! the! loan! and! paying! its! obligation! under! the!
Doctrine:' Where! clear! evidence! presented! support! the! fact! that! a!

corporations!affiliates!have!received!large!amounts!which!became!the!
consideration!for!the!company!execution!of!a!real!estate!mortgage!over!
its!properties,!then!the!piercing!doctrine!shall!be!applied!to!support!the!
fact! that! the! real! estate! mortgage! was! valid! and! supported! by! proper!
consideration.'
'
)
The!piercing!cannot!be!availed!of!in!order!to!dislodge!from!SECs!
jurisdiction! a! petition! for! suspension! of! payments! filed! under!
P.D.!902YA,!on!the!ground!that!the!petitioning!individuals!should!
!
be! treated! as! the! real! petitioners! to! the! exclusion! of! the!
petitioning!corporate!debtor:!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).'
unintended! may! result! from! an! erroneous! application.! PNB' v.'

Andrada' Electric' &' Engineering' Co.,' 381' SCRA' 244' (2002). 1!
Thus:!
o 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!
Application!of!the!piercing!of!the!subsidiary!company!to!merge!
it! with! the! holding! company! cannot! be! allowed! to! support! a!
theory! of! setYoff! or! compensation,! there! being! no! allegation!
much!less!any!proof!of!fraud.!Nisce'v.'Equitable'PCI'Bank,'Inc.,'
516'SCRA'231'(2007).'
An! employee! who! has! officially! retired! from! the! company! and!
availed! of! her! retirement! benefit,! but! who! continued! to! be!
employed! as! a! consultant! with! affiliate! companies,! cannot!
employ! piercing! in! order! to! treat! her! stint! with! the! affiliate!
companies! as! part! of! her! employment! with! the! main! company!
she! retired! from! ! there! is! no! fraud! or! employment! of! unfair!
shielding.! Rivera' v.' United' Laboratories,' Inc.,' 586' SCRA' 269'
(2009).'
4. 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.!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!
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).'
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).2!
Neither!has!it!been!alleged!or!proven!that!Merryland!is!
so! organized! and! controlled! and! its! affairs! are! so!
conducted! as! to! make! it! merely! an! instrumentality,!
agency! conduit! or! adjunct! of! Cardale.! Even! assuming!
that! the! businesses! of! Cardale! and! Merryland! are!
interrelated,! this! alone! is! not! justification! for!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!General! Credit! Corp.! v.! Alsons! Dev.! and! Investment! Corp.,! 513! SCRA! 225!
(2007);!Pantranco!Employees!Association!(PEAY!PTGWO)!v.!NLRC,!581!SCRA!598!
(2009);!Halley!v.!Printwell,!Inc.!649!SCRA!116!(2011).!
2
!Also! McLeod! v.! NLRC,! 512! SCRA! 222! (2007);! Uy! v.! Villanueva,! 526! SCRA! 73!
(2007).!
)
disregarding! their! separate! personalities,! absent! any!

showing!that!Merryland!was!purposely!used!as!a!shield!
to! defraud! creditors! and! third! persons! of! their! rights.!
Francisco'v.'Mejia,'362'SCRA'738'(2001).1!
The! mere! assertion! by! a! Filipino! litigant! against! the!
existence! of! a! tandem! between! two! Japanese!
for!which!the!doctrine!was!applied.!Koppel'(Phil.)'Inc.'v.'Yatco,'
77'Phil.'496'(1946).3'
person! of! the! corporation,! but! merely! an! equity! remedy! that!
pertains!to!the!transactions!in!controversy.4'
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).'
The! party! seeking! to! pierce! has! the! burden! of! presenting! clear!
and! convincing! evidence! to! justify! the! setting! aside! of! the!
separate!corporate!personality!rule.!The!question!of!whether!a!
corporation!is!a!mere!alter!ego!is!a!purely!one!of!fact,!and!the!
burden!is!on!the!party!who!alleges!it.!PNB'v.'Andrada'Electric'&'
Engineering'Co.,'381'SCRA'244'(2002).2!
5. Piercing' is' a' power' belonging' to' the' court' and! cannot! be!
!Also! Ramoso! v.! Court! of! Appeals,! 347! SCRA! 463! (2000);! Guatson! Intl! Travel!
and!Tours,!Inc.!v.!NLRC,!230!SCRA!815!(1990).!!
2
!Also! Concept! Builders,! Inc.! v.! NLRC,! 257! SCRA! 149! (1996);! Heirs! of! Ramon!
Durano,! Sr.! v.! Uy,! 344! SCRA! 238! (2000);! MR! Holdings,! Ltd.! V.! Bajar,! 380! SCRA!
617!(2002);!Ramirez!v.!Mar!Fishing!Co.,!Inc.,!672!SCRA!137!(2012).!
When!the!doctrine!is!applied,!the!consequences!would!be!that!
the! members! or! stockholders! of! the! corporation! will! be!
considered! as! the! corporation,! that! is,! liability! will! attach!
directly! to! the! officers! and! stockholders.! Umali' v.' Court' of'
Appeals,'189'SCRA'529'(1990).'
!
D.'CLASSIFICATION'OF'PIERCING'CASES:'
DEFEAT' OF' PUBLIC' CONVENIENCE' (EQUITY' PIERCING):! When!

the!application!of!the!separate!corporate!personality!would!be!
inconsistent! with! the! business! purpose! of! the! legal! fiction,! or!
when! piercing! the! corporate! fiction! is! necessary! to! achieve!
justice! or! equity! for! those! who! deal! in! good! faith! with! the!
corporation,! or! when! the! use! of! the! separate! juridical!
assumed! improvidently! by! a! sheriff.' Cruz' v.' Dalisay,' 152' SCRA'

482'(1987);'D.R.'CATC'Services'v.'Ramos,'477'SCRA'18'(2005).'
6. Piercing' Has' Only' Res' Judicata' Effect:! 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!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
The! application! of! the! piercing! doctrine! does! not! attach! to! the!
personality!is!used!to!confuse!legitimate!issues.!
FRAUD' PIERCING:! When! corporate! entity! used! to! commit! a!

crime,!to!undertake!fraud!or!do!a!wrong,!or!that!the!corporate!
veil! is! used! as! a! means! to! evade! the! consequences! of! ones!
criminal!or!fraudulent!acts.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
!Tantoco! v.! Kaisahan! ng! Mga! Manggagawa! sa! La! Campana,! 106! Phil.! 198!
(1959);!Francisco!v.!Mejia,!362!SCRA!738!(2001).!
4
!Villanueva,!C.!L.,!&!VillanuevaYTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
)
ALTERÊGO' PIERCING:! When! corporate! entity! merely! a! farce!

since!the!corporation!is!merely!the!alter!ego,!business!conduit,!
or!instrumentality!of!a!person!or!another!entity.!
Authorities! are! agreed! on! at! least! three! (3)! basic! areas! where!
piercing! the! veil,! with! which! the! law! covers! and! isolates! the!
corporation! from! any! other! legal! entity! to! which! it! may! be!
related,!is!allowed.!These!are:!1)!defeat!of!public!convenience,!
as! when! the! corporation! is! used! as! vehicle! for! the! evasion! of!
existing!obligation;!2)!fraud!cases!or!when!the!corporate!entity!
is!used!to!justify!wrong,!protect!fraud,!or!defend!a!crime;!or!3)!
alter!ego!cases,!where!the!corporation!is!merely!a!farce!since!it!
is!a!mere!alter!ego!or!business!conduit!of!a!person,!or!where!the!
corporation!is!so!organized!and!controlled!and!its!affairs!are!so!
conducted! as! to! make! it! merely! an! instrumentality,! agency,!
conduit!or!adjunct!of!another!corporation.!General'Credit'Corp.'
v.' Alsons' Dev.' and' Investment' Corp.,' 513' SCRA' 225' (2007)1!
citing' VILLANUEVA,' COMMERCIAL' LAW' REVIEW' (2004' ed),' at'
p.'576.!
'
General'Credit'Corp.'v.'Alsons'Dev.'and'Investment'Corp.'
'
Facts:' General! Credit! Corp! (GCC),! then! known! as! Commercial! Credit!
Corp! (CCC),! established! CCC! franchise! companies! in! different! urban!
centers!in!the!country.!CCC!Equity!Corporation!(EQUITY)!was!organized!
by!GCC!for!the!purpose!of!taking!over!the!operations!and!management!
of! the! various! franchise! companies.! Alsons! Devt! &! Investment! Corp!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Also! Pantranco! Employees! Association! (PEAYPTGWO)! v.! NLRC,! 581! SCRA! 598!
(2009);!Prisma!Construction!&!Dev.!Corp.!v.!Menchavez,!614!SCRA!590!(2010);!
Sarona!v.!NLRC,!663!SCRA!394!(2012).!
(ALSONS)!and!the!Alcantara!Family!each!owned!shares!in!the!aforesaid!
GCC!franchise!companies,!e.g.,!CCC!Davao!and!CCC!Cebu.!!
!
In! December! 1980,! ALSONS! and! the! Alcantara! Family! sold! their!
shareholdings! (101,953shares)! in! the! CCC! franchise! companies! to!
EQUITY! for! P2M,! for! which! EQUITY! issued! a! bearer! promissory! note!
for!P2M!with!a!oneYyear!maturity!date!and!18%!interest!per!annum.!!
!
Some! four! years! later,! the! Alcantara! Family! assigned! its! rights! and!
interests!over!the!bearer!note!to!ALSONS.!Even!before!the!execution!of!
the! assignment! deal,! letters! for! demand! for! interest! payment! were!
already! sent! to! EQUITY! through! its! President,! Wilfredo! Labayen,! who!
pleaded!inability!to!pay!the!stipulated!interest,!EQUITY!no!longer!having!
assets! or! property! neither! to! settle! its! obligation! nor! being! extended!
financial!support!by!GCC.!
!
On! January! 14,! 1986,! ALSONS! filed! a! complaint! for! a! sum! of! money!
against!EQUITY!and! GCC.! GCC! was! impleaded! as! partyYdefendant!since!
EQUITY!has!been!organized!as!a!tool!and!mere!conduit!of!GCC.!
'
Issue:' Whether! or! not! the! doctrine! of! Piercing! the! Veil! of! Corporate!
Fiction!should!be!applied!
'
Held:' YES.! The! relationship! of! GCC! and! EQUITY! have! been! that! of!
parentYsubsidiary! corporations,! the! doctrine! is! applicable! in! the! case!
at! bar.! There! are! at! least! 20! documented! circumstances! and!
transactions!which,!taken!together,!strongly!support!the!conclusion!that!
EQUITY! was! an! adjunct! /! instrumentality! /! business! conduit! of! GCC! !
i.e.!commonality!of!directors,!officers!and!stockholders,!sharing!of!office!
)
!
between! GCC! and! EQUITY,! financing! and! management! arrangements!
allowing!GCC!to!handle!the!funds!of!EQUITY,!virtual!control!of!GCC!over!
finances,! business! policies! and! practices! of! EQUITY,! and! the!
establishment!of!EQUITY!by!GCC!to!circumvent!CB!rules.!!
'
Doctrine:' Another!formulation!of!this!doctrine!is!that!when!2!business!
enterprises! are! owned,! conducted! and! controlled! by! the! same! parties,!
both! law! and! equity! will! disregard! the! legal! fiction! that! 2! corporations!
are! distinct! entities! and! treat! them! as! one! and! the! same,! when!
necessary!to!protect!third!parties!rights.'
!
1. 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!be!pierced!and!
disregarded.! PNB' v.' Andrada' Electric' &' Engineering' Co.,' 381'
SCRA'244'(2002).'
2. Summary'of'Probative'Factors:'Concept'Builders,'Inc.'v.'NLRC,'
257'SCRA'149'(1996).1'
The!absence!of!these!elements!prevents!piercing!the!corporate!
veil.!Lim'v.'Court'of'Appeals,'323'SCRA'102'(200).2!
'
Concept'Builders,'Inc.'v.'NLRC'
'
Facts:' Concept! Builders! Inc.! was! engaged! in! the! construction! business!
and!lost!in!a!case!before!the!NLRC!concerning!the!termination!of!private!
respondents!whom!it!had!employed!as!laborers,!carpenters!and!riggers!
in!a!project!which!Concept!claims!was!finished,!but!upon!inspection!was!
found!to!be!the!contrary.!The!Labor!Arbiter!rendered!judgment!against!
Concept!requiring!it!to!pay!private!respondents!back!wages.!The!Sheriff!
then! tried! to! execute! the! writ! of! execution! but! found! that! the! office!
previously!occupied!by!Concept!is!now!occupied!by!Hydro!Phils.!Inc.!!a!
manufacturing!company!allegedly!owned!by!the!same!stockholders.!
'
Issue:' Whether! or! not! the! doctrine! of! piercing! the! corporate! veil! is!
applicable!to!this!case.!
'
Held:' YES.! While! petitioners! claimed! it! ceased! operations! in! 1986,! it!
filed! an! Information! Sheet! with! the! SEC! in! 1987! stating! that! its! office!
address! is! their! old! address.! Both! information! sheets! were! filed! by!
Virgilio! Casino,! the! same! corporate! secretary.! They! had! the! same!
President,! Board! of! Directors! and! substantially! the! same! subscribers.!
Clearly,!petitioner!ceased!its!business!operations!in!order!to!evade!the!
payment! to! private! respondents! of! back! wages! and! to! bar! their!
reinstatement! to! their! former! positions.! HPPI! is! obviously! a! business!
conduit! of! Concept! Builders! and! its! emergence! was! skillfully!
orchestrated!to!avoid!the!latters!financial!liability.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!PNB!v.!Ritratto!Group,!Inc.,!362!SCRA!216!(2001);!Velarde!v.!Lopez,!419!SCRA!
422! (2004);! Jardine! Davies,! Inc.! v.! JRB! Realty,! Inc.,! 463! SCRA! 555! (2005);!
Pantranco!Employees!Association!(PEAYPTGWO)!v.!NLRC,!581!SCRA!598!(2009).!
!Child! Learning! Center,! Inc.! v.! Tagorio,! 475! SCRA! 236! (2005);! General! Credit!
Corp.! v.! Alsons! Dev.! and! Investment! Corp.,! 513! SCRA! 225! (2007);! Nisce! v.!
Equitable!PCI!Bank,!Inc.,!516!SCRA!231!(2007).!
)
!
'
Doctrine:'Probative!factors!of!identity!that!will!justify!the!application!of!
the!doctrine:!
1. Stock!membership!by!one!or!common!ownership!of!both!!
2. Identity!of!directors!and!officers!(management)!
3. Manner!of!keeping!corporate!books!and!records!(management)!
4. Methods!of!conducting!business!(management).!
!
3. Distinction' Between' Fraud' Piercing' and' Alterêgo' Piercing:'
Lipat'v.'Pacific'Banking'Corp.,'402'SCRA'339'(2003).'
'
Lipat'v.'Pacific'Banking'Corp.'
'
Facts:' Spouses! Lipat! (Alfredo! and! Estelita)! owns! Belas! Export! Trading!
(BET),! a! single! proprietorship! engaged! in! garment! manufacturing! in!
Quezon!City.!The!Lipats!also!owned!the!Mystical!Fashions!in!the!United!
States,! which! sells! goods! imported! from! the! Philippines! through! BET.!
Estelita! designated! her! daughter,! Teresita,! to! manage! BET! in! the!
Philippines! while! she! was! managing! Mystical! Fashions! in! the! United!
States.!
!
In!order!to!facilitate!the!convenient!operation!of!BET,!Estelita!executed!
a! special! power! of! attorney! appointing! Teresita! as! her! attorneyYinYfact!
to!obtain!loans.!By!virtue!of!this!SPA,!Teresita!obtained!a!sizeable!loan!
from! Pacific! Bank.! Three! months! after! the! loan,! BET! was! incorporated!
into! a! family! corporation! named! Belas! Export! Corporation! (BEC),!
engaged!in!the!same!business!and!utilized!the!same!properties.!The!loan!
was!restructured!in!the!name!of!BEC!and!secured!with!Lipats!property.!
!
BEC! defaulted,! and! the! bank! foreclosed! on! the! real! mortgage.! The!
spouses!Lipat!claim!that!the!loan!obtained!by!Teresita!were!ultra!vires!
acts!because!they!were!executed!without!the!requisite!board!resolution!
of!the!Board!of!Directors!of!BEC.!
'
Issue:' Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
fiction!applies!in!this!case.'
'
Held:' YES.! In! finding! the! Lipats! mortgaged! property! liable! for! the!
obligations!of!BEC,!both!courts!below!relied!upon!the!alter!ego!doctrine!
or!instrumentality!rule.!
!
Evidence! suggests! an! alter! ego! case! in! the! sense! that:! (1)! the! spouses!
are!the!owners!and!majority!shareholders!of!BET!and!BEC;!(2)!both!firms!
were!managed!by!their!daughter,!Teresita;!(3)!both!firms!were!engaged!
in! the! garment! business,! supplying! products! to! Mystical! Fashion,! a! US!
firm! established! by! Estelita;! (4)! both! firms! held! office! in! the! same!
building! owned! by! the! Lipats;! (5)! BEC! is! a! family! corporation! with! the!
Lipats! as! its! majority! stockholders;! (6)! the! business! operations! of! the!
BEC! were! so! merged! with! those! of! Mrs.! Lipat! such! that! they! were!
practically! indistinguishable;! (7)! the! corporate! funds! were! held! by!
Estelita! Lipat! and! the! corporation! itself! had! no! visible! assets;! (8)! the!
board!of!directors!of!BEC!was!composed!of!the!Burgos!and!Lipat!family!
members;!(9)!Estelita!had!full!control!over!the!activities!of!and!decided!
business! matters! of! the! corporation;! and! that! (10)! Estelita! Lipat! had!
benefited! from! the! loans! secured! from! Pacific! Bank! to! finance! her!
business! abroad! and! from! the! export! bills! secured! by! BEC! for! the!
account! of! Mystical! Fashion.! It! could! not! have! been! coincidental! that!
BET!and!BEC!are!so!intertwined!with!each!other!in!terms!of!ownership,!
)
!
business!purpose,!and!management.!
'
Doctrine:' When! the! corporation! is! the! mere! alter! ego! or! business!
conduit!of!a!person,!the!separate!personality!of!the!corporation!may!be!
disregarded.'
TESCON! contested! the! judgment! claiming! that! the! admission! made! in!
the! "Employer's! Report! of! Accident! or! Sickness"! was! due! to! honest!
mistake!and/or!excusable!negligence!on!its!part,!and!that!the!illness!for!
which!compensation!is!sought!is!not!an!occupational!disease,!hence,!not!
compensable!under!the!law.!
!
E.' DEFEAT' OF' PUBLIC' CONVENIENCE' (EQUITY' PIERCING):' Juridical'
Personality'Cannot'Be'Employed:'
1. To' Confuse' Legitimate' Issues:' Telephone' Engineering' and'
Service'Co.,'Inc.'V.'WCC,'104'SCRA'354'(1981).'
'
Telephone'Engineering'and'Service'Co.,'Inc.'V.'WCC'
'
Issue:'Whether!or!not!TESCO!may!be!held!liable!for!the!death.!
'
Held:' YES.! TESCO'S! denial! at! this! stage! that! it! is! the! employer! of! the!
deceased! is! obviously! an! afterthought,! a! devise! to! defeat! the! law! and!
evade!its!obligations.!This!denial!also!constitutes!a!change!of!theory!on!
appeal! which! is! not! allowed! in! this! jurisdiction.! The! Court! pierced! the!
'
Facts:' Petitioner! engaged! in! the! business! of! manufacturing! telephone!
equipment.! Its! sister! company,! the! Utilities! Management! Corporation!
(UMACOR),!with!offices!in!the!same!location.!UMACOR!is!also!under!the!
management!of!Jose!Luis!Santiago.!UMACOR!employed!the!late!Pacifica!
L.! Gatus! as! Purchasing! Agent.! Then! was! detailed! with! petitioner!
veil!between!TESCO!and!UMARCO!in!the!interest!of!justice!and!equity.!
'
Doctrine:'Although!respect!for!the!corporate!personality!as!such,!is!the!
general! rule,! there! are! exceptions.! In! appropriate! cases,! the! veil! of!
corporate!fiction!may!be!pierced!as!when!the!same!is!made!as!a!shield!
to!confuse!the!legitimate!issues.!
company.!He!reported!back!to!UMACOR!and!after!2!years!he!contracted!
illness!and!died!of!"liver!cirrhosis!with!malignant!degeneration."!
!
Respondent! Leonila! S.! Gatus,! filed! a! "Notice! and! Claim! for!
Compensation"! with! Workmen's! Compensation! Commission! subYoffice,!
alleging!that!her!husband!was!an!employee!of!TESCO,!and!that!he!died!
of!liver!cirrhosis.!UMACOR!submitted!an!Employer's!Report!of!Accident!
'
or! Sickness! which! indicated! that! the! employee! contracted! illness! in!
regular! occupation.! On! this! basis,! the! Acting! Referee! awarded! death!
benefits!plus!burial!expenses!in!favor!of!the!heirs!of!Gatus.!
!
against! Emilio,! Ariston! and! Rodolfo! Cano! as! president! and! proprietor,!
field! supervisor! and! manager,! respectively,! of! Emilio! Cano! Enterprises,!
Inc.! An! order! of! execution! was! issued! to! reinstate! Honorata! and! to!
deposit! with! the! court! the! amount! P7,222.58! within! 10! days! from!
2. To'Raise'Legal'Technicalities:'Emilio'Cano'Enterprises'v.'CIR,'13'
SCRA'291'(1965).'
'
Emilio'Cano'Enterprises'v.'CIR'
'
Facts:! A!complaint!for!unfair!labor!practice!was!filed!By!Honorata!Cruz!
)
!
receipt! of! the! order,! failing! which! the! court! will! order! either! a! levy! on!
respondents!properties!or!the!filing!of!an!action!for!contempt!of!court.!
(The! order! of! execution! was! directed! against! the! properties! of! Emilio!
Cano!Enterprises,!Inc.)!
'
(1962).1!
Issue:'Whether!or!not!the!judgment!against!Emilio!and!Rodolfo!in!their!
capacity!as!officials!of!the!corporation!can!be!made!effective!against!the!
property!of!the!latter!which!was!not!a!party!to!the!case.!
!
Held:' YES.! While! it! is! an! undisputed! rule! that! a! corporation! has! a!
personality! separate! and! distinct! from! its! members! or! stockholders!
because!of!a!fiction!of!the!law,!here!we!should!not!lose!sight!of!the!fact!
Where! a! debtor! registers! his! residence! to! a! family! corporation!

in! exchange! of! shares! of! stock! and! continues! to! live! therein,!
then! the! separate! juridical! personality! may! be! disregarded.!
PBCom'v.'CA,'195'SCRA'567'(1991).'
Where!corporate!fiction!was!used!to!perpetrate!social!injustice!
or! as! a! vehicle! to! evade! obligations! or! confuse! the! legitimate!
issues!(as!in!this!case!where!the!actions!of!management!of!the!
two! corporations! created! confusion! as! to! the! proper! employer!
of! claimants),! the! two! corporations! would! be! merged! as! one.!
Azcor'Manufacturing,'Inc.'v.'NLRC,'303'SCRA'26'(1999).'
that! the! Emilio! Cano! Enterprises,! Inc.! is! a! closed! family! corporation!
where!the!incorporators!and!directors!belong!to!one!single!family.!Here!
is! an! instance! where! the! corporation! and! its! members! can! be!
considered! as! one.! And! to! hold! such! entity! liable! for! the! acts! of! its!
members!is!not!to!ignore!the!legal!fiction!but!merely!to!give!meaning!to!
the!principle!that!such!fiction!cannot!be!invoked!if!its!purpose!is!to!use!
it!as!a!shield!to!further!an!end!subversive!of!justice.!
The! corporate! veil! cannot! be! used! to! blatantly! violate! the!
prohibition! against! forumYshopping.! Where! the! corporation!
itself!has!not!been!remiss!in!vigorously!prosecuting!or!defending!
corporate! causes! and! in! using! and! applying! remedies! available!
to!it,!then!shareholders,!whether!suing!as!the!majority!in!direct!
actions!or!as!the!minority!in!a!derivative!suit,!cannot!be!allowed!
to! pursue! the! same! claims.! First' Philippine' International' Bank'
v.'Court'of'Appeals,'252'SCRA'259'(1996).'
3. The'Case'for'Thinly^Capitalized'Corporations:'McConnel'v.'CA,'
'
Doctrine:' And! so! it! has! been! held! that! while! a! corporation! is! a! legal!
entity! existing! separate! and! apart! from! the! persons! composing! it,! that!
concept! cannot! be! extended! to! a! point! beyond! its! reason! and! policy,!
and! when! invoked! in! support! of! an! end! subversive! of! this! policy! it!
should!be!disregarded!by!the!courts.!
'
One! cannot! evade! civil! liability! by! incorporating! properties! or!

the! business.! Palacio' v.' Fely' Transportation' Co.,' 5' SCRA' 1011'
1'SCRA'722'(1961).'
'
McConnel'v.'CA'
'
Facts:! Park! Rite! Co.! (PRC)! leased! from! Rafael! Samanillo! a! vacant! lot!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Also!Mendoza!and!Yotoko!v.!Banco!Real!Dev.!Bank,!470!SCRA!86!(2005).!
)
!
which! was! used! for! parking! motor! vehicles! for! consideration.! It! turned!
out!that!in!operating!its!parking!business,!the!corporation!occupied!and!
used! not! only! the! Samanillo! lot! it! had! leased! but! also! an! adjacent! lot!
belonging! to! Padilla! (respondent)! without! the! owners! knowledge! and!
consent.!Padilla!wanted!payment!for!the!use!and!occupation!of!the!lot.!
the!corporate!obligations.!
'
Doctrine:' While! the! mere! ownership! of! all! or! nearly! all! of! the! capital!
stock! of! a! corporation! is! a! mere! business! conduit! of! the! stockholder,!
that!conclusion!is!amply!justified!where!it!is!shown!that!the!operations!
!
Judgment! was! rendered! against! Park! Rite,! but! it! was! found! to! be!
without!any!assets!apart!from!the!money!deposited!with!the!Court.!The!
judgment! creditors! then! filed! suit! in! the! CFI! Manila! against! the!
corporation! and! its! past! and! present! stockholders,! to! recover! from!
them,! jointly! and! severally,! the! unsatisfied! balance! of! the! judgment,!
plus!legal!interest!and!costs.!
of!the!corporation!were!so!merged!with!those!of!the!stockholders!as!to!
be!practically!indistinguishable!from!them.!
'
fraudulent! act! or! fraudulent! means! perpetrated! upon! the!

investing!public!who!were!made!to!believe!that!ASBHI!had!the!
financial! capacity! to! repay! the! loans! it! enticed! petitioners! to!
extend,!despite!the!fact!that!it!had!an!authorized!capital!stock!
of! only! P500,000.00! and! paid! up! capital! of! only! P125,000.00),!
with! the! deficient! capitalization! evidenced! by! its! articles! of!
incorporation,! the! treasurers! affidavit,! the! audited! financial!
!
Issue:' Whether! or! not! there! was! justification! for! disregarding! the!
corporate! entity! of! Park! Rite! Co.,! Inc.! and! holding! its! controlling!
stockholders!personally!responsible!for!a!judgment!against!the!corp.!
'
Held:' YES.! The! evidence! clearly! shows! that! these! persons! completely!
dominated!and!controlled!the!corporation!and!that!the!functions!of!the!
corporation!were!solely!for!their!benefits.!It!is!obvious!from!the!sharing!
that!only!1!or!2!people!possess!the!majority!shares.!Other!incorporators!
had! about! 1! or! 2! each! which! were! merely! qualifying! shares.! That! the!
corporation! was! a! mere! extension! of! their! personality! is! shown! by! the!
fact!that!the!office!of!Cirilo!Paredes!and!that!of!Park!Rite!Co.,!Inc.!were!
located!in!the!same!building,!in!the!same!floor!and!in!the!same!room!!
at!507!Wilson!Building.!This!is!further!shown!by!the!fact!that!the!funds!
of! the! corporation! were! kept! by! Cirilo! Paredes! in! his! own! name.! The!
facts! show! that! the! corporation! is! a! mere! instrumentality! of! the!
individual! stockholders;! hence! the! latter! must! individually! answer! for!
)
The! DOJ! Resolution! explicitly! identified! the! false! pretense,!
statements.! Moreover,! respondents! argument! assumes! that!

there!is!legal!obligation!on!the!part!of!petitioners!to!undertake!
an!investigation!of!ASBHI!before!agreeing!to!provide!the!loans.!
There! is! no! such! obligation.! It! is! unfair! to! expect! a! person! to!
procure! every! available! public! record! concerning! an! applicant!
for!credit!to!satisfy!himself!of!the!latters!financial!standing.!At!
least,! that! is! not! the! way! an! average! person! takes! care! of! his!
concerns.!Gabionza'v.'Court'of'Appeals,'565'SCRA'38'(2008).!
Where!the!corporation!was!under!the!control!of!its!stockholders!
who! ranYup! quite! a! high! obligation! with! the! printing! company!
knowing!fully!well!that!their!corporation!was!not!in!a!position!to!
pay! for! the! accounts,! and! where! in! fact! they! personally!
benefited! from! the! operations! of! the! company! to! which! they!
!
never!paid!their!subscription!in!full,!would!constitute!piercing!of!
the! veil! to! allow! the! creditor! to! be! able! to! collect! what!
otherwise! were! debts! owed! by! the! company! which! has! no!
visible!assets!and!has!ceased!all!operations.!Halley'v.'Printwell,'
Inc.'649'SCRA'116'(2011).'
'
Halley'v.'Printwell,'Inc.'
'
Facts:'BMPI!(Business!Media!Philippines!Inc.)!is!a!corporation!under!the!
control!of!its!stockholders,!including!Donnina!Halley.!In!the!course!of!its!
business,! BMPI! commissioned! PRINTWELL! to! print! Philippines,! Inc.! (a!
magazine! published! and! distributed! by! BMPI).! BMPI! placed! several!
'
Doctrine:' TRUST! FUND! DOCTRINE.! Under! which! corporate! debtors!
might! look! to! the! unpaid! subscriptions! for! the! satisfaction! of! unpaid!
corporate! debts.! Subscriptions! to! the! capital! of! a! corporation!
constitutes! a! trust! fund! for! the! payment! of! the! creditors! (by! mere!
analogy)! In! reality,! corporation! is! a! simple! debtor.! The! creditor! is!
allowed! to! maintain! an! action! upon! any! unpaid! subscriptions! and!
thereby!steps!into!the!shoes!of!the!corporation!for!the!satisfaction!of!its!
debt.!The!trust!fund!doctrine!is!not!limited!to!reaching!the!stockholders!
unpaid!subscriptions.!The!scope!of!the!doctrine!when!the!corporation!is!
insolvent! encompasses! not! only! the! capital! stock! but! also! other!
property!and!assets!generally!regarded!in!equity!as!a!trust!fund!for!the!
orders! amounting! to! P3160,000! but! was! only! able! to! pay! P25,000.!
PRINTWELL!sued!BMPI!for!collection!of!the!unpaid!balance!and!later!on!
impleaded!BMPIs!original!stockholders!and!incorporators!to!recover!on!
their!unpaid!subscriptions.!
'
Issue:' Whether! or! not! a! stockholder! (Halley! in! this! case)! who! was! in!
active! management! of! the! business! of! the! corporation! and! still! has!
payment!of!corporate!debts.!
unpaid! subscriptions! should! be! made! liable! for! the! debts! of! the!
corporation!by!piercing!the!veil!of!corporate!fiction!
'
Held:' YES.! Such! stockholder! should! be! made! liable! up! to! the! extent! of!
her!unpaid!subscription.!It!was!found!that!at!the!time!the!obligation!was!
incurred,!BMPI!was!under!the!control!of!its!stockholders!who!know!fully!
well!that!the!corporation!was!not!in!a!position!to!pay!its!account!(thinly!
capitalized).! And,! that! the! stockholders! personally! benefited! from! the!
'
Facts:' Yutivo! Sons! Hardware! Co.! is! a! company! engaged! in! the!
importation!and!sale!of!hardware!supplies!and!equipment.!The!former!
bought!a!number!of!cars!from!General!Motors!Overseas!Corporation.!As!
importer,!GM!paid!sales!tax!prescribed!by!sections!184,!185!and!186!of!
the! Tax! Code! on! the! basis! of! its! selling! price! to! Yutivo.! Said! tax! being!
operations! of! the! corporation! even! though! they! never! paid! their!
subscriptions!in!full.!
'
4. Avoidance'or'Minimization'of'Taxes:'Yutivo'Sons'Hardware'v.'
Court' of' Tax' Appeals' 1' SCRA' 160' (1961);' Liddell' &' Co.' v.'
Collector'of'Internal'Revenue,'2'SCRA'632'(1961).'
'
Yutivo'Sons'Hardware'v.'Court'of'Tax'Appeals'
collected!only!once!on!original!sales,!Yutivo!paid!no!further!sales!tax!on!
its! sales! to! the! public.! Eventually,! Yutivo! sold! exclusively! to! Southern!
Motors,! which! was! organized! to! engage! in! the! business! of! selling! cars,!
trucks,!and!spare!parts!to!the!public.!
)
!
!
When!GM!decided!to!withdraw!from!the!Philippines,!it!appointed!Yutivo!
as! importer! for! the! Visayas! and! Mindanao,! and! Yutivo! continued! its!
previous!arrangement!of!selling!exclusively!to!SM.!In!the!same!way!that!
GM! used! to! pay! sales! taxes! based! on! its! sales! to! Yutivo,! the! latter,! as!
to!arrive!at!the!true!tax!liability!of!Yutivo.!
'
Doctrine:'
'
importer,!paid!sales!tax!prescribed!on!the!basis!of!its!selling!price!to!SM,!
and! since! such! sales! tax,! as! already! stated,! is! collected! only! once! on!
original!sales,!SM!paid!no!sales!tax!on!its!sales!to!the!public.!
!
After!some!time,!the!CIR!made!an!assessment!on!Yutivo!and!demanded!
from! the! latter! P1,804,769.85! as! deficiency! sales! tax,! claiming! that! the!
taxable!sales!were!the!retail!sales!by!SM!to!the!public!and!not!the!sales!
mere! instrumentality,! or! adjunct! of! Yutivo,! the! Court! CTA! correctly!
disregarded!the!technical!defense!of!separate!corporate!entity!in!order!
Use!of!nominees!to!constitute!the!corporation!for!the!benefit!of!
the! controlling! stockholder! who! sought! to! avoid! payment! of!
taxes.!Marvel'Building'v.'David,'9'Phil.'376'(1951).'
The!plea!to!pierce!the!veil!of!corporate!fiction!on!the!allegation!
that! the! corporations! true! purpose! is! to! avoid! payment! by! the!
incorporating! spouses! of! the! estate! taxes! on! the! properties!
transferred!to!the!corporations:!With!regard!to!their!claim!that!
[the! companies]! Ellice! and! Margo! were! meant! to! be! used! as!
at! wholesale! made! by! Yutivo! to! the! latter! inasmuch! as! SM! and! Yutivo!
were!one!and!the!same!corporation,!the!former!being!the!subsidiary!of!
the!latter.!
'
Issue:'Whether!or!not!Southern!Motors!was!a!mere!adjunct!of!Yutivo.!
'
Held:' YES.! Briefly! stated,! Yutivo! financed! principally,! if! not! wholly,! the!
business!of!SM!and!actually!extended!all!the!credit!to!the!latter!not!only!
in! the! form! of! starting! capital! but! also! in! the! form! of! credits! extended!
for! the! cars! and! vehicles! allegedly! sold! by! Yutivo! to! SM! as! well! as!
advances! or! loans! for! the! expenses! of! the! latter! when! the! capital! had!
been! exhausted.! The! funds! of! SM! were! all! merged! in! the! cash! fund! of!
Yutivo.!At!all!times,!Yutivo,!through!officers!and!directors!common!to!it!
and! SM,! exercised! full! control! over! the! cash! funds,! policies,!
expenditures!and!obligations!of!the!latter.!Southern!Motors!being!but!a!
mere! tools! for! the! avoidance! of! estate! taxes,! suffice! it! to! say!
that!the!legal!right!of!a!taxpayer!to!reduce!the!amount!of!what!
otherwise! could! be! his! taxes! or! altogether! avoid! them,! by!
means! which! the! law! permits,! cannot! be! doubted.! Gala' v.'
Ellice'Agro[Industrial'Corp.,'418'SCRA'431'(2003).'
HOWEVER:! The! mere! existence! of! parentYsubsidiary! relations,!

or! the! fact! that! one! corporation! is! affiliated! with! another!
corporation! does! not! justify! piercing! based! on! serving! public!
convenience.! Comm.' of' Internal' Revenue' v.' Norton' and'
Harrison,'11'SCRA'704'(1954).1'
!
F.'FRAUD'CASES:'
When! the! legal! fiction! of! the! separate! corporate! personality! is!
abused,! such! as! when! the! same! is! used! for! fraudulent! or!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Tomas! Lao! Construction! v.! NLRC,! 278! SCRA! 716! (1997).! Marques! v.! Far! East!
Bank!and!Trust!Co.,!639!SCRA!312!(2011).!
)
!
wrongful! ends,! the! courts! have! not! hesitated! to! pierce! the!
corporate!veil.!Francisco'v.'Mejia,'362'SCRA'738'(2001).!
'
'
payment!of!taxes!so!that!the!properties!may!be!levied!upon!and!be!the!
subject! of! an! auction! where! Merryland! could! bid,! which! was! exactly!
what!happened.!
'
Doctrines:'With!specific!regard!to!corporate!officers,!the!general!rule!is!
Facts:' Andrea!Gutierrez!was!the!owner!of!a!parcel!of!land!in!Caloocan.!
This!property!was!subdivided!into!five!lots,!four!of!which!are!the!subject!
of! this! controversy.! The! four! lots! were! sold! to! Cardale! Financing! and!
Realty!Corporation!which!made!an!initial!payment,!and!the!balance!was!
secured! by! 3! of! 4! lots! mortgaged! to! Gutierrez! herself.! When! Cardale!
failed! to! pay,! Gutierrez! filed! a! suit! for! rescission.! Cardale! was!
represented!by!its!VP!and!Treasurer,!herein!petitioner!Adalia!Francisco.!
that! the! officer! cannot! be! held! personally! liable! with! the! corporation,!
whether! civilly! or! otherwise,! for! the! consequences! of! his! acts,! if! he!
acted! for! and! in! behalf! of! the! corporation,! within! the! scope! of! his!
authority!and!in!good!faith.!In!such!cases,!the!officers!acts!are!properly!
attributed! to! the! corporation.! However,! if! it! is! proven! that! the! officer!
has! used! the! corporate! fiction! to! defraud! a! third! party,! or! that! he! has!
acted! negligently,! maliciously! or! in! bad! faith,! then! the! corporate! veil!
!
The! case! dragged! on! for! 14! years,! during! which! the! taxes! for! the!
mortgaged!properties!were!not!paid.!As!a!result,!the!government!levied!
upon!them.!They!became!subject!of!an!auction!sale.!The!highest!bidder!
was! Merryland! Development! Corporation,! whose! President! was! also!
Adalia! Francisco.! Because! of! these,! Rita! Mejia,! the! administrator! of!
Gutierrezs! estate,! filed! a! complaint! for! damages! against! Francisco! for!
shall! be! lifted! and! he! shall! be! held! personally! liable! for! the! particular!
corporate!obligation!involved.!
Francisco'v.'Mejia'
fraud.!
'
Issue:'Whether!or!not!Francisco!may!be!held!liable.!
'
Held:' YES,!it!was!evident!that!Francisco!was!in!bad!faith,!not!informing!
Gutierrezs!estate!of!the!tax!delinquencies.!Apparently,!Francisco!made!
use! of! her! involvement! in! Cardale! and! Merryland! to! secure! an!
advantage! for! the! latter.! Cardale! as! the! mortgagor! had! the! duty! of!
paying!the!taxes!for!the!properties.!Evidence!showed!that!Francisco!as!
Cardales! Treasurer,! intended! to! conceal! the! delinquency! in! the!
)
The! general! rule! is! that! obligations! incurred! by! a! corporation,!

acting! through! its! directors,! officers! or! employees,! are! its! sole!
liabilities.! However,! there! would! be! piercing! of! the! veil! when!
the! corporation! is! used! by! any! of! them! as! a! cloak! or! cover! for!
fraud!or!illegality!or!injustice.!Here,!the!fraud!was!committed!by!
petitioners! to! the! prejudice! of! respondent! bank.' Mendoza' v.'
Banco'Real'Dev.'Bank,'470'SCRA'86'(2005).'
Fraud!and!bad!faith!on!the!part!of!certain!corporate!officers!or!
stockholders! may! warrant! the! piercing! of! the! veil! of! corporate!
fiction! so! that! the! said! individual! may! not! seek! refuge! therein,!
but!may!be!held!individually!and!personally!liable!for!his!or!her!
actions.! Lafarge' Cement' Phils.,' Inc.' v.' Continental' Cement'
Corp.,'443'SCRA'522'(2004).'
or!when!they!practice!fraud!on!internal!revenue!laws,!the!fiction!
of! their! separate! and! distinct! corporate! identities! shall! be!
disregarded,! and! both! entities! treated! as! one! taxable! person,!
subject! to! assessment! for! the! same! taxable! transaction.!
Commissioner'of'Internal'Revenue'v.'Menguito,'565'SCRA'461'
(2008).'
However,! mere! allegation! of! fraud! or! bad! faith,! without!

evidence!supporting!such!claims!cannot!warrant!the!piercing!of!
the!corporate!veil.!DBP'v.'Court'of'Appeals,'357'SCRA'626,'358'
SCRA'501,'363'SCRA'307'(2001).'
1. Acts'by'Controlling'Shareholder:'
The! fact! that! a! corporation! owns! all! of! the! stocks! of! another!
corporation,! taken! alone,! is! not! sufficient! to! justify! their! being!
treated!as!one!entity.!If!used!to!perform!legitimate!functions,!a!
subsidiarys! separate! existence! shall! be! respected,! and! the!
liability!of!the!parent!corporation,!as!well!as!the!subsidiary!shall!
be!confined!to!those!arising!in!their!respective!business.!Nisce'v.'
Equitable'PCI'Bank,'Inc.,'516'SCRA'231'(2007).1!
3. Guiding'Principles'in'Fraud'Cases:'
'
Where! a! stockholder,! who! has! absolute! control! over! the!
Why'is'there'inordinate'showing'of'alterêgo'elements?'
1. There! must! have! been! fraud! or! an! evil! motive! in! the! affected!
transaction,!and!the!mere!proof!of!control!of!the!corporation!by!
itself!would!not!authorize!piercing;!
2. The!corporate!fiction!is!used!as!a!means!to!commit!the!fraud!or!
business!and!affairs!of!the!corporation,!entered!into!a!contract!
with! another! corporation! through! fraud! and! false!
representations,! such! stockholder! shall! be! liable! solidarily! with!
coYdefendant! corporation! even! when! the! contract! sued! upon!
was! entered! into! on! behalf! of! the! corporation.! Namarco' v.'
avoid!the!consequences!thereof;!and!
3. The! main! action! should! seek! for! the! enforcement! of! pecuniary!
claims! pertaining! to! the! corporation! against! corporate! officers!
or!stockholders.!
!
Associated'Finance'Co.,'19'SCRA'962'(1967).'
or! even! share! the! same! address,! or! have! interlocking!

incorporators,! directors! or! officers,! in! the! absence! of! fraud! or!
other!public!policy!consideration,!does!not!warrant!piercing!the!
veil!of!corporate!fiction.!McLeod'v.'NLRC,'512'SCRA'222'(2007),'
quoting'from'Indophil'Textile'Mill'Workers'Union'v.'Calica,'205'
Where! the! corporation! is! used! as! a! means! to! appropriate! a!

property! by! fraud! which! property! was! later! resold! to! the!
controlling!stockholders,!then!piercing!should!be!allowed.!Heirs'
of'Ramon'Durano,'Sr.'v.'Uy,'344'SCRA'238'(2000).'
2. Tax'Evasion'or'Fraud:'
SCRA' 697' (1992),' and' Del' Rosario' v.' NLRC,' 187' SCRA' 777'
(1990);'Heirs'of'Fe'Tan'Uy'v.'International'Exchange'Bank,'690'
SCRA'519'(2013).'
In! a! number! of! cases,! the! Court! has! shredded! the! veil! of!
corporate!identity!and!ruled!that!where!a!corporation!is!merely!
an!adjunct,!business!conduit!or!alter!ego!of!another!corporation!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Marques!v.!Far!East!Bank!and!Trust!Co.,!639!SCRA!312!(2011).!
)
Respondent!corporations!may!be!engaged!in!the!same!business!
Mere! substantial! identity! of! incorporators! of! two! corporations!

does!not!necessarily!imply!fraud,!nor!warrant!the!piercing!of!the!
!
veil!of!corporate!fiction.!In!the!absence!of!clear!and!convincing!
evidence!to!show!that!the!corporate!personalities!were!used!to!
perpetuate! fraud,! or! circumvent! the! law,! the! corporations! are!
to! be! rightly! treated! as! distinct! and! separate! from! each! other.!
To! disregard! the! said! separate! juridical! personality! of! a!
corporation,! the! wrongdoing! must! be! proven! clearly! and!
1
convincingly.!Laguio'v.'NLRC,'262'SCRA'715'(1996). !
!
G.'ALTERÊGO'CASES:'
1. Using'Corporation'as'Conduit'or'Alter'Ego:'
Where!the!capital!stock!is!owned!by!one!person!and!it!functions!
only! for! the! benefit! of! such! individual! owner,! the! corporation!
and! the! individual! should! be! deemed! the! same.! Arnold' v.'
Willets'and'Patterson,'Ltd.,'44'Phil.'634'(1923).'
'
Arnold'v.'Willets'and'Patterson,'Ltd.'
'
Facts:'Willits!&!Patterson!was!a!partnership!organized!in!San!Francisco,!
California.!In!1916,!they!engaged!the!services!of!Arnold!to!be!their!agent!
in!the!Philippines!who!will!enjoy!profitYsharing!and!a!fixed!salary.!Arnold!
was!to!be!Willits!&!Pattersons!agent!for!five!years,!and!he!was!tasked!
to!operate!a!certain!oil!mill.!
!
Philippines! with! the! same! name.! Again,! he! owned! practically! all! the!
shares!(legally,!the!San!Francisco!corporation!owned!all!the!assets!and!
liabilities! of! the! Manila! corporation).! Sometime! in! 1919,! Willits! and!
Arnold!entered!into!another!contract,!marked!Exhibit!B,!which!clarified!
Arnolds!mode!of!compensation.!
!
Willits! corporation! went! through! financial! trouble,! and! its! creditors!
committee! refused! to! honor! Exhibit! B! because! according! to! it,! the!
corporation! never! allowed! or! acceded! to! such! a! contract! or!
understanding,!and!that!Willits!signed!it!without!authority.!
'
Issue:'Whether!or!not!Exhibit!B!is!binding!upon!the!corporation!and!the!
creditors!committee!despite!the!lack!of!approval!from!the!Board!
'
Held:' YES.! The! approval! of! the! Board! is! not! needed! since! it! is! evident!
that!Willis!owns!and!controls!the!corporation.!Willits!actions!were!done!
not! just! to! benefit! him! as! a! shareholder! but! to! control! the! whole!
corporation! and! to! affect! the! transaction! of! its! business,! in! the! same!
manner!as!if!it!had!been!clothed!with!all!the!formalities!of!a!corporate!
Sometime! later,! Patterson! retired,! and! Willits! then! created! a! new!

corporation! under! the! same! name.! Under! this! corporation,! Willits!
owned!practically!all!the!shares!except!those!nominal!shares!needed!to!
qualify! directors.! Willits! also! created! another! corporation! in! the!
act.!Also,!Exhibit!B!came!into!effect!in!1919!and!since!then,!was!used!by!
the!corporation!in!determining!Arnolds!salary!and!dues.!There!was!no!
objection! ever! raised! against! it! except! two! years! later,! in! 1921,! by! the!
creditors! committee.! Its! a! wellYsettled! doctrine! that! acts! of! officers,!
though! unauthorized,! may! be! ratified! by! the! corporation! where! the!
latter! acquiesces! to! the! act.! Here,! the! creditors! committee! cannot!
object! to! Exhibit! B! because! the! corporation! has! in! effect! ratified! its!
validity!by!applying!it!for!two!years.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
'
Doctrine:'When!the!stock!of!a!corporation!owned!by!one!individual!and!
!Martinez!v.!Court!of!Appeals,!438!SCRA!130!(2004).!
)
!
subsidiarys! separate! existence! shall! be! respected,! and! the!
liability!of!the!parent!corporation,!as!well!as!the!subsidiary!shall!
be! confined! to! those! arising! in! their! respective! business.! A!
corporation! has! a! separate! personality! distinct! from! its!
stockholders! and! from! other! corporations! to! which! it! may! be!
conducted!!a!legal!fiction!created!by!law!for!convenience!and!
the!corporation!functions!for!his!benefit,!the!corporation!and!individual!
should!be!deemed!the!same.!
'
A! corporation! has! a! personality! separate! and! distinct! from! the!

persons! composing! it,! as! well! as! from! any! other! legal! entity! to!
which!it!may!be!related.!Equally!wellYsettled!is!the!principle!that!
the! corporate! mask! may! be! removed! or! the! corporate! veil!
pierced!when!the!corporation!is!just!an!alter!ego!of!a!person!or!
to!prevent!injustice.!Nisce'v.'Equitable'PCI'Bank,'Inc.,'516'SCRA'
231'(2007).'
2. Mixingûp'Operations;'Disrespect'to'the'Corporate'Entity:'
of!another!corporation.!Sarona'v.'NLRC,'663'SCRA'394'(2012).!
o When! corporation! is! merely! an! adjunct,! business!
conduit!or!alter!ego!of!another!corporation,!the!fiction!
of! separate! and! distinct! corporation! entities! should! be!
disregarded.!Tan'Boon'Bee'&'Co.'v.'Jarencio,'163'SCRA'
205'(1988).1'
accounts.! Ramirez' Telephone' Corp.' v.' Bank' of' America,' 29'

SCRA'191'(1969).'
subsidiary! corporations! whose! shares! are! wholly! if! not! almost!

wholly! owned! by! its! parent! company.! The! structural! and!
systems! overlap! inherent! in! parent! and! subsidiary! relations!
often! render! the! subsidiary! as! mere! local! branch,! agency! or!
adjunct! of! the! foreign! parent.! Thus,! when! the! foreign! parent!
The! fact! that! a! corporation! owns! all! of! the! stocks! of! another!
corporation,! taken! alone,! is! not! sufficient! to! justify! their! being!
treated!as!one!entity.!If!used!to!perform!legitimate!functions,!a!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!General! Credit! Corp.! v.! Alsons! Dev.! and! Investment! Corp.,! 513! SCRA! 225!
(2007).!
Where! two! business! enterprises! are! owned,! conducted,! and!

controlled!by!the!same!parties,!both!law!and!equity!will,!when!
necessary! to! protect! the! rights! of! third! persons,! disregard! the!
legal!fiction!that!two!corporations!are!distinct!entities!and!treat!
them!as!identical.'Sibagat'Timber'Corp.'v.'Garcia,'216'SCRA'70'
(1992).'
The! fictive! veil! of! corporate! personality! holds! lesser! sway! for!
company!leased!a!large!parcel!of!land!purposely!for!the!benefit!
of! its! subsidiary,! which! took! over! possession! of! the! leased!
premises,!the!subsidiary!was!a!mere!alter!ego!of!ESSO!Eastern.!
Mariano'v.'Petron'Corp.,'610'SCRA'487'(2010).'
Mixing! of! personal! accounts! with! corporate! bank! deposit!
Employment! of! same! workers;! single! place! of! business,! etc.,!

may! indicate! alter! ego! situation.! Shoemart' v.' NLRC,' 225' SCRA'
311'(1993).'
'
Shoemart'v.'NLRC'
'
Facts:! Moris!Industries!was!engaged!in!manufacture!of!leather!goods.!In!
1985,!56!out!of!74!workers!decided!to!form!the!Moris!Industries!Union.!
When!the!Union!contacted!Moris!in!order!to!fix!a!collective!bargaining!
agreement,!Moris!suddenly!shut!down!and!ceased!operations!two!days!
later.!Because!of!this,!the!Union!filed!a!case!with!the!NLRC!against!Moris!
)
!
for! unfair! labor! practice,! recovery! of! wage! differentials! and! other!
monetary! benefits.! Shoemart,! and! its! president,! Henry! Sy,! was! also!
impleaded! because! according! to! the! Union,! Shoemart! and! Moris! had!
only!one!juridical!personality.!
!
Issue:' Whether!or!not!the!NLRC!correctly!applied!the!piercing!doctrine!
by!holding!SM!liable!together!with!Moris!
'
Held:' YES.! The! facts! show! that! Moris! was! the! mere! alter! ego! of! SM.!
Thus,! in! order! to! protect! the! rights! of! the! workers,! the! NLRC! properly!
applied! the! piercing! of! the! corporate! veil! doctrine.! And! since! Moris!
doesnt!exist!anymore!to!rehire!the!workers,!who!also!cant!work!for!SM!
because! of! a! difference! in! expertise! of! labor,! then! the! SC! deemed! it!
proper!to!hold!SM!solidarily!liable!with!Moris!for!separation!pay.!
!
1. The! Union! presented! one! Cresencio! Edic! as! a! witness.! Edic!
testified!that!he!was!first!hired!by!the!persons!who!owned!SM!
to! make! samples! to! be! displayed! on! the! store! windows.! When!
he! was! promoted! as! overYall! supervisor,! the! factory! was!
transferred,! the! production! division! was! separately!
incorporated! and! underwent! many! name! changes.! However,!
the!owners!remained!the!same.!
2. An! examination! of! the! Incorporation! papers! of! SM! Shoe! Mart!
and!Moris!Manufacturing!show!(sic)!that!except!for!Elizabeth!Sy!
! all! other! five! (5)! incorporators! and! directors! of! Morris!
Industries!are!major!stockholders!of!SM!Shoe!Mart!as!of!July!20,!
1985;!
3. The! SM! Shoe! Mart! is! the! exclusive! buyer! of! all! of! Moris'!
products;!
4. Both!are!housed! in! one! building! and! Moris! for! many! years!has!

been!using!the!payrolls!of!SM!Shoe!Mart.!SM!glibly!excuses!this!
fact! by! alleging! that! this! was! done! without! its! knowledge.! We,!
however,!considering!the!close!relationship!of!parties,!find!this!
incredible.!
'
Doctrine:'See!above.!
'
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).'
'
Padilla'v.'Court'of'Appeals'
'
Facts:'Susana!Realty!Inc.!(SRI)!sold!to!Light!Rail!Transit!Authority!(LRTA)!
several!parcels!of!land!along!Taft!Avenue!whereby!SRI!had!a!right!of!first!
refusal!in!case!LRTA!decided!to!develop!the!land.!LRTA!contracted!with!
PhoenixYOmega! Development! and! Management! Corporation! (PhoenixY
Omega)!to!develop!the!land!to!which!SRI!later!agreed!on!the!condition!
that!all!plans!must!be!approved!by!it.!PhoenixYOmega!then!assigned!its!
rights!to!PKA!Development!and!Management!Corporation!(PKA)!whose!
President! and! General! Manager! is! Padilla! (who! is! at! the! same! time!
Chairman!of!the!Board!of!PhoenixYOmega).!
!
So! now,! PKA! was! in! charge! of! developing! the! properties.! However,! it!
continuously!failed!to!and!eventually!its!building!permit!was!revoked!for!
)
!
defects! in! construction.! PKA! then! filed! for! rescission! of! the! contract,!
alleging! that! SRI! maliciously! withheld! approval! of! the! plans,! which! in!
turn! led! to! PKA! being! unable! to! comply! with! its! obligations.! However,!
the!judgment!went!in!favor!of!SRI.!!
!
Doctrine:' For! the! separate! juridical! personality! of! a! corporation! to! be!
disregarded,! the! wrongdoing! must! be! clearly! and! convincingly!
established.!It!cannot!be!presumed.!In!this!case,!there!was!no!reason!to!
justify!piercing!the!corporate!veil.!
'
The!contract!was!rescinded,!and!PKA!was!ordered!to!indemnify!SRI!for!
damages.!The!properties!were!returned!to!SRI,!but!PKA!failed!to!pay!the!
monetary! awards.! Thus,! SRI! filed! a! motion! for! the! issuance! of! an! alias!
writ!against!Padilla!and!PhoenixYOmega,!saying!that!they!were!one!and!
the! same! entity! with! PKA.! Padilla! and! PhoenixYOmega! claimed! they!
were! denied! due! process! because! Phoenix! was! not! given! its! days! in!
Court.!
3. Guiding'Principles'in'AlterÊgo'Cases:'
Doctrine!in!such!cased!is!based!on!estoppel:!if!stockholders!do!
not!respect!the!separate!entity,!others!cannot!also!be!expected!
to!be!bound!by!the!separate!juridical!entity;!
'
Issue:'Whether!or!not!Padillas!participation!in!the!proceedings!as!PKAs!
President!and!General!Manager!could!be!construed!as!the!opportunity!
to!be!heard!in!court!of!Padilla!and!PhoenixYOmega!
!
Held:'NO.!Padilla!and!PhoenixYOmega!were!not!given!their!day!in!court.!
It! is! clear! that! Padilla! participated! in! the! proceedings! as! General!
Piercing!in!alter!ego!cases!may!prevail!even!when!no!monetary!
claims! are! sought! to! be! enforced! against! the! stockholders! or!
officers!of!the!corporation.!
HOWEVER:! The! mere! existence! of! a! parentYsubsidiary!
separating!ownership!from!management;!
relationship! between! two! corporation,! or! that! one! corporation!

is! affiliated! with! another! company! does! not! by! itself! allow! the!
application!of!the!alterYego!piercing!doctrine.!Koppel'(Phil.),'Inc.'
v.'Yatco,'77'Phil.'97'(1946);'PHIVIDEC'v.'Court'of'Appeals,'181'
SCRA'669'(1990).'
Manager!of!PKA!and!not!in!any!other!capacity.!The!fact!that!he!was!the!
Chairman! of! the! Board! of! PhoenixYOmega! cannot! equate! to!
participation! by! PhoenixYOmega! in! the! same! proceedings.! PhoenixY
Omega!was!never!a!party!to!the!case!and!so!could!not!have!participated!
therein.! PKA! and! PhoenixYOmega! are! admittedly! sister! companies,! and!
may! be! sharing! personnel! and! resources,! but! there! was! no! allegation,!
much! less! positive! proof,! that! their! separate! corporate! personalities!
were! being! used! to! defeat! public! convenience,! justify! wrong,! protect!
fraud,!or!defend!crime.!
'
Doctrine! applies! even! in! the! absence! of! evil! intent,! because! of!
the! direct! violation! of! a! central! corporate! law! principle! of!
A! subsidiary! corporation! has! an! independent! and! separate!

juridical! personality,! distinct! from! that! of! its! parent! company,!
hence,! any! claim! or! suit! against! the! latter! does! not! bind! the!
former!and!viceY!versa.!Jardine' Davies,' Inc.' v.' JRB' Realty,' Inc.,'
463'SCRA'555'(2005).1!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Fortune!v.!Quinsayas,!690!SCRA!336!(2013).!
)
!
o
If! used! to! perform! legitimate! functions,! a! subsidiarys!

separate! existence! shall! be! respected,! and! the! liability!
of! the! parent! corporation! as! well! as! the! subsidiary! will!
be! confined! to! those! arising! in! their! respective!
businesses.! Even! when! the! parent! corporation! agreed!
to! the! terms! to! support! a! standby! credit! agreement! in!
judgment! rendered! by! the! court.! Padilla' v.' Court' of' Appeals,'
370'SCRA'208'(2001).'
2. When'corporate'officers'are'sued'in'their'official'capacity,'the'
corporation' which' was' not' made' a' party,' is' not' denied' due'
process.'Emilio'Cano'Enterprises'v.'CIR,'13'SCRA'291'(1965).'
favor! of! the! subsidiary,! does! not! mean! that! its!

personality!has!merged!with!that!of!the!subsidiary.!MR.'
Holdings,'Ltd.'V.'Bajar,'380'SCRA'617'(2002).'
120! [1992]),! an! appellate! proceedings! involving! petitioner!

Arcillas!bid!to!avoid!the!adverse!CA!decision!on!argument!that!
he! is! not! personally! liable! for! the! amount! adjudged! since! the!
same!constitutes!a!corporate!liability!which!nevertheless!cannot!
!
H.'PIERCING'DOCTRINE'AND'THE'DUE'PROCESS'CLAUSE'
1. Need'to'Bring'a'New'Case'Against'the'Officer.'McConnel'v.'CA,'
1'SCRA'723'(1961).'
A! suit! against! individual! shareholders! is! not! a! suit! against! the!

corporation.!Failure!to!implead!the!corporations!as!defendants!
and! merely! annexing! a! list! of! such! corporations! to! the!
complaints!is!a!violation!of!due!process!for!it!would!in!effect!be!
disregarding! their! distinct! and! separate! personality! without! a!
hearing.!PCGG'v.'Sandiganbayan,'365'SCRA'538'(2001).!
Although! both! lower! courts! found! sufficient! basis! for! the!

conclusion! that! PKA! and! Phoenix! Omega! were! one! and! the!
same,! and! the! former! is! merely! a! conduit! of! the! other! the!
Supreme!Court!held!void!the!application!of!a!writ!of!execution!
on!a!judgment!held!only!against!PKA,!since!the!RTC!obtained!no!
jurisdiction!over!the!person!of!Phoenix!Omega!which!was!never!
summoned!as!formal!party!to!the!case.!The!general!principle!is!
that!no!person!shall!be!affected!by!any!proceedings!to!which!he!
is! a! stranger,! and! strangers! to! a! case! are! not! bound! by! the!
We! suggest! as! much! in! Arcilla! v.! Court! of! Appeals,! (215! SCRA!
be! enforced! against! the! corporation! which! has! not! been!

impleaded! as! a! party! below.' Violago' v.' BA' Finance' Corp.,' 559'
SCRA'69'(2008).'
3. Provided'that'evidential'basis'has'been'adduced'during'trial'to'
apply' the' piercing' doctrine.' Jacinto' v.' Court' of' Appeals,' 198'
SCRA'211'(1991).1'
'
Jacinto'v.'Court'of'Appeals'
'
Facts:'The!case!is!an!appeal!concerning!the!decision!of!the!Regional!Trial!
Court! ordering! Inland! Industries! Inc.! and! Roberto! Jacinto! to! pay! jointly!
and! severally! Metropolitan! Bank! and! Trust! Co.! The! Bank! claims! that!
Roberto!Jacinto!can!be!held!personally!liable!because!he!is!the!President!
and! General! Manager! of! Inland! Industries! Inc.! and! his! wife! owns! a!
majority! of! its! shares.! While! on! the! face! of! the! complaint! there! is! no!
specific!allegation!that!the!corporation!is!a!mere!alter!ego!of!petitioner,!
subsequent! developments,! from! the! stipulation! of! facts! up! to! the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Arcilla!v.!Court!of!Appeals,!215!SCRA!120!(1992).!
)
!
presentation! of! evidence! and! the! examination! of! witnesses,!
unequivocally! show! that! respondent! Metropolitan! Bank! and! Trust!
Company!sought!to!prove!that!petitioner!and!the!corporation!are!one!or!
that! he! is! the! corporation.! No! serious! objection! was! heard! from!
petitioner.!
Court!may!deny!your!right!to!claim!a!separate!personality.!
1. Commit!a!fraud!!!Bogus!NGOs;!so!long!as!the!fraud!is!proved,!
the! Court! will! deny! separate! personality,! provided! that! it! was!
committed/concealed!thru!the!use!of!separate!personality.!
2. AlterYego/Instrumentalities!!!The!Court!has!pierced!the!veil!in!
'
Issue:'Whether!or!not!the!application!of!piercing!the!veil!was!supported!
with!evidence.!
'
Held:' YES.! Roberto! A.! Jacinto,! it! would! appear! that! he! is! in! fact,! the!
corporation! itself! known! as! Inland! Industries,! Inc.! Aside! from! the! fact!
that! he! is! admittedly! the! President! and! General! Manager! of! the!
occasions! where! the! act! committed! is! short! of! fraud! on! the!
ground! of! interlinking! which! indicates! that! the! subsidiary!
company!is!but!an!alterYego.!
3. Defeating! public! convenience,! equity! and! justice! !! As! such,!
piercing!of!the!corporate!veil!should!be!a!last!resort.!If!there!is!
another! way,! the! Courts! should! take! that! path! in! order! to!
preserve!such!an!important!feature!of!the!corporate.!
corporation! and! a! substantial! stockholder! thereof,! it! was! defendant!

Roberto! A.! Jacinto! who! dealt! entirely! with! the! plaintiff! in! those!
transactions.!In!the!Trust!Receipts!that!he!signed!supposedly!in!behalf!of!
Inland! Industries,! Inc.,! it! is! not! even! mentioned! that! he! did! so! in! this!
official!capacity.'
'
Doctrine:'When!evidence!is!presented!by!one!party,!with!the!express!or!
4. There!is!no!hard!and!fast!rule!regarding!piercing.!It!is!subject!to!
the!circumstances!of!the!case,!and!(unfortunately?)!dependent!
on!who!the!Justices!are.!
5. These!cases!of!piercing!the!corporate!veil,!when!the!Court!says!
that! the! stockholder! shares! the! same! personality! as! the!
corporation,!that!is!good!for!purposes!of!the!issue!that!is!being!
rule! upon.! But! it! does! not! result! in! a! complete! denial! of! the!
implied! consent! of! the! adverse! party,! as! to! issues! not! alleged! in! the!
pleadings,! judgment! may! be! rendered! validly! as! regards! those! issues,!
which!shall!be!considered!as!if!they!have!been!raised!in!the!pleadings.!
There! is! implied! consent! to! the! evidence! thus! presented! when! the!
adverse!party!fails!to!object!thereto.!
separate! personality! of! the! corporate! entity! for! matters!

unrelated!to!the!issue.!
!
!
NOTE:'Atty.!Hofilea!
GENERAL' RULE:! The! Corporation! has! a! personality! separate! from!
officers,!stockholders!and!related!companies.!
EXCEPTION:! When! it! is! necessary! to! advance! the! cause! of! justice,! the!
)
CORPORATE(CONTRACT(LAW(
(
I.(Pre0Incorporation(Contracts(
(
A.(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.)(Section(3.10,(
Securities(Regulation(Code([R.A.(8799])(
It)is)necessary)to)identify)the)promoters)because)it)fills)the)gap)
between)the)intention)to)create)the)corporation,)and)its)actual)
birth.)(
o In)the)normal)scheme)of)things,)should)the)promoter)be)
liable)for)contracts?)NO.)Because)when)the)corporation)
is)born,)all)contracts)are)transferred)to)it.(
o However,)where)the)company)was)not)formed,)then)the)
liability)of)the)promoters)become)significant.(
(
B.(Nature(of(Pre0incorporation(Agreements((Sections(60(and(61)(
(
Section(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)(
(
Section(61.(Pre0incorporation(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( pre0
incorporation(subscription(may(be(revoked(after(the(submission(of(the(
articles( of( incorporation( to( the( Securities( and( Exchange( Commission.(
(n)(
(
C.((Theories(on(Liabilities(for(Promoter's(Contracts:(
Cagayan&Fishing&Dev.&Co.,&Inc.&v.&Teodoro&Sandiko,&65&Phil.&223&
(1937).&&
Rizal&Light&&&Ice&Co.,&Inc.&v.&Public&Service&Comm.,&25&SCRA&285&
(1968).&&
Caram,&Jr.&v.&CA,&151&SCRA&372&(1987).&
&
Cagayan&Fishing&Dev.&Co.,&Inc.&v.&Teodoro&Sandiko&
(
Facts:( Manuel) Tabora) owns) 4) parcels) of) land) covered) by) three)
mortgages) which) it) sold) to) Cagayan) Fisheries) Dev.) Co.) Inc.) at) a) time)
when)it)was)still)in)the)process)of)incorporation)for)a)consideration)of)P1)
and) under) the) condition) that) the) company) would) pay) Taboras)
indebtedness) to) PNB.) 5) months) later,) Cagayan) was) incorporated,) but)
the) mortgage) loan) was) not) paid.) Subsequently) the) land) was) sold) to)
Sandiko) under) the) name) of) the) corporation) with) the) same) conditions.)
Sandiko) failed) to) comply) with) his) obligation) so) Cagayan) filed) an)action)
praying)that)the)judgment)be)rendered.)
(
Issue:(Whether)or)not)Sandiko)is)liable)to)Cagayan.)
)
!
(
Held:( NO.)The)transfer)to)Cagayan)was)null)because)at)the)time)it)was)
effected,) Cagayan) was) nonQexistent.) If) Cagayan) could) not) and) did) not)
acquire)the)4)parcels)of)land,)it)follows)that)it)had)no)right)to)sell)them)
to) Sandiko.) A) corporation,) until) organized,) has) no) being,) franchise) or)
Securities)and)Exchange)Commission)just)before)the)Certificate)of)Public)
Convenience) was) granted) to) it.) Rizal) Light) contended) that) Morong)
Electric)did)not)have)a)corporate)personality)at)the)time)it)was)granted)a)
franchise) by) the) Municipality) and) as) such) was) not) even) a) de) facto)
corporation.)
faculties.)Nor)do)those)engaged)in)bringing)it)into)being)have)any)power)
to) bind) it) by) contract,) unless) so) authorized) by) the) charter.! Manuel)
Tabora,)his)wife)and)others,)as)mere)promoters)of)a)corporation)on)the)
other) hand.) The) lands) remain) inscribed) in) Taboras) name.) Sandiko)
always) regarded) Tabora) as) the) owner) of) the) lands.) He) dealt) with) the)
latter) directly.) The) President) of) Cagayan) only) intervened) to) sign) the)
contract) in) behalf) of) Cagayan.) Even) PNB) always) treated) Tabora) as) the)
(
Issue:( Whether) or) not) Morong) Electric) could) validly) be) granted) a)
franchise)and)apply)for)a)Certificate)of)Public)Convenience)even)when)it)
did)not)yet)have)a)separate)corporate)legal)personality)at)those)times)
(
Held:(YES.)Morong)Electric)might)not)yet)have)a)corporate)personality)at)
those)times)but)ultimately,)it)was)granted)its)certificate)of)incorporation)
owner)of)the)lands.)
(
Doctrine:( These) promoters) could) not) have) acted) as) agent) for) a)
projected) corporation) since) that) which) had) no) legal) existence) could)
have)no)agent.)A)corporation,)until)organized,)has)no)life)and)therefore)
no) faculties.) However,) this) does) not) mean) that) acts) of) promoters) can)
never)be)ratified)by)the)corporation)when)it)is)subsequently)organized.)
by) the) SEC) and) it) accepted) its) franchise) according) to) the) terms) and)
conditions.)In)effect,)the)doctrine)of)ratification)was)applied)in)favor)of)
Morong)Electric.)
(
Doctrine:( The) fact) that) a) company) is) not) completely) incorporated) at)
the)time)the)grant)is)made)to)it)does)not)affect)the)validity)of)the)grant.)
But) such) grant) cannot) take) effect) until) the) corporation) is) organized.)
There)are)exceptions)
American)courts)generally)hold)that)contracts)made)by)the)promoters)of)
a)corporation)on)its)behalf)may)be(adopted,)accepted,)or)ratified)by)the)
corporation)when)organized.)
(
General(Rule:(For)corporations)that)are)not)yet)incorporated,)they)dont)
have)capacity)to)act)yet.)
(
Rizal&Light&&&Ice&Co.,&Inc.&v.&Public&Service&Comm.&
(
Facts:(Rizal)Light)and)Ice)has)been)distributing)electricity)in)the)Morong,)
Rizal) Area) since) 1949) when) it) was) awarded) a) Certificate) of) Public)
Convenience)by)the)Public)Service)Commission.)In)1962,)Morong)Electric)
Company) was) granted) a) franchise) to) operate) an) electric) service) in) the)
Municipality) of) Morong,) and) it) applied) for) a) Certificate) of) Public)
Convenience.) Its) Certificate) of) Incorporation) was) granted) by) the)
)
Caram,&Jr.&v.&CA&
(
Facts:( The) Carams) are) challenging) the) validity) of) the) Court) of) Appeals)
)
!
decision)ordering)them)to)pay)jointly)and)severally)with)Filipinas)Orient)
Airways) and) with) Barretto) and) Garcia) plaintiff) Arellano) for) his) services)
which) helped) in) the) incorporation) of) Filipinas) Orient) Airways.) The)
Carams)claim)that)they)were)not)the)ones)who)requested)the)services)of)
Arellano,) and) were) merely) financiers) of) the) airways.) As) such) they)
cannot)be)held)personally)liable.)
(
Issue:(Whether)or)not)the)Carams)are)also)and)personally)liable)for)such)
expenses)and,)if)so,)to)what)extent.)
(
Held:( NO.) After) a) perusal) of) the) decision) of) the) CA,) the) SC) found) that)
the)Carams)were)not)really)involved)in)the)initial)steps)that)finally)led)to)
the) incorporation) of) the) Filipinas) Orient) Airways.) It) was) Barretto) and)
Garcia)who)handled)the)preparation)of)the)project)study.)The)said)study)
being)then)subsequently)presented)to)the)Carams)to)induce)the)latter)in)
investing)to)the)proposed)airlines.)The)Carams)were)merely)among)the)
financiers)who)were)persuaded)by)the)strength)of)the)project)study)to)
invest)in)the)proposed)airline.)Furthermore,)there)was)no)showing)that)
the)Filipinas)Orient)Airways)was)a)fictitious)corporation)and)did)not)have)
a)separate)juridical)personality,)to)be)able)to)justify)making)the)Carams,)
as)principal)stockholders)thereof,)responsible)for)its)obligations.)
(
Doctrine:(
(
II.(De(Facto(Corporation((Section(20)(
(
Section(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.(
(
A)de)facto)corporation)is)one)that)has)not)yet)been)certified)as)
existing) by) the) SEC,) but) who) believes) in) good) faith) that) it) has)
authority)and)power)to)operate)as)a)corporation.(
o You) cant) claim) to) be) in) good) faith) if) there) is) no)
certificate)of)incorporation)since)you)know)that)it)is)only)
upon)the)issuance)of)the)certificate)by)the)SEC)that)the)
corporation)is)given)juridical)personality.(
(
A.(Elements:(Arnold&Hall&v.&Piccio,&86&Phil.&634&(1950).&
&
Arnold&Hall&v.&Piccio&
(
Facts:! Arnold)and)Bradley)Hall)(petitioners))and)Fred)and)Emma)Brown,)
Chapman,) and) Abella) (respondents)) signed) and) acknowledged) the)
articles)of)incorporation)of)the)Far)Eastern)Lumber)and)Commercial)Co.,)
Inc.) Attached) to) the) articles) of) incorporation) was) an) affidavit) of) the)
treasurer)stating)that)about)23k)of)the)stocks)were)subscribed)and)fully)
paid)with)properties)transferred)to)the)corporation.)
)
Pending)action)of)the)SEC)concerning)the)articles,)the)respondents)filed)
a) case) against) petitioners) where) they) claimed) that) FELC) was) an)
unregistered) partnership) and) now) they) wished) to) dissolve) it) due) to)
dissension) among) members.) The) Halls) filed) a) case,) claiming) that) the)
court) had) no) jurisdiction) to) decree) the) dissolution) of) the) company,)
because)it)being)a)de)facto)corporation,)dissolution)may)only)be)ordered)
)
!
in)a)quo)warranto)proceeding)before)the)Solicitor)General)and)that)the)
respondents,) having) signed) the) articles) of) incorporation,) are) estopped)
from)denying)that)it)is)a)corporation.)
(
Issue:( Whether) or) not) the) court) had) jurisdiction) to) decree) the)
III.( Corporation( by( Estoppel( Doctrine( (Section( 21;& Salvatierra& v.&

Garlitos,& 103& Phil.& 757& [1958];& Albert& v.& University& Publishing& Co.,& 13&
SCRA&84&[1965];&Asia&Banking&Corp.&v.&Standard&Products,&46&Phil.&145&
[1924];&Madrigal&Shipping&Co.,&v.&Ogilvie,&55&O.G.&No.&35,&p.&7331)(
(
dissolution)
(
Held:( YES.) The) parties) very) well) know) that) the) SEC) has) not) issued) the)
certificate)of)corporation.)Thus,)they)couldnt)claim)in)good)faith)to)be)a)
corporation.)In)this)case,)there)is)no)de)facto)corporation)immune)from)
collateral)attack.)Besides,)this)corporation)is)not)a)party)to)this)case.)The)
case) is) a) litigation) between) stockholders,) for) the) purpose) of) obtaining)
Section(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(
dissolution.) Even) the) existence) of) a) de) jure) corporation) may) be)
terminated) in) a) private) suit) for) its) dissolution) between) stockholders,)
without)the)intervention)of)the)state.)
(
Doctrine:( Personality) of) a) corporation) begins) to) exist) only) from) the)
moment) such) certificate) is) issued.) Immunity) from) collateral) attack) is)
granted) to) corporations) claiming) in) good) faith) to) be) a) corporation)
lack(of(corporate(personality.(
(
One(who(assumes(an(obligation(to(an(ostensible(corporation(as(such,(
cannot(resist(performance(thereof(on(the(ground(that(there(was(in(fact(
no(corporation.(
under) the) Corporation) Law.) When) both) parties) are) aware) that) a)
corporation) has) not) been) duly) organized,) then) the) corporation) by)
estoppel)doctrine)does)not)apply.)
1. One)who)assumes)an)obligation)to)an)ostensible)corporation)as)
such,) cannot) resist) performance) thereof) on) the) ground) that)
there)was)in)fact)no)corporation.)Section(21(2)(
2. Both)parties)must)recognize)the)corporate)party)even)when)one)
does)not)exist.)At)least)one)party)to)the)contract)was)under)the)
impression) that) the) other) corporate) party) was) a) duly)
incorporated)entity.)It)can)only)apply)when)a)certificate)is)issued)
(
A.(Elements(of(the(Doctrine(Corporation(by(Estoppel((
By) its) failure) to) submit) its) byQlaws) 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.)
Sawadjaan&v.&Court&of&Appeals,&459&SCRA&516&(2005).&
)
but) where,) for) lack) of) the) other) criteria,) the) de) facto)
corporation)doctrine)cannot)apply.)Arnold&Hall&v.&Piccio,&86&Phil.&
634&(1950).)
!
(
Salvatierra&v.&Garlitos&
(
Facts:( Manuela) Salvatierra) entered) into) a) contract) of) lease) with)
Philippine) Fibers) Producers) Corp.) (represented) by) its) President)
out)of)such)transaction.)
(
Doctrine(1:(A)registered)corporation)has)a)juridical)personality)separate)
and)distinct)from)its)component)members)or)stockholders)and)officers)
and) conversely,) a) stockholder) or) member) cannot) be) held) personally)
Refuerzo))over)a)parcel)of)land)in)Leyte)owned)by)the)former.)Barely)a)
year) after) the) lease,) Salvatierra) filed) for) damages,) accounting) and)
rescission;) she) averred) that) the) corporation) violated) the) provisions) in)
the) contract.) The) Court) rendered) a) judgment) in) favour) of) Salvatierra,)
and)moved)to)subject)parcels)of)land)owned)by)Refuerzo)to)attachment)
because)the)corporation)had)no)properties)in)its)name.)Refuerzo)filed)a)
motion) claiming) that) the) decision) rendered) was) null) and) void) with)
liable) for) any) financial) obligation) of) the) corporation) in) excess) of) his)
unpaid) subscription.) But) this) rule) is) understood) to) refer) merely) to)
registered)corporations)and)cannot)be)made)applicable)to)the)liability)of)
members)of)an)unincorporated)association.)
)
respect)to)him,)there)being)no)allegation)in)the)complaint)pointing)to)his)
personal) liability.) His) defense) was) that) for) while) it) was) stated) in) the)
complaint)that)he)was)a)signatory)to)the)lease)contract,)he)did)so)in)his)
capacity)as)president)of)the)corporation.)
(
Issue( 1:(Whether)or)not)Refuerzo,)in)his)personal)capacity,)can)be)held)
liable)for)corporate)debts.)
applicable)in)this)case.)
)
Held( 2:( NO.)The)doctrine)of)corporation)by)estoppel)does)not)apply)in)
this)case)because)fraud)was)part)of)the)transaction.)In)the)instant)case,)
on)plaintiff's)charge)that)she)was)unaware)of)the)fact)that)the)Philippine)
Fibers) Producers) Co.,) Inc.,) had) no) juridical) personality,) defendant)
Refuerzo) gave) no) confirmation) or) denial) and) the) circumstances)
(
Held(1:(YES.! A)person)who)acts)as)an)agent)without)authority)or)without)
a) principal) is) himself) regarded) as) the) principal;) a) person) acting) or)
purporting) to) act) on) behalf) of) a) corporation) which) has) no) valid)
existence) assumes) such) obligations) and) comes) personally) liable) for)
contracts) entered) into.) Refuerzo,) as) president) of) the) unregistered)
corporation) Phil.) Fibers,) was) the) agent) of) a) nonQexistent) principal,) his)
liability)cannot)be)limited)or)restricted)to)that)imposed)upon)corporate)
surrounding) the) execution) of) the) contract) lead) to) the) inescapable)
conclusion)that)plaintiff)Manuela)T.)Vda.)de)Salvatierra)was)really)made)
to)believe)that)such)corporation)was)duly)organized)in)accordance)with)
law.)
)
Doctrine(2:(While)as)a)general)rule)a)person)who)has)contracted)or)dealt)
with) an) association) in) such) a) way) as) to) recognize) its) existence) as) a)
shareholders.)In)acting)on)behalf)of)a)corporation)which)he)knew)to)be)
unregistered,) he) assumed) the) risk) of) reaping) the) consequential) arising)
(
Issue( 2:( Whether) or) not) the) doctrine) of) corporation) by) estoppel) is)
corporate)body)is)estopped)from)denying)the)same)in)an)action)arising)
out)of)such)transaction)or)dealing,)yet)this)doctrine)may)not)be)held)to)
be)applicable)where)fraud)takes)a)part)in)the)said)transaction.))
)
!
)
Agency) Doctrine:) Making) the) agent) of) an) inexistent) principal)

liable)on)the)contract)entered)upon.1)
o This) agency) doctrine) applies) only) where) there) is) fraud)
or)misrepresentation)on)the)part)of)one)of)the)contract)
parties.)The)doctrine)of)corporation)by)estoppel)has)not)
application) to) a) situation) where) both) parties) to) the)
contract) acted) in) the) honest) belief) that) a) contracting)
corporate)entity)did)exist.)
o It)is)in)such)noQfraud)or)noQmisrepresentation)cases)that)
Salvatierra) v.) Garlitos) is) clearly) inadequate.) This) is)
where)the)present)statutory)version)of)the)corporation)
by)estoppel)doctrine)applies,)since)its)applicability)does)
not)require)fault)or)conscious)misrepresentation.)
&
Albert&v.&University&Publishing&Co.&
(
Facts:(UP)Co.)through)Jose)Aruego,)its)President,)entered)into)a)contract)
with) Mariano) Albert) for) the) exclusive) right) to) publish) his) revised)
Commentaries)on)the)Revised)Penal)Code.)Because)of)UP)Co.s)failure)to)
pay)its)installments)to)Albert,)the)latter)sued)UP)Co.)alleging)that)it)was)
a) corporation) duly) organized) and) existing) under) the) laws) of) the)
Philippines.)UP)Co.)also)admitted)to)Alberts)allegation)of)its)corporate)
existence)as)well)as)to)the)execution)and)terms)of)the)contract.)Albert)
won)the)case,)and)thereafter)petitioned)for)a)writ)of)execution)against)
Aruego) as) the) real) defendant) because) it) was) recently) discovered) that)
there)is)no)such)entity)as)University)Publishing)Co.,)Inc.)The)SEC)records)
show) that) UP) Co.) was) never) registered) either) as) a) corporation) or)
partnership.)Aruego)claimed)he)is)not)a)party)to)the)case.)
)
Issue:! Whether) or) not) the) judgment) may) be) executed) against) Jose) M.)
Aruego,)supposed)President)of)University)Publishing)Co.,)Inc.,)as)the)real)
defendant.)
(
Held:( YES.) On) account) of) the) nonQregistration) UP) Co.) cannot) be)
considered) a) corporation,) not) even) a) corporation) de) facto.) It) has)
therefore) no) personality) separate) from) Jose) M.) Aruego;) it) cannot) be)
sued) independently.) It) is) patently) clear) that) Jose) M.) Aruego,) acting) as)
representative) of) a) nonQexistent) principal,) was) the) real) party) to) the)
contract)sued)upon,)reaping)the)benefits)resulting)from)it.)Responsibility)
under) the) judgment) falls) on) him) since) partial) payments) of) the)
consideration) were) made) by) him,) he) violated) its) terms,) which)
precipitated)the)previous)suit)in)question.)
NOTE:)Doctrine)of)corporation)by)estoppel)did)not)apply)to)this)case.)
)
Doctrine:( In) a) suit) against) a) corporation) with) no) valid) existence,) the)
person)who)had)and)exercised)the)rights)to)control)the)proceedings,)to)
make)defense,)to)adduce)and)to)crossQexamine)witnesses,)and)to)appeal)
from) a) decision,) is) the) real) defendant,) and) the) enforcement) of) a)
judgment)against)the)corporation)upon)him)is)substantial)observance)of)
due)process)of)law.&
)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
)
Albert) therefore) offers) us) the) "philosophical) bridge") between)

the)two)doctrines:))
!
o
o
First.)That)a)corporation)can)be)deemed)to)exist)when)in)
fact)none)may)exist,)in)order)to)validate)a)contract;)and))
Second.)That)although)the)veil)of)corporate)fiction)is)set)
up,)it)will)be)pierced)to)enforce)the)contract,)to)hold)the)
actors) behind) such) misrepresentation) liable) for) the)
obligations)arising)from)such)contract.1)
)
Asia&Banking&Corp.&v.&Standard&Products&
(
Facts:( Standard) Products,) Co.,) Inc.) was) indebted) to) Asia) Banking)
Corporation) and) secured) its) indebtedness) through) a) promissory) note.)
Upon) demand) for) the) balance) due,) Standard) failed) to) pay.) Hence) an)
action) was) brought) by) Asia) Banking) Corporation,) which) it) won.) But,)
Standard) Products,) Inc.) contended) that) Asia) Banking) Corp) failed) to)
prove) affirmatively) the) corporate) existence) of) the) parties,) and) the)
appellant) insists) that) under) these) circumstances) the) court) erred) in)
finding)that)the)parties)were)corporations)with)juridical)personality)and)
assigns)same)as)reversible)error.)
(
corporate)existence.)Under)these)circumstances)it)was)unnecessary)for)
the) plaintiff) to) present) other) evidence) of) the) corporate) existence) of)
either)of)the)parties.)
(
Doctrine:(The)general)rule)is)that)in)the)absence)of)fraud)a)person)who)
has)contracted)or)otherwise)dealt)with)an)association)in)such)a)way)as)
to)recognize)and)in)effect)admit)its)legal)existence)as)a)corporate)body)is)
thereby)estopped)to)deny)its)corporate)existence)in)any)action)leading)
out) of) or) involving) such) contract) or) dealing,) unless) its) existence) is)
attacked)for)cause)which)have)arisen)since)making)the)contract)or)other)
dealing)relied)on)as)an)estoppel)and)this)applies)to)foreign)as)well)as)to)
domestic)corporations.)
)
NOTE:( Atty.) Hofilea) !) The) doctrines) in) three) cases) were) laid) down)
before)the)Corporate)Code.)As)such,)these)doctrines)were)embodied)in)
the)Section)21)of)the)Corporation)Code.)
(
B.(Nature(of(Doctrine(
Issue:( Whether)or)not)respondent)Standard)Products)is)estopped)from)
denying)the)corporate)existence)of)the)plaintiff)Asia)Banking)Corp.)
(
Held:( YES.)The)defendant)having)recognized)the)corporate)existence)of)
the)plaintiff)by)making)a)promissory)note)in)its)favor)and)making)partial)
payments) on) the) same) is) therefore) estopped) to) deny) said) plaintiff's)
corporate)existence.)It)is,)of)course,)also)estopped)from)denying)its)own)
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)&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
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)
The) doctrine) is) meant) to) hold) contractual) parties) to) their)
representations) or) expectations) at) the) time) the) contract) was)
perfected;) and) it) does) not) allow) parties) to) draw) on) a) basic)
!
defect) ) lack) of) one) contracting) party) ) to) avoid) the)
enforcement)of)the)contract.1)
o 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).2)
A) person) who) accepts) employment) in) an)
unincorporated)charitable)association)is)estopped)from)
alleging) its) lack) of) juridical) personality.) Christian&
Childrens&Fund&v.&NLRC,&174&SCRA&681&(1989).&
The)doctrine)has)evolved)in)Corporate)Law)primarily)as)a)rule)to)
promote)the)integrity)of)commercial)contracts;)the)basic)role)of)
the) doctrine) of) corporation) by) estoppel) is) to) promote) the)
public's) underlying) faith) in) contracts) drawn) with) corporate)
entities,)rather)than)to)promote)corporate)principles.3)
o
One) who) deals) with) an) unincorporated) association)

which)is)not)duly)incorporated)is)not)estopped)to)deny)
its)corporate)existence)when)his)purpose)is)not)to)avoid)
liability,) but) precisely) to) enforce) the) contract) against)
the) action) for) the) purported) corporation.& Intl& Express&
Travel&v.&Court&of&Appeals,&343&SCRA&674&(2000).&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
)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).)
3
Under) the) law) on) estoppel) including) that) under) Section) 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).&
&
Lim&Tong&Lim&v.&Philippine&Fishing&Gear&Industries,&Inc.&
(
Facts:( Chua) and) Yao,) on) behalf) of) Ocean) Quest) Fishing) Corp.,) entered)
into) a) contract) for) the) purchase) of) fishing) nets) from) respondentQPFGI.)
They)claimed)that)they)were)engaged)in)a)business)with)petitionerQLim)
who)was)not)a)signatory)of)the)agreement.)However,)the)buyers)failed)
to) pay) for) their) purchases;) hence,) PFGI) filed) a) collection) suit) against)
Chua,) Yao) and) Lim) with) a) prayer) for) a) writ) of) preliminary) attachment.)
The)trial)court)ruled)that)a)partnership)existed)among)the)Lim,)Chua)and)
Yao)and)held)them)jointly)liable)to)pay)PFGI)based)on)the)testimonies)of)
witnesses) presented) and) the) Compromise) Agreement) executed) by) the)
three.)Lim)claims)that)he)should)not)be)held)liable)for)the)purchase)price)
since)he)was)not)part)of)the)negotiations)with)respondentQPFGI.)
)
Issue:( Whether) or) not) under) the) doctrine) of) corporation) by) estoppel,)
liability)can)be)imputed)only)to)Chua)and)Yao)and)not)to)Lim.)
(
Held:(NO.)Unquestionably,)petitioner)benefited)from)the)use)of)the)nets)
found)inside)F/B)Lourdes,)the)boat)that)has)earlier)been)proven)to)be)an)
asset) of) the) partnership.) Although) it) was) never) legally) formed) for)
unknown)reasons,)this)fact)alone)does)not)preclude)the)liabilities)of)the)
three)as)contracting)parties)in)representation)of)it.)Technically,)it)is)true)
that) petitioner) did) not) directly) act) on) behalf) of) the) corporation.)
)
!
thereof.)People&v.&Garcia,&271&SCRA&621&(1997);&People&
v.&Pineda,&G.R.&No.&117010,&18&April&1997&(unpub).&
2. On)the)other)hand,)when)no)fraud)or)misrepresentation)occurs,)
although) it) does) not) make) persons) acting) for) the) purported)
corporation) liable) personally,) it) would) prevent) both) sides) from)
raising)the)nonQexistence)of)the)corporation)as)a)means)to)avoid)
However,) having) reaped) the) benefits) of) the) contract) entered) into) by)
persons) with) whom) he) previously) had) an) existing) relationship,) he) is)
deemed)to)be)part)of)said)association)and)is)covered)by)the)scope)of)the)
doctrine)of)corporation)by)estoppel.)
(
Doctrine:(Clearly,)under)the)law)on)estoppel,)those)acting)on)behalf)of)a)
corporation) and) those) benefited) by) it,) knowing) it) to) be) without) valid)
existence,)are)held)liable)as)general)partners.&
enforcement)of)the)contract.2)
o In)noQfraud)or)noQmisrepresentation)cases,)the)estoppel)
doctrine) under) Section) 21) would) create) a) corporation)
when) none) exists) to) uphold) the) validity) and)
enforceability)of)the)contract)
o Limited)Partner)liability)!)One)who)acts)for)a)purported)
corporation)not)knowing)that)it)had)no)authority)to)do)
(
C.(Two(Levels:((i)(With(Fraud;(and((ii)(Without(Fraud(
1. When)fraud)or)misrepresentation)occurs)with)the)perfection)of)
the)contract)with)a)purported)corporation,)then)section)makes)
the)actor)personally)liable)on)the)contract)as)a)general)partner.1)
o General) Partners) !) liable) not) only) with) what) he)
purported)to)invest)in)the)venture,)but)he)could)be)held)
liable) to) all) his) properties,) even) those) not) actually)
invested)or)promised)to)be)invested)in)the)venture.&
o When) the) incorporators) represent) themselves) to) be)
officers) of) the) corporation) which) was) never) duly)
so) would) be) liable,) by) way) of) distinction,) only) as) a)
limited) partner;) that) is,) he) would) be) liable) only) to) the)
extent)of)his)investment)or)promised)investment)in)the)
purported) corporate) venture.) In) a) noQfraud) or) noQ
misrepresentation)case,)the)persons)acting)in)good)faith)
for) the) purported) corporation) would) still) be) personally)
liable,)but)only)to)the)extent)of)their)actual)or)promised)
registered) with) 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)Section)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,)
investment) in) the) corporate) venture.) This) logically) ties)

in) with) the) limited) liability) feature) of) a) purported)
corporation) given) legal) recognition) in) the) estoppel)
doctrine.)
3. When) there) was) clear) intention) to) form) a) partnership) venture)
through) a) corporate) vehicle,) which) essentially) means) that) the)
partners)had)intended)to)be)active)participants)in)the)business)
liabilities) and) damages) incurred) or) arising) as) a) result)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
!
of) the) corporation,) then) even) those) who) did) not) directly)
participate) in) the) contract) or) transaction) being) sued) upon,) but)
benefited) therefrom) may) be) held) liable) as) general) partners)
under)the)corporation)by)estoppel)doctrine.)On)the)other)hand,)
when) the) investors) intended) only) to) invest) in) a) corporate)
venture) with) no) intention) of) participating) in) its) corporate)
capital) stock,) property) and) other) assets) of) a) corporation) are)

regarded) as) equity) 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) assets) among) the)
stockholders) without) first) paying) corporate) creditors.) Hence,)
affairs,) and) the) corporation) was) not) formed,) no) partnership)

relation)is)deemed)established)by)the)failure)to)incorporate,)and)
such)investors)cannot)even)be)held)liable)for)the)contracts)and)
transaction) sued) upon) even) when) such) contracts) and)
transactions) were) entered) into) by) the) corporate) actors) in) the)
name)of)an)ostensible)corporation.1)Lim& Tong& Lim& v.& Philippine&
Fishing&Gear&Industries,&Inc.,&317&SCRA&728&(1999).)
any)disposition)of)corporate)funds)to)the)prejudice)of)creditors)
is) null) and) void.) Boman& Environmental& Dev.& Corp.& v.& CA,& 167&
SCRA&540&(1988).&
)
IV.(TRUST(FUND(DOCTRINE(
(
A.(Commercial/Common(Law(Premise:(Equity(versus(Debts;(Preference(
of(Creditors(over(Equity(Holders((Art.(2236,(Civil(Code)(
(
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).&
)
B.(Nature(and(Coverage(of(the(Trust(Fund(Doctrine:(
The)requirement)of)unrestricted)retained)earnings)to)cover)the)
shares)is)based)on)the)trust)fund)doctrine)which)means)that)the)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
The)subscriptions)to)the)capital)stock)of)a)corporation)constitute)
a)fund)to)which)the)creditors)have)a)right)to)look)for)satisfaction)
of)their)claims)and)that)the)assignee)in)insolvency)can)maintain)
an)action)upon)any)unpaid)stock)subscription)in)order)to)realize)
assets)for)the)payment)of)its)debts.)Phil.&Trust&Co.&v.&Rivera,&44&
Phil.&469&(1923).&
CIVIL(CODE(
Article(2236.(
The( debtor( is( liable( with( all( his( property,( present( and( future,( for( the(
fulfillment( of( his( obligations,( subject( to( the( exemptions( provided( by(
law.((1911a)(
Under) the) trust) fund) doctrine,) the) capital) stock,) property) and)
Atty.)Hofilea)!)a)shareholder)cannot)be)compelled)to)
pay) more) than) what) they) subscribed) to) in) order) to)
address)the)debts)of)the)corporation.&
Even) when) the) foreclosure) on) the) corporate) assets) was)

wrongfully) done,) stockholders) have) no) standing) to) recover) for)
themselves)moral)damages;)otherwise,)it)would)amount)to)the)
appropriation) by,) and) the) distribution) to,) such) stockholders) of)
part) of) the) corporations) 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)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).&
o Atty.)Hofilea)!)the)creditors)have)no)right)to)compel)
the) company) to) sell) the) unsubscribed) shares) it) has) left)
of)the)authorized)capital)stock.)
We)clarify)that)the)trust)fund)doctrine)is)not)limited)to)reaching)
the) stockholders) unpaid) subscriptions.) The) scope) of) the)
doctrine) when) the) corporation) is) insolvent) encompasses) not)
only) the) capital) stock,) but) also) other) property) and) assets)
generally)regarded)in)equity)as)a)trust)fund)for)the)payment)of)
corporate) debts.) All) assets) and) property) belonging) to) the)
corporation) held) in) trust) for) the) benefit) of) creditors) that) were)
distributed) or) in) the) possession) of) the) stockholders,) regardless)
of) full) payment) of) their) subscriptions) may) be) reached) by) the)
creditors)in)satisfaction)of)its)claim.)Halley&v.&Printwell,&Inc.&649&
SCRA& 116& (2011),& citing& VILLANUEVA,& PHILIPPINE& CORPORATE&
LAW&(2001),&p.&558.&
&
Halley&v.&Printwell,&Inc.&
(
Facts:(BMPI)(Business)Media)Philippines)Inc.))is)a)corporation)under)the)
control)of)its)stockholders,)including)Donnina)Halley.)In)the)course)of)its)
business,) BMPI) commissioned) PRINTWELL) to) print) Philippines,) Inc.) (a)
magazine) published) and) distributed) by) BMPI).) BMPI) placed) several)
orders) amounting) to) P316,000) but) was) only) able) to) pay) P25,000.)
PRINTWELL)sued)BMPI)for)collection)of)the)unpaid)balance)and)later)on)
impleaded)BMPIs)original)stockholders)and)incorporators)to)recover)on)
their)unpaid)subscriptions.)
(
Issue:( Whether) or) not) a) stockholder) (Halley) in) this) case)) who) was) in)
active) management) of) the) business) of) the) corporation) and) still) has)
unpaid) subscriptions) should) be) made) liable) for) the) debts) of) the)
corporation)by)piercing)the)veil)of)corporate)fiction)
(
Held:( YES.) Such) stockholder) should) be) made) liable) up) to) the) extent) of)
her)unpaid)subscription.)It)was)found)that)at)the)time)the)obligation)was)
incurred,)BMPI)was)under)the)control)of)its)stockholders)who)know)fully)
well)that)the)corporation)was)not)in)a)position)to)pay)its)account)(thinly)
capitalized).) And,) that) the) stockholders) personally) benefited) from) the)
operations) of) the) corporation) even) though) they) never) paid) their)
subscriptions)in)full.)
(
Doctrine:( TRUST( FUND( DOCTRINE.) Under) which) corporate) debtors)
might) look) to) the) unpaid) subscriptions) for) the) satisfaction) of) unpaid)
corporate) debts.) Subscriptions) to) the) capital) of) a) corporation)
constitutes) a) trust) fund) for) the) payment) of) the) creditors) (by) mere)
analogy)) In) reality,) corporation) is) a) simple) debtor.) The) creditor) is)
)
!
allowed) to) maintain) an) action) upon) any) unpaid) subscriptions) and)
thereby)steps)into)the)shoes)of)the)corporation)for)the)satisfaction)of)its)
debt.)The)trust)fund)doctrine)is)not)limited)to)reaching)the)stockholders)
unpaid)subscriptions.)The)scope)of)the)doctrine)when)the)corporation)is)
insolvent) encompasses) not) only) the) capital) stock) but) also) other)
property)and)assets)generally)regarded)in)equity)as)a)trust)fund)for)the)
payment)of)corporate)debts.&
&
C.(To(Purchase(Own(Shares((Sections(8,(41,(43(and(122,(last(paragraph)(
(
Section(8.(Redeemable(shares.(
Redeemable(shares(may(be(issued(by(the(corporation(when(expressly(
so(provided(in(the(articles(of(incorporation.(They(may(be(purchased(or(
taken( up( by( the( corporation( upon( the( expiration( of( a( fixed( period,(
regardless( of( the( existence( of( unrestricted( retained( earnings( in( the(
books(of(the(corporation,(and(upon(such(other(terms(and(conditions(as(
may( be( stated( in( the( articles( of( incorporation,( which( terms( and(
conditions(must(also(be(stated(in(the(certificate(of(stock(representing(
said(shares.(
(
Unrestricted) Retained) Earnings) !) These) are) earnings) which) is)

not)earmarked)for)any)particular)purpose.(
Dividends) come) from) the) unrestricted) retained) earnings.)

Otherwise,)you)will)impair)the)capital)of)the)corporation.(
o Stock)Dividend)!)instead)of)giving)you)cash)dividend)to)
which) you) are) entitled) to,) you) will) be) given) a) stock) as)
Decision)to)issue)stock)dividends)is)made)by)2/3)
of)the)stockholders)and)majority)of)the)Board.(
Cash)Dividend)!)liquidated)cash(
" Distribution) is) decided) upon) by) the) Board) of)
Directors.(
"
Redeemable) shares) need) to) be) classified) from) the) beginning)

that)they)are)redeemable.(
o This) is) the) exception) to) the) general) rule) that) you) need)
URE)in)order)to)buyQback)shares.(
(
Section(41.(Power(to(acquire(own(shares.(
A( stock( corporation( shall( have( the( power( to( purchase( or( acquire( its(
own(shares(for(a(legitimate(corporate(purpose(or(purposes,(including(
but(not(limited(to(the(following(cases:(Provided,(That(the(corporation(
has(unrestricted(retained(earnings(in( its( books( to( cover(the( shares( to(
be(purchased(or(acquired:(
(
1.(To(eliminate(fractional(shares(arising(out(of(stock(dividends;(
(
2.( To( collect( or( compromise( an( indebtedness( to( the( corporation,(
arising( out( of( unpaid( subscription,( in( a( delinquency( sale,( and( to(
purchase(delinquent(shares(sold(during(said(sale;(and(
(
3.(To(pay(dissenting(or(withdrawing(stockholders(entitled(to(payment(
for(their(shares(under(the(provisions(of(this(Code.((n)(
(
equivalent.) Its) like) reinvesting) your) dividends) to) the)

corporation.(
The) URE) is) also) what) the) corporation) can) use) to) buyQback) its)
shares)from)its)stockholders.(
)
!
Section(43.(Power(to(declare(dividends.((
The( board( of( directors( of( a( stock( corporation( may( declare( dividends(
out( of( the( unrestricted( retained( earnings( which( shall( be( payable( in(
cash,( in( property,( or( in( stock( to( all( stockholders( on( the( basis( of(
outstanding( stock( held( by( them:( Provided,( That( any( cash( dividends(
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(
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(two0thirds((2/3)(of(the(outstanding(capital(stock(at(a(regular(
or(special(meeting(duly(called(for(the(purpose.((16a)(
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(
(
Stock( corporations( are( prohibited( from( retaining( surplus( profits( in(
excess( of( one( hundred( (100%)( percent( of( their( paid0in( 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(
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(
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,(
such( as( when( there( is( need( for( special( reserve( for( probable(
contingencies.((n)(
be( found( shall( be( escheated( to( the( city( or( municipality( where( such(
assets(are(located.(
(
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)(
(
Section(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(
)
Under) common) law,) there) were) originally) conflicting) views) on)

whether) a) corporation) had) the) power) to) purchase) its) own)
!
stocks.) Only) a) few) American) jurisdictions) adopted) the) strict)
English) rule) forbidding) a) corporation) from) purchasing) its) own)
shares.)In)some)American)states)where)the)English)rule)used)to)
be) adopted,) statutes) granting) authority) to) purchase) out) of)
surplus) funds) were) enacted,) while) in) others,) shares) might) be)
purchased) even) out) of) capital) provided) the) rights) of) creditors)
were) not) prejudiced.) The) reason) underlying) the) limitation) of)
share) purchases) sprang) from) the) necessity) of) imposing)
safeguards) against) the) depletion) by) a) corporation) of) its) assets)
and) against) the) impairment) of) its) capital) needed) for) the)
protection) of) creditors.) Turner& v.& Lorenzo& Shipping& Corp.,& 636&
SCRA&13&(2010).&
&
D.(Rescission(of(Subscription(Agreement(
The) violation) of) terms) embodied) in) a) subscription) agreement,)

with)are)personal)commitments,)do)not)constitute)legal)ground)
to)rescind)the)subscription)agreement)since)such)would)violate)
the) Trust) Fund) Doctrine) and) the) procedures) for) the) valid)
distribution)of)assets)and)property)under)the)Corporation)Code.)
In) the) instant) case,) the) rescission) of) the) PreQSubscription)
Agreement) will) effectively) result) in) the) unauthorized)
distribution) of) the) capital) assets) and) property) of) the)
corporation,) thereby) violating) the) Trust) Fund) Doctrine) and) the)
Corporation) Code,) since) the) rescission) of) a) subscription)
agreement) is) not) one) of) the) instances) when) distribution) of)
capital) assets) and) property) of) the) corporation) is) allowed.)
Distribution)of)corporate)assets)among)the)stockholders)cannot)
even) be) resorted) to) achieve) corporate) peace.) Ong& Yong& v.&
Tiu,&401&SCRA&1&(2003).&
&
Ong&Yong&v.&Tiu&
(
Facts:( The) Tiu) family) members) are) the) owners) of) First) Landlink) Asia)
Development)Corporation)(FLADC).)One)of)the)corporations)projects)is)
the) construction) of) Masagana) Citimall) in) Pasay) City.) However,) due) to)
financial) difficulties) (they) were) indebted) to) PNB) for) P190) million),) the)
Tius) feared) that) the) construction) would) not) be) finished.) So) to) prevent)
the) foreclosure) of) the) mortgage) on) the) two) lots) where) the) mall) was)
being) built,) they) invited) the) Ongs) to) invest) in) FLADC.) The) two) parties)
entered)into)a)Presubscription)Agreement)whereby)each)of)them)would)
hold)1,000,000)shares)each)and)be)entitled)to)nominate)certain)officers.)
The) Tius) contributed) a) building) and) two) lots,) while) the) Ongs)
contributed)P100M.)
)
Two) years) later,) the) Tuis) filed) for) rescission) of) the) Presubscription)
Agremement) because) the) Ongs) refused) to) issue) them) their) shares) of)
stock) and) from) assuming) positions) of) VP) and) Treasurer) to) which) they)
were) entitled) to) nominate.) The) Ongs) contended) that) they) could) not)
issue) the) new) shares) to) the) Tius) because) the) latter) did) not) pay) the)
capital) gains) tax) and) the) documentary) stamp) tax) of) the) lots.) And)
because) of) this,) the) SEC) would) not) approve) the) valuation) of) the)
property) contribution) of) the) Tius.) The) Court) of) Appeals) ordered)
liquidation)of)FLADC)to)enforce)rescission)of)the)contract.)
(
Issue:( Whether)or)not)the)liquidation)of)FLADC)violated)the)Trust)Fund)
Doctrine)
(
Held:( YES.) In) this) case,) the) rescission) would) certainly) be) a) violation) of)
)
!
the) doctrine) and) also) of) the) Corporation) Code) because) the) rescission)
would) result) in) the) unauthorized) distribution) of) the) assets) of) the)
corporation.)Rescission)based)on)a)breach)in)the)terms)of)a)subscription)
agreement) is) not) one) of) the) instances) when) distribution) of) a)
corporations)assets)and)property)is)allowed)(Section)122).)It)would)not)
only) be) unlawful) but) it) would) also) be) prejudicial) to) the) corporate)
creditors) who) enjoy) absolute) priority) of) payment) over) any) individual)
stockholder.)
(
Doctrine:(This)doctrine)enunciates)that)subscriptions)to)the)capital)stock)
of)a)corporation)constitute)a)fund)to)which)the)creditors)have)a)right)to)
look) for) the) satisfaction) of) their) claims.) This) doctrine) is) the) underlying)
principle) in) the) procedure) for) the) distribution) of) capital) assets,)
embodied) in) the) Corporation) Code,) which) allows) the) distribution) of)
corporate)capital)only)in)three)instances:)(1))amendment)of)the)Articles)
of)Incorporation)to)reduce)the)authorized)capital)stock,)(2))purchase)of)
redeemable) shares) by) the) corporation,) regardless) of) the) existence) of)
unrestricted) retained) earnings,) and) (3)) dissolution) and) eventual)
liquidation)of)the)corporation.&
&
NOTE:(
Atty.) Hofilea) !) To) release) a) person) from) his) obligation) to) pay) his)
subscribed)shares)is)offensive)to)the)Trust)Fund)Doctrine.)
Trust) Fund) Doctrine) applies) to) all) properties) of) the) company,)
and)not)limited)to)simply)the)unpaid)subscriptions.)
A) company) may) do) what) it) wills) with) its) properties,) but)
creditors)are)protected.)
)
ARTICLES)OF)INCORPORATION)
located,)which)must)be)within)the)Philippines;)
4. The)term)for)which)the)corporation)is)to)exist;)
5. The)names,)nationalities)and)residences)of)the)incorporators;)
6. The) number) of) directors) or) trustees,) which) shall) not) be) less)
than)five)(5))nor)more)than)fifteen)(15);)
)
I.)Nature)of)Charter:)The$charter$is$in$the$nature$of$a$contract$between$
the$ corporation$ and$ the$ government." Government" of" P.I." v." Manila"
Railroad"Co.,"52"Phil."699"(1929)."
7. The) names,) nationalities) and) residences) of) persons) who) shall)

act) as) directors) or) trustees) until) the) first) regular) directors) or)
trustees)are)duly)elected)and)qualified)in)accordance)with)this)
Code;)
8. If) it) be) a) stock) corporation,) the) amount) of) its) authorized)
capital)stock)in)lawful)money)of)the)Philippines,)the)number)of)
shares) into) which) it) is) divided,) and) in) case) the) share) are) par)
The$ articles$ of$ incorporation$ has$ been$ described$ as$ one$ that$
defines$ the$ charter$ of$ the$ corporation$ and$ the$ contractual$
relationships$ between$ the$ state$ and$ the$ corporation,$ the$
stockholders$and$the$State,$and$between$the$corporation$and$its$
stockholders.$Lanuza"v."Court"of"Appeals,"454"SCRA"54"(2005)."
)
II.)Procedure)and)Documentary)Requirements)(Section)14)and)15))
)
value) shares,) the) par) value) of) each,) the) names,) nationalities)
and) residences) of) the) original) subscribers,) and) the) amount)
subscribed)and)paid)by)each)on)his)subscription,)and)if)some)or)
all) of) the) shares) are) without) par) value,) such) fact) must) be)
stated;)
9. If)it)be)a)nonTstock)corporation,)the)amount)of)its)capital,)the)
names,) nationalities) and) residences) of) the) contributors) and)
Section)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) nonTstock) corporation) may) not)
include)a)purpose)which)would)change)or)contradict)its)nature)
as)such;)
3. The)place)where)the)principal)office)of)the)corporation)is)to)be)
the)amount)contributed)by)each;)and)
10. Such)other)matters)as)are)not)inconsistent)with)law)and)which)
the)incorporators)may)deem)necessary)and)convenient.)
)
The) Securities) and) Exchange) Commission) shall) not) accept) the) articles)
of) incorporation) of) any) stock) corporation) unless) accompanied) by) a)
sworn)statement)of)the)Treasurer)elected)by)the)subscribers)showing)
that)at)least)twentyTfive)(25%))percent)of)the)authorized)capital)stock)
of)the)corporation)has)been)subscribed,)and)at)least)twentyTfive)(25%))
of) the) total) subscription) has) been) fully) paid) to) him) in) actual) cash)
)
!
and/or) in) property) the) fair) valuation) of) which) is) equal) to) at) least)
twentyTfive) (25%)) percent) of) the) said) subscription,) such) paidTup)
capital)being)not)less)than)five)thousand)(P5,000.00))pesos.)
stockholders$or$members$as$long$as$they$are$not$incorporators.1"
A.)As)to)Number)and)Residency)of)Incorporators)(Section)10))
)
own)or)be)a)subscriber)to)at)least)one)(1))share)of)the)capital)stock)of)
the)corporation.)
)
corporations$to$the$capital$stock$of$a$corporation$in$the$
process$ of$ incorporation$ be$ fully$ paid$ due$ to$ their$
limited$ liability$ capacity; 3 $but$ after$ incorporation,$
corporations$may$subscribe$without$having$to$fully$pay$
their$ subscription$ under$ the$ premise$ that$ the$ risk$ of$
insolvency$no$longer$exist$at$that$point.4"
It$ is$ possible$ for$ a$ business$ to$ be$ wholly$ owned$ by$ one$
individual,$ and$ the$ validity$ of$ its$ incorporation$ is$ not$ affected$
when$he$gives$nominal$ownership$of$only$one$share$of$stock$to$
each$ of$ the$ other$ four$ incorporators.$ This$ arrangement$ is$ not$
necessarily$ illegal,$ but$ it$ is$ valid$ only$ between$ and$ among$ the$
incorporators$ privy$ to$ the$ agreement.$ It$ does$ not$ bind$ the$
corporation$which$will$consider$all$stockholders$of$record$as$the$
lawful$ owners$ of$ their$ registered$ shares.$ As$ between$ the$
corporation$ on$ the$ one$ hand,$ and$ its$ stockholders$ and$ third$
persons$on$the$other,$the$corporation$looks$only$to$its$books$for$
the$ purpose$ of$ determining$ who$ its$ shareholders$ are.$ Nautica"
Canny"Corp."v."Yumul,"473"SCRA"415"(2005)."
In$ practice,$ the$ SEC$ would$ allow$ the$ incorporation$ of$ a$

corporation$ which$ would$ have$ as$ original$ stockholder$ in$ the$
articles$ of$ incorporation,$ as$ long$ as$ the$ minimum$ number$ of$
individual$incorporators$appear.$"
o In$one$opinion,$the$SEC$has$posited$that$both$domestic$
and$ foreign$ corporations,$ if$ allowed$ by$ their$ charters,$
may$ be$ initial$ subscribers$ to$ the$ capital$ stock$ of$ a$
corporation,$ but$ their$ subscription$ will$ not$ be$
considered$in$the$computation$of$the$25%$requirement$
for$incorporation.2$"
o The$ SEC$ also$ requires$ that$ the$ subscription$ of$
Section)10.)Number)and)qualifications)of)incorporators.)
Any)number)of)natural)persons)not)less)than)five)(5))but)not)more)than)
fifteen) (15),) all) of) legal) age) and) a) majority) of) whom) are) residents) of)
the)Philippines,)may)form)a)private)corporation)for)any)lawful)purpose)
or) purposes.) Each) of) the) incorporators) of) s) stock) corporation) must)
Only$ natural$ persons$ can$ be$ incorporators.$ However,$ the$ law$

does$not$preclude$corporations$and$partnership$from$becoming$
The$ Corporation$ Code$ maintains$ the$ requirement$ that$ at$ least$

five$ (5)$ individuals$ must$ be$ incorporators$ of$ a$ corporation$ for$
perhaps$a$more$practical$reason.$"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Government!of!the!Philippine!Islands!v.!El!Hogar!Filipino,$50$Phil.$399,$460Q461$
(1929).$$
2
$SEC$Opinion,$23$May$1967,$SEC$FOLIO$1960Q1976,$at$p.$284;$Also,$SEC$Opinion,$
14$November$1978.$$
3
$SEC$Opinion,$23$May$1967,$SEC$FOLIO$1960Q1976,$at$p.$284.$
4
$SEC$Opinion,$29$June$1976,$SEC$FOLIO$1960Q1976,$at$p.$936.$
)
!
o
Our$ jurisdiction$ recognizes$ the$ existence$ of$ promoter's$

contracts,$ or$ contracts$ entered$ into$ on$ behalf$ of$ a$
corporation$ still$ in$ the$ process$ of$ organization.$ Indeed,$
transactions$ may$ already$ be$ pursued$ with$ the$ parties$
aware$ that$ the$ corporation$ is$ still$ under$ registration$
proceedings.$ If$ anything$ goes$ wrong$ with$ the$
incorporation$ process,$ and$ there$ may$ have$ been$

liabilities$created$at$the$time$of$incorporation,$then$the$
existence$ of$ five$ individual$ incorporators$ allows$ the$
public$ or$ injured$ party$ to$ run$ after$ the$ persons$ who$
cannot$hide$behind$a$corporate$fiction$or$who$can$avail$
of$ limited$ liability$ features.$ In$ addition,$ there$ must$ still$
indeed$be$individuals,$who$can$be$held$criminally$liable,$
wish$to$establish$a$foreign$brand$in$the$Philippines,$they$
will$either$reside$in$the$Philippines$or$ask$people$to$act$
as$incorporators$(who$are$usually$their$lawyers).$
" Incorporators$are$not$at$all$times$the$promoters$
or$majority$stockholders.$This$is$not$necessarily$
illegal,$ although$ it$ brings$ out$ the$ problem$
whereby$ the$ incorporators$ are$ not$ necessarily$
for$ acts$ done$ relating$ to$ incorporation$ process.$ Such$

remedies$would$be$unavailing$or$would$be$meaningless$
if$the$incorporators$are$themselves$juridical$entities."
the$ people$ who$ should$ be$ held$ responsible$

since$they$are$not$the$promoters.$
Atty.$Hofilea$!$in$case$of$public$utilities,$the$company$
must$ be$ 60%$ owned$ and$ controlled.$ As$ such,$ if$ the$
incorporators$ own$ only$ one$ share,$ then$ the$ company$
cannot$be$a$public$utility.$$
" People$ v.$ Quasha$ !$ at$ the$ time$ of$ the$
If$ only$ two$ incorporators$ are$ residents$ of$ the$ Philippines$ a$

corporation$still$exists$$a$de!facto$corporation$provided$that$at$
least$ five$ (5)$ incorporators$ must$ sign$ the$ articles$ of$
incorporation.1$"
o This$however$does$not$prevent$the$existence$of$the$soQ
called$ oneQman$ corporation,$ where$ business$ is$ actually$
owned$ by$ one$ individual,$ it$ is$ still$ possible$ for$ him$ to$
incorporate$ by$ giving$ nominal$ ownership$ of$ only$ one$
establishment$ of$ the$ company,$ it$ is$ not$

necessary$ that$ the$ company$ be$ Filipino.$
However,$ if$ they$ want$ to$ get$ a$ franchise$ to$
operate$ as$ a$ public$ utility,$ then$ they$ must$ first$
meet$ the$ requirement$ of$ the$ 60%$ citizenship$
requirement$of$the$law.$
share$ of$ stock$ to$ each$ of$ 4$ other$ personsthis$ is$ not$
necessarily$illegal.$"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
There$ is$ no$ general$ requirement$ of$ Philippine$

citizenship$only$a$majority$of$the$incorporators$must$be$
residents$ of$ the$ Philippines.$ However,$ there$ are$ some$
areas$ of$ business$ and$ industry$ wherein$ ownership$ is$
reserved,$wholly$or$partially$to$Filipinos."
Atty.$ Hofilea$ !$ if$ there$ are$ 5$ American$ citizens$ who$
$SEC$Opinion,$11$October$1971,$SEC$FOLIO$1960Q1976,$at$p.$495.$
)
An$incorporator$will$always$retain$his$status$as$the$incorporator$
of$the$corporation$because$such$status$is$acquired$by$the$mere$
!
fact$ of$ being$ one$ of$ the$ persons$ who$ originally$ composed$ the$
corporation.$$
o He$may$cease$to$be$a$stockholder$or$a$member,$he$may$
lose$all$his$rights$and$interest$in$the$corporation,$but$he$
will$always$be$known$as$the$incorporator.$The$articles$of$
incorporation$ cannot$ therefore$ be$ amended$ to$ delete$
the$name$of$an$incorporator$and$substitute$it$with$that$
of$another,$the$latter$not$being$an$incorporator.1$
" You$ cannot$ remove$ an$ original$ incorporator$
from$the$charter.$
Atty.$Hofilea$!$can$a$person$sue$an$incorporator$who$
is$ no$ longer$ involved$ with$ the$ company$ (let$ go$ of$ his$
share)?$NO.$$
Where$there$is$a$change$in$the$initial$directors$(indicated$in$the$
articles$of$incorporation),$there$is$no$need$to$amend$the$articles$
of$incorporation.$$
)
B.)Corporate)Name)(Sections)18,)14(1))and)42))
)
Section)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)
)
Section)42.)Power)to)invest)corporate)funds)in)another)corporation)or)
business)or)for)any)other)purpose.)
Subject)to)the)provisions)of)this)Code,)a)private)corporation)may)invest)
its)funds)in)any)other)corporation)or)business)or)for)any)purpose)other)
than) the) primary) purpose) for) which) it) was) organized)when) approved)
by)a)majority)of)the)board)of)directors)or)trustees)and)ratified)by)the)
stockholders)representing)at)least)twoTthirds)(2/3))of)the)outstanding)
capital)stock,)or)by)at)least)two)thirds)(2/3))of)the)members)in)the)case)
of) nonTstock) 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))
)
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.)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$SEC$Opinion,$7$January$1974,$VIII$SEC$QUARTERLY$BULLETIN$21$($No.$I,$Jan.$1974).$
)
1. Corporate)Name)Guidelines)
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)."
o Atty.$ Hofilea$ !$ NOT$ DECEPTIVE$ PER$ SE.$ Latitude$ is$
given$ to$ someone$ in$ terms$ of$ determining$ whether$ a$
!
name$is$deceptive.$Where$a$name$is$deceptive$per$se,$it$
will$be$disallowed$by$the$SEC.)
" The$use$of$Inc.$in$required$under$Section$15)
" The$ use$ of$ a$ persons$ name$ in$ the$ corporation$
name$ is$ allowed$ only$ where$ the$ person$ is$ a$
shareholder$ or$ he$ has$ a$ significant$ position$ in$
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)."
The$name$of$a$corporation$is$essential$not$only$for$its$existence$
as$a$juridical$person,$but$also$in$manner$of$dealing$with$it,$and$in$
the$ Approval$ of$ Corporate$ and$ Partnership$ Names,$ two$

requisites$ must$ be$ proven,$ to$ wit:$ (a)$ That$ the$ complainant$
corporation$ acquired$ a$ prior$ right$ over$ the$ use$ of$ such$
corporate$ name;$ and$ (b)$ the$ proposed$ name$ is$ either:$ (i)$
identical,$or$(ii)$deceptively$or$confusingly$similar$to$that$of$any$
existing$corporation$or$to$any$other$name$already$protected$by$
the$ exercise$ of$ its$ juridical$ capacities;$ it$ cannot$ be$ changed$
except$ in$ the$ manner$ provided$ for$ by$ law.$ Red" Line" Trans." v."
Rural"Transit,"60"Phil."549"(1934)."
law;$or$(iii)$patently$deceptive,$confusing$or$contrary$to$existing$
laws.$Philips"Export"B.V."v."Court"of"Appeals,"206"SCRA"457,"463"
(1992)"
the$ corporation$ or$ he$ is$ neither$ but$ has$ his$

consent.)
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$ difficulties$ of$
administration$ and$ supervision$ over$ corporations.$ Industrial"
Refractories"Corp."v."Court"of"Appeals,"390"SCRA"252"(2002).1$
Incorporators$must$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$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
To$ fall$ within$ the$ prohibition$ of$ the$ law$ Revised$ Guidelines$ in$
$Also$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:$ A$ corporation$ may$ be$ sued$ under$ the$ name$ by$
which$ it$ makes$ itself$ known$ to$ its$ workers.$ PisonZArceo" Agri."
Dev."Corp."v."NLRC,"279"SCRA"312"(1997)."
2. Change)in)Corporate)Name)
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.$ Phil." 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).1$
3. SEC)Jurisdiction)Over)Issues)Involving)Corporate)Names)
SEC$has$quasiQjudicial$powers$to$hear$and$decide$a$controversy$
)
C.)Purpose)Clauses)(Sections)14(2))and)42))
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" AgroZIndustrial" Corp.," 418" SCRA" 431"
(2003)."
The$ significance$ of$ the$ purpose$ clause$ in$ the$ articles$ of$
incorporation$ is$ that$ it$ confers,$ as$ well$ as$ limits,$ the$ powers$
which$a$corporation$may$exercise.2$
o The$statement$of$the$primary$purpose$in$the$articles$of$
incorporation$is$means$to$protect$shareholders$so$they$
will$know$the$main$business$of$the$corporation$and$file$
derivative$ suits$ if$ the$ corporation$ deviates$ from$ the$
primary$ purpose.$ Uy" Siuliong" v." Director" of" Commerce"

and"Industry,"40"Phil."541"(1919)."
Some$of$the$other$reasons$for$indicating$purpose$in$the$
charter$of$the$corporation$are$so$that:$
" (a)$Prospective$investors$shall$know$the$kind$of$
business$the$corporation$deals$with;$
" (b)$ Management$ shall$ know$ the$ limits$ of$ its$
actions;$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$P.C.$Javier$&$Sons,$Inc.$v.$Court$of$Appeals,$462$SCRA$36$(2005).$
$Villanueva,$C.$L.,$&$VillanuevaQTiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$
2
The$best$proof$of$the$purpose$of$a$corporation$is$its$articles$of$
incorporation$ and$ byQlaws.$ The$ articles$ of$ incorporation$ must$
state$ the$ primary$ and$ secondary$ purposes$ of$ the$ corporation,$
while$the$byQlaws$outline$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$
between$two$corporation$as$to$who$has$a$better$right$to$the$use$
of$a$particular$corporate$name.$Industrial" Refractories" Corp." v."
Court"of"Appeals,"390"SCRA"252"(2002).)
(c)$ A$ thirdQparty$ can$ know$ whether$ his$ dealing$

with$ the$ corporation$ are$ with$ corporate$
functions$and$powers.$
The$ SEC$ has$ ruled$ that$ the$ rules$ governing$ the$ construction$ of$
charters$ of$ corporations$ are,$ for$ the$ most$ part,$ the$ same$ as$
those$ which$ govern$ the$ construction$ and$ interpretation$ of$
statutes,$contracts$and$other$written$instruments.3$
$
D.)Corporate)Term)(Section)11))
)
Section)11.)Corporate)term.))
A) corporation) shall) exist) for) a) period) not) exceeding) fifty) (50)) years)
from)the)date)of)incorporation)unless)sooner)dissolved)or)unless)said)
period) is) extended.) The) corporate) term) as) originally) stated) in) the)
articles) of) incorporation) may) be) extended) for) periods) not) exceeding)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
SEC$ Opinion,$ 26$ January$ 1994,$ XXVIII$ SEC$ QUARTERLY$ BULLETIN$ 46$ (No.$ 2,$ June$
1994),$citing!7A$FLETCHER,$Section$3640,$and$6$FLETCHER$CYC.$CORP.,$Section$2483.$$
)
!
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)
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.)
)
Exchange)Commission.)
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)
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)."
Article$605$of$Civil$Code$clearly$limits$any$usufruct$constituted$
in$favor$of$a$corporation$or$association$to$50$years.$A$usufruct$is$
meant$ only$ as$ a$ lifetime$ grant.$ Unlike$ a$ natural$ person,$ a$
corporation$ or$ associations$ lifetime$ may$ be$ extended$
indefinitely.$ The$ usufruct$ would$ then$ be$ perpetual.$ This$ is$
especially$ invidious$ in$ cases$ where$ the$ usufruct$ given$ to$ a$
corporation$or$association$covers$public$land.$NHA" v." Court" of"
Appeals,"456"SCRA"17"(2005)."
are)present)or)duly)represented)at)the)meeting.)(24)and)25))
)
Atty.$Hofilea$!$The$corporation$takes$a$loan$that$is$payable$in$
10$ years,$ but$ it$ expires$ in$ 5$ years.$ Although$ not$ illegal,$ it$ is$ a$
question$of$wisdom$on$the$part$of$the$loaning$entity."
o 50$years$from$filing$!$the$corporate$life$is$shortened."
o 50$ years$ !$ counted$ beginning$ from$ the$ issuance$ of$
the$certificate$of$incorporation."
$
E.)Principal)Place)of)Business)(Section)51))
)
Section)51.)Place)and)time)of)meetings)of)stockholders)or)members.)
Stockholders')or)members')meetings,)whether)regular)or)special,)shall)
)
Although$ the$ Rules$ of$ Court$ do$ not$ provide$ that$ when$ the$
plaintiff$ is$ a$ corporation,$ the$ complaint$ should$ be$ filed$ in$ the$
location$ of$ its$ principal$ office$ as$ indicated$ in$ its$ articles$ of$
incorporation,$ jurisprudence$ has,$ however,$ settled$ that$ the$
place$ where$ the$ principal$ office$ of$ a$ corporation$ is$ located,$ as$
stated$ in$ the$ articles,$ indeed$ establishes$ its$ residence.$ This$
ruling$is$important$in$determining$the$venue$of$an$action$by$or$
against$ a$ corporation,$ as$ in$ the$ present$ case.$ Hyatt" Elevators"
and" Escalators" Corp." v." Goldstar" Elevators," Phils.," Inc.," 473"
SCRA" 705" (2005)," citing" VILLANUEVA," PHILIPPINE" CORPORATE$
LAW"(1998),"p."162."
o Corporate)Residence)for)IntraTCorporate)Disputes"
" Section$ 1,$ Rule$ 1$ of$ the$ Interim$ Rules$ of$
Procedure$ for$ IntraQCorporate$ Controversies,$
provides$that$when$the$articles$of$incorporation$
indicate$ that$ the$ principal$ place$ of$ business$ is$

Metro$ Manila,$ then$ the$ action$ must$ be$ filed$ in$
the$city$where$the$head$office$is$actually$located"
Corporate)Residence)for)Corporate)Recovery)Cases"
" Action$ must$ be$ filed$ in$ the$ regional$ trial$ court$
which$has$jurisdiction$over$the$principal$office."
Under$Section$11,$Rule$14$of$the$1997$Rules$of$Civil$Procedure$
of$ the$ Philippines,$ if$ the$ defendant$ in$ a$ suit$ is$ a$ corporation$
organized$ under$ the$ laws$ of$ the$ Philippines,$ service$ may$ be$
made$ on$ the$ President,$ general$ manager,$ secretary,$ treasurer,$
or$inQhouse$counsel.1$
Place$of$residence$of$the$corporation$is$the$place$of$its$principal$
office.$Clavecilla"Radio"System"v."Antillon,"19"SCRA"379"(1967)"
o The$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)."
Stock)corporations)incorporated)under)this)Code)shall)not)be)required)
to) have) any) minimum) authorized) capital) stock) except) as) otherwise)
specifically) provided) for) by) special) law,) and) subject) to) the) provisions)
of)the)following)section.)
Atty.$ Hofilea$ !$ the$ principal$ address$ is$ necessarily$ just$ one$

otherwise$ it$ would$ not$ be$ principal.$ It$ is$ also$ necessary$ for$
regulation$purposes$of$the$government.$
$
F.) Minimum) Capitalization) (Section) 12):) Why) is) maximum)
capitalization)required)to)be)indicated?)
)
In$ normal$ practice,$ SEC$ will$ not$ allow$ a$ corporation$ to$ be$
organized$ with$ P5,000$ minimum$ paidQup$ capital$ because$ it$ is$
too$ thinly$ capitalized.$ More$ likely$ SEC$ would$ require$ a$ higher$
paidQup$amount$for$incorporation.$SEC$can$do$this$because$as$an$
administrative$body$it$can$make$rules.2$
)
G.)Subscription)and)PaidTup)Requirements)(Section)13))
)
Section)13.)Amount)of)capital)stock)to)be)subscribed)and)paid)for)the)
purposes)of)incorporation.))
At) least) twentyTfive) percent) (25%)) of) the) authorized) capital) stock) as)
stated)in)the)articles)of)incorporation)must)be)subscribed)at)the)time)
of) incorporation,) and) at) least) twentyTfive) (25%)) per) cent) of) the) total)
subscription) must) be) paid) upon) subscription,) the) balance) to) be)
payable) on) a) date) or) dates) fixed) in) the) contract) of) subscription)
without)need)of)call,)or)in)the)absence)of)a)fixed)date)or)dates,)upon)
call)for)payment)by)the)board)of)directors:)Provided,)however,)That)in)
no)case)shall)the)paidTup)capital)be)less)than)five)Thousand)(P5,000.00))
pesos.)
)
Section)12.)Minimum)capital)stock)required)of)stock)corporations.)
The$ entries$ in$ the$ articles$ of$ incorporation$ of$ the$ original$
issuances$of$shares$of$stock$has$a$stronger$weight$that$the$stock$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
!
and$ transfer$ book$ in$ determining$ the$ validity$ and$ issuance$ of$
such$shares.$Lanuza"v."Court"of"Appeals,"454"SCRA"54"(2005)."
o The$ACS$and$Subscribed$stocks$are$found$in$the$articles$
of$incorporation.$
o For$ PaidQin$ Capital,$ you$ can$ look$ at$ Certificate$ of$
Deposits,$and$verify$via$bank$accounts.$
"Capital$ Stock"$ !$ is$ the$ amount$ fixed$ in$ the$ articles$ of$
corporation$procured$to$be$subscribed$and$paidQin.$It$is$settled$
that$shares$issued$in$excess$of$the$authorized$capital$stocks$are$
void.$
"Outstanding$Capital$Stock"$!$is$the$total$shares$of$stock$issued$
to$subscribers$or$stockholders,$whether$or$not$fully$or$partially$
paid$ (as$ long$ as$ there$ is$ a$ binding$ subscription$ agreement),$
except$treasury$shares.$$
"Subscribed$Capital$Stock"$!$is$that$portion$of$the$capital$stock$
subscribed$(i.e.$procured$to$be$paid)$whether$or$not$fully$paid.$
"Subscription"$ !$ is$ the$ mutual$ agreement$ of$ the$ corporation$

and$subscriber$to$take$and$pay$for$the$stock$a$corporation.$
The$ subscription$ must$ be$ paid$ upon$ demand$ of$ the$ Board$ of$
Directors,$or$on$the$date$that$you$have$promised$to$pay.$
$
H.)Steps)and)Documents)Required)in)SEC)
1. Certificate)of)Deposit)
SEC$ Guidelines$ require$ that$ a$ bank$ certificate$ covering$ the$

deposit$ of$ the$ paidQup$ capital,$ in$ accordance$ with$ a$ prescribed$
form$ under$ oath$ by$ a$ responsible$ official$ of$ the$ bank,$ must$
accompany$the$incorporation$papers.1$
2. Letter)of)Authority)to)examine)bank)deposit)
In$addition,$a$letter$of$authority$authorizing$the$SEC$to$examine$
not$ only$ the$ bank$ deposit$ but$ also$ the$ corporations$ books$ of$
accounts$ and$ supporting$ records$ to$ determine$ the$ existence$
and$ utilization$ of$ the$ paidQup$ capital$ stock$ must$ also$ be$
submitted.$ The$ letter$ of$ authority$ shall$ be$ binding$ upon$ the$
corporation$even$if$there$is$a$change$of$corporate$officers.2$
3. Written)Undertaking)to)Change)Corporate)Name)
The$SEC$also$requires$that$incorporators$are$required$to$submit$
a$written$undertaking$to$change$their$partnership$or$corporate$
name$in$case$there$is$another$person,$firm$or$entity$with$a$prior$
right$to$the$use$of$the$said$name$or$one$similar$to$it.3$
$
III.)Grounds)for)Disapproval)(Section)17))
)
Section) 17.) Grounds) when) articles) of) incorporation) or) amendment)
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)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Section$ 1,$ SEC$ GUIDELINES$ FOR$ THE$ VERIFICATIONS$ OF$ THE$ PAIDQUP$ CAPITAL$ (CASH)$ OF$
CORPORATIONS$(1976).$
2
Section$2,$ibid.$
3
SEC$GUIDELINES$IN$THE$APPROVAL$OF$CORPORATE$AND$PARTNERSHIP$NAMES$(1977).$
)
!
benefit$ of$ the$ residents,$ the$ object$ is$ unlawful$ and$ the$ articles$
can$ be$ denied$ registration.$ Asuncion" v." De" Yriarte," 28" Phil." 67"
(1914)."
disapproval:)
)
1.)That)the)articles)of)incorporation)or)any)amendment)thereto)is)not)
substantially)in)accordance)with)the)form)prescribed)herein;)
)
articles$of$incorporation,$is$lawful,$then$the$SEC$has$no$authority$
to$ inquire$ whether$ the$ corporation$ has$ purposes$ other$ than$
those$ stated,$ and$ mandamus$ will$ lie$ to$ compel$ it$ to$ issue$ the$
certificate$ of$ incorporation.$ Gala" v." Ellice" AgroZIndustrial"
Corp.,"418"SCRA"431"(2003)."
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) quasiTbanking) 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.)
)
When$the$proposed$articles$show$that$the$object$is$to$organize$
a$ barrio$ into$ a$ separate$ corporation$ for$ the$ purpose$ of$ taking$
possession$ and$ having$ control$ of$ all$ municipal$ property$ within$
the$ incorporated$ barrio$ and$ administer$ it$ exclusively$ for$ the$
It$is$well$to$note$that,$if$a$corporations$purpose,$as$stated$in$the$
The$ SECs$ function$ is$ merely$ ministerial$ because$ they$ are$

required$to$issue$the$certificate$of$incorporation.$"
o There$ is$ room$ for$ the$ exercise$ of$ discretion$ in$ that$ it$
may$ dismiss$ an$ application$ for$ incorporation,$ but$
otherwise,$it$has$no$other$right$to$exercise$discretion."
o
You$ can$ compel$ the$ SEC$ to$ approve$ the$ articles$ of$
incorporation."
$
IV.)Amendments)to)the)Articles)of)Incorporation)(Section)16).)
)
Section)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)twoTthirds)(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)twoTthirds)(2/3))of)the)members)if)it)be)a)nonTstock)
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)
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.)
)
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.)
)
Typically,$meetings$do$take$place$to$pass$upon$an$amendment.)
o
Although$ the$ law$ does$ not$ expressly$ provide$ that$ a$

meeting$be$made$where$the$votes$will$be$cast$and$the$
written$assents$made.)
)
V.)Commencement)of)Corporate)Existence)(Section)19).)
)
Section)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)
)
BY#LAWS(
I.(Nature(and(Functions:(
The$power$to$adopt$by.laws$is$an$inherent$power$on$the$part$of$
By.laws$are$intramural$in$nature$and$not$meant$to$bind$parties$
outside$the$corporate$family.)
o
One$ point$ of$ view$ is$ that$ since$ by.laws$ operate$ merely$
as$internal$rules$among$the$stockholders$and$corporate$
officers,$ they$ cannot$ affect$ nor$ prejudice$ third$ persons$
who$deal$in$good$faith$with$the$corporation,$unless$they$
have$knowledge$of$the$same;$and$that$strangers$are$not$
bound$ to$ know$ the$ by.laws$ of$ a$ corporation$ which$ are$
merely$ provisions$ for$ the$ government$ of$ a$ corporation$
and$notice$of$them$will$not$be$presumed.$
Under$ such$ theory,$ since$ by.law$ provisions$ are$

intramural$in$nature$and$are$not$meant$to$bind$parties$
outside$ the$ corporate$ family,$ it$ stands$ to$ reason$ that$
the$public$dealing$with$the$corporation$is$not$supposed$
to$ be$ interested$ in$ the$ provisions$ of$ the$ corporation's$
by.laws,$and$therefore$should$not$be$bound$thereby.$1$
those$ forming$ a$ corporation$ or$ any$ other$ form$ of$ association.$

Gokongwei)v.)SEC,)89)SCRA)337)(1979).)
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).)
o By.laws$ have$ traditionally$ been$ defined$ as$ regulations,$
ordinances,$ rules$ or$ laws$ adopted$ by$ an$ association$ or$
corporation$ or$ the$ like$ for$ its$ internal$ governance,$
including$ rules$ for$ routine$ matters$ such$ as$ calling$
meetings$and$the$like.$If$those$key$by.law$provisions$on$
matters$such$as$quorum$requirements,$meetings,$or$on$
the$ internal$ governance$ of$ the$ local/chapter$ are$
themselves$ already$ provided$ for$ in$ the$ constitution,$
then$it$would$be$feasible$to$overlook$the$requirements$
for$ by.laws.$ Indeed$ in$ such$ an$ event,$ to$ insist$ on$ the$
submission$ of$ a$ separate$ document$ denominated$ as$
By.Laws$would$be$an$undue$technicality,$as$well$as$a$
redundancy.$ San) Miguel) Corp.) v.) Mandaue) Packing)
Products)Plants)UnionL)FFW,)467)SCRA)107)(2005).)
$
A.(Common(Law(Limitations(on(By#Laws((Requisites(of(Valid(By#Laws)(
1. By#Laws(Cannot(Be(Contrary(to(Law(and(Charter(
By.laws$ are$ intended$ merely$ for$ the$ protection$ of$ the$

corporation,$and$prescribe$regulation,$not$restrictions;$they$are$
always$subject$to$the$charter$of$the$corporation.$Rural)Bank)of)
Salinas,)Inc.)v.)Court)of)Appeals,)210)SCRA)510)(1992).)
Although$ the$ power$ of$ the$ corporation$ to$ adopt$ by.laws$ is$ an$
inherent$ right,$ and$ it$ exist$ even$ without$ the$ law$ expressly$
granting$ such$ power,$ nevertheless,$ Section$ 36$ of$ the$
Corporation$Code$expressly$enumerates$as$one$of$the$powers$of$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Villanueva,$C.$L.,$&$Villanueva.Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
)
!
a$corporation,$the$power$to$adopt$by.laws$"not$contrary$to$law,$
morals$ or$ public$ policy."$ Jurisprudence$ has$ long$ before$
established$that$by.law$provisions$cannot$contravene$the$law.1$)
amending$ its$ by.laws$ and$ providing$ that$ his/her$ position$ shall$

cease$ to$ exist$ upon$ the$ occurrence$ of$ a$ specified$ event.$
Salafranca)v.)Philamlife)(Pamplona))Village)Homeowners,)300)
SCRA)469)(1998).)
2. By#Law( Provisions( Cannot( Be( Unreasonable( or( Be( Contrary( to(
the(Nature(of(By#laws.(
The$ corporation$ being$ a$ creature$ of$ the$ law,$ its$ by.law$

provisions$ cannot$ prevail$ over$ legal$ provisions$ and$ the$ lawful$
court$orders$and$processes.2)
Examples:(
A$ by.law$ provision$ that$ empowers$ the$ Board$ of$ Directors$ to$

cancel$ the$ shares$ of$ any$ member$ and$ return$ to$ the$ owner$
thereof$ the$ value$ thereof$ was$ declared$ void$ for$ being$ in$
violation$of$the$provision$in$the$Corporation$Law$that$provided$
that$capital$can$only$be$returned$after$dissolution.$Government)
of)P.I.)v.)El)Hogar)Filipino,)50)Phil.)399)(1927))
articles$ of$ incorporation$ to$ the$ contrary$ would$ supersede$ the$

similar$provision$in$the$by.laws$of$a$corporation.$In$other$words,$
any$provision$in$the$by.laws$which$contravenes$the$provision$in$
the$ articles$ of$ incorporation$ must$ give$ way$ to$ the$ article$
provision,$ even$ when$ the$ nature$ of$ the$ subject$ matter$ is$
something$ that$ would$ normally$ find$ it$ provided$ in$ the$ by.laws$
rather$than$in$the$articles$of$incorporation.3$
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$
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$
The$ by.laws$ provisions$ cannot$ be$ such$ or$ be$ amended$ to$ be$
adoption$ of$ regulations$ as$ to$ the$ formalities$ and$ procedure$ to$
be$followed$in$effecting$transfer.$Thomson)v.)Court)of)Appeals,)
298)SCRA)280)(1998).)
3. By#Law(Provisions(Cannot(Discriminate.(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!Government!of!the!Philippine!Islands!v.!El!Hogar!Filipino,$50$Phil.$399$(1927).$
2
Example:(
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).)
able$ to$ go$ around$ the$ security$ of$ tenure$ clause$ of$ employees$
nor$ impair$ the$ obligation$ of$ existing$ contracts$ or$ rights$
otherwise,$ it$ would$ enable$ an$ employer$ to$ remove$ any$
employee$ from$ his$ employment$ by$ the$ simple$ expediency$ of$
1
Under$ Section$ 47$ of$ the$ Corporation$ Code,$ even$ specified$

provisions$ of$ the$ by.laws$ are$ "subject$ to$ the$ provisions$ of$ the$
Constitution,$ this$ Code,$ other$ special$ laws,$ and$ the$ articles$ of$
incorporation."$ That$ would$ mean$ that$ any$ provision$ in$ the$
$
B.(Binding(Effects(on(By#laws(on(the(Dealing(Public:(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
)
The$ rule$ is$ that$ by.law$ provisions$ must$ be$ reasonable$ and$
calculated$ to$ carry$ into$ effect$ the$ objects$ of$ the$ corporation$
comes$ from$ the$ theory$ that$ by.laws,$ as$ a$ basic$ contract$
document,$ has$ the$ sole$ purpose$ of$ regulating$ the$ relationship$
between$ and$ among$ the$ parties$ within$ the$ intra.corporate$
relationship.$ Consequently,$ any$ by.law$ provision$ that$ does$ not$
fulfill$such$objective$is$deemed$to$be$unreasonable$and$void.$)
o General(Rule:(The$validity$or$reasonableness$of$a$by.law$
provision$is$a$question$of$law.$
o Exception:$ This$ rule$ is$ subject$ to$ the$ limitation$ that$
"where$the$reasonableness$of$a$by.law$is$a$mere$matter$
of$ judgment,$ and$ one$ upon$ which$ reasonable$ minds$
must$necessarily$differ,$a$court$would$not$be$warranted$
in$ substituting$ its$ judgment$ instead$ of$ the$ judgment$ of$
those$ who$ are$ authorized$ to$ make$ by.laws$ and$ who$
have$exercised$their$authority."1$
Example:(
By.law$provisions$on$the$required$quorum$for$special$meetings$
of$ the$ Board$ have$ the$ force$ of$ law$ and$ are$ binding$ even$ on$
third.parties$ who$ deal$ with$ the$ properties$ of$ the$ corporation.$
Pea%v.%Court%of%Appeals,%193%SCRA%717%(1991).)
)
Pea%v.%Court%of%Appeals)
(
Facts:( Pampanga' Bus' Co.' (PAMBUSCO)' owned' several' mortgaged' lots.'
The$ lots$ were$ foreclosed$ and$ were$ sold$ to$ Rosita$ Pea,$ as$ highest$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Ibid,$at$pp.$361.362,!citing$People!ex!rel.!Wildi!v.!Ittner,$165$Ill.$App.$360,$367$
(1911).$
bidder.$ PAMBUSCO$ through$ 3$ of$ 5$ directors$ (the$ only$ ones$ present$ at$
that$ meeting)$ resolved$ to$ authorize$ Briones$ (one$ of$ the$ directors)$ to$
execute& a& deed& of& assignment& of& their& right& of& redemption& in& favor& of&
Marcelino*Enriquez,*who*thereafter*sold*the*same*to*Spouses*Yap.*Pea*
contends$that$there$could$be$no$valid$sale$to$the$spouses$Yap$because$
the$deed$of$assignment$in$favor$of$Enriquez$was$void$for$being$executed$
ultra$ vires$ and$ against$ the$ by.laws$ of$ the$ corporation$ which$ provided$
that$ a$ quorum$ requires$ that$ at$ least$ 4$ directors$ be$ present$ at$ the$
meeting,$ otherwise$ the$ meeting$ may$ be$ invalidated$ by$ failure$ or$
irregularity$of$notice.$
$
Issue:(Whether$or$not$the$act$of$the$board$was$against$the$corporations$
by.laws,$and$consequently,$void.$
(
Held:(YES.$Section$4$of$PAMBUSCOs$by.laws$provided$that$at$least$four$
directors$ should$ be$ present$ to$ constitute$ a$ quorum.$ According$ to$ the$
Corporation$ Code$ any$ action$ resolved$ by$ the$ board$ with$ less$ than$ the$
number$ provided$ in$ the$ by.laws$ of$ the$ corporation$ to$ constitute$ a$
quorum$ would$ not$ bind$ the$ corporation.$ When$ a$ quorum$ is$ not$
reached,$all$the$present$directors$could$do$is$to$adjourn.$Moreover,$the$
purported$directors$who$attended$the$meeting$and$voted$in$favor$of$the$
assignment$ were$ bogus$ directors$ as$ they$ were$ not$ listed$ in$ the$ SEC$ as$
directors,$nor$were$they$stockholders$of$the$company.$
$
Doctrine:( The$ by.laws$ of$ a$ corporation$ are$ its$ own$ private$ laws$ which$
substantially$have$the$same$effect$as$the$laws$of$the$corporation.$In$this$
sense$they$become$part$of$the$fundamental$law$of$the$corporation$with$
which$the$corporation$and$its$directors$and$officers$must$comply.$
$
)
!
WHAT( IF:( Atty.$ Hofilea$ !$ if$ the$ other$ two$ directors$ showed$ up$ and$
agreed$ to$ what$ the$ three$ others$ had$ initially$ made,$ would$ judgment$
have$been$different?$NO.$$
(
NonLBinding) Effects) of) ByLLaws) to) Outsiders.) The$ nature$ of$

by.laws$being$intramural$instruments$would$mean$that$they$are$
not$ binding$ on$ third.$ parties,$ except$ those$ who$ have$ actual$
knowledge$ of$ their$ contents.$ China) Banking) Corp.) v.) Court) of)
Appeals,)270)SCRA)503)(1997).)
)
China)Banking)Corp.)v.)Court)of)Appeals)
(
Facts:( Galicano$ Calapatia,$ Jr.$ is$ a$ stockholder$ of$ private$ respondent$
Valley$Golf$&$Country$Club,$Inc.$(VGCCI).$He$pledged$his$Stock$Certificate$
to$ petitioner$ China$ Banking$ Corp.$ (CBC)$ to$ secure$ a$ debt.$ This$ was$
recorded$in$the$corporate$books$with$VGCCIs$consent.$Calapatia$failed$
to$pay$his$obligations,$so$CBC$filed$a$petition$for$extrajudicial$foreclosure$
and$ informed$ VGCCI$ asking$ that$ the$ pledged$ stock$ be$ transferred$ to$
CBCs$name.$However,$VGCCI$also$informed$CBC$that$it$will$not$be$able$
to$ do$ so$ because$ Calapatia$ has$ unsettled$ accounts$ with$ the$ club.$
Subsequently,$ because$ of$ Calapatias$ unsettled$ accounts$ with$ the$ club,$
VGCCI$sold$the$stocks$in$a$public$auction$in$accordance$with$Section$3,$
Article$VIII$of$its$By.Laws.$Three$years$after,$CBC$informed$VGCCI$that$it$
was$ the$ new$ owner$ by$ virtue$ of$ the$ auction$ sale,$ however,$ VGCCI$
replied$that$for$reason$of$delinquency,$the$same$share$of$stock$was$sold$
at$the$public$auction.$So$of$course,$CBC$protested$and$filed$a$case$with$
the$ RTC$ of$ Makati$ for$ the$ nullification$ of$ the$ auction$ sale$ and$ the$
issuance$of$a$new$stock$certificate$in$its$name.$
(
Issue:(Whether$or$not$the$by.laws$of$VGCCI$can$affect$CBC.$
$
Held:(NO.$VGCCI$only$began$sending$notices$of$delinquency$to$Calapatia$
after$it$was$informed$by$CBC$of$its$foreclosure$proceedings.$Also,$even$
though$ VGCCI$ acknowledged$ the$ pledge$ agreement$ between$ Calapatia$
and$ CBC,$ it$ completely$ disregarded$ CBCs$ rights$ as$ a$ pledgee$ by$ not$
informing$it$of$the$public$auction$it$initiated.$$
$
VGCCI$ contended$ that$ CBC$ had$ actual$ knowledge$ of$ the$ clubs$ by.laws$
and$therefore$must$be$bound.$However,$in$order$to$be$bound,$the$third$
party$ must$ have$ acquired$ knowledge$ of$ the$ by.laws$ at$ the$ time$ the$
agreement$ was$ entered$ into$ between$ him$ and$ the$ shareholder.$ In$ the$
case$ at$ bar,$ CBC$ was$ only$ informed$ of$ the$ by.laws$ after$ it$ informed$
VGCCI$ of$ the$ public$ auction.$ Also,$ VGCCI$ could$ have$ easily$ informed$
petitioner$of$its$by.laws$when$it$sent$notice$formally$recognizing$CBC$as$
pledge$of$one$of$its$shares$registered$in$Calapatias$name.$
(
Doctrine:(
General( Rule:( Third$ persons$ are$ not$ bound$ by$ the$ by.laws$ of$ a$
corporation$since$they$are$not$privy$thereto.$
Exception:( When$ third$ persons$ have$ actual$ knowledge$ or$ constructive$
knowledge$ of$ the$ same.$ However,$ this$ knowledge$ of$ the$ by.laws$ must$
be$ present$ at$ the$ time$ of$ the$ perfection$ of$ the$ contract,$ and$ not$ only$
during$the$proceedings.$
$
)
Neither$ can$ we$ concede$ that$ such$ contract$ would$ be$ invalid$
just$because$the$signatory$thereon$was$not$the$Chairman$of$the$
Board$which$allegedly$violated$the$corporations$by.laws.$Since$
by.laws$ operate$ merely$ as$ internal$ rules$ among$ the$
!
stockholders,$they$cannot$affect$or$prejudice$third$persons$who$
deal$ with$ the$ corporation,$ unless$ they$ have$ knowledge$ of$ the$
same.$PMI)Colleges)v.)NLRC,)277)SCRA)462)(1997).)
$
C.(Principle(of(Waiver(of(Applicable(to(By#Laws(
A$by.law$may$be$waived$by$a$stockholder$or$member$when$it$is$
he$ whose$ individual$ rights$ are$ advanced$ or$ protected$ by$ its$
provisions.$If$a$corporation$acts$or$contracts$in$disregard$of$a$by.
law$ with$ the$ consent$ or$ acquiescence$ of$ the$ stockholders$ or$
members,$there$is$a$waiver$of$the$by.laws,$at$least$pro$hac$vice,$
whether$ it$ is$ afterwards$ sought$ to$ set$ up$ the$ by.laws$ against$
strangers$or$as$against$its$stockholder$or$members.1$
(
II.(Adoption(Procedure((Section(46)(
(
Section(46.(Adoption(of(by#laws.(
Every(corporation(formed(under(this(Code(must,(within(one((1)(month(
after( receipt( of( official( notice( of( the( issuance( of( its( certificate( of(
incorporation( by( the( Securities( and( Exchange( Commission,( adopt( a(
code(of(by#laws(for(its(government(not(inconsistent(with(this(Code.(For(
the(adoption(of(by#laws(by(the(corporation(the(affirmative(vote(of(the(
stockholders(representing(at(least(a(majority(of(the(outstanding(capital(
stock,( or( of( at( least( a( majority( of( the( members( in( case( of( non#stock(
corporations,( shall( be( necessary.( The( by#laws( shall( be( signed( by( the(
stockholders( or( members( voting( for( them( and( shall( be( kept( in( the(
principal( office( of( the( corporation,( subject( to( the( inspection( of( the(
stockholders( or( members( during( office( hours.( A( copy( thereof,( duly(

certified(to(by(a(majority(of(the(directors(or(trustees(countersigned(by(
the(secretary(of(the(corporation,(shall(be(filed(with(the(Securities(and(
Exchange( Commission( which( shall( be( attached( to( the( original( articles(
of(incorporation.(
(
Notwithstanding( the( provisions( of( the( preceding( paragraph,( by#laws(
may(be(adopted(and(filed(prior(to(incorporation;(in(such(case,(such(by#
laws( shall( be( approved( and( signed( by( all( the( incorporators( and(
submitted( to( the( Securities( and( Exchange( Commission,( together( with(
the(articles(of(incorporation.(
(
In( all( cases,( by#laws( shall( be( effective( only( upon( the( issuance( by( the(
Securities(and(Exchange(Commission(of(a(certification(that(the(by#laws(
are(not(inconsistent(with(this(Code.(
(
The(Securities(and(Exchange(Commission(shall(not(accept(for(filing(the(
by#laws( or( any( amendment( thereto( of( any( bank,( banking( institution,(
building( and( loan( association,( trust( company,( insurance( company,(
public( utility,( educational( institution( or( other( special( corporations(
governed( by( special( laws,( unless( accompanied( by( a( certificate( of( the(
appropriate( government( agency( to( the( effect( that( such( by#laws( or(
amendments(are(in(accordance(with(law.((20a)(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$SEC$ Opinion$ No.$ 22,$ series$ of$ 2003,$ addressed$ to$ Flores$ Ladia$ Bacalla$ Law$
Firm$as$cited$in$Villanueva,$C.$L.,$&$Villanueva.Tiansay,$T.$S.$(2013).$Philippine$
Corporate$Law.$(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$
)
There$ can$ be$ no$ automatic$ dissolution$ simply$ because$ the$

incorporators$ failed$ to$ file$ the$ required$ by.laws$ under$ Section$
46$ of$ Corporation$ Code.$ There$ is$ no$ outright$ demise$ of$
corporate$ existence.$ Proper$ notice$ and$ hearing$ are$ cardinal$
components$ of$ due$ process$ in$ any$ democratic$ institution,$
!
agency$ or$ society.$ In$ other$ words,$ the$ incorporators$ must$ be$
given$ the$ chance$ to$ explain$ their$ neglect$ or$ omission$ and$
remedy$the$same.$Loyola)Grand)Villas)Homeowners)v.)CA,)276)
SCRA)681)(1997).)
A$ corporation$ which$ has$ failed$ to$ file$ its$ by.laws$ within$ the$
prescribed$ period$ does$ not$ ipso$ facto$ lose$ its$ powers$ as$ such,$
and$ 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.$
[?]$Sawadjaan)v.)Court)of)Appeals,)459)SCRA)516)(2005).)
o
There$is$a$matter$of$compliance$with$the$requirements$
so$there$is$a$corporation,$but$it$is$simply$defective.)
(
III.(Contents((Section(47)(
(
A.(Matters(Usually(Found(in(the(By#Laws(
(
Section(47.(Contents(of(by#laws.(
Subject( to( the( provisions( of( the( Constitution,( this( Code,( other( special(
laws,( and( the( articles( of( incorporation,( a( private( corporation( may(
provide(in(its(by#laws(for:(
(
1.( The( time,( place( and( manner( of( calling( and( conducting( regular( or(
special(meetings(of(the(directors(or(trustees;(
(
2.( The( time( and( manner( of( calling( and( conducting( regular( or( special(
meetings(of(the(stockholders(or(members;(
(
3.(The(required(quorum(in(meetings(of(stockholders(or(members(and(
the(manner(of(voting(therein;(
(
4.(The(form(for(proxies(of(stockholders(and(members(and(the(manner(
of(voting(them;(
(
5.(The(qualifications,(duties(and(compensation(of(directors(or(trustees,(
officers(and(employees;(
(
6.(The(time(for(holding(the(annual(election(of(directors(of(trustees(and(
the(mode(or(manner(of(giving(notice(thereof;(
(
7.(The(manner(of(election(or(appointment(and(the(term(of(office(of(all(
officers(other(than(directors(or(trustees;(
(
8.(The(penalties(for(violation(of(the(by#laws;(
(
9.( In( the( case( of( stock( corporations,( the( manner( of( issuing( stock(
certificates;(and(
(
10.( Such( other( matters( as( may( be( necessary( for( the( proper( or(
convenient(transaction(of(its(corporate(business(and(affairs.((21a)(
(
(
B.(Other(Matters(that(May(Be(Included(in(By#Laws(
The$by.laws$relate$to$the$internal$affairs$of$the$corporation.(
o
It$ may$ contain$ the$ duties$ and$ responsibilities$ of$ the$

people$comprising$the$corporation.(
$
Other(matters(which(under(the(Corporation(Code(may(be(provided(for(
)
!
in(the(by#laws(are(as(follows:(
(
(a)( Designation( of( time( when( voting( rights( may( be( exercised( by(
stockholders(of(record;1(
(
(
(i)(Providing(for(interest(on(unpaid(subscriptions;9(
$
(j)(Entries(to(be(made(in(the(stock(and(transfer(book;10(and(
(
(b)(Providing(for(additional(officers(for(the(corporation;2(
(
(c)(Provisions(for(the(compensation(of(the(directors;3(
(
(d)(Creation(of(an(executive(committee;4(
(
(e)( Date( of( the( annual( meeting( or( provisions( of( special(
(k)( Providing( for( meetings( of( the( members( in( a( non#stock(

corporation(outside(of(the(principal(office(of(the(corporation.11$
(
C.(Matters(That(May(Be(Found(in(Articles(of(Incorporation(and(By#Laws(
(
incorporation$vis..vis$the$by.laws?(
o Those$expressly$stated$in$the$Corporation$Code$must$be$
placed$in$either$document$accordingly.(
o However,$ with$ regard$ to$ information$ that$ is$ not$ in$ the$
articles$of$incorporation,$then$it$is$left$to$the$discretion$
meetings(of(the(stockholders(or(members(of(the(corporation; (
(
(f)( Quorum( on( meetings( of( stockholders( or( members( of( the(
corporation;6(
(
(g)( Providing( for( the( presiding( officer( at( meetings( of( the(
directors( or( trustees,( as( well( as( of( the( stockholders( or(
members;7(
(
(h)(Procedure(for(issuance(of(certificates(of(shares(of(stock;8(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Section$24,$Corporation$Code.$
$Section$25.$ibid.$
3
$Section$30.$ibid.$
4
$Section$35.$ibid.$
5
$Sections$50$and$53.$ibid.$
6
$Section$52.$ibid.$
7
$Section$54.$ibid.$
8
$Section$63.$ibid.$
2
How$ do$ you$ determine$ what$ goes$ into$ the$ articles$ of$
of$ the$ directors/incorporators$ where$ to$ place$ the$

information.$ Provided,! that! what! is! in! the! articles! of!
incorporation!cannot!be!contained!in!the!by@laws(?)!
(
In(addition,(the(Corporation(Code(expressly(allows(certain(matters(to(
be(provided(for(either)in)the)articles)of)incorporation)or)the)byLlaws(of(
the(corporation,(thus:(
(
(a)(Providing(for(cumulative(voting(in(non#stock(corporations;12(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
9
$Section$66.$ibid.$
$Section$74.$ibid.$
11
$Section$93.$ibid.$
12
$Section$24.$ibid.$
10
)
!
(
(b)( Providing( for( a( higher( quorum( requirement( for( a( valid(
board(meeting;1(
(
(c)(Limiting,(broadening(or(denial(of(the(right(to(vote,(including(
2
voting(by(proxy,(for(members(in(non#stock(corporations; (
(
(d)(Transferability(of(membership(in(a(non#stock(corporations;3(((
(
(e)(Termination(of(membership(in(non#stock(corporations;4(
(
(f)( Manner( of( election( and( term( of( office( of( trustees( and(
5
officers(in(non#stock(corporations; (
(
(g)(Manner(of(distribution(of(assets(in(non#stock(corporations(
upon(dissolution;6(and(
(
(h)(Providing(for(staggered(board(in(educational(institutions;7(
(
In(a(close(corporation,(restrictions(on(the(right(to(transfer(shares(must(
appear(both(in(the(articles(of(incorporation(and(in(the(by#laws,(as(well(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Section$25.$ibid.$
2
$Section$89.$ibid.$
3
$Section$90.$ibid.$
4
$Section$91.$ibid.$
5
$Section$92.$ibid.$
6
$Section$94.$ibid.$
7
$Section$108.$ibid.$
as( in( the( certificate( of( stock;( otherwise,( the( restriction( shall( not( be(
binding(on(any(purchaser(thereof(in(good(faith.8(
(
D.(Matters(That(Cannot(Be(Provided(for(in(By#Laws(
(
On(the(other(hand,(under(the(provisions(of(the(Corporation(Code,(the(
following(matters(must(be(provided(for(in(the(articles(of(incorporation,(
and(consequently(cannot(be(governed(by(the(corporation's(by#laws:(
(
(a)( Classification( of( shares( of( stock( and( preferences( granted( to(
preferred(shares;9(
(
(b)(Provisions(on(founder's(shares;10(
(
(c)(Providing(for(redeemable(shares;11(
(
(d)(Provisions(on(the(purposes(of(the(corporation;12(
(
(e)(Providing(for(the(corporate(term(of(existence;13(
(
(f)(Capitalization(of(stock(corporations;14(
(
(g)(Corporate(name;1(and(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8
$Section$98.$ibid.$
$Section$6,$Corporation$Code.$
10
$Section$7,$ibid.$
11
$Section$8,$ibid.$
12
$Sections$14,$15,$36(11)$and$45,$ibid.$
13
$Sections$11,$14$and$37,$ibid.$
14
$Sections$13$and$14,$ibid..$
9
)
!
(
(h)(Denial(of(pre#emptive(rights;2$
(
IV.(Amendments(and(Revisions(of(By#Laws((Section(48)(
(
Section(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(
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)(
(
SUMMATION(
!$ Although$ the$ law$ provides$ a$ 1.month$ lee.way$ where$ a$ corporation$
can$submit$their$by.laws.$$
articles$ of$ incorporation.$ This$ practice$ has$ been$ around$ so$

much$that$the$SEC$may$sometimes$reject$your$application$if$the$
by.laws$are$not$attached.$
$
!$Articles$+$By.Laws$=$Companys$Constitutive$Documents$
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(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
$Sections$14$and$18,$ibid..$
$Section$39,$ibid..$
However,$ in$ practice,$ the$ by.laws$ are$ submitted$ with$ the$
)
Hierarchy:$Law$!$Articles$of$Incorporation$!$By.Laws(
CORPORATE(POWERS(AND(AUTHORITY(
(
I.(Corporate(Power(and(Capacity((Article(46,(Civil(Code;(Sections(36(and(
45)(
(
CIVIL(CODE(
Article(46.(
Juridical(persons(may(acquire(and(possess(property(of(all(kinds,(as(well(
as( incur( obligations( and( bring( civil( or( criminal( actions,( in( conformity(
with(the(laws(and(regulations(of(their(organization.((38a)(
(
This%article%compliments%Section%36(1)%of%the%Corporation%Code.%(
o As% such,% even% if% the% right% to% sue% and% be% sued% was% not%
granted% in% the% Corporation% Code,% the% corporation% can%
still%invoke%it%under%the%Civil%Code.(
(
Section(36.(Corporate(powers(and(capacity.(
Every( corporation( incorporated( under( this( Code( has( the( power( and(
capacity:(
(
1.(To(sue(and(be(sued(in(its(corporate(name;(
(
2.(Of(succession(by(its(corporate(name(for(the(period(of(time(stated(in(
the(articles(of(incorporation(and(the(certificate(of(incorporation;(
(
3.(To(adopt(and(use(a(corporate(seal;(
(
4.( To( amend( its( articles( of( incorporation( in( accordance( with( the(
provisions(of(this(Code;(
(
5.(To(adopt(byYlaws,(not(contrary(to(law,(morals,(or(public(policy,(and(
to(amend(or(repeal(the(same(in(accordance(with(this(Code;(
(
6.( In( case( of( stock( corporations,( to( issue( or( sell( stocks( to( subscribers(
and( to( sell( stocks( to( subscribers( and( to( sell( treasury( stocks( in(
accordance(with(the(provisions(of(this(Code;(and(to(admit(members(to(
the(corporation(if(it(be(a(nonYstock(corporation;(
(
7.(To(purchase,(receive,(take(or(grant,(hold,(convey,(sell,(lease,(pledge,(
mortgage( and( otherwise( deal( with( such( real( and( personal( property,(
including( securities( and( bonds( of( other( corporations,( as( the(
transaction( of( the( lawful( business( of( the( corporation( may( reasonably(
and( necessarily( require,( subject( to( the( limitations( prescribed( by( law(
and(the(Constitution;(
(
8.( To( enter( into( merger( or( consolidation( with( other( corporations( as(
provided(in(this(Code;(
(
9.( To( make( reasonable( donations,( including( those( for( the( public(
welfare( or( for( hospital,( charitable,( cultural,( scientific,( civic,( or( similar(
purposes:( Provided,( That( no( corporation,( domestic( or( foreign,( shall(
give(donations(in(aid(of(any(political(party(or(candidate(or(for(purposes(
of(partisan(political(activity;(
(
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(necessary(to(
carry( out( its( purpose( or( purposes( as( stated( in( the( articles( of(
incorporation.(
(
Section(45.(Ultra(vires(acts(of(corporations.(
No(corporation(under(this(Code(shall(possess(or(exercise(any(corporate(
powers( except( those( conferred( by( this( Code( or( by( its( articles( of(
incorporation( and( except( such( as( are( necessary( or( incidental( to( the(
exercise(of(the(powers(so(conferred.((n)(
%
A.(Classification(of(Corporate(Powers:(Express;(Implied,(and(Incidental(
A%corporation%has%only%such%powers%as%are%expressly%granted%to%
o
it%by%law%and%by%its%articles%of%incorporation,%those%which%may%be%
incidental% to% such% conferred% powers,% those% reasonably%
necessary% to% accomplish% its% purposes% and% those% which% may% be%
incident% to% its% existence.% Pilipinas( Loan( Company( v.( SEC,( 356(
SCRA(193((2001).(
o Expressed%!%Those%stated%in%the%law,%the%Code,%and%the%
articles%of%incorporation/byFlaws(
" The% powers% granted% under% the% Corporation%
Code% need% not% be% in% the% articles% of%
incorporation%or%the%byFlaws%to%be%exercised.(
" Some% of% the% powers% expressly% granted% under%
Section% 36% are% considered% to% be% inherent% or%
incidental%powers,%which%means%that%even%when%
not% granted% under% the% law% expressly,% such%
incidental%powers%are%deemed%to%be%within%the%
capacity% of% corporate% entities,% such% as% the%

power%to%adopt%and%amend%a%set%of%byFlaws.1(
Implied%!%Sometimes%referred%to%as%necessary;%Those%
powers% exercised% necessarily% to% perform% the% primary%
purpose%for%which%the%company%was%formed.(
" You% can% use% your% common% sense% to% determine%
whether%your%corporation%has%an%implied%power%
to%exercise%or%pursue%certain%actions.(
" Example:%you%can%hire%accountants%because%the%
SEC%requires%you%to%file%financial%statements.(
Incidental% !% Those% powers% which% the% corporation% can%
exercise%by%virtue%of%the%purpose%of%the%corporation.(
Atty.% Hofilea% !% Dont% kill% yourself% trying% to% find% an%
objective% distinction% between% implied% or% incidental%
powers.%It%can%be%fluid.(
(
Express(
Implied(
Incidental(
Comes%from%the%law,%
Flow%from%the%nature%
byFlaws%and%articles%of% of%the%underlying%
Flow%from%the%nature%
of%the%corporation%as%
incorporation.%
business%enterprise%
a%juridical%person.%
These%enumerated%
powers%constitute%
part%of%the%express%
powers%of%every%
juridical%person%
These%exist%as%a%
necessary%
consequence%of%the%
grant%and/or%exercise%
of%the%express%powers%
Powers%that%attach%to%
a%corporation%the%
moment%of%its%
creation%without%
regard%to%its%express%
constituted%within%
of%the%corporation%or%
Philippine%jurisdiction.% the%pursuit%of%its%
powers%or%particular%
primary%purpose.%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
! Gokongwei!v.!Securities!and!Exchange!Commission,!89%SCRA%337%(1979).%
)
!
purposes%are%provided%
in%its%articles.%
%
B.(Where(Corporate(Power(Lodged(
A% corporation% has% no% power% except% those% expressly% conferred%

on% it% by% the% Corporation% Code% and% those% that% are% implied% or%
incidental% to% its% existence.% In% turn,% a% corporation% exercises% said%
powers%through%its%board%of%directors%and/or%its%duly%authorized%
To%issue%or%sell%stocks%to%subscribers%or%admit%members%for%nonF
stock%corporations%
o Issue%v.%Sell%
" Issue% (of% new% shares)% !% Taken% from% the%
unissued/unsubscribed% shares,% which% no% one%
officers% and% agentsIn% turn,% physical% acts% of% the% corporation,%

like%the%signing%of%documents,%can%be%performed%only%by%natural%
persons%duly%authorized%for%the%purpose%by%corporate%byFlaws%or%
by%a%specific%act%of%the%board%of%directors.%Shipside(Inc.(v.(Court(
of(Appeals,(352(SCRA(334((2001).1(
%
C.(Powers(of(the(Corporation(
The%right%of%succession%
o
o
This%is%possessed%for%as%long%as%the%corporation%exists.%
This%power%is%the%key%by%which%a%corporation%is%deemed%
to% have% a% strong% juridical% personality,% and% is% the%
foundation%of%the%primary%doctrine%that%the%personality%
To%adopt%and%use%a%corporate%seal%
o What:% It% is% an% emblem% or% sign% that% represents% the%
corporation.%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%Salenga%v.%Court%of%Appeals,%664%SCRA%635%(2012);%Ellice%AgroFIndustrial%Corp.%
v.%Young,%686%SCRA%51%(2012);%Fausto%C.%Ignacio%v.%Home%Bankers%Savings%and%
Trust%Co.,%689%SCRA%173%(2013).%
owns.% The% company% is% giving% or% accepting% a%

new%subscription;%an%act%of%the%corporation.%
" Sell% (previously% issued% shares)% !% Taken% from%
shares% which% were% previously% owned;% an% act% of%
the%corporation%OR%the%owner%of%shares.%
Atty.% Hofilea% !% normally% a% corporation% cannot% sell%
shares% to% the% subscribers.% However,% there% are%
exceptions%whereby%the%company%can%sell%shares%which%
it%owns.%
" A% corporation% can% become% the% owners% of% (and%
eventually% sell)% issued% shares% if% it% buys% it% back%
from% the% subscribers.% These% are% TREASURY%
SHARES.%These%do%not%become%unissued%shares,%
but%are%still%considered%as%outstanding%stocks.%
of%the%corporation%is%separate%and%distinct%from%that%of%
its%stockholders%or%members.%
Function:% A% corporate% signature% that% may% represent%

consent% or% agreement.% However,% this% is% not% necessary%
for%validity%of%agreemets.%
Atty.%Hofilea%!%this%seems%to%be%a%remnant%of%the%past%
where%matters%of%solemnity%were%if%importance.%
To%merge%and%consolidate%with%other%corporations%
o It%can%be%done%within%reasonable%bounds.%
(
SUMMARY(
! (Corporations%have%inherent%powers%which%it%may%exercise%even%if%it%is%
)
!
not%noted%in%the%articles%of%incorporation%or%byFlaws.%
!%Succeeding%articles%deal%with%powers%of%the%corporation.%
(
II.(Express(Powers(
(
A.(Enumerated(Powers((Section(36)(
To%sell,%lease,%dispose,%or%encumber%assets%
o Is%there%a%limitation%on%the%power%of%the%corporation%to%
deal%with%property?%The%Corporation%Code%provides%that%
it%is%in%line%with%the%business%of%the%corporation.%
" Doctrine:% The% property% bought% does% not%
necessarily% have% to% be% directly% related% to% the%
operations% of% the% business,% but% it% can% be%
justified%by%overFall%good%of%the%corporation.%
" Can% the% company% % whose% main% business% is% to%
operate% taxis% in% the% Philippines% % acquire% a%
"
condominium% unit% in% New% York% at% a% time% when%

it% is% considered% a% bad% investment?% % Such%
investment%can%be%justifiable.%%
Atty.%Hofilea%!%This%kind%of%situation%is%not%so%
much% whether% the% corporation% has% the% power%
or%not,%but%whether%it%is%wise%or%not.%The%Court%
will% allow% the% board% of% directors% to% decide% on%
wisdom%of%the%matter.%The%Courts%however,%can%
come% in% where% there% is% an% allegation% that% the%
corporation%has%no%power%to%do%so.%This%may%be%
initiated% where% someone% alleges% that% the% act% is%
ultra% vires.% In% our% age% (2013),% the% world% has%
become%smaller%and%so%it%can%be%argued%that%in%
the%long%run,%such%investment%can%be%beneficial%
to%the%company%%so%its%a%matter%of%argument.%
A%corporation%can%own%stocks%of%another%corporation.%
(
B.(Extend(or(Shorten(Corporate(Term((Sections(37(and(81[1])(
(
Section(37.(Power(to(extend(or(shorten(corporate(term.(
A(private(corporation(may(extend(or(shorten(its(term(as(stated(in(the(
articles( of( incorporation( when( approved( by( a( majority( vote( of( the(
board( of( directors( or( trustees( and( ratified( at( a( meeting( by( the(
stockholders(representing(at(least(twoYthirds((2/3)(of(the(outstanding(
capital(stock(or(by(at(least(twoYthirds((2/3)(of(the(members(in(case(of(
nonYstock(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)(
(
Section(81.(Instances(of(appraisal(right.(
Any( stockholder( of( a( corporation( shall( have( the( right( to( dissent( and(
demand( payment( of( the( fair( value( of( his( shares( in( the( following(
instances:(
(
1.( In( case( any( amendment( to( the( articles( of( incorporation( has( the(
effect( of( changing( or( restricting( the( rights( of( any( stockholder( or( class(
of( shares,( or( of( authorizing( preferences( in( any( respect( superior( to(
)
!
those(of(outstanding(shares(of(any(class,(or(of(extending(or(shortening(
the(term(of(corporate(existence;(
(
2.(In(case(of(sale,(lease,(exchange,(transfer,(mortgage,(pledge(or(other(
disposition( of( all( or( substantially( all( of( the( corporate( property( and(
amounts% to% an% amendment% of% the% articles% of% incorporation.%

When% such% amendment% takes% place,% the% rules% on% amending%
must%be%complied%with.%
2. Appraisal(Rights(Issues(
assets(as(provided(in(the(Code;(and(
(
3.(In(case(of(merger(or(consolidation.((n)(
The%power%to%extend%corporate%life%is%not%a%inherent%power%of%a%
corporation,%since%the%corporate%term%is%not%only%a%matter%that%
constitutes% an% integral% clause% of% the% articles% of% incorporation,%
but% also% the% State% in% granting% juridical% personality% to% a%
corporation%is%presumed%to%have%granted%only%for%the%period%of%
time%provided%in%the%corporation's%charter.%%
The% power% to% shorten% corporate% life,% although% an% item% that%
would% cover% an% amendment% of% the% articles% of% incorporation,% is%
for% practical% purposes,% an% inherent% right% on% the% part% of% the%
corporation,%since%the%decision%to%shorten%the%business%life%of%a%
business% endeavor% should% really% be% addressed% to% the% business%
decision% of% the% business% venturers.% Although% the% State% would%
have% to% approve% formally% the% shortening% of% the% original%
corporate% term% of% a% corporation,% for% all% practical% purposes,% the%
State% really% compels% the% underlying% enterprise% to% go% on% when%
the%coFventurers%have%decided%to%cease%operations%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%
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.% % Nevertheless,%
under% Section% 81% of% the% Code,% the% appraisal% right% is% also%
available% to% a% dissenting% stockholder% even% when% it% covers% the%
shortening%of%the%term%of%corporate%existence.%
(
1. Nature(of(Power1(
Atty.%Hofilea%!%The%Corporate%Term%is%embodied%in%the%articles%
of% incorporation.% As% such,% to% change% the% corporate% term%
(
C.(Increase(or(Decrease(Capital(Stock((Section(38)(
(
Section( 38.( Power( to( increase( or( decrease( capital( stock;( incur,( create(
or(increase(bonded(indebtedness.(
No( corporation( shall( increase( or( decrease( its( capital( stock( or( incur,(
create( or( increase( any( bonded( indebtedness( unless( approved( by( a(
majority(vote(of(the(board(of(directors(and,(at(a(stockholder's(meeting(
duly(called(for(the(purpose,(twoYthirds((2/3)(of(the(outstanding(capital(
stock(shall(favor(the(increase(or(diminution(of(the(capital(stock,(or(the(
incurring,(creating(or(increasing(of(any(bonded(indebtedness.(Written(
notice(of(the(proposed(increase(or(diminution(of(the(capital(stock(or(of(
the(incurring,(creating,(or(increasing(of(any(bonded(indebtedness(and(
of( the( time( and( place( of( the( stockholder's( meeting( at( which( the(
proposed(increase(or(diminution(of(the(capital(stock(or(the(incurring(or(
increasing( of( any( bonded( indebtedness( is( to( be( considered,( must( be(
addressed( to( each( stockholder( at( his( place( of( residence( as( shown( on(
)
!
the( books( of( the( corporation( and( deposited( to( the( addressee( in( the(
post(office(with(postage(prepaid,(or(served(personally.(
(
A(certificate(in(duplicate(must(be(signed(by(a(majority(of(the(directors(
of( the( corporation( and( countersigned( by( the( chairman( and( the(
(
Any(increase(or(decrease(in(the(capital(stock(or(the(incurring,(creating(
or(increasing(of(any(bonded(indebtedness(shall(require(prior(approval(
of(the(Securities(and(Exchange(Commission.(
(
secretary(of(the(stockholders'(meeting,(setting(forth:(
(
1.(That(the(requirements(of(this(section(have(been(complied(with;(
(
2.(The(amount(of(the(increase(or(diminution(of(the(capital(stock;(
(
3.( If( an( increase( of( the( capital( stock,( the( amount( of( capital( stock( or(
One( of( the( duplicate( certificates( shall( be( kept( on( file( in( the( office( of(
the( corporation( and( the( other( shall( be( filed( with( the( Securities( and(
Exchange( Commission( and( attached( to( the( original( articles( of(
incorporation.(From(and(after(approval(by(the(Securities(and(Exchange(
Commission( and( the( issuance( by( the( Commission( of( its( certificate( of(
filing,( the( capital( stock( shall( stand( increased( or( decreased( and( the(
incurring,( creating( or( increasing( of( any( bonded( indebtedness(
number( of( shares( of( noYpar( stock( thereof( actually( subscribed,( the(
names,( nationalities( and( residences( of( the( persons( subscribing,( the(
amount(of(capital(stock(or(number(of(noYpar(stock(subscribed(by(each,(
and(the(amount(paid(by(each(on(his(subscription(in(cash(or(property,(
or( the( amount( of( capital( stock( or( number( of( shares( of( noYpar( stock(
allotted( to( each( stockYholder( if( such( increase( is( for( the( purpose( of(
making(effective(stock(dividend(therefor(authorized;(
authorized,(as(the(certificate(of(filing(may(declare:(Provided,(That(the(
Securities( and( Exchange( Commission( shall( not( accept( for( filing( any(
certificate( of( increase( of( capital( stock( unless( accompanied( by( the(
sworn( statement( of( the( treasurer( of( the( corporation( lawfully( holding(
office(at(the(time(of(the(filing(of(the(certificate,(showing(that(at(least(
twentyYfive( (25%)( percent( of( such( increased( capital( stock( has( been(
subscribed(and(that(at(least(twentyYfive((25%)(percent(of(the(amount(
(
4.(Any(bonded(indebtedness(to(be(incurred,(created(or(increased;(
(
5.( The( actual( indebtedness( of( the( corporation( on( the( day( of( the(
meeting;(
(
6.(The(amount(of(stock(represented(at(the(meeting;(and(
(
subscribed( has( been( paid( either( in( actual( cash( to( the( corporation( or(
that( there( has( been( transferred( to( the( corporation( property( the(
valuation( of( which( is( equal( to( twentyYfive( (25%)( percent( of( the(
subscription:( Provided,( further,( That( no( decrease( of( the( capital( stock(
shall( be( approved( by( the( Commission( if( its( effect( shall( prejudice( the(
rights(of(corporate(creditors.(
(
NonYstock( corporations( may( incur( or( create( bonded( indebtedness,( or(
7.(The(vote(authorizing(the(increase(or(diminution(of(the(capital(stock,(
or(the(incurring,(creating(or(increasing(of(any(bonded(indebtedness.(
increase(the(same,(with(the(approval(by(a(majority(vote(of(the(board(
of( trustees( and( of( at( least( twoYthirds( (2/3)( of( the( members( in( a(
)
!
corporation%must%not%only%comply%with%the%provisions%of%Section%
38,% but% also% with% the% provisions% of% Section% 16% of% the% Code%
governing%the%amendment%of%the%articles%of%incorporation.%%
o Atty.%Hofilea%!%decrease%of%capital%stock%is%not%allowed%
when% it% would% prejudice% creditors.% Creditors% deal% with%
the%corporation%that%there%would%be%a%specific%capital%to%
meeting(duly(called(for(the(purpose.(
(
Bonds( issued( by( a( corporation( shall( be( registered( with( the( Securities(
and( Exchange( Commission,( which( shall( have( the( authority( to(
determine(the(sufficiency(of(the(terms(thereof.((17a)(
(
Despite% the% board% resolution% approving% the% increase% in% capital%

stock% and% the% receipt% of% payment% on% the% future% issues% of% the%
help%back%the%debt%incurred.%
2. Appraisal(Rights(Issues(
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.(
NWPC,(260(SCRA368((1996).(
capital%stock%redefines%the%contractual%relations%in%the%corporate%
setting% as% it% requires% the% approval% of% stockholders% owning% or%
representing% twoFthirds% (2/3)% of% the% outstanding% capital% stock,%
does%not%include%the%appraisal%right%on%the%part%of%the%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%
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).(
1. Nature(of(Power1(
The% power% to% increase% or% decrease% capital% stock% is% not% an%
inherent%power%of%the%corporation,%not%only%because%it%touches%
upon% an% item% expressly% required% to% be% provided% for% in% the%
articles% of% incorporation,% but% also% the% capital% stock% of% a%
corporation%is%governed%by%common%law%doctrines,%such%as%the%
trust% fund% doctrine,% and% preFemptive% rights.% Therefore,% in%
increasing%or%decreasing%the%capital%stock%of%the%corporation,%the%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
The% policy% embodied% in% Section% 38% of% the% Corporation% Code%
therefore,%although%it%recognizes%that%an%increase%in%authorized%
need% to% increase% capitalization% to% fund% its% operations% or%

expansions,%and%needs%to%look%primarily%into%its%equity%investors%
to%fund%the%same.%
3. Effectivity(of(Increase(in(Capital(Stock(
Prior% to% SEC% approval% of% the% increase% in% the% authorized% capital%
stock% of% the% corporation,% and% 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% the%
SEC.%
!
4. Special(Rules(on(Listed(Shares(1(
The% SEC% Rules% in% the% case% of% corporations% whose% securities% are%
listed% in% the% stock% exchange% or% registered% under% the% then%
Revised%Securities%Act%(now%covered%by%the%Securities%Regulation%
Code),%is%that%no%announcement%of%an%offer%of%rights%to%acquire%
share%or%to%issue%stock%dividends%to%stockholders%shall%be%made%
after% an% increase% of% capital% stock% without% a% definite% fixed% date%
for%the%exercise%of%such%right%or%issuance%of%stock%dividends.%%
o The% rule% is% meant% to% avoid% delays% in% the% issuance% of%
rights%or%distribution%of%stock%dividends%after%an%increase%
Atty.% Hofilea% !% regardless% of% the% status% of% the% ACS,% you% can%
apply%for%an%increase.%
o The%law%does%not%require%that%the%unissued%shares%first%
Differentiate(between(Article(38(or(Article(40(
%Section% 1,% Rules% Requiring% Definite% Dates% for% the% Exercise% of% PreFEmptive% or%
Other%Rights%or%For%the%Issuance%of%Stock%Dividends%(1973).%
2
Debentures%are%issued%on%the%basis%of%the%general%credit%of%the%
Atty.% Hofilea% !% Public% indebtedness;% not% similar% to% debts%
secured%for%the%ordinary%course%of%business.%
2. Nature(of(Power(
The% power% to% incur,% create% and% increase% bonded%

indebtedness% governed% by% Section% 38% of% the% Civil% Code%
should% be% analyzed% from% the% fact% that% it% constitutes% an%
aspect% of% the% inherent% power% of% every% corporation% to%
borrow% or% to% incur% loan% obligations.% Ordinarily,% this%
exercise% to% borrow% falls% within% the% business% judgment%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
In% one% opinion,% the% SEC% has% limited% the% term% "bonded%
indebtedness"% to% cover% only% indebtedness% of% the% corporation%
corporation%and%are%not%secured%by%collaterals,%and%therefore%do%
not% constitute% bonded% indebtedness% and% will% not% require%
approval%of%the%stockholders.%
(
D.(Incur,(Create(or(Increase(Bonded(Indebtedness((Section(38)(2(
o
power% of% the% Board% of% Directors% under% the% doctrine% of%
centralized% management% and% would% not% require%
stockholders%ratification.(
The% power% to% incur% and% create% indebtedness% under%
Section%40%of%the%Code%provides%that%an%encumbrance%of%
all% or% substantially% all% of% the% assets% of% the% corporation%
which%are%secured%by%mortgage%on%real%or%personal%property,%as%
distinguished% from% "debentures"% which% are% unsecured%
corporate%indebtedness.%%
be% released% before% the% corporation% can% increase% its%

authorized%capital%stocks.%
would%require%stockholders%ratification.(
1. Nature(of(a(Bond(3(
of%capital%stock.%
Ordinarily,%the%incurring,%creating%or%increasing%of%indebtedness%
really% does% not% go% into% or% amend% the% corporate% contractual%
relationship%between%and%among%the%members%of%the%corporate%
family.% However,% when% it% comes% to% bonded% indebtedness,%
Section% 38% imposes% the% same% procedural% requisites% as% the%
increase% or% decrease% of% capital% stock,% since% they% create% special%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
%SEC% Opinion,% 29% April% 1987,% XXI% SEC% QUARTERLY% BULLETIN% 21F22% (No.% 3,% Sept.%
1987).% See! also% SEC% Opinion,% 6% April% 1990,% XXIV% SEC% QUARTERLY% BULLETIN% 28F29%
(No.%3,%Sept.%1990).%
)
!
burdens% on% the% corporation,% such% as% the% need% to% provide% for% a%
sinking%fund%to%answer%for%the%maturity%value%of%the%bonds%and%
the%creation%of%first%liens%of%important%assets%of%the%corporation.(
Usually% bonded% indebtedness% involve% very% large% amounts% and%
the% burdens% created% on% the% operations% of% the% corporation%
usually%covers%a%long%period%of%time.%
The%rationale%for%the%rather%strict%requirements%under%the%Code%
for%the%incurring,%creating%or%increasing%of%bonded%indebtedness%
is%to%ensure%that%not%only%the%board%of%directors%alone%can%bind%
the% corporation% to% such% burdensome% affairs,% but% that% the%
qualified% concurrence% of% the% stockholders% or% members% should%
be%obtained.((((
Atty.%Hofilea%!%even%without%Section%38,%the%2/3%requirement%
would%still%be%necessary%because%incurring%bonded%indebtedness%
is%burdensome.(
3. Appraisal(Right(
No% appraisal% right% is% granted% to% dissenting% stockholders% when%

the% corporation% either% validly% incurs,% creates% or% increases%
bonded%indebtedness%since,%the%granting%of%such%appraisal%right%
under% such% circumstances% would% drain% the% corporation% of%
financial%resources%contrary%to%the%purpose%for%which%the%power%
is% exercise% to% raise% funds% for% corporate% affairs.% Also,% the%
incurring,% creation% or% increasing% of% bonded% indebtedness% does%
not%really%go%into%the%original%intent%or%corporate%relationship%of%
the%stockholders%or%members%with%the%corporation.%Even%when%
such% indebtedness% is% not% bonded% under% the% principles% of% the%
trust% fund% doctrine,% corporate% creditors% have% priority% over% the%
assets%of%the%corporation;%therefore,%adding%the%feature%of%being%
a% bonded% indebtedness% did% not% really% take% anything% from% the%
position%of%the%stockholders%or%members%that%they%would%have%
had%if%the%indebtedness%were%not%a%bonded%indebtedness.(
(
E.(Sell(or(Dispose(of(Assets((Section(40)(
(
Section(40.(Sale(or(other(disposition(of(assets.(
Subject(to(the(provisions(of(existing(laws(on(illegal(combinations(and(
monopolies,( a( corporation( may,( by( a( majority( vote( of( its( board( of(
directors( or( trustees,( sell,( lease,( exchange,( mortgage,( pledge( or(
otherwise(dispose(of(all(or(substantially(all(of(its(property(and(assets,(
including( its( goodwill,( upon( such( terms( and( conditions( and( for( such(
consideration,( which( may( be( money,( stocks,( bonds( or( other(
instruments( for( the( payment( of( money( or( other( property( or(
consideration,( as( its( board( of( directors( or( trustees( may( deem(
expedient,( when( authorized( by( the( vote( of( the( stockholders(
representing(at(least(twoYthirds((2/3)(of(the(outstanding(capital(stock,(
or( in( case( of( nonYstock( corporation,( by( the( vote( of( at( least( to( twoY
thirds( (2/3)( of( the( members,( in( a( stockholder's( or( member's( meeting(
duly(called(for(the(purpose.(Written(notice(of(the(proposed(action(and(
of( the( time( and( place( of( the( meeting( shall( be( addressed( to( each(
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(
Consequently,% nowhere% is% the% consent% of% the% State% required% or%
referred% to% under% Section% 40% when% the% corporation% sells% or%
disposes%of%all%or%substantially%all%of%its%assets.%
2. Nature(of(Transactions(Covered(2(
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(
between%the%corporation%and%the%stockholders,%other%than%as%if%
the% corporation% were% again% at% the% starting% point% of% it% business%
life.% The% reason% why% a% stockholders'% ratification% is% required%
when%the%board%sells,%disposes%or%encumbers%all%or%substantially%
all%of%the%corporate%assets%is%that%it%recognizes%the%stockholders%
right%to%the%nature%and%status%of%the%corporate%business,%as%well%
as% future% developments% proceeding% therefrom,% when% they% put%
their% investments% into% the% corporation.% When% the% corporation,%
through% its% board,% attempts% to% alter% or% dispose% of% such% level,%
even% when% the% corporation% ends% up% with% the% same% value%
covering% the% cash% or% other% form% of% consideration% received% for%
the% sale% or% disposition,% it% must% get% the% confirmation% of% the%
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( nonYstock( corporations( where( there( are( no( members( with( voting(
rights,( the( vote( of( at( least( a( majority( of( the( trustees( in( office( will( be(
stockholders.%
o Stockholders% have% a% common% law% proprietary% or%
beneficial% interests% on% the% corporate% business%
enterprise,% and% any% sale,% transfer,% disposition,% or%
encumbrance% thereof% would% be% void% if% effected% by% the%
Board% of% Directors% without% the% appropriate%
stockholders%approval.%
sufficient( authorization( for( the( corporation( to( enter( into( any(

transaction(authorized(by(this(section.((28(1/2a)(
(
1. Nature(of(Power(1(
Theoretically,% there% is% no% change% in% the% basic% relationship%
In% other% words,% the% exercise% of% such% a% power% really% affects% the%
business%enterprise%level%of%corporate%setFup,%an%area%much%left%
by%the%State%to%the%judgment%of%the%managers,%and%does%not%in%
any%way%affect%or%alter%the%juridical%entity%granted%by%the%State.%
The% property% of% the% corporation% is% not% the% property% of% the%
stockholders%or%members,%and%as%such,%may%not%be%sold%without%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
!
express% authority% from% the% Board% of% Directors.( Litonjua( v.(
Eternit(Corp.,(490(SCRA(204((2006).(
3. Transactions(NOT(Covered(by(Ratificatory(Vote(Requirements(1(
remaining% business,% since% the% sale% or% disposition% of% "all"% assets%
or%property%means%there%is%no%remaining%business%to%conduct.2%
Section%40(4):(
substantially%all%assets%and%property%of%a%corporation%as%one%by%
which% the% corporation% would% be% rendered% incapable% of%
continuing%the%business%or%accomplishing%the%purpose%for%which%
it% was% incorporated% % any% sale% or% disposition% short% of% this% will%
not% need% stockholder% ratification,% and% may% be% pursued% by% the%
majority%vote%of%the%Board%of%Directors.%Strategic( Alliance( Dev.(
Corp.(v.(Radstock(Securities(Ltd.,(607(SCRA(413((2009).(
a. If% it% is% necessary% in% the% usual% and% regular% course% of%
business%of%such%corporation;%or%%
b. If% the% proceeds% of% the% sale% or% other% disposition% of% such%
property%and%assets%be%appropriated%for%the%conduct%of%
its%remaining%business.%
There%is%a%clear%distinction%between%the%assets%of%a%corporation%
and% its% business% enterprise% (which% is% also% termed% as% the% going%
concern% in% other% disciplines),% which% the% author% would% equate%
as% the% capability% to% earn% profit% from% the% business% activity.%
When% the% law% therefore% says% all% or% substantially% all% of% the%
assets,%it%means%that%what%is%being%sold%or%encumbered%is%the%
business%enterprise,%because%even%if%most%assets%remain%after%
the% transaction,% the% ability% to% earn% profit% may% no% longer% be%
present.%
4. Sale(or(Disposition(of(All(Corporate(Assets(or(Property(
Such% a% sale,% disposition% or% encumbrance% cannot% be% covered% by%

the%exemption%provided%in%Section%40%where%no%stockholders'%or%
members'% approval% is% necessary% because% the% sale% of% all% of% the%
assets%or%property%of%a%business%can%never%be%"in%the%usual%and%
regular% course% of% business% of% such% corporation,"% nor% can% it% be%
argued%that%the%proceeds%of%the%sale%or%other%disposition%of%such%
property% and% assets% be% appropriated% for% the% conduct% of% its%
The% Corporation% Code% defines% a% sale% or% disposition% of%
(
Strategic(Alliance(Dev.(Corp.(v.(Radstock(Securities(Ltd.,(
(
Facts:( The% Construction% Development% Corporation% of% the% Philippines%
(CDCP)% had% a% 30Fyear% franchise% to% construct,% operate% and% maintain% toll%
facilities% in% the% North% and% South% Luzon% Tollways.% Basay% Mining%
Corporation% (an% affiliate% of% CDCP)% obtained% loans% from% Marubeni%
Corporation%of%Japan%amounting%to%P10%billion,%which%CDCP%guaranteed%
solidarily.% Thereafter,% CDCP% changed% its% corporate% name% to% PNCC% to%
reflect%the%governments%(90.3%)%shareholding%in%the%corporation.%
%
The% money% owed% Marubeni% remained% unpaid% and% unacknowledged% for%
20%years.%But%in%October%2000,%PNCC%recognized%this%financial%obligation%
to%Marubeni.%Barely%3%months%after,%Marubeni%assigned%its%entire%credit%
to%Radstock%Corporation%for%less%than%P100%million,%who%in%turn%sought%
to% collect% from% PNCC.% Eventually,% Radstock% and% PNCC% entered% into% the%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
!
5. Sale(or(Disposition(of(Substantially(All(of(the(Corporate(Assets(
or(Property(
compromise% agreement% whereby% PNCC% shall% assign% to% a% third% party%

assignee%(designated%by%Radstock)%all%its%rights%and%interests%in%specified%
real% properties% (amounting% to% P6Billion% F% reduced% obligation)% provided%
the% assignee% shall% be% duly% qualified% to% own% real% properties% in% the%
Philippines.% PNCC% shall% also% assign% to% Radstock% 20%% of% the% outstanding%
to% cover% substantially% all% the% corporate% property% and% assets,% if%
thereby% the% corporation% would% be% rendered% incapable% of% (a)%
continuing% the% business% or% (b)% 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( (Phils.),( Inc.( v.( PNOC(
capital% stock% of% PNCC,% and% 6%% share% in% the% gross% toll% revenue% of% the%
Manila%North%Tollways%Corporation%from%2008F2035.%
(
Issue:(Whether%or%not%the%compromise%agreement%is%valid.%
(
Held:(NO.%The%assignment%of%6%%revenues%and%outstanding%capital%stock%
is%not%allowed%because%the%franchise%of%PNCC%has%already%expired%and%all%
Shipping(and(Transport(Corp.,(498(SCRA(400((2006).(
its%assets%turned%over%to%the%government.%Therefore,%the%revenues%and%
stock%capital%belong%to%the%government.%There%can%be%no%disbursement%
of% public% funds% without% appropriation% by% congress.% Public% bidding% is%
required% to% dispose% of% governmental% property.% Mere% assignments% are%
prohibited.% PNCC% must% follow% preference% of% credit.% PNCC% has% other%
creditors,% among% them% the% national% government% which% should% be% paid%
first,% and% other% creditors% who% have% final% and% executory% judgements%
The% test% on% whether% a% sale% or% disposition% or% encumbrance% is%
substantial%is%a%qualitative,%rather%than%a%quantitative%test.1(
o This% means% that% sale% of% one% piece% of% machinery,% if% it% is%
against%PNCC.%The%loan%from%Marubeni%is%unsecured%and%should%be%one%
of% the% last% to% be% paid.% So% the% compromise% agreement% effectively%
satisfying% the% unsecured% loan% to% Marubeni% before% the% preferred%
creditors%is%invalid.%
(
Doctrine:( See% above.% Also,% see% Legal% Effect% on% Assignee% Even% When%
Contracts% Entered% into% With% the% Requisites% Stockholders% or% Members%
Approval.%
(
The% disposition% of% the% assets% of% a% corporation% shall% be% deemed%
essential% in% the% continuation% of% the% business,% amounts%

to%sale%of%substantially%all%assets.%(
" Approval% of% qualified% majority% of% the%
outstanding%capital%stock%is%needed(
Sale%of%several%parcels%of%land,%on%the%other%hand,%if%not%
disruptive% of% the% corporations% business% is% not% a%
substantial%sale%of%all%corporation%assets.%(
"
A%mere%board%resolution%would%be%sufficient.(
Sale% by% Board% of% Trustees% of% the% only% corporate% property%
without% compliance% with% Section% 40% of% Corporation% Code%
requiring% ratification% of% members% representing% at% least% twoF
thirds% of% the% membership,% would% make% the% sale% null% and% void.%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
Islamic( Directorate( v.( Court( of( Appeals,( 272( SCRA( 454( (1997);(
Pea%v.%CA,%193%SCRA%717%(1991).(
6. Lease(or(Encumbrance(of(All(of(Substantially(All(of(the(Assets1(
corporate%creditors%and%the%amount%and%nature%of%their%claims,%
giving% of% notice% of% the% sale,% and% applying% the% proceeds% of% the%
sale%proportionately%to%the%payment%of%the%listed%obligations.%
When%a%corporation%decides%to%lease%all%or%substantially%all%of%its%
assets,%then%it%would%fall%within%the%ambit%of%Section%40,%because%
in%effect%the%corporation%can%no%longer%pursue%whatever%line%of%
business% it% has% by% having% contracted% away% the% use% of% the%
business%enterprise%to%a%lessee%!%basically%they%have%nothing%to%
use%for%the%business.(
requirements% renders% the% transaction% void% and% fraudulent,%

irrespective%of%the%intentions%of%the%parties%to%the%transaction.3%
8. Consequences(of(Contracts(Entered(Into(Without(the(Requisite(
Stockholders(Approval(
Section%40(3)%
When%a%corporation%decides%to%encumber%all%or%substantially%all%
Entering% into% the% sale,% disposition% or% encumbrance% of% all% or%
of% its% assets,% it% continues% to% retain% ownership% and% possession%
thereof%and%still%be%in%a%position%to%pursue%the%lines%of%business%
for% which% the% assets% have% been% devoted% to.% The% reason% why%
ratification%by%stockholders%is%necessary:(
substantially% all% of% the% assets% of% the% corporation% should% be%
treated% as% being% within% the% governing% doctrine% of% ultra% vires%
contracts% of% the% third% type% (i.e.,% those% entered% into% by%
unauthorized%officers%or%representatives%of%the%corporation)%and%
should%be%construed%and%disposed%under%the%doctrine%prevailing%
on%such%ultra%vires%contracts.%!%Such%contract%would%be%void.%
9. Legal( Effect( on( Assignee( Even( When( Contracts( Entered( into(
With(the(Requisites(Stockholders(or(Members(Approval(4(
The% encumbrance% of% all% or% substantially% all% assets% has%

the% potential% of% disrupting% the% pursuit% of% the% business%
especially%if%foreclosure%happens%(i.e.%dispossession).(
o Such%encumbrance%would%fall%within%the%same%category%
of% incurring% or% creating% bonded% indebtedness% under%
Section%38.(
7. Bulk(Sales(Law(
o
Aside%from%the%requirements%under%Section%40,%the%sale%of%all%or%
substantially%all%of%the%corporate%assets%or%property%may%require%
compliance%with%the%Bulk%Sales%Law,2%when%the%transaction%falls%
within%the%classification%of%the%Law%as%"sale%in%bulk"%and%would%
require% the% seller% to% execute% a% sworn% statement% listing% the%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
%Act%No.%3952,%as%amended%by%Rep.%Act%No.%111.%
Under% the% Bulk% Sales% Law,% failure% to% comply% with% its%
General( Rule:( When% you% sell% assets,% you% simply% sell% it,% and% the%
liability%stays%with%you.(
Exception:( Unless%the%buyer/assignee%assumes%your%obligations%
concerning%the%asset.(
Actions%made%pursuant%to%Section%40%would%constitute%a%species%
of% business% enterprise% and% the% legal% effect% is% to% make% the%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
!For!a!more!substantive!discussions!on!the!applicability!of!the!Bulk!Sales!Law,!
see%Chapter%16,%VILLANUEVA,%LAW%ON%SALES,%Rex%Book%Store,%%(1998%ed.).%
4
)
!
assignee% liable% for% the% obligations% arising% from% the% business%
enterprise.(
Strategic% v.% Radstock% !% the% Court% stated% that% the% transfer% can%
only% happen% if% the% transferee% assumes% liability% for% all% the%
obligations.%This%is%because,%the%transfer%was%essentially%done%in%
fraud% of% creditors% (including% the% government).% This% case% is% a%
different%animal%all%together.(
10. Appraisal(Right(1(
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%than%with%a%corporation%that%is%no%longer%
capable%of%pursuing%the%business.%
%
duly(called(for(the(purpose.(Written(notice(of(the(proposed(investment(
and( the( time( and( place( of( the( meeting( shall( be( addressed( to( each(
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)(
(
1. Rational(of(Rule(
F.(Invest(Corporate(Funds(for(NonYPrimary(Purpose(Endeavor((Section(
42)(
(
Section(42.(Power(to(invest(corporate(funds(in(another(corporation(or(
business(or(for(any(other(purpose.(
Subject(to(the(provisions(of(this(Code,(a(private(corporation(may(invest(
its(funds(in(any(other(corporation(or(business(or(for(any(purpose(other(
than( the( primary( purpose( for( which( it( was( organized( when( approved(
by(a(majority(of(the(board(of(directors(or(trustees(and(ratified(by(the(
stockholders(representing(at(least(twoYthirds((2/3)(of(the(outstanding(
capital(stock,(or(by(at(least(two(thirds((2/3)(of(the(members(in(the(case(
of( nonYstock( corporations,( at( a( stockholder's( or( member's( meeting(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
Whenever% the% corporation% seeks% to% engage% into% a% secondary%

purpose% allowed% under% its% articles% of% incorporation,% although%
intra% vires,% it% must% seek% the% approval% of% the% stockholders% or%
members%of%the%corporation.%
The% law% therefore% presumes% rather% strongly% 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% and% decide%

upon% such% diversion% of% corporate% funds% from% the%
primary%business%of%the%corporation.%
2. Coverage(of(Funds(
The% SEC% has% ruled% that% the% term% funds% under% Section% 42%
includes%any%corporate%property%to%be%used%in%the%furtherance%of%
!
the%business,%and%consequently%when%property%is%devoted%in%any%
business%other%that%pursuit%of%the%primary%purpose%for%which%the%
corporation% was% incorporated,% it% would% need% the% ratificatory%
vote% of% twoFthirds% (2/3)% of% the% outstanding% capital% stock% of% the%
corporation.1%
3. Investments( That( Should( Be( Considered( Within( Primary(
without% need% of% obtaining% stockholders'% approval;% much% less%

should%such%investments%trigger%any%appraisal%right%on%the%part%
of%dissenting%stockholders.%
manufactures% the% jute% bags% used% in% packing% sugar% falls% within%
the% implied% powers% of% the% sugar% central% as% part% of% its% primary%
purpose%and%does%not%need%ratification%by%the%stockholders.%De(
la(Rama(v.(MaVao(Sugar(Central(Co.,(27(SCRA(247((1969).(
(
Purpose(2(
Section%42%expressly%provides%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,% since%
the% matter% lies% clearly% within% the% business% discretion% or%
judgment%of%the%board%of%directors%of%the%corporation.%%
o There% are% certain% investments% of% the% corporation% that%
would%be%deemed%consistent%with%the%primary%purpose%
by%virtue%of%the%essence%of%the%corporation%as%a%business%
enterprise.%%
All% corporations,% whatever% may% be% their% primary% purposes,% are%

deemed%to%have%the%power%to%invest%corporate%funds%in%another%
corporation% or% business,% as% a% means% of% obtaining% the% best%
returns%of%their%investible%funds.%
Examples:(
A% fishing% company,% through% its% board,% should% be% allowed% to%

place% say% its% investible% fund% of% P100,000.00% in% PLDT% or% San%
Miguel%commercial%papers%or%even%perhaps%their%shares,%if%they%
offer% the% best% return% at% that% point% in% time% for% the% corporation,%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%XXIX%SEC%QUARTERLY%BULLETIN%2%(No.%2,%June%1995).%%
2
Investment%by%a%sugar%central%in%the%equity%of%a%corporation%that%
De(la(Rama(v.(MaVao(Sugar(Central(Co.(
(
Facts:( De% La% Rama% and% 3% other% minority% stockholders% of% MaFAo% Sugar%
Central%filed%a%derivative%suit%against%the%MaFAo%Sugar%Central%Co.,%Inc.,%
and%Amado%Araneta%and%3%other%directors.%De%La%Rama%claims%that%the%
directors% made% an% illegal% investment% in% Phil.% Fibers% Processing% Co.,% Inc.%
He%contends%that%since%the%investment%was%made%NOT%in%pursuance%of%
the%corporate%purpose%and%without%the%requisite%authority%of%2/3%of%the%
stockholders,%then%the%investment%was%thus%illegal%for%being%in%violation%
of%Section%17F1/2%of%the%Corporation%Law.%
%
Araneta% claims% that% the% investment% was% not% illegal% as% it% was%
subsequently% ratified% by% the% Board% of% Directors% in% a% resolution.% Also%
since% the% company% was% engaged% in% the% manufacture% of% sugar% bags,% it%
was% thus% perfectly% legitimate% for% MaFAo% Sugar% either% to% manufacture%
sugar% bags% or% invest% in% another% corporation% engaged% in% said%
manufacture.%
%
Issue:( Whether% or% not% the% affirmative% vote% of% the% stockholders%
representing%2/3%of%the%voting%power%is%necessary%
)
!
(
Held:( NO.% The% court% held% that% the% affirmative% vote% of% the% stockholders%
representing%2/3%of%the%voting%power%is%not%necessary.%
(
Doctrine:( The%corporation%code%allows%a%corporation%to%invest%its%funds%
in% another% corporation% for% any% other% purpose% other% than% the% main%
purpose.%%
Provided%that%the%board%has%been%authorized%by%affirmative%vote%
of%the%stockholders%representing%2/3%of%the%voting%power.%%
BUT%if%the%investment%is%made%in%a%corporation%whose%business%
is%important%to%the%investing%corporation%and%would%aid%it%in%its%
purpose,%then%to%require%authority%of%the%stockholders%would%be%
to%unduly%curtail%the%power%of%the%board%of%directors.%%
incorporation.%%
BUT% when% the% purchase% of% shares% of% another% corporation% is%
done% solely% for% investment% and% not% to% accomplish% the% purpose%
of%its%incorporation,%the%vote%of%approval%of%the%stockholders%is%
necessary.%
The%nonFobtaining%of%the%ratificatory%vote%of%the%stockholders%or%
members%under%Section%42%of%the%Code%should%be%construed%to%
be%within%the%realm%of%ultra%vires%contracts%of%the%second%type,%
having%been%entered%into%by%representatives%of%the%corporation%
not%duly%authorized.%
6. Confirmation( of( the( Business( Enterprise( Level( of(
Relationship(
4. Investments(Outside(of(Secondary(Purposes(1(
Under% such% terms,% the% ratificatory% vote% of% stockholders% or%

members%to%legally%allow%a%corporation%to%invest%funds%outside%
of% its% primary% purpose% (and% those% which% are% necessary% or%
incidental%to%the%exercise%of%such%purpose)%would%be%limited%to%
pursuing%the%secondary%purposes%of%the%corporation.%
5. Consequences(of(NonYObtaining(of(Ratificatory(Vote(2(
a% corporation% may% exercise% such% other% powers% as% may%

be% essential% or% necessary% to% carry% out% its% purpose% or%
purposes%"as%stated%in%its%articles%of%incorporation."%%
Section% 45% provides% expressly% that% no% corporation% shall%
possess% or% exercise% any% corporate% power% except% those%
conferred%by%the%Corporation%Code,%or%by%its%articles%of%
If%one%where%to%limit%the%review%to%the%wordings%of%Section%42,%
the%answer%would%seem%to%be%in%the%affirmative.%%
The%provisions%of%Section%42%of%the%Corporation%Code%recognize%
However,% the% terms% of% Section% 42% are% deemed% to% be%
circumscribed% by% the% provisions% of% Sections% 36% and% 45% of% the%
Corporation%Code.%%
o Section% 36,% after% enumerating% express% powers% of%
the%legal%standing%of%stockholders%or%members%of%ever%corporate%
setFup% on% matters% that% affect% the% business% enterprise,% as% it%
grants%them%standing%to%vote%on%matters,%and%does%not%leave%the%
crucial% decision% of% whether% or% not% to% invest% corporate% funds% in%
corporations,% provides% an% allFencompassing% clause% that%
nonFprimary% business% enterprise% within% the% sole% business%

discretion%of%the%Board.(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
!
(
G.(Declare(Dividends((Section(43)(
(
declared%to%creditors%as%part%of%the%settlement%of%debts.%Nielson(
&(Co.(v.(Lepanto(Consolidated(Mining(Co.,(26(SCRA(540((1968).%
Section(43.(Power(to(declare(dividends.((
less(than(twoYthirds((2/3)(of(the(outstanding(capital(stock(at(a(regular(
(
excess( of( one( hundred( (100%)( percent( of( their( paidYin( capital( stock,(
contingencies.((n)(
Dividends%from%retained%earnings%can%only%be%declared%to%those%
who% are% stockholders% of% the% corporation;% dividends% cannot% be%
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).(
When%the%Board%distributes,%it%is%based%on%the%number%of%shares%
and% to% all% stockholders.% The% Board% cannot% choose% who% will%
receive%or%not.(
o However,% in% cases% where% the% stockholder% has% not% fully%
paid%for%his%share,%his%cash%dividends%will%first%be%applied%
to% your% unpaid% subscription% (which% you% should% have%
paid%according%to%your%contract).(
(SEC%Circular%11,%s.2003)%Unrestricted%Retained%Earnings%!%not%
allocated%for%any%project%or%debt%of%the%corporation.(
Kinds(of(Dividends(
*Rights%to%dividends%may%be%affected%due%to%various%types%of%shares%
Cash(
Property(
Stock(
All%products%of%your%investments%
Board%Approval%is%sufficient%to%execute%
Stockholders%
approval%is%required%
No%meeting%is%required%
Meeting%is%required%
for%approval%
Issued%in%cash%
)
Treasury%shares%which% New%shares%of%stocks%
have%been%reissued%as% issued%from%unissued%
dividends%are%actually% shares%
property%dividends%
!
Only%upon%declaration%of%the%board%will%a%
stockholder%have%a%right%to%claim%their%cash%
or%property%dividends.%
corporation,% such% as% when% there% is% need% for% special%

reserve%for%probable%contingencies.3%
of% Corporations,% where% the% financial% statements% of% the%

corporation% show% surplus% profits% in% excess% of% 100%% of% paidFup%
capital,%it%shall%explain%by%footnotes%why%the%same%has%not%been%
declared%as%dividends;%if%the%explanation%is%not%satisfactory,%the%
SEC% shall% direct% the% corporation% to% distribute% the% excess% as%
dividends.4%%
(
1. Retention(of(Surplus(Profit((
Section% 43% prohibits% stock% corporations% from% retaining% surplus%

profits%in%excess%of%oneFhundred%percent%(100%)%of%their%paidFup%
capital%stock,1%except%in%the%following%situations:%
a. When%justified%by%definite%corporate%expansion%projects%
or%programs%approved%by%the%board%of%directors;2%
i. Definite% !% Mere% possibility% of% expansion% is%
insufficient%to%withhold%surplus%profit.%
b. 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%
The% power% granted% to% stockholders% to% demand% from% the% Board%
the%declaration%of%dividends%under%Section%43%is%one%of%the%few%
instances% under% the% Code% where% the% stockholders% themselves%
exercise%a%primary%power,%instead%of%the%usual%ratificatory%vote%
on%actions%taken%primarily%by%the%board%of%directors.%
2. Report(to(SEC(
been%secured;%or%
c. When% it% can% be% clearly% shown% that% such% retention% is%
necessary% under% special% circumstances% obtaining% in% the%
Any% declaration% of% dividends,% whether% cash% or% stock,% shall% be%
reported% to% the% SEC% within% fifteen% (15)% days% from% the% date% of%
declaration.% For% corporations% whose% shares% or% securities% are%
listed%in%the%stock%exchange%or%registered%and%licensed%under%the%
Revised%Securities%Act%(now%the%Securities%Regulation%Code),%the%
report%shall%be%filed%with%the%SEC%before%or%simultaneously%with%
the% release% or% publication% of% the% notice% of% declaration% of%
dividends%to%stockholders.5%(
3. Restrictions(on(Banks(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%Even%under%the%old%Corporation%Law,%the%SEC%had%issued%the%Rules%Governing%
the% Distribution% of% Excess% Profits% of% Corporations% (1973),% which% provides% that%
"All% corporations% which% have% surplus% profits% in% excess% of% necessary%
requirements%for%capital%expansion%and%reserves%shall%declare%and%distribute%the%
excess%profits%as%dividends%to%stockholders.%(Section%1)%
2
%SEC% RULES% GOVERNING%THE% DISTRIBUTION%OF% EXCESS% PROFITS%OF% CORPORATIONS%provides%
that%the%amounts%appropriated%for%such%purpose%shall%be%segregated%from%the%
free%surplus;%and%that%upon%completion%of%the%expansion%program,%the%reserve%
established%shall%be%declared%as%stock%dividends.%
Under%the%SEC%Rules%Governing%the%Distribution%of%Excess%Profits%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
%SEC% RULES% GOVERNING%THE% DISTRIBUTION%OF% EXCESS% PROFITS%OF% CORPORATIONS%includes%

as% justification% for% nonFdeclaration% of% dividends% when% the% same% is% consistent%
with%policy%or%requirements%of%a%government%office.%
4
%Section%2%thereof.%
5
%Section% 3,% SEC% RULES% GOVERNING% THE% DISTRIBUTION% OF% EXCESS% PROFITS% OF%
CORPORATIONS%(1973)%
)
!
Under%Section%57%of%the%General%Banking%Law%of%2000,1%no%bank%
or% quasiFbank% shall% declare% dividends% greater% than% its%
accumulated% net% profits% then% on% hand% deducting% therefrom% its%
losses% and% bad% debts.% Neither% shall% the% bank% or% quasiFbank%
declare%dividends,%if%at%the%time%of%declaration:%
a. Its% clearing% account% with% the% Bangko% Sentral% is%
overdrawn;%%
b. It% is% deficient% in% the% required% liquidity% floor% for%
government% deposits% for% five% % (5)% or% more% consecutive%
days;%
c. It% does% not% comply% with% the% liquidity% standards/ratios%
prescribed% by% the% Bangko% Sentral% for% purposes% of%
determining%funds%available%for%dividend%declaration;%or%
d. It% has% committed% a% major% violation% as% may% be%
determined%by%the%Bangko%Sentral.%%
%
H.( Management( Contracts( (Section( 44):( Why( the( difference( in( rule(
between(entity(and(individual?(
(
Section(44.(Power(to(enter(into(management(contract.(
No( corporation( shall( conclude( a( management( contract( with( another(
corporation( unless( such( contract( shall( have( been( approved( by( the(
board(of(directors(and(by(stockholders(owning(at(least(the(majority(of(
the( board( of( directors( of( the( managed( corporation,( then( the(
management( contract( must( be( approved( by( the( stockholders( of( the(
managed( corporation( owning( at( least( twoYthirds( (2/3)( of( the( total(
outstanding( capital( stock( entitled( to( vote,( or( by( at( least( twoYthirds(
(2/3)( of( the( members( in( the( case( of( a( nonYstock( 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)(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
%Rep.%Act%8791.%%
the(same(interest(of(both(the(managing(and(the(managed(corporations(
own( or( control( more( than( oneYthird( (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(outstanding(capital(stock,(or(by(at(least(a(majority(of(the(members(
in(the(case(of(a(nonYstock(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(
1
)
Atty.%Hofilea%!%While%this%provision%provides%substantial%basis%
for% a% corporations% management% of% another,% the% board% of% the%

managed% corporation% must% not% abdicate% their% power%
completely.%At%the%end%of%the%day,%they%must%still%call%the%shots.(
1. Coverage(of(Management(Contract((Section(44(2))(
A%management%contract%is%not%the%same%as%an%agency%contract,%
and% therefore% is% not% revocable% at% will.% Nielson( &( Co.,( Inc.( v.(
Lepanto( Consolidated( Mining,( 26( SCRA( 540( (1968);( Ricafort( v.(

Moya,(195(SCRA(247((1991).(
2. Rationale(for(Ratification(Requirements1(
On( Part( of( the( Managed( Corporation:( Such% a% management%
contractual%understanding%with%the%stockholders%of%such%
managing%corporation.%
3. Ratification( Requirements( When( There( is( Common( Control( of(
Involved(Corporations((Section(44(1))(
4. Cases(Not(Covered(by(Section(44(2(
contract%is%a%deviation%from%the%principle%under%Section%23%that%
the% corporate% affairs% shall% be% managed% by% the% board% of%
directors,% and% thereby% a% departure% from% such% an% arrangement%
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.%
would% devote% their% time% and% resources% for% the% affairs% of% the%
corporation,% and% the% entering% into% the% management% contract%
whereby% the% board,% as% the% direct% agents% of% the% managing%
corporation,% would% be% devoting% their% time% and% resources%
towards% the% operations% of% another% corporation,% would% be% a%
deviation% from% such% a% contractual% relationship,% and% thereby%
would% require% the% confirmation% of% the% stockholders% of% the%
It% would% seem% from% the% express% language% of% Section% 44,% that%
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.%
On( Part( of( the( Managing( Corporation:( The% rationale% for%

ratificatory%measures%on%the%part%of%the%managing%corporation%is%
that% the% management% arrangement% is% a% deviation% from% the%
principle% also% that% the% board% of% directors% in% the% managing%
corporation% assumed% office% with% the% understanding% that% they%
Exception:( Under% these% principles,% 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%
(
I.(Purchase(Own(Shares((Section(41)(
They%become%treasury%shares.%
Requisites:%
o
o
Legal%purpose%
Out%of%unrestricted%earnings%
(
III.(Implied(Powers(
managing%corporation.%
Examples:(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
water,%such%corporation%cannot%engage%in%the%business%of%land%
transportation,% which% is% an% entirely% different% line% of% business,%
and,%for%which%reason,%may%not%acquire%any%certificate%of%public%
convenience% to% operate% a% taxicab% service.( Luneta( Motor( Co.( v.(
A.D.(Santos,(Inc.,(5(SCRA(809((1962).(
A% corporation% whose% primary% purpose% is% to% generate% electric%

power% has% no% authority% to% undertake% stevedoring% services% to%
unload%coal%into%its%pier%since%it%is%not%reasonably%necessary%for%
the% operation% of% its% power% plant.% NPC( v.( Vera,( 170( SCRA( 721(
(1989).(
dulyForganized% corporation,% unless% specifically% revoked% by%

another%law.%Umale(v.(ASB(Realty(Corp.,(652(SCRA(215((2011).(
When% the% articles% expressly% provide% that% the% purpose% of% the%
corporation% was% to% engage% in% the% transportation% of% person% by%
act,% for% it% as% for% securing% a% loan% to% finance% the% activities% of% the%
corporation,%hence,%not%an%ultra%vires%act.%Atrium(Management(
Corp.(v.(Court(of(Appeals,(353(SCRA(23((2001).(
(
V.(Other(Powers((Section(36)(
%
A.(Sell(Land(and(Other(Properties(
A%corporation%organized%to%engage%as%a%lending%investor%cannot%
engage%in%pawnbroker.%Philipinas(Loan(Co.(v.(SEC,(356(SCRA(193(
(2001).(
A% mining% company% has% no% power% to% engage% in% real% estate%
An% officer% who% is% authorized% to% purchase% the% stock% of% another%
corporation%has%implied%power%to%perform%all%other%obligations%
arising%therefrom%such%as%payment%of%the%shares%of%stock.%InterV
Asia(Investments(Industries(v.(Court(of(Appeals,(403(SCRA(452(
(2003).(
%
B.(Borrow(Funds(
ordinary% course% of% business% usages% and% practices% of% the%
As% a% creature% of% the% law,% the% powers% and% attributes% of% a%
corporation% are% those% set% out,% expressly% or% implied,% in% the% law.%
Among% the% general% powers% granted% by% law% to% a% corporation% is%
the% power% to% sue% in% its% own% name.% This% power% is% granted% to% a%
The%power%to%borrow%money%is%one%of%those%cases%where%even%a%
special%power%of%attorney%is%required%under%Article%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%
%
IV.(Incidental(Powers(
When% the% corporations% 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.% Articles% 1874% and% 1878% of% Civil% Code% requires% that%
when%land%is%sold%through%an%agent,%the%agents%authority%must%
be%in%writing,%otherwise%the%sale%is%void.%San( Juan( Structural( v.(
CA,(296(SCRA(631((1998).1(
development.% Heirs( of( Antonio( Pael( v.( Court( of( Appeals,( 372(
SCRA(587((2001).(
The%act%of%issuing%checks%is%within%the%ambit%of%a%valid%corporate%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%AF%Realty%&%Dev.,%Inc.%v.%Dieselman%Freight%Services%Co.,%373%SCRA%385%(2002);%
Firme% v.% Bukal% Enterprises% and% Dev.% Corp.,% 414% SCRA% 190% (2003);% Cosco%
Philippines%Shipping,%Inc.%v.%Kemper%Insurance%Company,%670%SCRA%343%(2012).%
)
!
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).(
shopping% is% necessarya% certification% not% signed% by% a% duly%

authorized% person% renders% the% petition% subject% to% dismissal.%
Gonzales(v.(Climax(Mining(Ltd.,(452(SCRA(607((2005);2%such%as%
the% administrator% or% project% manager,% Esteban,( Jr.( v.( Vda.( de(
Onorio,(360(SCRA(230((2001);%or%the%General%Manager,%Central(
Cooperative(Exchange(Inc.(v.(Enciso,(162(SCRA(706((1988).(
%
C.(Power(to(Sue(and(Be(Sued(
Under%Section%36%in%relation%to%Section%23%of%Corporation%Code,%
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% corporations% behalf.% Tam( Wing( Tak( v.( Makasiar,( 350(
SCRA(475((2001).1(
1. Power(to(Bind(the(Corporation(in(a(Suit(
complaint.% Median( Container( Corp.( v.( Metropolitan( Bank( and(

Trust( Co.,( 561( SCRA( 622( (2008);% the% submission% in% the% motion%
for%reconsideration%of%the%authority%to%sign%the%verification%and%
certification% constitutes% substantial% compliance% with% the%
procedural% requirements.% Asean( Pacific( Planners( v.( City( of(
Urdaneta,(566(SCRA(219((2008).(
When% the% power% to% sue% is% delegated% by% the% byFlaws% to% a%
particular%officer,%such%officer%may%appoint%counsel%to%represent%
the% corporation% in% a% preFtrial% hearing% without% need% of% a% formal%
board%resolution.%Citibank,(N.A.(v.(Chua,(220(SCRA(75((1993).(
Court.% Cunanan( v.( Jumping( Jap( Trading( Corp.,( 586( SCRA( 620(
(2009).(
If%the%petitioner%is%a%corporation,%a%board%resolution%authorizing%
a% corporate% officer% to% execute% the% certification% against% forum%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%Shipside%Inc.%v.%Court%of%Appeals,%352%SCRA%334%(2001);%SSS%v.%COA,%384%SCRA%
548% (2002);% United% Paragon% Mining% Corp.% v.% Court% of% Appeals,% 497% SCRA% 638%
(2006);% Mediserv,% Inc.% v.% Court% of% Appeals,% 617% SCRA% 284% (2010);% Cebu% Bionic%
Builders%Supply,%Inc.%v.%DBP,%635%SCRA%13%(2010);%Ellice%AgroFIndustrial%Corp.%v.%
Young,%686%SCRA%51%(2012).%
When% a% corporate% officers% has% been% granted% express% power% by%

the%Board%of%Directors%to%institute%a%suit,%the%same%is%considered%
broad%enough%to%include%the%power%of%said%corporate%officer%to%
execute% the% verification% and% certification% against% forum%
shopping% required% in% initiatory% pleadings% under% the% Rules% of%
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(Shipyard(Corp.(v.(CA,(
415(SCRA(573((2003).(
2. Certificate(of(NonYForum(Shopping:(
Nonetheless,% such% lack% of% authority% may% be% cured:% even% if% the%
counsel% executed% the% verification% and% certificate% of% nonFforum%
shopping% before% the% board% authorized% him,% the% passing% of% the%
board%resolution%of%authorization%before%the%actual%filing%of%the%
%Also%DBP%v.%Court%of%Appeals,%440%SCRA%200%(2004);%Public%Estates%Authority%v.%
Uy,% 372% SCRA% 180% (2001);% Philippine% Airlines,% Inc.% v.% Flight% Attendance% and%
Stewards% Association% of% the% Philippines% (FASAP),% 479% SCRA% 605% (2006);% Metro%
Drug% Distribution,% Inc.% v.% Narcisco,% 495% SCRA% 286% (2006);% Cagayan% Valley% Drug%
Corp.%v.%Commissioner%of%Internal%Revenue,%545%SCRA%10%(2008)%Mediserv,%Inc.%
v.% Court% of% Appeals,% 617% SCRA% 284% (2010);% Cosco% Philippines% Shipping,% Inc.% v.%
Kemper%Insurance%Company,%670%SCRA%343%(2012).%
)
certification% against% nonFforum% shopping% in% behalf% of% the%

corporation% without% the% benefit% of% a% board% resolution.% South(
Cotabato( Communications( Corp.( v.( Sto.( Tomas,( 638( SCRA( 566(
(2011).(
3. Service(of(Summons(on(Corporations(
rule% that% allows% service% of% summons% upon% an% agent50% of% the%
corporation.% E.B.( Villarosa( &( Partners( Co.,( Ltd.( v.( Benito,( 312(
SCRA(65((1999).(
%
A% President% of% a% corporation,% among% other% enumerated%

corporate%officers%and%employees,%can%sign%the%verification%and%
To%sue%and%be%sued%(Additional%Notes)%
A% de% facto% corporation% may% also% sue% and% be% sued,% and% their%
status%as%de%facto%cannot%be%assailed%collaterally%unless%in%a%case%
duly%submitted%for%that%purpose.%
General(Rule:(The%rule%that%the%power%of%the%corporation%to%sue%
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%
and%be%sued%in%any%court%is%lodged%with%the%Board%of%Directors%
that%exercise%its%corporate%powers,%is%not%wellFestablished.%%
Even% if% the% counsel% executed% the% verification% and% certificate% of%
nonFforum% shopping% before% the% board% authorized% him,% the%
passing% of% the% board% resolution% of% authorization% before% the%
actual% filing% of% the% complaint,% or% the% submission% in% the% motion%
for%reconsideration%of%the%authority%to%sign%the%verification%and%
certification% constitutes% substantial% compliance% with% the%
procedure%requirements.9%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%Kanlaon%Construction%Enterprises%Co.,%Inc.%v.%NLRC,%279%SCRA%337%(1997).%
%Gesulgon%v.%NLRC,%219%SCRA%561%(1993).%
3
%Golden% Country% Farms,% Inc.% v.% Sanvar% Development% Corp.,% 214% SCRA% 295%
(1992);%G%&%G%Trading%Corp.%v.%Court%of%Appeals,%158%SCRA%466%(1988).%
4
!Summit& Trading& and& Dev.& Corp.& v.& Avendao,& 135& SCRA& 397& (1985);& also&
Vlason%Enterprises%Corp.%v.%Court%of%Appeals,%310%SCRA%26%(1999).%
5
%Republic%v.%Ker%&%Co.,%Ltd.,%18%SCRA%207%(1966).%
6
%Villa%Rey%Transit,%Inc.%v.%Far%East%Motor%Corp.,%81%SCRA%298%(1978).%
7
%Far%Corporation%v.%Francisco,%146%SCRA%197%(1986).%
Exception:( The% only% exception% to% such% rule% is% when% the%
circumstances% allow% the% filing% by% a% relatorFstockholder% of% a%

derivative% suit% in% behalf% of% the% corporation% without% prior%
approval%of%the%Board%of%Directors%or%Trustees.8%
Example:%
summons% upon% a% construction% project% manager; 1 %a%

corporations% assistant% manager; 2 %ordinary% clerk% of% a%
corporation; 3 %private% secretary% of% corporate% executives; 4%
retained% counsel; 5%officials% who% had% charge% or% control% of% the%
operations% of% the% corporation,% like% the% assistant% general%
manager;6%or%the%corporations%Chief%Finance%and%Administrative%
Officer;7%no%longer%apply%since%they%were%decided%under%the%old%
%
D.(Power(to(Hire(Employees(and(Appoint(Agents(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8
9
)
profits,%and%would%constitute%a%breach%by%the%Board%of%
Directors%of%its%fiduciary%duties%to%the%stockholders.1%
Except%where%the%authority%of%employing%servants%and%agents%is%
expressly%vested%in%the%board%of%directors%or%trustees,%an%officer%
or% agent% who% has% general% control% and% management% of% the%
corporations%business,%or%a%specific%part%thereof,% may%bind%the%
corporation%by%the%employment%of%such%agents%and%employees%
as%are%usual%and%necessary%in%the%conduct%of%such%business.%But%
the% contracts% of% employment% must% be% reasonable.% Yu( Chuck( v.(
Kong(Li(Po,(46(Phil.(608((1924).(
%
E.(Provide(Gratuity(Pay(for(Employees((Section(36[10])(
Doctrine%of%Corporate%Social%Responsibility%2%
Providing% gratuity% pay% for% employees% is% an% express% power% of% a%
corporation% under% the% Corporation% Code,% and% cannot% be%
considered%to%be%ultra%vires%to%avoid%any%liability%arising%from%the%
issuance% of% resolution% granting% such% gratuity% pay.% Lopez( Realty(
The%limitation:%Reasonable%!%it%depends%
o
v.(Fontecha,(247(SCRA(183,(192((1995).(
remain% with% the% corporation,% and% thereby% increase% their%

productivity% and% avoid% wastage% occurring% through% unnecessary%
high%turnFover%of%personnel.(
Doctrine%of%Maximization%of%Profits%
o
o
Definitely% this% cannot% be% justified% as% beneficial% for% the%

corporation%because%you%are%parting%with%property.%
Essentially,% every% donation% made% by% the% corporation%
would% contravene% the% doctrine% of% maximization% of%
The% amount% should% not% be% so% big% of% an% amount% such%
that% it% infringes% the% capacity% to% conduct% business% and%
the%amount%necessary%to%pay%back%creditors.%
If% donations% constitute% merely% a% wastage% or% have% no%
reasonable%means%of%enhancing%the%business%enterprise%
(e.g.% goodwill),% then% they% would% be% unreasonable%
donations%and%are%ultra%vires.3%
The% underlying% rationale% for% the% express% power% of% corporation%

to% grant% gratuities% is% that% they% engender% loyalty% among% the%
corporations% human% resources% and% grants% them% motivation% to%
%
F.(Power(to(Make(Donations((Section(36[9])(
Corporations% being% creatures% of% law% and% receiving% the%

protection%of%the%State%as%well%as%profiting%from%society%
must%bear%certain%nonFprofit%and%social%responsibilities.%
Under% this% theory,% donations% and% other% contributions%
made% by% the% Board% of% Directors% would% not% constitute%
ultra%vires%acts.%
Donations%cannot%be%made%in%aid%of%a%political%party.%
o
Atty.% Hofilea% !%The% Omnibus% Election% Code% amended%

the% provision% of% the% Corporation% Code,% and% states% that%
donations%can%be%made%to%political%candidates.%
(
G.(Enter(Into(a(Partnership(or(Joint(Venture:(Tuason(&(Co.(v.(Bolanos,(
95(Phil.(106((1954);(SEC(Opinion,(dated(29(February(1980.(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
3
)
!
(
Tuason(&(Co.(v.(Bolanos(
(
Facts:( J.M.% Tuason% &% Co.% brought% an% action% for% the% recovery% of%
possession%of%real%property%against%Bolanos.%Bolanos%alleges%ownership%
(
Doctrine:( The% true% rule% is% that% though% a% corporation% has% no% power% to%
enter%into%a%partnership,%it%may%nevertheless%enter%into%a%joint%venture%
with% another% where% the% nature% of% that% venture% is% in% line% with% the%
business%authorized%by%its%charter.%
of% the% land% by% prescription.% The% case% was% ruled% in% favor% of% Tuason%
(prescription%does%not%run%against%registered%property).%
%
On%appeal,%Bolanos%alleges,%among%others,%that%the%complaint%by%Tuason%
should% have% been% dismissed% for% not% having% been% brought% by% the% real%
party% in% interest.% This% is% because% the% action% is% brought% in% behalf% of% JM%
Tuason%&%Co.%Inc.%by%Gregorio%Araneta%Inc.,%its%managing%partner.(
why% a% corporation% may% become% a% coFventurer% or% partner% in% a%

joint%venture%arrangement,%it%would%seem%that%the%policy%behind%
the%prohibition%on%why%a%corporation%cannot%be%made%a%partner%
do% not% apply% in% a% joint% venture% arrangement.% Being% for% a%
particular%project%or%undertaking,%when%the%board%of%directors%of%
a% corporation% evaluate% the% risks% and% responsibilities% involved,%
they% can% more% or% less% exercise% their% own% business% judgment% is%
(
Issue:( Whether% or% not% the% case% should% have% been% dismissed% on% the%
ground%that%the%case%was%not%brought%by%the%proper%party%in%interest%
(
Held:( NO.% What% Section% 2,% Rule% 2% of% the% Rules% of% Court% provide% is% that%
the% action% be% brought% in% the% name% of,% but% not% necessarily% by% the% real%
party% in% interest.% While% the% complaint% states% that% the% plaintiff% is%
represented% herein% by% its% Managing% Partner% Gregorio% Araneta,% Inc.,%
another% corporation,% there% is% nothing% against% one% corporation% being%
represented%by%another%person,%natural%or%juridical,%in%a%suit%in%court.%
%
The% contention% that% Gregorio% Araneta,% Inc.% cannot% act% as% managing%
partner%for%plaintiff%on%the%theory%that%it%is%illegal%for%two%corporations%to%
enter%into%a%partnership%is%without%merit.%There%is%nothing%in%the%record%
to%indicate%that%the%venture%in%which%plaintiff%is%represented%by%Gregorio%
Araneta,%Inc.%as%its%managing%partner%is%not%in%line%with%the%corporate%
business%of%either%of%them.%
A% joint% venture% is% essentially% a% partnership% arrangement,%

although% of% a% special% type,% since% it% pertains% to% a% particular%
project%or%undertaking.1%Although%Tuason%does%not%elaborate%on%
determining% the% extent% by% which% the% corporation% would% be%

involved% in% the% project% and% the% likely% liabilities% to% be% incurred.%
Unlike% in% an% ordinarily% partnership% arrangement% which% may%
expose% the% corporation% to% any% and% various% liabilities% and% risks%
which% cannot% be% evaluated% and% anticipated% by% the% board,% the%
situation% therefore% in% a% joint% venture% arrangement,% allows% the%
board%to%fully%bind%the%corporation%to%matters%essentially%within%
the%boards%business%appreciation%and%anticipation.2!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%BAUTISTA,%supra,!at%p.%50.%In%Torres!v.!Court!of!Appeals,%278%SCRA%793,%86%SCAD%
812% (1997),% the% Supreme% Court% held% unequivocally% that% a% joint% venture%
agreement% for% the% development% and% sale% of% a% subdivision% project% would%
constitute%a%partnership%pursuant%to%the%elements%thereof%under%Article%1767%of%
the%Civil%Code%that%defines%when%a%partnership%exists.%
2
)
!
(
exercise(of(the(powers(so(conferred.((n)(
The% prevailing% rule% in% the% United% States% is% that% "unless% it% is%
expressly%authorized%by%statute%or%charter,%a%corporation%cannot%
ordinarily% enter% into% partnerships% with% other% corporations% or%
with%individuals,%for,%in%entering%into%a%partnership,%the%identity%
of% the% corporation% is% lost% or% merged% with% that% of% another% and%
the% direction% of% the% affairs% is% placed% in% other% hands% than% those%
provided% by% law% of% its% creationA% corporation% can% act% only%
through%its%duly%authorized%officers%and%agents%and%is%not%bound%
by%the%acts%of%anyone%else,%while%in%a%partnership%each%member%
binds% the% firm% when% acting% within% the% scope% of% the%
partnership."1%
The%doctrine%is%grounded%on%the%theory%that%the%stockholders%of%
a% corporation% are% entitled,% in% the% absence% of% any% notice% to% the%
and%therefore%beyond%the%power%conferred%upon%it%by%law.%The%
term% ultra% vires% is% distinguished% from% an% illegal% act% for% the%
former% is% merely% voidable% which% may% be% enforced% by%
performance,% ratification,% or% estoppel,% while% the% latter% is% void%
and%cannot%be%validated.%Atrium(Management(Corp.(v.(CA,(353(
SCRA(23((2001).(
2. Second(Type(Ultra(Vires:%Those(which(have(been(executed(on(
behalf( of( the( corporation( without( proper( authority( from( the(
contrary% in% the% articles% of% incorporation,% to% assume% that% their%
directors% will% conduct% the% corporate% business% without% sharing%
that%duty%and%responsibility%with%others.2%
(
VI.(ULTRA(VIRES(DOCTRINE(
(
A.(Types(of(Ultra(Vires(Acts((Section(45)(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
on% it% by% the% Corporation% Code,% its% charter,% and% those% that% are%
implied% or% incidental% to% its% existence.% In% turn,% a% corporation%
exercises%said%powers%through%its%Board%of%Directors%and%/or%its%
duly% authorized% officers% and% agents.% Monfort( Hermanos(
Agricultural(Dev.(Corp.(v.(Monfort(III,(434(SCRA(27((2004).(
1. First(Type(Ultra(Vires:%Those(which(are(outside(of(the(express,(
implied(and(incidental(powers(of(the(corporation.(
%FLETCHER%CYC.%CORPORATIONS%(Perm.%Ed.)%2520.%
%BAUTISTA,%TREATISE%ON%PHILIPPINE%PARTNERSHIP%LAW%(1978%Ed.),%at%p.%9.%
)
An%ultra%vires%act%is%one%committed%outside%the%object%for%which%
a%corporation%is%created%as%defined%by%the%law%of%its%organization%
Board(of(Directors.(
Section(45.(Ultra(vires(acts(of(corporations.((
No(corporation(under(this(Code(shall(possess(or(exercise(any(corporate(
powers( except( those( conferred( by( this( Code( or( by( its( articles( of(
incorporation( and( except( such( as( are( necessary( or( incidental( to( the(
A% corporation% has% no% power% except% those% expressly% conferred%
When% the% President% enters% into% speculative% contracts% without%

prior% board% approval,% and% without% subsequent% Board%
ratification,%nor%were%the%transactions%included%in%the%reports%of%
the% corporation,% such% contracts% do% not% bind% the% corporation.% It%
must% be% pointed% out% that% the% Board% of% Directors,% not% the%
President,% exercises% corporate% powers.% Safic( Alcan( &( Cie( v.(
Imperial(Vegetable(Oil(Co.,(Inc.,(355(SCRA(559((2001).(
Example:(
Contracts% or% acts% of% a% corporation% must% be% made% either% by% the%
Board% of% Directors% or% by% a% corporate% agent% duly% authorized% by%
the% Board% % absent% such% valid% delegation/% authorization,% the%

rule%is%that%the%declaration%of%an%individual%directors%relating%to%
the% affairs% of% the% corporation,% but% not% in% the% course% of,% or%
connected% with% the% performance% of% authorized% duties% of% such%
director,%are%held%not%binding%on%the%corporation.%Manila(Metal(
Container(Corp.(v.(PNB,(511(SCRA(444((2006).(
3. Third(Type(Ultra(Vires:(Those(which(are(per(se(contrary(to(law,(
morals(and(public(policy.(
Example:(
Although%the%arrangement%between%the%two%mining%companies%
was%prohibited%under%the%terms%of%the%old%Corporation%Law,%the%
Supreme%Court%did%not%declare%the%nullity%of%the%agreements%on%
the% ground% that% only% private% rights% and% interests,% as%
distinguished% from% public% interests,% were% involved% in% the% case.%
Harden( v.( Benguet( Consolidated( Mining( Co.,( 58( Phil.( 140(
(1933).%
%
%
Harden,% a% stockholder% of% Balatoc,% as% well% as% other% stockholders% filed% a%
case%against%Benguet%and%Balatoc%praying%that%the%contract%be%declared%
unlawful,% and% subsequently% annulled,% and% that% the% shares% of% stock%
issued% to% Benguet% be% obliterated.% They% based% their% complaint% on% a%
provision% in% the% then% Corporation% Law% (adopted% from% the% Act% of%
Congress% of% 1916)% which% states% that% it% shall% be% unlawful% for% any%
member%of%a%corporation%engaged%in%agriculture%or%mining%(...)%to%be%in%
any%wise%interested%in%any%other%corporation%engaged%in%agriculture%or%in%
mining.%
(
Issue:(Whether%or%not%the%contract%should%be%annulled%for%illegality.%
(
Held:( NO.% The% provision% was% enacted% based% on% public% policy% which%
dictates% the% need% to% regulate% mining% rights.% The% penalties% imposed% in%
what%is%now%section%190%(A)%of%the%Corporation%Law%for%the%violation%of%
the%prohibition%in%question%are%of%such%nature%that%they%can%be%enforced%
only% by% a% criminal% prosecution% or% by% an% action% of% quo% warranto.% But%
these% proceedings% can% be% maintained% only% by% the% AttorneyFGeneral% in%
(
Facts:( Benguet% Consolidated,% a% sociedad% anonima,% and% Balatoc% Mining%
Co.,%a%corporation,%were%engaged%in%the%business%of%mining%gold.%During%
its%early%years,%Balatoc%was%underdeveloped%so%it%entered%into%a%contract%
with%Benguet%Consolidated%wherein%Benguet%will%erect%power%plants%and%
develop% a% milling% plant% for% Balatoc.% In% return,% Balatoc% gave% Benguet%
shares%with%a%par%value%of%P600K.%The%contract%was%a%result%of%a%general%
representation% of% the% Government.% Moreover,% Benguet% Company% has%

committed%no%civil%wrong%against%the%plaintiffs.%In%this%case,%Harden%has%
no%legal%standing.%
(
Doctrine:( Even%where%corporate%contracts%are%illegal%per%se,%when%only%
public% or% government% policy% is% at% stake% and% no% private% wrong% is%
committed,%the%courts%will%leave%the%parties%as%they%are,%in%accordance%
with%their%original%contractual%expectations.%
stockholders% meeting% held% by% Balatoc.% The% project% soon% after% turned%
out%well,%with%Benguet%profiting%from%their%shares.%
%
B.(General(Judicial(Attitude(Towards(the(Ultra(Vires(Doctrine(
Harden(v.(Benguet(Consolidated(Mining(Co.(
)
The%plea%of%ultra%vires%will%not%be%allowed%to%prevail,%whether%
interposed%for%or%against%a%corporation,%when%it%will%not%advance%
donation% of% 4,000% shares% of% stock% as% originally% planned% into% a%
renunciation%in%favor%of%the%children%of%all%the%companys%right,%
title,% and% interest% as% beneficiary% in% and% to% the% proceeds% of% the%
life%insurance%policies%subject%to%the%express%condition%that%said%
proceeds% should% be% retained% as% a% loan% drawing% interest% at% 5%%
justice%but,%on%the%contrary,%will%accomplish%a%legal%wrong%to%the%
prejudice%of%another%who%acted%in%good%faith.%Zomer(Dev.(Corp.(
v.(Intl(Exchange(Bank,(581(SCRA(115((2009).(
%
C.(Ratification(of(Ultra(Vires(Acts:(
Acts%done%by%the%Board%of%Directors%which%are%ultra%vires%cannot%
be% setFaside% if% the% acts% have% been% ratified% by% the% stockholders.%
Pirovano(v.(De(la(Rama(Steamship(Co.,(Inc.,(96(Phil.(335((1954).(
(
Pirovano(v.(De(la(Rama(Steamship(Co.,(Inc(
(
Facts:( The% heirs% of% Enrico% Pirovano% filed% before% CFI% of% Rizal% an% action%
seeking%to%enforce%some%board%resolutions%which%gives%his%children%the%
proceeds% of% the% insurance% policies% taken% on% the% life% of% the% deceased.%
Pirovano,%former%president%of%steamship%corporation,%was%said%to%have%
contributed% greatly% to% progress% of% the% company% by% raising% its% paidFup%
capital%from%P240K%to%P15.5M.%A%few%years%before%he%died%in%the%hands%
of% the% Japanese,% the% company% insured% the% life% of% Pirovano% in% various%
insurance%companies%for%P1M.%
The% first% series% of% resolutions% was% issued% wherein% a% sum% of%
P400k%convertible%to%4k%shares%of%stock%at%par%shall%be%set%aside%
for% his% heirs.% This% was% later% changed% because,% it% was% found% by%
the% sister% of% Estefania% de% la% Rama,% Lourdes,% that% in% computing%
the% actual% value% of% the% stocks,% the% widow% of% Pirovano% % as%
guardian% of% the% children% % would% have% twice% as% much% voting%
power%as%her%other%4%sisters.%%
The% board% adopted% a% resolution% changing% the% form% of% the%
per%annum%and%shall%be%payable%after%the%company%shall%have%
first%settled%in%full%the%balance%of%its%present%remaining%bonded%
indebtedness%to%NDC.%Estefania%as%guardian%of%the%children%then%
acted%this%donation.%%
After%a%few%years%the%stockholders%formally%ratified%the%donation%stated%
in%the%resolutions.%%
%
The%president%of%the%corporation,%Sergio%Osmena%filed%an%inquiry%before%
SEC%alleging%that%said%donation%was%void%because%the%corporation%acted%
beyond% its% scope% of% powers% because% a% corporation% cant% dispose% of% his%
assets%by%gift.%
%
Issue:(Whether%or%not%the%donation%is%valid%and%enforceable.%
(
Held:( YES.% The% resolution% is% not% an% ultraFvires% act% on% the% part% of% the%
corporation.%The%corporation%was%given%broad%and%unlimited%powers%to%
carry% out% the% purpose% for% which% it% was% organized% which% includes% the%
power% to% (1)% invest% and% deal% with% corporate% money% not% immediately%
required% in% such% manner% as% from% time% to% time% may% be% determined% (2)%
aid% in% any% other% manner% to% any% person,% association% or% corporation% of%
which% any% obligation% is% held% by% this% corporation.% The% donation%
undoubtedly%comes%within%the%scope%of%this%broad%power.%
%
The% grant% or% donation% is% question% is% remunerative% in% nature% and% was%
)
!
given% in% consideration% of% the% services% rendered% by% the% heirs% father% or%
the%corporation.%The%donation%has%already%been%perfected%such%that%the%
corporation% could% no% longer% rescind% it.% It% was% embodied% in% a% Board%
Resolution.%Representatives%of%the%corporation%and%even%its%creditors%as%
the% NDC% have% given% their% concurrence.% The% donation% was% a% corporate%
act% carried% out% by% the% corporation% not% only% with% the% sanction% of% the%
Board%of%Directors%but%also%of%its%stockholders.%The%donation%hasreached%
a% stage% of% perfection% which% is% valid% and% binding% upon% the% corporation%
and%cannot%be%rescinded%unless%there%exists%legal%grounds%for%doing%so.%
(
Doctrine:(Said%donation%even%if%ultra%vires%is%not%void%and%if%voidable,%its%
infirmity% has% been% cured% by% ratification% and% subsequent% acts% of% the%
corporation.% The% corporation% is% now% estopped% or% prevented% from%
contesting%the%validity%of%the%donation.%To%allow%the%corporation%to%undo%
what%it%has%done%would%be%most%unfair%and%contravene%the%wellFsettled%
doctrine%that%the%defense%of%ultra%vires%cannot%be%set%up%or%availed%of%in%
any%completed%transaction.%
%
Ratification%can%be%both%express%and%implied.(
Even% when% a% particular% corporate% act% does% not% fall% within% the%
express% or% implied% powers% of% the% corporation,% nevertheless% it%
will% not% be% set% aside% when,% not% being% malum% prohibitum,% the%
corporation,%through%its%senior%officers%or%its%Board%of%Directors,%
are%estopped%from%questioning%the%legality%of%such%act,%contract%
or% transaction.% Carlos( v.( Mindoro( Sugar( Co.,( 57( Phil.( 343(
(1932).1(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
%Republic% v.% Acoje% Mining% Co.,% 3% SCRA% 361% (1963);% Crisologo% Jose% v.% Court% of%
Appeals,%177%SCRA%594%(1989).%
)
Acts% done% in% excess% of% corporate% officers% scope% of%

authority% cannot% bind% the% corporation.% However,% when%
subsequently% a% compromise% agreement% was% on% behalf%
of% the% corporation% being% represented% by% its% President%
acting%pursuant%to%a%Board%of%Directors%resolution,%such%
constituted% as% a% confirmatory% act% signifying% ratification%
of% all% prior% acts% of% its% officers.% NPC( v.( AlonzoVLegasto,(
443(SCRA(342((2004).(
DIRECTORS,*TRUSTEES*AND*OFFICERS*
!
Board!of!Directors!is!the!body!which:!!
1. Exercises!all!powers!provided!for!under!the!Corporation!Code;!!
2. Conducts!all!business!of!the!corporation;!!
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).(
corporation* of* which* he* is* a* director* shall* thereby* cease* to* be* a*
director.* Trustees* of* nonTstock* corporations* must* be* members*
thereof.* A* majority* of* the* directors* or* trustees* of* all* corporations*
organized*under*this*Code*must*be*residents*of*the*Philippines.*
*
Doctrine!of!Centralized!Management1(
o General* Rule:* The! corporations! consent! is! that! of! its!
Board!of!Directors.(
o
Atty.!Hofilea!!!There!must!be!a!minimum!of!five!(5)!directors!
and!a!maximum!of!fifteen!(15).!
*
I.* DOCTRINE* OF* CENTRALIZED* MANAGEMENT:* Powers* of* Board* of*
Directors*(Section*23)*
*
Section*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*
Exception:( Specified! instances! in! the! Corporation! Code!

where!the!particular!exercise!of!the!corporate!power!by!
the!Board,!in!order!to!be!binding!and!effective,!requires!
the! consent! or! ratification! of! the! stockholders! or!
members,!and!also!on!the!part!of!the!State.(
Right*of*Appraisal:*It!should!be!noted!that!although!for!
efficiency! of! running! of! corporate! affairs! the! rule! of!
majority!has!been!adopted!in!the!case!of!stockholders!
and! members,! the! Corporation! Code! still! recognizes!
that!in!certain!instances!a!dissenting!stockholder!whose!
contractual! expectation! has! either! been! frustrated! or!
altered!by!the!decision!of!the!majority,!should!be!given!
the! right! not! have! to! stay! within! the! confines! of! the!
corporate! contractual! relationship.! In! such! instances,!
the! dissenting! stockholder! is! granted! an! option! to!
withdraw!from!such!relationship,!by!the!exercise!of!the!
right!of!appraisal.(
Courts* Attitude* Towards* the* Boards* Exercise* of*
Power:*The!Board!of!a!corporation!has!sole!authority!to!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
)
!
determine! policy! and! conduct! the! ordinary! business! of!
the!corporation!within!the!scope!of!its!charter.!As!long!
as! the! board! acts! honestly! and! the! contract! does! not!
defraud! or! abuse! the! rights! of! the! minority,! the! courts!
will! not! interfere! in! their! judgments! and! transactions.!
The! minority! members! of! the! board! and! the! minority!
stockholders! cannot! come! to! court! upon! allegations! of!

want!of!judgment!or!lack!of!efficiency!on!the!part!of!the!
majority!and!change!the!course!of!the!administration!of!
corporate!affairs.(
!Yu!Chuck!v.!Kong!Li!Po,!46!Phil.!608,!614!(1924);!Gamboa!v.!Victoriano,!90!
SCRA! 40! (1979);! Reyes! v.! RCPI! Employees! Credit! Union,! Inc.,! 499! SCRA! 319!
(2006);! Yasuma! v.! Heirs! of! Cecilio! S.! De! Villa,! 499! SCRA! 466! (2006);! Raniel! v.!
Jochico,! 517! SCRA! 221! (2007);! Republic! v.! Coalbrine! International,! 617! SCRA!
491!(2010).!
2
Atty.!Hofilea!!!The!one!share!required!to!be!held!by!a!director!
is!a!qualifying!share!and!in!practice!is!ignorable.!
*
A.*Rationale*for*Centralized*Management*Doctrine:*
The! raison! detre! behind! the! conferment! of! corporate! powers!

on!the!Board!of!Directors!is!not!lost!on!the!Court!!indeed,!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! any! large! organization.!
Stockholders! are! too! numerous,! scattered! and! unfamiliar! with!
the! business! of! a! corporation! to! conduct! its! business! directly.!
And!so!the!plan!of!corporate!organization!is!for!the!stockholders!
Just! as! a! natural! person! may! authorize! another! to! do! certain!
acts!in!his!behalf,!so!may!the!Board!of!Directors!validly!delegate!
some!of!its!functions!to!individual!officers!or!agents!appointed!
by!it.!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
or!connected!with!the!performance!of!authorized!duties!
of! such! director,! are! held! not! binding! on! the!
corporation.!!
Section! 23! expressly! provides! that! the! corporate! powers! of! all!
corporations! shall! be! exercised! by! the! Board! of! Directors.!
Manila(Metal(Container(Corp.(v.(PNB,(511(SCRA(444((2006).1(
o The! source! of! power! of! the! Board! of! Directors! is!
primarily! and! directly! vested! by! law;! it! is! not! a!
delegated!power!from!the!stockholders!or!members!of!
the!corporation.2!
Thus,! contracts! or! acts! of! a! corporation! must! be! made!

either!by!the!Board!of!Directors!or!by!a!corporate!agent!
duly!authorized!by!the!board.!!
Absent! such! valid! delegation/authorization,! the! rule! is!
that!the!declarations!of!an!individual!director!relating!to!
the!affairs!of!the!corporation,!but!not!in!the!course!of,!
to! choose! the! directors! who! shall! control! and! supervise! the!
conduct!of!corporate!business.(Filipinas(Port(Services(v.(Go,(518(
SCRA(453((2007).(
(
Filipinas(Port(Services(v.(Go(
*
Facts:* Filports! Board! of! Directors! (herein! respondents)! enacted! a!
resolution! creating! six! new! positions.! People! were! elected! into! said! 6!
)
!
offices! and! given! a! monthly! salary.! They! also! increased! the! salaries! of!
the!Chairman!and!other!officers.!Eliodoro!Cruz!(previous!board!director)!
wrote!a!letter!to!the!Board!questioning!these!decisions,!saying!that!the!
Board! was! not! authorized! to! do! so! by! the! companys! byWlaws! as!
required!by!Section!35!of!the!Corporation!Code.!
management!of!the!corporations!regular!business!affairs,!unless!more!
extensive!power!is!expressly!conferred.*
(
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!byWlaws.!(
Examples:(
*
Issue:* Whether! or! not! the! Board! of! Directors! had! the! power! to! create!
the!assailed!positions!
*
Held:* YES.! While! the! byWlaws! do! not! expressly! provide! for! the! boards!
authority!to!create!an!executive!committee,!the!Court!cannot!deem!that!
the! positions! created! automatically! formed! an! executive! committee.!
The! executive! committee! referred! to! in! Sec.! 35! means! a! committee!
that! has! equal! powers! with! the! board! and! must! be! distinguished! from!
other! committees! that! can! be! created! and! controlled! by! the! board.! In!
this! case,! the! positions! created! are! ordinary! positions! were! created! in!
accordance!with!the!regular!business!of!Filport;!thus,!it!is!entirely!within!
the! boards! power! to! create! them! and! provide! remuneration! therefor.!
Plus,! Cruz! himself! moved! to! create! the! positions! of! AVPS! for! Finance,!
Operations,! and! Administration! during! his! incumbency! as! Filport!
president.!
*
Doctrine:* As! per! Section! 23! of! the! Corporation! Code,! the! corporate!
powers!of!all!corporations!formed!under!the!code!shall!be!exercised!by!
the! board,! and! all! property! owned! and! business! conducted! by! the!
corporation!shall!also!be!held!and!controlled!by!the!board.!The!board!is!
the! sole! authority! to! determine! policies,! enter! into! contracts,! and!
A! corporation! is! an! artificial! being! and! can! only! exercise! its!
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!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!byWlaws!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).(
!
B.*Theories*on*Source*of*Board*Power*
1. Theory* of* Original* Power* ! * The! source! of! the! power! of! the!
Board! comes! directly! from! the! law,! and! the! Board! is! originally!
conduct!the!ordinary!business!of!the!corporation!within!the!scope!of!its!
charter.! However,! the! authority! of! the! board! is! restricted! to! the!
)
and!directly!granted!corporate!power!as!the!embodiment!of!the!
corporation.!This!theory!has!no!democratic!notions!but!actually!
is!more!akin!to!the!principles!of!autocracy.*
a. Accordingly! there! is! little! for! the! stockholders! to! do!
beyond! electing! directors,! making! byWlaws! and!
exercising! certain! other! special! powers! defined! by! law.!
!
These! notions! are! in! accordance! with! the! mandate! of!
Section!23!of!the!Corporation!Code.*
b. Under!the!theory!of!original!power,!the!Board!is!vested!
with! the! legal! or! naked! title! to! the! properties! and!
business!enterprise!of!the!corporation,!being!viewed!as!
a! medium! or! the! corpus,! with! the! stockholders! being!
considered!as!the!beneficiaries,!and!thereby!a!fiduciary!
relationship! established! between! the! Board! as! the!
trustee,!and!the!stockholders!as!the!beneficiaries.*
c. Atty.! Hofilea! !! the! Board! of! Directors! visWWvis! the!
stockholders!have!a!fiduciary/trust!relationship.(
2. Theory* of* Delegated* Power* ! * the! authority! exercised! by! the!
Board! is! viewed! as! delegated! to! them! by! stockholders.! Under!
such! theory,! the! source! of! primary! theory! can! override! the!
decisions!of!its!delegates.*
a. Such* theory! promotes! the! notion! of! agency! in! the!
corporate! setWup,! where! the! real! sources! of! power! are!
the! stockholders! or! members,! and! the! representatives!
thereof! would! be! the! Board.! It! is! also! consistent! with!
notions! in! Property! Law! that! as! a! general! rule,! the!
(
Angeles(v.(Santos(
(
Facts:! A! complaint! was! instituted! by! Angeles,! de! Lara,! Bernabe,! as!
stockholders!and!member!of!the$minority$of$the$Board$of$Directors,$for$
and$ in$ behalf$ of$ the$ corporation,$ Paraaque$ Rice$ Mill,$ Inc.,$ against$
Santos,!Mayuga,!Pascual,!and!Rodriguez!who!constitute!the!majority!of!
the! Board! of! Directors.! Generally,! the! allegations! consists! of! denial! of!
Santos! as! president! of! the! Corporation! to! give! access! to! the!
corporations!books!which!was!then!necessary!because!(1)!de!Lara!was!
conducting! an! investigation,! (2)! such! books! should! have! been! in! the!
hands!of!the!treasurer!(Bernabe)!and!not!the!president,!and!(3)!that!the!
defendants!had!been!disposing!of!the!assets!of!the!corporation!without!
authority! from! the! Board.! The! court! issued! an! ex! parte! order! of!
receivership!appointing!Melchor!de!Lara!as!receiver!but!the!defendants!
objected!claiming!that!the!Court!had$no$jurisdiction$over$the$Paraaque$
Delegated*Powers*Coming*from*the*Stockholders:!The!Board!of!
Rice!Mill,!Inc.,!because!it!had!not!been!include!as!party!defendant!in!this!
case!and!that,!therefore!the!court!could!not!properly!appoint!a!receiver!
of!the!corporation!pendente!lite.!
*
Issue:*Whether!or!not!the!trial!court!was!without!jurisdiction!to!appoint!
a!receiver!and!should!have!dismissed!the!case!
!
Held:* NO.! That% the% action% was% properly% instituted% by% the% plaintiff% as%
Directors! is! a! creation! of! the! stockholders! and! controls! and!

directs! the! affairs! of! the! corporation! by! delegation! of! the!
stockholders+ for+ and+ in+ behalf+ of+ the+ corporation+ Paraaque+ Rice+ Mill,+
Inc.!and!the!lower!court!committed!no!reveiwable!error!in!appointing!a!
owners! exercise! ultimate! power! and! disposition! over!

the! subject! matter! to! which! he! holds! title.! The!
stockholders! or! members! are! the! real! owners! of! the!
corporation,! and! to! them! the! corporate! powers! must!
belong,! and! that! the! Board! of! Directors! or! Trustees!
merely!act!as!their!agents!or!representatives.*
stockholders.! By! drawing! themselves! the! powers! of! the!

corporation,! they! occupy! positions! of! trusteeship! in! relation! to!
the!stockholders.!Angeles(v.(Santos,(64(Phil.(697((1937).(
)
!
receiver!of!the!corporation!pendente!lite.!
*
Doctrine:! Where! a! majority! of! the! board! of! directors! wastes! or!
dissipates! the! funds! of! the! corporation! or! fraudulently! disposes! of! its!
properties,!or!performs!ultra!vires!acts,!the!court,!in!the!exercise!of!its!
constitute! the! board! of! trustees.! During! the! annual! members! meeting!
held! on! April! 6,! 1998,! there! were! only! eleven! (11)! living! memberW
trustees,! as! four! (4)! had! already! died.! Out! of! the! eleven,! seven! (7)!
attended! the! meeting! through! their! respective! proxies.! The! meeting!
was!convened!and!chaired!by!Atty.!Sabino!Padilla!Jr.!over!the!objection!
equity! jurisdiction,! and! upon! showing! that! intraWcorporate! remedy! is!

unavailing,! will! entertain! a! suit! filed! by! the! minority! members! of! the!
board! of! directors,! for! and! in! behalf! of! the! corporation,! to! prevent!
waste!and!dissipation!and!the!commission!of!illegal!acts!and!otherwise!
redress!the!injuries!of!the!minority!stockholders!against!the!wrongdoing!
of!the!majority.(
of!Atty.!Antonio!C.!Pacis,!who!argued!that!there!was!no!quorum.!In!the!
meeting,! Petitioners! Ernesto! Tanchi,! Edwin! Ngo,! Virginia! Khoo,! and!
Judith!Tan!were!voted!to!replace!the!four!deceased!memberWtrustees.!
*
Issue:*Whether!or!not!the!meeting!was!null!and!void!for!lack!of!quorum!
*
Held:* NO.! ! Under! Section! 52! of! the! Corporation! Code,! the! majority! of!
One! of! the! most! important! rights! of! a! qualified! shareholder! or!
member!is!the!right!to!vote!for!the!directors!or!trustees!who!are!
to! manage! the! corporate! affairs.! The! right! to! choose! the!
persons!who!will!direct,!manage!and!operate!the!corporation!is!
significant,! because! it! is! the! main! way! in! which! a! stockholder!
can!have!a!voice!in!the!management!of!corporate!affairs,!or!in!
which! a! member! in! a! nonstock! corporation! can! have! a! say! on!
how! the! purposes! and! goals! of! the! corporation! may! be!
achieved.! Once! the! directors! or! trustees! are! elected,! the!
stockholders! or! members! relinquish! corporate! powers! to! the!
board! in! accordance! with! law.! Tan( v.( Sycip,( 499( SCRA( 216(
(2006).(
(
Tan(v.(Sycip(
(
Facts:* Grace! Christian! High! School! (GCHS)! is! a! nonstock,! nonWprofit!
educational! corporation! with! fifteen! (15)! regular! members,! who! also!
the! members! representing! the! actual! number! of! voting! rights,! not! the!
number! or! numerical! constant! that! may! originally! be! specified! in! the!
articles!of!incorporation,!constitutes!the!quorum.!Under!the!ByWLaws!of!
GCHS,! membership! in! the! corporation! shall,! among! others,! be!
terminated! by! the! death! of! the! member.! The! dead! members! who! are!
dropped!from!the!membership!roster!in!the!manner!and!for!the!cause!
provided! for! in! the! ByWLaws! of! GCHS! are! not! to! be! counted! in!
determining! the! requisite! vote! in! corporate! matters! or! the! requisite!
quorum! for! the! annual! members! meeting.! With! 11! remaining!
members,!the!quorum!in!the!present!case!should!be!6.!Therefore,!there!
being! a! quorum,! the! annual! members! meeting,! conducted! with! six!
members!present,!was!valid!(as!to!other!resolutions).!
!
HOWEVER,!the!election!of!the!four!trustees!cannot!be!legally!upheld!
for! the! obvious! reason! that! it! was! held! in! an! annual! meeting! of! the!
members! (where! a! majority! of! the! Board! were! present),! not! of! the!
board! of! trustees.! We! cannot! ignore! the! GCHS! bylaw! provision,! which!
)
!
specifically! prescribes! that! vacancies! in! the! board! must! be! filled! up! by!
the!remaining!trustees!who!must!sit!as!a!board!in!order!to!validly!elect!
the!new!ones.!
*
Doctrine:* Membership! in! and! all! rights! arising! from! a! nonWstock!
*
The* directors* or* trustees* and* officers* to* be* elected* shall* perform* the*
duties* enjoined* on* them* by* law* and* the* byTlaws* of* the* corporation.*
Unless* the* articles* of* incorporation* or* the* byTlaws* provide* for* a*
greater*majority,*a*majority*of*the*number*of*directors*or*trustees*as*
corporation! are! personal! and! nonWtransferable,! unless! the! articles! of!

incorporation! or! the! bylaws! of! the! corporation! provide! otherwise.! The!
determination! of! whether! or! not! dead! members! are! entitled! to!
exercise! their! voting! rights! (through! their! executor! or! administrator)!
depends!on!the!articles!of!incorporation!or!bylaws.(
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.*
*
Atty.!Hofilea!!!if!you!push!the!point!that!the!directors!are!the!
agents!of!the!stockholders,!there!may!be!complications!because!
in!agency,!the!principal!can!override!the!agent.!However,!in!the!
case! of! corporations,! the! stockholders! (principal)! are! not!
allowed! to! overrule! or! supplant! the! decisions! of! the! Board! of!
Directors* or* trustees* cannot* attend* or* vote* by* proxy* at* board*
meetings.*
*
Directors!(agent).*
also!be!the!treasurer.!This!was!laid!down!via!a!SEC!rule!and!not!
found!in!the!Corporation!Code.(
*
C.*Board*Must*Act*As*a*Body*(Section*25)*
*
Section*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* byTlaws.* 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.*
Atty.!Hofilea!!!the!secretary!as!a!matter!of!policy!should!not!
General*Rule:*The!grant!of!corporate!power!is!to!the!board!as!a!
body,! and! not! to! the! individual! members.! The! corporation! can!
be!bound!only!by!the!collective(act!of!the!board.!
o The! rationale! for! this! rule! is! the! public! policy,! that! it!
makes!better!management!practice!for!the!board!to!sit!
down,! to! discuss! corporate! affairs,! and! decide! on! the!
basis!of!their!consensus.1!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!The!SEC!has!opined!that!directors!and!trustees!can!only!exercise!their!power!
as! a! board,! not! individually.! They! shall! meet! and! counsel! each! other! and! any!
determination! affecting! the! corporation! shall! be! arrived! at! only! after!
)
Exception:* A! corporation! can! be! bound! even! by! the! act! of! its!
officers,! but! always! because! of! the! act! or! default! of,! or! as! an!
implied!authority!coming!from!the!Board.!
1. Directors* or* Trustees* Cannot* Act* Individually* to* Bind* the*
Corporation*
corporation,! especially! when! the! byWlaws! specifically! provided!

that! the! acts! entered! into! can! only! be! done! by! the! Board! of!
Directors.!Ramirez(v.(Orientalist(Co.,(38(Phil.(634((1918).(
o The!implication!is!clear!in!reference!to!outsiders!dealing!
with! the! corporation,! that! not! all! corporate! actions!
need!formal!board!approval.!The!board!need!not!come!
together!and!act!as!a!body!to!perform!a!corporate!act.!
In!many!cases!no!act!is!required!of!the!members!of!the!
Contracts! or! acts! of! corporation! must! be! made! either! by! the!
Board! of! Directors! or! by! a! corporate! agent! duly! authorized! by!
the! Board.! Absent! such! valid! delegation,! the! rule! is! that! the!
declaration!of!an!individual!director!relating!to!the!affairs!of!the!
corporation,! but! not! in! the! course! of,! or! connected! with! the!
performance!of!authorized!duties!of!such!director,!are!held!not!
binding!on!the!corporation.1*
2. Ratification*by*the*Board*does*not*need*formal*meeting*
board! in! order! to! bind! the! corporation;! the! fact! that!
they! know! of! a! particular! corporate! transaction! or!
contract,!and!they!stayed!silent!about!it,!or!worse,!they!
allowed! the! corporation! to! gain! by! the! transaction! or!
contract,!would!already!bind!the!corporation.2!
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!
Between!the!act!of!the!Board!as!a!body!affirming!informally!the!
perfection! of! a! contract! entered! into! in! behalf! of! the!
corporation! by! a! senior! officer,! and! the! subsequent! formal!
board! resolution! rejecting! the! same! contract,! the! former! must!
prevail! under! the! doctrine! of! estoppel.! Acua& v.& Batac&
Producers(Cooperative(Marketing(Assn.,(20(SCRA(526([1967]).(
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).(
Exercise!of!the!powers!of!the!Board!of!Directors!may!either!be!
express!and!formal!through!the!adoption!of!a!board!resolution!
in!a!meeting!called!for!the!purpose,!or!it!may!be!implied!where!
the! Board! collectively! and! knowingly! allows! the! President! to!
enter!into!important!contracts!in!the!pursuit!of!the!business!of!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
consultation! at! a! meeting! of! the! board! attended! by! at! least! a! quorum.! SEC!
Opinion,!10!March!1972,!SEC!FOLIO!1960W1976,!at!p.!526.!
1
A!DirectorWTreasurer!has!no!power!to!bind!the!company!even!in!
transactions! that! are! pursuant! to! the! primary! purpose! its!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
)
!
the! corporation.! Board( of( Liquidators( v.( Heirs( of( Maximo( M.(
Kalaw,(20(SCRA(987((1967).(
(
2. Ratification!from!the!board!
!
3. Directors*or*Trustees*cannot*bind*the*Board*in*a*Stockholders*
or*Members*Meeting*
Board(of(Liquidators(v.(Heirs(of(Maximo(M.(Kalaw(
(
See(Tan(v.(Sycip,(499(SCRA(216((2006).(
4. Directors* or* Trustees* Cannot* Attend* or* Act* by* Proxy* or*
Alternate1*
Facts:* National! Coconut! Corporation! (NACOCO)! through! its! Kalaw!

entered! into! several! contracts! involving! copra! trading! activities! which!
became! unprofitable.! NACOCO! suffered! losses! NACOCO! herein! alleges!
that!under!the!byWlaws!of!the!corporation,!the!general!manager!only!has!
the! power! to! perform! or! execute! on! behalf! of! the! corporation! upon!
prior!approval!of!the!Board!all!contracts!necessary!and!essential!to!the!
proper!accomplishment!for!which!the!Corporation!was!organized.!
!
Issue:* Whether! or! not! Kalaw! and! the! rest! of! the! board! were! guilty!
negligence!and!bad!faith!and/or!breach!of!trust!for!having!entered!into!
the!unprofitable!contracts!
*
Held:* NO.! Under! the! circumstances,! Kalaws! acts! were! valid! corporate!
acts.!Evidence!shows!that!it!was!the!practice!of!the!corporation!to!allow!
its!general!manager!to!negotiate!contracts,!in!its!copra!trading!for!and!
in!NACOCOs!behalf,!without!prior!board!approval.!The!Court!ruled!that!
if! the! byWlaws! were! to! be! literally! followed,! the! board! should! give! its!
stamp!of!prior!approval!on!all!corporate!contracts.!But![in!this!case]!the!
board!itself,!by!its!acts!and!through!acquiescence,!practically!laid!aside!
the!byWlaw!requirement!of!prior!approval!
*
Doctrine:!There!are!2!ways!by!which!corporate!actions!may!come!about!
through!its!Board!of!Directors:!
1. The!board!may!empower!or!authorize!the!act!or!contract!
On!account!of!their!responsibility!to!the!corporation,!and!by!the!
fact! that! they! were! elected! into! the! Board! based! on! their!
personal! qualifications,! business! acumen! and! background,!
directors!or!trustees!cannot!validly!act!by!proxy.*
The! SEC! has! ruled! that! alternate! directors! are! not! allowed! by!
law,!since!directors!are!required!to!exercise!their!judgment!and!
discretion! in! running! the! affairs! of! the! corporation! and! cannot!
be! substituted! by! others! because! their! position! is! one! of! trust!
and!confidence.2*
*
D.* Effects* of* Bogus* Board:!The!acts!or!contracts!effected!by!a!bogus!
board!would!be!void!pursuant!to!Article!1318!of!Civil!Code3!because!of!
the!lack!of!consent.!Islamic(Directorate(of(the(Philippines(v.(Court(of(
Appeals,(272(SCRA(454((1997).(
!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
!SEC! Opinions,! dated! 27! May! 1970! and! 25! April! 2985,! addressed! to!
Polyphosphates,!Inc.!
3
!Article!1318.!There!is!no!contract!unless!the!following!requisites!concur:!
(1)!Consent!of!the!contracting!parties;!
(2)!Object!certain!which!is!the!subject!matter!of!the!contract;!
(3)!Cause!of!the!obligation!which!is!established.!(1261)!
)
!
E.*Executive*Committee*(Section*35)*
*
General* Rule:* The! Board! can! overrule! the! decisions! of! an!
executive!committee.(
Section*35.*Executive*committee.*
The* byTlaws* of* a* corporation* may* create* an* executive* committee,*
composed* of* not* less* than* three* members* of* the* board,* to* be*
Exception:* UNLESS,! such! contract! has! been! executed! by! the!

third! party! involved,! or! rights! have! already! vested! on! third!
parties.(
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*byTlaws*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*byTlaws*or*the*
adoption* of* new* byTlaws;* (4)* the* amendment* or* repeal* of* any*
!
II.*BUSINESS*JUDGMENT*RULE:*
resolution*of*the*board*which*by*its*express*terms*is*not*so*amendable*
or* repealable;* and* (5)* a* distribution* of* cash* dividends* to* the*
shareholders.*
*
Ultimate!power!must!remain!with!the!Board!of!Directors,!and!it!
It!is!within!the!power!of!the!Board!of!Directors!to!authorize!any!
person! or! committee! to! undertake! corporate! acts.! The! board!
has! power! to! constitute! even! an! executive! committee,! even!
when!no!such!committee!is!provided!for!in!the!articles!and!byW
laws!of!the!corporation.!Filipinas( Port( Services,( Inc.( v.( Go,( 518(
SCRA(453((2007).(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Business*Judgment*Rule*! *The!corporate!principle!recognizing!
corporate! power! and! competence! to! be! lodged! primarily! with!
the!Board!of!Directors.(
Established!is!the!principle!that!when!a!resolution!is!passed!in!
good!faith!by!the!board!of!directors,!it!is!valid!and!binding,!and!
whether!or!not!it!will!cause!losses!or!decrease!the!profits!of!the!
central,!the!court!has!no!authority!to!review!them,"!adding!that!
"[i]t! is! a! wellWknown! rule! of! law! that! questions! of! policy! or!
management! are! left! solely! to! the! honest! decision! of! officers!
and! directors! of! a! corporation,! and! the! court! is! without!
authority! to! substitute! its! judgment! [for! that]! of! the! board! of!
directors;!the!board!is!the!business!manager!of!the!corporation,!
and!so!long!as!it!acts!in!good!faith!its!orders!are!not!reviewable!
by! the! courts."( Montelibano( v.( Bacolod^Murcia( Miling( Co.,( 5(
SCRA(36((1962).((
would!be!against!corporate!principle!to!empower!the!Executive!
Committee! with! authority! that! the! Board! itself! cannot!
countermand.1(
(
Montelibano(v.(Bacolod^Murcia(Miling(Co.,(Inc.(
(
Facts:* The! BacolodWMurica! Milling! entered! into! Milling! Contracts! with!
Montelibano!and!Gonzaga!&!Co.!(planters).!The!contract!provided!that!
the!resulting!product!should!be!divided!in!the!ratio!of!45%!for!the!mill!
and! 55%! for! the! planters.! This! was! amended! to! give! the! planters! an!
)
!
increased!participation!of!60%.!Years!later,!Bacolod!denied!the!5%!share!
increase! of! Petitioner! citing! that! it! had! no! consideration,! thus! its!
considered!a!donation!!a!ultra!vires!act.!
*
Issue:* Whether! or! not! the! Resolution! is! valid! and! binding! on! the!
the! corporation! their! management! prerogatives/control! on!

business!matters!over!to!the!state.!PSE(v.(Court(of(Appeals,(281(
SCRA(232((1997).(
*
PSE(v.(Court(of(Appeals(
corporation!and!the!planters!
*
Held:* YES.! The! amended! contract! has! the! same! consideration! as! the!
main! contract! at! it! was! just! attached! to! the! latter.! there! is! no! rational!
explanation! for! the! company's! assenting! to! the! further! concessions!
asked! by! the! planters! before! the! contracts! were! signed,! except! as!
further! inducement! for! the! planters! to! agree! to! the! extension! of! the!
(
Facts:* Puerto! Azul! Land! Inc.! (PALI),! a! domestic! real! estate! corporation,!
made! an! application! to! the! SEC! for! the! purpose! of! having! its! stocks!
listed!in!order!for!it!to!be!sold!in!the!public.!A!year!after!a!permit!to!sell!
was! granted,! heirs! of! the! former! President! Marcos! claimed! that!
President!Marcos!was!the!legal!owner!of!certain!properties!forming!part!
of!the!Puerto!Azul!Beach!Hotel!Complex!which!PALI!claims!to!be!among!
contract!period,!to!allow!the!company!now!to!retract!such!concessions!
would! be! to! sanction! a! fraud! upon! the! planters! who! relied! on! such!
additional!stipulations.!As!the!resolution!in!question!was!passed!in!good!
faith! by! the! board! of! directors,! it! is! valid! and! binding,! and! whether! or!
not!it!will!cause!losses!or!decrease!the!profits!of!the!central,!the!court!
has!no!authority!to!review!them.!Such!is!not!an!ultra!vires!act.!
*
its!assets.!The!PSE,!taking!into!consideration!these!claims,!rejected!the!
application!for!listing.!In!response,!PALI!sought!the!decision!of!the!SEC!
which! then! reversed! the! decision! of! the! PSE! and! ordered! the! latter! to!
list!the!PALI!stocks.!
!
Issue:*Whether!or!not!the!SEC!acted!arbitrarily!in!reversing!the!decision!
of!the!PSE!and!ordering!the!listing!of!PALI!stocks!
Doctrine:*The!court!also!reiterated!the!rule!that!questions!of!policy!or!of!
management! are! left! solely! to! the! honest! decision! of! officers! and!
directors! of! a! corporation,! and! the! court! is! without! authority! to!
substitute!its!judgment!with!that!of!the!Board!of!Directors;!the!board!is!
the!business!manager!of!the!corporation,!and!so!long!as!it!acts!in!good!
faith!its!orders!are!nor!reviewable!by!the!courts.!
*
Held:* YES.! The! PSE! is! engaged! in! a! business! imbued! with! high! public!
interest! and! is! under! the! control! and! supervision! of! the! SEC.! Though!
under! such! control! and! supervision! by! the! SEC,! the! PSE! cannot! be!
questioned! on! matters! of! internal! management,! policies,! and!
administration! in! the! absence! of! bad! faith.! In! fact,! in! the! decision!
rendered! by! the! board! of! the! PSE,! was! found! of! good! standing! by! the!
court.! PSE! was! correct! in! denying! the! listing! of! the! PALI! stocks! since!
Theoretical! Basis! for! the! Business! Judgment! Rule:! The!

recognition! of! the! corporation! merely! as! an! association! of!
individuals!who!thereby!do!not!give!up!through!the!medium!of!
there! were! various! allegations! against! the! listing.! Taking! all! these! into!
consideration,! the! PSE! deemed! that! PALI! stocks! are! not! for! the! best!
)
!
interest! of! the! investing! public! and! will! deteriorate! the! high! standards!
and!goodwill!upheld!by!the!PSE.!
*
Doctrine:*Questions!of!policy!and!of!management!are!left!to!the!honest!
decision! of! the! officers! and! directors! of! a! corporation,! and! the! courts!
citing(VILLANUEVA,(PHILIPPINE(CORPORATE(LAW((1998(ed),(p.(
288.(
(
are!without!authority!to!substitute!their!judgment!for!the!judgment!of!
the! board! of! directors.! The! board! is! the! business! manager! of! the!
corporation,! and! so! long! as! it! acts! in! good! faith,! its! orders! are!
reviewable!by!the!courts.*
Facts:* The! Tiu! family! members! are! the! owners! of! First! Landlink! Asia!
Development!Corporation!(FLADC).!One!of!the!corporations!projects!is!
the! construction! of! Masagana! Citimall! in! Pasay! City.! However,! due! to!
financial! difficulties! (they! were! indebted! to! PNB! for! P190! million),! the!
Tius! feared! that! the! construction! would! not! be! finished.! So! to! prevent!
the! foreclosure! of! the! mortgage! on! the! two! lots! where! the! mall! was!
being! built,! they! invited! the! Ongs! to! invest! in! FLADC.! The! two! parties!
*
A.* BJR* First* Branch:* Resolutions! approved,! contracts! and! transactions!
entered! into,! by! the! Board! of! Directors! within! the! powers! of! the!
corporation!cannot!be!reversed!by!the!Courts,!not!even!on!the!behest!
of!the!stockholders!of!the!corporation.1!
The! Board! of! Directors! is! the! business! manager! of! the!
corporation,! and! so! long! as! it! acts! in! good! faith,! its! orders! are!
not! reviewable! by! the! courts.! Estacio( v.( Pampanga( I( Electric(
Cooperative,(Inc.,(596(SCRA(542((2009).(
Questions! of! policy! and! management! are! left! to! the! honest!
decision! of! the! officers! and! directors! of! a! corporation,! and! the!
courts!are!without!authority!to!substitute!their!judgment!for!the!
judgment! of! the! board! of! directors.! Cua,( Jr.( v.( Tan,( 607( SCRA(
645((2009).(
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),(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Ong(Yong(v.(Tiu(
(
entered!into!a!Presubscription!Agreement!whereby!each!of!them!would!
hold!1,000,000!shares!each!and!be!entitled!to!nominate!certain!officers.!
The! Tius! contributed! a! building! and! two! lots,! while! the! Ongs!
contributed!P100M.!
!
Two! years! later,! the! Tuis! filed! for! rescission! of! the! Presubscription!
Agremement! because! the! Ongs! refused! to! issue! them! their! shares! of!
stock! and! from! assuming! positions! of! VP! and! Treasurer! to! which! they!
were! entitled! to! nominate.! The! Ongs! contended! that! they! could! not!
issue! the! new! shares! to! the! Tius! because! the! latter! did! not! pay! the!
capital! gains! tax! and! the! documentary! stamp! tax! of! the! lots.! And!
because! of! this,! the! SEC! would! not! approve! the! valuation! of! the!
property! contribution! of! the! Tius.! The! Court! of! Appeals! ordered!
liquidation! of! FLADC! to! enforce! rescission! of! the! contract! which! was!
granted!only!to!prevent!squabbles!and!numerous!litigations!between!
the!parties.!
*
)
!
Issue:*Whether!or!not!the!Court!of!Appeals!erred!in!ordering!liquidation!
*
Held:*YES.!The!Tius!also!argued!that!the!rescission!would!not!result!into!
liquidation! because! their! case! is! actually! a! petition! to! decrease! the!
capital! stock.! As! provided! in! Section! 122! of! the! Corporation! Code,!
2. When! he! is! guilty! of! gross! negligence! or! bad! faith! in! directing!
the!affairs!of!the!corporation;3!
3. When!he!acquires!any!personal!or!pecuniary!interest!in!conflict!
with!his!duty!as!such!directors.4!
distribution!of!any!of!its!assets!or!property!is!permitted!only!after!lawful!
dissolution! and! payment! of! all! debts! and! liabilities.! An! exception! is! by!
decrease!of!capital!stock.!So!the!Tius!claim!that!they!do!not!violate!the!
liquidation! procedures! under! the! law.! They! were! asking! the! court! to!
compel! FLADC! to! file! a! petition! with! SEC! to! approve! the! decrease! in!
capital! stock.! The! Supreme! Court! ruled! that! it! has! no! right! to! intrude!
into!the!internal!affairs!of!the!corporation!so!it!cannot!compel!FLADC!to!
corporate! officers! may! be! held! personally! liable! for! corporate!

acts,! provide! also! the! three! (3)! instances! when! courts! are!
authorized! to! supplant! the! decision! of! the! board,! which! is!
deemed! to! be! biased! and! may! prove! detrimental! to! the!
corporation.!
Examples:(
file! the! petition.! Decreasing! a! corporations! authorized! capital! stock! is!

an!amendment!of!the!Articles!of!Incorporation,!a!decision!that!only!the!
stockholders!and!the!directors!can!make.!!
*
Doctrine:*See!above.(
Exceptions:(
1. When! the! director! willfully! and! knowingly! vote! for! patently!

unlawful!acts!of!the!corporation;2!
1
2
!Section!31,!Corporation!Code.!!
If!the!cause!of!the!losses!is!merely!error!in!business!judgment,!
not! amounting! to! bad! faith! or! negligence,! directors! and/or!
officers! are! not! liable.! For! them! to! be! held! accountable,! the!
mismanagement!and!the!resulting!losses!on!account!thereof!are!
not! the! only! matters! to! be! proven;! it! is! likewise! necessary! to!
show! that! the! directors! and/or! officers! acted! in! bad! faith! and!
with!malice!in!doing!the!assailed!acts.!Bad!faith!does!not!simply!
connote! bad! judgment! or! negligence;! it! imports! a! dishonest!
such! business! judgment! cannot! be! held! personally! liable! for! the!
consequences! of! such! acts.! However,! when! the! directors! or! trustees!
violate!their!duties,!they!can!be!held!personally!liable.!This!is!consistent!
with!the!Law!on!Agency.1!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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).(
(
B.*BJR*Second*Branch:*General*Rule:*Directors!and!officers!acting!within!
The!aboveWenumerated!exceptions!when!directors,!trustees!and!
purpose! or! some! moral! obliquity! and! conscious! doing! of! a!

wrong,! a! breach! of! a! known! duty! through! some! motive! or!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
4
!Ibid.!!
!Sections!31!and!34,!Corporation!Code.!!
)
!
interest!or!illWwill!partaking!of!the!nature!of!fraud.!Filipinas(Port(
Services,(Inc.(v.(Go,(518(SCRA(453((2007).(
!
III.* COUNTERTVEILING* DOCTRINES* TO* PROTECT* CORPORATE*
CONTRACTS*
The!doctrine!of!estoppel!or!ratification!(as!well!as!the!doctrine!
of!apparent!authority),!is!premised!on!a!reliance!in!good!faith!
by! a! third! party! that! the! representative! of! the! corporation! has!
proper! authority! as! generally! derived! from! law,! corporate! byW
laws,! or! authorization! from! the! board,! either! expressly! or!
impliedly! by! habit,! custom,! acquiescence! in! the! general! course!
of! business.! The! nature! of! the! transaction! and! the!
circumstances! under! which! the! transaction! is! pursued! are!
looked!into!by!the!courts!to!determine!the!proper!application!of!
the!estoppel!doctrine.1(
*
A.*Theory*of*Estoppel*or*Ratification*
The!principle!of!estoppel!precludes!a!corporation!and!its!Board!
of!Directors!from!denying!the!validity!of!the!transaction!entered!
into!by!its!officer!with!a!third!party!who!in!good!faith,!relied!on!
the!authority!of!the!former!as!manager!to!act!on!behalf!of!the!
corporation.! Lipat( v.( Pacific( Banking( Corp.,( 402( SCRA( 339(
(2003).(
(
Lipat(v.(Pacific(Banking(Corp.(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Facts:* Spouses! Lipat! (Alfredo! and! Estelita)! owns! Belas! Export! Trading!
(BET),! a! single! proprietorship! engaged! in! garment! manufacturing! in!
Quezon!City.!The!Lipats!also!owned!the!Mystical!Fashions!in!the!United!
States,! which! sells! goods! imported! from! the! Philippines! through! BET.!
Estelita! designated! her! daughter,! Teresita,! to! manage! BET! in! the!
Philippines! while! she! was! managing! Mystical! Fashions! in! the! United!
States.!
!
In!order!to!facilitate!the!convenient!operation!of!BET,!Estelita!executed!
a! special! power! of! attorney! appointing! Teresita! as! her! attorneyWinWfact!
to!obtain!loans.!By!virtue!of!this!SPA,!Teresita!obtained!a!sizeable!loan!
from! Pacific! Bank.! Three! months! after! the! loan,! BET! was! incorporated!
into! a! family! corporation! named! Belas! Export! Corporation! (BEC),!
engaged!in!the!same!business!and!utilized!the!same!properties.!The!loan!
was!restructured!in!the!name!of!BEC!and!secured!with!Lipats!property.!
!
BEC! defaulted,! and! the! bank! foreclosed! on! the! real! mortgage! and!
Eugenio! Trinidad! was! the! highest! bidder.! The! spouses! Lipat! claim! that!
the! loan! obtained! by! Teresita! were! ultra! vires! acts! because! they! were!
executed! without! the! requisite! board! resolution! of! the! Board! of!
Directors! of! BEC.! Pacific! Bank! and! Trinidad! alleged! in! common! that!
petitioners!Lipat!cannot!evade!payments!because!they!and!the!BEC!are!
one! and! the! same,! the! latter! being! a! family! corporation.! ! Respondent!
Trinidad!further!claimed!that!he!was!a!buyer!in!good!faith!and!for!value!
and! that! petitioners! are! estopped! from! denying! BECs! existence! after!
holding!themselves!out!as!a!corporation.!
*
Issue:*Whether!or!not!petitioners!are!estopped!from!asserting!that!the!
acts!were!ultra!vires!for!not!being!supported!by!Board!Resolutions.!
)
!
*
Held:* YES.! Firstly,! it! could! not! have! been! possible! for! BEC! to! release! a!
board!resolution!no!business!or!stockholders!meetings!were!conducted!
nor!were!there!election!of!officers!held!since!its!incorporation.!!In!fact,!
not!a!single!board!resolution!was!passed!by!the!corporate!board!and!it!
byWlaws,!or!relevant!provisions!of!law,!yet,!just!as!a!natural!person!may!
authorize!another!to!do!certain!acts!for!and!on!his!behalf,!the!board!of!
directors! may! validly! delegate! some! of! its! functions! and! powers! to!
officers,! committees,! or! agents.! ! The! authority! of! such! individuals! to!
bind! the! corporation! is! generally! derived! from! law,! corporate! byWlaws,!
was!Estelita!Lipat!and/or!Teresita!Lipat!who!decided!business!matters.!
!
Secondly,! the! principle! of! estoppel! precludes! petitioners! from! denying!
the!validity!of!the!transactions!entered!into!by!Teresita!Lipat!with!Pacific!
Bank,! who! in! good! faith,! relied! on! the! authority! of! the! former! as!
manager!to!act!on!behalf!of!petitioner!Estelita!Lipat!and!both!BET!and!
BEC.!Teresita!Lipat!had!dealt!with!Pacific!Bank!on!the!mortgage!contract!
or!authorization!from!the!board,!either!expressly!or!impliedly!by!habit,!
custom,! or! acquiescence! in! the! general! course! of! business.! 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,! in! 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!
by! virtue! of! a! special! power! of! attorney! executed! by! Estelita! Lipat.!!
Recall!that!Teresita!Lipat!acted!as!the!manager!of!both!BEC!and!BET!and!
had! been! deciding! business! matters! in! the! absence! of! Estelita! Lipat.!!
Further,! the! export! bills! secured! by! BEC! were! for! the! benefit! of!
Mystical! Fashion! owned! by! Estelita! Lipat.! Hence,! Pacific! Bank! cannot!
be!faulted!for!relying!on!the!same!authority!granted!to!Teresita!Lipat!by!
Estelita! Lipat! by! virtue! of! a! special! power! of! attorney.! ! It! is! a! familiar!
actual!or!constructive!knowledge!thereof,!whether!within!or!beyond!the!
scope!of!his!ordinary!powers.!
(
doctrine! that! 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! as! possessing! the! power! to! do! those! acts;!
thus,!the!corporation!will,!as!against!anyone!who!has!in!good!faith!dealt!
with! it! through! such! agent,! be! estopped! from! denying! the! agents!
authority.!
*
Doctrine:* While! the! power! and! responsibility! to! decide! whether! the!
corporation!should!enter!into!a!contract!that!will!bind!the!corporation!is!
lodged!in!its!board!of!directors,!subject!to!the!articles!of!incorporation,!
)
In!order!to!ratify!the!unauthorized!act!of!an!agent!and!make!it!
binding!on!the!corporation,!it!must!be!shown!that!the!governing!
body! or! officer! authorized! to! ratify! had! full! and! complete!
knowledge! of! all! the! material! facts! connected! with! the!
transaction! to! which! it! relates.! Ratification! can! never! be! made!
on! the! part! of! the! corporation! by! the! same! person! who!
wrongfully! assume! the! power! to! make! the! contract,! but! the!
ratification! must! be! by! the! officer! or! governing! body! having!
authority!to!make!such!contract.!Vicente( v.( Geraldez,( 52( SCRA(
210((1973).(
representative.1(
o The! admission! by! counsel! on! behalf! of! the! corporation!
of!the!latters!culpability!for!personal!loans!obtained!by!
its!corporate!officers!cannot!be!given!legal!effect!when!
the! admission! was! without! any! enabling! act! or!
attendant! ratification! of! corporate! act,! as! would!
authorize!or!even!ratify!such!admission.!In!the!absence!
of! such! ratification! or! authority,! such! admission! does!
not! bind! the! corporation.! Aguenza( v.( Metropolitan(

Bank(and(Trust(Co.,(271(SCRA(1((1997).(
Acts! done! in! excess! of! corporate! officers! scope! of!
authority! cannot! bind! the! corporation.! However,! when!
subsequently! a! compromise! agreement! was! on! behalf!
of! the! corporation! being! represented! by! its! President!
acting!pursuant!to!a!Board!of!Directors!resolution,!such!
constituted! as! a! confirmatory! act! signifying! ratification!
of! all! prior! acts! of! its! officers.!National( Power( Corp.( v.(
Alonzo^Legasto,(443(SCRA(342((2004).(
!
B.*Doctrine*of*Laches*or*Stale*Demands*
The! principle! of! laches! or! stale! demands! provides! that! the!
failure! or! neglect,! for! an! unreasonable! and! unexplained! length!
of! time,! to! do! that! which! by! exercising! due! diligence! could! or!
should!have!been!done!earlier,!or!the!negligence!or!omission!to!
assert!a!right!within!a!reasonable!time,!warrants!a!presumption!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
that! the! party! entitled! to! assert! it! either! has! abandoned! it! or!
declined! to! assert! it.! Rovels( Enterprises,( Inc.( v.( Ocampo,( 391(
SCRA(176((2002).(
The!ratificatory!act!that!would!bind!the!corporation!would!have!
to! come! from! the! Board! of! Directors! or! a! properly! authorized!
*
C.*Doctrine*of*Apparent*Authority:*Article*1883,*Civil*Code.*
If!a!corporation!intentionally!or!negligently!clothes!its!officers!or!
agents!with!apparent!power!to!perform!acts,!it!will!be!estopped!
to! deny! such! apparent! authority! is! real,! as! to! innocent! third!
persons! dealing! in! good! faith! with! such! officers! or! agents.!
Francisco(v.(GSIS,(7(SCRA(577((1963).2!
o
The!Doctrine!of!Apparent!Authority!must!proceed!from!
the!nature!of!the!position!held!by!the!corporate!officer!
in! question! in! that! he! represents! the! will! of! the!
corporation!through!the!Board!of!Directors.3!
!
Francisco(v.(GSIS(
(
Facts:*Trinidad!J.!Francisco,!in!consideration!of!a!loan,!mortgaged!parcel!
of! land! with! 21! bungalows! known! as! VicWMari! Compound.! In! January!
1959,! GSIS! extrajudicially! foreclosed! the! mortgage! on! the! ground! that!
up! to! that! date! the! Francisco! was! in! arrears! on! her! monthly!
installments.! On! the! same! date,! Atty.! Vicente! Franciscos! (father! of!
Trinidad)!request!was!approved!by!the!GSIS!board!which!was!sent!in!the!
form! of! a! telegram! with! the! signature! of! Rodolfo! Andal,! general!
manager! of! GSIS.! The! defendant! received! the! said! amount! however! it!
did!not,!take!over!the!administration!of!the!compound!as!agreed!upon.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!United!Coconut!Planters!Bank!v.!Planters!Products,!Inc.,!672!SCRA!285!(2012).!
3
)
!
Thus,! the! Franciscos! continued! to! administer! the! same,! but! remitting!
the! proceeds! to! the! GSIS.! Subsequently,! letters! were! sent! asking! the!
plaintiff! for! a! proposal! for! the! payment! of! her! indebtedness,! since! the!
oneWyear! period! for! redemption! had! expired.! In! reply,! Atty.! Francisco!
protested!against!this,!saying!that!they!have!already!accepted!his!offer!
1. The! acts! of! the! purported! corporate! officer! or! agent! justifying!
belief!in!the!agency!by!the!principal!corporation.!
2. Knowledge!thereof!by!the!principal!corporation!(i.e.!its!Board!of!
Directors)!which!is!sought!to!be!held;!and!
3. Reliance! thereon! by! the! principal! corporation! (i.e.! its! Board! of!
Directors)!consistent!with!ordinary!care!and!prudence.!
and! that! he! has! already! commenced! his! part! on! the! terms! of! his!
contract.!
*
Issue:**Whether!or!not!the!compromise!made!is!binding!upon!defendant!
corporation.!
*
Held:* YES.! The! compromise! made! through! the! telegrams! is! binding.!
Under! Article! 1910! of! the! New! Civil! Code,2!acts! done! by! such!
officers! beyond! the! scope! of! their! authority! cannot! bind! the!
corporation! unless! it! has! ratified! such! acts! expressly! or! tacitly,!
or!is!estopped!from!denying!themThus,!contracts!entered!into!
by! corporate! officers! beyond! the! scope! of! authority! are!
unenforceable! against! the! corporation! unless! ratified! by! the!
There!was!apparent!authority!!that!of!the!GM,!Andal.!Even!assuming!
there! was! a! mistake! in! the! telegram,! GSIS! notified! the! Franciscos! too!
late! ! and! only! after! having! received! several! remittances.! There! was!
also!notice!to!the!GSIS,!because!Vicente!attached!the!disputed!telegram!
in! replying! to! that! which! was! sent! by! GSIS.! Notice! to! an! officer! with!
regard! to! matters! within! his! authority! is! tantamount! to! notice! to! the!
corporation.!There!was!thus!implied!ratification.!
*
Doctrine:* Persons! transacting! with! corporations! need! not! disbelieve!
every!act!of!its!officers,!especially!those!regular!on!their!face.!They!are!
entitled!to!rely!upon!external!manifestations!of!corporate!consent.!And!
if!a!corporation!knowingly!permits!its!officers!to!do!acts!with!apparent!
authority,!it!is!estopped!from!denying!such!authority.!
For! the! Doctrine! of! Apparent! Authority! to! apply,! the! party!
invoking!the!same!must!prove!the!following:1!
Corporation.! Woodchild( Holdings,( Inc.( v.( Roxas( Electric(

Constructions(Co.,(Inc.,(436(SCRA(235((2004).(
o Atty.! Hofilea! !! what! was! unique! here,! which! the!
presidents! action! was! not! binding,! is! that! there! was! a!
limit! to! the! authority! of! the! president! to! sell! in!
connection!with!the!land.!(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Woodchild! Holdings,! Inc.! v.! Roxas! Electric! Constructions! Co.,! Inc.,! 436! SCRA!
235! (2004)! as! cited! in! Villanueva,! C.! L.,! &! VillanuevaWTiansay,! T.! S.! (2013).!
Philippine!Corporate!Law.!(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!Article!1910.!!
The! principal! must! comply! with! all! the! obligations! which! the! agent! may! have!
contracted!within!the!scope!of!his!authority.!
!
As!for!any!obligation!wherein!the!agent!has!exceeded!his!power,!the!principal!is!
not!bound!except!when!he!ratifies!it!expressly!or!tacitly.!(1727)!
)
!
Woodchild(Holdings,(Inc.(v.(Roxas(Electric(Constructions(Co.,(Inc.(
(
Facts:* Roxas! Electric! and! Construction! Company! Inc! (RECCI)! owned! 2!
parcels! of! land,! Lot! B1! and! Lot! B2.! RECCIs! Board! of! Directors! issued! a!
resolution! authorizing! the! corporation! through! its! President,! Roberto!
Roxas,! to! sell! B2! and! to! sign! and! execute! the! necessary! documents.!
Roxas! sold! B2! to! Woodchild! Holdings! Inc! (WHI)! through! its! President,!
Jonathan! Dy.! In! the! Deed! of! Absolute! Sale,! Roxas! also! granted! WHI! a!
right!of!way!over!B1!and!an!option!to!purchase!certain!portions!thereof!
in! case! the! need! arose! as! earlier! requested! by! WHI.! After! Roxas! died,!
WHI!demanded!that!RECCI!sell!a!portion!of!B1!but!it!refused!claiming!it!
never!authorized!Roxas!to!do!so.!
*
Doctrine:* For! an! act! of! the! principal! to! be! considered! as! an! implied!
ratification! of! an! unauthorized! act! of! an! agent,! such! act! must! be!
inconsistent! with! any! other! hypothesis! than! that! he! approved! and!
intended!to!adopt!what!had!been!done!in!his!name.!
a!particular!act,!ratification!of!that!act!must!also!be!in!writing.(
(
*
Issue:* Whether!or!not!RECCI!is!estopped!from!claiming!that!Roxas!had!
not!authority!to!sell!B1.!
*
Held:*NO.!For!the!principle!of!apparent!authority!to!apply,!the!WHI!was!
burdened!to!prove!the!following:!(a)!the!acts!of!RECCI!justifying!belief!in!
the! agency! by! the! WHI;! (b)! knowledge! by! RECCI! which! is! sought! to! be!
held;!and,!(c)!reliance!thereon!by!WHI!consistent!with!ordinary!care!and!
prudence.!!
!
The!apparent!power!of!an!agent!is!to!be!determined!by!the!acts!of!the!
principal! and! not! by! the! acts! of! the! agent.! There! is! no! evidence! of!
specific! acts! made! by! the! RECCI! showing! or! indicating! that! it! had! full!
knowledge! of! any! representations! made! by! Roxas! to! WHI! that! it! had!
authorized! Roxas! to! grant! WHI! an! option! to! buy! B1,! or! to! create! a!
burden! or! lien! thereon.! There! is! no! implied! ratification! when! RECCI!
received!the!P5M!purchase!price!for!B2.!
Ratification!is!based!on!waiver!(intentional!relinquishment!of!a!
known! right).! Ratification! cannot! be! inferred! from! acts! that! a!
principal! has! a! right! to! do! independently! of! the! unauthorized!
act!of!the!agent.!If!writing!is!required!to!grant!an!authority!to!do!
The!general!rule!remains!that,!in!the!absence!of!authority!from!
the! Board! of! Directors,! no! person,! not! even! its! officers,! can!
validly! bind! a! corporation.! If! a! corporation,! however,!
consciously! lets! one! of! its! officers,! or! any! other! agent,! to! act!
within! the! scope! of! an! apparent! authority,! it! will! be! estopped!
from!denying!such!officers!authorityUnmistakably,!the!Courts!
directive!in!Yao!Ka!Sin!Trading!is!that!a!corporation!should!first!
prove! by! clear! evidence! that! its! corporate! officer! is! not! in! fact!
authorized! to! act! on! its! behalf! before! the! burden! of! evidence!
shifts!to!the!other!party!to!prove,!by!previous!specific!acts,!that!
an! officer! was! clothes! by! the! corporation! with! apparent!
authority.! Westmont( Bank( v.( Inland( Construction( and( Dev.(
Corp.,(582(SCRA(230((2009).!
!
Westmont(Bank(v.(Inland(Construction(and(Dev.(Corp.(
(
Facts:*Inland!Construction!and!Development!Corp.!executed!real!estate!
mortgages!over!its!3!properties!and!3!promissory!notes!for!the!loans!it!
)
!
obtained!from!Westmont!Bank.!A!Deed!of!Assignment,!Conveyance!and!
Release! was! executed! by! Aranda! (President! of! Inland)! wherein! he!
assigns! all! his! rights! and! interest! in! HanilWGonzalez! Corp! in! favour! of!
Abrantes.! In! the! deed,! the! obligations! of! Inland! (including! that! with!
Westmont! Bank)! shall! be! transferred! to! Abrantes.! Westmont! Banks!
Account!officer,!Calo,!signed!for!its!conformity!to!the!deed.!Inland!then!
filed! a! complaint! for! injunction! in! the! Regional! Trial! against! Westmont!
Bank!when!the!latter!foreclosed!the!properties!mortgaged!by!Inland.!In!
their! Answer,! the! bank! claimed! that! it! had! no! knowledge! of! such!
assignment!of!obligation!and!did!not!conform!to!it.*
*
Issue:* Whether! or! not! Westmont! Bank! is! bound! by! the! deed! of!
Assignment!
*
Held:*YES.!Calo!(signee!in!the!deed!of!assignment)!was!the!one!assigned!
to!transact!on!behalf!of!the!Bank!with!respect!to!the!loan!transactions!
with!Inland.!Because!of!this,!it!is!presumed!that!he!had!the!authority!to!
sign!for!the!bank!in!the!Deed!of!Assignment.!The!Court!stated!that!if!a!
corporation!consciously!lets!one!of!its!officers,!or!any!other!agent,!to!act!
If!a!corporation!knowingly!permits!one!of!its!officers!to!
act! within! the! scope! of! an! apparent! authority,! it! holds!
him! out! to! the! public! as! possessing! the! power! to! do!
those!acts,!the!corporation!will,!as!against!anyone!who!
has! in! good! faith! dealt! with! it! through! such! agent,! be!
estopped! from! denying! the! agents! authority.! Soler( v.(
Court( of( Appeals,( 358( SCRA( 57( (2001);( Rural( Bank( of(
Milaor((Camarines(Sur)(v.(Ocfemia,(325(SCRA(99((2000)(
The! authority! of! a! corporate! officer! dealing! with! third!
persons! may! be! actual! or! apparent! .! .! .! the! principal! is!
liable! for! the! obligations! contracted! by! the! agent.! The!
agents!apparent!representation!yields!to!the!principal's!
true! representation! and! the! contract! is! considered! as!
entered! into! between! the! principal! and! the! third!
person.! First( Philippine( Intl( Bank( v.( Court( of( Appeals,(
252(SCRA(259((1996).(
Victim! Standing! for! doctrine! to! apply! !! the! doctrine! of!

apparent! authority! cannot! apply! to! benefit! a! party! who! deals!
with! the! corporation! aware! of! the! corporate! representatives!
lack!of!authority.1(
o Apparent!authority!is!determined!only!by!the!acts!of!the!
principal!and!not!by!the!acts!of!the!agent.!There!can!be!
no! apparent! authority! of! an! agent! without! acts! or!
conduct! on! the! part! of! the! principal;! such! acts! must!
within! the! scope! of! an! apparent! authority! it! will! be! estopped! from!
denying! such! officers! authority.! The! burden! of! proof! is! set! upon! the!
Corporation.!In!this!case!the!Bank!failed!to!discharge!its!primary!burden!
of!proving!that!Calo!was!not!authorized!to!bind!it.!
*
Doctrine:* The!Court!stated!that!if!a!corporation!consciously!lets!one!of!
its! officers,! or! any! other! agent,! to! act! within! the! scope! of! an! apparent!
authority!it!will!be!estopped!from!denying!such!officers!authority.!The!
have! been! known! and! relied! upon! in! good! faith! as! a!
result!of!the!exercise!of!reasonable!prudence!by!a!third!
party! as! claimant! and! such! acts! or! conduct! must! have!
burden!of!proof!is!set!upon!the!Corporation.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
)
produced! a! change! of! position! to! the! third! partys!

detriment.(
Persons! who! deal! with! corporate! agents! within!
circumstances! showing! that! the! agents! are! acting! in!
excess! of! corporate! authority,! may! not! hold! the!
corporation! liable.! Traders( Royal( Bank( v.( Court( of(
transaction! of! discounting! the! checks! involving! the! same!

personalities! wherein! any! enabling! resolution! from! the! Board!
was! dispensed! with! and! yet! the! bank! was! able! to! collect! from!
the! corporation.! Nyco( Sales( Corp.( v.( BA( Finance( Corp.,( 200(
SCRA(637((1991).(
Appeals,(269(SCRA(601((1997).(
Foundation,(Inc.,(v.(Court(of(Appeals,(421(SCRA(328((2004).(
A! verbal! promise! given! by! the! Chairman! and! President! of! the!
company!to!the!general!manager!and!chief!operating!officer!to!
give! the! latter! unlimited! sick! leave! and! vacation! leave! benefits!
and! its! cash! conversion! upon! his! retirement! or! resignation,!
when!not!an!integral!part!of!the!companys!rules!and!policies,!is!
not!binding!on!the!company!when!it!is!without!the!approval!of!
the! Board! of! Directors.! Kwok( v.( Philippine( Carpet(
Manufacturing(Corp.,(457(SCRA(465((2005).(
When! an! officer! in! a! banking! corporation! arrange! a! credit! line!

agreement!and!forwards!the!same!to!the!legal!department!at!its!
head!officer,!and!the!bank!did!no!disaffirm!the!contract,!then!it!
is!bound!by!it.!Premier(Dev.(Bank(v.(Court(of(Appeals,(427(SCRA(
686((2004).(
President! ostensible! and! apparent! authority! to! inter! alia! deal!

with! the! respondent! Bank,! and! therefore! the! foundation! is!
estopped! from! questioning! the! Presidents! authority! to! obtain!
the! subject! loans! from! the! respondent! Bank.! Lapulapu(
Apparent*authority*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,! in! other! words! the! apparent!
authority!to!act!in!general!with!which!is!clothes!them;!or!(2)!the!
acquiescence! in! his! acts! of! a! particular! nature,! with! actual! or!
constructive!knowledge!thereof,!within!or!beyond!the!scope!of!
his! ordinary! powers.! InterÂsia( Investment( Industries( v.( Court(
of(Appeals,(403(SCRA(452((2003).(
Examples:*
Per! its! Secretarys! Certificate,! the! foundation! had! given! its!
The! acceptance! of! the! offer! to! purchase! by! the! clerk! of! the!
A! corporation! cannot! disown! its! Presidents! act! of! applying! to!

the!bank!for!credit!accommodation,!simply!on!the!ground!that!it!
never!authorized!the!President!by!the!lack!of!any!formal!board!
resolution.! The! following! placed! the! corporation! and! its! Board!
branch! of! the! bank,! and! the! representation! that! the! manager!
had! already! approved! the! sale! (which! in! fact! was! not! true),!
cannot! bind! the! bank! to! the! contract! of! sale,! it! being! obvious!
that! such! a! clerk! is! not! among! the! bank! officers! upon! whom!
putative! authority! may! be! reposed! by! a! third! party.! There! is,!
of!Directors!in!estoppel!in!pais:!Firstly,!the!byWlaws!provides!for!
the!powers!of!the!President,!which!includes,!executing!contracts!
and! agreements,! borrowing! money,! signing,! indorsing! and!
delivering! checks;! secondly,! there! were! already! previous!
thus,! no! legal! basis! to! bind! the! bank! into! any! valid! contract! of!
sale! with! the! buyers,! given! the! absolute! absence! of! any!
approval!or!consent!by!any!responsible!officer!of!the!bank.!DBP(
v.(Ong,(460(SCRA(170((2005).(
)
Rationale* for* the* Doctrine* of* Apparent* Authority:! Naturally,!

the!third!person!has!little!or!no!information!as!to!what!occurs!in!
corporate! meeting;! and! he! must! necessarily! rely! upon! the!
external! manifestations! of! corporate! consent.! The! integrity! of!
commercial!transactions!can!only!be!maintained!by!holding!the!
corporation!strictly!to!the!liability!fixed!upon!it!by!its!agents!in!
accordance! with! law.! What! transpires! in! the! corporate! board!
room! is! entirely! an! internal! matter.! Hence,! petitioner! may! not!
impute! negligence! on! the! part! of! the! respondents! in! failing! to!
find!out!the!scope!of!Atty.!Solutas!authority.!Indeed,!the!public!
has!the!right!to!rely!on!the!trustworthiness!of!bank!officers!and!
their! acts.! Associated( Bank( v.( Pronstroller,( 558( SCRA( 113(
(2008).(
(
Associated(Bank(v.(Pronstroller(
(
Facts:* The! Spouses! Vaca! executed! a! Real! Estate! Mortgage! in! favor! of!
Associated!Bank!over!their!parcel!of!residential!land!in!Green!Meadows!
Subdivision.! Eventually,! the! property! was! foreclosed! and! sold! at! public!
auction!with!Associated!Bank!as!the!highest!bidder.!However,!the!Vacas!
commenced! an! action! for! the! nullification! of! the! real! estate! mortgage!
and! the! foreclosure! sale.! Pending! its! resolution! in! the! Supreme! Court,!
Associated!Bank!negotiated!with!the!Spouses!Pronstroller!through!Atty.!
Jose! Soluta,! the! banks! Vice! President! and! member! of! its! Board! of!
Directors.! Letter! agreements! were! executed! whereby! the! Spouses!
Pronstrollers! would! give! a! downpayment! (first! letter! agreement),! and!
then!given!an!extension!to!pay!the!balance!which!would!be!given!upon!
delivery!of!the!property!subsequent!to!the!resolution!of!the!Vaca!case!
with!such!property!being!free!from!occupants!(embodied!in!the!second!
letter! agreement).! Later,! the! bank! reorganised! its! management! and!

Atty.! Dayday! replaced! Atty.! Soluta.! Atty.! Dayday! informed! Spouses!
Pronstroller! that! their! deposit! would! be! forfeited! because! the! second!
letter!agreement!was!a!mistake!because!Atty.!Soluta!had!no!authority!to!
give!an!extension.!
*
Issue:* Whether! or! not! Associated! Bank! is! bound! by! the! LetterW
Agreement! signed! by! Atty.! Soluta! under! the! doctrine! of! apparent!
authority.!
*
Held:* YES.! Undoubtedly,! the! Associated! Bank! had! previously! allowed!
Atty.!Soluta!to!enter!into!the!first!agreement!without!a!board!resolution!
expressly! authorizing! him;! thus,! it! had! clothed! him! with! apparent!
authority!to!modify!the!same!via!the!second!letterWagreement.!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.!
*
Doctrine:* The! doctrine! of! apparent! authority,! with! special! reference!
to! banks,! had! long! been! recognized! in! this! jurisdiction.! 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! in! 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,! within! or! beyond! the! scope! of! his!
ordinary!powers.!
(
)
Atty.!Hofilea!!!the!byWlaws!do!not!always!have!all!the!details!
of! the! officers! but! it! is! a! good! place! to! start! to! determine!
whether!the!officer!you!are!dealing!with!has!authority!or!not!to!
deal!with!you!regarding!the!matter.!Absent!this,!you!can!ask!the!
company! to! provide! you! with! a! Board! Resolution! authorizing! a!
particular!person!to!deal!with!you!and!under!what!limitations.!
!
IV.*Qualifications*of*Directors/Trustees*(Sections*23*and*27)*
*
law!requires!is!that!he!has!legal!title!to!the!share.!Under!the!old!
Corporation! Law! it! was! required! that! every! director! must! own!
"in!his!own!right"!at!least!one!share!of!the!capital!stock!of!the!
corporation.! Under! the! present! Section! 23! of! the! Corporation!
Code,!it!requires!only!that!the!share!of!a!director!"shall!stand!in!
his!name!on!the!books!of!the!corporation."1!
Section*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* nonTstock* 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.*
The!fact!that!a!director!is!only!holding!the!share!as!a!nominee!of!
another!person!does!not!disqualify!him!as!a!director.!What!the!
The!1Wshare!requirement!is!a!continuing!requirement!
2. Rules*on*Additional*Qualifications*and*Disqualifications*
The! qualifications! provided! for! in! the! law! are! only! minimum!
qualifications;!additional!qualifications!and!disqualifications!can!
be!provided!for!but!only!by!proper!provisions!in!the!byWlaws!of!
the!corporation.!Gokongwei,(Jr.(v.(SEC,(89(SCRA(336((1979).(
o Atty.! Hofilea! !! other! qualifications! may! be! found!
from! the! laws! (e.g.! Philippine! resident,! possess! legal!
capacity).! As! a! general! rule,! citizenship! is! not! a!
requirement!to!be!a!director!of!a!corporation.!However,!
it!may!be!a!requirement!in!cases!directors!of!corporate!
public!utilities!operating!on!a!franchise.(
(
Gokongwei,(Jr.(v.(Securities(and(Exchange(Commission(
*
Facts:!John!Gokongwei,!a!stockholder!of!San!Miguel!Corporation!(and!a!
president! and! stockholder! of! Robina! Corp.! and! Consolidated! Foods!
Corp.,!a!competitor!of!SMC,!in!various!areas,!such!as!Instant!Coffee,!Ice!
*
1. Qualifications*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
Cream,! Poultry! and! Hog! Feeds! and! many! more),! filed! a! petition! for!
declaration!of!nullity!of!amended!byWlaws,!cancellation!of!certificate!of!
filing! of! the! amendedWby! laws,! injunction! and! damages! against! the!
majority!of!the!members!of!the!Board!of!Directors!of!the!SMC!based!on!
the!following!grounds:!
directors! is! expressly! conferred! by! law.! Every! corporation! has! the!
inherent! power! to! adopt! byWlaws! for! its! internal! government,! and! to!
regulate!the!conduct!and!prescribe!the!rights!and!duties!of!its!members!
towards! itself! and! among! themselves! in! reference! to! the! management!
of! its! affairs.! And! under! section! 21! of! the! Corporation! Law,! a!
Corporations! have! no! inherent! power! to! disqualify! a!

stockholder!from!being!elected!as!director!depriving!him!of!his!
vested!right!because!he!is!an!officer!of!a!competitor!company.!
corporation!may!prescribe!in!its!byWlaws!the!qualifications,!duties!and!
compensation!of!directors,!officers!and!employees!...!(
The! corporation! has! been! investing! corporate! funds! in! other!
A!director!must!own!at!least!one!share!of!stock.!Pea% v.% Court(

of(Appeals,(193(SCRA(717((1991).1(
corporations!and!business!outside!of!the!primary!purpose!of!the!
corporation!
*
Issue:* Whether! or! not! the! corporation! has! the! power! to! disqualify! a!
The!law!does!not!require!that!a!ViceWPresident!be!a!stockholder.!
Baguio(v.(Court(of(Appeals,(226(SCRA(366((1993).!
Beneficial!ownership!under!VTA!no!longer!qualifies.!Lee(v.(Court(
of(Appeals,(205(SCRA(752((1992).(
competitor!from!being!elected!to!the!board!of!directors!as!a!reasonable!
exercise!of!corporate!authority!
*
Held:*YES.!Any!corporation!may!amend!its!articles!of!incorporation!by!a!
vote! or! written! assent! of! the! stockholders! representing! at! least! 2/3! of!
the! subscribed! capital! stock! of! the! corporation.! It! cannot! be! said! that!
prior!to!this,!Gokongwei!has!a!vested!right!to!vote!and!be!voted!for!in!
the! face! of! the! fact! that! the! law! at! the! time! such! right! as! stockholder!
was!acquired!contained!the!prescription!that!the!corporate!charter!and!
the!byWlaw!shall!be!subject!to!amendment,!alteration!and!modification.!
Every! person! who! buys! a! stock! with! a! corporation! impliedly! contracts!
that!the!will!of!the!majority!shall!govern!in!all!matters!within!the!limits!
of! the! act! of! incorporation! and! lawfully! enacted! byWlaws! and! not!
forbidden!by!law.!
*
Doctrine:! The! authority! of! a! corporation! to! prescribe! qualifications! of!
(
Lee(v.(Court(of(Appeals(
(
Facts:* Herein! petitioners! were! served! summons! in! accordance! with! a!
third!party!complaint!filed!against!Alfa!Integrated!Textile!Mills!of!which!
Lee! and! Lacdao! was! president! and! vice! president! respectively.! They!
claim! that! the! summons! for! Alfa! was! erroneously! served! upon! them!
considering! that! the! management! of! Alfa! had! been! transferred! to!
Development! Bank! of! the! Philippines.! They! claim! that! the! voting! trust!
agreement!between!Alfa!and!DBP!vests!all!management!and!control!of!
Alfa! to! the! DBP.! DBP! claimed! that! it! was! not! authorized! to! receive!
summons!on!behalf!of!Alfa!since!DBP!had!not!taken!over!the!company!
which!has!a!separate!and!distinct!corporate!personality!and!existence.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Also!Detective!&!Protective!Bureau,!Inc.!v.!Cloribel,!26!SCRA!255!(1969).!
)
!
!
Issue:* Whether! or! not! the! execution! of! the! voting! trust! agreement! by!
Lee! and! Lacdao! whereby! all! their! shares! to! the! corporation! have! been!
transferred!to!the!trustee!deprives!the!stockholder!of!their!positions!as!
directors!of!the!corporation.!
director,! what! is! material! is! the! legal! title! to,! not! beneficial! ownership!
of,!the!stock!as!appearing!on!the!books!of!the!corporation.(
(
3. Rule*on*Corporate*Stockholders1*
*
Held:* YES.! Lee! and! Lacdao,! by! virtue! of! the! voting! trust! agreement!
executed! in! 1981! disposed! of! all! their! shares! through! assignment! and!
delivery! in! favor! of! DBP,! as! trustee.! Consequently,! Lee! and! Lacdao!
ceased! to! own! at! least! one! outstanding! share! in! their! names! on! the!
books!of!Alfa!as!required!under!Section!23!of!the!new!Corporation!code.!
They! also! ceased! to! have! anything! to! do! with! the! management! of! the!
corporation! cannot! attend! personally! board! meetings! of! the!

corporation!wherein!it!is!elected!as!a!director,!but!only!through!
representative! or! a! proxy,! which! would! contravene! the!
established! rule! that! a! director! may! not! be! represented! by! a!
proxy!at!a!meeting!of!the!board.2*
enterprise,! they! ceased! to! be! directors.! Hence,! the! transfer! of! their!
shares! to! the! DBP! created! vacancies! in! their! respective! positions! as!
directors!of!Alfa.!In!the!absence!of!a!showing!that!DBP!had!caused!to!be!
transferred! in! their! names! one! share! of! stock! for! the! purpose! of!
qualifying!as!directors!of!Alfa,!Lee!and!Lacdao!could!no!longer!deemed!
to!retain!their!status!as!officers!of!Alfa.!Hence,!the!service!of!summons!
to!Alfa!through!Lee!and!Lacbao!was!invalid.!
*
Doctrine:* A! voting! trust! agreement! results! in! the! separation! of! the!
voting! rights! of! a! stockholder! from! his! other! rights.! This! may! create! a!
dichotomy! between! the! equitable! or! beneficial! ownership! of! the!
corporate!shares!of!a!stockholder,!on!the!one!hand,! and!the!legal!title!
thereto!on!the!other.!With!the!omission!of!the!phrase!"in!his!own!right"!
[in!the!new!corporation!code]!the!election!of!trustees!and!other!persons!
who! in! fact! are! not! the! beneficial! owners! of! the! shares! registered! in!
their! names! on! the! books! of! the! corporation! becomes! formally!
legalized.!Hence,!this!is!a!clear!indication!that!in!order!to!be!eligible!as!a!
In! cases! of! corporate! stockholders! or! corporate! members! of! a!

corporation,! such! entities! cannot! be! qualified! to! be! elected! as!
such!to!the!board!of!the!corporation.!A!corporation!cannot!act!
by!itself!but!only!through!its!officers!and!agents,!and!as!such!a!
In! the! case! of! corporate! stockholders! or! corporate! members,!

their! representation! in! the! board! can! be! achieved! by! making!
their! individual! representatives! trustees! of! the! shares! or!
membership,! which! would! then! make! them! stockholders! or!
members! of! record,! and! thereby! qualified! to! be! elected! to! the!
board,! but! at! the! same! time! maintaining! legal! responsibility! of!
trustees!to!the!corporate!stockholder!or!members.!
4. Disqualifications*
*
Section*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*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
!Section!26,!Corporation!Code.!!
)
!
or* appointment,* shall* qualify* as* a* director,* trustee* or* officer* of* any*
corporation.*
**
Punishable! by! imprisonment! or! a! period! exceeding! 6! years:!

regardless! of! your! actual! sentence,! so! long! as! the! crime! was!
punishable! by! a! period! exceeding! 6! years,! you! will! be!
disqualified!once!convicted.*
Conviction!of!a!violation!of!the!Corporation!Code:!since!it!is!only!
the! Court! who! can! determine! if! you! have! violated! the! Code,!
then! you! probably! need! to! have! been! convicted! of! such!
violation!in!order!to!be!considered!disqualified.*
*
V.*Election*of*Directors*and*Trustees**
*
A.*Directors*(Sections*24*and*26)*
*
Section*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*
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* byTlaws,* 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.*
*
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* byTlaws,* in* his* own* name* on* the*
stock*books*of*the*corporation,*or*where*the*byTlaws*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*
)
Entitle!to!Vote!!!Do!you!include!in!counting,!for!purposes!of!
a!majority!present!in!a!meeting,!those!delinquent!stockholders?!
Does!this!phrase!apply!to!stock!corporations?*
By! ballot! !! it! is! not! necessary! that! a! majority! of! the!
stockholders!agree!that!the!election!be!by!ballot.!So!long!as!one!
(any)! shareholder! requests! for! the! election! to! be! conducted!
by!ballot,!then!such!should!be!done.*
Atty.! Hofilea! !! the! number! of! seats! for! directors! must! be!
maintained.!It!cannot!be!altered!beyond!that!prescribed!by!the!
articles! of! incorporation.! However,! in! reality,! if! no! one! objects!
!
then! the! stockholders! can! choose! to! just! fill! some! of! the! seats!
and!not!all.*
1. Cumulative*Voting1*
Cumulative! voting! !! is! a! voting! procedure! wherein! 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.!
Straight! voting! !! allows! a! simple! majority! of! the!
shareholders! to! elect! the! entire! board! of! directors!
leaving!the!minority!shareholders!unrepresented.!Under!
straight! voting,! each! shareholder! simply! votes! the!
number!of!shares!he!owns!for!each!director!nominated.!
Section! 24! of! the! Corporation! Code! expressly! provides! for!

cumulative! voting! in! the! election! of! the! directors! of! stock!
corporations.! The! provisions! for! cumulative! voting! are!
mandatory.!
The!policy!of!cumulative!voting!is!to!allow!minority!stockholders!
the!capacity!to!be!able!to!elect!representatives!to!the!board!of!
directors.2!!
o No! exception! is! provided! for! in! Section! 24! so! that! the!
articles!may!not!provide!for!restriction!or!suppression!of!
the!principle!of!cumulative!voting!in!stock!corporations.!!
represents!all!interest!groups!in!the!corporate!setting.**
2. Report*on*Election*of*Directors,*Trustees*and*Officers*
*
Section*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.*
*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
!Glazer,! Glazer,! &! Grofman,! Cumulative! Voting! In! Corporate! Elections:!
Introducing!Strategy!into!the!Equation,!35!S.!CAROLINA!L.!REV.!295!(1934).!
Cumulative! voting! is! reckoned! to! be! equitable! since! it! allows!
stockholders!the!opportunity!for!representation!on!the!board!of!
directors! in! proportion! to! their! holdings.! Such! minority!
representation!is!believed!not!to!interfere!with!the!principle!of!
majority! rule! since! the! number! of! directors! elected! by! each!
group!will!vary!with!its!proportion!of!ownership.!!
o On!the!other!hand,!the!system!of!cumulative!voting!has!
been! criticized! by! other! sectors! because! in! tends! to!
partisan! representation! in! the! board,! which! is!
inconsistent! with! the! notion! that! a! director! properly!
Cumulative!Voting!v.!Straight!Voting!
o
)
The! provisions! of! Section! 26! of! the! Corporation! Code! are!
deemed! to! be! mandatory! and! jurisdictional.! And! the!
determination!of!who!are!the!legal!directors!and!officers!of!the!
!
corporation! is! conditioned! upon! the! reports! submitted! to! the!
SEC!pursuant!to!said!section.1!
Since!under!Section!26!of!the!Corporation!Code!all!corporations!
are! mandated! to! submit! a! formal! report! to! the! SEC! on! the!
changes!in!their!directors!and!officers,!then!only!those!directors!
and! officers! appearing! in! such! report! (General! Information!
Sheet)! to! the! SEC! are! deemed! legally! constituted! to! bind! the!
corporation,! especially! in! the! bringing! of! suits! in! behalf! of! the!
corporation.! Premium( Marble( Resources( v.( Court( of( Appeals,(
264(SCRA(11((1996).(
(
Premium(Marble(Resources(v.(Court(of(Appeals(
(
Facts:!The!case!began!when!Premium!Marble!Resources!Inc.,!assisted!by!
Atty.! Arnulfo! Dumadag! as! counsel,! filed! an! action! for! damages! against!
International! Corporate! Bank.! Later,! the! same! corporation,! i.e.,!
Premium,! but! this! time! represented! by! Siguion! Reyna,! Montecillio! and!
Ongsiako!Law!Office!as!counsel,!filed!a!motion!to!dismiss!the!action!of!
petitioners! on! the! ground! that! the! filing! of! the! case! was! without!
authority! from! its! duly! constituted! board! of! directors! as! shown! by! the!
excerpt!of!the!minutes!of!the!Premiums!board!of!directors!meeting.!In!
its! opposition! to! the! motion! to! dismiss,! Premium! thru! Atty.! Dumadag!
contended! that! the! persons! who! signed! the! board! resolution! namely!
Belen,! Jr.,! Nograles! &! Reyes,! are! not! directors! of! the! corporation! and!
were! allegedly! former! officers! and! stockholders! of! Premium! who! were!
dismissed! for! various! irregularities! and! fraudulent! acts;! that! Siguion!
Reyna! Law! office! is! the! lawyer! of! Belen! and! Nograles! and! not! of!
Premium!and!that!the!Articles!of!Incorporation!of!Premium!shows!that!
Belen,!Nograles!and!Reyes!are!not!majority!stockholders.!
!
Issue:*Whether!or!not!the!filing!of!the!case!for!damages!against!private!
respondent! bank! (International! Corporate! Bank)! was! authorized! by! a!
duly!constituted!Board!of!Directors!of!the!petitioner!corporation*
*
Held:* NO.! The! Minutes! of! the! Meeting! of! the! Board! on! April! 1,! 1982!
states!that!the!newly!elected!officers!for!the!year!1982!were!Oscar!Gan,!
Mario!Zavalla,!Aderito!Yujuico!and!Rodolfo!Millare,!petitioner!however,!
failed!to!show!proof!that!this!election!was!reported!to!the!SEC.!In!fact,!
the! last! entry! in! their! General! Information! Sheet! with! the! SEC,! as! of!
1986!appears!to!be!the!set!of!officers!elected!in!March!1981.!The!claim,!
therefore,!of!petitioners!as!represented!by!Atty.!Dumadag,!that!Zaballa,!
et! al.,! are! the! incumbent! officers! of! Premium! has! not! been! fully!
substantiated.!Hence,!the!court!agrees!with!the!finding!of!the!Court!of!
Appeals,! that! in! the! absence! of! any! board! resolution! from! its! board! of!
directors!the![sic]!authority!to!act!for!and!in!behalf!of!the!corporation,!
the!present!action!must!necessarily!fail.!The!power!of!the!corporation!to!
sue!and!be!sued!in!any!court!is!lodged!with!the!board!of!directors!that!
exercises!its!corporate!powers.!!
*
Doctrine:*By!the!express!mandate!of!the!Corporation!Code!(Section!26),!
all!corporations!duly!organized!pursuant!thereto!are!required!to!submit!
within! the! period! therein! stated! (30! days)! to! the! Securities! and!
Exchange! Commission! the! names,! nationalities! and! residences! of! the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
directors,!trustees!and!officer!selected.!!
)
The! underlying! policy! of! the! Corporation! Code! is! that! the!
business! and! affairs! of! a! corporation! must! be! governed! by! a!
board!of!directors!whose!members!have!stood!for!election,!and!
who! have! actually! been! elected! by! the! stockholders,! on! an!
annual! basis.! Only! in! that! way! can! the! directors! continued!
accountability! to! the! shareholders,! and! the! legitimacy! of! their!
decisions! that! bind! the! corporations! stockholders,! be! assured.!
The!shareholder!vote!is!critical!to!the!theory!that!legitimizes!the!
exercise! of! power! by! the! directors! or! officers! over! properties!
that!they!do!not!own.!Valle( Verde( Country( Club,( Inc.( v.( Africa,(
598(SCRA(202((2009).(
(
Valle(Verde(Country(Club,(Inc.(v.(Africa(
(
Facts:! The! Valle! Verde! Country! Club! (VVCC)! has! a! 9Wmember! Board! of!
Directors.! From! 1997! to! 2001,! the! requisite! quorum! for! holding! of! the!
stockholders!meeting!could!not!be!obtained!so!the!directors!continued!
to!serve!in!holdWover!capacity.!In!1998,!two!directors!resigned!and!were!
replaced.! Africa! questions! the! election! of! the! two! directors! with! the!
Securities! and! Exchange! Commission! for! allegedly! being! in!
contravention! of! Section! 29! of! the! Corporation! Code! which! states! that!
all! vacancies! that! occur! other! than! by! removal! by! the! stockholders! or!
expiration!of!term!may!be!filled!by!the!vote!of!at!least!a!majority!of!the!
remaining! directors! (if! still! constituting! a! quorum).! However! if! the!
vacancy!was!caused!by!either!removal!by!the!stockholders!or!expiration!
of! term,! then! it! must! be! filled! by! a! vote! of! the! stockholders.! Anyone!
who! would! fill! the! vacancy! prior! to! such! will! only! serve! for! the!
unexpired! term.! Africa! points! out! that! since! Makalintals! term! had!
already!expired!with!the!lapse!of!the!oneWyear!term!provided!in!Section!
23,! there! is! no! more! unexpired! term! during! which! Ramirez! could!
serve.!VVCC!on!the!other!hand!alleges!that!a!members!term!shall!be!for!
one! year! and! until! his! successor! is! elected! and! qualified;! otherwise!
stated,!a!members!term!expires!only!when!his!successor!to!the!Board!is!
elected!and!qualified.!
*
Issue:*Whether!or!not!the!remaining!directors!of!a!corporations!Board,!
still!constituting!a!quorum,!can!elect!another!director!to!fill!in!a!vacancy!
caused!by!the!resignation!of!a!holdWover!director!
*
Held:*NO.!Makalintals!term!of!office!began!in!1996!and!expired!in!1997,!
but,!by!virtue!of!the!holdover!doctrine!in!Section!23!of!the!Corporation!
Code,!he!continued!to!hold!office!until!his!resignation!on!November!10,!
1998.!This!holdover!period,!however,!is!not!to!be!considered!as!part!of!
his! term,! which,! as! declared,! had! already! expired.! His! resignation! as! a!
holdover!director!did!not!change!the!nature!of!the!vacancy!(i.e.!vacancy!
by!expiration!of!term!of!director);!the!vacancy!due!to!the!expiration!of!
Makalintals! term! had! been! created! long! before! his! resignation.! As!
correctly!pointed!out!by!the!RTC,!when!remaining!members!of!the!VVCC!
Board! elected! Ramirez! to! replace! Makalintal,! there! was! no! more!
unexpired!term!to!speak!of,!as!Makalintals!oneWyear!term!had!already!
expired.! Pursuant! to! law,! the! authority! to! fill! in! the! vacancy! caused! by!
Makalintals!leaving!lies!with!the!VVCCs!stockholders,!not!the!remaining!
members!of!its!board!of!directors.!
*
Doctrine:*It!also!bears!noting!that!the!vacancy!referred!to!in!Section!29!
contemplates! a! vacancy! occurring! within! the! directors! term! of! office.!
When!a!vacancy!is!created!by!the!expiration!of!a!term,!logically,!there!is!
no!more!unexpired!term!to!speak!of.!Hence,!Section!29!declares!that!it!
)
!
shall!be!the!corporations!stockholders!who!shall!possess!the!authority!
to!fill!in!a!vacancy!caused!by!the!expiration!of!a!members!term.(
(
Corporations! are! required! under! Section! 26! of! the! Corporation!

Code! to! submit! to! the! SEC! within! thirty! (30)! days! after! the!
election! the! names,! nationalities,! and! residences! of! the!
directors,! trustees! and! officers! of! the! Corporation.! In! order! to!
keep! stockholders! and! the! public! transacting! business! with!
domestic! corporation! properly! informed! of! their! organization!
operational! status,! the! SEC! has! issued! the! rule! requiring! the!
filing! of! the! General! Information! Sheet.! Monfort( Hermanos(
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(
!
B.*CUMULATIVE*VOTING*(Section*24)*
more* than* fifteen* (15)* in* number* as* may* be* fixed* in* their* articles* of*
incorporation* or* byTlaws,* shall,* as* soon* as* organized,* so* classify*
themselves*that*the*term*of*office*of*oneT*third*(1/3)*of*their*number*
shall* expire* every* year;* and* subsequent* elections* of* trustees*
comprising* oneTthird* (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* byT
laws,*officers*of*a*nonTstock*corporation*may*be*directly*elected*by*the*
members.*(n)*
*
Section*138.*Designation*of*governing*boards.*
The* provisions* of* specific* provisions* of* this* Code* to* the* contrary*
Cumulative(Voting(in(Corporate(Elections:(Introducing(Strategy(
in(the(Equation,(35(South(Carolina(L.(Rev.(295(
notwithstanding,*nonTstock*or*special*corporations*may,*through*their*
articles* of* incorporation* or* their* byTlaws,* designate* their* governing*
boards*by*any*name*other*than*as*board*of*trustees.*(n)*
See!previous!sections.(
*
C.*Trustee*(Sections*92*and*138)*
*
Section*92.*Election*and*term*of*trustees.*
Unless* otherwise* provided* in* the* articles* of* incorporation* or* the* byT
laws,* the* board* of* trustees* of* nonTstock* corporations,* which* may* be*
)
In! nonWstock! corporations,! the! default! rule! in! the! election! of!
trustees! is! straight! voting.! Unlike! the! mandatory! rule! for!
cumulative! voting! for! stock! corporations,! in! nonWstock!
corporations,!it!is!possible!to!provide!for!other!types!of!voting!in!
!
either! the! articles! of! incorporation! or! the! byWlaws! of! the!
corporation.1!
*
VI.*Vacancy*in*Board*(Section*29)*
*
Code,!in!cases!where!the!vacancy!in!the!corporations!board!of!
directors! is! caused! not! only! by! the! expiration! of! a! members!
term,! the! successor! so! elected! to! fill! in! a! vacancy! shall! be!
elected! only! for! the! unexpired! term! of! his! predecessors! in!
office.! The! law! has! authorized! the! remaining! members! of! the!
board!to!fill!in!a!vacancy!only!in!specified!instances,!so!as!not!to!
retard!or!impair!the!corporations!operations;!yet,!in!recognition!
of!the!stockholders!right!to!elect!the!members!of!the!board,!it!
Section*29.*Vacancies*in*the*office*of*director*or*trustee.*
Any*vacancy*occurring*in*the*board*of*directors*or*trustees*other*than*
by*removal*by*the*stockholders*or*members*or*by*expiration*of*term,*
may* be* filled* by* the* vote* of* at* least* a* majority* of* the* remaining*
directors* or* trustees,* if* still* constituting* a* quorum;* otherwise,* said*
vacancies* must* be* filled* by* the* stockholders* in* a* regular* or* special*
meeting*called*for*that*purpose.*A*director*or*trustee*so*elected*to*fill*
limited!the!period!during!which!the!successor!shall!serve!only!to!
the! unexpired! term! of! his! predecessor! in! office.! Valle( Verde(
Country(Club,(Inc.(v.(Africa,(598(SCRA(202((2009).(
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.*
*
The! theory! of! delegated! power! of! the! board! of! directors!
similarly! explains! why,! under! Section! 29! of! the! Corporation!
Any!position!in!the!board!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.2!
!
VII.*Term*of*Office,*HoldTover*Principle*
A!byWlaw!provision!or!company!practice!of!giving!a!stockholder!a!
permanent!seat!in!the!Board!would!be!against!the!provision!of!
Sections!28!and!29!of!Corporation!Code!which!requires!member!
of!the!board!of!corporations!to!be!elected.!Grace(Christian(High(
School(v.(Court(of(Appeals,(281(SCRA(133((1997).(
HoldWover! !! a! situation! that! arises! when! no! successor! is!

cleared! due! to! valid! and! justifiable! reason,! and! the! incumbent!
holds! over! and! continues! to! function! until! another! officer! is!
chosen!and!qualified.3(
o
A! holdWover! situation! does! not! disqualify! an! incumbent!

officer!from!seeking!another!term!in!office.(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!Section!39,!Corporation!Code.!
!SEC!Opinion!No.!06W18,!20!March!2006!
)
!
o
In!the!event!no!new!board!is!elected!and!qualified!after!
the! original! oneWyear! term! of! the! board! of! directors,!
then!under!the!holdWover!principle,!the!existing!board,!if!
still! constituting! a! quorum,! is! still! a! legitimate! board!
with!full!authority!to!bind!the!corporation.1(
Directors! may! lawfully! fill! vacancies! occurring! in! the!
corporations! stockholders.! That! a! director! continues! to! serve!

after! one! year! from! his! election! (i.e.,! on! a! holdover! capacity),!
cannot! be! considered! as! extending! his! term.! This! holdover!
period,! however,! is! not! to! be! considered! as! part! of! his! term,!
which,! as! declared,! had! already! expired.! Valle( Verde( Country(
Club,(Inc.(v.(Africa,(598(SCRA(202((2009).(
board,! and! such! officials,! as! well! as! the! original!

directors,! holdWover! until! qualification! of! their!
successors.! Government( v.( El( Hogar( Filipino,( 50( Phil.(
399((1927).(
1. NonTPermanency*of*Board*Seat*
The!remedy!is!quo!warranto!to!question!the!legality!and!proper!
of!the!board!of!corporations!to!be!elected.!Grace(Christian(High(
School(v.(Court(of(Appeals,(281(SCRA(133((1997).(
qualification! of! persons! elected! to! the! board.! Ponce( v.(

Encarnacion,(94(Phil.(81((1953).(
that!a!vacancy!occurring!in!the!board!of!directors!caused!by!the!
expiration! of! a! members! term! shall! be! filled! by! the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
The! remaining! members! of! a! corporations! board! of! directors!

cannot!elect!another!director!to!fill!in!a!vacancy!caused!by!the!
resignation! of! a! holdWover! director.! The! holdover! period! is! not!
part!of!the!term!of!office!of!a!member!of!the!board!of!directors.!
Consequently,! when! during! the! holdover! period,! a! director!
resigns!from!the!board,!the!vacancy!can!only!be!filledWup!by!the!
stockholders,! since! there! is! no! term! left! to! fillWup! pursuant! to!
the!provisions!of!Section!29!of!the!Corporation!which!mandates!
!The! Corporation! Code! does! not! require! the! taking! of! an! oath! of! office! to!
qualify! the! elected! directors! and! officers.! Election! alone! does! not! make! the!
person!elected,!a!director!but!there!must!be!an!acceptance,!either!express!or!
implied,! although! he! is! rebuttably! presumed! to! accept! upon! notification,! or!
enters! upon! the! duties! of! an! office! after! his! election! or! appointment.! SEC!
Opinion,!21!January!1986,!XX!SEC!QUARTERLY!BULLETIN!(Nos.!1!&!2,!March!&!June,!
1986).!!!
A!byWlaw!provision!or!company!practice!of!giving!a!stockholder!a!
permanent!seat!in!the!Board!would!be!against!the!provision!of!
Sections!28!and!29!of!Corporation!Code!which!requires!member!
The! mandatory! requirements! for! an! annual! election! of! the!

Board!of!Directors!is!an!aspect!of!good!corporate!governance,!in!
that! it! subjects! the! directors! to! a! periodic! review! of! the!
performance!of!their!duties!and!responsibilities,!thereby!making!
them! more! responsive! to! the! interests! of! the! stockholders!
whose! mandate! they! must! win! annually.! Valle( Verde( Country(
Club,(Inc.(v.(Africa,(598(SCRA(202((2009).(
*
VIII.*Removal*of*Directors*or*Trustees*(Section*28)*
*
Section*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* twoT*
thirds*(2/3)*of*the*outstanding*capital*stock,*or*if*the*corporation*be*a*
nonTstock* corporation,* by* a* vote* of* at* least* twoTthirds* (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*
if!there!is!a!2/3!vote.(
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* nonTstock* corporation,* on* the*
written*demand*of*a*majority*of*the*members*entitled*to*vote.*Should*
the* secretary* fail* or* refuse* to* call* the* special* meeting* upon* such*
demand*or*fail*or*refuse*to*give*the*notice,*or*if*there*is*no*secretary,*
the*call*for*the*meeting*may*be*addressed*directly*to*the*stockholders*
Only! stockholders! or! members! have! the! power! to! remove! the!
directors!or!trustees!elected!by!them,!as!laid!down!in!Section!28!
of! Corporation! Code.! Raniel( v.( Jochico,( 517( SCRA( 221,( 230(
(2007).(
o It! is! implied! in! Section! 28! that! since! the! power! to!
remove! directors! is! vested! with! the! stockholders,! then!
such!power!cannot!be!exercised!by!the!Board,!whether!
that!be!pursuant!to!a!resolution!passed!by!the!Board!or!
even! when! such! power! of! removal! is! granted! to! the!
Board! by! provisions! in! the! articles! of! incorporation!
and/or!byWlaws!of!the!corporation.!Such!provision!in!the!
articles!or!byWlaws!is!null!and!void!for!being!contrary!to!
law!and!public!policy.1(
3. What*Constitutes*Cause*as*Basis*for*Removal?*
Code.*
*
1. Removal*of*Directors*and*Trustees*
General* Rule:* Any! director! may! be! removed! from! office! by! a!
vote!of!the!stockholders!holding!or!representing!twoWthird!(2/3)!
of!the!outstanding!capital!stock.!(
o When!removal!is!for!cause,!the!2/3!vote!is!the!minimum!
to!remove!a!director.(
o When! removal! is! without! cause,! the! 2/3! vote! is! also!
enough!to!remove!a!director.(
A! stockholders! meeting! called! for! the! removal! of! a! director! is!

valid!only!when!called!by!at!least!twoW!thirds!of!the!outstanding!
capital!stock.!Roxas(v.(De(la(Rosa,(49(Phil.(609((1926).(
2. Board*Has*No*Power*to*Discipline*or*Remove*One*of*Their*Own*
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*
Exception:*When!the!director!is!elected!by!the!minority!through!
cumulative!voting,!he!may!not!be!removed!without!cause!even!
The!Corporation!Code!does!not!define!the!cause!that!can!be!a!
legal!basis!for!removal!of!a!member!of!the!Board.!What!is!clear!
is! that! for! cause! goes! into! the! three! duties! of! a! director! and!
officer!!loyalty,!obedience!and!diligence.*
The!provisions!under!Section!28!are!mandatory!(i.e.!notice)!and!
failure! to! comply! with! the! procedure,! even! if! the! removal!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
resolution! was! approved! by! at! least! 2/3! of! the! outstanding!
capital!stock,!would!make!such!removal!void.1*
*
IX.*Directors*or*Trustees*Meetings*(Sections*49,*53,*54*and*92)*
*
Section*49.*Kinds*of*meetings.*
Meetings* of* directors,* trustees,* stockholders,* or* members* may* be*
regular*or*special.*(n)*
*
Section*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* byTlaws* provide*
The* president*shall*preside*at*all*meetings* of*the*directors*or*trustee*

as*well*as*of*the*stockholders*or*members,*unless*the*byTlaws*provide*
otherwise.*(n)*
*
A.*Requisites*for*a*Valid*Board*Meeting*
1. Meeting* of* the* directors* or* trustees* duly* assembled* as* a*
board,*at*the*place,*time*and*manner*provided*in*the*byTlaws;*
board!meeting!by!proxy.2!
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*byTlaws.*
*
Meetings* of* directors* or* trustees* of* corporations* may* be* held*
anywhere*in*or*outside*of*the*Philippines,*unless*the*byTlaws*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* byTlaws.* A* director* or* trustee* may* waive* this*
requirement,*either*expressly*or*impliedly.*(n)*
*
Section*54.*Who*shall*preside*at*meetings.*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
A! director! or! trustee! cannot! attend! nor! be! represented! in! a!

SEC! Memorandum! Circular! No.! 15,! series! of! 2001,! pursuant! to!
the! terms! of! the! Code! of! Commerce,! embodies! 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!board!of!directors,!providing!for!safeguards!to!ensure!
the! integrity! of! the! meeting,! the! proper! recording! of! the!
minutes!thereof!and!the!safekeeping!of!the!electronic!recording!
mechanism!as!part!of!the!records!of!the!corporation.3!
SEC!held!that!a!trustee!may!now!be!allowed!to!vote!through!the!
internet,! provided! that! the! internet! medium! to! be! used! is! akin!
to! or! similar! to! the! one! being! used! in! videoconferencing! or!
teleconferencing,!where!a!participant!can!see!or!hear!the!actual!
proceedings! of! a! board! meeting! and! actively! participate! in! the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!SEC! Opinion,! 7! February! 1994,! XXVIII! SEC! Quarterly! Bulletin! 4! (No.! 3,! March!
1994)!
3
!Likewise,! Section! 15! of! the! General! Banking! Law! of! 2000! provides! that! the!
meeting!of!the!board!of!directors!of!banks!may!be!conducted!through!modern!
technologies! such! as,! but! not! limited! to,! teleconferencing! and!
videoconferencing.!!
)
!
deliberation! of! the! Board;! but! that! a! trustee! may! not! validly!
vote!by!email!along,!which!was!deemed!an!inadequate!medium!
because! a! userWparticipants! role! in! such! case! is! passive!
considering! that! his! access! to! the! entire! proceedings! is! limited!
to!the!information!in!print!transmitted!through!the!internet.1!
meetings.! Dead! members! shall! not! be! counted.! Tan( v.( Sycip,(
499(SCRA(216((2006).(
and! counted! on! the! basis! of! the! outstanding! capital! stock,! as!
defined! by! Section! 137! of! the! Corporation! Code.! Tan( v.( Sycip,(
499(SCRA(216((2006).(
The!SEC!has!opined!that!the!Corporation!Code!does!not!confer!
upon! any! stockholder! the! right! to! attend! board! meeting! and!
that! the! allowance! of! stockholders! to! attend! board! meeting! is!
upon!the!discretion!of!the!board!itself.2*
2. Presence*of*the*required*quorum;*and*
3. Decision* of* the* majority* of* the* quorum* or,* in* other* cases,* a*
majority*of*the*entire*board.*
!
B.*Quorum*
The!quorum!in!the!meeting!of!the!Board!shall!be!the!presence!
of!a!majority!of!the!number!of!directors!as!fixed!in!the!articles!
of!incorporation.!The!required!vote!to!pass!a!resolution!shall!be!
a!majority!vote!of!the!directors!present!at!such!meeting!where!
quorum!is!achieved.3(
When! the! principle! for! determining! quorum! for! stock!

corporations! is! applied! by! analogy! to! nonWstock! corporations,!
only!those!who!are!actual!members!with!voting!rights!should!be!
counted.!Tan(v.(Sycip,(499(SCRA(216((2006).!
!
C.* Abstention:! 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).(
!
D.*Minutes*of*Meetings*
For!stock!corporations,!the!quorum!referred!to!in!Section!52!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
The! signing! of! the! minutes! by! all! the! members! of! the! board! is!
not! requiredthere! is! no! provision! in! the! Corporation! Code!
that!requires!that!the!minutes!of!the!meeting!should!be!signed!
by!all!the!members!of!the!board.!The!signature!of!the!corporate!
secretary! gives! the! minutes! of! the! meting! probative! value! and!
credibility.!People(v.(Dumlao,(580(SCRA(409((2009).(
of!the!Corporation!Code!is!based!on!the!number!of!outstanding!
voting! stocks.! For! nonWstock! corporations,! only! those! who! are!
actual,! living! members! with! voting! rights! shall! be! counted! in!
determining! the! existence! of! a! quorum! during! members!
!SEC! Opinion! No.! 26,! addressed! to! Ms.! Jaycel! E.! Sato;! SEC! Opinion! No.! 27,!
series!of!2003,!addressed!to!Mr.!Arthur!Mar!O.!Alivio.!
2
!SEC! Opinion,! 21! January! 1992,! XXVI! SEC! QUARTERLY! BULLETIN! 6! (No.! 2,! June!
1992).!
3
In! stock! corporations,! the! presence! of! a! quorum! is! ascertained!
The!entries!contained!in!the!minutes!are!prima!facie!evidence!of!
what! actually! took! place! during! the! meeting,! pursuant! to!
Section!44,!Rule!130!of!the!Revised!Rule!on!Evidence.!People(v.(
Dumlao,(580(SCRA(409((2009).(
resolution!is!a!formal!action!by!a!corporate!board!of!directors!or!
other! corporate! body! authorizing! a! particular! act,! transaction,!
or! appointment,! while,! on! the! other! hand,! minutes! are! a! brief!
statement! not! only! of! what! transpired! at! a! meeting,! usually! of!
stockholders/members! or! directors/trustees,! but! also! at! a!
meeting! of! an! executive! committee.! People( v.( Dumlao,( 580(
SCRA(409((2009).(
!
X.*COMPENSATION*OF*DIRECTORS*(Section*30)*
*
Section*30.*Compensation*of*directors.*
In* the* absence* of* any* provision* in* the* byTlaws* fixing* their*
compensation,* the* directors* shall* not* receive* any* compensation,* as*
such* directors,* except* for* reasonable* pre* 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.*
Western(Institute(of(Technology,(Inc.(v.(Salas(
(
Facts:*The!Salas!family!are!the!majority!and!controlling!members!of!the!
Board! of! Trustees! of! the! Western! Institute! of! Technology,! a! stock!
corporation!engaged!in!the!operation,!among!others,!of!an!educational!
institution.! The! Villasis! (minority! stock! holders! of! the! corporation)!
contest!the!resolution!passed!by!the!Board!of!Directors!which!increased!
the! officers! of! the! officers! of! the! corporation.! Such! resolution! was!
supposedly!passed!in!accordance!with!the!amended!byWlaws!of!the!WIT!
on!compensation!of!all!officers!of!the!corporation.!
*
Issue:*Whether!or!not!such!grant!of!compensation!is!in!violation!of!the!
proscription!against!such!under!Section!30!of!the!Corporation!Code.!
*
Functions* of* Directors* and* Trustees* v.* Functions* of* Officers:*

Directors! and! trustees! are! not! entitled! to! salary! or! other!
compensation!when!they!perform!nothing!more!than!the!usual!
Held:*NO.!The!proscription,!however,!against!granting!compensation!to!
director/trustees! of! a! corporation! is! not! a! sweeping! rule.! Worthy! of!
note!is!the!clear!phraseology!of!Section!30!which!state:!"[T]he!directors!
shall!not!receive!any!compensation,!as!such!directors."!The!implication!
is!that!members!of!the!board!may!receive!compensation,!in!addition!to!
reasonable!per!diems,!when!they!render!services!to!the!corporation!in!a!
capacity!other!than!as!directors/trustees.!Herein,!resolution!48,!s.!1986!
granted! monthly! compensation! to! Salas,! et.! al.! not! in! their! capacity! as!
and!ordinary!duties!of!their!office,!founded!on!the!presumption!
that!directors!and!trustees!render!service!gratuitously,!and!that!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
the! return! upon! their! shares! adequately! furnishes! the! motives!

for! service,! without! compensation.! But! they! can! receive!
remunerations!for!executive!officer!position.!Western( Institute(
of(Technology,(Inc.(v.(Salas,(278(SCRA(216((1997).1(
(
Resolution*versus*Minutes*of*Meetings:!A!resolution!is!distinct!
and! different! from! the! minutes! of! the! meetinga! board!
!Singson!v.!Commission!on!Audit,!627!SCRA!36!(2010).!
)
!
members! of! the! board,! but! rather! as! officers! of! the! corporation,! more!
particularly! as! Chairman,! ViceWChairman,! Treasurer! and! Secretary! of!
Western!Institute!of!Technology.!Clearly,!therefore,!the!prohibition!with!
respect! to! granting! compensation! to! corporate! directors/trustees! as!
such!under!Section!30!is!not!violated!in!this!particular!case.!
*
Doctrine:* Directors!or!trustees,!as!the!case!may!be,!are!not!entitled!to!
salary! or! other! compensation! when! they! perform! nothing! more! than!
the!usual!and!ordinary!duties!of!their!office.!This!rule!is!founded!upon!a!
presumption! that! directors/trustees! render! service! gratuitously,! and!
that!the!return!upon!their!shares!adequately!furnishes!the!motives!for!
service,! without! compensation.! Under! Section! 30! of! the! Corporation!
Code,!there!are!only!two!(2)!ways!by!which!members!of!the!board!can!
be! granted! compensation! apart! from! reasonable! per! diems:! (1)! when!
there! is! a! provision! in! the! byWlaws! 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.*
Relationship*between*Directors*and*Stockholders*
A!director!when!he!sits!on!the!Board!is!required!to!act!
in!independence!from!those!who!elected!him.!*
" In! this! sense,! the! director! is! not! a! mere!
representative!or!agent!of!the!stockholder*
The! director! is! an! agent! of! the!
corporation!NOT!of!the!stockholder.*
There!is!a!trust!relationship!(fiduciary)*
Relationship*between*Directors/Officers*and*the*Corporation*
o
o
Directors!act!in!representation!of!the!Corporation.*
As! such,! the! directors! must! act! for! the! interest! of! the!
corporation.*
*
A.*Directors*as*Fiduciaries*
PreTCorporation* Code:* Palting( v.( San( Jose( Petroleum,( Inc.,( 18(

SCRA(924.(
Palting(v.(San(Jose(Petroleum,(Inc.(
General* Rule:* The! Courts! of! law! will! not! meddle! into! business!
determination,!one!of!which!is!salary!scale!of!people.*
(
Facts:* San! Jose! Petroleum,! Inc.! (SJ! PETROLEUM),! a! corporation!
Exception:*When!the!amount!becomes!huge!and!unreasonable,!
organized! and! existing! in! the! Republic! of! Panama,! applied! and! was!
granted! by! the! Securities! and! Exchange! Commission! license! to! sell! 2M!
(later!increased!to!5M)!shares!of!capital!stock.!SJ!Petroleum!claims!that!
the! proceeds! of! the! sale! will! be! used! to! finance! the! operations! of! San!
Jose!Oil!Corporation!which!has!14!petroleum!exploration!concessions!in!
various!provinces.!Palting!and!other!prospective!investors!filed!with!the!
SEC! an! opposition! to! said! registration! on! the! ground! that! the! tieWup!
the!courts!may!come!in!and!suspend!the!enforcement!of!the!byW
law!provision.*
o Generally,! dividends! and! compensation! policies!
represent!areas!of!conflicts!of!interests!and!these!are!an!
exception!to!the!business!judgment!rule.*
*
XI.*FIDUCIARY*DUTIES*OF*DIRECTORS*AND*OFFICERS*
between!SJ!Petroleum,!a!Panamanian!corporation!and!SJ!Oil,!a!domestic!
)
!
corporation! violates! the! Constitution,! the! Corporation! Law! and! the!
Petroleum!Act!of!1949.!In!its!answer,!SJ!Petroleum!stated!that!it!was!a!
business! enterprise! enjoying! parity! rights,! with! respect! to! mineral!
resources! in! the! Philippines,! which! may! be! exercised! pursuant! to! the!
LaurelWLangley!Agreement,!through!a!medium,!the!SJ!Oil.!
citizens! by! virtue! of! the! Parity! Agreement.! Said! US! citizens! can! either!
directly!or!indirectly!own!or!control!the!business!enterprise.(
*
Issue:* Whether! or! not! the! tieWup! between! the! respondent! San! Jose!
Petroleum,! a! foreign! corporation,! and! San! Jose! Oil! Company,! Inc.,! a!
domestic!mining!corporation,!is!violative!of!the!Constitution,!the!LaurelW!
Langley! Agreement,! the! Petroleum! Act! of! 1949,! and! the! Corporation!
Law.!
*
Held:*YES.!SJ!Petroleum!is!not!accorded!with!Parity!Rights,!which!would!
have!allowed!the!Company!to!interest!in!mining.!
1. It!is!not!owned!or!controlled!directly!by!US!citizens!because!it!is!
owned!and!controlled!by!Panamanian!corporation;!
2. It!is!not!indirectly!owned!and!controlled!by!US!citizens!because!
the!controlling!corporation!is!in!turn!owned!by!two!Venezuelan!
corporations;!
3. Although! the! two! Venezuelan! corporations! claim! to! be! owned!
by!stockholders!residing!in!the!US,!there!is!no!showing!that!said!
stockholders!were!US!citizens;!
4. The! word! indirectly! should! not! be! unduly! stretched! in!
application.!
*
Doctrine:* Our! Constitution! provides! that,! the! exploitation! of! natural!
resources! shall! be! limited! to! citizens! of! the! Philippines! or! to!
corporations! or! associations! at! least! 60%! of! the! capital! of! which! is!
owned!by!such!citizens.!However,!this!right!was!earlier!extended!to!US!
Nature* of* Duties* of* Directors* and* Officers:* Prime( White(

Cement(Corp.(v.(IAC,(220(SCRA(103((1993).(
Prime(White(Cement(Corp.(v.(Intermediate(Appellate(Court(
(
Facts:* Prime! White! Cement! Corp! (PWCC)! thru! its! President! and!
Chairman! of! the! Board! entered! into! a! dealership! agreement! with!
Alejandro! Te,! making! him! the! exclusive! dealer! and/or! distributor! of!
PWCCs! cement! products! in! the! entire! Mindanao! area! for! 5! years.! The!
agreement! is! that! the! price! of! cement! per! bag! (P9.70)! is! fixed! for! the!
entire!5Wyear!period,!and!that!Te!must!sell!20,000!bags!per!month.!
!
Later,!PWCC!through!its!corporate!secretary!informed!Te!that!the!board!
of!directors!decided!to!impose!limitations!on!their!agreement,!including!
limiting! the! period! of! the! dealership! (3! months),! decreasing! allocation!
(8,000!bags)!and!increasing!the!price!per!bag!(P13.30).!Te!demanded!the!
enforcement!of!the!original!dealership!agreement!but!PWCC!refused!to!
comply.!The!latter!even!entered!into!an!exclusive!dealership!agreement!
with!Napoleon!Co!for!the!marketing!of!the!cement!in!Mindanao,!hence!
this!suit.!
*
Issue:! Whether! or! not! the! "dealership! agreement"! referred! by! the!
President!and!Chairman!of!the!Board!of!PWCC!is!a!valid!and!enforceable!
contract.!
*
Held:*NO.!The!general!rules!provided!by!the!Corporate!Law!(in!force!at!
)
!
the!time!of!the!case)!as!well!as!the!present!Corporation!Code!!whereby!
the!corporate!powers!are!exercised!by!the!Board!of!Directors!and!may!
be!delegated!to!its!president!or!officers!!cannot!apply!with!the!case!on!
hand,! since! the! said! rules! pertain! to! dealings! with! 3rd! persons! (i.e.!
person! outside! the! corporation).! In! this! case,! Te! was! not! only! an!
ordinary! stockholder! of! PWCC,! but! was! a! member! of! the! Board! of!
Directors!and!Auditor!of!the!corporation.!He!is!what!is!often!referred!to!
as!a!selfWdealing!director.!!
!
Granting! arguendo! that! the! dealership! agreement! involved! here!
would!be!valid!and!enforceable!if!entered!into!with!a!person!other!than!
a!director!or!officer!of!the!corporation,!the!fact!that!the!other!party!to!
his! own! advantage! and! benefit.! As! corporate! managers,! directors! are!
committed!to!seek!the!maximum!amount!of!profits!for!the!corporation.!!
void!or!voidable.!If!the!contract!is!fair!and!reasonable!under!the!
circumstances,!it!may!be!ratified!by!the!stockholders!provided!a!
full!disclosure!of!his!adverse!interest!is!made.!
such,!he!owes!a!duty!of!loyalty!to!his!corporation.!In!case!his!interests!
conflict! with! those! of! the! corporation,! he! cannot! sacrifice! the! latter! to!
Section!32!of!the!Corporation!Code!provides!the!general!rule!as!
well! as! the! exception! on! dealings! of! directors,! trustees! or!
officers! with! the! corporation.! Although! the! old! Corp! Law! does!
not! contain! a! similar! provision,! the! said! provision! incorporates!
wellWsettled!principles!in!corporate!law.!
the! contract! was! a! Director! and! Auditor! of! the! petitioner! corporation!
changes! the! whole! situation.! The! contract! was! neither! fair! nor!
reasonable.!Based!on!the!original!agreement!that!provided!a!flat!rate!of!
P9.70! per! bag! for! 5Wyears,! respondent! Te! must! have! knowledge! that!
within! that! period,! there! would! be! a! considerable! rise! in! the! price! of!
white!cement.!As!director,!respondent!Tes!bounden!duty!was!to!act!in!
such!manner!as!not!to!unduly!prejudice!PWCC.!However,!it!is!quite!clear!
that! he! was! guilty! of! disloyalty! to! the! corporation,! that! he! was!
attempting! in! effect,! to! enrich! himself! at! the! expense! of! the!
corporation.! Furthermore,! there! is! no! showing! that! the! stockholders!
ratified!the!dealership!agreement!or!that!they!were!fully!aware!of!its!
provisions.! The! contract! was! therefore! not! valid! and! this! Court! cannot!
allow!him!to!reap!the!fruits!of!his!disloyalty.!
*
Doctrine:* A! director! of! a! corporation! holds! a! position! of! trust! and! as!
A!director's!contract!with!his!corporation!is!not!in!all!instances!
In!Philippine!jurisdiction,!the!members!of!the!Board!of!Directors!
have!a!threeWfold!duty:!duty!of!obedience,!duty!of!diligence,!and!
the! duty! of! loyalty.! Accordingly,! the! members! of! the! board! of!
directors! (1)! shall! direct! the! affairs! of! the! corporation! only! in!
accordance! with! the! purpose! for! which! it! was! organized;! (2)!
shall! not! willfully! and! knowingly! vote! for! or! assent! to! patently!
unlawful!acts!of!the!corporation!or!act!in!bad!faith!or!with!gross!
negligence! in! directing! the! affairs! of! the! corporation;! and! (3)!
shall! not! acquire! any! personal! or! pecuniary! interest! in! conflict!
with!their!duty!as!such!directors!or!trustees.!Strategic( Alliance(
Dev.( Corp.( v.( Radstock( Securities( Ltd.,( 607( SCRA( 413( (2009),(
citing(VILLANUEVA,(PHILIPPINE(CORPORATE(LAW,(2001,(p.(318.!
!
Strategic(Alliance(Dev.(Corp.(v.(Radstock(Securities(Ltd.(
(
Facts:* The! Construction! Development! Corporation! of! the! Philippines!
(CDCP)! had! a! 30Wyear! franchise! to! construct,! operate! and! maintain! toll!
)
!
facilities! in! the! North! and! South! Luzon! Tollways.! Basay! Mining!
Corporation! (an! affiliate! of! CDCP)! obtained! loans! from! Marubeni!
Corporation!of!Japan!amounting!to!P10!billion,!which!CDCP!guaranteed!
solidarily.! Thereafter,! CDCP! changed! its! corporate! name! to! PNCC! to!
reflect!the!governments!(90.3%)!shareholding!in!the!corporation.!
!
Second.! The! PNCC! Board! admitted! liability! for! the! Marubeni! loans!
despite! PNCCs! total! liabilities! far! exceeding! its! assets.! ! There! is! no!
dispute!that!the!Marubeni!loans,!once!recognized,!would!wipe!out!the!
assets! of! PNCC,! virtually! emptying! the! coffers! of! the! PNCC.! While!
!
The! money! owed! Marubeni! remained! unpaid! and! unacknowledged! for!
20!years.!But!in!October!2000,!PNCC!recognized!this!financial!obligation!
to!Marubeni.!Barely!3!months!after,!Marubeni!assigned!its!entire!credit!
to!Radstock!Corporation!for!less!than!P100!million,!who!in!turn!sought!
to! collect! from! PNCC.! Eventually,! Radstock! and! PNCC! entered! into! the!
compromise! agreement! whereby! PNCC! shall! assign! to! a! third! party!
PNCC! insists! that! it! remains! financially! viable,! the! figures! in! the! COA!
Audit!Reports!tell!otherwise.!
!
Third.!!In!a!debilitating!selfWinflicted!injury,!the!PNCC!Board!revived!what!
appeared! to! have! been! a! dead! claim! by! abandoning! one! of! PNCCs!
strong! defenses,! which! is! the! prescription! of! the! action! to! collect! the!
Marubeni!loans.!In!this!case,!Basay!Mining!obtained!the!Marubeni!loans!
assignee!(designated!by!Radstock)!all!its!rights!and!interests!in!specified!
real! properties! (amounting! to! P6Billion! W! reduced! obligation)! provided!
the! assignee! shall! be! duly! qualified! to! own! real! properties! in! the!
Philippines.! PNCC! shall! also! assign! to! Radstock! 20%! of! the! outstanding!
capital! stock! of! PNCC,! and! 6%! share! in! the! gross! toll! revenue! of! the!
Manila!North!Tollways!Corporation!from!2008W2035.!
*
sometime! between! 1978! and! 1981.! ! While! Radstock! claims! that!

numerous!demand!letters!were!sent!to!PNCC,!based!on!the!records,!the!
extrajudicial!demands!to!pay!the!loans!appear!to!have!been!made!only!
in!1984!and!1986.!Meanwhile,!the!written!acknowledgment!of!the!debt,!
in!the!form!of!Board!Resolution!No.!BDW092W2000,!was!issued!only!on!20!
October!2000.!The!PNCC!Board!admitted!liability!for!the!Marubeni!loans!
despite!the!fact!that!the!same!might!no!longer!be!judicially!collectible.!
Issue:* Whether! or! not! the! PNCC! Board! Acted! in! Bad! Faith! and! with!
Gross!Negligence!in!Directing!the!Affairs!of!PNCC*
*
Held:* YES.! The! PNCC! Board! blatantly! violated! its! duty! of! diligence! as! it!
miserably!failed!to!act!in!good!faith!in!handling!the!affairs!of!PNCC.!!
!
First.!For!almost!two!decades,!the!PNCC!Board!had!consistently!refused!
to! admit! liability! for! the! Marubeni! loans! because! of! the! absence! of! a!
!
Fourth.! The! basis! for! the! admission! of! liability! for! the! Marubeni! loans,!
which! was! an! opinion! of! the! Feria! Law! Office,! was! not! even! shown! to!
the!PNCC!Board.!Atty.!Raymundo!Francisco,!the!Asset!Privatization!Trust!
trustee!overseeing!the!proposed!privatization!of!PNCC!at!the!time,!was!
responsible! for! recommending! to! the! PNCC! Board! the! admission! of!
PNCCs! liability! for! the! Marubeni! loans.! ! Atty.! Francisco! based! his!
recommendation! solely! on! a! mere! alleged! opinion! of! the! Feria! Law!
PNCC! Board! resolution! authorizing! the! issuance! of! the! letters! of!
guarantee.!
Office!W!which!he!did!not!show!to!the!board.!The!PNCC!Board!admitted!
liability! for! the! P10.743! billion! Marubeni! loans! without! seeing,! reading!
)
!
charter! or! by! the! general! law.! Lopez( Realty,( Inc.( v.( Fontecha,(
247(SCRA(183((1995)(
or! discussing! the! Feria! opinion! which! was! the! sole! basis! for! its!
admission! of! liability.! Such! act! surely! goes! against! ordinary! human!
nature,! and! amounts! to! gross! negligence! and! utter! bad! faith,! even!
bordering! on! fraud,! on! the! part! of! the! PNCC! Board! in! directing! the!
affairs! of! the! corporation.! Owing! loyalty! to! PNCC! and! its! stockholders,!
!
C.*Duty*of*Diligence*(Section*31)*
*
the! PNCC! Board! should! have! exercised! utmost! care! and! diligence! in!
admitting! a! gargantuan! debt! that! would! certainly! force! PNCC! into!
insolvency,! a! debt! that! previous! PNCC! Boards! in! the! last! two! decades!
consistently! refused! to! admit.! The! PNCC! Board! knew! that! PNCC,! as! a!
government! owned! and! controlled! corporation! (GOCC),! must! rely!
exclusively!on!the!opinion!of!the!Office!of!the!Government!Corporate!
Counsel!(OGCC),!which!they!did!not!abide!by.!
Section*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*
!
The!act!of!the!PNCC!Board!in!issuing!Board!Resolution!No.!BDW092W2000!
expressly! admitting! liability! for! the! Marubeni! loans! demonstrates! the!
PNCC! Boards! gross! and! willful! disregard! of! the! requisite! care! and!
diligence! in! managing! the! affairs! of! PNCC,! amounting! to! bad! faith! and!
resulting! in! grave! and! irreparable! injury! to! PNCC! and! its! stockholders.!
This! reckless! and! treacherous! move! on! the! part! of! the! PNCC! Board!
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*
clearly!constitutes!a!serious!breach!of!its!fiduciary!duty!to!PNCC!and!its!
stockholders,! rendering! the! members! of! the! PNCC! Board! liable! under!
Section!31!of!the!Corporation!Code.!
*
Doctrine:*See!above.!
the*profits*which*otherwise*would*have*accrued*to*the*corporation.*
*
!
B.*Duty*of*Obedience*
A!corporation,!through!its!Board!of!Directors,!should!act!in!the!
manner! and! within! the! formalities,! if! any,! prescribed! by! its!
)
Duty!of!Diligence!!!The!directors!must!act!with!due!diligence!in!
all!the!times!that!it!would!bind!the!corporation.(
Exception!to!the!Business!Judgment!Rule:(
o Knowingly!and!willfully!vote!!!This!is!the!default!idea!
about!a!directors!vote,!but!it!may!be!overturned.(
o Patently! unlawful! !! Where! the! directors! made! a!
decision! without! knowledge! that! the! act! was! unlawful,!
they! are! protected! from! being! personally! liable.!
!
However,! where! a! person! with! reasonable! sense! is!
supposed!to!know!that!the!act!is!unlawful,!the!directors!
wont!be!protected.(
The! directors! of! the! corporation! shall! be! personally! liable! to!
reimburse! the! corporation! for! the! amounts! of! dividends!
wrongfully!declared!and!paid!to!stockholders,!when!they!failed!
to!consider!that!the!recorded!retained!earnings!in!the!books!of!
the! corporation! was! illusory! considering! the! various! accounts!
receivables!that!had!to!be!written!off!as!uncollectible.!Steinberg(
v.(Velasco,(52(Phil.(953((1929).(
(
Steinberg(v.(Velasco(
(
Facts:*Steinberg!(plaintiff)!was!the!receiver!of!Sibugey!Trading!Company,!
while! Velasco! et.! al! (defendants)! were! the! members! of! the! Board! of!
Directors.! In! 1922,! the! Board! of! Directors! of! Sibugey! authorized! the!
purchase! of,! and! purchased,! 330! shares! of! the! capital! stock! of! the!
corporation! at! the! price! of! P3,300,! and! that! at! the! time! the! purchase,!
the!corporation!was!indebted!in!the!sum!of!P13,807.50,!and!that,!it!had!
accounts! receivable! in! the! sum! of! P19,126.02.! In! the! same! year,! a!
resolution!to!distribute!dividends!amounting!to!P3,000!was!approved!by!
the! board.! In! 1923,! the! petition! was! filed! for! its! dissolution! upon! the!
ground! that! it! was! insolvent,! its! accounts! payable! amounted! to!
and!grossly!ignorant,!and!therefore!should!pay!for!the!losses!
*
Held:*YES.!It!appears!that!the!dividends!were!made!in!installments!so!as!
not!to!affect!the!financial!condition!of!the!corporation.!In!other!words,!
that!the!corporation!did!not!then!have!an!actual!bona!fide!surplus!from!
which! the! dividends! could! be! paid.! As! stated,! the! authorized! capital!
stock! was! P20,000! divided! into! 2,000! shares! of! the! par! value! of! P10!
each,! which! only! P10,030! was! subscribed! and! paid.! Deducting! the!
P3,300!paid!for!the!purchase!of!the!stock,!there!would!be!left!P7,000!of!
paid!up!stock,!from!which!deduct!P3,000!paid!in!dividends,!there!would!
be!left!P4,000!only.!In!this!situation,!it!is!apparent!the!directors!did!not!
act! in! good! faith! or! that! they! were! grossly! ignorant! of! their! duties.! As!
such,!they!are!liable!to!pay.!
*
Doctrine:* Creditors! of! a! corporation! have! the! right! to! assume! that! so!
long!as!there!are!outstanding!debts!and!liabilities,!the!board!of!directors!
will!not!use!the!assets!of!the!corporation!to!purchase!its!own!stock,!and!
that!it!will!not!declare!dividends!to!stockholders!when!the!corporation!
is!insolvent.!
P9,241.19,! and! its! accounts! receivable! P12,512.47.! Stienberg! now!

alleges,!this!was!all,!wrongfully!done!and!in!bad!faith,!and!to!the!injury!
and!fraud!of!its!creditors.!He!now!prays!that!Velasco!et.!al.!pay!the!sums!
of!money!wrongfully!given!to!them!with!interest!and!cost.!
*
Issue:* Whether! or! not! the! board! of! directors! did! not! act! in! good! faith!
)
General* Duty* to* Exercise* Reasonable* Care.! The! directors! of! a!

corporation! are! bound! to! care! for! its! property! and! manage! its!
affairs!in!good!faith,!and!for!a!violation!of!these!duties!resulting!
they! will! be! liable! for! damages! cause,! and! that! if! they! act!
beyond! their! power,! and! the! corporation! losses,! or! dispose! of!
its! property! without! authority,! they! will! be! required! to! make!
good!the!loss!out!of!their!private!estates.!
Want* of* Knowledge,* Skill,* or* Competency.!If!directors!commit!

an! error! of! judgment! through! mere! recklessness! or! want! of!
ordinary! prudence! or! skill,! they! may! be! held! liable! for! the!
!
consequences.! A! director! is! bound! not! only! to! exercise! proper!
care! and! diligence,! but! ordinary! skill! and! judgment.! As! he! is!
bound!to!exercise!ordinary!skill!and!judgment,!he!cannot!set!up!
that!he!did!not!possess!them.*
Issue:* Whether! or! not! the! directors! neglected! their! duty! by! accepting!
the!cashiers!statement!of!liabilities!and!failing!to!inspect!the!depositors!
ledger!
*
Held:* NO.! The! Court! held! that! the! directors! should! not! be! held!
The! President! being! closer! to! the! operations! of! the! bank! on! a!
dayWtoWday! basis! is! more! liable! for! breach! of! diligence! when!
compared!to!directors!who!must!act!on!the!basis!of!reports!and!
answerable! for! taking! the! cashiers! statement! of! liabilities! to! be! as!
correct!as!the!statement!of!assets!always!was.!The!directors!confidence!
seemed! warranted! by! the! semiWannual! examinations! and! they! were!
encouraged! in! their! belief! that! all! was! well! by! the! president,! whose!
responsibility!and!knowledge!were!greater!than!theirs.!Dresser,!on!the!
other! hand,! was! daily! at! the! bank,! he! had! the! deposit! ledger! in! his!
hands,! and! he! had! hints! and! warning! regarding! the! theft! from! other!
representations! to! them! during! board! meetings.! Bates( v.(

Dresser,(251(U.S.(524,(64(L.(Ed.(388,(40(S.(Ct.(247([1919).(
(
Bates(v.(Dresser(
(
Facts:* Dresser! was! the! president! and! executive! officer,! a! large!
stockholder,! of! the! National! City! Bank! of! Cambridge.! Earl! was! the!
cashier! and! Coleman! was! the! banks! bookkeeper.! An! auditor! reported!
that! the! daily! balance! book! was! very! much! behind,! that! it! was!
impossible! to! prove! the! deposits! and! that! a! competent! bookkeeper!
should!be!employed.!Coleman!kept!the!deposit!ledger!and!this!was!the!
work! that! fell! into! his! hands.! Coleman! then! acted! as! paying! and!
receiving! teller,! in! addition! to! his! other! duty.! Later,! Coleman! began! a!
series!of!thefts!which!he!effectively!hid!from!the!Board!of!Directors!who!
attributed! the! decline! of! monthly! deposits! to! competition! with! rival!
banks.! The! banks! semiWannual! examinations! by! national! bank!
examiners!found!nothing!that!would!raise!suspicion.!The!directors!also!
relied!on!the!cashier!since!he!was!an!honest!man.!However,!if!only!Earl!
had! opened! the! envelopes! that! came! from! the! clearinghouse,! he!
wouldve!discovered!the!fraud.!
*
employees! of! the! bank.! In! accepting! the! presidency,! Dresser! must! be!
taken! to! have! contemplated! responsibility! for! losses! to! the! bank,! if!
chargeable! to! his! fault.! Those! that! happened! was! chargeable! to! his!
fault,! after! he! had! warnings! that! should! have! led! to! steps! that! would!
have!made!the!fraud!impossible.!
*
Doctrine:* The! directors! were! not! bound! by! virtue! of! the! office!
gratuitously! assumed! by! them! to! call! in! the! passbooks! and! compare!
them! with! the! ledger,! and! until! the! event! showed! the! possibility! they!
hardly!could!have!seen!that!their!failure!to!look!at!the!ledger!opened!a!
way!to!fraud.(
(
)
Although! directors! have! the! protection! of! the! business!

judgment!rule!against!personal!liability!for!decisions!that!cause!
damage! to! the! corporation,! such! protection! is! available! only!
when! they! act! or! decide! based! on! an! informed! judgment! and!
not! merely! accept! the! representations!and!reports! of! the! CEO.!
!
Smith( v.( Van( Gorkam,( 488( A.2d( 858,( Supreme( Court( of(
Delaware,(1985).!
!
Smith(v.(Van(Gorkam(
(
duty!by!their!failure!to!inform!themselves!of!all!information!reasonably!
available! to! them! and! relevant! to! their! decision! to! recommend! the!
merger.!Van!Gorkom!breached!his!duty!to!care!by!offering!$55!a!share!
because,! the! record! is! devoid! of! any! competent! evidence! that! $55!
represented!the!per!share!intrinsic!value!of!the!Company.!The!business!
Facts:* Trans! Union! was! suffering! a! tax! credit! problem! prompting! Van!
Gorkom! to! sell! his! shares! but! eventually! negotiated! to! involve! all! the!
stocks! of! Trans! Union.! A! corporation! called! Marmon! was! attempting! a!
leverage!buyWout!of!Trans!Union.!Van!Gorkom!proposed!a!price!of!$55!a!
share.!Van!Gorkom!and!his!CFO!didnt!bother!to!do!any!research!to!see!
how! much! the! company! was! actually! worth.! He! didnt! even! inform!
Trans! Unions! legal! department! about! the! transaction.! Later,! it! was!
judgment!rule!was!not!a!defense!because!the!directors!and!Van!Gorkom!
didnt!use!any!business!judgment!when!they!came!to!their!decision.!
*
Doctrine:*In!order!to!hide!behind!the!business!judgment!rule,!you!have!
to!show!that!you!made!an!informed!decision!based!on!some!principle!of!
business.!
found!that!the!value!of!$55!was!only!about!60%!of!what!the!company!
was!worth.!!Van!Gorkom!called!an!emergency!meeting!of!the!board!of!
directors,! proposed! the! merger,! and! the! directors! gave! preliminary!
approval.! In! the! meeting,! Van! Gorkom! did! not! disclose! that! there! was!
no!basis!for!the!$55!price!and!that!there!had!been!objections!by!Trans!
Union! management! regarding! the! merger.! Neither! did! he! provide! the!
directors!with!copies!of!the!merger!agreement.!The!directors!eventually!
decision,! the! directors! of! a! corporation! acted! on! an! informed!

basis,! in! good! faith! and! in! the! honest! belief! that! the! action!
taken! was! in! the! best! interests! of! the! company.! ...Thus,! the!
party!attacking!a!board!decision!as!uninformed!must!rebut!the!
recommended! that! the! shareholders! approve! the! merger! even! though!

they!did!not!really!learn!if!the!terms!of!the!merger!were!a!good!deal!for!
the!company.!The!Appellate!Court!found!that!the!directors!were!grossly!
negligent!because!they!approved!the!merger!without!substantial!inquiry!
or!any!expert!advice.!Therefore!they!breached!their!duty!to!care.*
*
Issue:* Whether! or! not! the! actions! of! Van! Gorkom! and! the! board! is!
protected!by!the!Business!Judgement!Rule!Doctrine.!
The! rule! itself! is! a! presumption! that! in! making! a! business!
presumption!that!its!business!judgment!was!an!informed!one.!
Under! the! business! judgment! rule! there! is! no! protection! for!
directors! who! have! made! an! unintelligent! or! unadvised!
judgment.! Basically,! the! actual! decision! is! not! so! important,!
what! the! courts! will! look! to! is! whether! there! was! an! adequate!
decisionWmaking!process.!
!
*
Held:* NO.! The! Court! found! that! the! directors! breached! their! fiduciary!
)
For!wrongdoing!to!make!a!director!personally!liable!for!debts!of!
the! corporation,! the! wrongdoing! approved! or! assented! to! by!
the! director! must! be! a! patently! unlawful! act.! Mere! failure! to!
comply! with! the! notice! requirement! of! labor! laws! on! company!
closure! or! dismissal! of! employees! does! not! amount! to! a!
patently!unlawful!act.!Patently!unlawful!acts!are!those!declared!
!
unlawful!by!law!which!imposes!penalties!for!commission!of!such!
unlawful! acts.! There! must! be! a! law! declaring! the! act! unlawful!
and!penalizing!the!act.!Carag(v.(NLRC,(520(SCRA(28((2007);(Dy^
Dumalasa(v.(Fernandez,(593(SCRA(656((2009).(
Holding! a! corporate! officer! personally! liable! for! directing! the!

corporate!affairs!with!gross!negligence!or!in!bad!faith!does!not!
amount!to!an!application!of!the!doctrine!of!piercing!the!veil!of!
corporate! fiction,! for! such! personal! liability! is! imposed! directly!
under! Section! 31! to! directors! and! officers! of! corporation! who!
are! guilty! of! violating! their! duty! of! diligence.! Sanchez( v.(
Republic,(603(SCRA(229((2009).(
!
D.*Duty*of*Loyalty*(Sections*31*to*34)*
*
Section* 32.* Dealings* of* directors,* trustees* or* officers* with* the*
corporation.*
A* contract* of* the* corporation* with* one* or* more* of* its* directors* or*
trustees* or* officers* is* voidable,* at* the* option* of* such* corporation,*
unless*all*the*following*conditions*are*present:*
*
1.*That*the*presence*of*such*director*or*trustee*in*the*board*meeting*in*
which* the* contract* was* approved* was* not* necessary* to* constitute* a*
quorum*for*such*meeting;*
*
2.*That*the*vote*of*such*director*or*trustee*was*not*necessary*for*the*
approval*of*the*contract;*
*
3.* That* the* contract* is* fair* and* reasonable* under* the* circumstances;*
and*
*
4.* That* in* case* of* an* officer,* the* contract* has* been* previously*
authorized*by*the*board*of*directors.*
*
Where* any* of* the* first* two* conditions* set* forth* in* the* preceding*
paragraph* is* absent,* in* the* case* of* a* contract* with* a* director* or*
trustee,*such*contract*may*be*ratified*by*the*vote*of*the*stockholders*
representing*at*least*twoTthirds*(2/3)*of*the*outstanding*capital*stock*
or*of*at*least*twoTthirds*(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.*
*
Section* 33.* Contracts* between* corporations* with* interlocking*
directors.*
Except* in* cases* of* fraud,* and* provided* the* contract* is* fair* and*
reasonable*under*the*circumstances,*a*contract*between*two*or*more*
corporations* having* interlocking* directors* shall* not* be* invalidated* on*
that* ground* alone:* Provided,* That* if* the* interest* of* the* interlocking*
director*in*one*corporation*is*substantial*and*his*interest*in*the*other*
corporation* or* corporations* is* merely* nominal,* he* shall* be* subject* to*
the* provisions* of* the* preceding* section* insofar* as* the* latter*
corporation*or*corporations*are*concerned.*
*
Stockholdings* exceeding* twenty* (20%)* percent* of* the* outstanding*
capital* stock* shall* be* considered* substantial* for* purposes* of*
interlocking*directors.*
*
)
!
Section*34.*Disloyalty*of*a*director.*
Where*a*director,*by*virtue*of*his*office,*acquires*for*himself*a*business*
opportunity* which* should* belong* to* the* corporation,* thereby*
obtaining*profits*to*the*prejudice*of*such*corporation,*he*must*account*
to*the*latter*for*all*such*profits*by*refunding*the*same,*unless*his*act*
Facts:*John!Gokongwei,!a!stockholder!of!San!Miguel!Corporation!(and!a!
declaration!of!nullity!of!amended!byWlaws,!cancellation!of!certificate!of!
has*been*ratified*by*a*vote*of*the*stockholders*owning*or*representing*
at* least* twoTthirds* (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.*
filing! of! the! amendedWby! laws,! injunction! and! damages! against! the!
It!is!well!established!that!corporate!officers!are!not!permitted!to!
use! their! position! of! trust! and! confidence! to! further! their!
private! interests.! The! doctrine! of! corporate! opportunity! is!
precisely!recognition!by!the!courts!that!the!fiduciary!standards!
could! not! be! upheld! where! the! fiduciary! was! acting! for! two!
entities! with! competing! interest.! The! doctrine! rest!
fundamentally!on!the!unfairness,!in!particular!circumstances,!of!
an!officer!or!director!taking!advantage!of!an!opportunity!for!his!
personal!profit!when!the!interest!of!the!corporation!justly!calls!
for!protection.!Gokongwei(v.(SEC,(89(SCRA(336((1979).(
(
Gokongwei(v.(SEC(
(
Duty! of! Loyalty! !! the! directors! must! act! primarily! for! the!
interest! of! the! corporation.! The! directors! may! pursue! personal!

endeavors! provided! these! do! not! conflict! with! the! interest! of!
the!corporation.*
1. Doctrine*of*Corporate*Opportunity.*
2. Using*Inside*Information*

corporation!
!
Issue:! Whether! or! not! the! corporation! has! the! power! to! disqualify! a!
competitor!from!being!elected!to!the!board!of!directors!as!a!reasonable!
exercise!of!corporate!authority!
*
Held:* YES.! It! is! well! established! that! corporate! officers! "are! not!
permitted!to!use!their!position!of!trust!and!confidence!to!further!their!
private! interests."! It! is! not! denied! that! a! member! of! the! Board! of!
Directors! of! the! San! Miguel! Corporation! has! access! to! sensitive! and!
highly! confidential! information,! such! as:! (a)! marketing! strategies! and!
pricing! structure;! (b)! budget! for! expansion! and! diversification;! (c)!
research! and! development;! and! (d)! sources! of! funding,! availability! of!
personnel,!proposals!of!mergers!or!tieWups!with!other!firms.!!
!
It!is!obviously!to!prevent!the!creation!of!an!opportunity!for!an!officer!or!
)
!
director!of!San!Miguel!Corporation,!who!is!also!the!officer!or!owner!of!a!
competing!corporation,!from!taking!advantage!of!the!information!which!
he!acquires!as!director!to!promote!his!individual!or!corporate!interests!
to!the!prejudice!of!San!Miguel!Corporation!and!its!stockholders,!that!the!
questioned!amendment!of!the!byWlaws!was!made.!Certainly,!where!two!
corporations! are! competitive! in! a! substantial! sense,! it! would! seem!
improbable,! if! not! impossible,! for! the! director,! if! he! were! to! discharge!
effectively!his!duty,!to!satisfy!his!loyalty!to!both!corporations!and!place!
the!performance!of!his!corporation!duties!above!his!personal!concerns.*
*
(
When!a!directorWmajority!stockholder,!who!is!the!administrator!
of! corporate! affairs! directly! negotiating! the! sale! of! corporate!
landholdings! to! the! Government! at! great! prices,! purchases! the!
stocks! of! a! shareholder! without! informing! the! latter! of! the! onW
going!negotiations,!such!director!is!deemed!to!have!fraudulently!
acquired!the!shareholdings!by!way!of!deceit!practiced!by!means!
of! concealing! his! knowledge! of! important! corporate! affairs.!
Strong(v.(Repide,(41(Phil.(947((1909).(
Doctrine! of! corporate! opportunity! applies! to! confidential!

employees!of!the!corporation.!cf.(Sing(Juco(v.(Llorente,(43(Phil.(
589((1922).(
!
E.*Duty*to*Creditors*and*Outsiders*
Under! the! trust! fund! doctrine,! it! would! be! a! violation! of! the!
right!of!creditors!to!allow!the!return!to!the!stockholders!of!any!
portion! of! their! capital! or! declare! dividends! outside! of! the!
unrestricted! retained! earnings.! Also! upon! insolvency! of! the!
corporation,!the!Board!of!Directors!are!duty!bound!to!hold!the!
assets! of! the! corporation! primarily! for! the! payment! of! the!
creditors.!Mead(v.(McCullough,(21(Phil.(95((1911).(
(
Mead(v.(McCullough(
(
Facts:*The!complaint!contains!three!causes!of!action!one!of!which!is!for!
the!value!of!the!personal!effects!alleged!to!have!been!left!by!Mead!and!
sold!by!the!defendants.!The!parties!organized!the!Philippine!Engineering!
&!Construction!Co.!(PECC)!by!giving!$2000!Mexican!currency!cash!each,!
except!for!Mead!who!contributed!property.!Mead!was!also!the!general!
manager! until! he! resigned! to! accept! employment! with! the! Canton! &!
Shanghai!Railway!Co.!
!
Several! contracts! entered! by! Mead! as! general! manager! failed,!
specifically!a!wrecking!contract!with!the!navy.!Because!of!these!failures,!
the! board! voted! to! sell! all! the! rights! and! interests! of! PECC! to! the!
wrecking! contract! in! favor! of! McCullough! (along! with! some! of! Meads!
personal! effects).! McCullough! then! incorporated! a! new! company,!
Manila!Salvage!Association,!and!transferred!all!his!rights!and!interests!to!
the!contract!to!MSA.!Mead!alleges!that!these!were!done!in!bad!faith.!
!
Issue:*Whether!or!not!the!sale!or!transfer!to!McCullough!of!the!assets!of!
said! corporation! was! done! within! the! laws! and! powers! of! the!
corporation.!
*
Held:* YES.! A! private! corporation,! which! owes! no! special! duty! to! the!
public! and! which! has! not! been! given! the! right! of! eminent! domain,! has!
absolute!right!and!power!as!against!the!whole!world!except!the!state,!to!
)
!
sell! and! dispose! of! all! of! its! property.! A! transaction! done! in! good! faith!
which! achieves! substantial! justice! cannot! be! disturbed! based! on! mere!
suspicions.!!
*
Doctrine:*Generally!speaking,!the!voice!of!a!majority!of!the!stockholders!
is!the!law!of!the!corporation,!but!there!are!exceptions!to!this!rule.!There!
must! necessarily! be! a! limit! upon! the! power! of! the! majority.! Without!
such! a! limit! the! will! of! the! majority! would! be! absolute! and! irresistible!
and!might!easily!degenerate!into!an!arbitrary!tyranny.!Notwithstanding!
these! limitations! upon! the! power! of! the! majority! of! the! stockholders,!
their! (the! majoritys)! resolutions,! when! passed! in! good! faith! and! for! a!
just!cause,!deserve!careful!consideration!and!are!generally!binding!upon!
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).(
*
H.* SEC* Revised* Code* of* Corporate* Governance* (SEC* Memorandum.*
Circular*No.*6,*s.*2009)*
companies!who!actually!offer!you!nothing!since!nothing!
is!backing!them!up.*
the!minority.(
(
F.*Corporate*Dealings*with*Directors*and*Officers*(Section*32)*
dealings! by! directors/trustees! and! officers! merely! incorporate!

wellWestablished! principles! in! Corporate! Law.! A! director! who!
enters! into! a! distributorship! agreement! with! the! corporation!
would! make! the! contract! voidable! at! the! option! of! the!
corporation! especially! when! the! terms! are! disadvantageous! to!
the!corporation.!The!director!cannot!claim!the!same!doctrine!as!
an! outsider! dealing! in! good! faith! with! the! corporation.! Prime(
!
G.* Contracts* Between* Corporations* with* Interlocking* Directors*
(Section*33)*
SEC! Revised! Code! of! Corporate! Governance! !! applies! to!

specific! corporations! whose! securities! are! registered! in! the!
stock! exchange;! they! are! large! companies! with! a! lot! of! public!
shareholders.*
o The!SEC!hopes!to!protect!the!public!from!possible!fraud!
that! large! companies! may! commit! in! the! process! of!
gathering!investments.*
o These! large! companies! must! have! at! least! two!
independent!directors!able!to!police!the!activities!of!the!
The! provisions! of! Section! 32! of! the! Corporation! Code! on! selfW
White(Cement(Corp.(v.(IAC,(220(SCRA(103((1993).(
Securities!Regulation!Code!was!issued!pursuance!to!a!mandate!
of!the!SEC.*
o Blue! Sky! Law! !! To! secure! you! from! being! misled! by!
corporation! (not! merely! a! puppet! of! the! shareholders)!

and!must!be!very!transparent.*
*
XII.*CORPORATE*OFFICERS*
The! rule! under! Section! 33! of! Corporation! Code! allowing!

annulment!of!contracts!between!corporations!with!interlocking!
)
The! general! principles! of! agency! govern! the! relation! between!

the!corporation!and!its!officers!or!agents,!subject!to!the!articles!
of!incorporation,!byWlaws,!or!relevant!provisions!of!law!!when!
authorized,!their!acts!bind!the!corporation,!otherwise,!their!acts!
!
cannot!bind!it.!Yasuma(v.(Heirs(of(Cecilio(S.(De(Villa,(499(SCRA(
466((2006);(Litonjua(v.(Eternit(Corp.,(490(SCRA(204((2006).(
!
A.*Powers*of*Corporate*Officers:*
Just! as! a! natural! person! may! authorize! another! to! do! certain!
acts! for! and! on! his! behalf,! the! Board! of! Directors! may! validly!
delegate! some! of! its! functions! and! powers! to! officers,!
committees! or! agents! ! the! authority! of! such! individuals! to!
bind! the! corporation! is! generally! derived! from! law,! corporate!
byWlaws! or! authorization! from! the! board,! either! expressly! or!
impliedly! by! habit,! custom! or! acquiescence! in! the! general!
course! of! business.! Cebu( Mactan( Members( Center( Inc.( v.(
Tsukahara,(593(SCRA(172((2009).!While!it!is!a!general!rule!that,!
in! the! absence! of! authority! from! the! board! of! directors,! no!
person,!not!even!its!officers,!can!validly!bind!a!corporation,!the!
Board!may!validly!delegate!some!of!its!functions!and!powers!to!
its! officers,! committee! and! agents.! Associated( Bank( v.(
Pronstroller,(558(SCRA(113((2008).1(
(
Associated(Bank(v.(Pronstroller(
(
Facts:* The! Spouses! Vaca! executed! a! Real! Estate! Mortgage! in! favor! of!
Associated!Bank!over!their!parcel!of!residential!land!in!Green!Meadows!
Subdivision.! Eventually,! the! property! was! foreclosed! and! sold! at! public!
auction!with!Associated!Bank!as!the!highest!bidder.!However,!the!Vacas!
commenced! an! action! for! the! nullification! of! the! real! estate! mortgage!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Yu! Chuck! v.! Kong! Li! Po,! 46! Phil.! 608,! 614! (1924);! Cebu! Mactan! Members!
Center!Inc.!v.!Tsukahara,!593!SCRA!172!(2009).!
and! the! foreclosure! sale.! Pending! its! resolution! in! the! Supreme! Court,!
Associated!Bank!negotiated!with!the!Spouses!Pronstroller!through!Atty.!
Jose! Soluta,! the! banks! Vice! President! and! member! of! its! Board! of!
Directors.! Letter! agreements! were! executed! whereby! the! Spouses!
Pronstrollers! would! give! a! downpayment! (first! letter! agreement),! and!
then!given!an!extension!to!pay!the!balance!which!would!be!given!upon!
delivery!of!the!property!subsequent!to!the!resolution!of!the!Vaca!case!
with!such!property!being!free!from!occupants!(embodied!in!the!second!
letter! agreement).! Later,! the! bank! reorganized! its! management! and!
Atty.! Dayday! replaced! Atty.! Soluta.! Atty.! Dayday! informed! Spouses!
Pronstroller! that! their! deposit! would! be! forfeited! because! the! second!
letter!agreement!was!a!mistake!because!Atty.!Soluta!had!no!authority!to!
give!an!extension.!
*
Issue:* Whether! or! not! Associated! Bank! is! bound! by! the! LetterW
Agreement! signed! by! Atty.! Soluta! under! the! doctrine! of! apparent!
authority.!
*
Held:* YES.! Undoubtedly,! the! Associated! Bank! had! previously! allowed!
Atty.!Soluta!to!enter!into!the!first!agreement!without!a!board!resolution!
expressly! authorizing! him;! thus,! it! had! clothed! him! with! apparent!
authority!to!modify!the!same!via!the!second!letterWagreement.!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.!
*
Doctrine:*The!general!rule!is!that,!in!the!absence!of!authority!from!the!
board! of! directors,! no! person,! not! even! its! officers,! can! validly! bind! a!
corporation.! The! power! and! responsibility! to! decide! whether! the!
)
!
bind! the! corporation,! unless! it! has! ratified! such! acts! or! is!
estopped! from! disclaiming! them.! Reyes( v.( RCPI( Employees(
Credit(Union,(Inc.,(499(SCRA(319((2006).(
corporation!should!enter!into!a!contract!that!will!bind!the!corporation!is!
lodged!in!the!board!of!directors.!However,!just!as!a!natural!person!may!
authorize! another! to! do! certain! acts! for! and! on! his! behalf,! the! board!
may! validly! delegate! some! of! its! functions! and! powers! to! officers,!
committees!and!agents.(
in! writing.! Contracts! entered! into! by! a! corporate! officer! or!

obligations! or! prestations! assumed! by! such! officer! for! and! in!
behalf! of! such! corporation! are! binding! on! the! said! corporation!
only!if!such!officer!acted!within!the!scope!of!his!authority!or!if!
such!officer!exceeded!the!limits!of!his!authority,!the!corporation!
has! ratified! such! contracts! or! obligations.! Kwok( v.( Philippine(
While! the! Court! agrees! that! those! who! belong! to! the! upper!
corporate! echelons! would! have! more! privileges,! it! cannot! be!
presume! the! existence! of! such! privileges! or! benefitshe! who!
claims!the!same!is!burdened!to!prove!not!only!the!existence!of!
such! benefits! but! also! that! he! is! entitled! to! the! same.!Kwok( v.(
Philippine(Carpet(Manufacturing(Corp.,(457(SCRA(465((2005).(
An! officers! power! as! an! agent! of! the! corporation! must! be!
sought!from!the!statute,!charter,!the!byWlaws!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).!
Carpet(Manufacturing(Corp.,(457(SCRA(465((2005).(
2. President.*Peoples(Aircargo(v.(Court(of(Appeals,(297(SCRA(170(
(1998).(
Even! though! a! judgment,! decree! or! order! is! addressed! to! the!
corporation! only,! the! officers! as! well! as! the! corporation! itself,!
may!be!punished!for!contempt!for!disobedience!to!its!terms,!at!
least! if! they! knowingly! disobey! the! courts! mandate,! since! a!
lawful!judicial!command!to!a!corporation!is!in!effect!a!command!
to!the!officers.!Heirs(of(Trinidad(de(Leon(Vda.(De(Roxas(v.(Court(
of(Appeals,(422(SCRA(101((2004).(
1. Rule*on*Corporate*Officers*Power*to*Bind*Corporation*
As!a!general!rule,!the!acts!of!corporate!officers!within!the!scope!
of! their! authority! are! binding! on! the! corporation,! but! when!
these! officers! exceeded! their! authority,! their! actions! cannot!
Doctrine*of*Apparent*Authority:!Corporate!policies!need!not!be!
Requisites:!Member!of!the!Board!of!Directors!and!must!possess!
at!least!one!share(
*
Peoples*Aircargo*v.*Court*of*Appeals*
(
Facts:*Peoples!Aircargo!is!a!domestic!corporation,!which!was!organized!
in! the! middle! of! 1986! to! operate! a! customs! bonded! warehouse.! ! To!
obtain! a! license! for! the! corporation! from! the! Bureau! of! Customs,!
Antonio! Punsalan! Jr.,! the! corporation! president,! solicited! a! proposal!
from! Stefano! Sano! (who! was! preferred! because! of! his! membership! in!
the!task!force!supervising!the!transition!of!the!bureau!from!the!Marcos!
to! the! Aquino! Government)! for! a! feasibility! study.! This! constituted! the!
First! Contract! for! which! Sano! was! paid! for.! On! December! 1086,! a!
Second! Contract,! this! time! for! consultancy! services,! was! made! upon!
Punsalans! request.! The! consultancy! services! included! an! Operations!
Manual!and!Seminar/Workshop!for!the!employees!of!Peoples!Aircargo.!
)
!
Sano!was!not!paid!for!the!2nd!contract!so!he!filed!a!collection!case.!By!
this! time,! Punsalan! had! sold! his! shares! and! resigned! as! president.!
Peoples! Aircargo! denied! that! Sano! conducted! Consultancy! services.! It!
alleged!that!the!contract!entered!into!between!Sano!and!Punsalan!was!
without!authority.*
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!agents!authority.!
*
*
Issue:*Whether!or!not!Punsalan,!as!president,!has!apparent!authority!to!
enter!into!the!second!contract!that!could!bind!the!corporation*
*
Held:! YES.! Since! the! corporation! had! previously! allowed! Punsalan! to!
enter! into! the! first! contract! with! Sano! without! a! board! resolution!
expressly! authorizing! him,! thus,! it! had! clothed! its! president! with!
apparent! authority! to! execute! the! Second! Contract.! Furthermore,!
private! respondent! prepared! an! operations! manual! and! conducted! a!
seminar! for! the! employees! of! petitioner! in! accordance! with! their!
contract.!Petitioner!accepted!the!operations!manual,!submitted!it!to!the!
Bureau! of! Customs! and! allowed! the! seminar! for! its! employees.! As! a!
result!of!this,!petitioner!was!given!by!the!Bureau!of!Customs!a!license!to!
operate!a!bonded!warehouse.!Even!if!the!Second!Contract!was!outside!
the! usual! powers! of! the! president,! petitioners! ratification! of! said!
contract!and!acceptance!of!benefits!have!made!it!binding,!nonetheless.!
*
Doctrine:* Contracts! entered! into! by! a! corporate! president! without!
express!prior!board!approval!bind!the!corporation,!when!such!officers!
apparent!authority!is!established!and!when!these!contracts!are!ratified!
by!the!corporation.!
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!as!possessing!the!power!to!do!those!
)
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! corporations! 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).(
The! President! of! the! corporation! which! becomes! liable! for! the!
accident! caused! by! its! truck! driver! cannot! be! held! solidarily!
liable!for!the!judgment!obligation!arising!from!quasiWdelict,!since!
the! fact! alone! of! being! President! is! not! sufficient! to! hold! him!
solidarily! liable! for! the! liabilities! adjudged! against! the!
corporation! and! its! employee.!Secosa( v.( Heirs( of( Erwin( Suarez(
Fancisco,(433(SCRA(273((2004).(
3. Corporate*Secretary*
Requisite:!Resident!and!citizen!of!the!Philippines(
!
o
The!corporate!secretary!can!be!a!member!of!the!Board!
of!Directors!since!there!is!no!prohibition!for!such.(
In! the! absence! of! provisions! to! the! contrary,! the! corporate!
4. Corporate*Treasurer*
Requirement:!May!or!may!not!be!a!director(
A!corporate!treasurers!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!
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! transferorW
stockholder! may! rightfully! bring! suit! to! compel! performance.!
Torres,(Jr.(v.(Court(of(Appeals,(278(SCRA(793((1997).(
Although! the! corporate! secretarys! duty! to! record! transfers! of!

stock!is!ministerial,!he!cannot!be!compelled!to!do!so!when!the!
transferees!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! 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!Section!40!of!Corporation!Code,!
cannot!be!invalidated!when!the!buyer!relies!upon!a!Secretarys!
Certificate! confirming! authority.! A! secretarys! 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).!
)
authorized,! a! treasurer,! whose! power! are! limited,! cannot! bind!

the!corporation!in!a!sale!of!its!assets,!which!obviously!is!foreign!
to!a!corporate!treasurers!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!payees!account!and!not!to!be!further!negotiated,!may!be!
personally! liable! for! the! damaged! caused! the! corporation.!
Atrium( Management( Corp.( v.( Court( of( Appeals,( 353( SCRA( 23(
(2001).(
5. Manager*
Although!a!branch!manager!of!a!bank,!within!his!field!and!as!to!
third! persons,! is! the! general! agent! and! is! in! general! charge! of!
the! corporation,! with! apparent! authority! commensurate! with!
the! ordinary! business! entrusted! him! and! the! usual! course! and!
conduct!thereof,!yet!the!power!to!modify!contracts!of!the!bank!
remains! generally! with! the! board! of! directors.! Being! a! branch!
manager!alone!is!insufficient!to!support!the!conclusion!that!he!
has! been! clothed! with! apparent! authority! to! verbally! alter!
terms! of! the! banks! written! contract,! such! as! the! mortgage!
contract.! Banate( v.( Philippine( Countryside( Rural( Bank( (Liloan,(
Cebu),(Inc.,(625(SCRA(21((2010).(
!
!
B.*POWER*OF*THE*BOARD*TO*APPOINT*AND*TERMINATE*CORPORATE*
OFFICERS**
The!law!does!not!expressly!indicate!a!limit!over!the!term!of!the!
corporate!officers.!But!it!seems!they!should!serve!for!a!term!of!
one!year!so!that!the!next!set!of!directors!will!not!be!precluded!
from!appointing!a!new!set!of!corporate!officers.*
1. Who*Is*a*Corporate*Officer?*(Section*25)*
Corporate!officers!in!the!context!of!P.D.!No.!902WA!are!those!
officers!of!the!corporation!who!are!given!that!character!by!the!
Corporation! Code! or! by! the! corporations! byWlaws.! Gurrea( v.(
Lezama,(103(Phil.(553((1958).1(
(
Gurrea(v.(Lezama(
(
Facts:*Gurrea!sought!to!have!Resolution!No.!65!of!the!Board!of!Directors!
of!the!La!Paz!Ice!Plant!and!Cold!Storage!Co.,!Inc.,!removing!him!from!his!
position! of! manager! of! said! corporation! declared! null! and! void! and! to!
recover! damages! incident! thereto.! The! action! is! predicated! on! the!
ground! that! said! resolution! was! adopted! in! contravention! of! the!
provisions!of!the!byWlaws!of!the!corporation,!of!the!Corporation!Law!and!
of! the! understanding,! intention! and! agreement! reached! among! its!
stockholders.!
*
Issue:* Whether! or! not! Gurrea! was! properly! removed! from! his! position!
as!manager!of!La!Paz!Ice!Plant!by!a!mere!resolution.!
*
Held:* YES.! Guerras! position! was! only! created! by! the! officers.! The! by!
laws!did!not!provide!for!the!creation!of!his!position.!Therefore,!he!may!
not!be!considered!as!an!officer!and!the!manner!of!removal!provided!
for!in!the!by!laws!shall!not!be!made!applicable!to!him.!He!may!thus!be!
removed!by!a!mere!resolution!by!the!officers!of!the!corporation.!
!
The!byWlaws!of!the!instant!corporation!in!turn!provide!that!in!the!board!
of!directors!there!shall!be!a!president,!a!viceWpresident,!a!secretary!and!
a!treasurer.!These!are!the!only!ones!mentioned!therein!as!officers!of!the!
corporation.!The!manager!is!not!included.!The!byWlaws!provide!that!the!
officers! of! the! corporation! may! be! removed! or! suspended! by! the!
affirmative!vote!of!2/3!of!the!corporation.!The!conclusion!is!inescapable!
that! Guerra! can! be! suspended! or! removed! by! said! board! of! directors!
under! such! terms! as! it! may! see! fit! and! not! as! provided! for! in! the! byW
laws,! without! the! 2/3! vote! of! the! stockholders,! as! required! when! an!
officer!is!to!be!removed.!
*
Doctrine:* One!distinction!between!officers!and!agents!of!a!corporation!
lies!in!the!manner!of!their!creation.!An!officer!is!created!by!the!charter!
of! the! corporation,! and! the! officer! is! elected! by! the! directors! or! the!
stockholders.! An! agency! is! usually! created! by! the! officers,! or! one! or!
more! of! them,! and! the! agent! is! appointed! by! the! same! authority.! It! is!
clear! that! the! two! terms! officers! and! agents! are! by! no! means!
interchangeable.(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Garcia! v.! Eastern! Telecommunications! Philippines,! 585! SCRA! 450! (2009);!

WQPP!Marketing!Communications,!Inc.!v.!Galera,!616!SCRA!422!(2010).!
)
The!position!of!Executive!Secretary,!which!is!provided!for!in!the!
Societys!byWlaws,!is!an!officer!position.!Since!the!appointment!
of! the! incumbent! did! not! contain! a! fixed! term,! the! implication!
!
was!that!the!appointee!held!the!appointment!at!the!pleasure!of!
the! Board! of! Directors,! such! that! when! the! Board! opted! to!
replace! the! incumbent,! technically! there! was! no! removal! but!
only! an! expiration! of! the! term! and! there! was! no! need! of! prior!
notice,!due!hearing!or!sufficient!grounds!before!the!incumbent!
could! be! separated! from! office.! Mita( Pardo( de( Tavera( v.(
1
Tuberculosis(Society,(112(SCRA(243((1982). (
(
Mita(Pardo(de(Tavera(v.(Tuberculosis(Society(
(
Facts:**Dr.!Buktaw,!then!executive!secretary!of!the!Board!of!Directors!of!
the! Philippine! Tuberculosis! Society! (Society)! retired.! Dr.! Mita! Pardo! de!
Tavera! was! appointed! as! his! replacement.! President! Canizares! sent! an!
appointment!letter.!The!letter!of!appointment,!however,!didnt!include!
a! fixed! term.! Subsequently,! de! Tavera! was! removed! from! her! post!
without! telling! her! the! cause.! One! of! the! defendants,! Alberto! Romulo!
was! appointed! to! her! position! with! a! vote! of! 7(affirm)W2(abstain)W
1(objection).!The!defendants!claimed!denying!that!plaintiff!was!illegally!
removed! from! her! position! as! Executive! Secretary! and! averring! that!
*
Held:* NO.! Although! the! minutes! of! the! organizational! meeting! show!
that! the! Chairman! mentioned! the! need! of! appointing! a! permanent!
Executive! Secretary,! such! statement! alone! cannot! characterize! the!
appointment!of!petitioner!without!a!contract!of!employment!definitely!
fixing!her!term!because!of! the! specific! provision! of! Section! 7.02! of! the!
Code! of! ByWLaws! that:! The! Executive! Secretary! shall! hold! office! at! the!
pleasure! of! the! Board! of! Directors,! unless! their! term! of! employment!
shall! have! been! fixed! in! their! contract! of! employment.! Besides! the!
word! permanent! could! have! been! used! to! distinguish! the!
appointment!from!acting!capacity.!
*
(
Management! of! the! corporation! who! also! determines! the!

compensation! to! be! paid! such! employees.! Corporate! officers,!
on!the!other!hand,!are!elected!or!appointed!by!the!directors!or!
stockholders,!and!are!those!who!are!given!that!character!either!
by!the!Corporation!Code!or!by!the!corporations!byWlaws.!Gomez(
v.(PNOC(Dev.(and(Management(Corp.,(606(SCRA(187((2009).2(
o A! mere! manager! not! so! named! in! the! byWlaws! does! is!
under!the!Societys!byWlaws,!said!position!is!held!at!the!pleasure!of!the!
Board! of! Directors! and! when! the! pleasure! is! exercised,! it! only! means!
that! the! incumbent! has! to! vacate! the! same! because! her! term! has!
expired.!
*
Issue:*Whether!or!not!de!Tavera!was!illegally!dismissed*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!PSBA% v.% Leao,% 127% SCRA% 778% (1984);% Dy% v.% NLRC,% 145% SCRA% 211% (1986);%
Visayan! v.! NLRC,! 196! SCRA! 410! (1991);! Easycall! Communications! Phils.,! Inc.! v.!
King,! 478! SCRA! 102! (2005);! Marc! II! Marketing,! Inc.! v.! Joson,! 662! SCRA! 35!
(2011);!Barba!v.!Liceo!de!Cagayan!University,!686!SCRA!648!(2012).!
Ordinary! company! employees! are! generally! employed! not! by!

action! of! the! directors! and! stockholders! but! by! that! of! the!
not!an!officer!of!the!corporation.!Pamplona( Plantation(
Company(v.(Acosta,(510(SCRA(249((2006).(
When! the! byWlaws! provide! for! the! position! of!
Superintendent/! Administrator,! it! is! clearly! a!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!Okol!v.!Slimmers!World!Intl,!608!SCRA!97!(2009).!
)
!
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).!
Although! the! byWlaws! provide! expressly! that! the! Board! of!

Directors! shall! have! full! power! to! create! new! offices! and! to!
appoint!the!officers!thereto,!any!office!created,!and!any!officer!
appointed! pursuant! to! such! clause! does! not! become! a!
corporate! officer,! but! is! an! employee! and! the! determination!
of!the!rights!and!liabilities!relating!to!his!removal!are!within!the!
jurisdiction!of!the!NLRC;!they!do!not!constitute!intraWcorporate!
controversies.! A! different! interpretation! can! easily! leave! the!
way! open! for! the! Board! of! Directors! to! circumvent! the!
constitutionally! guaranteed! security! of! tenure! of! the! employee!
by!the!expedient!inclusion!in!the!ByWLaws!of!an!enabling!clause!
on!the!creation!of!just!any!corporate!officer!position.!(at!p.!27).!
The!rulings!in!Tabang!v.!NLRC,!266!SCRA!462!(1997),!and!Nacpil!
v.! International! Broadcasting! Corp.,! 379! SCRA! 653! (2002),!
should! no! longer! be! controlling.! Matling( Industrial( and(
Commercial(Corp.(v.(Coros,(633(SCRA(12((2010).1(
(
Matling(Industrial(and(Commercial(Corp.(v.(Coros(
(
Facts:* Ricardo! R.! Coros! is! the! Vice! President! for! Finance! and!
Administration! of! Matling! Industrial! and! Commercial! Corporation.!
However,!Matling!dismissed!him.!As!a!result,!Coros!filed!a!complaint!for!
illegal! suspension! and! illegal! dismissal! against! Matling! and! some! of! its!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Reiterated! in! Marc! II! Marketing,! Inc.! v.! Joson,! 662! SCRA! 35! (2011);! Barba! v.!
Liceo!de!Cagayan!University,!686!SCRA!648!(2012).!
corporate!officers!before!the!NLRC.!Matling,!et!al.!moved!to!dismiss!the!
petition.!They!claimed!that!SEC,!and!not!NLRC,!had!jurisdiction!over!the!
case,! the! matter! being! an! intraWcorporate! in! nature.! This! is! because!
Coros!was!also!a!member!of!the!corporations!Board!of!Directors!prior!
to!his!termination.!
*
Issue:* Whether! or! not! Coros,! as! Vice! President! for! Finance! and!
Administration,! was! a! corporate! office! of! Matling! Industrial! and!
Commercial!Corporation.!
*
Held:* NO.! The! position! of! Vice! President! for! Finance! and!
Administration! was! not! explicitly! written! in! the! byWlaws.! Coros! was!
appointed!Vice!President!by!Matlings!general!manager!and!not!by!the!
Board!of!Directors.!It!was!also!the!general!manager!who!determined!the!
amount! of! compensation! he! received.! Therefore,! Coros! is! merely! an!
employee!and!not!a!corporate!officer.!This!being!the!case,!NLRC!and!not!
SEC!has!jurisdiction!over!his!complaint!for!illegal!dismissal.!In!addition,!
there!is!no!relation!between!his!acquisition!of!his!status!as!stockholder!
or! Director! and! his! position! as! Vice! President! of! Finance! and!
Administration.! His! position! as! stockholder! or! Director! remained!
unaffected! by! his! dismissal! as! Vice! President.! This! is! not! an! intraW
corporate! controversy,! because! an! intraWcorporate! controversy! is! one,!
which!arises!between!a!stockholder!and!a!corporation.!
*
Doctrine:* A! position! must! be! expressly! mentioned! in! the! ByWlaws! in!
order! to! be! considered! as! a! corporate! office.! The! creation! of! an! office!
under! a! byWlaw! enabling! provision! is! not! enough! to! make! a! position! a!
corporate!office.!A!different!interpretation!can!easily!allow!the!Board!to!
circumvent! the! constitutional! guarantee! of! security! of! tenure! by!
)
!
including! an! enabling! clause! on! the! creation! of! any! corporate! office! in!
the! byWlaws.! The! Board! may! create! appointive! positions! other! than!
those!expressly!mentioned!in!the!byWlaws.!However,!persons!occupying!
such! positions! are! not! considered! as! corporate! officers! within! the!
meaning!of!Section!25.(
cases!and!intraWcorporate!affairs!regarding!elections!and!appointments.!
*
Held:* NO.! It! is! the! SEC! who! has! jurisdiction! in! the! abovementioned!
cases.! The! Articles! of! Incorporation! of! MICC! expressly! states! that! de!
Rossis! position! as! Executive! ViceWPresident! was! considered! to! be! an!
officer!position.!
*
Doctrine:*The!SEC!has!the!jurisdiction!over!removal!of!corporate!officers!
as!well!as!intraWcorporate!affairs!regarding!election!and!appointment!of!
corporate!officers.(
2. Nature*of*Exercise*of*Power*to*Terminate*Officers*
An! officers! removal! is! a! corporate! act,! and! if! such! removal!
occasions! an! intraWcorporate! 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! [now! RTC! Special! Commercial!
Courts],! not! that! of! NLRC.! De( Rossi( v.( NLRC,( 314( SCRA( 245(
(1999);( Okol( v.( Slimmers( World( International,( 608( SCRA( 97(
of!corporate!officers!is!an!officer!of!said!corporation!and!not!a!
mere! employee! ! being! a! corporate! officer,! his! removal! is!
deemed!to!be!an!intraWcorporate!dispute!cognizable!by!the!SEC!
and! not! by! the! Labor! Arbiter.! Garcia( v.( Eastern(
(2009).(
(
De(Rossi(v.(NLRC(
(
Facts:!Armando!de!Rossi!is!an!Italian!Citizen!and!was!the!Executive!ViceW
President! and! General! Manager! of! Matling! Industrial! and! Commercial!
Corp.! (MICC).! He! started! to! work! in! 1985! and! was! terminated! in! 1988!
for!failing!to!secure!his!employment!permit!and!grossly!mismanaged!the!
business!affairs!of!the!companyhe!allegedly!diverted!corporate!funds!
to!his!personal!use.!Aggrieved,!he!then!filed!a!case!against!MICC!in!the!
NLRC!for!illegal!dismissal.!
*
Issue:* Whether! or! not! the! NLRC! has! jurisdiction! over! illegal! dismissal!
One!who!is!included!in!the!byWlaws!of!a!corporation!in!its!roster!
Telecommunications(Philippines,(585(SCRA(450((2009).(
!
XIII.*LIABILITIES*OF*CORPORATE*OFFICERS*(Section*31)*
Mere! ownership! by! an! officer! (President)! of! majority! of! the!
equity!of!the!corporation!do!not!warrant!a!piercing!of!the!veil!of!
corporate! fiction! to! make! such! officer! personally! liable! for! the!
debts! of! the! corporation.! Palay,( Inc.( v.( Clave,( 124( SCRA( 638(
(1093).1(
(
Palay,(Inc.(v.(Clave(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Pabalan!v.!NLRC,!184!SCRA!495!(1990);!Sulo!ng!Bayan,!Inc.!v.!Araneta,!Inc.!Inc.,!
72!SCRA!347!(1976);!Mindanao!Motors!Lines,!Inc.!v.!CIR,!6!SCRA!710!(1962).!
)
!
(
Facts:* Palay,! Inc.,! through! its! President,! Albert! Onstott! executed! a!
Contract!to!Sell!a!parcel!of!land!to!Dumpit.!!Paragraph!6!of!the!contract!
provided!for!automatic!extrajudicial!rescission!upon!default!in!payment!
of! any! monthly! installment! after! the! lapse! of! 90! days! from! the!
petitioners! part.! They! had! literally! relied,! albeit! mistakenly,! on!

paragraph!6!of!its!contract!with!Dumpit!when!it!rescinded!the!contract!
to!sell!extrajudicially!and!had!sold!it!to!a!third!person.!Onstott!was!made!
liable! because! he! was! then! the! President! of! the! corporation.! No!
sufficient! proof! exists! on! record! that! said! petitioner! used! the!
expiration! of! the! grace! period! of! 1! month,! without! need! of! notice! and!
with! forfeiture! of! all! installments! paid.! Dumpit! paid! the! downpayment!
and!several!installments.!Almost!6!years!later,!Dumpit!wrote!Palay,!Inc.!
offering!to!update!all!his!overdue!accounts!with!interest,!and!seeking!its!
written! consent! to! the! assignment! of! his! rights! to! a! certain! Lourdes!
Dizon.! Palay,! Inc.! informed! him! that! his! Contract! to! Sell! had! long! been!
rescinded!pursuant!to!paragraph!6!of!the!contract,!and!that!the!lot!had!
corporation! to! defraud! private! respondent.! He! cannot! be! made!

personally! liable! just! because! he! appears! to! be! the! controlling!
stockholder.!
*
Doctrine:*The!veil!of!corporate!fiction!may!be!pierced!when!it!is!used!as!
a! shield! to! further! an! end! subversive! of! justice;! or! for! purposes! that!
could! not! have! been! intended! by! the! law! that! created! it;! or! to! defeat!
already! been! resold.! Dumpit! filed! a! letter! complaint! with! the! National!
Housing!Authority!(NHA)!for!reconveyance.!
*
Issue:* Whether! or! not! petitioners! may! be! held! liable! for! the! refund! of!
the!installment!payments!made!by!Dumpit.!
*
Held:* YES.! Rights! to! the! lot! should! be! restored! to! Dumpit! or! the! same!
public!convenience,!justify!wrong,!protect!fraud,!or!defend!crime;!or!to!
perpetuate!fraud!or!confuse!legitimate!issues;!or!to!circumvent!the!law!
or!perpetuate!deception;!or!as!an!alter!ego,!adjunct!or!business!conduit!
for!the!sole!benefit!of!the!stockholders.(
should! be! replaced! by! another! acceptable! lot.! However,! considering!

that! the! property! had! already! been! sold! to! a! third! person! and! there! is!
no! evidence! on! record! that! other! lots! are! still! available,! private!
respondent!is!entitled!to!the!refund!of!installments!paid!plus!interest!at!
the!legal!rate!of!12%!computed!from!the!date!of!the!institution!of!the!
action.!!
!
As!a!general!rule,!a!corporation!may!not!be!made!to!answer!for!acts!or!
are,!as!a!general!rule,!not!personally!liable!for!their!official!acts,!
because! a! corporation,! by! legal! fiction,! has! a! personality!
separate! and! distinct! from! its! officers,! stockholders! and!
members.!Price(v.(Innodata(Phils.,(Inc.,(567(SCRA(269((2008).1(
liabilities!of!its!stockholders!or!those!of!the!legal!entities!to!which!it!may!
be! connected! and! vice! versa.! There! were! no! badges! of! fraud! on!
!
A.*GENERAL*RULE:*Corporate*Officers*Not*Liable*for*Corporate*Debts*
Unless! they! have! exceeded! their! authority,! corporate! officers!
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!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Republic!Planters!Bank!v.!Court!of!Appeals,!216!SCRA!738!(1992);!Lowe,!Inc.!v.!
Court! of! Appeals,! 596! SCRA! 140! (2009);! Marc! II! Marketing,! Inc.! v.! Joson,! 662!
SCRA!35!(2011);!St.!Tomas!v.!Salac,!685!SCRA!245!(2012).!
)
!
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).1!
wrongdoing! of! the! director! must! be! established! clearly! and!

convincingly.! Bad! faith! is! never! presumed.! Bad! faith! does! not!
connote! bad! judgment! or! negligence.! Bad! faith! imports! a!
dishonest!purpose.!Bad!faith!means![a]!breach!of!a!known!duty!
through! some! ill! motive! or! interest.! Bad! faith! partakes! of! the!
nature!of!fraud.!Carag!v.!NLRC,!520!SCRA!28!(2007).4!
Officers! of! a! corporation! may! become! liable! for! its! loans! when!
they!have!breached!their!duty!of!diligence!under!Section!31!of!
the!Corporation!Code.!Aratea(v.(Suico,(518(SCRA(501((2007);2!or!
when! they! have! contractually! made! themselves! personally!
liable!for!a!corporate!loan.!Prisma(Construction(&(Dev.(Corp.(v.(
Menchavez,(614(SCRA(590((2010).(
The! finding! of! solidary! liability! among! the! corporation,! its!

officers! and! directors! would! patently! be! baseless! when! the!
decision!contains!no!allegation,!finding!or!conclusion!regarding!
particular! acts! committed! by! said! officers! and! director! that!
show! them! to! have! been! individually! guilty! of! unmistakable!
malice,! bad! faith,! or! illWmotive! in! their! personal! dealings! with!
A! corporation! has! a! personality! separate! and! distinct! from! the!

persons! composing! or! representing! it;! hence,! personal! liability!
attaches! only! in! exceptional! cases,! such! as! when! the! director,!
trustee,! or! officer! is! guilty! of! bad! faith! or! gross! negligence! in!
directing! the! affairs! of! the! corporation.! Continental( Cement(
Corp.(v.(Asea(Brown(Boveri,(Inc.,(659(SCRA(137((2011).3(
To!hold!a!director!personally!liable!for!debts!of!the!corporation,!
and! thus! pierce! the! veil! of! corporate! fiction,! the! bad! faith! or!
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).5(
Where!the!Chairman!&!President!has!made!himself!accountable!
in! the! promissory! note! in! his! personal! capacity! and! as!
authorized!by!the!Board!Resolution,!and!in!the!absence!of!any!
representation!on!the!part!of!corporation!that!the!obligation!is!
all!its!own!because!of!its!separate!corporate!identity,!we!see!no!
occasion! to! consider! piercing! the! corporate! veil! as! material! to!
the!case.!Prisma(Construction(&(Dev.(Corp.(v.(Menchavez,(614(
SCRA(590((2010).(
An!officerWstockholder!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!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Rustan!Pulp!&!Paper!Mills,!Inc.!v.!IAC,!214!SCRA!665!(1992);!Banque!Generale!
Belge!v.!Walter!Bull!and!Co.,!84!Phil.!164!(1949).!
2
!Singian,!Jr.!v.!Sandiganbayan,!478!SCRA!348!(2005)!
3
!Prisma!Construction!&!Dev.!Corp.!v.!Menchavez,!614!SCRA!590!(2010);!Urban!
Ban,!Inc.!v.!Pena,!659!SCRA!418!(2011).!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
!EPG!Constructions!Co.!v.!CA,!210!SCRA!230!(1992).!
!Emilio! Cano! Enterprises,! Inc.! v.! CIR,! 13! SCRA! 291! (1965);! Arcilla! v.! Court! of!
Appeals,!215!SCRA!120!(1992).!
5
)
!
has! to! be! pierced! to! avoid! injustice! and! inequity.! Paradise(
Sauna(Massage(Corporation(v.(Ng,(181(SCRA(719((1990).(
B.*Rundown*on*Officers*Liabilities:*Tramat(Mercantile,(Inc.(v.(Court(of(
Appeals,(238(SCRA(14((1994).1(
(
personal!capacity.!Tramat!has!its!own!distinct!and!separate!personality.!
In! the! case! at! bench,! there! is! no! indication! that! petitioner! David! Ong!
could!be!held!personally!accountable!under!any!of!the!mentioned!cases!
(see!doctrine).!
*
Tramat(Mercantile,(Inc.(v.(Court(of(Appeals(
(
Facts:*Melchor!de!la!Cuesta!(doing!business!under!the!name!of!Farmers!
Machineries)!sold!a!tractor!to!Tramat!Mercantile.!David!Ong,!president!
and! manager! of! Tramat,! issued! a! check! for! payment.! In! turn,! Tramat!
sold!the!tractor!along!with!a!lawn!mower!to!MWSS.!The!latter!refused!
to! pay! when! it! learned! that! the! tractor! was! not! brand! new! and! there!
Doctrine:* Personal! liability! of! a! corporate! director,! trustee! or! officer!

along! (although! not! necessarily)! with! the! corporation! may! so! validly!
attach,!as!a!rule,!only!when:!
1. He!assents!!
a. To!a!patently!unlawful!act!of!the!corporation!
b. For!bad!faith,!or!gross!negligence!in!directing!its!affairs!!
c. For! conflict! of! interest,! resulting! in! damages! to! the!
were! hidden! defects.! Ong! then! issued! a! stop! payment! for! the! check!
issued!to!de!la!Cuesta!(it!seems!that!Ong!intended!to!pay!de!la!Cuesta!
with! the! proceeds! of! the! sale! to! MWSS).! Because! of! this,! de! la! Cuesta!
filed!an!action!for!recovery!of!the!P33,500!payment!as!well!as!P10,000!
as! attorney's! fees.! Ong! answered! that! de! la! Cuesta! had! no! cause! of!
action,!and!that!the!transaction!was!between!de!la!Cuesta!and!Tramat!
Mercantile,!not!Ong.*
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;!
4. He!is!made,!by!a!specific!provision!of!law,!to!personally!answer!
*
Issue:*Whether!or!not!Ong!can!be!held!liable!in!his!personal!capacity.!
*
Held:* NO.! David! Ong! was! acting! as! an! officer! of! Tramat,! not! in! his!
for!his!corporate!action.!
(
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).(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!MAM!Realty!v.!NLRC,!244!SCRA!797!(1995);!NFA!v.!Court!of!Appeals,!311!SCRA!
700!(1999);!Atrium!Management!Corp.!v.!Court!of!Appeals,!353!SCRA!23!(2001);!
Malayang! Samahan! ng! mga! Manggawgawa! sa! M.! Greenfield! v.! Ramos,! 357!
SCRA!77!(2001);!Powton!Conglomerate,!Inc.!v.!Agcolicol,!400!SCRA!523!(2003);!
H.L.!Carlos!Construction,!Inc.!v.!Marina!Properties!Corp.,!421!SCRA!428!(2004);!
McLeod!v.!NLRC,!512!SCRA!222!(2007).!
)
While! the! limited! liability! doctrine! is! intended! to! protect! the!
stockholder! by! immunizing! him! from! personal! liability! for! the!
The!corporate!representatives!signing!as!a!solidary!guarantee!as!
corporate! representative! did! not! undertake! to! guarantee!
!
personally! the! payment! of! the! corporations! debt! embodied! in!
the! trust! receipts.! Debts! incurred! by! directors,! officers! and!
employees! acting! as! such! corporate! agents! are! not! theirs! but!
the! direct! liability! of! the! corporation! they! represent.! As! an!
exception,! directors! or! officers! are! personally! liable! for! the!
corporations! debt! if! they! so! contractually! agree! or! stipulate.!
Tupaz(IV(v.(Court(of(Appeals,(476(SCRA(398((2005).(
Bad!faith!does!not!arise!just!because!a!corporation!fails!to!pay!
its!obligation,!because!the!inability!to!pay!ones!obligation!is!not!
synonymous! with! fraudulent! intent! not! to! honor! the!
obligations.! In! order! to! piece! the! veil! of! corporate! fiction,! for!
reasons! of! negligence! by! the! director,! trustee! or! officer! in! the!
conduct!of!the!transactions!of!the!corporation,!such!negligence!
must!be!gross.!Magaling(v.(Ong,(562(SCRA(152((2008).(
Directors! or! trustees! who! willfully! or! knowingly! vote! for! or!
assent! to! patently! unlawful! acts! of! the! corporation! or! acquire!
any! 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.!EDSA(
Shangri^La( Hotel( and( Resorts,( Inc.( v.( BF( Corp.,( 556( SCRA( 25(
(2008).(
*
C.*SPECIAL*PROVISIONS*IN*LABOR*LAWS:*
Since!a!corporate!employer!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! as! defined! in!
Article! 283! of! the! Labor! Code.!A.C.( Ransom( Labor( Union^CCLU(
v.(NLRC,(142(SCRA(269((1986).(
A.C.(Ransom(Labor(Union^CCLU(v.(NLRC(
(
Facts:*On!June!6,!1961,!employees!of!AC!Ransom,!most!being!members!
of!the!AC!Ransom!Labor!Union,!went!on!strike.!The!said!strike!was!lifted!
on! June! 21! with! most! of! the! strikers! being! allowed! to! resume! their!
work.!However,!twenty!two!strikers!were!refused!reinstatement.!!
!
In! 1969,! the! Hernandez! family! (owners! of! AC! RANSOM)! organized!
another!corporation!under!the!name!of!Rosario!Industrial!Corporation.!
The!said!company!dealt!in!the!same!type!of!business!as!AC!Ransom.!!
!
In! 1972,! a! decision! to! reinstate! the! 22! strikers! was! rendered! by! the!
Court!of!Industrial!Relations.!!
!
In!1973,!RAMSOM!filed!an!application!for!clearance!to!close!and!cease!
operations!which!was!granted,!and!as!such!the!reinstatement!of!the!22!
strikers! has! been! precluded.! Because! of! this,! the! Union! subsequently!
asked!the!officers!of!Ransom!to!be!personally!liable!for!payment!of!the!
back!wages.!
*
Issue:* Whether! or! not! the! officers! of! the! corporation! should! be! held!
personally!liable!to!pay!for!the!back!wages.!
*
Held:* YES.!In!the!instant!case,!RANSOM,!in!foreseeing!the!possibility!or!
probability! of! payment! of! back! wages! to! the! 22! strikers,! organized!
ROSARIO! to! replace! RANSOM,! with! the! latter! to! be! eventually! phased!
out!if!the!22!strikers!win!their!case.!
Note:! The! record! does! not! clearly! identify! the! officer! or! officers! of!
RANSOM!directly!responsible!for!failure!to!pay!the!back!wages!of!the!22!
)
!
and!bad!faith!in!terminating!their!employment.!AHS/Philippines(
v.(Court(of(Appeals,(257(SCRA(319((1996).2(
strikers.! In! the! absence! of! definite! proof! in! that! regard,! it! should! be!
presumed! that! the! responsible! officer! is! the! President! of! the!
corporation!who!can!be!deemed!the!chief!operation!officer!thereof.!
!
Doctrine:*Under!Article!212!(c)!of!the!Labor!Code,!Employee!includes!
illegally!dismissing!an!employee!should!be!held!personally!liable!
for!the!corporate!obligations!arising!from!such!act.!Maglutac(v.(
NLRC,( 189( SCRA( 767( (1990); 3 !and! for! the! separate! juridical!
personality! of! a! corporation! to! be! disregarded! as! to! make! the!
highest! corporate! officer! personally! liable! on! labor! claims,! the!
wrongdoing! must! be! clearly! and! convincingly! established.! Del(
Rosario(v.(NLRC,(187(SCRA(777((1990).(
any! person! acting! in! the! interest! of! an! employer,! directly! or! indirectly.!
Since!Ransom!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!(Ransom).!
(
1. Overturning*the*A.C.*Ransom*Ruling:*
Article! 212(e)! of! the! Labor! Code,! by! itself,! does! not! make! a!
corporate! officer! personally! liable! for! the! debts! of! the!
corporation!because!Section!31!of!the!Corporation!Code!is!still!
the! governing! law! on! personal! liability! of! officers! for! the! debts!
of! the! corporation.! David( v.( National( Federation( of( 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).1(
Corporate!officers!are!not!personally!liable!for!money!claims!of!
discharged! employees! unless! they! acted! with! evident! malice!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!AMA!Computer!CollegeWEast!Rizal!v.!Ignacio,!590!SCRA!633,!659W660!(2009).!
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.! In! labor!
cases,! corporate! directors! and! officers! are! solidarily! liable! with!
the! corporation! for! the! termination! of! employment! of!
employees!done!with!malice!or!bad!faith.!Brent(Hospital,(Inc.(v.(
NLRC,(292(SCRA(304((1998).4(
Unions,(586(SCRA(100((2009).(
Only!the!responsible!officer!of!a!corporation!who!had!a!hand!in!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!Reiterated! in! Nicario! v.! NLRC,! 295! SCRA! 619! (1998);! Flight! Attendants! and!
Stewards! Association! of! the! Philippines! v.! Philippine! Airlines,! 559! SCRA! 252!
(2008);! M+W! Zander! Philippines,! Inc.! v.! Enriquez,! 588! SCRA! 590$ (2009);$ AMA$
Computer) CollegeWEast% Rizal% v.% Ignacio,% 590% SCRA% 633,% 659W660# (2009);# Lowe,#
Inc.% v.% Court% of% Appeals,% 596% SCRA% 140,% 155% (2009);% Peaflor% v.% Outdoor%
Clothing!Manufacturing!Corp.,!618!SCRA!208!(2010).!
3
!Reiterated! in! Gudez! v.! NLRC,! 183! SCRA! 644! (1990);! Chua! v.! NLRC,! 182! SCRA!
353!(1990);!Reahs!Corp.!v.!NLRC,!271!SCRA!247!(1997)!
4
!Culili! v.! Eastern! Telecommunications! Philippines,! Inc.,! 642! SCRA! 338! (2011);!
Grandteq!Industrial!Steel!Products,!Inc.!v.!Estrella,!646!SCRA!391!(2011);!Alert!
Security! and! Investigation! Agency,! Inc.! v.! Pasawilan,! 657! SCRA! 655! (2011);!
Lynvil!Fishing!Enterprises,!Inc.!v.!Ariola,!664!SCRA!679!(2012);!Blue!Sky!Trading!
Co.,!Inc.!v.!Blas,!667!SCRA!727!(2012).!
)
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! highWranking! 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!
laws.!Villanueva(v.(Adre,(172(SCRA(876((1989).(
A.C.! Ransom! doctrine! has! been! reiterated! subsequently! in!
Restuarante(Las(Conchas(v.(Llego,(314(SCRA(24((1999).1(
Since!a!corporation!is!an!artificial!person,!it!must!have!an!officer!
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).!
4. Definitive*Overturning*of*A.C.*Ransom*Ruling:*
A.C.! Ransom! is! not! in! point! because! there! the! corporation!
actually! ceased! operations! after! the! decision! of! the! Court! was!
promulgated!against!it,!making!it!necessary!to!enforce!it!against!
its! former! president.! When! the! corporation! is! still! existing! and!
able!to!satisfy!the!judgment!in!favor!of!the!private!respondent,!
the! corporate! officers! cannot! be! held! personally! liable.! Lim( v.(
NLRC,(171(SCRA(328((1989).(
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!
whatsoever.!Uichico(v.(NLRC,(273(SCRA(35((1997).(
2. Limiting*the*A.C.*Ransom*Ruling*to*Insolvent*Corporation*
Under! the! Labor! Code,! in! the! case! of! corporations,! it! is! the!
president!who!responds!personally!for!violation!of!the!labor!pay!
It!is!settled!that!in!the!absence!of!malice,!bad!faith,!or!specific!
provisions! of! law,! a! stockholder! or! an! officer! of! a! corporation!
cannot! be! made! personally! liable! for! corporate! liabilities.!
McLeod(v.(NLRC,(512(SCRA(222((2007).2(
A.C.! Ransom! will! apply! only! where! the! persons! who! are! made!
personally! liable! for! the! employees! claims! are! stockholdersW
officers! of! employerWcorporation.! In! the! case! at! bar,! a! mere!
general! manager! while! admittedly! the! highest! ranking! local!
representative! of! the! corporation,! is! nevertheless! not! a!
stockholder!and!much!less!a!member!of!the!Board!of!Directors!
nor! an! officer! thereof.! De( Guzman( v.( NLRC,( 211( SCRA( 723(
(1992).(
3. Upholding*the*A.C.*Ransom*Ruling:*
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Reiterated!in!Carmelcraft!Corp.!v.!NLRC,!186!SCRA!393!(1990);!Valderrama!v.!
NLRC,!256!SCRA!466!(1996).!
2
!Citing!Land!Bank!of!the!Philippines!v.!Court!of!Appeals,!364!SCRA!375!(2001);!
BogoWMedellin! Sugarcane! Planters! Asso.,! Inc.! v.! NLRC,! 296! SCRA! 108! (1998);!
Complex! Electronics! Employees! Assn.! v.! NLRC,! 310! SCRA! 403! (1999);! Acesite!
Corp.!v.!NLRC,!449!SCRA!360!(2005);!CocaWCola!Bottlers!Phils.,!Inc.!v.!Daniel,!460!
SCRA! 494! (2005);! Suldao! v.! Cimech! System! Construction,! Inc.,! 506! SCRA! 256!
(2006);! Supreme! Steel! Pipe! Corp.! v.! Bardaje,! 522! SCRA! 155! (2007);! Culili! v.!
Eastern! Telecommunications! Philippines,! Inc.,! 642! SCRA! 338! (2011).! Grandteq!
Industrial!Steel!Products,!Inc.!v.!Estrella,!646!SCRA!391!(2011).!
)
Clearly,! in! A.C.! Ransom,! RANSOM,! through! its! President,!

organized! ROSARIO! to! evade! payment! of! backwages! to! the! 22!
strikers.! This! situation,! or! anything! similar! showing! malice! or!
bad!faith!on!the!part!of!Patricio,!does!not!obtain!in!the!present!
case.! [What! applies! therefore! is! the! ruling! [i]n! Santos! v.! NLRC,!
[254!SCRA!673!(1996)].!McLeod(v.(NLRC,(512(SCRA(222((2007).1(
It! was! clarified! in! Carag! v.! NLRC,! 520! SCRA! 28! (2007),! and!
McLeod!v.!NLRC,!512!SCRA!22!(2007),!that!Article!212(e)!of!the!
Labor! Code,! by! itself,! does! not! make! a! corporate! officer!
personally! liable! for! the! debts! of! the! corporationthe!
governing! law! on! personal! liability! of! directors! or! officers! for!
debts! of! the! corporation! is! still! Section! 31! of! the! Corporation!
Code.!Pantranco(Employees(Association((PEA^PTGWO)(v.(NLRC,(
581(SCRA(598((2009).2(
!
D.*Personal*Liability*of*Trustees*and*Officers*of*NonTStock*Corporation*
The!nonWstock!corporation!acted!in!clear!bad!faith!when!it!sent!
the!final!notice!to!a!member!under!the!pretense!they!believed!
him!to!be!still!alive,!when!in!fact!it!had!very!well!known!that!he!
had!already!died.!Valley(Golf(and(Country(Club,(Inc.(v.(Vda.(De(
Caram,(585(SCRA(218((2009).(
NonWstock! corporations! and! their! officers! are! not! exempt! from!

the! obligation! imposed! by! Articles! 19,! 20! and! 21! under! the!
Chapter!on!Human!Relations!of!the!Civil!Code,!which!provisions!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Reiterated! in! H.R.! Carlos! Construction,! Inc.! v.! Marina! Properties! Corp.,! 421!
SCRA! 428! (2004);! Pamplona! Plantation! Company! v.! Acosta,! 510! SCRA! 249!
(2006);! Elcee! Farms,! Inc.! v.! NLRC,! 512! SCRA! 602! (2007);! Uy! v.! Villanueva,! 526!
SCRA!73!(2007).!
2
!Reiterated! in! David! v.! National! Federation! of! Labor! Unions,! 586! SCRA! 100!
(2009).!
)
enunciate!a!general!obligation!under!law!for!every!person!to!act!
fairly! and! in! good! faith! towards! one! another.! Valley( Golf( and(
Country(Club,(Inc.(v.(Vda.(De(Caram,(585(SCRA(218((2009).(
RIGHT&OF&STOCKHOLDERS&AND&MEMBERS&
!
I.&What&Does&Share&Represent?&
While!shares!of!stock!constitute!personal!property,!they!do!not!
represent!property!of!the!corporation![i.e.,!they!are!properties!
of! the! stockholders! who! own! them].! A! share! of! stock! only!
typifies! an! aliquot! part! of! the! corporations! property,! or! the!
right! to! share! in! its! proceeds! to! that! extent! when! distributed!
according!to!law!and!equity,!but!the!holder!is!not!the!owner!of!
any!part!of!the!capital![properties]!of!the!corporation,!nor!is!he!
entitled! to! the! possession! of! any! definite! portion! of! its! assets.!
The! stockholder! is! not! a! coAowner! of! corporate! property.!
Stockholders,of,F.,Guanson,and,Sons,,Inc.,v.,Register,of,Deeds,
of,Manila,,6,SCRA,373,(1962).!
o
!As! early! as! the! case! of! Fisher! v.! Trinidad,! the! Court!
already! declared! that! [t]he! distinction! between! the!
title!of!a!corporation,!and!the!interest!of!its!members!or!
stockholders! in! the! property! of! the! corporation,! is!
familiar! and! wellAsettled.! The! ownership! of! that!
property!is!in!the!corporation,!and!not!in!the!holders!of!
shares! of! its! stock.! The! interest! of! each! stockholder!
consists! in! the! right! to! a! proportionate! part! of! the!
profits! whenever! dividends! are! declared! by! the!
corporation,!during!its!existence,!under!its!charter,!and!
to!a!like!proportion!of!the!property!remaining,!upon!the!
termination! or! dissolution! of! the! corporation,! after!
payment! of! its! debts.! Mobilia, Products,, Inc., v.,
Umezawa,,452,SCRA,736,(2005).,
Atty.! Hofilea! !! Shares! of! stock! is! intangible! personal!

property! since! the! shares! represent! merely! an! interest!
in!the!company.,
The!registration!of!shares!in!a!stockholders!name,!the!issuance!
of! stock! certificates,! and! the! right! to! receive! dividends! which!
pertain! to! the! shares! are! all! rights! that! flow! from! ownership.!
Lim, Tay, v., Court, of, Appeals,, 293, SCRA, 634, (1998);, TCL, Sales,
Corp.,v.,Court,of,Appeals,,349,SCRA,35,(2001).,
&
A.&Sources&of&Shares:,
1. Shares! acquired! from! the! company! itself! !! these! are! shares!
that!are!sold!from!the!unissued!shares!of!the!company.!
2. Shares! acquired! from! a! stockholder! of! the! company! !! these!
are! shares! sold! by! a! stockholder! of! the! company! to! another!
person!who!may!or!may!not!be!an!existing!stockholder.!
!
II.&Preemptive&Rights&(Section&39)&
&
Section&39.&Power&to&deny&preQemptive&right.&
All&stockholders&of&a&stock&corporation&shall&enjoy&preQemptive&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&preQemptive&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&twoQthirds&(2/3)&of&
the& outstanding& capital& stock,& in& exchange& for& property& needed& for&
corporate&purposes&or&in&payment&of&a&previously&contracted&debt.&
)
!
&
A.&PreQemptive&rights&defined&
Atty.! Hofilea! !! Before! Mr.! X! can! become! a! member! of! the!

corporation,! the! existing! stockholders! must! first! be! allowed! to!
buy! whatever! stocks! the! company! desires! to! issue.! Where! not!
all!the!members!of!the!corporation!decide!not!to!invest!further,!
the!remainder!may!be!offered!to!Mr.!X.!
o The!recognition!of!the!preAemptive!right!is!intended!to!
protect! both! the! proprietary! and! voting! rights! of! a!
stockholder! in! a! corporation.! The! proportionate!
when! no! specific! grant! or! recognition! of! such! right! is! provided!
for!in!statutory!law.2!
PreAemptive! right! under! Section! 39! of! the! Corporation! Code!

refers! to! the! right! of! a! stockholder! of! a! stock! corporation! to!
subscribe! to! all! issues! or! disposition! of! shares! of! any! class,! in!
proportion! to! their! respective! shareholdings.! Although! it! can!
validly! be! withdrawn,! it! cannot! be! done! in! breach! of! fiduciary!
duties! such! as! to! perpetuate! control! over! the! corporation.!
Majority,Stockholders,of,Ruby,Industrial,Corp.,v.,Lim,,650,SCRA,
461,(2011).!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!SEC! Opinion,! 11! August! 1997,! XXXII! SEC! QUARTERLY! BULLETIN! 15! (No.! 2,! Dec.!
1997);!SEC!EAD!Memo,!dated!29!July!1997.!!
Atty.! Hofilea! !! Can! preAemptive! rights! be! taken! away?! YES.!

The! right! may! be! denied! by! the! articles! of! incorporation! or! by!
the!byAlaws.!
&
B.&Extent&of&Coverage&of&PreQemptive&Rights&
interests! of! a! stockholder! in! a! corporation! determines!

his! proportionate! power! to! vote! in! corporate! affairs!
when!the!law!gives!the!stockholders!a!right!to!affirm!or!
deny! board! actions.! The! proportionate! interest! of! the!
stockholder! to! the! outstanding! capital! stock! also!
determines! his! proportionate! share! in! the! dividends!
declared! by! the! corporation,! as! well! as! his!
proportionate! right! to! the! remaining! assets! of! the!
corporation!upon!dissolution!of!the!corporation.!1!!
The!preAemptive!rights!of!stockholders!in!a!corporation!are!not!
statutory! rights,! but! are! common! law! rights,! and! exist! even!
Under!the!current!provision!Section!39!of!the!Corporation!Code,!
the! preAemptive! right! of! stockholders! is! recognized! to! exist! to!
"all!issues!or!disposition!of!shares!of!any!class."!The!use!of!the!
terms! "issues! or! disposition"! clearly! provides! that! the! preA
emptive! right! should! now! be! available! even! to! issues! from! the!
existing! unsubscribed! portion! of! the! authorized! capital! stock!
when! the! board! decides! to! open! them! for! subscription,! and!
even! to! reAissuance! or! sale! of! treasury! shares! of! the!
corporation.3!
&
C.&Exceptions&to&PreQemptive&Rights&
3!exceptions!provided!in!Section!39:!(1)!debt,!(2)!in!compliance!
with! the! required! public! issuance,! and! (3)! shares! to! be! issued,!
with! approval! of! the! 2/3! of! the! stockholders,! in! exchange! for!
property!for!corporate!purposes.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
!Villanueva,!C.!L.,!&!VillanuevaATiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
3
)
!
o
The! SEC! has! ruled! that! a! majority! vote! of! stockholders!

waiving!the!preAemptive!right!in!a!meeting!called!for!the!
purpose! would! not! be! valid! and! binding! on! the!
individual! stockholders! since! the! preAemptive! right! is! a!
personal! right! of! a! stockholder,! and! accordingly,! the!
waiver!should!be!given!individually!by!the!stockholders!
concerned! or! he! may! authorize! somebody! to! execute!
the!same!for!and!in!his!behalf!by!way!of!a!special!power!
of!attorney.1!!
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)&
&
Issue!v.!Disposition!
o
o
of! the! corporation! ! they! are! owned! by! the! stockholders! of!
record.!The!corporation!whose!shares!of!stock!are!the!subject!of!
transfer!transaction!(through!sale,!assignment,!donation,!or!any!
other!mode!of!conveyance)!need!not!be!a!part!to!transaction!to!
be! valid;! however,! to! bind! the! corporation! as! well! as! third!
parties,!it!is!necessary!that!the!transfer!is!recorded!in!the!books!
of! the! corporation.! Forest, Hills, Golf, &, Country, Club, v., Vertex,
Issue!!!refers!to!new!shares!issued!to!stockholders.!
Disposition!!!treasury!shares!owned!by!the!company!
may! be! disposed! by! the! company! by! selling! such! to!
the!stockholders.!
&
III.&Right&to&Transfer&or&Dispose&of&Shareholdings&(Section&63)&
&
Section&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&byQ
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&attorneyQinQfact&or&other&person&legally&authorized&to&
make& the& transfer.& No& transfer,& however,& shall& be& valid,& except& as&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!SEC!Opinion,!6!Dec.!1994,!XXIX!SEC!QUARTERLY! BULLETIN!10!(No.!2,!June!1995);!
SEC! Opinion,! 12! Dec.! 1994,! XXIX! SEC! QUARTERLY! BULLETIN! 14! (No.2,! June! 1995);!
SEC!Opinion,!1!October!1981.!
Shares!of!stock!of!a!corporation!are!not!owned!or!are!the!assets!
Sales,and,Trading,,Inc.,,692,SCRA,706,(2013).,
&
A.&Restriction&on&Transfers:&
A! contractual! undertaking! on! restriction! of! transfer! of! shares!

that!has!a!reasonable!business!purpose!and!limited!in!coverage!
is!valid!and!binding.!Lambert,v.,Fox,,26,Phil.,588,(1914).!
!
Lambert,v.,Fox,
,
Facts:& John!R.!Edgar!&!Co!found!itself!in!such!condition!financially!that!
its! creditors,! including! Lambert! and! Fox,! agreed! to! take! over! the!
business,!incorporate!it!and!accept!stock!in!payment!of!their!respective!
credits.! Eventually,! Lambert! and! Fox! became! the! two! largest!
)
!
terms! and! considerations! which! are! reasonable,! and!
only!when!the!corporation!or!the!other!stockholders!do!
not! or! fail! to! exercise! their! option,! is! the! offering!
stockholder! at! liberty! to! dispose! of! his! shares! to! third!
parties.!
" Before! you! can! sell! your! shares! you! must! offer!
stockholders!in!the!new!corporation,!John!R.!Edgar!&!Co.,!Incorporated.!
A! few! days! after! incorporation,! Lambert! and! Fox! entered! into! an!
agreement! where! they! mutually! agreed! not! to! sell,! transfer,! or!
otherwise!dispose!of!any!part!of!their!shareholdings!until!after!one!year!
from!the!date!of!the!agreement.!A!violation!thereof!would!be!liable!for!
breach! of! contract! and! damages.! Fox! sold! his! stock! to! one! of! the!
corporations!competitors,!E.C.!McCullough!&!Co.,
&
Issue:&Whether!or!not!Fox!is!liable.!
&
Held:&YES.!Fox!contends!that!the!stipulation!in!the!contract!suspending!
the!power!to!sell!the!stock!is!an!illegal!stipulation,!is!in!restraint!of!trade!
and!offends!public!policy.!The!Court!sees!otherwise.!The!suspension!of!
the! power! to! sell! has! a! beneficial! purpose,! results! in! the! protection! of!
the!corporation!as!well!as!of!the!individual!parties!to!the!contract,!and!is!
reasonable!as!to!the!length!of!time!of!the!suspension.!But!the!Court!also!
said!that!the!mentioned!doctrine!did!not!mean!to!cover!the!suspension!
of!the!right!of!alienation!of!stock,!limiting!ourselves!to!the!statements!
that!the!suspension!in!this!particular!case!is!legal!and!valid.!
&
Doctrine:&See!above.!Requisites!for!valid!restriction!on!transfer:!
Reasonableness!
TimeAboundedness!
Valid!and!Binding!
!
o
"Right! of! first! refusal"! !! which! would! provide! that! a!

stockholder! who! may! wish! to! sell! or! assign! his! shares!
must!first!offer!the!shares!to!the!corporation!or!to!the!
other! existing! stockholders! of! the! corporation,! under!
)
them! first! to! the! corporation! or! existing!

shareholders!
Right! of! first! option"! !! grants! to! the! corporation! the!
right! to! buy! the! shares! at! a! fixed! price,! and! would! be!
valid!if!the!terms!and!consideration!are!reasonable.!
"BuyAback! agreement"! !! exists! in! situations! when!
shares! are! given! or! assigned! to! officers! or! employees!
under! the! condition! that! should! they! resign! or! be!
terminated! from! employment,! the! corporation! shall! be!
granted! the! right! to! buyAback! the! shares.! Such!
stipulations! are! valid! so! long! as! the! terms! and! the!
consideration!are!reasonable.!!!
Void!
o
"Right!of!prior!consent"!!!provision!would!require!that!
any!stockholder!who!may!wish!to!sell,!assign!or!dispose!
of!his!shares!in!the!corporation!may!do!so!only!when!he!
obtains! the! consent! of! the! board! of! directors! or! other!
stockholders! of! the! corporation.! Such! stipulations! are!
void! since! they! unduly! restrain! the! exercise! of! the!
stockholder!of!his!proprietary!interest!in!the!shares,!as!
illustrated! in! a! situation! where! a! stockholder! cannot!
dispose! of! his! shares! because! of! failure! to! obtain! such!
consent.!
!
"
Before! you! can! sell! your! shares,! you! must! first!

get! the! approval! of! the! shareholders.! !! Atty.!
Hofilea!states!that!consent!rights!are!not!valid!
because! all! the! person,! whose! consent! you!
need,!has!to!do!is!dissent.!This!is!like!making!the!
share!nonAtransferable.!
If! the! provision! states! that! you! can! only! sell!

upon! the! approval! of! a! third! person! (who! may!
or! may! not! even! be! a! member! of! the!
corporation)!
An!absolute!prohibition!to!transfer!shares!!!even!when!
contained!in!the!articles!of!incorporation,!would!be!void!
since!it!would!violate!the!provision!of!Section!63!of!the!
"
Corporation! Code! which! treats! of! shares! of! stock! as!

personal! property! of! which! the! stockholder! has! the!
inherent!right!to!dispose!as!incident!of!his!ownership.1!!
1. RIGHT&OF&REFUSAL:&
The! indication! on! the! face! of! the! stock! certificate! that! it! is!
Nontransferable! alone! does! not! compel! the! corporation! to!
buy!back!the!shares!from!the!stockholder,!and!held!that!in!the!
absence! of! a! similar! contractual! obligation! and! of! a! legal!
provision! applicable! thereto,! it! is! logical! to! conclude! that! it!
would!be!unjust!and!unreasonable!to!compel!the!corporation!to!
comply!with!a!nonAexistent!or!imaginary!obligation.!Padgett,v.,
Padgett,v.,Babcock,&,Templeton,,Inc.,
,
Facts:&Padgett!was!an!employee!of!Babcock!&!Templeton,!Inc.!(BTI)!and!
bought!35!shares!of!the!corporation.!He!was!given!9!additional!shares!as!
Christmas! Bonuses.! The! Certificates! of! Stock! bore! the! words! NonA
transferable!on!their!faces.!Before!he!left!BTI,!Padgett!proposed!to!the!
President!that!BTI!buy!his!44!shares!at!par!value!plus!interest!or!that!he!
be!authorized!to!sell!them!to!other!people.,
&
Issue:&Whether!or!not!the!stocks!are!transferable.!
&
Held:& YES.! The! court! held! that! the! notation! be! held! null! and! void!
because! it! is! a! limitation! on! the! right! of! ownership! and! a! restraint! on!
trade.!
&
Doctrine:& Any! restriction! on! a! stockholders! right! to! dispose! of! his!
shares!must!be!construed!strictly.!Any!attempt!to!restrain!a!transfer!of!
shares!is!regarded!as!being!in!restraint!of!trade,!in!the!absence!of!a!valid!
lien! upon! its! shares,! and! except! to! the! extent! that! valid! restrictive!
regulations!and!agreements!exist!and!are!applicable.,
,
Babcock,&,Templeton,,Inc.,,59,Phil.,232,(1933).,
,
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!SEC! Opinion,! 20! February! 1995,! XXIX! SEC! QUARTERLY! BULLETIN! 4! (No.! 3,! Sept.!
1995).!
)
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).,
!
,
Fleishcher,v.,Botica,Nolasco,
&
Facts:&Manuel!Gonzales!was!the!original!owner!of!five!shares!of!stock!of!
Botica!Nolasco!Inc.!Gonzales!assigned!and!delivered!said!five!shares!to!
be! transferred! as! therein! provided.! The! holder! of! shares,! as! owner! of!
personal!property,!is!at!liberty,!under!said!section,!to!dispose!of!them!in!
favor! of! whomsoever! he! pleases,! without! any! other! limitation! in! this!
respect,!than!the!general!provisions!of!law.,
,
Henry!Fleischer!to!repay!his!debt!to!the!latter.!Doctor!Miciano,!who!was!
the! secretaryAtreasurer! of! said! corporation,! offered! to! buy! from! Henry!
Fleischer,! on! behalf! of! the! corporation,! said! shares! of! stock! invoking!
Article! 12! of! the! byAlaws,! which! states! that! the! corporation! had! a!
preferential! right! to! buy! from! Manuel! Gonzalez! said! shares.! Fleischer!
refused.!Thereafter,!Fleischer!requested!Doctor!Miciano!to!register!said!
shares!in!his!name!but!the!latter!refused!to!do!so,!saying!that!it!would!
be!in!contravention!of!the!byAlaws!of!the!corporation.!
&
Issue:& Whether! or! not! Article! 12! of! the! byAlaws! of! the! Botica! Nolasco,!
Inc.,!is!in!conflict!with!the!provisions!of!the!Corporation!Law!(Act.!1459)!
&
Held:&YES.!Section!13,!paragraph!7!of!the!Corporation!Law,!empowers!a!
corporation!to!make!byAlaws,!not!inconsistent!with!any!existing!law,!for!
the!transferring!of!its!stock.!Section!35!of!the!same!specifically!provides!
that!the!shares!of!stock!are!personal!property!and!may!be!transferred!
by! delivery! of! the! certificate! indorsed! by! the! owner,! etc.! A! stock!
corporation! in! adopting! a! byAlaw! governing! transfer! of! shares! of! stock!
should!take!into!consideration!the!specific!provisions!of!Section!13!and!
35! of! The! Corporation! Law,! and! said! byAlaw! should! be! made! to!
harmonize!with!said!provisions.!It!should!not!be!inconsistent!therewith.!
&
Doctrine:&Section!35!defines!the!nature,!character!and!transferability!of!
shares!of!stock.!Under!said!section!they!are!personal!property!and!may!
)
The! only! limitation! imposed! by! Section! 63! is! when! the!
corporation!holds!any!unpaid!claim!against!the!shares!intended!
to!be!transferred.!A!corporation,!either!by!its!board,!its!byAlaws,!
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.! ByAlaws! 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).,
The!right!of!first!refusal!is!primarily!an!attribute!of!ownership.!
Conversely,!a!waiver!thereof!is!an!act!of!ownership.!To!allow!the!
PCGG!to!vote!the!sequestered!shares!for!this!purpose!would!be!
sanctioning! its! exercise! of! an! act! of! strict! ownership.! PCGG, v.,
SEC,,G.R.,No.,82188,,30,June,1988,(unrep.),
The!agreement!of!coAshareholders!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!exceed!40%,!it!is!not!
the! foreign! stockholders! ownership! of! the! shares! which! is!
adversely! affected! by! the! capacity! of! the! corporation! to! own!
landthat!is,!the!corporation!becomes!disqualified!to!own!land.!
This! finds! support! under! the! basic! corporate! law! principle! that!
!
the! corporation! and! its! stockholders! are! separate! juridical!
entities.! In! this! vein,! the! right! of! first! refusal! over! shares!
pertains!to!the!shareholders!whereas!the!capacity!to!own!land!
pertains!to!the!corporation.!J.G.,Summit,Holdings,,Inc.,v.,Court,
of,Appeals,,450,SCRA,169,(2005).!
to! preserve! and! protect! itself! by! excluding! competitors! or!

hostile! interests.! The! provision! is! made! obviously! to! prevent! a!
stockholder! from! creating! an! opportunity! to! take! advantage! of!
the! information! which! he! may! have! acquired! as! such! to!
promote! his! individual! interest! to! the! prejudice! of! the!
corporation! and! other! stockholders.! The! stockholders! have! a!
In!a!landholding!corporation!which!by!constitutional!mandate!is!
fiduciary! relation! with! their! corporation! for! the! collective!

benefit! of! the! stockholders.! Any! person! who! intends! to! buy!
stock! in! a! corporation! does! so! with! the! knowledge! that! its!
affairs! are! governed! by! the! articles! of! incorporation! and! byA
laws;! and! with! such! knowledge,! the! stockholder! may! be!
considered!to!have!consented!to!the!disqualification!to!engage!
in!the!same!line!of!business!and!thus,!it!cannot!be!said!that!the!
limited!to!40%!foreign!equity,!and!where!there!exists!a!right!of!
first! refusal! agreement! between! the! coAshareholders,! the! fact!
that!the!corporations!owns!land!cannot!deprive!stockholders!of!
their! right! of! first! refusal.! No! law! disqualifies! a! person! from!
purchasing!shares!in!a!landholding!corporation!even!if!the!latter!
will!exceed!the!allowed!foreign!equity,!what!the!law!disqualifies!
is!the!corporation!from!owning!land.!J.G.,Summit,Holdings,,Inc.,
v.,Court,of,Appeals,,450,SCRA,169,(2005).!
2. Restraint& of& Trade:! An! agreement! by! which! a! person! obliges!
himself!not!to!engage!in!competitive!trade!for!five!years!is!valid!
and! reasonable! and! not! an! undue! or! unreasonable! restraint! of!
stockholders!right!is!infringed.!2!
trade!and!is!obligatory!on!the!parties!who!voluntarily!enter!into!
such! agreement.! xOllendorf, v., Abrahamson,, 38, Phil., 585,
(1918).!
The!SEC,!as!a!matter!of!policy,!allows!restrictions!on!transfer!of!
shares! in! the! articles! of! incorporation! if! the! same! is! necessary!
and!convenient!to!the!attainment!of!the!objective!for!which!the!
competition!clause!may!be!properly!provided!for!as!a!condition!
for! being! a! stockholder! in! the! articles! of! incorporation! or! byA
laws!of!the!corporation.1!
company!was!incorporated,!unless!palpably!unreasonable!under!
the! circumstances.! The! underlying! test! as! to! whether! the!
restriction!are!valid!and!enforceable!is!whether!the!restriction!is!
sufficiently!reasonable!as!to!justify!the!restriction!overriding!the!
general! policy! against! restraint! on! alienation! of! personal!
property.! The! SEC! has! ruled! that! the! period! of! one! month! is!
deemed! reasonably! sufficient! for! the! existing! stockholder! of!
The!SEC!ruled!that!such!disqualification!provision!is!a!valid!and!
corporation! within! which! to! signify! their! desire! to! buy! the!
NonQCompetition& Clause:! The! SEC! has! opined! that! a! nonA
reasonable!exercise!of!corporate!authority!since!a!corporation,!
under! the! principle! of! selfApreservation,! has! the! inherent! right!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!SEC! Opinion,! 12! August! 1998,! XXXIII! SEC! QUARTERLY! BULLETIN! 14! (No.! 1,! June,!
1999).!
!SEC! Opinion,! 12! August! 1998,! XXXIII! SEC! QUARTERLY! BULLETIN! 14! (No.! 1,! June,!
1999).!
)
!
shares!of!stock!being!offered!for!sale!by!any!stockholder!before!
the!same!may!be!offered!to!third!parties.1!
&
B.&Remedy&If&Registration&Refused:&
Mandamus! will! not! lie! to! compel! the! corporate! secretary! to!
register!the!transfer!of!shares!in!the!corporate!books!when!the!
petitioner! is! not! the! registered! stockholder! nor! does! he! hold! a!
power!of!attorney!from!the!latter.!This!is!under!the!general!rule!
that! as! between! the! corporation! one! the! one! hand! and! its!
shareholders! on! other,! the! corporation! looks! only! to! its! books!
for!the!purpose!of!determining!who!its!shareholders!are,!so!that!
a! mere! indorsee! of! a! certificate! of! stock,! claiming! to! be! the!
owner,! will! not! necessarily! be! recognized! as! such! by! the!
corporation! and! its! officers,! in! absence! of! express! instructions!
of!the!registered!owner!to!make!such!transfer!to!the!indorsee,!
or! a! power! of! attorney! authorizing! such! transfer.! Hager, v.,
Bryan,,19,Phil.,138,(1911).2,
the! BryanALandon! Company! authorizing! him! to! make! demand! on! the!
secretary! of! the! Visayan! Electric! Company! to! make! the! transfer! which!
petitioner!seeks!to!have!made!through!the!medium!of!the!mandamus!of!
this!court.!
&
Issue:& Whether! or! not! a! writ! of! mandamus! will! lie! under! the!
circumstances!of!the!case!to!allow!the!transfer!of!shares.!
&
Held:&NO.!Petitioner!did!not!have!the!right!to!demand!the!transfer!since!
he! was! not! the! stockholder! of! record.! Furthermore,! even! the! BryanA
Landon! Company! did! not! demand! from! Visayan! Electric! Company! the!
transfer!of!said!shares.!Neither!did!it!give!by!way!of!a!special!power!of!
attorney! to! petitioner! the! authority! to! effect! such! a! transfer.! Hence,!
there! is! no! clear! and! legal! obligation! upon! the! respondent! that! will!
justify!the!issuance!of!a!writ!to!compel!the!latter!to!perform!a!transfer.!
&
Doctrine:&See!above.!
,
Hager,v.,Bryan,
1. Period&to&Enforce.&!Considering!that!the!law!does!not!prescribe!
&
Facts:& Hager! files! a! petition! for! mandamus! to! compel! the! company!
secretary! to! transfer! certain! shares! of! stock! of! the! Visayan! Electric!
Company!to!a!Mr.!Levering.!The!company!had!refused!to!do!so!because!
a! period! within! which! the! registration! of! purchase! of! shares!

should! be! effected,! the! action! to! enforce! the! right! does! not!
accrue!until!there!has!been!a!demand!and!a!refusal!concerning!
the! transfer.! Ponce& v.& Alsons& Cement& Corp.,& 393& SCRA& 602&
(2002).&
o When! all! the! requirements! have! been! complied! with,!
the! duty! of! the! corporate! secretary! to! record! the!
the! stocks! in! question! were! in! the! name! of! BryanALandon! Company.!
There! was! no! allegation! that! Hager! holds! any! power! of! attorney! from!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
transfer!in!the!books!of!the!corporation!is!ministerial.,
!SEC! Opinion,! 20! February! 1995,! XXIX! SEC! QUARTERLY! BULLETIN! 4! (No.! 3,!
September!1995).!!
2
!Rivera!v.!Florendo,!144!SCRA!643!(1986);!Ponce!v.!Alsons!Cement!Corp.,!393!
SCRA!602!(2002).!
)
A!stipulation!on!the!stock!certificate!that!any!assignment!would!
not! be! binding! on! the! corporation! unless! registered! in! the!
!
corporate! books! as! required! under! the! byAlaws! and! without!
providing! when! registration! should! be! made,! would! mean! that!
the!cause!of!action!and!the!determination!of!prescription!period!
would!begin!only!when!demand!for!registration!is!made!and!not!
at! the! time! of! the! assignment! of! the! certificate.! Won, v., Wack,
Wack,Golf,&,Country,Club,,104,Phil.,466,(1958).,
The!claim!for!damages!of!what!the!shares!could!have!sold!had!
the!demand!for!their!registration!in!the!name!of!the!buyer!been!
complied! with! is! deemed! to! be! speculative! damage! and! nonA
recoverable.! Batong, Buhay, Gold, Mines, v., CA,, 147, SCRA, 4,
(1987).,
!
Note&on&Sale&of&Shares:&
The! Corporate! Secretary! can! be! held! liable! for! recorded!

transfers!whose!tax!clearance!have!not!been!paid.!!
It!is!only!when!all!these!things!have!been!complied!that!you!can!
really!compel!the!corporate!secretary!to!record!your!transaction!
in!accordance!with!his!or!her!ministerial!function.!
!
Legal&Advice&for&the&transferee:&
&
Section&43.&Power&to&declare&dividends.&
The& board& of& directors& of& a& stock& corporation& may& declare& dividends&
out& of& the& unrestricted& retained& earnings& which& shall& be& payable& in&
cash,& in& property,& or& in& stock& to& all& stockholders& on& the& basis& of&
outstanding& stock& held& by& them:& Provided,& That& any& cash& dividends&
due&on&delinquent&stock&shall&first&be&applied&to&the&unpaid&balance&on&
the& subscription& plus& costs& and& expenses,& while& stock& dividends& shall&
be& withheld& from& the& delinquent& stockholder& until& his& unpaid&
subscription& is& fully& paid:& Provided,& further,& That& no& stock& dividend&
shall&be&issued&without&the&approval&of&stockholders&representing&not&
less&than&twoQthirds&(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& paidQin& 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&
transferee!will!be!entitled!to!the!transfer!of!dividends!which!the!
transferor! may! receive! from! the! corporation! during! the! period!
after!the!sale!but!before!the!name!of!the!transferee!is!recorded!
in!the!books!of!the!corporation.!
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,&
such& as& when& there& is& need& for& special& reserve& for& probable&
contingencies.&(n)&
When! there! are! board! of! meetings,! you! can! ask! the! transferor!
&
To! get! a! declaration! of! trust! from! the! transferor! so! that! the!
to!give!you!a!proxy!who!will!vote!for!you!in!the!meeting.!
!
IV.&Rights&to&Dividends&(Section&43)&
)
The! term! dividend! in! its! technical! sense! and! ordinary!

acceptation! is! that! part! of! portion! of! the! profits! of! the!
enterprise! which! the! corporation,! by! its! governing! agents,! sets!
!
apart!for!ratable!division!among!the!holders!of!it!capital!stock
it!is!a!payment,!and!the!right!thereto!is!an!incident!of!ownership!
of!stock.!Cojuangco,v.,Sandiganbayn,,586,SCRA,790,(2009).!
Although! stock! certificates! grant! the! stockholder! the! right! to!

receive!quarterly!dividends!of!1%,!cumulative!and!participating,!
the! stockholders! do! not! become! entitled! to! the! payment!
thereof! as! a! matter! of! right! without! necessity! of! a! prior!
declaration! of! dividends.! Section! 43! of! Corporation! Code!
prohibits! the! issuance! of! any! stock! dividend! without! the!
approval!of!stockholders,!representing!not!less!than!twoAthirds!
(2/3)! of! the! outstanding! capital! stock,! which! underscores! the!
fact!that!payment!of!dividends!to!a!stockholder!is!not!a!matter!
of! right! but! a! matter! of! consensus.! Furthermore,! interest!
bearing! stocks,! on! which! the! corporation! agrees! absolutely! to!
pay! interest! before! dividends! are! paid! to! the! common!
stockholders,!is!legal!only!when!construed!as!requiring!payment!
of! interest! as! dividends! from! net! earnings! or! surplus! only.!
Republic,Planters,Bank,v.,Agana,,269,SCRA,1,(1997).,
When!the!Court!directed!that!a!total!of!111,415!shares!of!PLDT!
be!reconveyed!to!the!Republic!by!way!of!declaring!the!Republic!
to!be!the!rightful!owner!of!said!shares,!that!necessarily!included!
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&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& noQpar& 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&
!
V.&Right&to&Vote&and&to&Attend&Meetings&(Sections&6&and&89)&
&
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& nonQassessable& and& the& holder& of& such& shares& shall& not& be&
Section&6.&Classification&of&shares.&
The&shares&of&stock&of&stock&corporations&may&be& divided&into&classes&
liable& to& the& corporation& or& to& its& creditors& in& respect& thereto:&
Provided;& That& shares& without& par& value& may& not& be& issued& for& a&
the!reconveyance!to!the!Republic!of!the!dividends!and!interest!
accruing! thereto.! Cojuangco, v., Sandiganbayn,, 586, SCRA, 790,
(2009).,
)
!
consideration& less& than& the& value& of& five& (P5.00)& pesos& per& share:&
Provided,& further,& That& the& entire& consideration& received& by& the&
corporation&for&its&noQpar&value&shares&shall&be&treated&as&capital&and&
shall&not&be&available&for&distribution&as&dividends.&
&
&
7.&Investment&of&corporate&funds&in&another&corporation&or&business&in&
accordance&with&this&Code;&and&
&
8.&Dissolution&of&the&corporation.&
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.&
&
&
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.&
&
Section&89.&Right&to&vote.&
The& right& of& the& members& of& any& class& or& classes& to& vote& may& be&
Where& the& articles& of& incorporation& provide& for& nonQvoting& 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&byQlaws;&
limited,&broadened&or&denied&to&the&extent&specified&in&the&articles&of&
incorporation&or&the&byQlaws.&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& byQ
laws,&a&member&may&vote&by&proxy&in&accordance&with&the&provisions&
of&this&Code.&(n)&
&
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;&
&
&
Voting& by& mail& or& other& similar& means& by& members& of& nonQstock&
corporations& may& be& authorized& by& the& byQlaws& of& nonQstock&
corporations& with& the& approval& of,& and& under& such& conditions& which&
may&be&prescribed&by,&the&Securities&and&Exchange&Commission.&
&
A.&Who&has&the&right&to&vote&
6.& Merger& or& consolidation& of& the& corporation& with& another&

corporation&or&other&corporations;&
)
General& Rule:& The! person! registered! in! the! books! of! the!
company!has!owner!of!the!shares!is!one!who!is!entitled!to!vote!
as!shareholder.,
!
o
Since!the!appointment!of!proxy!is!purely!personal,!and!
the! right! to! vote! is! inseparable! from! the! right! of!
ownership! of! stock! without! the! owners! consent,! and!
therefore!a!proxy!to!vote!stock,!to!be!valid,!must!have!
been!given!by!the!person!who!is!the!legal!owner!of!the!
stock!and!entitled!to!vote!the!same!at!the!time!it!is!to!
corporation!that!is!exercised!through!his!vote.!The!right!
to! vote! is! a! right! inherent! in! and! incidental! to! the!
ownership!of!corporate!stock,!and!as!such!is!a!property!
right.!Castillo,v.,Balinghasay,,440,SCRA,442,(2004).,
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.,
be!voted. !
The!right!to!vote!is!inherent!in!and!incidental!to!the!ownership!
of!corporate!stocks.!It!is!settled!that!unissued!stocks!may!not!be!
voted! or! considered! in! determining! whether! a! quorum! is!
present! in! a! stockholders! meeting,! or! whether! a! requisite!
proportion! of! the! stock! of! the! corporation! is! voted! to! adopt! a!
certain! measure! or! act.! Only! stock! actually! issued! and!
outstanding! may! be! voted.! Under! Section! 6! of! the! Corporation!
Code,! each! share! of! stock! is! entitled! to! vote,! unless! otherwise!
provided!in!the!articles!of!incorporation!or!declared!delinquent!
under!Section!67!of!the!Code.!Neither!the!stockholders!nor!the!
corporation! can! vote! or! represent! shares! that! have! never!
passed! to! the! ownership! of! stockholders,! or,! having! so! passed,!
have!again!been!purchased!by!the!corporation.!These!shares!are!
not! to! be! taken! into! consideration! in! determining! majorities.!
When!the!law!speaks!of!a!given!proportion!of!the!stock,!it!must!
be! construed! to! mean! shares! that! have! passed! from! the!
corporation,!and!that!may!be!voted.!Tan,v.,Sycip,,499,SCRA,216,
(2006).,
o One! of! the! rights! of! a! stockholder! is! the! right! to!
participate! in! the! control! and! management! of! the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!SEC! Opinion,! 3! December! 1993,! XXVIII! SEC! QUARTERLY! BULLETIN! 5! (No.! 2,! June!
1994).!!
)
Until!challenged!successfully!in!proper!proceedings,!a!registered!
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).,
o The!right!to!vote!sequestered!shares!of!stock!registered!
in! the! names! of! private! individuals! or! entities! and!
alleged! to! have! been! acquired! with! illAgotten! 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! illAgotten;! 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! "twoAtiered"!
test!does!not!apply!when!the!funds!that!are!prima!facie!
public!in!character!or,!at!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! "twoAtiered"! one,!
applies.! Republic, v., COCOFED,, 372, SCRA, 462, (2001);,
Trans, Middle, East, (Phils), v., Sandiganbayan,, 490, SCRA,
455,(2006).,
&
B.&Instances&When&Stockholders&Entitled&to&Vote:&
1. Amendment!of!articles!of!incorporation!(Section&16)!
2. Election!of!directors!and!trustees!(Section&24)!
3. Investment!in!another!business!or!corporation!(Sections&36&and&
4.
5.
6.
7.
8.
42)&
Increase!and!Decrease!of!capital!stock!(Section&38)!
Incurring,!or!increasing!bonded!indebtedness!(Section&38)&
Sale,!disposition!or!encumbrance!of!all!or!substantially!all!of!the!
corporate!assets&(Section&40)&!
Declaration!of!stock!dividends!(Section&43).!
Management!contracts!(Section&44)!
necessary,&unless&there&is&a&written&proxy,&signed&by&all&the&coQowners,&
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)&
&
D.&Pledgor,&Mortgagors&and&Administrators&(Section&55)&
&
Section.&55.&Right&to&vote&of&pledgors,&mortgagors,&and&administrators.&
In& case& of& pledged& or& mortgaged& shares& in& stock& corporations,& the&
pledgor& or& mortgagor& shall& have& the& right& to& attend& and& vote& at&
meetings&of&stockholders,&unless&the&pledgee&or&mortgagee&is&expressly&
given& by& the& pledgor& or& mortgagor& such& right& in& writing& which& is&
recorded&on&the&appropriate&corporate&books.&(n)&
&
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)&
&
9. Adoption,!amendment!and!repeal!of!byAlaws!(Section&48).&
10. Fixing!of!consideration!of!no!par!value!shares!(Section&62)&
11. Merger!and!consolidation!(Section&72)!
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).,
&
C.&Joint&Ownership&(Section&56)&
&
Section&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& coQowners& shall& be&
)
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!
Although! the! Rules! of! Court,! while! permitting! an! executor! or!
administrator! to! represent! or! to! bring! suits! on! behalf! of! the!
deceased,! do! not! prohibit! the! heirs! from! representing! the!
!
deceased.!When!no!administrator!has!been!appointed,!there!is!
all! the! more! reason! to! recognize! the! heirs! as! the! proper!
representatives! of! the! deceased.! Gochan, v., Young,, 354, SCRA,
207,(2001).,
&
E.&Treasury&Share&No&Voting&Rights&(Section&57)&
&
or!the!bylaws.!Applying!Section!91!to!the!present!case,!
we!hold!that!dead!members!who!are!dropped!from!the!
membership! roster! in! the! manner! for! the! cause!
provided! for! in! the! ByALaw! of! GCHS! are! not! to! be!
counted! in! determining! the! requisite! vote! in! corporate!
matters! or! the! requisite! quorum! for! the! annual!
members! meeting.! With! 11! remaining! members,! the!
Section&57.&Voting&right&for&treasury&shares.&
Treasury& shares& shall& have& no& voting& right& as& long& as& such& shares&
remain&in&the&Treasury.&(n)&
&
Treasury!shares!cannot!be!voted!upon.!Tan, v., Sycip,, 499, SCRA,

216,(2006).,
quorum! in! the! present! case! should! be! 6.! therefore,!

there! being! a! quorum,! the! annual! members! meeting,!
conducted!with!six!members!present,!was!valid.!Tan, v.,
Sycip,,499,SCRA,216,(2006).,
&
F.&Voting&Rights&of&Members&
In! stock! corporation,! shareholders! may! generally! transfer! their!

shares.! Thus,! on! the! death! of! a! shareholder,! the! executor! or!
administrator! duly! appointed! by! the! Court! is! vested! with! the!
legal!title!to!the!stock!and!entitled!to!vote!it.!Until!a!settlement!
and!division!of!the!estate!is!effected,!the!stocks!of!the!decedent!
Under! the! ByALaws! of! GCHS,! membership! in! the!

corporation! shall,! among! others,! be! terminated! by! the!
death! of! the! member.! Section! 91! of! the! Corporation!
Code! further! provides! that! termination! extinguishes! all!
the! rights! of! a! member! of! the! corporation,! unless!
otherwise! provided! in! the! articles! of! the! incorporation!
&
G.&Conduct&of&Stockholders'&Meetings:&
1. Kinds&and&Requirements&of&Meetings&(Sections&49&and&50);&
are! held! by! the! administrator! or! executor.! On! the! other! hand,!
membership! in! and! all! rights! arising! from! a! nonstock!
corporation! are! personal! and! nonAtransferable,! unless! the!
articles! of! incorporation! or! the! bylaws! of! the! corporation!
provide! otherwise.! In! other! words,! the! determination! of!
whether! or! not! dead! members! are! entitled! to! exercise! their!
voting!rights!(through!their!executor!or!administrator)!depends!
&
on!those!articles!of!incorporation!or!byAlaws.!Tan, v., Sycip,, 499,

SCRA,216,(2006).,
on&a&date&fixed&in&the&byQlaws,&or&if&not&so&fixed,&on&any&date&in&April&of&
every& year& as& determined& by& the& board& of& directors& or& trustees:&
Section&49.&Kinds&of&meetings.&
Meetings& of& directors,& trustees,& stockholders,& or& members& may& be&
regular&or&special.&(n)&
&
Section&50.&Regular&and&special&meetings&of&stockholders&or&members.&
Regular& meetings& of& stockholders& or& members& shall& be& held& annually&
)
!
Provided,& That& written& notice& of& regular& meetings& shall& be& sent& to& all&
stockholders&or&members&of&record&at&least&two&(2)&weeks&prior&to&the&
meeting,&unless&a&different&period&is&required&by&the&byQlaws.&
&
Special&meetings&of&stockholders&or&members&shall&be&held&at&any&time&
2. Place&and&Time&of&Meeting&(Sections&51&and&93);&
&
Section&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&
deemed& necessary& or& as& provided& in& the& byQlaws:& Provided,& however,&
That& at& least& one& (1)& week& written& notice& shall& be& sent& to& all&
stockholders&or&members,&unless&otherwise&provided&in&the&byQlaws.&
&
Notice& of& any& meeting& may& be& waived,& expressly& or& impliedly,& by& any&
stockholder&or&member.&
&
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.&
&
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&byQlaws.&The&petitioning&stockholder&or&member&
shall& preside& thereat& until& at& least& a& majority& of& the& stockholders& or&
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)&
&
Section&93.&Place&of&meetings.&
members&present&have&been&chosen&one&of&their&number&as&presiding&
officer.&(24,&26)&
The&byQlaws&may&provide&that&the&members&of&a&nonQstock&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)&
&
Regular!Meetings&
o
o
Regular!meetings!may!(1)!be!provided!in!the!byAlaws!or!
(2)!scheduled!by!the!board!in!April.&
The! byAlaws! may! provide! for! more! than! one! meeting!
annually!!there!is!no!prohibition!to!this!effect.&
Special!Meetings&
o
Held!at!any!time!it!is!called.&
&
Stock&Corporation&
Principal!office!or!city!where!it!is!
located!
)
NonQStock&Corporation&
Any!place!in!the!Philippines,!even!
if!it!is!outside!the!city!or!place!of!
!
the!principal!office!
&
3. Quorum&(Section&52)&
&
Section&52.&Quorum&in&meetings.&
Unless& otherwise& provided& for& in& this& Code& or& in& the& byQ& 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&
nonQstock&corporations.&(n)&
Section&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)&
&
&
proxies,!while!proxy& validation!concerns!the!validation!of!such!
secured! and! submitted! proxies.! It! is! possible! that! an! intraA
corporate! controversy! may! animate! a! disgruntled! shareholder!
to!complain!to!the!Securities!and!Exchange!Commission!(SEC)!a!
corporations! violations! of! SEC! rules! and! regulations,! but! that!
motive! alone! should! not! be! sufficient! to! deprive! the! SEC! of! its!
Quorum!is!based!on!the!totality!of!the!shares!which!have!been!
subscribed! and! issued! whether! it! be! founders! shares! or!
common!shares.!To!base!the!computation!of!quorum!solely!on!
the! obviously! deficient,! if! not! inaccurate! stock! and! transfer!
book,! and! completely! disregarding! the! issued! and! outstanding!
shares! indicated! in! the! articles! of! incorporation! would! work!
injustice!to!the!owners!and/or!successors!in!interest!of!the!said!
shares.!The!stock!and!transfer!book!cannot!be!used!as!the!sole!
basis! for! determining! the! quorum! as! it! does! not! reflect! the!
totality! of! shares! which! have! been! subscribed,! more! so! when!
the!articles!of!incorporation!show!a!significantly!larger!amount!
of! shares! issued! and! outstanding! as! compared! to! that! listed! in!
the! stock! and! transfer! book.! Lanuza, v., Court, of, Appeals,, 454,
SCRA,54,(2005).,
!
VI.&Contracts&and&Agreement&Affecting&Shareholdings&
&
A.&Proxy&(Section&58)&
&
)
Proxy& solicitation! involves! the! securing! and! submission! of!
investigatory! and! regulatory! powers,! especially! so! since! such!

powers!are!exercisable!on!a!motu!proprio!basis.!GSIS,v.,Court,of,
Appeals,,585,SCRA,679,(2009).,
Nature& of& Proxy& Relationship:& A! proxy! is! a! special! form! of!

agency! and! governed! by! the! Law! on! Agency.! Consequently,!
being!a!strictly!fiduciary!relation,!a!proxy!is!essentially!revocable!
in!nature;!and!any!attempt!or!stipulation!to!render!it!irrevocably!
would! be! to! no! avail.! Generally,! proxies,! even! those! with!
irrevocable! terms,! have! always! been! considered! as! revocable,!
unless!coupled!with!an!interest,!and!their!revocation!may!be!by!
formal!notice,!orally,!or!by!conduct!as!by!the!appearance!of!the!
stockholder! or! member! giving! the! proxy,! or! the! issuance! of! a!
subsequent!proxy,!or!the!sale!of!shares.&
!
The!SEC!has!appropriately!observed!that!a!person!acting!
as!proxy!for!a!stockholder!is!in!the!eyes!of!the!law,!the!
latters!agent!and!as!such,!a!mere!fiduciary!who!has!the!
duty! of! acting! in! strict! accord! with! requirements! of! a!
fiduciary!relation;!and!that!accordingly,!the!proxy!holder!
must! act! in! accordance! with! the! instructions! given! to!
it! is! to! its! abrogated! jurisdictional! powers.! The! fact! that! the!
jurisdiction! of! the! regular! courts! under! Section! 5(c)! is! confined!
to! the! voting! on! election! of! officers,! and! not! on! all! matters!
which! may! be! voted! upon! by! stockholders,! elucidates! that! the!
power! of! the! Securities! and! Exchange! Commission! (SEC)! to!
regulate! proxies! remains! extant! and! could! very! well! be!
him/her! by! the! stockholder! and! any! violation! of! such!

fiduciary! duty! shall! be! governed! by! the! pertinent! laws!
on!Agency,!not!by!the!Corporation!Code.1&
1. Requisites&for&Valid&Proxy:&&&
a. The!proxy!shall!in!writing!
b. Signed!by!the!stockholder!or!member!
c. Filed! before! the! scheduled! meeting! with! the! corporate!
exercised! when! stockholders! vote! on! matters! other! than! the!

election! of! directors.! GSIS, v., Court, of, Appeals,, 585, SCRA, 679,
(2009).,
secretary.!!
2. Who& May& be& Appointed& Proxy:, Section! 58! of! the! Corporation!
Code! imposes! no! limitation! as! to! the! persons! who! may! be!
appointed!as!proxy!and!byAlaw!provisions!restricting!the!right!of!
a!stockholder!to!appoint!a!proxy!would!be!void.!However,!in!the!
case! of! nonAstock! corporation,! Section! 89! of! the! Corporation!
Code! the! articles! of! incorporation! or! byAlaws! may! restrict! the!
right! of! a! member! to! vote! by! proxy.! The! SEC! has! opined! that!
under!Section!89!the!right!of!members!to!vote!by!proxy!may!be!
denied! entirely! by! appropriate! provisions! in! the! articles! of!
incorporation!or!byAlaws!of!a!nonAstock!corporation.2!!!
The!SECs!power!to!pass!upon!the!validity!of!proxies!in!relation!
to!election!controversies!has!effectively!been!withdrawn,!tied!as!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!SEC!Opinion,!15!July!197,!XXXII!SEC!QUARTERLY!BULLETIN!4!(No.!2,!Dec.!1997).!
SEC!Opinion,!20!September!1994,!XXIX!SEC!QUARTERLY!BULLETIN!20!(No.1,!March!
1995).!!
2
&
B.&Voting&Trust&Agreements&(Section&59)&
&
Section&59.&Voting&trusts.&
One&or&more&stockholders&of&a&stock&corporation&may&create&a&voting&
trust&for&the&purpose&of&conferring&upon&a&trustee&or&trustees&the&right&
to& vote& and& other& rights& pertaining& to& the& shares& for& a& period& not&
exceeding& five& (5)& years& at& any& time:& Provided,& That& in& the& case& of& a&
voting& trust& specifically& required& as& a& condition& in& a& loan& agreement,&
said&voting&trust&may&be&for&a&period&exceeding&five&(5)&years&but&shall&
automatically& expire& upon& full& payment& of& the& loan.& A& voting& trust&
agreement& must& be& in& writing& and& notarized,& and& shall& specify& the&
terms&and&conditions&thereof.&A&certified&copy&of&such&agreement&shall&
be& filed& with& the& corporation& and& with& the& Securities& and& Exchange&
Commission;& otherwise,& said& agreement& is& ineffective& and&
unenforceable.& The& certificate& or& certificates& of& stock& covered& by& the&
voting&trust&agreement&shall&be&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&trustee&or&trustees&may&vote&by&proxy&unless&the&agreement&
provides&otherwise.&(36a)&
&
the!transferor!transfers!the!right!to!votes,!etc.!but!not!the!right!
to! own,! the! transferor! remains! to! be! the! owner.! A! transfer! of!
the!right!to!own!the!shares!amounts!to!a!disposition/sale!of!the!
shares.,
&
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.&
&
Atty.!Hofilea!!!where,!pursuant!to!a!voting!trust!agreement,!
Transferor!!!transfers!the!certificates!of!stock.!,
" Even!where!the!transferor!holds!only!the!voting!
trust!certificate,!he!may!sell!his!shares.!What!he!
delivers! to! the! buyer! is! the! VTC.! This! kind! of!
disposition!does!not!terminate!the!rights!of!the!
trustee.,
Transferee/Trustee!!!gives!a!voting!trust!certificate!,
A! VTA! separates! the! voting! rights! and! other! rights! covered! of!
the! stock! from! other! attributes! of! ownership,! intended! to! be!
irrevocable! for! a! definite! period! of! time! and! the! purpose! of!
which! is! to! give! to! the! trustee! to! acquire! voting! control! of! the!
corporation.!Lee,v.,CA,,205,SCRA,752,(1992).,
,
Lee,v.,Court,of,Appeals,
&
Facts:& Herein! petitioners! were! served! summons! in! accordance! with! a!
third!party!complaint!filed!against!Alfa!Integrated!Textile!Mills!of!which!
Lee! and! Lacdao! was! president! and! vice! president! respectively.! They!
claim! that! the! summons! for! Alfa! was! erroneously! served! upon! them!
considering! that! the! management! of! Alfa! had! been! transferred! to!
Development! Bank! of! the! Philippines.! They! claim! that! the! voting! trust!
)
!
agreement!between!Alfa!and!DBP!vests!all!management!and!control!of!
Alfa! to! the! DBP.! DBP! claimed! that! it! was! not! authorized! to! receive!
summons!on!behalf!of!Alfa!since!DBP!had!not!taken!over!the!company!
which!has!a!separate!and!distinct!corporate!personality!and!existence.!
&
voting! rights! of! a! stockholder! from! his! other! rights.! This! may! create! a!
dichotomy! between! the! equitable! or! beneficial! ownership! of! the!
corporate!shares!of!a!stockholder,!on!the!one!hand,!and!the!legal!title!
thereto!on!the!other.!With!the!omission!of!the!phrase!"in!his!own!right"!
[in!the!new!corporation!code]!the!election!of!trustees!and!other!persons!
Issue:&Whether!or!not!the!5Ayear!period!of!the!voting!trust!agreement!in!
question!had!lapsed!in!1986!so!that!the!legal!title!to!the!stocks!covered!
by! the! said! voting! trust! agreement! ipso! facto! reverted! to! Lee! and!
Lacdao!as!beneficial!owners!pursuant!to!the!6th!paragraph!of!Section!59!
of!the!new!corporation!code!
&
Held:& NO.! It! is! manifestly! clear! from! the! terms! of! the! voting! trust!
who! in! fact! are! not! the! beneficial! owners! of! the! shares! registered! in!
their! names! on! the! books! of! the! corporation! becomes! formally!
legalized.!Hence,!this!is!a!clear!indication!that!in!order!to!be!eligible!as!a!
director,! what! is! material! is! the! legal! title! to,! not! beneficial! ownership!
of,!the!stock!as!appearing!on!the!books!of!the!corporation.&
agreement! between! ALFA! and! the! DBP! that! the! duration! of! the!
agreement! is! contingent! upon! the! fulfillment! of! certain! obligations! of!
ALFA! with! the! DBP.! Had! the! fiveAyear! period! of! the! voting! trust!
agreement! expired! in! 1986,! the! DBP! would! not! have! transferred! all! its!
rights,! titles! and! interests! in! ALFA! "effective! June! 30,! 1986"! to! the!
national! government! through! the! Asset! Privatization! Trust! (APT)! as!
attested! to! in! a! Certification! dated! 24! January! 1989! of! the! Vice!
Everett,v.,Asia,Banking,Corporation,,49,Phil.,512,(1926).,
President! of! the! DBP's! Special! Accounts! Department! II.! In! the! same!
certification,! it! is! stated! that! the! DBP,! from! 1987! until! 1989,! had!
handled! accounts,! which! included! ALFA's! assets! pursuant! to! a!
management! agreement! by! and! between! the! DBP! and! APT.! Hence,!
there!is!evidence!on!record!that!at!the!time!of!the!service!of!summons!
on! ALFA! through! Lee! and! Lacdao! on! 21! August! 1987,! the! voting! trust!
agreement!in!question!was!not!yet!terminated!so!that!the!legal!title!to!
the!stocks!of!ALFA,!then,!still!belonged!to!the!DBP.!
&
Doctrine:& A! voting! trust! agreement! results! in! the! separation! of! the!
The!trustor!has!a!right!to!terminate!the!VTA!for!breach!thereof.!
Voting!trust!agreement!as!part!of!a!loan!arrangement.! NIDC, v.,
Aquino,,163,SCRA,153,(1988).,
&
C.&Pooling&Agreements&or&Shareholders&Agreements&(Section&100)&
&
Section&100.&Agreements&by&stockholders.&
1.& Agreements& by& and& among& stockholders& executed& before& the&
formation& and& organization& of& a& close& corporation,& signed& by& all&
stockholders,& shall& survive& the& incorporation& of& such& corporation& and&
shall& continue& to& be& valid& and& binding& between& and& among& such&
stockholders,& if& such& be& their& intent,& to& the& extent& that& such&
agreements& are& not& inconsistent& with& the& articles& of& incorporation,&
irrespective& of& where& the& provisions& of& such& agreements& are&
contained,&except&those&required&by&this&Title&to&be&embodied&in&said&
articles&of&incorporation.&
&
)
!
2.&An&agreement&between&two&or&more&stockholders,&if&in&writing&and&
signed& by& the& parties& thereto,& may& provide& that& in& exercising& any&
voting& rights,& the& shares& held& by& them& shall& be& voted& as& therein&
provided,&or&as&they&may&agree,&or&as&determined&in&accordance&with&a&
procedure&agreed&upon&by&them.&
&
3.&No&provision&in&any&written&agreement&signed&by&the&stockholders,&
relating& to& any& phase& of& the& corporate& affairs,& shall& be& invalidated& as&
between& the& parties& on& the& ground& that& its& effect& is& to& make& them&
partners&among&themselves.&
&
4.& A& written& agreement& among& some& or& all& of& the& stockholders& in& a&
close& corporation& shall& not& be& invalidated& on& the& ground& that& it& so&
relates&to&the&conduct&of&the&business&and&affairs&of&the&corporation&as&
to& restrict& or& interfere& with& the& discretion& or& powers& of& the& board& of&
directors:& Provided,& That& such& agreement& shall& impose& on& the&
stockholders&who&are&parties&thereto&the&liabilities&for&managerial&acts&
imposed&by&this&Code&on&directors.&
&
5.& To& the& extent& that& the& stockholders& are& actively& engaged& in& the&
management& or& operation& of& the& business& and& affairs& of& a& close&
corporation,&the&stockholders&shall&be&held&to&strict&fiduciary&duties&to&
each& other& and& among& themselves.& Said& stockholders& shall& be&
personally& liable& for& corporate& torts& unless& the& corporation& has&
obtained&reasonably&adequate&liability&insurance.&
&
VII.&Rights&to&Inspect&and&Copy&Corporate&Records&
&
A.&Basis&of&Right&
The! stockholders! right! of! inspection! of! corporate! books! and!

records!is!based!on!his!ownership!of!the!assets!and!property!of!
the!corporation.!It!is!therefore!an!incident!of!ownership!of!the!
corporate! property,! whether! this! ownership! or! interest! be!
termed! an! equitable! ownership,! a! beneficial! ownership! or! a!
quasiAownership.!The!right!of!inspection!is!predicated!upon!the!
necessity! of! selfAprotection! on! the! part! of! the! stockholder.!
Gokongwei,,Jr.,v.,SEC,,89,SCRA,336,(1979).!
!
Gokongwei,,Jr.,v.,Securities,and,Exchange,Commission,
&
Facts:!John!Gokongwei,!a!stockholder!of!San!Miguel!Corporation!(and!a!
declaration!of!nullity!of!amended!byAlaws,!cancellation!of!certificate!of!
filing! of! the! amendedAby! laws,! injunction! and! damages! against! the!


corporation!(This!gave!rise!to!the!second!issue)!
The!second!issue!arose!when,!Gokongwei!filed!a!motion!to!inspect!the!
documents! of! San! Miguel! International! Inc.! (SMI)! a! subsidiary! of,! and!
wholly! controlled! by,! SMC.! GokongweiS! motion! was! denied! by! the!
SECTION!!When!SMC!invested!in!SMI,!according!to!Gokongwei,!this!was!
)
!
the! demand! is! made! in! good! faith! or! for! a! legitimate! purpose.!
Africa,v.,PCGG,,205,SCRA,39,(1992).,
against! the! primary! purpose! clause! of! SMC,! which! is! a! violation! of! the!
Corporation!Law.!
&
Issue:& Whether! or! not! the! SEC! gravely! abused! its! discretion! in! denying!
petitioners! request! for! an! examination! of! the! records! of! San! Miguel!
Summary& of& Rulings:! The! right! to! inspect! corporate! books! and!
records:!
o 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).,
o Cannot!be!denied!on!the!ground!that!the!director!is!on!
International!Inc.,!a!fully!owned!subsidiary!of!San!Miguel!Corporation!
&
Held:& YES.! Considering! that! the! foreign! subsidiary! is! wholly! owned! by!
respondent!San!Miguel!Corporation!and,!therefore,!under!its!control,!it!
would! be! more! in! accord! with! equity,! good! faith! and! fair! dealing! to!
construe!the!statutory!right!of!Gokongwei!as!stockholder!to!inspect!the!
books!and!records!of!the!corporation!as!extending!to!books!and!records!
of! such! wholly! subsidiary! which! are! in! respondent! corporations!
possession!and!control.!
!
Doctrine:!See!above.&
The!stockholders!right!of!inspection!of!the!corporations!books!
and! records! is! based! upon! his! ownership! of! shares! in! the!
corporation!and!the!necessity!for!selfAprotection.!Puno,v.,Puno,
Enterprises,,599,SCRA,585,(2009).,
&
B.&Limitations&on&Right&
The! only! express! limitations! on! the! right! of! inspection! under!
Section!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)!
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).,
&
C.&Specified&Records&(Sections&74,&75&and&141)&&
)
!
&
Section&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&
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&
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&
examine& and& copy& excerpts& from& the& corporation's& records& and&

minutes& has& improperly& used& any& 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&
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,&
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&byQlaws&may&prescribe.&
The&stock&and&transfer&book&shall&be&kept&in&the&principal&office&of&the&
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,&
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&
trustee,&stockholder&or&member&for&damages,&and&in&addition,&shall&be&
guilty&of&an&offense&which&shall&be&punishable&under&Section&144&of&this&
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.)&
&
Section&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& paidQup& capital& of& the& corporation& is& less& than&
may&require.&Such&report&shall&be&submitted&within&such&period&as&may&
be&prescribed&by&the&Securities&and&Exchange&Commission.&(n)&
&
business!transactions"!covers!practically!all!matters!of!import!in!
a!profitAseeking!corporation.!The!corporation!is!in!duty!bound!to!
expose!its!records!and!book!for!inspection!by!the!shareholders,!
but! it! is! not! always! bound! to! show! all! of! them! under! all!
circumstances.1!
!
Summary,of,Doctrinal,Rulings,on,Right,to,Inspect,
!
The! right! to! inspect! by! a! stockholder,! member,! director! or! trustee! is!
subject!to!the!following!doctrinal!rulings:!
a. The!demand!for!inspection!should!cover!only!reasonable!hours!
on!business!days;!
b. The! stockholder,! member,! director! or! trustees! demanding! the!
exercise! of! the! right! is! one! who! has! not! improperly! used! any!
information! secured! through! any! previous! examination! of! the!
records!of!the!corporation!or!any!other!corporation;!
c. The! demand! must! be! accompanied! with! statement! of! the!
purpose! of! the! inspection,! which! must! show! good! faith! or!
P50,000.00,& the& financial& statements& may& be& certified& under& oath& by&
the&treasurer&or&any&responsible&officer&of&the&corporation.&(n)&
&
Section&141.&Annual&report&or&corporations.&
Every&corporation,&domestic&or&foreign,&lawfully&doing&business&in&the&
Philippines&shall&submit&to&the&Securities&and&Exchange&Commission&an&
annual&report&of&its&operations,&together&with&a&financial&statement&of&
its& assets& and& liabilities,& certified& by& any& independent& certified& public&
accountant&in&appropriate&cases,&covering&the&preceding&fiscal&year&and&
such& other& requirements& as& the& Securities& and& Exchange& Commission&
The! section! is! worded! in! broad! language,! for! "record! of! all!
legitimate!purpose;!and!
d. If! the! corporation! or! its! officers! contest! such! purpose! or!
contend! that! there! is! evil! motive! behind! the! inspection,! the!
burden!of!proof!is!with!the!corporation!or!such!officer!to!show!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
the!same.!
!
D.&Remedies&If&Denied:&Mandamus&
In! contrasting! the! language! of! the! present! Corporation! Code!

from!the!old!Corporation!Law,!the!law!now!provides!for!express!
limitation! on! the! right! to! inspect! and! now! requires! as! a!
condition!for!such!examination!that!one!requesting!it!must!not!
have! been! guilty! of! using! improperly! any! information! secured!
through!a!prior!examination,!an!that!the!person!asking!for!such!
examination! must! be! acting! in! good! faith! and! for! a! legitimate!
purpose! in! making! his! demand.! The! stockholder! seeking! to!
exercise! the! right! of! inspection! must! set! forth! the! reasons! and!
the!purposes!for!which!he!desires!such!inspection.!Gonzales, v.,
PNB,,122,SCRA,489,(1983).,
Provided,& That& such& dissolution& shall& not& preclude& the& institution& of&
appropriate& action& against& the& director,& trustee& or& officer& of& the&
corporation& responsible& for& said& violation:& Provided,& further,& That&
nothing& in& this& section& shall& be& construed& to& repeal& the& other& causes&
for&dissolution&of&a&corporation&provided&in&this&Code.&(190&1/2&a)&
&
the!penal!provision!under!Section!144!of!the!Corporation!Code!
may! be! applied! in! a! case! of! violation! of! a! stockholder! or!
members! right! to! inspect! the! corporate! books/records! as!
provided!for!under!Section!74!of!the!Corporation!Code.!Sy,Tiong,
Shiou,v.,Sy,Chim,,582,SCRA,517,(2009).,
,
1. Who& May& Be& Held& Liable:& The!corporate!officer!who!has!in!his!
custody! the! books! and! paper! sought! to! be! inspected,! and!
Burden! of! proof! to! show! that! examination! is! for! improper!
purpose! is! on! the! part! of! the! corporation.! Republic, v.,
Sandiganbayan,,199,SCRA,39,(1999).,
refuses! to! allow! inspection.! If! the! refusal! is! pursuant! to! a!
resolution! or! order! of! the! board! of! directors! or! trustees,! then!
the! directors! or! trustees! who! voted! for! such! refusal! shall! be!
held!liable.1&
2. Defenses&Available&to&Director,&Trustee&or&Officer&Held&Liable:&
The! following! defenses! are! expressly! recognized! under! Section!
74! as! defenses! available! to! a! director,! trustee! or! officer! for!
&
E.&Criminal&Sanction&under&Section&144&
&
Section&144.&Violations&of&the&Code.&
Violations&of&any&of&the&provisions&of&this&Code&or&its&amendments&not&
otherwise&specifically&penalized&therein&shall&be&punished&by&a&fine&of&
not& less& than& one& thousand& (P1,000.00)& pesos& but& not& more& than& ten&
thousand& (P10,000.00)& pesos& or& by& imprisonment& for& not& less& than&
thirty& (30)& days& but& not& more& than& five& (5)& years,& or& both,& in& the&
discretion&of&the&court.&If&the&violation&is&committed&by&a&corporation,&
the& same& may,& after& notice& and& hearing,& be& dissolved& in& appropriate&
proceedings& before& the& Securities& and& Exchange& Commission:&
In!the!recent!case!of!AngbAbaya, v., Ang,, 573, SCRA, 129, (2008),!

the!Court!had!the!occasion!to!enumerate!the!requisites!before!
refusing!to!allow!a!stockholder!or!member!to!exercise!his!right!
to!inspect!corporate!records:&&
a. The!person!demanding!to!examine!has!improperly!used!
any!information!secured!through!any!prior!examination!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
of!the!records!or!minutes!of!such!corporation!or!for!any!
other!corporation;!or!
b. The! one! requesting! to! inspect! was! not! taking! in! good!
faith!or!for!a!legitimate!purpose!in!making!his!demand.!
Corporation! Code,! the! defense! of! improper! use! or! motive! is! in!
the! nature! of! a! justifying! circumstance! that! would! exonerate!
those! who! raise! and! are! able! to! prove! the! same! ! where! the!
corporation! denies! inspection! on! the! ground! of! improper!
motive! or! purpose,! the! burden! of! proof! is! taken! from! the!
Exception:&&
o
o
In! a! criminal! complaint! for! violation! of! Section! 74! of! the!
Atty.!Hofilea!!!take!notice!of!the!type!of!documents&
The!law!requires!the!findings!to!be!made!public&
The! findings! must! be! presented! as! evidence! before! a!
court&
&
VIII.&Appraisal&Right&(Sections&81&to&86&and&105)&
&
Section&81.&Instances&of&appraisal&right.&
Section&142.&Confidential&nature&of&examination&results.&
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&
All& interrogatories& propounded& by& the& Securities& and& Exchange&

Commission& and& the& answers& thereto,& as& well& as& the& results& of& any&
examination& made& by& the& Commission& or& by& any& other& official&
authorized& by& law& to& make& an& examination& of& the& operations,& books&
and& records& of& any& corporation,& shall& be& kept& strictly& confidential,&
except&insofar&as&the&law&may&require&the&same&to&be&made&public&or&
where& such& interrogatories,& answers& or& results& are& necessary& to& be&
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&
&
presented&as&evidence&before&any&court.&(n)&
3.&In&case&of&merger&or&consolidation.&(n)&
&
Section&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&
shareholder!and!placed!on!the!corporation.!Sy,Tiong,Shiou,v.,Sy,
Chim,,582,SCRA,517,(2009).,
&
F.&Confidential&Nature&of&SEC&Examinations&(Section&142)&
&
&
General& Rule:& The! SEC! has! the! authority! to! inspect! all!
documents! submitted! to! them,! but! they! must! keep! their!
findings! confidential.! As! such! the! public! has! no! entitlement! to!
the!findings.&
)
!
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&
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)&
&
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&
Section&84.&When&right&to&payment&ceases.&
No&demand&for&payment&under&this&Title&may&be&withdrawn&unless&the&
corporation&consents&thereto.&If,&however,&such&demand&for&payment&
is& withdrawn& with& the& consent& of& the& corporation,& or& if& the& proposed&
corporate& action& is& abandoned& or& rescinded& by& the& corporation& or&
disapproved& by& the& Securities& and& Exchange& Commission& where& such&
approval& is& necessary,& or& if& the& Securities& and& Exchange& Commission&
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&
determines&that&such&stockholder&is&not&entitled&to&the&appraisal&right,&
then&the&right&of&said&stockholder&to&be&paid&the&fair&value&of&his&shares&
shall& cease,& his& status& as& a& stockholder& shall& thereupon& be& restored,&
and&all&dividend&distributions&which&would&have&accrued&on&his&shares&
shall&be&paid&to&him.&(n)&
&
Section&85.&Who&bears&costs&of&appraisal.&
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)&
&
Section&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,&
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)&
&
all&rights&accruing&to&such&shares,&including&voting&and&dividend&rights,&
shall& be& suspended& in& accordance& with& the& provisions& of& this& Code,&
Section&86.&Notation&on&certificates;&rights&of&transferee.&
Within& ten& (10)& days& after& demanding& payment& for& his& shares,& a&
)
!
shares.! This! right,! known! as! the! right! of! appraisal,! is! expressly!
recognized! in! Section! 81! of! the! Corporation! Code.! Clearly,! the!
right!of!appraisal!may!be!exercised!when!there!is!a!fundamental!
change! in! the! charter! or! articles! of! incorporation! substantially!
prejudicing! the! rights! of! the! stockholders.! It! does! not! vest!
unless! objectionable! corporate! action! is! taken.! It! serves! the!
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)&
&
Section&105.&Withdrawal&of&stockholder&or&dissolution&of&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&
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&
purpose! of! enabling! the! dissenting! stockholder! to,! have! his!

interest!purchased!and!to!retire!from!the!corporation.,Turner,v.,
Lorenzo,Shipping,Corp.,,636,SCRA,13,(2010).,
Appraisal! rights! ensure! the! stockholder! a! way! out! in! certain!

instances.,
o Even! in! the! middle! of! the! process! of! appraisal! rights,! a!
stockholder!can!decide!to!just!sell!his!shares!to!another!
person!rather!than!to!the!company.,
&
B.&Who&is&Entitled&to&Exercise&
A!prejudiced!stockholder!may!exercise!such!right.!A!prejudiced!
stockholder! is! one! who! dissented! in! the! meeting! where! the!
proposal! or! proposed! amendment! was! approved.! The!
stockholder! must! have! voted! against! the! corporation!
transaction!in!order!to!avail!of!the!appraisal!right.!Mere!silence!
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.&
or!abstention!does!not!entitle!such!stockholder!to!the!exercise!
of!the!right.1!
&
The! stockholder! must! be! present! at! the! meeting! and! vote!
therein!to!be!able!to!avail!of!his!appraisal!rights.,
o
A.&Nature&of&Appraisal&Right&
A! stockholder! who! dissents! from! certain! corporate! actions! has!

the! right! to! demand! payment! of! the! fair! value! of! his! or! her!
Where!appraisal!rights!were!availed!of!on!the!ground!of!
extension! of! corporate! term,! and! after! which! such!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
extension! was! abandoned,! the! right! of! the! stockholder!
to!exercise!appraisal!rights!ceases!also.,
&
C.&Instances&When&Right&is&Exercisable:&&
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!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).,
Sections!37,!42!and!81!of!the!Corporation!Code!enumerate.&
&
D.& Denial& of& Appraisal& Right:& May!the!right!be!denied!in!the!articles!of!
incorporation?! Is! a! contractual! stipulation! in! the! articles! of!
incorporation! waiving! the! appraisal! right! void?! Rights! granted! by! law!
can!be!waived!individually,!unless!such!waiver!would!contravene!public!
intracorporate! remedy! is! futile! or! useless,! a! stockholder! may!

institute! a! suit! in! behalf! of! himself! and! other! stockholders! and!
for!the!benefit!of!the!corporation.!However,!the!corporation!is!
the! real! party! in! interest! in! a! derivative! suit! and! the! suing!
stockholder! is! only! a! nominal! party.! Cua,, Jr., v., Tan,, 607, SCRA,
645,(2009).,
IX.& DERIVATIVE& SUITS& (Interim& Rules& of& Procedure& Governing& IntraQ

Corporate&Controversies)&&
Derivative!suits!are!governed!by!a!special!set!of!procedural!rules!
known! as! the! Interim! Rules! of! Procedure! Governing! IntraA
Corporate! Controversies! under! Republic! Act! No.! 8799! (A.M.!
No.! 01A2A04ASC;! effective! 01! April! 2001).! Section! 1,! Rule! 1!
thereof!expressly!lists!derivative!suits!among!the!cases!covered!
by! it.! HibYield, Realty,, Inc., v., Court, of, Appeals,, 590, SCRA, 548,,
556,(2009).,
&
A.& Derivative& Suit& Must& Be& Effected& When& Board& Cannot& Properly&
Exercise&Business&Judgment&&
)
While! questions! of! policy! and! management! are! left! to! the!
honest! decision! of! the! officers! and! directors! of! a! corporation,!
and! the! courts! are! without! authority! to! substitute! their!
judgment!for!the!judgment!of!the!Board!of!Directors;!yet!where!
the! corporate! directors! are! guilty! of! breach! of! trust! ! not! of!
mere! error! of! judgment! or! abuse! of! discretion! ! and!
policy.!Therefore,!when!it!is!waived!without!the!dissenting!stockholder's!
consent,! such! as! when! it! is! defeated! by! provisions! in! the! articles! of!
incorporation,! then! it! will! be! violative! of! public! policy.! But! when! an!
individual,!who!is!already!a!stockholder,!who!is!not!constrained!to!waive!
because! he! is! already! a! stockholder! enters! into! a! contract! knowingly,!
intelligently!waiving!his!appraisal!right,!such!waiver!is!not!void.&
!
General! Rule:! In! the! absence! of! a! special! authority! from! the!
Board!of!Directors!to!institute!a!derivative!suit!for!and!in!behalf!
Under!Section!36!of!the!Corporation!Code,!in!relation!to!Section!
23,!where!a!corporation!is!an!injured!party,!its!power!to!sue!is!
lodged! with! its! board! of! directors! or! trustees.! An! individual!
stockholder!is!permitted!to!institute!a!derivative!suit!on!behalf!
of! the! corporation! wherein! he! holds! stocks! in! order! to! protect!
or! vindicate! corporate! rights,! whenever! the! officials! of! the!
corporation! refuse! to! sue,! or! are! the! ones! to! be! sued,! or! hold!
the! control! of! the! corporation.! In! such! actions,! the! suing!
stockholder!is!regarded!as!a!nominal!party,!with!the!corporation!
!
as!the!real!party!in!interest.!Chua,v.,Court,of,Appeals,,443,SCRA,
259,(2004).1,
,
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).,
Chua,v.,Court,of,Appeals,
&
Issue:& Whether! or! not! the! criminal! complaint! is! in! the! nature! of! a!
derivative!suit!
&
Held:&NO.!It!was!not!stated!that!the!criminal!complaint!was!filed!by!Hao!
in!behalf!and!for!the!benefit!of!the!corporation.!
&
Doctrine:&In!a!derivative!suit,!the!plaintiff!must!allege!that!he!is!suing!in!
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,,467,SCRA,
312,(2005).2,
suing! stockholder! is! regarded! as! the! nominal! party,! with! the!
corporation! as! the! party! in! interest.! Majority, Stockholders, of,
Ruby,Industrial,Corp.,v.,Lim,,650,SCRA,461,(2011).,
,
B.&Nature&of&the&Power&to&File&Derivative&Suit&
A!stockholders!right!to!institute!a!derivative!suit!is!not!based!on!
any! express! provision! of! the! Corporation! Code,! or! even! the!
Securities! Regulation! Code,! but! is! impliedly! recognized! when!
the! said! laws! make! corporate! directors! or! officers! liable! for!
damages! suffered! by! the! corporation! and! its! stockholders! for!
violation! of! their! fiduciary! duties.! Yu, v., Yukayguan,, 589, SCRA,
&
C.&Requisites&of&Derivative&Suit&
In!the!case!of,!we!enumerated!the!foregoing!requisites!before!a!
stockholder!can!file!a!derivative!suit:!(a)!the!party!bringing!suit!
should! be! a! shareholder! during! the! time! of! the! act! or!
transaction! complained! of,! the! number! of! shares! not! being!
material;! (b)! the! party! has! tried! to! exhaust! intraAcorporate!
remedies,!relief,!but!the!latter!has!failed!or!refused!to!heed!his!
588,(2009).,
An! individual! stockholder! is! permitted! to! institute! a! derivative!

suit! on! behalf! of! the! corporation! wherein! he! holds! stocks! in!
order! to! protect! or! vindicate! corporate! rights,! whenever!
officials! of! the! corporation! refuse! to! sue! or! are! the! ones! to! be!
sued!or!hold!the!control!of!the!corporationAin!such!actions,!the!
behalf!and!for!the!benefit!of!the!corporation!and!all!other!stockholders!
who! may! wish! to! join! him.! The! corporation! must! be! impleaded! as! a!
party!and!must!be!served!with!process.!
The!whole!purpose!of!the!law!authorizing!a!derivative!suit!is!to!
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!
plea;! and! (c)! the! cause! of! action! actually! devolves! on! the!
corporation;! the! wrongdoing! or! harm! having! been! or! being!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!Filipinas!Port!Services,!Inc.!v.!Go,!518!SCRA!453!(2007);!Yu!v.!Yukayguan,!589!
SCRA!588!(2009);!HiAYield!Realty,!Inc.!v.!Court!of!Appeals,!590!SCRA!548!(2009).!
!HiAYield!Realty,!Inc.!v.!Court!of!Appeals,!590!SCRA!548,!556!(2009);!Strategic!
Alliance!Dev.!Corp.!v.!Radstock!Securities!Ltd.,!607!SCRA!413!(2009).!
)
!
caused!to!the!corporation!and!not!to!the!particular!stockholder!
bringing! the! suit.! San, Miguel, Corp., v., Kahn,, 176, SCRA, 447,
(1989).1,
Section! 1,! Rule! 8! of! the! Interim! Rules! of! Procedure! Governing!
the! institution! by! a! stockholder! of! a! derivative! suit.! Yu, v.,

Yukayguan,,589,SCRA,588,(2009).,
&
D.&Who&May&Bring&the&Suit&
IntraACorporate! Controversies! lays! down! the! following!

requirements! which! a! stockholder! must! comply! with! in! filing! a!
derivative!suit:!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! at!
the! events! constituting! the! cause! of! action! and! at! the! time! of!
the! filing! of! the! derivative! suit.! Pascual, v., Orozco,, 19, Phil., 83,
(1911);,Gochan,v.,Young,,354,SCRA,207,(2001).,
o Atty.!Hofilea!!!Once!you!file!an!action,!any!disposition!
of! your! shares! may! only! be! made! under! permission! of!
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,!byAlaws,!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!is!not!a!nuisance!or!harassment!suit.!Yu,v.,Yukayguan,,
the!Court.,
The! fact! that! it! is! a! family! corporation! does! not! in! any! way!
exempt! a! stockholder! from! complying! with! the! clear!
requirements! and! formalities! of! the! rules! for! filing! derivative!
suit!!there!is!nothing!in!the!pertinent!laws!or!rules!supporting!
the!distinction!between,!and!the!difference!in!the!requirements!
for,!family!corporations!visAaAvis!other!types!of!corporations,!in!
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!partyAinAinterest.!
Filipinas,Port,Services,,Inc.,v.,Go,,518,SCRA,453,(2007).,
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Filipinas!Port!Services,!Inc.!v.!Go,!518!SCRA!453!(2007)Reyes!v.!Regional!Trial!
Court!of!Makati,!Br.!142,!561!SCRA!593!(2008);!HiAYield!Realty,!Inc.!v.!Court!of!
Appeals,!590!SCRA!548!(2009).!
2
!HiAYield!Realty,!Inc.!v.!Court!of!Appeals,!590!SCRA!548,!556!(2009);!Strategic!
Alliance!Dev.!Corp.!v.!Radstock!Securities!Ltd.,!607!SCRA!413!(2009);!Cua,!Jr.!v.!
Tan,!607!SCRA!645!(2009).!
A! derivative! action! is! a! suit! by! a! shareholder! to! enforce! a!

corporate!cause!of!action.!The!corporation!is!a!necessary!party!
to!the!suit.!And!the!relief!which!is!granted!is!a!judgment!against!
a! third! person! in! favor! of! the! corporation.! Similarly,! if! a!
corporation! has! a! defense! to! an! action! against! it! and! is! not!
asserting!it,!a!stockholder!may!intervene!and!defend!on!behalf!
of! the! corporation.! Chua, v., Court, of, Appeals,, 443, SCRA, 259,
(2004).3,
o Since! the! ones! to! be! sued! are! the! directors/officers! of!
the! corporation! itself,! a! stockholder,! like! petitioner!
589,SCRA,588,(2009).2,
The!relators!must!be!stockholders!both!at!time!of!occurrence!of!
A!minority!stockholder!and!member!of!the!board!has!no!power!
or! authority! to! sue! on! the! corporations! behalf.! Nor! can! we!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
!Go!v.!Distinction!Properties!Dev.!and!Construction,!Inc.,!671!SCRA!461!(2012).!
)
!
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!now!showing!that!petitioner!has!complied!with!the!
a!derivative!suit.!The!Court!held!that!where!the!director!of!the!
corporation! permitted! the! fraudulent! transaction! to! go!
unpunished! by! allowing! the! importation! of! finished! textile!
instead!of!raw!cotton!for!the!textile!mill,!and!nothing!appears!to!
have!been!done!to!remove!the!erring!purchasing!managers,!the!
appointment!of!receiver!may!have!been!thought!of!by!the!court!
so! that! the! dollar! allocation! for! raw! material! may! be! reviewed!
and! the! textile! mill! placed! on! an! operating! basis,! because! it! is!
foregoing!requisites.!Tam,Wing,Tak,v.,Makasiar,,350,SCRA,475,
(2001);,HibYield,Realty,,Inc.,v.,Court,of,Appeals,,590,SCRA,548,,
556,(2009).,
o 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).,
possible! that! a! receiver! in! which! the! Central! Bank! may! have!
confidence! is! appointed,! the! dollar! allocation! for! raw! material!
may!be!restored.!
The!status!of!heirs!as!coAowners!of!shares!of!stocks!prior!to!the!
partition! of! the! decedents! estate! does! not! immediately! and!
necessarily!make!them!stockholders!of!the!corporation!!unless!
and! until! there! is! compliance! with! the! Section! 63! of! the!
Corporation! Code! on! the! manner! of! transferring! shares,! the!
heirs!do!not!become!registered!stockholders!of!the!corporation.!
Reyes,v.,Regional,Trial,Court,of,Makati,,Br.,142,,561,SCRA,593,
(2008);,Puno,and,Puno,Enterprises,,Inc.,,599,SCRA,585,(2009).,
Violation&of&Laws, ! ,Reyes,v.,Tan, 3,SCRA,198,(1961)!also!gave!a!

valid!basis!the!violation!of!laws!allowed!by!the!board!as!basis!for!
Wastage& and& Diversion& of& Corporate& Funds& ! & It! may! be!
considered! a! wastage! or! diversion! of! corporate! funds! to! hire!
officers! and! appoint! directors! whose! main! purpose! is! to! shield!
the!chairman!from!criminal!prosecution.!
&
F.&Exhaustion&of&IntraQCorporate&Remedies:&
party! has! tried! to! exhaust! intaAcorporate! remedies,! i.e.,! has!

made! a! demand! on! the! Board! of! Directors! for! the! appropriate!
relief,! but! the! latter! has! failed! to! or! refused! to! heed! his! plea.!
Everett, v., Asia, Banking, Corp.,, 49, Phil., 512, (1927);, Angeles, v.,
Santos,,64,Phil.,697,(1937).,
A!lawyer!engaged!as!counsel!for!a!corporation!cannot!represent!
members! of! the! same! corporations! 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).,
E.&Grounds&for&Derivative&Suit&
)
A!condition!precedent!to!the!filing!of!a!derivative!suit!is!that!the!
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).,
benefit! or! interest! of! the! corporation.! When! the! relief! prayed!
for! do! not! pertain! to! the! corporation,! then! it! is! an! improper!
derivative!suit.!Legaspi,Towers,300,,Inc.,v.,Muer,,673,SCRA,453,
(2012), 1 ,citing, VILLANUEVA,, PHILIPPINE, CORPORATE, LAW,,
1998,ed.,,p.,375.,
Further,! while! it! is! true! that! the! complaining! stockholder! must!
satisfactorily! show! that! he! has! exhausted! all! means! to! redress!
his!grievances!within!the!corporation,!except!when!such!remedy!
is!complete!control!of!the!person!against!whom!the!suit!is!being!
filed.! The! reason! is! obvious:! a! demand! upon! the! board! to!
institute! an! action! and! prosecute! the! same! effectively! would!
have! been! useless! and! an! exercise! in! futility.! HibYield, Realty,,
Inc.,v.,Court,of,Appeals,,590,SCRA,548,,557,(2009).,
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).,
The! obvious! intent! behind! the! rule! requiring! the! stockholder!

filing! a! derivative! suit! to! first! exert! all! reasonable! efforts! to!
exhaust! all! remedies! available! under! the! articles! of!
incorporation,!by!laws,!laws!or!rules!governing!the!corporation!
or! partnership! to! obtain! relief! he! desires! is! to! make! the!
derivative! suit! the! final! recourse! of! the! stockholders,! after! all!
other! remedies! to! obtain! the! relief! sought! had! failed.! Yu, v.,
Yukayguan,,589,SCRA,588,(2009).,
The! complaint! cannot! demand! for! the! defendants! to! pay! the!
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!
Cuaderno,, 19, SCRA, 671, (1967);, Reyes, v., Tan,, 3, SCRA, 198,
(1961).!
Since! it! is! the! corporation! that! is! the! real! partyAinAinterest! in! a!
derivative! suit,! then! the! reliefs! prayed! for! must! be! for! the!
Appointment! of! receiver! can! be! an! ancillary! remedy! in! a!

derivative!suit.!Chase,v.,CFI,of,Manila,,18,SCRA,602,(1966).,
suing!stockholders!the!value!of!their!respective!participation!in!
the! assets! that! have! been! damaged,! for! a! derivative! suit! must!
have! cause! of! action! for! the! benefit! of! the! corporation.!
Evangelista, v., Santos,, 86, Phil., 387, [1950];, Republic, Bank, v.,
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., LimbYu,,
352,SCRA,216,(2001).,
&
G.&Nature&of&Relief&or&Remedies&Prayed&For:&
The!allegations!of!injury!to!the!relators!can!coAexist!with!those!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Also!R.N.!Symaco!Trading!Corp.!v.!Santos,!467!SCRA!312!(2005).!
)
!
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! while! the!
stockholder! filing! suit! for! the! corporations! behalf! is! only!
nominal!party.!The!corporation!should!be!included!as!a!party!in!
the!suit.!Hornilla,v.,Salunat,,405,SCRA,220,(2003).,
business! judgment! consideration! are! not! applicable! since! in!

such!a!conflict!situation!it!can!hardly!be!expected!that!the!board!
or!its!culprit!members!would!be!in!a!position!to!exercise!proper!
business!judgment!to!protect!the!interest!of!the!corporation.!In!
such! situation,! not! even! the! exhaustion! of! intraAcorporate!
remedy!is!necessary!for!a!stockholder!to!bring!a!derivative!suit!
in!behalf!of!the!corporation.!
&
H.&Venue&for&Derivative&Suit&
Under!Section!5,!Rule!1!of!the!Interim!Rules,!the!proper!venue!
for! derivative! suit! would! be! in! the! RTC! which! has! jurisdiction!
over!the!principal!office!of!the!corporation.!HibYield,Realty,,Inc.,
v.,Court,of,Appeals,,590,SCRA,548,(2009).,
&
J.&Nuisance&Suits2&
&
I.&Business&Judgment&Rule1&
Sometimes! in! may! be! better! for! the! corporation! not! to! seek!
Under! Section! 1,! Rule! 8! of! the! Interim! Rules! of! Procedure!
Governing!IntraACorporate!Controversies,!one!of!the!conditions!
for! filing! a! derivative! suit! is! that! the! suit! is! not! a! nuisance! or!
harassment! suit;! otherwise,! the! court! is! authorized! to!
forthwith!dismiss!the!case.!
relief! for! a! wrong! done! to! it.! Since! the! primary! duty! of! the!
directors!is!to!increase!the!net!asset!value!of!the!corporation,!by!
deriving! profits,! certain! remedies! may! actually! cost! the!
corporation! more! in! terms! of! future! profits.! Therefore,! when!
wrong!is!committed!against!the!corporation,!whether!to!bring!a!
suit! for! the! corporation! or! not! primarily! lies! within! the!
discretion!and!exercise!of!business!judgment!of!the!board.!And!
consequently,!when!the!board!has!in!the!exercise!of!its!business!
judgment,!decided!in!good!faith!that!it!will!not!pursue!remedies!
on!behalf!of!the!corporation,!then!the!use!of!the!derivative!suit!
mechanism!by!the!stockholder!would!be!improper.!
It!is!only!when!the!board!itself!has!the!be!author!of!the!wrong!
being! done! or! having! been! done! to! the! corporation,! where!
Under! Section! 1(b)(4),! Rule! 1! of! the! said! Interim! Rules,! the!
availability!of!appraisal!right!for!the!act!or!acts!complained!of!is!
an! important! factor! in! intraAcorporate! suits! for! the! courts! to!
determine!whether!the!suit!is!a!nuisance!suit!or!one!brought!for!
harassment.!
!
X.&Right&to&Proportionate&Share&of&Remaining&Assets&Upon&Dissolution&
(Section&122)&
&
Section&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.&
&
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)&
)
In! the! liquidation! of! a! corporation,! after! the! payment! of! all!
corporate!debts!and!liabilities,!the!remaining!assets,!if!any,!must!
be! distributed! to! the! stockholders! in! proportion! to! their!
interests! in! the! corporation.! The! share! of! each! stockholder! in!
the! assets! upon! liquidation! is! what! is! known! as! liquidating!
dividend.,President,of,PDIC,v.,Reyes,,460,SCRA,473,(2005).!
CAPITAL'STOCK'&'SHARES'OF'STOCK'
treasury$ shares.$ Thus,$ quorum$ is$ based$ on$ the$ totality$ of$ the$
shares$ which$ have$ been$ subscribed$ and$ issued,$ whether$ it$ be$
founders$ shares$ or$ common$ shares.$ Lanuza) v.) Court) of)
Appeals,)454)SCRA)54)(2005).)
'
I.'Power'of'the'Corporation'to'Issue'Shares'of'Stock'
The$power$to$issue$shares$of$stock$in$a$corporation$is$lodged$in$
the$board$of$directors$and$no$stockholders$meeting$is$required$
to$ consider$ it$ because$ additional$ issuances$ of$ shares$ of$ stock$
does$ not$ need$ approval$ of$ the$ stockholders$ $ what$ is$ only$
capital$is$that$portion$of$the$authorized$capital$stock$which$has$
been$both$subscribed$and$paidNot$all$funds$or$assets$received$
by$ the$ corporation$ can$ be$ considered$ paid@up$ capital,$ for$ this$
term$has$a$technical$signification$in$Corporation$Law.$Such$must$
form$ part$ of$ the$ authorized$ capital$ stock$ of$ the$ corporation,$
required$ is$ the$ board$ resolution$ approving$ the$ additional$

issuance$ of$ shares.$ Majority) Stockholders) of) Ruby) Industrial)
Corp.)v.)Lim,)650)SCRA)461)(2011).)
subscribed$ and$ then$ actually$ paid$ up.$ MSCIINACUSIP) v.)

National)Wages)and)Productivity)Comm.,)269)SCRA)173)(1997).)
Recall:$Pre@emptive$rights)
o
The$ board$ has$ the$ discretion$ to$ decide$ to$ issue$ new$
shares,$ but$ the$ shares$ must$ be$ offered$ to$ the$ current$
stockholders$ first$ in$ accordance$ with$ their$ pre@emptive$
rights,$ UNLESS$ such$ has$ been$ denied$ from$ the$
stockholders$in$the$articles$of$incorporation.)
'
The$ outstanding$ capital$ stock$ is$ defined$ under$ Section$ 137$ of$
the$ Corporation$ Code$ as$ the$ total$ shares$ of$ stock$ issued$ to$
subscribers$or$stockholders$whether$or$not$fully$or$partially$paid$
(as$ long$ as$ there$ is$ binding$ subscription$ agreement)$ except$
The$portion$which$have$been$paid$by$the$stockholders,$
represented$by$the$account$"Paid@up$Capital";$and$$
The$ portion$ which$ is$ to$ be$ paid$ on$ the$ subscriptions,$
represented$by$the$account$"Subscription$Receivables."$$
The$ capital$ stock$ of$ a$ corporation$ cannot$ be$ subject$ to$ levy$ by$
corporate$ creditors$ as$ to$ allow$ them$ to$ operate$ the$ affairs$ of$
the$corporation.$The$capital$stock$of$the$corporation$represents$
the$ interest$ and$ is$ the$ property$ of$ stockholders$ in$ the$
corporation,$ who$ can$ only$ be$ deprived$ thereof$ in$ the$ manner$
provided$by$law.2$
Section'137.'Outstanding'capital'stock'defined.'
The'term'"outstanding'capital'stock",'as'used'in'this'Code,'means'the'
total'shares'of'stock'issued'under'binding'subscription'agreements'to'
subscribers' or' stockholders,' whether' or' not' fully' or' partially' paid,'
except'treasury'shares.'(n)'
The$ definition$ of$ capital$ stock$ clearly$ shows$ that$ its$ composed$
of$two$items,$namely:1$$
o
'
II.'Concept'of'Capital'Stock'(Section'137)'
'
By$express$provision$of$Section$13$of$Corporation$Code,$paid@up$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Villanueva,$C.$L.,$&$Villanueva@Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
2
$J.R.S.$ Business$ Corp.$ v.$ Imperial$ Insurance,$ Inc.,$ 11$ SCRA$ 634,$ 639$ (1964),$
citing$Therebee$v.$Baker,$35$N.E.$Eq.$[8$Stew.]$501,$505;$In$re$Wells'$Estate,$144$
N.W.$174,$177,$Wis.$294,$cited$in$6$WORDS$AND$PHRASES,$109.$
)
usages$ have$ long$ been$ established$ in$ jurisprudence.$ Briefly,$

capital$ refers$ to$ the$ value$ of$ the$ property$ or$ assets$ of$ a$
corporation.$ The$ capital$ subscribed$ is$ the$ total$ amount$ of$ the$
capital$ that$ persons$ (subscribers$ or$ shareholders)$ have$ agreed$
to$take$and$pay$for,$which$need$not$necessarily$be,$and$can$be$
more$than,$the$par$value$of$the$shares.$In$fine,$it$is$the$amount$
that$the$corporation$receives,$inclusive$of$the$premium$if$any,$in$
consideration$ of$ the$ original$ issuance$ of$ the$ shares.$ NTC) v.)
Court)of)Appeals,)311)SCRA)508)(1999).)
An$ investment,$ being$ in$ the$ nature$ of$ equity,$ is$ an$
expenditure$ to$ acquire$ property$ or$ other$ assets$ in$ order$ to$
produce$ revenue.$ It$ is$ the$ placing$ of$ capital$ or$ laying$ out$ of$
money$ in$ a$ way$ intended$ to$ secure$ income$ or$ profit$ from$ its$
employment.$ Unlike$ a$ deposit$ of$ money$ or$ a$ loan$ that$ earns$
interest,$ cannot$ be$ assured$ of$ a$ dividend$ or$ an$ interest$ on$ the$
amount$invested,$for$dividends$on$investments$are$granted$only$
after$profits$or$gains$are$generated.$President)of)PDIC)v.)Reyes,)
460)SCRA)473)(2005).)
Revenue) v.) First) Express) Pawnshop) Co.,) Inc.,) 589) SCRA) 253)
(2009).)
The$term$capital$and$other$terms$used$to$describe$the$capital$
structure$of$a$corporation$are$of$universal$acceptance,$and$their$
Advances$for$Future$Subscription$is$a$receivable$account$and$
does$not$form$part$of$the$capital$stock$of$the$corporation$since$
it$ does$ not$ correspond$ to$ any$ particular$ issuance$ of$ shares$ of$
stock.$Central) Textile) Mills) v.) National) Wage) and) Productivity)
Comm.,)260)SCRA)368)(1996).$Consequently$there$is$no$liability$
for$the$payment$of$the$documentary$stamp$tax$on$such$deposit$
for$ future$ subscription$ for$ the$ reason$ that$ there$ is$ yet$ no$
subscription$ that$ creates$ rights$ and$ obligations$ between$ the$
subscriber$ and$ the$ corporation.$ Commissioner) of) Internal)
'
III.'Classification'of'Shares'(Section'6)'
'
Section'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'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' noSpar' 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' nonSassessable' and' the' holder' of' such' shares' shall' not' be'
'
4.'Incurring,'creating'or'increasing'bonded'indebtedness;''
'
5.'Increase'or'decrease'of'capital'stock;'
'
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'noSpar'value'shares'shall'be'treated'as'capital'and'
shall'not'be'available'for'distribution'as'dividends.'
'
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.'
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.'
'
'
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.'
Where' the' articles' of' incorporation' provide' for' nonSvoting' 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'bySlaws;'
'
'
It$is$not$correct$to$say$that$holders$of$the$preferred$shares$lose$
all$ their$ voting$ rights,$ since$ Section$ 6$ of$ the$ Corporation$ Code$
provides$ for$ the$ situations$ where$ non@voting$ shares$ like$
preferred$ shares$ are$ granted$ voting$ rights.$ Philippine) Coconut)
Producers)Federation.)v.)Republic,)600)SCRA)102)(2009).)
'
A.'Policies'on'Classification'of'Shares:''
3.'Sale,'lease,'exchange,'mortgage,'pledge'or'other'disposition'of'all'or'
substantially'all'of'the'corporate'property;'
)
The$Corporation$Code$provides$three$(3)$basic$policies$on$share$
classification:'
1. Firstly,$ it$ expressly$ recognizes$ the$ freedom$ and$ power$ of$ a$
corporation$to$classify$shares.'
!
2. Secondly,$ the$ Code$ expressly$ adopts$ the$ presumption$ of$
equality$ of$ the$ rights$ and$ features$ of$ shares$ when$ nothing$ is$
expressly$provided$to$the$contrary.'
o Although$ a$ corporation$ has$ the$ power$ to$ classify$ its$
shares$ of$ stock,$ provide$ for$ preferences$ and$ other$
conditions,$ when$ nothing$ has$ been$ provided$ for$ in$ the$
articles$of$incorporation,$no$presumption$should$exist$to$
distinguish$one$share$from$another.$
The$Securities$and$Exchange$Commission$has$ruled$that$
the$ mere$ classification$ of$ shares$ into$ preferred$ shares$
does$ not$ necessarily$ deprive$ them$ of$ voting$ rights.$ In$
the$ absence$ of$ any$ restrictions$ in$ the$ articles$ of$
incorporation$ or$ by@laws$ of$ the$ corporation,$ preferred$
shares$would$be$voting$shares$having$the$same$rights$as$
common$ shares,$ since$ under$ Section$ 6$ of$ the$
Corporation$ Code,$ all$ shares$ shall$ equal$ rights$ except$
when$ otherwise$ provided$ in$ the$ articles$ of$
incorporation$ and$ state$ in$ the$ certificate$ of$ stock.$
Consequently,$ where$ the$ articles$ of$ incorporation$ and$
the$ certificates$ of$ stock$ are$ silent$ on$ the$ matter$ of$
voting$ rights,$ all$ issued$ shares,$ regardless$ of$ their$ class$

nomenclature,$shall$be$considered$to$have$equal$voting$
rights.1$
3. Thirdly,$ the$ Code$ provides$ for$ voting$ rights$ for$ all$ types$ of$
shares$on$matters$it$considers$as$fundamental$measures.$Under$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 16$ July$ 1996,$ XXX$

SECURITIES$ AND$ EXCHANGE$ COMMISSION$ QUARTERLY$ BULLETIN$ 22$ (No.$ 2,$ Dec.$
1996).$
Section$6,$there$shall$always$be$a$class$or$series$of$shares$which$
have$complete$voting$rights.)
'
B.'Common'Shares'
A$common$stock$represents$the$residual$ownership$interest$in$
the$corporation.$It$is$a$basic$class$of$stock$ordinarily$and$usually$
issued$without$extraordinary$rights$or$privileges$and$entitles$the$
shareholder$ to$ a$ pro$ rata$ division$ of$ profits.$ Commissioner) of)
Internal)Revenue)v.)Court)of)Appeals,)301)SCRA)152)(1999).)
'
C.' Preferred' Shares:' Republic) Planters) Bank) v.) Agana,) 269) SCRA) 1)
(1997):))
)
Republic)Planters)Bank)v.)Agana)
'
Facts:' Robes@Francisco$ Realty$ &$ Development$ Corporation$ (RFRDC)$
secured$a$loan$from$the$Republic$Planters$Bank$which$were$partly$in$the$
form$ of$ cash$ and$ partly$ in$ the$ form$ of$ stock$ certificates.$ The$ stock$
certificates$ were$ preferred$ shares$ in$ the$ names$ of$ Adalia$ F.$ Robes$ and$
Carlos$ F.$ Robes$ who$ subsequently,$ however,$ endorsed$ his$ shares$ in$
favor$of$Adalia.$The$terms$for$certificates$of$stocks$include$the$right$to$
receive$ quarterly$ dividends$ and$ such$ shares$ may$ be$ redeemed$ at$ the$
option$of$the$Corporation$2$years$from$date$of$issue.$RFRDC$and$Robes$
proceeded$ against$ the$ Bank$ and$ filed$ a$ Complaint$ anchored$ on$ their$
alleged$ rights$ to$ collect$ dividends$ under$ the$ preferred$ shares$ in$
question$and$to$have$petitioner$redeem$the$same$under$the$terms$and$
conditions$of$the$stock$certificates.$$
'
Issue:' Whether$ the$ bank$ can$ be$ compelled$ to$ redeem$ the$ preferred$
)
!
shares$issued$to$RFRDC$and$Robes.$
'
Held:'NO.$While$the$stock$certificate$does$allow$redemption,$the$option$
to$ do$ so$ was$ clearly$ vested$ in$ the$ bank.$ The$ redemption$ therefore$ is$
clearly$ the$ type$ known$ as$ "optional".$ Thus,$ except$ as$ otherwise$
'
1. Participating'and'NonSparticipating1'
a. Participating$preferred$shares$!$that$entitle$the$holders$
to$participate$with$the$holders$of$common$shares$in$the$
retained$ earnings$ after$ the$ amount$ of$ stipulated$
dividend$has$been$paid$to$the$preferred$shares.$
provided$in$the$stock$certificate,$the$redemption$rests$entirely$with$the$
corporation$ and$ the$ stockholder$ is$ without$ right$ to$ either$ compel$ or$
refuse$the$redemption$of$its$stock.$Furthermore,$payment$of$dividends$
to$a$stockholder$is$not$a$matter$of$right$but$a$matter$of$consensus$as$the$
Corporation$ Code$ prohibits$ the$ issuance$ of$ any$ stock$ dividend$ without$
the$prior$approval$of$the$stockholders.$
'
b. Non@participating$ preferred$ shares$ !$ are$ those$ that$

entitle$holders$of$preferred$shares$only$to$the$stipulated$
preferred$dividends$and$no$more.$
2. Cumulative'and'NonScumulative2'
a. Cumulative$ preferred$ shares$ !' entitle$ the$ holders$
thereof$ to$ payment$ not$ only$ of$ current$ dividends$ but$
also$of$back$dividends$not$previously$paid,$when$and$if$
Doctrine:'A$preferred$share$of$stock,$on$one$hand,$is$one$which$entitles$
the$ holder$ thereof$ to$ certain$ preferences$ over$ the$ holders$ of$ common$
stock.$These$are$designed$to$induce$persons$to$subscribe$for$shares$of$a$
corporation.$ The$ most$ common$ forms$ may$ be$ classified$ into$ two:$ (1)$
preferred$shares$as$to$assets;$and$(2)$preferred$shares$as$to$dividends.$
There$is$no$guaranty,$however,$that$the$share$will$receive$any$dividends.$
The$present$Corporation$Code$provides$that$the$board$of$directors$of$a$
stock$ corporation$ may$ declare$ dividends$ only$ out$ of$ unrestricted$
retained$earnings.$Thus,$the$declaration$of$dividends$is$dependent$upon$
the$availability$of$surplus$profit$or$unrestricted$retained$earnings,$as$the$
case$may$be.$Preferences$granted$to$preferred$stockholders,$moreover,$
do$not$give$them$a$lien$upon$the$property$of$the$corporation$nor$make$
them$creditors$of$the$corporation,$the$right$of$the$former$being$always$
subordinate$ to$ the$ latter.$ Dividends$ are$ thus$ payable$ only$ when$ there$
are$profits$earned$by$the$corporation$and$as$a$general$rule,$even$if$there$
are$ existing$ profits,$ the$ board$ of$ directors$ has$ the$ discretion$ to$
determine$whether$or$not$dividends$are$to$be$declared.$
dividends$ are$ declared,$ to$ the$ extent$ agreed$ upon,$

before$ holders$ of$ common$ shares$ are$ paid.$ The$
fundamental$characteristic$of$cumulative$stock$is$that$if$
the$ preferred$ dividend$ is$ not$ paid$ in$ full$ in$ any$ year,$
whether$or$not$earned,$the$deficiency$must$be$made$up$
before$any$dividend$may$be$paid$on$the$common$stock.$
b. Non@cumulative$preferred$shares$!$entitle$the$holders$
merely$ to$ the$ payment$ of$ current$ dividends$ that$ are$
paid,$ to$ the$ extent$ agreed$ upon$ before$ the$ holders$ of$
common$shares$are$paid.$
3. Par'Value'and'No'Par'Value'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
)
!
a. The$ Supreme$ Court$ characterized$ no@par$ value$ shares$
thus:$ "[a]$ no@par$ value$ share$ does$ not$ purport$ to$
represent$ any$ stated$ proportionate$ interest$ in$ the$
capital$ stock$ measured$ by$ value,$ but$ only$ an$ aliquot$
part$of$the$whole$number$of$such$shares$of$the$issuing$
corporation.$The$holder$of$no@par$shares$may$see$from$
holders$of$common$stock.3$$
the$ certificate$ itself$ that$ he$ is$ only$ an$ aliquot$ sharer$ in$
the$ assets$ of$ the$ corporation.$ But$ this$ character$ of$
proportionate$ interest$ is$ not$ hidden$ beneath$ a$ false$
appearance$of$a$given$sum$of$in$money,$as$in$the$case$of$
par$ value$ shares.$ The$ capital$ stock$ of$ a$ corporation$
issuing$ only$ no@par$ value$ shares$ is$ not$ set$ forth$ by$ a$
stated$amount$of$money,$but$instead$is$expressed$to$be$
divided$into$a$stated$number$of$shares,$such$as$1,0000$
shares.$ This$ indicates$ that$ a$ shareholder$ of$ 100$ such$
shares$ is$ an$ aliquot$ sharer$ in$ the$ assets$ of$ the$
corporation,$ no$ matter$ what$ value$ they$ may$ have,$ to$
the$extent$of$100/1,000$or$1/10.$Thus,$by$removing$the$
par$value$of$shares,$the$attention$of$persons$interested$
in$ the$ financial$ condition$ of$ a$ corporation$ is$ focused$
The$contractual$rights$and$preferences$of$an$issue$of$preferred$
stock$must$be$provided$for$in$the$articles$of$incorporation.4)
o Under$ Section$ 6$ of$ the$ Corporation$ Code,$ preferred$
shares$ 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$the$Corporation$Code.5$
Under$the$policy$of$the$Corporation$Code$that$does$not$
grant$ benefits$ to$ a$ share$ unless$ expressly$ provided$ for$
in$the$articles$of$incorporation,$the$naming$of$shares$as$
"preferred"$ without$ indicating$ what$ preferential$ rights$
they$are$accorded,$would$not$give$such$preferred$shares$
upon$the$value$of$assets$and$the$amount$of$its$debts."1'
Preferred$ shares$ as$ to$ assets$ gives$ the$ holder$ thereof$

preference$ in$ the$ distribution$ of$ the$ assets$ of$ the$
corporation$in$case$of$liquidation.2$$
Preferred$ shares$ as$ to$ dividends$ give$ the$ holder$ the$
right$ to$ receive$ dividends$ on$ said$ shares$ to$ the$ extent$
agreed$upon$before$any$dividends$at$all$are$paid$to$the$
$Preferred$ stocks$ are$ those$ which$ entitle$ the$ shareholder$ to$

some$priority$on$dividends$and$asset$distribution.$CIR)v.)Court)
of)Appeals,)301)SCRA)152)(1999).)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
$Republic$Planters$Bank$v.$Agana,$269$SCRA$1,$80$SCAD$1$(1997).$
$Republic$Planters$Bank$v.$Agana,$269$SCRA$1,$80$SCAD$1$(1997).$
4
5
3
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Delpher$Trades$Corp.$v.$Intermediate$Appellate$Court,$157$SCRA$349,$353@354$
[1988],$ quoting$ directly$ from$ AGBAYANI,$ COMMENTARIES$ AND$ JURISPRUDENCE$ ON$ THE$
COMMERCIAL$LAWS$OF$THE$PHILIPPINES,$Vol.$III,$1980$Ed.,$p.$107).$
)
!
any$ right$ in$ addition$ to$ those$ enjoyed$ by$ common$
shares.1$
In$ the$ absence$ of$ provisions$ in$ the$ articles$ of$ incorporation$
denying$voting$rights$to$preferred$shares,$preferred$shares$have$
the$ same$ voting$ rights$ as$ common$ shares.$ However,$ preferred$
shareholders$ are$ often$ excluded$ from$ any$ control,$ that$ is,$
deprived$of$the$right$to$vote$in$the$election$of$directors$and$on$
other$ matters,$ on$ the$ theory$ that$ the$ preferred$ shareholders$
are$merely$investors$in$the$corporation$for$income$in$the$same$
manner$ as$ bondholders.$ In$ fact,$ under$ the$ Corporation$ Code$
only$ preferred$ or$ redeemable$ shares$ can$ be$ deprived$ of$ the$
right$to$vote.$Common$shares$cannot$be$deprived$of$the$right$to$
vote$in$any$corporate$meeting,$and$any$provision$in$the$articles$
of$incorporation$restricting$the$right$of$common$shareholders$to$
vote$is$invalid.)Gamboa)v.)Teves,)652)SCRA)690)(2011);)affirmed)
in)Heirs)of)Gamboa)v.)Teves,)682)SCRA)397)(2012).)
)
Gamboa)v.)Teves)
'
Facts:' Prime$ Holdings$ Inc.$ (PHI)$ owned$ 46%$ of$ the$ outstanding$ capital$
stock$ of$ the$ Philippine$ Telecommunications$ Investment$ Corporation$
(PTIC).$PTIC$owned$26%$of$the$outstanding$common$shares$of$PLDT.$The$
shares$held$by$PHI$were$sequestered$by$the$PCGG$and$declared$to$be$ill@
gotten$ wealth$ of$ the$ Marcos.$ This$ being$ the$ case,$ the$ Inter@Agency$
Privatization$Council$(IPC)$of$the$Philippine$Government$sold$the$shares$
to$Metro$Pacific$Assets$Holdings,$Inc.$(MPAH),$an$affiliate$of$First$Pacific$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Company$ Limited$ (First$ Pacific),$ a$ Hong$ Kong@based$ investment$

management$and$holding$company$and$a$shareholder$of$the$Philippine$
Long$ Distance$ Telephone$ Company$ (PLDT).$ (Note:$ First$ Pacific$ had$ a$
right$ of$ first$ refusal$ in$ accordance$ with$ the$ Articles$ of$ Incorporation$ of$
PTIC$thats$why$the$shares$were$sold$to$their$affiliate$company).$
$
The$petitioner$questioned$the$sale$on$the$ground$that$it$also$involved$an$
indirect$ sale$ of$ 12$ million$ shares$ (or$ about$ 6.3$ percent$ of$ the$
outstanding$ common$ shares)$ of$ PLDT$ owned$ by$ PTIC$ to$ First$ Pacific.$
With$ the$ this$ sale,$ First$ Pacifics$ common$ shareholdings$ in$ PLDT$
increased$from$30.7$percent$to$37$percent,$thereby$increasing$the$total$
common$ shareholdings$ of$ foreigners$ in$ PLDT$ to$ about$ 81.47%.$ This,$
according$ to$ the$ petitioner,$ violates$ Section$ 11,$ Article$ XII$ of$ the$ 1987$
Philippine$Constitution$which$limits$foreign$ownership$of$the$capital$of$a$
public$utility$to$not$more$than$40%.$
'
Issue:'Whether$or$not$the$term$capital$in$Section$11,$Article$XII$of$the$
Constitution$ refers$ to$ the$ total$ common$ shares$ only,$ or$ to$ the$ total$
outstanding$ capital$ stock$ (combined$ total$ of$ common$ and$ non@voting$
preferred$shares)$of$PLDT,$a$public$utility.$
'
Held:'YES.$The$Court$partly$granted$the$petition$and$held$that$the$term$
capital$ in$ Section$ 11,$ Article$ XII$ of$ the$ Constitution$ refers$ only$ to$
shares$ of$ stock$ entitled$ to$ vote$ in$ the$ election$ of$ directors$ of$ a$ public$
utility,$i.e.,$to$the$total$common$shares$in$PLDT.$
$
Holders$ of$ PLDT$ preferred$ shares$ are$ explicitly$ denied$ of$ the$ right$ to$
vote$in$the$election$of$directors.$On$the$other$hand,$holders$of$common$
shares$ are$ granted$ the$ exclusive$ right$ to$ vote$ in$ the$ election$ of$
)
!
directors.$ To$ summarize,$ (1)$ foreigners$ own$ 64.27%$ of$ the$ common$
shares$of$PLDT,$which$class$of$shares$exercises$the$sole$right$to$vote$in$
the$ election$ of$ directors,$ and$ thus$ exercise$ control$ over$ PLDT;$ (2)$
Filipinos$ own$ only$ 35.73%$ of$ PLDTs$ common$ shares,$ constituting$ a$
minority$of$the$voting$stock,$and$thus$do$not$exercise$control$over$PLDT;$
voting$or$not,$and$claims$that$the$term$capital$in$section$11,$article$XII$
of$ the$ constitution$ has$ long$ been$ settled$ and$ defined$ to$ refer$ to$ the$
total$outstanding$shares$of$stock,$whether$voting$or$non@voting.$
'
Issue:'Whether$or$not$the$contention$of$Pangilinan$et$al.$is$correct.$
(3)$preferred$shares,$99.44%$owned$by$Filipinos,$have$no$voting$rights;$
(4)$ preferred$ shares$ earn$ only$ 1/70$ of$ the$ dividends$ that$ common$
shares$ earn;$ (5)$ preferred$ shares$ have$ twice$ the$ par$ value$ of$ common$
shares;$ and$ (6)$ preferred$ shares$ constitute$ 77.85%$ of$ the$ authorized$
capital$ stock$ of$ PLDT$ and$ common$ shares$ only$ 22.15%.$ This$ kind$ of$
ownership$ and$ control$ of$ a$ public$ utility$ is$ a$ mockery$ of$ the$
Constitution.$
'
Held:'NO.$The$Supreme$Court$has$never$yet$interpreted$the$meaning$of$
capital$in$the$context$of$section$11,$article$XII$of$the$Constitution.$For$
more$ than$ 75$ years$ since$ the$ 1935$ Constitution,$ the$ court$ has$ not$
interpreted$ or$ defined$ the$ term$ capital$ found$ in$ various$ economic$
provisions$ of$ the$ 1935,$ 1973$ and$ 1987$ constitutions.$ There$ has$ never$
been$ a$ judicial$ precedent$ interpreting$ the$ term$ capital$ in$ the$ 1935,$
'
Doctrine:' Considering$ that$ common$ shares$ have$ voting$ rights$ which$
translate$to$control,$as$opposed$to$preferred$shares$which$usually$have$
no$ voting$ rights,$ the$ term$ capital$ in$ Section$ 11,$ Article$ XII$ of$ the$
Constitution$ refers$ only$ to$ common$ shares.$ However,$ if$ the$ preferred$
shares$also$have$the$right$to$vote$in$the$election$of$directors,$then$the$
term$ capital$ shall$ include$ such$ preferred$ shares$ because$ the$ right$ to$
1973$and$1987$constitutions,$until$now.$Hence,$it$is$patently$wrong$and$
utterly$baseless$to$claim$that$the$court$in$defining$the$term$capital$in$
its$28$June$2011$decision$modified,$reversed,$or$set$aside$the$purported$
long@standing$ definition$ of$ the$ term$ capital,$ which$ supposedly$ refers$
to$the$total$outstanding$shares$of$stock,$whether$voting$or$non@voting.$
'
Doctrine:'Capital$refers$only$to$those$shares$which$have$voting$rights,$
participate$in$the$control$or$management$of$the$corporation$is$exercised$
through$the$right$to$vote$in$the$election$of$directors.$In$short,$the$term$
capital$ in$ Section$ 11,$ Article$ XII$ of$ the$ Constitution$ refers$ only$ to$
shares$of$stock$that$can$vote$in$the$election$of$directors.)
and$not$the$total$outstanding$shares$of$stock.$
)
Heirs)of)Gamboa)v.)Teves)
'
Facts:'Contesting$the$ruling$in$Gamboa$v.$Teves$(2011),$Pangilinan$et$al.$
claims$ that$ Securities$ and$ Exchange$ Commission$ and$ DOJ$ have$ always$
interpreted$capital$to$refer$to$total$outstanding$shares$of$stock$whether$
)
D.' Redeemable' Shares' (Section' 8;' Republic) Planters) Bank) v.) Agana,)
269)SCRA)1)[1997])''
'
Section'8.'Redeemable'shares.'
Redeemable'shares'may'be'issued'by'the'corporation'when'expressly'
so'provided'in'the'articles'of'incorporation.'They'may'be'purchased'or'
taken' up' by' the' corporation' upon' the' expiration' of' a' fixed' period,'
regardless' of' the' existence' of' unrestricted' retained' earnings' in' the'
)
!
would$ now$ constitute$ a$ clear$ exception$ to$ the$ trust$ fund$
doctrine.2$
o Nevertheless,$ the$ consistency$ of$ policy$ of$ protecting$
corporate$ creditors$ is$ still$ there$ in$ the$ sense$ that$
creditors$will$not$be$misled$since$it$is$required$that$the$
redemption$feature$must$be$stated$both$in$the$articles$
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.'
'
Redemption$ is$ repurchase,$ a$ reacquisition$ of$ stock$ by$ a$

corporation$ which$ issued$ the$ stock$ in$ exchange$ for$ property,$
whether$or$not$the$acquired$stock$is$cancelled,$retired$or$held$in$
the$ treasury.$ Essentially,$ the$ corporation$ gets$ back$ some$ of$ its$
stock,$ distributes$ cash$ or$ property$ to$ the$ shareholder$ in$
payment$for$the$stock,$and$continues$in$business$as$before.$The$
redemption$of$stock$dividends$previously$issued$is$used$as$a$veil$
for$ the$ constructive$ distribution$ of$ cash$ dividends.$
Commissioner) of) Internal) Revenue) v.) Court) of) Appeals,) 301)
SCRA)152)(1999).)
o The$ Securities$ and$ Exchange$ Commission$ Rules$
Governing$ Redeemable$ and$ Treasury$ Shares,1$expressly$
define$"redeemable$shares"$as$shares$of$stock$issued$by$
a$ corporation$ which$ the$ corporation$ can$ purchase$ or$
take$ up$ from$ their$ holders$ as$ expressly$ provided$ for$ in$
its$ articles$ of$ incorporation$ and$ certificates$ of$ stock$
representing$said$shares.$
of$incorporation$and$the$certificates$of$stock.$
The$ Rules$ provide$ that$ all$ corporations$ which$ have$
issued$ redeemable$ shares$ with$ mandatory$ redemption$
features$ are$ required$ to$ set$ up$ and$ maintain$ a$ sinking$
fund,$which$shall$be$deposited$with$a$trustee$bank$and$
not$ be$ invested$ in$ risky$ or$ speculative$ ventures.$ The$
Rules$ also$ provide$ that$ redeemable$ shares$ may$ be$
redeemed,$ regardless$ of$ the$ existence$ of$ unrestricted$
retained$ earnings,$ "provided$ that$ the$ corporation$ has,$
after$ such$ redemption,$ sufficient$ assets$ in$ its$ books$ to$
cover$debts$and$liabilities$inclusive$of$capital$stock."$$
In$ addition,$ the$ Securities$ and$ Exchange$ Commission$
Rules$ provide$ that$ redeemable$ shares$ reacquired$ shall$
be$ considered$ retired$ and$ no$ longer$ issuable,$ unless$
otherwise$ provided$ in$ the$ articles$ of$ incorporation$ of$
the$redeeming$corporation.$
The$ express$ provisions$ of$ Section$ 8$ which$ allows$ redemption$
"regardless$ of$ the$ existence$ of$ unrestricted$ retained$ earnings"$
It$ has$ been$ held$ that$ when$ the$ certificates$ of$ stock$ recognizes$
redemption,$ but$ the$ option$ to$ do$ so$ is$ clearly$ vested$ in$ the$
corporation,$ the$ redemption$ is$ clearly$ the$ type$ known$ as$
optional$ and$ rest$ entirely$ with$ the$ corporation$ and$ the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Issued$by$the$SECURITIES$AND$EXCHANGE$COMMISSION$on$26$April$1982.$See$
SECURITIES$AND$EXCHANGE$COMMISSION$Rules$and$Regulations$(1986$ed.),$at$
p.$256.$$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
)
!
stockholder$ is$ without$ right$ to$ either$ compel$ or$ refuse$ the$
redemption$of$its$stock.1$
not$ enjoy$ such$ rights,$ and$ would$ necessarily$ include$ the$

existence$ of$ common$ shares,$ which$ ordinarily$ would$ have$ the$
right$ to$ vote$ and$ be$ voted$ into$ the$ board$ of$ directors.$ That$
would$have$to$be$the$rationale$basis$for$the$restriction$provided$
in$ Section$ 7$ that$ such$ exclusive$ rights$ shall$ not$ exceed$ five$ (5)$
years$and$subject$to$the$approval$of$the$Securities$and$Exchange$
'
E.'Founder'Shares'(Section'7)2'
'
Section'7.'Founders''shares.'
Founders''shares'classified'as'such'in'the'articles'of'incorporation'may'
be' given' certain' rights' and' privileges' not' enjoyed' by' the' owners' of'
other' stocks,' provided' that' where' the' exclusive' right' to' vote' and' be'
voted'for'in'the'election'of'directors'is'granted,'it'must'be'for'a'limited'
period' not' to' exceed' five' (5)' years' subject' to' the' approval' of' the'
Securities' and' Exchange' Commission.' The' fiveSyear' period' shall'
Commission.$It$would$then$also$be$reasonable$to$conclude$that$
a$ class$ of$ shares,$ even$ when$ not$ given$ the$ nomenclature$ of$
founders$share,$would$necessarily$fall$within$the$provision$of$
Section$ 7$ (and$ therefore$ be$ classified$ as$ founders$ share)$
whenever$ such$ class$ of$ shares$ are$ given$ the$ exclusive$ right$ to$
vote$ and$ be$ voted$ for$ in$ the$ election$ of$ directors,$ and$
necessarily$ such$ exclusive$ rights$ shall$ have$ a$ limited$ period$ of$
commence' from' the' date' of' the' aforesaid' approval' by' the' Securities'
and'Exchange'Commission.'
five$(5)$years.3'
'
What' Constitutes' Founders' Share?' Perhaps$ the$ most$ obvious$

feature$of$founders$share$is$that$they$are$issued$basically$to$the$
founders$or$initial$organizers$of$the$corporation,$but$nothing$in$
the$ language$ of$ Section$ 7$ expressly$ so$ provides.$ We$ must$
presume$that$what$makes$shares$as$founders$shares$would$be$
that$ they$ are$ given$ the$ exclusive$ rights$ not$ given$ to$ other$
stockholders,$and$specially$the$right$to$vote$and$be$voted$for$in$
the$election$of$directors.$The$existence$of$founders$shares$must$
'
necessarily$include$the$fact$that$there$are$other$shares$that$do$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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1
Effect' When' Exclusivity' Period' Expires:) The$ Securities$ and$

Exchange$ Commission$ has$ opined$ that$ upon$ the$ expiration$ of$
the$period$within$which$the$founders$shares$can$exercise$their$
$Republic$Planters$Bank$v.$Agana,$269$SCRA$1,$80$SCAD$1$(1997).$$
2
$In$ Castillo$ v.$ Balinghasay,$ 440$ SCRA$ 442$ (2004),$ the$ position$ that$ when$ the$
articles$ of$ incorporation$ provide$ expressly$ a$ class$ of$ shares$ to$ have$ the$
exclusive$right$to$vote$and$be$voted$for$into$the$Board$of$Directors,$that$such$
shares$would$essentially$be$founders$share$was$raised$but$not$resolved$by$the$
Court.$
exclusive$ right$ to$ vote$ and$ be$ voted$ for$ in$ the$ election$ of$
directors,$ such$ exclusive$ right$ would$ only$ be$ transferred$ to$
common$shareholders$who$are$supposed$to$exercise$such$right$
had$there$been$no$founders$share.$Other$classes$of$shares,$such$
as$preferred$shares,$are$not$affected.4'
4
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 10$ August$ 1995,$ XXX$
SECURITIES$ AND$ EXCHANGE$ COMMISSION$ QUARTERLY$ BULLETIN$ 5$ (No.$ 1,$ June$
1996);$SECURITIES$AND$EXCHANGE$COMMISSION$Opinion,$27$September$1989,$
XXIV$ SECURITIES$ AND$ EXCHANGE$ COMMISSION$ QUARTERLY$ BULLETIN$ 23$ (No.$ 1,$
March$1990).$$
)
!
F.' Treasury' Shares' (Section' 9;' Commissioner) v.) Manning,) 66) SCRA) 14)
[1975]).'
'
the$ number$ of$ issues$ shares$ or$ the$ amount$ of$ the$ stated$
capital.1$
Section'9.'Treasury'shares.'
Treasury' shares' are' shares' of' stock' which' have' been' issued' and' fully'
issued$ out$ of$ the$ retained$ earnings$ previously$ used$ to$ support$
their$acquisition,$provided$that$the$amount$of$the$said$retained$
earnings$ has$ not$ been$ subsequently$ impaired$ by$ losses.2$Any$
declaration$and$issuance$of$treasury$shares$as$property$dividend$
shall$be$disclosed$and$properly$designated$as$property$dividend$
in$the$books$of$the$corporation$and$in$its$financial$statements.3$$
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.'
$
used$ for$ a$ variety$ of$ corporate$ purposes,$ such$ as$ for$ a$ stock$
bonus$ plan$ for$ management$ and$ employees,$ or$ for$ acquiring$
another$company.$It$may$be$held$indefinitely,$resold$or$retired.$
While$ held$ in$ the$ companys$ treasury,$ the$ stock$ earns$ no$
dividends$ and$ has$ no$ vote$ in$ company$ affairs.$ Philippine)
purchase$ or$ acquisition,$ be$ sold$ or$ disposed$ of$ at$ a$ public$ or$
private$sale.4$
'
G.'Stock'Warrants'
The$ Securities$ and$ Exchange$ Commission$ has$ opined$ that$

treasury$ shares$ have$ no$ effect$ on$ the$ stated$ capital$ of$ the$
corporation$ unless2 and2 until2 they2 are2 cancelled2 or2 retired,$ in$
which$ event$ the$ stated$ capital$ is$ reduced$ by$ the$ amount$ then$
representing$the$shares.$Treasury$shares$must$be$distinguished$
from$ the$ authorized$ but$ unissued$ shares:$ the$ acquisition$ of$
treasury$shares$does$not$reduce$the$number$of$issued$shares$or$
the$ amount$ of$ stated$ capital$ and$ their$ sale$ does$ not$ increase$
Rule)on)Treasury)Shares)for)Banks$$No$bank$shall$purchase$or$
acquire$shares$of$its$own$capital$stock$or$accept$its$own$shares$
as$ a$ security$ for$ a$ loan,$ except$ when$ authorized$ by$ the$
Monetary$ Board;$ and$ in$ every$ case$ the$ stock$ so$ purchase$ or$
acquired$ shall,$ within$ six$ (6)$ months$ from$ the$ time$ of$ its$
A$ treasury$ share,$ which$ may$ be$ common$ or$ preferred,$ may$ be$
Coconut) Producers) Federation,) Inc.) v.) Republic,) 600) SCRA) 102)

(2009).)
Treasury$ shares$ may$ be$ declared$ as$ property$ dividend$ to$ be$
Under$the$Securities$and$Exchange$Commission$Amended$Rules$
Governing$ Warrants, 5 $a$ "warrant"$ is$ defined$ as$ "a$ type$ of$
security$which$entitles$the$holder$the$right$to$subscribe$to,$the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$SECURITIES$AND$EXCHANGE$COMMISSION$Opinion,$18$March$1987,$Securities$
and$Exchange$Commission$QUARTERLY$BULLETIN$(No.$1,$March$1987),$at$pp.$19@20.$
2
$Securities$ and$ Exchange$ Commission.$ 5(3),$ SECURITIES$ AND$ EXCHANGE$
COMMISSION$Rules$Governing$Redeemable$and$Treasury$Shares$(1982).$
3
$Securities$ and$ Exchange$ Commission.$ 5(3),$ SECURITIES$ AND$ EXCHANGE$
COMMISSION$Rules$Governing$Redeemable$and$Treasury$Shares$(1982).$
4
$Securities$ and$ Exchange$ Commission.$ 10,$ The$ General$ Banking$ Law$ of$ 2000$
[RA$8791].$$$
5
$XXVIII$SECURITIES$AND$EXCHANGE$COMMISSION$QUARTERLY$BULLETIN$78$(No.$2,$
June$1994).$$
)
directors$of$the$issuing$corporation."1$
b. Non@detachable$ warrant$ which$ cannot$ be$ sold,$

transferred$ or$ assigned$ to$ any$ person$ by$ the$
warrantholder$ separate$ from,$ or$ independent$ of$ the$
Beneficiary$Securities.6$$
The$ Securities$ and$ Exchange$ Commission$ Amended$ Rules$ now$

recognize$two$(2)$types$of$Issuers$of$warrants,$namely:2$
a. A$ duly$ registered$ domestic$ corporation$ which$ issues$ or$
proposes$to$issue$Subscription$Warrants;$or$
b. A$ person$ or$ a$ group$ of$ persons$ who$ issue(s)$ or$
propose(s)$to$issue$Covered$Warrants.$
The$Securities$and$Exchange$Commission$Amended$Rules$define$
a$ warrant$ certificate$ as$ the$ certificate$ representing$ the$ right$
to$a$warrant$which$may$be$detachable$or$not,$duly$issued$by$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Securities$and$Exchange$Commission.$1(1),$XXVIII$SECURITIES$AND$EXCHANGE$
COMMISSION$QUARTERLY$BULLETIN$78$(No.$2,$June$1994).$
2
$Securities$ and$ Exchange$ Commission.$ 1(11),2 XXVIII$ SECURITIES$ AND$
EXCHANGE$COMMISSION$QUARTERLY$BULLETIN$78$(No.$2,$June$1994).$$
3
Securities$and$Exchange$Commission.$1(2),$XXVIII$SECURITIES$AND$EXCHANGE$
Warrantholders$ may$ exercise$ their$ right$ granted$ under$ a$

warrant$ within$ the$ period$ approved$ by$ the$ Securities$ and$
Exchange$Commission$which$shall$not$be$less$than$one$(1)$year,$
nor$ more$ than$ five$ (5)$ years$ from$ the$ date$ of$ the$ issue$ of$ the$
warrants.7$An$ Issuer$ of$ warrants$ must$ provide$ for$ a$ Warrants$
Registry$Book$maintained$by$the$warrants$registrar$independent$
The$Rules$allow$for$two$(2)$types$of$warrants,$namely:3$
a. "Subscription$ Warrant"$ which$ entitles$ the$ holder$
thereof$ the$ right$ to$ subscribe$ to$ a$ pre@determined$
number$ of$ shares$ out$ of$ the$ unissued$ capital$ stock$ of$
the$Issuer;$$
b. "Covered$ Warrant"$ which$ entitles$ the$ holder$ thereof$
the$right$to$purchase$from$the$Issuer$a$pre@determined$
number$of$existing$shares.$
the$ Issuer$ to$ the$ warrantholder.4$There$ are$ therefore$ two$ (2)$

types$of$warrant$certificates,$namely:$
a. Detachable$warrant$which$may$be$sold,$transferred$or$
assigned$ to$ any$ person$ by$ the$ warrantholder$ separate$
from,$ and$ independent$ of,$ the$ corresponding$
Beneficiary$Securities;5$and$
unissued$ capital$ stock$ of$ a$ corporation$ or$ to$ purchase$ issued$

shares$ in$ the$ future,$ evidenced$ by$ a$ Warrant$ Certificate,$
whether$ detachable$ or$ not,$ which$ may$ be$ sold$ or$ offered$ for$
sale$to$the$public$but$does$not$apply$to$a$right$granted$under$an$
Option$ Plan$ duly$ approved$ by$ the$ [Securities$ and$ Exchange$
Commission]$ for$ the$ benefit$ of$ employees,$ officers$ and/or$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
5
COMMISSION$ QUARTERLY$ BULLETIN$ 78$ (No.$ 2,$ June$ 1994).$ In$ case$ of$ detachable$
warrants,$ the$ Covered$ Warrant$ Certificate$ must$ state$ on$ its$ face$ that$ the$
Covered$ Warrant$ does$ NOT$ represent$ shares$ of$ stock,$ but$ a$ mere$ right$ to$
purchase$ an$ indicated$ class$ or$ type$ of$ stock$ owned$ by$ the$ Issuer$ under$ the$
terms$ and$ condition$ stated$ therein.$ Securities$ and$ Exchange$ Commission.$ 7,$
XXVIII$SECURITIES$AND$EXCHANGE$COMMISSION$QUARTERLY$ BULLETIN$78$(No.$2,$
June$1994).$$
6
$Secs.$1(9)$and$12,$XXVIII$SECURITIES$AND$EXCHANGE$COMMISSION$QUARTERLY$
BULLETIN$78$(No.$2,$June$1994).$$
7
$Securities$ and$ Exchange$ Commission.$ 1(12),$ XXVIII$ SECURITIES$ AND$
EXCHANGE$COMMISSION$QUARTERLY$BULLETIN$78$(No.$2,$June$1994).$
)
!
of$ the$ Issuer.1$Any$ sale,$ transfer,$ or$ assignment$ of$ a$ warrant$

must$ be$ duly$ recorded$ in$ the$ Warrants$ Registry$ Book,$ and$
unless$recorded$in$therein,$the$transfer$of$warrants$shall$not$be$
binding$on$the$Issuer.2$$
already$ rendered,$ then$ the$ initial$ payment$ shall$ not$ be$

required.6$
The$ Securities$ and$ Exchange$ Commission$ has$ issued$ the$ Rules$

Governing$ the$ Grants$ of$ Stock$ Options,$ which$ defines$ a$ stock$
option$as$"a$privilege$granted$to$a$party$to$subscribe$to$a$certain$
portion$ of$ the$ unissued$ capital$ stock$ of$ a$ corporation$ within$ a$
specified$ period$ and$ under$ the$ terms$ and$ conditions$ of$ the$
grant,$exercisable$by$the$grantee$at$any$time$within$the$period$
granted."3$
The$ Rules$ provide$ that$ no$ corporation$ shall$ grant) any$ stock$
equitably;$
c. Stock$ options$ granted$ to$ non@stockholders$ may$ be$
granted$ only$ upon$ showing$ that$ the$ board$ has$ been$
duly$ authorized$ to$ grant$ same$ by$ its$ charter$ or$ by$ a$
resolution$ of$ the$ stockholders$ owning$ at$ least$ two@
thirds$ (2/3)$ of$ the$ outstanding$ capital$ stock$ of$ the$
corporation,$both$voting$and$non@voting;$
No$ exercise$ of$ the$ right$ of$ the$ option$ shall$ be$ valid$ unless$
accompanied$by$the$payment$of$not$less$than$40%$of$the$total$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Securities$ and$ Exchange$ Commission.$ 11,$ XXVIII$ SECURITIES$ AND$ EXCHANGE$

2
$Securities$ and$ Exchange$ Commission.$ 12,$ XXVIII$ SECURITIES$ AND$ EXCHANGE$
3
$Securities$and$Exchange$Commission.$1,$Rules$Governing$the$Grants$of$Stock$
Options$(1977).$$
4
Options$(1977).$
The$Rules$also$provide$for$the$following$guidelines:$
a. Stock$ options$ may$ be$ granted$ on$ the$ basis$ of$
proportionate$ interests$ of$ stockholders$ in$ the$ capital$
stock;$
b. Stock$options$granted$to$employees$or$officers$who$are$
not$members$of$the$board$may$also$be$allowed$after$a$
review$ of$ the$ scheme$ since$ it$ would$ be$ in$ consonance$
with$ the$ policy$ of$ the$ government$ to$ widen$ corporate$
base$and$to$distribute$corporate$profits$wider$and$more$
option$ unless$ approval$ by$ the$ Securities$ and$ Exchange$

Commission$ is$ first$ obtained. 4 $Aside$ from$ a$ formal$ board$
resolution$authorizing$the$grant$of$the$option,$the$Rules$require$
that$ the$ application$ with$ Securities$ and$ Exchange$ Commission$
should$contain$a$detailed$statement$as$to$the$plan$or$scheme$by$
which$the$option$shall$be$exercised.$
price$ of$ the$ shares$ so$ purchased,$ which$ payment$ shall$ be$
properly$receipted$for$by$the$corporate$treasurer,$except$where$
the$ grantee$ is$ an$ employee$ or$ officer$ who$ is$ not$ a$ director$ of$
the$ corporation$ in$ which$ case$ only$ 25%$ of$ the$ total$ price$ shall$
be$ required,$ or$ allow$ a$ planned$ payroll$ deduction$ scheme.5$If$
the$ option$ shall$ be$ for$ compensation$ or$ payment$ of$ services$
'
H.'Stock'Options'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5
$Securities$ and$ Exchange$ Commission.$ 2(g),$ Rules$ Governing$ the$ Grants$ of$
Stock$Options$(1997).$
6
2Securities$ and$ Exchange$ Commission.$ 2(g),$ Rules$ Governing$ the$ Grants$ of$
Stock$Options$(1997).$
)
!
d. Options$ granted$ to$ directors,$ managing$ groups$ and$
corporate$ officers$ must$ be$ approved$ in$ a$ stockholders'$
meeting$ by$ stockholders$ owning$ at$ least$ two@thirds$
(2/3)$of$all$the$outstanding$capital$stock,$voting$or$non@
voting;$
e. The$options$must$be$exercised$within$a$period$of$three$
f.
(3)$ years$ from$ the$ approval$ thereof$ by$ the$ Securities$

and$ Exchange$ Commission,$ or$ upon$ extension$ thereof$
duly$ approved$ by$ the$ Securities$ and$ Exchange$
Commission;$and$
No$ transfer$ of$ the$ right$ to$ an$ option$ shall$ be$ made$
without$ the$ approval$ of$ the$ Securities$ and$ Exchange$
Commission.1$$
price$ should$ not$ be$ lower$ than$ par$ or$ less$ than$ 80%$ of$ the$
market$ price$ at$ the$ time$ of$ the$ exercise,$ or$ if$ there$ is$ no$
transaction$ at$ the$ time$ of$ exercise,$ then$ the$ last$ asked$ price$
whichever$ is$ higher;$ provided$ that$ if$ the$ shares$ are$ not$ listed,$
the$80%$referred$to$shall$be$based$on$book$value.3$$$
'
I.'ReSClassification'of'Shares'
of$ stock$ features$ like$ priority$ in$ dividend$ declarations$ or$

absence$ of$ voting$ rights.$ Yet$ neither$ the$ reclassification$ nor$
exchange$per$se$yields$income$for$tax$purposes.$.$.$In$this$case,$
the$ exchange$ of$ shares,$ without$ more,$ produces$ no$ realized$
income$ to$ the$ subscriber.$ There$ is$ only$ a$ modification$ of$ the$
subscribers$rights$and$privilegeswhich$is$not$a$flow$of$wealth$
for$ tax$ purposes.$ The$ issue$ of$ taxable$ dividend$ may$ arise$ only$
The$ Rules$ anticipates$ circumvention$ thereof$ through$ favorable$

subscriptions$which$really$are$stock$options.$Therefore$the$Rules$
provide$that$when$a$person$has$been$allowed$to$subscribe$to$so$
many$shares$as$would$make$him$a$stockholder$to$at$least$5%$of$
the$ total$ subscribed$ capital$ stock$ of$ the$ corporation$ at$ a$ price$
below$ the$ current$ market$ price,$ even$ when$ the$ subscription$ is$
above$par,$such$subscription$shall$be$considered$and$treated$as$
stock$ option$ and$ the$ subscriber$ must$ be$ required$ to$ tender$
payment$thereof$to$the$corporation$of$at$least$75%$of$the$total$
price$of$the$subscription.2$$
Reclassification$of$shares$does$not$always$bring$any$substantial$
alteration$ in$ the$ subscribers$ proportional$ interest.$ But$ the$
exchange$is$differentthere$would$be$a$shifting$of$the$balance$
once$a$subscriber$disposes$of$his$entire$interests$and$not$when$
there$ is$ still$ maintenance$ of$ proprietary$ interest.$ CIR) v.) Court)
of)Appeals,)301)SCRA)152)(1999).)
The$ conversion$ of$ common$ shares$ into$ preferred$ shares,$

pursued$to$the$amendment$of$the$SMC$articles$of$incorporation,$
is$ a$ legitimate$ exercise$ of$ corporate$ powers$ under$ the$
Corporation$ Code.$ The$ conversion$ does$ not$ amount$ to$ SMC$
using$ its$ funds$ to$ effect$ conversion,$ but$ would$ amount$ merely$
to$ a$ reconfiguration$ of$ said$ (common)$ shares$ into$ preferred$
Such$ subscriptions$ shall$ not$ also$ be$ transferable$ until$ full$

payment$thereof.$If$the$shares$are$to$be$disposed$of$or$sold,$the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Options$(1997).$
2
Options$(1997).$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
2Securities$and$Exchange$Commission.$6,$Rules$Governing$the$Grants$of$Stock$
Options$(1997).$
)
!
shares.$ Philippine) Coconut) Producers) Federation,) Inc.) v.)
Republic,)600)SCRA)102)(2009).)
'
IV.' Hybrid' Securities:' Government) v.) Phil.) Sugar) Estates,) 38) Phil.) 15)
(1918).)
)
Tayabas$Land$Company,$without$any$findings$to$costs.$
'
Doctrine:)
'
Government)v.)Phil.)Sugar)Estates)
'
Facts:$An$action$of$quo$warrant$was$brought$by$the$Attorney@General$in$
behalf$of$the$Republic$of$the$Philippines$against$Philippine$Sugar$for$its$
dissolution$ on$ the$ ground$ that$ the$ latter$ had$ misused$ its$ corporate$
authority$ and$ had$ engaged$ in$ the$ business$ of$ buying$ and$ selling$ real$
in$ruling$that$it$is$partnership$(i.e.,$equity)$arrangement:$
a. There$ was$ no$ period$ fixed$ in$ the$ contract$ for$ the$
repayment$ of$ the$ money,$ except$ that$ the$ first$ return$
from$sale$of$the$land$was$to$be$devoted$to$the$payment$
of$ the$ capital,$ and$ there$ was$ no$ date$ fixed$ for$ such$
payment;$
b. The$entire$amount$of$the$"credit"$was$not$to$be$turned$
over$ at$ once$ but$ was$ to$ be$ used$ by$ the$ "borrowing"$
estate$which$was$not$part$of$its$franchise.$$
Philippine$Sugar$entered$into$a$contract$with$the$Tayabas$Land$
Company$ for$ the$ purpose$ of$ engaging$ in$ the$ business$ of$
purchasing$ lands$ along$ the$ right$ of$ way$ of$ the$ Manila$ Railroad$
Company$ through$ the$ Province$ of$ Tayabas$ with$ a$ view$ to$
reselling$the$same$to$the$Manila$Railroad$Company$at$a$profit.$
'
Issue:'Whether$or$not$Philippine$Sugar$should$be$dissolved.$
'
Held:' YES.$ The$ judgment$ of$ the$ lower$ court$ should$ be$ modified.$ It$ is$
hereby$ ordered$ and$ decreed$ that$ the$ franchise$ heretofore$ granted$ to$
the$defendant$by$which$it$was$permitted$to$exist$and$do$business$as$a$
corporation$ in$ the$ Philippine$ Islands,$ be$ withdrawn$ and$ annulled$ and$
that$ it$ be$ disallowed$ to$ do$ and$ to$ continue$ doing$ business$ in$ the$
Philippine$Islands,$unless$it$shall$within$a$period$of$six$months$after$final$
decision,$ liquidate,$ dissolve$ and$ separate$ absolutely$ in$ every$ respect$
and$ in$ all$ of$ its$ relations,$ complained$ of$ in$ the$ petition,$ with$ The$
In$Government)v.)Philippine)Sugar)Estates)Co.) 38)Phil.)15)(1918),$
the$ Supreme$ Court,$ in$ determining$ whether$ the$ arrangement$
between$ two$ corporations$ was$ a$ contract$ of$ partnership$ or$ a$
loan$arrangement,1$noted$the$following$features$in$the$contract$
company$as$it$was$needed;$
c. The$ return$ on$ the$ capital$ was$ not$ by$ a$ fixed$ rate$ of$
interest$ but$ 25%$ of$ the$ profits$ earned$ by$ the$
"borrowing"$company$in$"todos2los2negocios;"$
d. The$"lending"$company$agreed$to$pay$25%$of$all$general$
expenditures$ true$ and$ necessary$ that$ the$ "borrowing"$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$The$ issue$ arose$ from$ an$ alleged$ violation$ of$ then$ Section$ 13$ of$ the$ old$
Corporation$ Law$ which$ provided$ that$ no$ corporation$ shall$ be$ authorized$ to$
conduct$the$business$of$buying$and$selling$real$estate$or$be$permitted$to$hold$
or$ own$ real$ estate$ except$ such$ as$ may$ reasonably$ necessary$ to$ enable$ it$ to$
carry$ out$ the$ purposes$ for$ which$ it$ has$ been$ created;$ however,$ the$ section$
authorized$a$corporation$to$loan$funds$upon$real$estate,$security,$and$purchase$
of$real$estate$when$necessary$for$the$collection$of$loans,$but$it$shall$dispose$of$
real$estate$so$obtained$within$five$years$after$receiving$the$title.$
)
!
company$ must$ make$ for$ the$ development$ of$ its$
business;$$
e. The$ consent$ of$ the$ "lending"$ company$ was$ necessary$
when$the$"borrowing"$company$desired$to$sell$the$land$
at$below$an$agreed$market$price,$but$was$not$required$
if$the$selling$price$was$over$the$benchmark$figure;$and$$$
f.
The$"lending"$company$acted$as$treasurer$of$the$entire$
enterprise.$
The$foregoing$terms$and$conditions$of$the$contract$between$the$
two$corporations$indicated$that$although$denominated$as$a$loan$
agreement,$ the$ arrangement$ between$ the$ companies$ was$
actually$ one$ of$ partnership,$ with$ the$ amount$ "loaned"$
constituting$actual$equity$investment$in$the$venture.$The$Court$
held:$ "It$ is$ difficult$ to$ understand$ how$ this$ contract$ can$ be$
considered$a$loan.$There$was$no$date$fixed$for$the$return$of$the$
money$and$there$was$no$fixed$return$to$be$made$for$the$use$of$
the$money.$The$return$was$dependent$solely$upon$the$profits$of$
the$business.$It$is$possible$for$the$defendant$to$receive$a$return$
from$ the$ business$ even$ after$ all$ of$ the$ `capital'$ has$ been$
returned.$ The$ capital$ was$ to$ be$ returned$ as$ soon$ as$ the$ land$
was$sold$and$apparentlythere$were$to$be$no$profits$until$this$
capital$ was$ returned.$ The$ defendant$ was$ not$ to$ receive$
anything$for$the$use$of$said$sum$until$after$the$capital$had$been$
fully$ repaid,$ which$ is$ not$ consistent$ with$ the$ idea$ of$ loan.$ It$ is$
not$impossible$to$provide$that$the$capital$be$repaid$first$but$the$
usual$method$is$to$pay$the$interest$first.$.$."$
The$ other$ practical$ consideration$ for$ investors$ in$ choosing$

between$equity$or$loan$investments$in$a$corporation$boils$down$
to$ tax$ considerations:$ the$ interests$ returns$ on$ loans$ or$ credit$
investments$ are$ taxable$ to$ the$ lending$ company,$ whereas$

dividend$returns$on$equity$investments$are$subject$to$zero$rate$
of$income$tax.1$
'
V.'QuasiSReorganization'
'
A.'Reduction'of'Capital'Stock'(Section'38)'
'
Section' 38.' Power' to' increase' or' decrease' capital' stock;' incur,' create'
or'increase'bonded'indebtedness.'
No' corporation' shall' increase' or' decrease' its' capital' stock' or' incur,'
create' or' increase' any' bonded' indebtedness' unless' approved' by' a'
majority'vote'of'the'board'of'directors'and,'at'a'stockholder's'meeting'
duly'called'for'the'purpose,'twoSthirds'(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'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Under$the$1997$National$Internal$Revenue$Code,$although$dividends$received$
by$a$domestic$corporation$from$another$domestic$corporation$are$exempt$from$
income$ tax$ (Securities$ and$ Exchange$ Commission.$ 27[D][4]),$ beginning$ 1$
January$ 1998,$ dividends$ declared$ from$ profits$ earned$ from$ that$ date$ to$
individuals$ are$ subject$ to$ a$ final$ tax$ of$ 10%$ (Securities$ and$ Exchange$
Commission.$24[B][2]).$$$
)
!
post'office'with'postage'prepaid,'or'served'personally.'
'
A'certificate'in'duplicate'must'be'signed'by'a'majority'of'the'directors'
of' the' corporation' and' countersigned' by' the' chairman' and' the'
secretary'of'the'stockholders''meeting,'setting'forth:'
Any'increase'or'decrease'in'the'capital'stock'or'the'incurring,'creating'
or'increasing'of'any'bonded'indebtedness'shall'require'prior'approval'
of'the'Securities'and'Exchange'Commission.'
'
One' of' the' duplicate' certificates' shall' be' kept' on' file' in' the' office' of'
'
1.'That'the'requirements'of'this'section'have'been'complied'with;'
'
2.'The'amount'of'the'increase'or'diminution'of'the'capital'stock;'
'
3.' If' an' increase' of' the' capital' stock,' the' amount' of' capital' stock' or'
number' of' shares' of' noSpar' stock' thereof' actually' subscribed,' the'
the' corporation' and' the' other' shall' be' filed' with' the' Securities' and'
Exchange' Commission' and' attached' to' the' original' articles' of'
incorporation.'From'and'after'approval'by'the'Securities'and'Exchange'
Commission' and' the' issuance' by' the' Commission' of' its' certificate' of'
filing,' the' capital' stock' shall' stand' increased' or' decreased' and' the'
incurring,' creating' or' increasing' of' any' bonded' indebtedness'
authorized,'as'the'certificate'of'filing'may'declare:'Provided,'That'the'
names,' nationalities' and' residences' of' the' persons' subscribing,' the'

amount'of'capital'stock'or'number'of'noSpar'stock'subscribed'by'each,'
and'the'amount'paid'by'each'on'his'subscription'in'cash'or'property,'
or' the' amount' of' capital' stock' or' number' of' shares' of' noSpar' stock'
allotted' to' each' stockSholder' if' such' increase' is' for' the' purpose' of'
making'effective'stock'dividend'therefor'authorized;'
'
Securities' and' Exchange' Commission' shall' not' accept' for' filing' any'
certificate' of' increase' of' capital' stock' unless' accompanied' by' the'
sworn' statement' of' the' treasurer' of' the' corporation' lawfully' holding'
office'at'the'time'of'the'filing'of'the'certificate,'showing'that'at'least'
twentySfive' (25%)' percent' of' such' increased' capital' stock' has' been'
subscribed'and'that'at'least'twentySfive'(25%)'percent'of'the'amount'
subscribed' has' been' paid' either' in' actual' cash' to' the' corporation' or'
4.'Any'bonded'indebtedness'to'be'incurred,'created'or'increased;'
'
5.' The' actual' indebtedness' of' the' corporation' on' the' day' of' the'
meeting;'
'
6.'The'amount'of'stock'represented'at'the'meeting;'and'
'
7.'The'vote'authorizing'the'increase'or'diminution'of'the'capital'stock,'
that' there' has' been' transferred' to' the' corporation' property' the'
valuation' of' which' is' equal' to' twentySfive' (25%)' percent' of' the'
subscription:' Provided,' further,' That' no' decrease' of' the' capital' stock'
shall' be' approved' by' the' Commission' if' its' effect' shall' prejudice' the'
rights'of'corporate'creditors.'
'
NonSstock' corporations' may' incur' or' create' bonded' indebtedness,' or'
increase'the'same,'with'the'approval'by'a'majority'vote'of'the'board'
or'the'incurring,'creating'or'increasing'of'any'bonded'indebtedness.'
'
of' trustees' and' of' at' least' twoSthirds' (2/3)' of' the' members' in' a'
meeting'duly'called'for'the'purpose.'
)
!
'
Bonds' issued' by' a' corporation' shall' be' registered' with' the' Securities'
and' Exchange' Commission,' which' shall' have' the' authority' to'
determine'the'sufficiency'of'the'terms'thereof.'(17a)'
'
Reduction$ of$ capital$ stock$ cannot$ be$ employed$ to$ avoid$ the$
corporations$obligations$under$the$Labor$Code.$Madrigal)&)Co.)
v.)Zamora,)151)SCRA)355)(1987).)
'
B.'Stock'Splits'
On$ the$ other$ hand,$ in$ stock$ consolidations,$ new$ shares$ are$
issued$in$replacement$of$old$shares$with$a$higher$par$or$issued$
value,$ without$ affecting$ the$ total$ value$ of$ the$ issued$ shares.$
Stock$ consolidations$ are$ resorted$ to$ make$ each$ share$ have$ a$
higher$ par$ or$ issued$ value$ and$ thereby$ make$ them$ more$
expensive$in$acquiring$and$to$bring$the$stock$within$higher$end$
of$the$market.3'
$
VI.' Shareholders' Not' Corporate' Creditors.' Garcia) v.) Lim) Chu) Sing,) 59)
Phil.)562)(1934).)
In$ a$ stock$ split,$ each$ of$ the$ issued$ and$ outstanding$ shares$ is$
simply$ broken$ up$ into$ a$ greater$ number$ of$ shares,$ each$
representing$ a$ proportionately$ smaller$ interest$ in$ the$

corporation.$ $ The$ usual$ purpose$ of$ a$ stock$ split$ is$ to$ lower$ the$
price$ per$ share$ to$ a$ more$ marketable$ price$ and$ thus$ increase$
the$ number$ of$ the$ potential$ shareholders.$ $ They$ encourage$
investment.1$
'
Facts:' Lim$Cuan$Sy$delivered$to$Mercantile$Bank$of$China$a$promissory$
note$guaranteed$by$Lim$Chu$Sing$as$surety$and$also$secured$by$a$chattel$
mortgage.$ It$ also$ has$ a$ stipulation$ that$ in$ case$ of$ default,$ the$ whole$
Under$ Accounting$ Standards,$ when$ the$ number$ of$ additional$

shares$issued$as$a$stock$dividend$is$so$great$that$it$has,$or$may$
reasonably$ be$ expected$ to$ have,$ the$ effect$ of$ materially$
reducing$the$share$market$value,$the$transaction$partakes$of$the$
nature$of$a$stock$split.$An$issuance$of$additional$shares$of$20%$
or$ more$ of$ the$ number$ of$ previously$ outstanding$ shares$ is$
regarded$as$a$stock$split.2$
'
C.''Stock'Consolidations'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
$Statement$of$Financial$Accounting$Standards$No.$18,$par.$10.$
Garcia)v.)Lim)Chu)Sing)
amount$will$become$due$and$demandable.$Lim$Cuan$Sy$failed$to$comply$
with$ his$ obligation$ and$ so$ the$ bank$ required$ Lim$ Chu$ Sing$ as$ surety$ to$
deliver$the$promissory$note$(P19,$605.17)$with$interest$at$6%$p.a.$
$
Lim$Chu$Sing$had$been$paying$the$monthly$installments$with$interest$on$
thereon,$leaving$a$balance$of$P9,105.17,$after$which$he$defaulted$in$the$
payment$of$the$installments$which$made$the$promissory$note$due$and$
demandable.$The$Mercantile$Bank$of$China$then$foreclosed$the$chattel$
mortgage$and$privately$sold$the$property$without$the$knowledge$of$Lim$
Chu$ Sing.$ Lim$ Chu$ Sing$ is$ also$ the$ owner$ of$ shares$ of$ stock$ at$ the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
)
!
corporation's$capital,$or$the$right$to$share$in$the$proceeds$when$
the$ remaining$ assets$ of$ the$ corporation$ are$ distributed$
according$to$law$and$equity,$its$holders$do$not$own$any$part$of$
the$assets$represented$by$the$capital$of$the$corporation;$nor$are$
the$ stockholders$ entitled$ to$ the$ possession$ of$ any$ definite$
portion$ of$ the$ corporation's$ assets$ or$ properties. 2 $Shares$ of$
Mercantile$Bank$amounting$to$P10,000.$Mercantile$Bank$seeks$to$apply$
the$amount$of$P10,000$representing$the$value$of$his$shares$of$stock$to$
defendants$indebtedness$of$P9,105.17.$
'
Issue:'Whether$or$not$it$is$proper$to$compensate$the$indebtedness$with$
the$value$of$the$shares$of$stock$
'
Held:'NO.$The$defendant@appellant$Lim$Chu$Sing$not$being$a$creditor$of$
the$ Mercantile$ Bank$ of$ China,$ although$ the$ latter$ is$ a$ creditor$ of$ the$
former,$there$is$no$sufficient$ground$to$justify$a$compensation.$
'
Doctrine:' The$ shares$ of$ a$ banking$ corporation$ do$ not$ constitute$ an$
stock$ do$ not$ legally$ represent$ a$ proprietary$ claim$ of$ co@

ownership$ or$ tenancy@in@common$ in$ the$ assets$ and$ properties$
of$the$corporation.3$$
The$Supreme$Court$in$Magsaysay7Labrador2v.2Court2of2Appeals,4$
indebtedness$of$the$corporation$to$the$stockholder$and,$therefore,$the$
latter$is$not$a$creditor$of$the$former$for$such$shares.$The$indebtedness$
of$a$shareholder$to$a$banking$corporation$cannot$be$compensated$with$
the$amount$of$his$shares$therein,$there$being$no$relation$of$creditor$and$
debtor$with$respect$to$such$shares.)
has$ characterized$ a$ stockholder's$ interest$ in$ corporate$

contracts,$ transactions$ and$ properties,$ "if2 it2 exists2 at2 all,$ .$ .$ .$ is$
indirect,$ contingent,$ remote,$ conjectural,$ consequential$ and$
collateral.$At$the$very$least,$their$interest$is$purely$inchoate,$or$
in$ sheer$ expectancy$ of$ a$ right$ in$ the$ management$ of$ the$
corporation$ and$ to$ share$ in$ the$ profits$ thereof$ and$ in$ the$
properties$ and$ assets$ thereof$ on$ dissolution,$ after$ payment$ of$
the$corporate$debts$and$obligations."$
Shares$of$stock$in$a$corporation$constitute$personal$property$of$
the$ stockholder,$ which$ he$ can$ contract$ with$ as$ in$ any$ other$
form$ of$ property,$ like$ assignment$ by$ way$ of$ disposition,$ or$
pledge$ by$ way$ of$ encumbrance.$ Shares$ of$ stock$ therefore$ are$
properties$ and$ have$ intrinsic$ pecuniary$ value$ to$ the$
'
VII.'Subscription'Contract'(Sections.'60'and'72;'overturned'Trillana)v.)
Quezon)Colegialla,)93)Phil.)383)[1953]).'
'
the$ stockholder$ and$ the$ corporation.$ The$ subscription$
stockholders. $$
Shares$of$stock,$however,$do$not$represent$proprietary$rights$of$
stockholders$ to$ the$ assets$ or$ properties$ of$ the$ corporation.$
Although$ shares$ of$ stock$ represent$ aliquot$ parts$ of$ the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
The$subscription$agreement$underpins$the$relationship$between$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
$Boyer@Roxas$v.$Court$of$Appeals,$211$SCRA$470$(1992).$$
$Magsaysay@Labrador$ v.$ Court$ of$ Appeals,$ 180$ SCRA$ 266,$ 271@272$ (1989);$
Stockholders$ of$ F.$ Guanzon$ and$ Sons,$ Inc.$ v.$ Register$ of$ Deeds$ of$ Manila,$ 6$
SCRA$373$(1962);$Pascual$v.$Del$Sanz$Orozco,$19$Phil.$82,$86$(1911).$
4
$180$SCRA$266,$271$(1989).$
3
)
!
agreement$ therefore$ is$ a$ special$ contract$ in$ Corporate$ Law;$
although$it$is$governed$by$the$Law$on$Contracts,$specifically$as$a$
species$ of$ sale$ contracts,$ a$ subscription$ agreement$ has$ special$
features$that$go$beyond$such$discipline,$and$delve$into$the$very$
heart$of$Corporate$Law.$'
subscription$ agreement$ shall$ exist$ upon$ meeting$ of$ the$ minds,$

i.e.,2consent,$it$would$necessarily$mean$that$the$covered$shares$
have$ therefore$ been$ issued2 by$ the$ corporation$ at$ that$ point$ in$
time,$since$subscription$and$issuance$as$to$a$particular$share$of$
stock$ happen$ exactly$ at$ same$ point$ in$ time,$ being$ merely$
opposite$sides$of$the$same$coin.$$
'
Section'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)'
'
It$ is$ subscription$ to$ shares$ of$ stock$ that$ creates$ the$ legal$
subscriber$ becomes$ a$ stockholder$ of$ the$ corporation,$ and$

through$ which$ he$ becomes$ the$ owners$ of$ the$ shares$ of$ stock$
subscribed$ and$ exercise$ acts$ of$ ownership,$ subject$ to$ the$
limiting$provisions$under$the$Corporation$Code,$such$as$the$lien$
which$the$corporation$has$over$not$fully$paid$shares$under$the$
second$ paragraph$ of$ Section$ 63.$ In$ other$ words,$ unlike$ the$
species$sale,$which$constitutes$merely$a$title$and$not$a$mode$by$
relationship$between$the$stockholder$and$the$corporation;$it$is$
subscription,$ and$ not$ the$ payment$ of$ such$ subscription,$ that$
grants$ to$ the$ stockholder$ the$ statutory$ and$ common$ rights$
granted$to$stockholders.1$
which$ ownership$ of$ the$ subject$ matter$ is$ transferred,$ a$

subscription$agreement$constitutes$the$very$mode$by$which$the$
covered$ shares$ are$ thereby$ issued$ and$ then$ owned$ by$ the$
subscriber.$
Section'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)'
$
'
A.'When'Shares'Deemed'Subscribed2'
Therefore,$a$subscription$agreement$exists$upon$the$meeting$of$
the$ minds$ of$ the$ corporation$ and$ the$ subscriber$ as$ to$ the$
number$ and$ subscription$ value$ of$ shares.$ And$ since$ a$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Fua$Cun$v.$Summers,$44$Phil.$705$(1923).$$
2
What$can$be$drawn$from$the$provisions$of$Sections$60,$63,$and$
72$ is$ that$ the$ entering$ into$ any$ contract$ for$ the$ acquisition$ of$
unissued$ stock,$ which$ shall$ be$ deemed$ as$ subscription$
agreement,$ would$ constitute$ itself$ the$ tradition$ by$ which$ the$
'
B.'Purchase'Agreement:)Bayla)v.)Silang)Traffic)Co.,)Inc.,)73)Phil.)557)
(1942).'
)
Bayla)v.)Silang)Traffic)Co.,)Inc.)
'
Facts:' Sofronio$Bayla$and$other$petitioners$instituted$this$action$in$the$
CFI$of$Cavite$against$Silang$Traffic$Corporation$in$order$to$recover$a$sum$
)
!
of$ money$ they$ paid$ to$ the$ corporation$ on$ account$ of$ shares$ of$ stock$
they$ each$ agreed$ to$ take$ and$ pay$ for$ under$ the$ condition$ that$ if$ the$
subscriber$fails$to$pay$any$of$the$installments$when$due,$or$if$they$are$
levied$upon$by$the$creditors$of$the$said$subscriber,$the$shares$were$to$
revert$to$the$seller$and$the$payments$already$made$will$also$be$forfeited$
contract$over$unissued$shares$of$stocks.$Section$60$of$the$present$code$
removed$ said$ distinctions$ and$ presently$ provides$ all$ agreements$
pertaining$ to$ the$ purchase$ of$ unissued$ shares$ would$ be$ considered$ as$
subscription$agreements.$
$
to$ the$ seller,$ and$ that$ the$ latter$ may$ take$ possession$ without$ court$
proceedings.$The$agreement$was$later$rescinded,$although$the$Board$of$
Directors$ claim$ that$ such$ rescission$ is$ not$ applicable$ to$ Bayla$ and$ the$
others$ because$ their$ failure$ to$ pay$ installments$ thereon$ had$ already$
caused$their$shares$and$previous$installments$to$be$forfeited.$
'
Issue:'Whether$or$not$the$contract$is$a$contract$of$subscription$
o
o
'
Held:' NO.$ The$ said$ agreement$ is$ entitled$ Agreement$ for$ Installment$
Sale$ of$ Shares$ in$ the$ Silang$ Traffic$ Co,$ and$ while$ the$ purchaser$ is$
designated$as$the$subscriber$and$the$corporation$seller,$the$'
agreement$ was$ entered$ into$ in$ 1935$ long$ after$ the$ incorporation$ and$
organization$of$the$corporation$which$took$place$in$1927.$The$purchase$
was$ to$ be$ payable$ in$ quarterly$ installments$ for$ five$ years.$ The$ lower$
court$ failed$ to$ see$ the$ distinction$ between$ a$ subscription$ and$ a$
purchase.$$Given$that$this$is$a$sale,$the$rescission$of$such$is$valid.$
$
Doctrine:' A$ subscription,$ properly$ speaking,$ is$ the$ mutual$ agreement$
of$the$subscribers$to$take$and$pay$for$the$stock$of$a$corporation,$while$a$
purchase$is$an$independent$agreement$between$the$individual$and$the$
corporation$to$buy$shares$of$stock$from$it$at$stipulated$price.$
)
NOTE:' This$case$was$decided$under$the$old$corporation$law$thats$why$
there$were$distinctions$between$a$subscription$contract$and$a$purchase$
Characteristics' of' Subscription' Agreements.$ There$ can$ be$ a$

subscription$ only$ with$ reference$ to$ shares$ of$ stock$ which$ have$
never$been$issued,$in$the$following$cases:$
The$ original$ issuance$ from$ authorized$ capital$ stock$ at$

the$time$of$incorporation;$$
The$ opening,$ during$ the$ life$ of$ the$ corporation,$ of$ the$
portion$ of$ the$ original$ authorized$ capital$ stock$
previously$unissued;$or$$
The$ increase$ of$ authorized$ capital$ stock$ achieved$
through$ a$ formal$ amendment$ of$ the$ articles$ of$
incorporation$ and$ registration$ thereof$ with$ the$
Securities$and$Exchange$Commission.$$
Any$ transaction$ covering$ issued2 shares$ of$ stock$ is$ not$ a$

subscription$ agreement,$ and$ therefore$ is$ governed$ by$ the$ Law$
on$Sales$on$assignment.1$
o
Bayla2v.2Silang2Traffic2Co.,2Inc.,$which$was$decided$under$
the$ Corporation$ Law,$ laid$ down$ the$ distinctions$
between$ a$ subscription$ contract$ and$ a$ purchase$
agreement.$ However,$ since$ the$ distinctions$ between$ a$
subscription$ agreement$ and$ purchase$ of$ stock$ led$ to$
various$ frauds$ being$ committed$ against$ stockholders$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$See$Chapter$XIV$of$the$CLBs$book$LAW$ON$SALES$(Rex$Book$Store,$1998$ed.),$
on$ the$ characteristics$ of$ assignment$ of$ intangibles,$ like$ shares$ of$ stock,$ as$ a$
species$of$sale.$
)
!
and$ creditors$ of$ the$ corporation,$ Section$ 60$ of$ the$
Corporation$ Code$ removed$ such$ distinctions$ and$ now$
provides$that$all$agreements$pertaining$to$the$purchase$
of$ unissued$ shares$ of$ stock$ of$ a$ corporation$ would$ be$
considered$as$subscription$agreements$and$governed$by$
the$principles$of$Corporate$Law.$
incorporation$ agreement$ is$ replaced$ by$ the$ promoter's$

contract,$although$this$is$merely$an$expectancy.1$
subscribers.$Whether$it$is$a$pre@incorporation$agreement$or$an$
ordinary$subscription$agreement,$a$subscription$is$essentially$an$
agreement$ among$ the$ stockholders.$ This$ is$ the$ second$
relationship$and$the$reason$why$it$is$provided$in$Section$61$that$
a$subscriber$can$only$withdraw$from$the$contract$or$agreement$
when$ there$ is$ consent$ of$ all$ subscribers.$ Under$ this$ concept,$ a$
subscription$ agreement$ is$ in$ a$ sense$ a$ contract$ among$ the$
)
C.'PreSIncorporation'Subscription'(Section'61)'
'
Section'61.'PreSincorporation'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'
several$ subscribers,$ and$ no$ one$ of$ the$ subscribers$ can$ thus$
withdraw$ from$ the$ contract$ without$ the$ consent$ of$ all$ the$
others$ and$ thereby$ diminish,$ without$ the$ universal$ consent$ of$
all$ the$ others,$ the$ common$ fund$ in$ which$ all$ have$ acquired$ an$
interest.2$$
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' preS
incorporation'subscription'may'be'revoked'after'the'submission'of'the'
articles' of' incorporation' to' the' Securities' and' Exchange' Commission.'
(n)'
Section$ 61$ of$ the$ Corporation$ Code$ recognized$ that$ the$

subscription$ agreement$ is$ a$ contract$ between$ the$ subscriber$
and$ the$ corporation.$ Although$ the$ corporation$ is$ still$ non@
existent$ since$ it$ is$ still$ in$ the$ process$ of$ incorporation,$ it$ is$ still$
bound,$ under$ the$ pre@incorporation$ agreement.$ The$ pre@
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.$On)Yong)v.)
Tiu,)375)SCRA)614)(2002).)
'
It$ also$ recognizes$ the$ contractual$ relationship$ among$ all$ the$
)
On)Yong)v.)Tiu)
'
Facts:' The$ Tiu$ family$ members$ are$ the$ owners$ of$ First$ Landlink$ Asia$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
$SECURITIES$AND$EXCHANGE$COMMISSION$Opinion,$30$Oct.$1989,$SECURITIES$
AND$EXCHANGE$COMMISSION$QUARTERLY$BULLETIN$50@52$(1$March$1990).$$
)
!
Development$Corporation$(FLADC).$One$of$the$corporations$projects$is$
the$ construction$ of$ Masagana$ Citimall$ in$ Pasay$ City.$ However,$ due$ to$
financial$ difficulties$ (they$ were$ indebted$ to$ PNB$ for$ P190$ million),$ the$
Tius$ feared$ that$ the$ construction$ would$ not$ be$ finished.$ So$ to$ prevent$
the$ foreclosure$ of$ the$ mortgage$ on$ the$ two$ lots$ where$ the$ mall$ was$
mean$ its$ dissolution$ as$ provided$ in$ the$ Corporation$ Code."$ The$
prohibition,$ therefore,$ under$ Section$ 122$ against$ distribution$ of$ assets$
or$properties$of$the$corporation$does$not$apply.$
$
The$ Court$ of$ Appeals$ correctly$ confirmed$ the$ rescission$ of$ the$ Pre@
being$ built,$ they$ invited$ the$ Ongs$ to$ invest$ in$ FLADC.$ The$ two$ parties$
entered$into$a$Presubscription$Agreement$whereby$each$of$them$would$
hold$1,000,000$shares$each$and$be$entitled$to$nominate$certain$officers.$
The$ Tius$ contributed$ a$ building$ and$ two$ lots,$ while$ the$ Ongs$
contributed$P100M.$
$
Two$ years$ later,$ the$ Tuis$ filed$ for$ rescission$ of$ the$ Presubscription$
Subscription$Agreement$on$the$basis$of$Art.$1191$of$the$Civil$Code.$Art.$
1191.$The$power$to$rescind$obligations$is$implied$in$reciprocal$ones,$in$
case$ one$ of$ the$ obligors$ should$ not$ comply$ with$ what$ is$ incumbent$
upon$him.$As$a$legal$consequence$of$rescission,$the$order$of$the$Court$
of$Appeals$to$return$the$cash$and$property$contribution$of$the$parties$is$
based$on$law,$hence,$cannot$be$considered$an$act$of$misappropriation.$$
'
Agremement$ because$ the$ Ongs$ refused$ to$ issue$ them$ their$ shares$ of$
stock$ and$ from$ assuming$ positions$ of$ VP$ and$ Treasurer$ to$ which$ they$
were$ entitled$ to$ nominate.$ The$ Ongs$ contended$ that$ they$ could$ not$
issue$ the$ new$ shares$ to$ the$ Tius$ because$ the$ latter$ did$ not$ pay$ the$
capital$ gains$ tax$ and$ the$ documentary$ stamp$ tax$ of$ the$ lots.$ And$
because$ of$ this,$ the$ Securities$ and$ Exchange$ Commission$ would$ not$
approve$ the$ valuation$ of$ the$ property$ contribution$ of$ the$ Tius.$ The$
Doctrine:' When$ properties$ were$ assigned$ pursuant$ to$ a$ pre@

incorporation$agreement,$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$dissolution.$
$
NOTE:'On$2003,$The$SC$reversed$itself$on$motion$for$reconsideration$by$
Court$ of$ Appeals$ ordered$ liquidation$ of$ FLADC$ to$ enforce$ rescission$ of$
the$ contract$ which$ was$ granted$ only$ to$ prevent$ squabbles$ and$
numerous$litigations$between$the$parties.$
'
Issue:' Whether$or$not$the$order$of$the$Court$of$Appeals$for$the$return$
of$the$parties'$contribution$(distribution$of$FLADC$assets,$in$the$words$of$
the$Ongs)$violates$Section$122$of$the$Corporation$Code.$
'
the$Ongs$which$held:$The$rescission$of$the$Pre@Subscription$Agreement$
will$ effectively$ result$ in$ the$ unauthorized$ distribution$ of$ the$ capital$
assets$and$property$of$the$corporation,$thereby$violating$the$Trust$Fund$
Doctrine$ and$ the$ Corporation$ Code,$ since$ rescission$ of$ a$ subscription$
agreement$is$not$one$of$the$instances$when$distribution$of$capital$assets$
and$ property$ of$ the$ corporation$ is$ allowed.$ Rescission$ will,$ in$ the$ final$
analysis,$result$in$the$premature$liquidation$of$the$corporation$without$
the$ benefit$ of$ prior$ dissolution$ in$ accordance$ with$ Sections$ 117,$ 118,$
Held:' NO.$ The$ Court$ of$ Appeals$ clarified$ in$ its$ Resolution$ promulgated$
on$ August$ 17,$ 2000$ that$ "in$ ordering$ liquidation,$ the$ Court$ does$ not$
119$and$120$of$the$Corporation$Code.)
)
)
!
D.' Release' from' Subscription' Obligation:' Tan) v.) Sycip,) 499) SCRA) 216)
(2006).1)
)
'
members,$the$quorum$in$the$present$case$should$be$6.$Therefore,$there$
being$ a$ quorum,$ the$ annual$ members$ meeting,$ conducted$ with$ six$
members$present,$was$valid$(as$to$other$resolutions).$
$
HOWEVER,$the$election$of$the$four$trustees$cannot$be$legally$upheld$
Facts:' Grace$ Christian$ High$ School$ (GCHS)$ is$ a$ nonstock,$ non@profit$

educational$ corporation$ with$ fifteen$ (15)$ regular$ members,$ who$ also$
constitute$ the$ board$ of$ trustees.$ During$ the$ annual$ members$ meeting$
held$ on$ April$ 6,$ 1998,$ there$ were$ only$ eleven$ (11)$ living$ member@
trustees,$ as$ four$ (4)$ had$ already$ died.$ Out$ of$ the$ eleven,$ seven$ (7)$
attended$ the$ meeting$ through$ their$ respective$ proxies.$ The$ meeting$
was$convened$and$chaired$by$Atty.$Sabino$Padilla$Jr.$over$the$objection$
for$ the$ obvious$ reason$ that$ it$ was$ held$ in$ an$ annual$ meeting$ of$ the$
members$ (where$ a$ majority$ of$ the$ Board$ were$ present),$ not$ of$ the$
board$ of$ trustees.$ We$ cannot$ ignore$ the$ GCHS$ bylaw$ provision,$ which$
specifically$ prescribes$ that$ vacancies$ in$ the$ board$ must$ be$ filled$ up$ by$
the$remaining$trustees$who$must$sit$as$a$board$in$order$to$validly$elect$
the$new$ones.$
'
of$Atty.$Antonio$C.$Pacis,$who$argued$that$there$was$no$quorum.$In$the$
meeting,$ Petitioners$ Ernesto$ Tanchi,$ Edwin$ Ngo,$ Virginia$ Khoo,$ and$
Judith$Tan$were$voted$to$replace$the$four$deceased$member@trustees.$
'
Held:' NO.$ $ Under$ Section$ 52$ of$ the$ Corporation$ Code,$ the$ majority$ of$
the$ members$ representing$ the$ actual$ number$ of$ voting$ rights,$ not$ the$
number$ or$ numerical$ constant$ that$ may$ originally$ be$ specified$ in$ the$
Doctrine:' Membership$ in$ and$ all$ rights$ arising$ from$ a$ non@stock$

corporation$ are$ personal$ and$ non@transferable,$ unless$ the$ articles$ of$
incorporation$ or$ the$ bylaws$ of$ the$ corporation$ provide$ otherwise.$ The$
determination$ of$ whether$ or$ not$ dead$ members$ are$ entitled$ to$
exercise$ their$ voting$ rights$ (through$ their$ executor$ or$ administrator)$
depends$on$the$articles$of$incorporation$or$bylaws.)
Tan)v.)Sycip)
articles$of$incorporation,$constitutes$the$quorum.$Under$the$By@Laws$of$
GCHS,$ membership$ in$ the$ corporation$ shall,$ among$ others,$ be$
terminated$ by$ the$ death$ of$ the$ member.$ The$ dead$ members$ who$ are$
dropped$from$the$membership$roster$in$the$manner$and$for$the$cause$
provided$ for$ in$ the$ By@Laws$ of$ GCHS$ are$ not$ to$ be$ counted$ in$
determining$ the$ requisite$ vote$ in$ corporate$ matters$ or$ the$ requisite$
quorum$ for$ the$ annual$ members$ meeting.$ With$ 11$ remaining$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Velasco$ v.$ Poizat,$ 37$ Phil.$ 802$ (1918);$ PNB$ v.$ Bituloc$ Sawmill,$ Inc.,$ 23$ SCRA$
1366$(1968);$National$Exchange$Co.$v.$Dexter,$51$Phil.$601$(1928).$
One$of$the$implications$of$considering$the$subscription$contract$
to$be$one$entered$into$among$stockholders$is$that$it$is$beyond$
the$powers$of$the$board$of$directors$to$release$the$subscribers$
since$the$consent$of$all$subscribers$is$necessary.2$And$even$if$the$
all$ the$ subscribers$ would$ approve$ the$ release$ of$ a$ particular$
subscriber$ it$ is$ still$ not$ possible$ if$ the$ creditors$ would$ be$
prejudiced,$under$the$trust$fund$doctrine.3$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
$Velasco$v.$Poizat,$37$Phil.$802$(1918)$
3
)
!
$
E.'Condition'of'Payment'Provided'in'BySlaws.'De)Silva)v.)Aboitiz)&)Co.,)
44)Phil.)755)(1923).)
)
De)Silva)v.)Aboitiz)&)Co.1)
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;'
$
Facts:$De$Silva$subscribed$for$650$shares$of$stock.$He$has$paid$only$200$
shares.$ Subsequently,$ the$ Board$ of$ said$ corporation$ declared,$ by$
resolution,$ the$ unpaid$ subscription$ to$ be$ due$ and$ demandable;$ and$
non@payment$of$which$on$the$date$fixed$would$amount$to$a$sale$of$said$
shares.$ De$ Silva$ questioned$ said$ authority$ of$ the$ Board,$ as$ the$
corporation's$ by@laws$ provided$ that$ the$ Board$ may$ deduct$ an$ amount$
'
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'
from$the$net$profit$to$be$applied$to$unpaid$subscriptions.$He$contended$
that$ the$ Board$ cannot$ prescribe$ another$ manner$ of$ collecting$ unpaid$
subscriptions$when$one$has$already$been$provided$in$the$by@laws.$
$
Held:' The$ Court$ ruled$ that$ the$ Board$ of$ Directors$ has$ absolute$
discretion$ to$ choose$ which$ remedy$ it$ deems$ proper$ in$ order$ to$ collect$
on$ the$ unpaid$ subscriptions.$ If$ it$ does$ not$ which$ to$ make$ use$ of$ the$
corporation;'
'
4.'Previously'incurred'indebtedness'of'the'corporation;'
'
5.'Amounts'transferred'from'unrestricted'retained'earnings'to'stated'
capital;'and'
'
authority$given$to$it$in$the$by@law,$it$still$has$two$other$remedies.$It$may$
put$up$the$unpaid$stock$for$sale$as$provided$in$Sections$38$to$48$of$the$
Corporation$Law$or$by$action$in$court.$
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.'
)
VIII.'CONSIDERATION'(Section'62):'
'
Section'62.'Considering'for'stocks.'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
'
Shares'of'stock'shall'not'be'issued'in'exchange'for'promissory'notes'or'
)
!
of$ the$ cash$ consideration$ in$ order$ to$ make$ the$ subscription$
agreement$valid$and$binding.$Indeed,$a$subscription$agreement$
is$ a$ consensual$ contract,$ perfect,$ valid$ and$ binding$ upon$ the$
meeting$of$the$minds$of$the$parties$on$the$subject$matter$(the$
shares$subscribed)$and$the$consideration.$
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'noSpar'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'bySlaws,'or'in'
the' absence' thereof,' by' the' stockholders' representing' at' least' a'
majority' of' the' outstanding' capital' stock' at' a' meeting' duly' called' for'
the'purpose.'(5'and'16)'
the$ corporation$ and$ the$ subscriber$ may$ be$ "cash",$ the$ non@
payment$ of$ the$ consideration$ does$ not$ render$ the$ contract$
invalid$ or$ void,$ for$ indeed$ the$ unpaid$ subscription$ constitutes$
"subscription$ receivable"$ in$ the$ books$ of$ the$ corporation.$ Only$
when$ there$ is$ a$ call$ by$ the$ board,$ or$ when$ under$ the$ terms$ of$
the$ subscription$ agreement$ payment$ is$ due,$ is$ the$ stockholder$
legally$ required$ to$ pay$ actual$ cash$ to$ the$ corporation,$ and$
failure$ to$ do$ so$ would$ subject$ the$ shares$ to$ being$ declared$
delinquent$ and$ leading$ to$ the$ suspension$ of$ the$ rights$ of$ a$
stockholder.'
Atty.$ Hofilea$ !$ while$ youre$ free$ to$ choose$ how$ you$ pay$ for$
your$shares,$the$company$must$always$receive$the$value$for$the$
shares$they$are$parting$with.$
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$ corporations$ books.$
Lincoln)Phil.)Life)v.)Court)of)Appeals,)293)SCRA)92)(1998).1$
'
B.'Property3'
'
A.'Cash2'
The$property$which$a$corporation$may$accept$in$exchange$for$its$
stock$ must$ be$ of$ a$ kind$ which$ the$ corporation$ may$ lawfully$
acquire$ and$ hold$ in$ carrying$ out$ the$ purposes$ of$ its$
incorporation,$and$which$is$necessary$or$proper$for$it$to$own$in$
carrying$ on$ its$ business. 4 $It$ cannot$ lawfully$ issue$ stock$ for$
property$ which$ its$ charter$ does$ not$ authorize$ it$ to$ acquire,$ or$
for$property$acquired$for$an$unauthorized$purpose.$
In$ spite$ of$ the$ wordings$ of$ Section$ 62$ of$ cash$ actually$ paid$ to$
the$corporation,$it$is$not$required$that$there$be$actual2payment$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$The$ 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).$
2
Therefore,$even$though$the$consideration$agreed$upon$between$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
4
$Securities$and$Exchange$Commission.$62,$Corporation$Code.$
)
other$stockholders.$Compensation$payable$for$services$actually$
rendered$ to$ the$ corporation$ is$ credit$ which$ is$ property$ and$
whose$value$is$ascertainable.'
The$property$must$be$of$substantial$nature,$having$a$pecuniary$
value$capable$of$being$ascertained,$and$must$be$something$real$
and$ tangible$ as$ distinguished$ from$ something$ constructive$ or$
speculative;$ and$ it$ must$ be$ of$ such$ character$ that$ it$ can$ be$
delivered$ to$ the$ corporation,$ instead$ of$ being$ merely$
communicated$to$its$officers$or$employees.$It$must$also$be$such$
as$ is$ capable$ of$ being$ applied$ to$ the$ payment$ of$ debts$ and$ of$
distribution$among$the$stockholders.$
The$ Securities$ and$ Exchange$ Commission$ has$ ruled$ that$

property,$such$as$financial$instruments$and$receivables,$may$be$
legally$ accepted$ as$ capital$ contributions,$ subject$ to$ the$
following$conditions:$
a. Actually$received$by$the$corporation;$
b. Necessary$ or$ convenient$ for$ the$ corporations$ use$ and$
future$is$void$under$Section$62$of$the$Corporation$Code,$and$the$
corporation$ should$ not$ be$ estopped$ to$ deny$ that$ the$ services$
constituted$ payment$ of$ the$ stock$ subscription$ even$ though$ it$
has$received$the$benefit$thereof.$$
'
D.'Shares3'
lawful$purpose;$and$
c. At$ a$ fair$ valuation$ equal$ to$ the$ par$ value$ of$ the$ stock$
issued$ to$ be$ approved$ by$ the$ Securities$ and$ Exchange$
Commission.1$
'
C.'Service2'
A$corporation$is$allowed$to$receive$as$payment$for$its$stocks$not$
only$ money$ and$ property$ but$ also$ labor2 performed$ for$ or$
services2 actually2 rendered$ to$ the$ corporation$ provided$ the$
transaction$ is$ in$ good$ faith$ and$ no$ fraud$ is$ perpetrated$ upon$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 25$ January$ 1995,$ XXIX$

1995)$$
2
An$agreement$to$issue$stock$for$services$to$be$rendered$in$the$
Stock$dividends$are$in$the$nature$of$shares$of$stock,$where$the$
consideration$ is$ the$ amount$ of$ unrestricted$ retained$ earnings$
converted$into$equity$in$the$corporations$books.4$$
o Declaration$ of$ stock$ dividends$ should$ be$ distinguished$
from$ reclassification$ or$ conversion$ of$ shares$ which$ do$
not$really$affect$the$integrity$of$capital$stock$which$has$
been$ paid@up$ previously$ but$ only$ changes$ its$
composition$or$manner$of$classification.$
'
E.'Retained'Earnings'
'
F.'Watered'Stocks'(Section'65)'
'
Section'65.'Liability'of'directors'for'watered'stocks.'
Any' director' or' officer' of' a' corporation' consenting' to' the' issuance' of'
stocks' for' a' consideration' less' than' its' par' or' issued' value' or' for' a'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
4
$Lincoln$Philippine$Life$v.$Court$of$Appeals,$293$SCRA$92,$96$SCAD$542$(1998).$$
)
!
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'
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.'
'
received' at' the' time' of' issuance' of' the' stock' and' the' par' or' issued'
value'of'the'same.'(n)'
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'bySlaws,'computed'from'such'date'until'full'
'
Shares$ issued$ as$ fully$ paid$ when$ in$ truth$ the$ consideration$
received$is$known$to$be$less$than$the$par$value$or$issued$value$
of$the$shares$are$called$"watered$stock".$The$term$sometimes$is$
used$ to$ include$ "bonus$ shares"$ under$ an$ agreement$ that$
nothing$shall$be$paid$to$the$corporation$for$them,$and$"discount$
shares"$ issued$ at$ a$ discount$ under$ an$ agreement$ to$ pay$ less$
than$the$par$value$in$money.1'
'
G.'Payment'of'Balance'of'Subscription'(Sections'66'and'67):')
)
payment.' If' within' thirty' (30)' days' from' the' said' date' no' payment' is'
made,'all'stocks'covered'by'said'subscription'shall'thereupon'become'
delinquent'and'shall'be'subject'to'sale'as'hereinafter'provided,'unless'
the'board'of'directors'orders'otherwise.'(38)'
)
1. Nature' of' the' Call' (Section' 67):' The$ word$ call$ is$ capable$ of$
three$ meanings,$ namely:$ (a)$ it$ may$ mean$ the$ resolution$ of$ the$
Section'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'bySlaws.'If'no'rate'of'interest'is'fixed'in'
board$of$directors$for$the$payment$of$unpaid$subscriptions;$(b)$
notification$of$such$resolution$made$on$the$stockholders;$or$(c)$
the$time$when$subscriptions$become$payable.2'
o A$call$must$be$uniform$with$respect$to$all$holders$of$the$
class$ of$ shares$ on$ which$ it$ is$ made$ who$ have$ already$
paid$an$equal$amount$on$their$shares,$and$as$a$general$
the'bySlaws,'such'rate'shall'be'deemed'to'be'the'legal'rate.'(37)'
'
Section'67.'Payment'of'balance'of'subscription.'
Subject'to'the'provisions'of'the'contract'of'subscription,'the'board'of'
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1
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 31$ August$ 1995,$ XXX$

1996).$$
)
!
rule$ it$ must$ not$ exceed$ the$ balance$ remaining$ unpaid$
on$their$shares.$
2. When'Call'Not'Necessary:'There$are$two$(2)$instances$when$call$
is$ not$ necessary$ to$ make$ the$ subscriber$ liable$ for$ payment$ of$
the$unpaid$subscription:'
a. When,$ under$ the$ terms$ of$ the$ subscription$ contract,$
subscription$is$payable,$not$upon$call,$but$immediately,$
or$ on$ a$ specified$ day,$ or$ when$ it$ is$ payable$ in$
installments$at$specified$times;$and$'
b. If$the$corporation$becomes$insolvent,$which$makes$the$
liability$on$the$unpaid$subscription$due$and$demandable$
regardless$ of$ any$ stipulation$ to$ the$ contrary$ in$ the$
subscription$agreement.'
Lingayen) Gulf) Electric) Power) Co.) v.) Baltazar,) 93) Phil.) 404)
(1953).)
)
Lingayen)Gulf)Electric)Power)Co.)v.)Baltazar)
'
Facts:'Companys$president$subscribed$to$shares$and$paid$partially.$$The$
Board$made$a$call$for$payment$through$a$resolution$with$the$first$50%$
payable$ within$ 60$ days$ beginning$ August$ 1,$ 1946,$ and$ the$ remaining$
50%$payable$within$60$days$beginning$October$1,$1946.$The$resolution$
provided$ that$ all$ unpaid$ subscriptions$ after$ the$ due$ dates$ would$ be$
subject$ to$ a$ 12%$ interest$ per$ annum,$ and$ if$ after$ February$ 1947$ they$
remain$ unpaid,$ they$ would$ revert$ to$ the$ corporation.$ This$ resolution$
was$set$aside$about$a$year$later$by$Resolution$No.$17$which$stated$that$
the$company$was$in$no$position$to$absorb$unpaid$shares,$and$the$Board$
decided$ to$ issue$ a$ call$ for$ payment$ of$ unpaid$ shares.$ Resolution$ No.$ 4$
was$passed$a$year$later$directing$for$the$revaluation$of$shares.$However,$
the$ president$ refused$ to$ pay,$ prompting$ the$ corporation$ to$ sue.$ The$
defense$was$that$the$call$was$invalid$for$lack$of$publication,$and$that$the$
defendant$was$released$from$liability$by$virtue$of$Resolution$17$and$4.'
'
Issue:' Whether$ or$ not$ the$ respondent$ is$ liable$ for$ unpaid$ subscription$
despite$the$lack$of$publication.'
'
Held:' NO.$ Notice$ of$ any$ call$ for$ the$ payment$ of$ unpaid$ subscription$
should$ be$ made$ not$ only$ personally$ but$ also$ by$ publication$ once$ a$
week,$ for$ four$ consecutive$ weeks$ in$ some$ newspapers$ in$ accordance$
with$Section$40$of$the$Corporation$Code.$It$will$be$noted$that$section$40$
is$ mandatory$ as$ regards$ publication,$ using$ the$ word$ "must".$ The$ claim$
that$Baltazar$was$released$from$liability$of$paying$under$Resolution$No.$
17$ and$ 4$ does$ not$ hold$ water$ because$ the$ release$ attempted$ in$
Resolution$No.$17$of$1946$was$not$valid$for$lack$of$a$unanimous$vote.$If$
found$ that$ at$ least$ seven$ stockholders$ were$ absent$ from$ the$ meeting$
when$said$resolution$was$approved.$
'
Doctrine:'In$conclusion$we$hold$that$under$the$Corporation$Law,$notice$
of$ call$ for$ payment$ for$ unpaid$ subscribed$ stock$ must$ be$ published,$
except$ when$ the$ corporation$ is$ insolvent,$ in$ which$ case,$ payment$ is$
immediately$demandable.$We$also$rule$that$release$from$such$payment$
must$be$made$by$all$the$stockholders.$
)
)
The$Lingayen)v.)Baltazar)case$faced$the$question$on$whether$or$
not$ a$ shareholder$ may$ be$ released$ from$ payment$ without$
forfeiting$his$shares.$)
!
o
Atty.$Hofilea$!$iffy$about$the$implication$of$releasing$a$
shareholder$ from$ obligation$ if$ with$ consent$ of$ the$
stockholders,$because$it$violates$the$trust$fund$doctrine.)
A$stockholder$who$is$employed$with$the$company,$cannot$offset$
his$ unpaid$ subscription$ against$ his$ awarded$ claims$ for$ wages,$
where$ there$ has$ been$ no$ call$ for$ the$ payment$ of$ such$
subscription.$Apodaca)v.)NLRC,)172)SCRA)442)(1989).)
'
H.'Delinquency'on'Subscription'(Sections'68,'69,'70'and'71;'Philippine)
Trust)Co.)v.)Rivera,)44)Phil.)469)[1923];)Miranda)v.)Tarlac)Rice)Mill)Co.,)
57)Phil.)619)[1932])'
'
Section'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'
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.'
'
Section'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'
)
!
b. Failure$to$pay$the$subscription$on$the$date$specified$on$
the$contract$of$subscription.'
2. Effects'of'delinquency'
a. It$ disqualifies$ the$ stockholder$ to$ be$ voted$ for$ or$ be$
entitled$ to$ vote$ or$ to$ representation$ at$ any$
stockholder's$meeting;'
commenced'by'the'filing'of'a'complaint'within'six'(6)'months'from'the'
date'of'sale.'(47a)'
'
Section'70.'Court'action'to'recover'unpaid'subscription.'
Nothing' in' this' Code' shall' prevent' the' corporation' from' collecting' by'
action'in'a'court'of'proper'jurisdiction'the'amount'due'on'any'unpaid'
subscription,'with'accrued'interest,'costs'and'expenses.'(49a)'
'
Section'71.'Effect'of'delinquency.'
No' delinquent' stock' shall' be' voted' for,' be' entitled' to' vote' or' to'
representation' at' any' stockholder's' meeting,' nor' shall' the' holder'
thereof' be' entitled' to' any' of' the' rights' of' a' stockholder' except' the'
b. It$disqualifies$the$stockholder$to$exercise$any$rights$of$a$
stockholder$ except$ the$ right$ to$ dividends,$ until$ and$
unless$he$pays$the$amount$due$on$his$subscription$with$
accrued$ interest$ and$ the$ costs$ and$ expenses$ of$
advertisement,$if$any.'
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)'
of$ the$ regular$ or$ special$ meeting$ of$ the$ stockholders,$ nor$ shall$
the$ shares$ be$ included$ in$ the$ determination$ of$ a$ quorum$ for$
shareholdings$ meetings. 2 $The$ only$ right$ remaining$ to$ a$
delinquent$ stockholder$ is$ the$ right$ to$ receive$ dividends$ under$
Section$71$of$the$Corporation$Code,$but$the$cash$dividend$due$
The$prescriptive$period$to$recover$on$unpaid$subscription$does$
shall$first$be$applied$to$the$unpaid$balance,$while$stock$dividend$
shall$be$withheld$until$the$unpaid$balance$is$fully$paid.$In$effect,$
the$stockholders$right$to$dividend$is$even$restricted.3'
3. Who'May'Question'a'Delinquency'Sale?'(Section'68'and'69).'
not$commence$from$the$time$of$subscription$but$from$the$time$
of$ demand$ by$ Board$ of$ Directors$ to$ pay$ the$ balance$ of$
subscription.$Garcia)v.)Suarez,)67)Phil.)441)(1939).)
Who' is' the' Highest' Bidder?' Remaining$ shares$ go$ to$ the$
delinquent$ stockholder$ for$ the$ simple$ reason$ that$ Section$ 68$

protects$ the$ delinquent$ stockholder$ himself.$ Corporations$ are$
not$supposed$to$make$money$out$of$the$sale.1'
1. Delinquency'is'achieved'in'either'one'of'two'ways:'
a. Failure$to$pay$the$subscription$on$the$date$mentioned$in$
the$call;$or'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
The$holders$of$delinquent$shares$shall$not$be$entitled$to$notice$
'
IX.'CERTIFICATE'OF'STOCK'(Section'63)''
'
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 13$ March$ 1998,$ XXXII$

1998).$$
3
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 13$ March$ 1998,$ XXXII$
1998).$$
)
!
Section'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'byS
'
Facts:' Alfonso$ Tan$ owned$ 400$ shares$ of$ Visayan$ Educational$ Supply$
Corporation,$ and$ was$ president$ until$ 1982$ and$ director$ until$ 1983.$ In$
1981,$ two$ of$ Visayans$ incorporators$ withdrew$ from$ the$ company.$ To$
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'attorneySinSfact'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'
satisfy$the$5@member$minimum$requirement$of$the$Board$of$Directors,$
petitioner$ Alfonso$ sold$ 50$ of$ his$ shares$ to$ his$ brother$ Angel.$ With$ the$
sale,$Petitioner$Alfonsos$stock$certificate$no.$2$was$cancelled,$and$stock$
certificates$ no.$ 6$ (Angels$ 50$ shares)$ and$ no.$ 8$ (remaining$ 350$ shares)$
were$signed$and$issued$by$Angel$as$the$new$director$and$VP$of$Visayan,$
upon$ orders$ of$ the$ president,$ Alfonso.$ Allegedly,$ Alfonso$ was$ required$
to$ endorse$ stock$ certificate$ no.$ 2$ but$ he$ failed$ to$ give$ it$ back$ 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)'
decided$ to$ keep$ it.$ Later,$ Alfonso$ withdrew$ from$ the$ corporation$ on$
condition$ that$ he$ be$ paid$ with$ stocks@in@trade$ equivalent$ to$ 33.3%$ in$
lieu$ of$ the$ stock$ value$ of$ his$ shares$ in$ the$ amount$ of$ P35,000.00.$
Subsequently,$ the$ board$ of$ Visayan$ voted$ and$ cancelled$ stock$
certificates$ no.$ 2$ and$ no.$ 8.$ Years$ later,$ Alfonso$ brought$ a$ case$ to$ the$
Securities$ and$ Exchange$ Commission$ of$ Cebu$ questioning,$ for$ the$ first$
time,$the$cancellation$of$stock$certificates$no.$2$and$no.$8.$He$contends$
'
A.'Nature'of'Certificate:'
A$stock$certificate$is$not$necessary$to$render$one$a$stockholder$
in$a$corporation;$nevertheless,$it$is$the$paper$representative$or$
tangible$ evidence$ of$ the$ stock$ itself$ and$ the$ various$ interests$
therein.$ The$ stock$ certificate$ expresses$ the$ contract$ between$
the$ corporation$ and$ the$ stockholder,$ but$ it$ is$ not$ essential$ to$
the$existence$of$a$share$in$stock$or$the$creation$of$the$relation$
of$ shareholder$ to$ the$ corporation.' Tan) v.) Securities) and)
Exchange)Commission,)206)SCRA)740)(1992).1)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$C.N.$Hodges$v.$Lezama,$14$SCRA$1030$(1965);$Ponce$v.$Alsons$Cement$Corp.,$
393$SCRA$602$(2002);$Nautica$Canning$Corp.$v.$Yumul,$473$SCRA$415$(2005).$
Tan)v.)Securities)and)Exchange)Commission)
the$cancellation$on$the$ground$that$there$was$never$any$endorsement$
from$ Alfonso$ and$ that$ he$ never$ delivered$ his$ stock$ certificates,$
rendering$ the$ transfer$ ineffective$ under$ Section$ 63$ of$ the$ Corporation$
Code.$
'
Issue:' Whether$ or$ not$ Alfonsos$ argument$ that$ the$ wording$ of$ Section$
63$ of$ the$ Corporation$ Code$ requires$ delivery$ as$ a$ mode$ of$ transfer$ is$
correct.$
$
Held:' NO.$ The$ requirement$ of$ delivery$ under$ Section$ 63$ is$ merely$
)
!
directory$and$not$mandatory.$Furthermore,$there$is$no$doubt$that$there$
was$delivery$of$Stock$Certificate$No.$2$made$by$the$petitioner$to$the$
Corporation$before$its$replacement$with$the$Stock$Certificate$no.$6$no.$
8.$ The$ problem$ arose$ when$ petitioner$ was$ given$ back$ stock$ certificate$
no.$ 2$ for$ him$ to$ endorse$ and$ instead$ he$ deliberately$ withheld$ it.$ The$
transfer$ was$ recognized$ when$ Angel,$ became$ a$ director$ and$ the$ Vice$
President$ of$ the$ company$ by$ reason$ of$ his$ fifty$ (50)$ shares$ from$
Alfonso.$ The$ certificate$ is$ not$ stock$ in$ the$ corporation$ but$ is$ merely$
evidence$ of$ the$ holders$ interest$ and$ status$ in$ the$ corporation,$ his$
ownership$ of$ the$ share$ represented$ thereby,$ but$ is$ not$ in$ law$ the$
equivalent$of$such$ownership.$
'
corporation$ as$ the$ owner,$ he$ is$ considered$ a$

stockholder$or$record$and$is$entitled$to$all$the$rights$of$a$
stockholder.1$
Atty.$ Hofilea$ !$ at$ the$ end$ of$ the$ day,$ there$ may$ be$
circumstances$ which$ the$ Court$ may$ allow$ as$ basis$ to$ dispense$
justice.$
1. Probative'Value'of'Certificate'of'Stock'
Even$ without$ the$ covering$ certificate$ of$ stock$ having$ been$

issued,$ yet,$ the$ registered$ subscriber$ to$ the$ shares$ may$ validly$
and$ legally$ transact$ with$ the$ shares,$ and$ sell$ and$ dispose$ of$
them$to$any$interested$buyer$thereof$provided$he$complies$with$
the$ right$ of$ first$ refusal$ provided$ for$ in$ the$ by@laws$ (?)$ of$ the$
corporation.$ Makati) Sports) Club,) Inc.) v.) Cheng,) 621) SCRA) 103)
(2010).)
)
Doctrine:' Section$ 63$ provides$ that$ xxx$ Shares$ of$ stocks$ so$ issued$ are$
personal$property$and$may$be$transferred$by$delivery$of$the$certificate$
or$ certificates$ indorsed$ by$ the$ owner.$ The$ Court$ held$ that$ the$ use$ of$
the$word$may$is$merely$permissive$rather$than$mandatory.$The$word$
may$indicates$that$the$transfer$may$be$effected$in$a$manner$different$
from$that$provided$for$in$the$law.)
)
The$Securities$and$Exchange$Commission$has$aptly$ruled$
that$ a$ person$ may$ own$ shares$ of$ corporate$ stock$
without$ possessing$ a$ stock$ certificate$ which$ after$ all$ is$
merely$an$evidence$of$ownership$of$the$stock;$and$that$
for$ as$ long$ as$ the$ subscriber$ to$ the$ stock$ is$ duly$
recorded$ in$ the$ stock$ and$ transfer$ book$ of$ the$
Makati)Sports)Club,)Inc.)v.)Cheng)
'
Facts:' The$ Board$ of$ Directors$ of$ Makati$ Sports$ Club$ (MSCI)$ adopted$ a$
resolution$ authorizing$ the$ sale$ of$ 19$ unissued$ shares$ at$ a$ floor$ price.$
Defendant$ Cheng$ was$ a$ Treasurer$ and$ Director$ of$ MSCI.$ Hodreal$
expressed$ his$ interest$ to$ buy$ a$ share$ and$ requested$ his$ name$ be$
A$ certificate$ of$ stock$ is$ the$ evidence$ of$ a$ holders$ interest$ and$
status$ in$ a$ corporation$ $ it$ is$ prima$ facie$ evidence$ that$ the$
holder$is$a$shareholder$of$a$corporation;$it$is$not$the$share$itself.$
Lincoln)Phil.)Life)v.)Court)of)Appeals,)293)SCRA)92)(1998);)Lao)v.)
included$in$the$waiting$list.$McFoods$also$expressed$interest$in$acquiring$
a$ share.$ A$ Deed$ of$ Absolute$ Sale$ was$ executed$ and$ a$ Stock$ Certificate$
was$issued$to$McFoods.$McFoods$then$sent$a$letter$to$the$MSCI$giving$
Lao,)567)SCRA)558)(2008).$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 6$ January$ 1999,$ XXXIII$
SECURITIES$ AND$ EXCHANGE$ COMMISSION$ QUARTERLY$ BULLETIN$ 44$ (No.$ 1,$ June,$
1999).$$
)
!
advise$ of$ its$ offer$ to$ resell$ the$ share.$ It$ appears$ that$ while$ the$ sale$
between$ the$ MSCI$ and$ McFoods$ was$ still$ under$ negotiations,$ there$
were$ negotiations$ between$ McFoods$ and$ Hodreal$ for$ the$ purchase$ by$
the$ latter$ of$ a$ share$ of$ the$ MSCI.$ Upon$ request,$ a$ new$ certificate$ was$
issued.$ An$ investigation$ was$ then$ conducted$ and$ the$ committee$ held$
MSCI$received$McFoods$letter$of$offer$to$sell$the$share,$that$McFoods$
and$Hodreal$executed$the$Deed$of$Absolute$Sale$over$the$said$share$of$
stock.$
'
Doctrine:' A$ certificate$ of$ stock$ is$ the$ paper$ representative$ or$ tangible$
that$ there$ is$ prima$ facie$ evidence$ to$ show$ that$ defendant$ Cheng$
profited$from$the$transaction$because$of$her$knowledge.$$
$
MSCI$ asserts$ that$ McFoods$ never$ intended$ to$ become$ a$ legitimate$
holder$of$its$purchased$Class$A$share$but$did$so$only$for$the$purpose$
of$realizing$a$profit$in$the$amount$of$P1,000,000$at$the$expense$of$the$
former.$ MSCI$ further$ claims$ that$ Cheng$ confabulated$ [this$ means$
evidence$ of$ the$ stock$ itself$ and$ of$ the$ various$ interests$ therein.$ The$
certificate$is$not$a$stock$in$the$corporation$but$is$merely$evidence$of$the$
holders$ interest$ and$ status$ in$ the$ corporation,$ his$ ownership$ of$ the$
share$ represented$ thereby.$ It$ is$ not$ in$ law$ the$ equivalent$ of$ such$
ownership.$ It$ expresses$ the$ contract$ between$ the$ corporation$ and$ the$
stockholder,$but$is$not$essential$to$the$existence$of$a$share$of$stock$or$
the$nature$of$the$relation$of$shareholder$to$the$corporation.)
talked]$with$McFoods$by$providing$it$with$an$insiders$information$as$to$
the$ status$ of$ the$ shares$ of$ stock$ of$ MSCI$ and$ even,$ allegedly$ with$
unusual$ interest,$ facilitated$ the$ transfer$ of$ ownership$ of$ the$ subject$
share$of$stock$from$McFoods$to$Hodreal,$instead$of$an$original,$unissued$
share$of$stock.$
'
Issue:' Whether$ or$ not$ McFoods$ violated$ Section$ 30(e)$ of$ MSCIs$
Amended$By@Laws$on$its$pre@emptive$rights$
'
Held:' NO.$When$McFoods$offered$for$sale$one$Class$A$share$of$stock$
to$ MSCI$ for$ the$ latter$ to$ exercise$ its$ pre@emptive$ right$ as$ required$ by$
Section$30(e)$of$MSCIs$Amended$By@Laws,$it$legally$had$the$right$to$do$
so$ since$ it$ was$ already$ an$ owner$ of$ a$ Class$ A$ share$ by$ virtue$ of$ its$
payment,$and$the$Deed$of$Absolute$Share,$notwithstanding$the$fact$that$
the$stock$certificate$was$issued$only$later.$Without$doubt,$MSCI$failed$to$
repurchase$ McFoods$ Class$ A$ share$ within$ the$ thirty$ (30)$ day$ pre@
emptive$period$as$provided$by$the$Amended$By@Laws.$It$was$only$when$
)
The$fact$that$the$stock$certificates$registered$in$the$name$of$one$
person$are$found$in$the$possession$of$another$stockholder$does$
not$prove$that$the$possessor$is$the$owner$of$the$covered$shares.$
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$certificate.$Republic)v.)Estate)of)Hans)Menzi,)475)SCRA)20)
(2005).)
2. Issuance'of'Certificate'of'Stock$'
A$ certificate$ of$ stock$ could$ not$ be$ considered$ issued$ in$

contemplation$ of$ law$ unless$ signed$ by$ the$ president$ or$ vice@
president$ and$ countersigned$ by$ the$ secretary$ or$ assistance$
secretary.$Bitong)v.)Court)of)Appeals,)292)SCRA)503)(1998).)
The$ issuance$ or$ delivery$ of$ the$ certificate$ of$ stock$ is$ not$
necessary$ to$ constitute$ the$ subscriber$ a$ stockholder$ of$ the$
corporation;$ however,$ delivery$ is$ generally,$ an$ essential$
!
element$of$the$issuance$of$the$certificate$of$stock$itself.$There$is$
no$ issuance$ of$ the$ certificate$ where$ it$ is$ never$ detached$ from$
the$ certificate$ book$ although$ the$ blanks$ therein$ are$ properly$
filled$ up,$ if$ the$ person$ whose$ name$ is$ inserted$ therein$ has$ no$
control$over$the$books$of$the$corporation.1$
'
B.'QuasiSNegotiable'Character'of'Certificate'of'Stock'
While$ the$ issuance$ of$ a$ stock$ certificate$ is$ not$ a$ condition$
A$certificate$of$stock$is$merely$a$quasi@negotiable$instrument$in$
precedent$to$render$one$a$stockholder,$under$Section$63$of$the$
Corporation$Code$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$ sense$ that$ it$ may$ be$ transferred$ by$ endorsement,$ coupled$
with$ delivery;$ but$ it$ is$ not$ negotiable$ because$ the$ holder$
thereof$takes$it$without$prejudice$to$such$rights$or$defenses$as$
the$registered$owners$or$transferors$creditors$may$have$under$
the$ Corporation$ Code$ which$ requires$ full$ payment$ of$ the$

subscription.2$
the$ law,$ except$ only$ insofar$ as$ such$ rights$ or$ defenses$ are$
subject$ to$ the$ limitations$ imposed$ by$ the$ principles$ governing$
estoppel.$De)los)Santos)v.)Republic,)96)Phil.)577)(1955).$
$
The$ Securities$ and$ Exchange$ Commission$ has$ opined$ that$ the$

remedies$available$ to$ a$ stockholder$ if$ a$ corporation$ wrongfully$
refuses$to$issue$a$certificate$of$stock$are$as$follows:$
a. To$ file$ a$ suit$ for$ specific$ performance$ of$ an$ express$ or$
implied$contract;$
b. To$file$for$an$alternative$relief$by$way$of$damages$where$
specific$performance$cannot$be$granted;$
c. To$file$a$petition$for$mandamus$to$compel$the$issuance$
of$ the$ certificate$ where$ the$ conditions,$ facts$ and$
circumstances$ of$ the$ particular$ case$ bring$ it$ within$ the$
legal$rules$which$govern$the$granting$of$the$writ;$or$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
d. To$ rescind$ the$ contract$ of$ subscription$ if$ the$

corporation$ wrongfully$ refuses$ to$ deliver$ a$ certificate,$
and$sue$to$recover$back$what$has$been$paid.3$
2Tuazon2 v.2 La2 Previsora2 Filipina,$ 67$ Phil.$ 36$ (1938),$ quoting2 from$ 11$ FLETCHER$
CYC.$CORP.,$at$$324@325.$
2
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 6$ January$ 1999,$ XXXIII$
SECURITIES$ AND$ EXCHANGE$ COMMISSION$ QUARTERLY$ BULLETIN$ 44$ (No.$ 2,$ June,$
1999).$$
De)los)Santos)v.)Republic)
'
Facts:'This$involves$the$title$to$1,600,000$shares$of$stock$of$the$Lepanto$
Consolidated$ Mining$ Co.,$ Inc.$ (Lepanto),$ a$ domestic$ corporation.$
Originally,$half$of$said$shares$of$stock$were$claimed$by$Apolinario$de$los$
Santos,$and$the$other$half,$by$Isabelo$Astraquillo.$During$the$pendency$
of$this$case,$Astraquillo$has$allegedly$conveyed$and$assigned$his$interest$
in$ his$ shares$ to$ de$ los$ Santos.$ The$ shares$ in$ question$ are$ covered$ by$
several$ stock$ certificates$ issued$ in$ favor$ of$ Vicente$ Madrigal,$ who$ is$
registered$ in$ the$ books$ of$ Lepanto$ as$ owner$ of$ said$ stocks$ and$ whose$
indorsement$in$blank$appears$on$the$back$of$said$certificates.$$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 8$ January$ 1987,$ XXI$

Securities$and$Exchange$Commission$QUARTERLY$BULLETIN$1$(No.$1,$March$1987);$
SECURITIES$AND$EXCHANGE$COMMISSION$Opinion,$9$June$1988,$XXII$SECURITIES$
AND$EXCHANGE$COMMISSION$QUARTERLY$BULLETIN$18$(Nos.$3,$Sep.$1988).$$
)
!
$
De$los$Santos$contends$that$he$bought$55,000$shares$from$Juan$Campos$
and$ 1,200,000$ shares$ from$ Carl$ Hess.$ On$ the$ other$ hand,$ the$ US$
Attorney$General$contends$that$prior$to$the$outbreak$of$the$war$in$the$
Pacific,$ said$ shares$ of$ stock$ were$ bought$ by$ Vicente$ Madrigal,$ in$ trust$
aware$of$sufficient$facts$to$put$them$on$notice$of$the$need$of$inquiring$
into$ the$ regularity$ of$ the$ transactions$ and$ the$ title$ of$ the$ supposed$
vendors.$Indeed,$the$certificates$of$stock$in$question$were$in$the$name$
of$Madrigal.$Obviously,$Campos$and$Hess$were$not$registered$owners$of$
the$ corresponding$ shares$ of$ stock.$ Being$ presumed$ to$ know$ the$ law$
for,$ and$ for$ the$ benefit$ of,$ the$ Mitsui$ Bussan$ Kaisha$ (Mitsuis),$ a$
corporation$organized$in$accordance$with$the$laws$of$Japan,$with$branch$
office$ in$ the$ Philippines.$ They$ further$ contend$ that$ Madrigal$ delivered$
the$corresponding$stock$certificates$to$the$Mitsuis,$which$kept$them$in$
its$office$in$Manila,$until$the$liberation$of$the$city$by$the$American$forces$
early$ in$ 1945.$ They$ add$ that$ the$ Mitsuis$ had$ never$ sold,$ or$ otherwise$
disposed$of$the$shares$and$that$these$must$have$been$looted$during$the$
and,$as$experienced$traders$in$shares$of$stock,$plaintiffs$must$have$been$
conscious$ of$ the$ consequent$ infirmities$ in$ the$ title$ of$ the$ supposed$
vendors,$or$of$the$handicaps.$Moreover,$the$aforementioned$sales$were$
admittedly$hostile$to$the$Japanese,$who$had$prohibited$it$and$plaintiffs$
had$ actual$ knowledge$ of$ these$ facts$ and$ of$ the$ risks$ attendant$ to$ the$
alleged$ transaction.$ In$ other$ words,$ plaintiffs$ advisedly$ assumed$ those$
risks$ and,$ hence,$ they$ cannot$ validly$ claim,$ against$ the$ registered$
liberation.$$
$
After$the$war,$pursuant$to$the$all$property$vested$in$the$United$States,$
or$any$of$its$officials,$under$the$Trading$with$the$Enemy$Act,$located$in$
the$Philippines$at$the$time$of$such$vesting,$or$the$proceeds$thereof,$shall$
be$ transferred$ to$ the$ Republic$ of$ the$ Philippines$ (this$ is$ why$ the$
Republic$is$a$party).$
stockholder,$the$status$of$purchasers$in$good$faith.$
'
Doctrine:'Section$35$of$the$Corporation$Law$reads$that$A$share$of$stock$
may$ be$ transferred$ by$ endorsement$ of$ the$ corresponding$ stock$
certificate,$coupled$with$its$delivery.$However,$the$transfer$shall$not$be$
valid,$ except$ as$ between$ the$ parties,$ until$ it$ is$ entered$ and$ noted$
upon$the$books$of$the$corporation.$No$such$entry$in$the$name$of$the$
'
Issue:'Whether$or$not$plaintiffs$had$purchased$the$shares$of$stock.'
'
Held:' NO.$ It$ appears$ that$ the$ only$ evidence$ on$ the$ alleged$ sale$ of$ the$
shares$ of$ stock$ in$ question$ is$ the$ testimony$ of$ de$ los$ Santos.$ Campos$
and$Hess,$the$alleged$vendors,$could$not$take$the$witness$stand$because$
both$ are$ already$ dead.$ The$ record$ shows$ that$ Madrigal$ had$ never$
disposed$of$said$shares$of$stock$in$any$manner,$except$by$turning$over$
plaintiffs$ having$ been$ made,$ it$ follows$ that$ the$ transfer$ allegedly$
effected$by$alleged$seller$in$their$favor$is$not$valid,$except$as$between$
themselves.$It$does$not$bind$either$Madrigal$or$the$Mitsuis,$who$are$not$
parties$to$said$alleged$transaction.$
$
the$ corresponding$ stock$ certificates$ to$ the$ Mitsuis,$ the$ beneficial$ and$
true$owners.$At$any$rate,$at$the$time$of$the$alleged$sales,$plaintiffs$were$
)
Atty.$ Hofilea$ !$ while$ stock$ certificates$ sound$ like$ its$ a$

negotiable$ instrument$ (hence$ the$ term$ quasi@negotiable)$ its$
actually$not.$$
o Stock$ certificates$ are$ not$ quite$ negotiable$ instruments$
though$ you$ can$ transfer$ them$ by$ delivery$ or$
endorsement.$It$is$still$subject$to$defenses$the$endorser$
might$ have.$ As$ such,$ where$ a$ stock$ certificate$ is$
negotiated$ in$ blank,$ you$ should$ consider$ the$
circumstances$ that$ might$ surround$ such$ blank$ stock$
certificate$$determine$the$nature$of$holding.$
Stock$ certificates$ are$ evidence$ of$ ownership.$ They$ are$
transfer$of$shares$only$if$the$same$is$coupled$with$delivery.$The$
delivery$ of$ the$ stock$ certificate$ duly$ endorsed$ by$ the$ owner$ is$
the$operative$act$of$transfer$of$shares$from$the$lawful$owner$to$
the$ new$ transferee.$ But$ to$ be$ valid$ against$ third$ parties,$ the$
transfer$ must$ be$ recorded$ in$ the$ books$ of$ the$ corporation.$
Bitong) v.) Court) of) Appeals,) 292) SCRA) 503) (1998);) RaquelI
not$like$transfer$certificate$of$title$(TCT)$of$land.$
Santos)v.)Court)of)Appeals,)592)SCRA)169)(2009).)
Since$ certificates$ of$ stock$ are$ quasi7negotiable$ in$ nature,$ the$

normal$mode$of$dealing$with$such$certificates$is$by$the$process$
of$ endorsement$ and$ delivery.$ It$ must$ be$ noted$ that$
endorsement$ and$ delivery$ of$ certificates$ of$ stock$ may$ be$ for$
any$of$the$three$(3)$purposes:1$
a. For$sale$or$assignment$of$the$shares;$
b. Pursuant$to$a$trust$or$nominee$arrangement;$or$$
c. By$way$of$pledge$or$encumbrance$of$the$shares.$
Endorsement$ is$ an$ essential$ ingredient$ in$ dealing$ with$

certificates$of$stock,$and$generally$cannot$be$dispensed$with.$$
o In$order$for$a$transfer$of$stock$certificate$to$be$effective,$
it$ must$ be$ properly$ indorsed$ and$ that$ title$ to$ such$
certificate$ of$ stock$ is$ vested$ in$ the$ transferee$ by$ the$
delivery$ of$ the$ duly$ indorsed$ certificate$ of$ stock.$
Indorsement$ of$ the$ certificate$ of$ stock$ is$ a$ mandatory$
requirement$ of$ law$ for$ an$ effective$ transfer$ of$ a$
certificate$of$stock.$Razon)v.)IAC,)207)SCRA)234)(1992).$
The$ rule$ is$ that$ the$ endorsement$ of$ the$ certificate$ of$ stock$ by$
the$ owner$ or$ his$ attorney@in@fact$ or$ any$ other$ person$ legally$
authorized$to$make$the$transfer$shall$be$sufficient$to$effect$the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
Bitong)v.)Court)of)Appeals)
'
Facts:' The$ 2$ cases$ originated$ from$ a$ derivative$ suit$ filed$ by$ petitioner@
Bitong$ before$ the$ Securities$ and$ Exchange$ Commission.$ Petitioner$
complained$ of$ irregularities$ committed$ by$ Eugenia$ Apostol,$ President$
and$ Chairperson$ of$ the$ Board$ of$ Directors$ of$ Mr.$ &$ Ms.$ Publishing$ Co,$
Inc.$(Mr.$&$Ms.$Co.)$She$claims$that$Eugenia$and$her$husband$Jose$were$
liable$for$fraud,$misrepresentation,$disloyalty,$evident$bad$faith,$conflict$
of$interest$and$mismanagement$in$directing$the$affairs$of$Mr.$&$Ms.$Co.$
to$ the$ damage$ and$ prejudice$ of$ the$ corporation,$ its$ stockholders,$
including$petitioner.$These$acts$include$cash$advances$to$the$Philippine$
Daily$ Inquirer$ (of$ which$ Spouses$ Apostol$ were$ stockholder,$ directors$
and$officers),$as$well$as$purchase$of$PDI$shares$with$money$of$Mr.$&$Ms.$
Co.$
Respondents$ aver$ that$ petitioner$ does$ not$ have$ personality$ to$ initiate$
and$prosecute$a$derivative$suit$because$she$was$merely$a$holder@in@trust$
of$JAKA$shares.$It$was$recounted$that$Mr$&$Ms$Co.$stemmed$from$the$
restructuring$ of$ a$ failed$ prior$ venture$ by$ organizing$ a$ new$ corporation$
with$the$help$of$JAKA$Investment$Corporation$and$the$Apostols.$
'
Issue:' Whether$ or$ not$ Bitong$ was$ a$ stockholder,$ therefore$ giving$ her$
)
!
personality$to$prosecute$a$derivative$suit$against$private$respondents.$
$
Held:'NO.$The$records$are$unclear$on$how$petitioner$allegedly$acquired$
the$ shares$ of$ stock$ of$ JAKA.$ Petitioner$ being$ the$ CEO$ of$ JAKA$ and$ the$
sole$person$in$charge$of$all$the$business$and$financial$transactions$and$
affairs$ of$ JAKA$ was$ supposed$ to$ be$ in$ the$ best$ position$ to$ show$
convincing$ evidence$ on$ the$ alleged$ transfer$ of$ shares$ to$ her,$ if$ indeed$
there$was$a$transfer.$
$
As$ found$ by$ the$ Securities$ and$ Exchange$ Commission$ Hearing$ Panel,$
there$ was$ overwhelming$ evidence$ despite$ what$ appears$ on$ the$
certificate$ of$ stock$ and$ stock$ and$ transfer$ book,$ petitioner$ was$ not$ a$
bona$ fide$ stockholder$ of$ Mr.$ &$ Ms.$ Co.$ before$ March$ 1989$ or$ at$ the$
time$ the$ complained$ acts$ were$ committed$ to$ qualify$ her$ to$ institute$ a$
stockholders$ derivative$ suit$ against$ private$ respondents.$ Bitong$
admitted$that$Apostol$(as$president$of$the$corporation)$only$signed$her$
certificate$of$stocks$in$1989$
'
Doctrine:'For$a$valid$transfer$of$stocks,$the$requirements$are$as$follows:$
1. There$must$be$delivery$of$the$stock$certificate$
2. Certificate$ must$ be$ endorsed$ by$ the$ owner$ or$ his$ attorney@in@
fact$or$other$legally$authorized$to$make$the$transfer$
3. To$be$valid$against$3rd$persons,$the$transfer$must$be$recorded$
in$the$books$of$the$corporation.$
Considering$ that$ the$ requirements$ provided$ under$ Securities$ and$
Exchange$ Commission.$ 63$ of$ The$ Corporation$ Code$ should$ be$
mandatorily$ complied$ with,$ the$ rule$ on$ presumption$ of$ regularity$
cannot$apply.$The$regularity$and$validity$of$the$transfer$must$be$proved.)
)
Even$ when$ a$ formal$ Deed$ of$ Assignment$ covering$ the$ shares$

was$ duly$ executed,$ without$ the$ endorsement$ and$ delivery$ of$
the$covering$certificates$of$stocks,$the$covered$shares$cannot$be$
deemed$ to$ transferred$ and$ registered$ in$ the$ names$ of$ the$
assignees.$Rural)Bank)of)Lipa)City)v.)Court)of)Appeals,)366)SCRA)
188)(2001);)Rivera)V.)Florendo,)144)SCRA)643)(1986).)
)
Rural)Bank)of)Lipa)City)v.)Court)of)Appeals)
'
Facts:' Reynaldo$Villanueva,$Sr.,$a$stockholder$of$the$Rural$Bank$of$Lipa$
City,$ executed$ a$ Deed$ of$ Assignment,$ assigning$ his$ shares,$ as$ well$ as$
those$of$8$other$shareholders$under$his$control$with$a$total$of$10,$467$
shares,$ in$ favor$ of$ the$ stockholders$ of$ the$ Bank$ represented$ by$ its$
directors$ Bernardo$ Bautista,$ Jaime$ Custodio$ and$ Octavio$ Katigbak.$ The$
spouses$ Villanueva$ was$ indebted$ to$ the$ bank$ and$ in$ a$ board$ meeting$
assured$ the$ bank$ that$ they$ would$ pay,$ otherwise$ the$ bank$ would$ be$
entitled$ to$ liquidate$ their$ shareholdings,$ including$ those$ under$ their$
control.$ The$ spouses$ failed$ to$ settle$ their$ obligation$ and$ ignored$ the$
Banks$demands,$whereupon$their$shares$of$stock$were$converted$into$
Treasury$Stocks.$
$
In$ January$ 1994,$ a$ new$ set$ of$ officers$ was$ elected$ but$ the$ spouses$
Villanueva$were$not$notified,$and$so$they$questioned$the$validity$of$the$
proceedings.$ The$ new$ set$ of$ officers$ informed$ Atty.$ Ignacio$ that$ the$
Villanuevas$were$no$longer$entitled$to$notice$of$the$said$meeting$since$
they$had$relinquished$their$rights$as$stockholders$in$favor$of$the$Bank.$
'
Issue:'Whether$there$was$a$valid$transfer$of$the$shares$to$the$Bank$that$
would$ preclude$ the$ spouses$ Villanueva$ of$ any$ right$ to$ participate$ as$
)
!
stockholder$or$board$member$
'
Held:' NO.$ While$ it$ may$ be$ true$ that$ there$ was$ an$ assignment$ of$ the$
spouses$shares$to$the$petitioners,$said$assignment$was$not$sufficient$to$
effect$ the$ transfer$ of$ shares$ since$ there$ was$ no$ endorsement$ of$ the$
Section'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))
)
certificates$of$stock$by$the$owners,$their$attorneys@in@fact$or$any$other$
person$ legally$ authorized$ to$ make$ the$ transfer.$ Moreover,$ petitioners$
admit$that$the$assignment$of$shares$was$not$coupled$with$delivery,$the$
absence$of$which$is$a$fatal$defect.$
$
Still,$while$the$assignment$may$be$valid$and$binding$on$the$petitioners$
and$ private$ respondents,$ it$ does$ not$ necessarily$ make$ the$ transfer$
effective.$ Consequently,$ the$ petitioners,$ as$ mere$ assignees,$ cannot$
enjoy$the$status$of$a$stockholder,$cannot$vote$nor$be$voted$for,$and$will$
not$ be$ entitled$ to$ dividends,$ insofar$ as$ the$ assigned$ shares$ are$
concerned.$ Parenthetically,$ the$ private$ respondents$ cannot,$ as$ yet,$ be$
deprived$ of$ their$ rights$ as$ stockholders,$ until$ and$ unless$ the$ issue$ of$
ownership$ and$ transfer$ of$ the$ shares$ in$ question$ is$ resolved$ with$
finality.$
'
Doctrine:' The$ rule$ is$ that$ the$ delivery$ of$ the$ stock$ certificated$ duly$
endorsed$ by$ the$ owner$ is$ the$ operative$ act$ of$ transfer$ of$ shares$ from$
the$ lawful$ owner$ to$ the$ transferee.$ Thus,$ title$ may$ be$ vested$ in$ the$
transferee$only$by$delivery$of$the$duly$indorsed$certificate$of$stock.$For$
a$valid$transfer$of$stocks,$there$must$be$strict$compliance$with$the$mode$
of$transfer$prescribed$by$law.)
)
C.'Right'to'Certificate'of'Stock'for'Fully'Paid'Shares'(Section'64)'
'
The$ Board$ resolution$ which$ prohibited$ from$ voting$ shares$ of$

stocks$ which$ were$ not$ fully$ paid,$ although$ certificates$ have$
been$ issued$ for$ them.$ Not$ fully$ paid$ shares$ which$ are$ not$
delinquent$ may$ not$ be$ denied$ their$ voting$ rights.$ It$ also$ held$
that$(under$the$old$Corporation$Law)$unless$prohibited$by$the$b@
laws,$ certificates$ of$ stock$ may$ be$ issued$ for$ less$ than$ the$
number$ of$ the$ shares$ subscribed$ for$ provided$ the$ par$ value$ of$
ach$ of$ the$ stocks$ represented$ by$ each$ of$ the$ certificates$ has$
been$paid.$Baltazar) v.) Lingayen) Gulf) Elect.) Power) Co.,) Inc.,) 14)
SCRA)522)[1965]).)
)
Baltazar)v.)Lingayen)Gulf)Elect.)Power)Co.,)Inc.)
'
Facts:$Plaintiffs$Baltazar$and$Rose$(Batazar$Group)$were$incorporators$of$
Lingayen$ Gulf$ Electric$ Power$ Co,$ subscribed$ to$ 600$ and$ 400$ shares$ of$
the$ capital$ stock,$ respectively.$ Of$ the$ 600$ shares$ of$ capital$ stock$
subscribed$ by$ Baltazar,$ he$ had$ fully$ paid$ 535$ shares$ of$ stock,$ and$ the$
Corporation$issued$to$him$several$certificates$of$stock,$corresponding$to$
the$ 535$ shares.$ Of$ the$ 400$ shares$ of$ stock$ subscribed$ by$ Rose,$ he$ had$
375$ shares$ of$ fully$ paid$ stock,$ duly$ covered$ by$ certificates$ of$ stock$
issued$to$him.$The$respondents$Ungson,$Estrada,$Fernandez$and$Yuson$
(Ungson$Group)$were$stockholders$of$the$Corporation,$all$holding$a$total$
number$of$fully$paid@up$shares$of$stock,$of$less$than100$shares.$and$the$
defendant$Acena$(part$of$the$Ungson$Group),$was$an$incorporator$and$
)
!
stockholder,$ holding$ 600$ shares$ of$ stock.$ Ungson,$ Estrada,$ Fernandez$
and$Yuzon,$where$Directors$of$the$Corporation.$
$
The$ Ungson$ group,$ passed$ three$ (3)$ resolutions$ which$ essentially$ says$
that:$
said$ payments;$ its$ call$ for$ payment$ of$ unpaid$ subscription$ and$ its$
declaration$ of$ delinquency$ for$ non@payment$ of$ said$ call$ affecting$ only$
the$ remaining$ number$ of$ shares$ of$ its$ capital$ stock$ for$ which$ no$ fully$
paid$capital$stock$shares$certificates$have$been$issued,$and$only$do$not$
have$voting$rights$by$said$declaration$of$delinquency.$
1. All$ watered$ stocks$ issued$ to$ Acena,$ Baltazar,$ Rose$ and$

Jubenville,$of$no$value$and$consequently$cancelled$
2. All$unpaid$subscriptions$will$have$interest,$payments$should$be$
applied$to$the$interest$first$
3. That$shares$of$stock,$issued$to$stock$holder,$but$still$has$unpaid$
subscribed$ shares,$ all$ of$ his$ stock$ even$ those$ paid$ are$ not$
entitled$ to$ vote.$ (basically$ it$ prohibited$ Baltazar$ et.$ al.$ the$
'
Doctrine:'The$present$law$requires$as$a$condition$before$a$shareholder$
can$ vote$ his$ shares,$ that$ his$ full$ subscription$ be$ paid$ in$ the$ case$ of$ no$
par$ value$ stock;$ and$ in$ case$ of$ stock$ corporation$ with$ par$ value,$ the$
stockholder$ can$ vote$ the$ shares$ fully$ paid$ by$ him$ only,$ irrespective$ of$
the$unpaid$delinquent$shares.$A$corporation$may$now,$in$the$absence$of$
provisions$ in$ their$ by@laws$ to$ the$ contrary,$ apply$ payment$ made$ by$
power$to$vote$until$all$their$subscriptions$are$paid.)$
$
Baltazar$ and$ Rose$ filled$ a$ complaint$ to$ allow$ them$ to$ vote,$ their$ fully$
paid$up$shares$of$stocks,$and$to$declare$said$three$resolutions$illegal$and$
invalid.$ they$ had$ a$ tentative$ settlement.$ The$ lower$ court$ rendered$ a$
decision,$approving$the$agreement.$The$Ungsons$did$not$agree$with$the$
decision$of$the$court$hence$this$appeal.$
'
Issue:' Whether$ or$ not$ a$ shareholder,$ who$ subscribes$ to$ a$ number$ of$
shares$over$which$he$partially$pays$and$is$issued$certificates$of$stock,$is$
entitled$to$vote$the$latter$
'
Held:' YES.$ Where$ the$ corporation$ issued$ par$ value$ shares,$ the$
stockholder$ can$ vote$ the$ shares$ fully$ paid$ by$ him,$ irrespective$ of$ the$
unpaid$ delinquent$ shares.$ The$ corporation$ had$ chosen$ to$ apply$
payments$ by$ its$ stockholders$ to$ definite$ shares$ of$ the$ capital$ stock$ of$
the$ corporation$ and$ had$ fully$ paid$ capital$ stock$ shares$ certificates$ for$
subscribers@stockholders$ either$ as:$ (a)$ full$ payment$ for$ the$

corresponding$number$of$shares$of$stock,$the$par$value$of$each$of$which$
is$covered$by$such$payment;$or$(b)$as$payment$pro@rata$to$each$and$all$
the$entire$number$of$shares$subscribed$for.)
)
Atty.$ Hofilea$ !$ despite$ jurisprudence,$ the$ law$ $ and$ the$

Securities$ and$ Exchange$ Commission$ has$ interpreted$ $ states$
that$ a$ subscription$ agreement$ is$ indivisible.$ As$ such$ so$ long$ as$
you$have$an$unpaid$amount,$you$cannot$enjoy$the$rights.)
'
D.'Lost'or'Destroyed'Certificates'(Section'63'and'73)'
$
Section'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'
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'
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'
with' the' books' of' the' corporation,' said' corporation' shall' publish' a'
notice' in' a' newspaper' of' general' circulation' published' in' the' place'
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' aboveSdescribed.'
(R.'A.'201a)'
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'
)
While$Section$73$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$ stock$ and$
transfer$ book$ is$ the$ best$ evidence$ to$ establish$ stock$
ownership.$ (Securities$ and$ Exchange$ Commission$ 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$ Corporation$ Code$ in$ accordance$ with$ the$
Securities$and$Exchange$Commission$Opinion,$but$by$doing$so,$it$
cannot$avail$of$the$free$and$harmless$clause$provided$in$said$
!
section,$ that$ $ 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(s)$of$stock$in$lieu$of$those$lost,$stolen$or$destroyed$
and$open$itself$to$claims$for$damages.$1$
'
E.'Forged'and'Unauthorized'Transfers.'
Since$certificates$of$stock$are$only$quasi@negotiable$instruments,$
a$ transferee$ in$ good$ faith$ under$ a$ forged$ assignment$ acquires$
no$ title$ which$ can$ be$ asserted$ against$ the$ true$ owner,$ unless$
the$true$owners$own$negligence$has$been$such$as$to$create$an$
estoppel$ against$ him.$ Delos) Santos) v.) Republic,) 96) Phil.) 577)
(1955).)
A$bona$fide$pledgee$or$transferee$of$a$stock$from$the$apparent$
owner$is$not$chargeable$with$knowledge$of$the$limitations$laced$
on$ said$ certificates$ by$ the$ real$ owner,$ or$ of$ any$ secret$
agreement$relating$to$the$use$which$might$be$made$of$the$stock$
by$ the$ holder.$ When$ a$ stock$ certificate$ has$ been$ endorsed$ in$
blank$by$the$owner$thereof,$it$becomes$a$street$certificate$so$
that$ upon$ its$ face$ the$ holder$ is$ entitled$ to$ demand$ its$ transfer$
into$ his$ name$ from$ the$ issuing$ corporation.$ As$ such$ the$
certificate$ if$ quasi@negotiable$ and$ the$ transferee$ thereof$ is$
justified$in$believing$that$it$belongs$to$the$older$and$transferor.$
J.) Santamaria) v.) HongKong) and) Shanghai) Banking) Corp.,) 89)
Phil.)780)(1951).)
)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
J.)Santamaria)v.)HongKong)and)Shanghai)Banking)Corp.)
'
Facts:' Mrs.$Josefa$T.$Santamaria$bought$10,000$shares$of$the$Batangas$
Minerals,$ Inc.,$ through$ the$ offices$ of$ Woo,$ Uy@Tioco$ &$ Naftaly$ (a$ stock$
brokerage$ firm).$ It$ was$ endorsed$ in$ blank$ to$ her.$ She$ then$ used$ the$
certificate$as$a$security$for$the$purchase$of$10,000$shares$of$the$Crown$
Mines,$ Inc.$ with$ R.J.$ Campos$ &$ Co.,$ another$ brokerage$ firm.$ Two$ days$
later,$ she$ returned$ to$ R.J.$ Campos$ &$ Co.$ to$ pay$ for$ the$ shares$ and$
redeem$her$certificate$only$to$find$out$that$the$firm$was$prohibited$by$
the$ Securities$ and$ Exchange$ Commission$ from$ transacting$ business.$
Also,$ her$ stocks$ that$ were$ used$ as$ security$ have$ been$ transferred$ to$
Hongkong$ and$ Shanghai$ Banking$ Corporation,$ who$ had$ come$ into$
possession$ of$ the$ certificates$ because$ R.J.$ Campos$ &$ Co.,$ Inc.$ had$
opened$ an$ overdraft$ account$ with$ this$ bank$ and$ to$ this$ effect$ it$ had$
executed$a$document$where$they$pledged$to$the$said$bank$"all$stocks,$
shares$ and$ securities$ which$ I/we$ may$ hereafter$ come$ into$ their$
possession$of$my/our$account$and$whether$originally$deposited$for$safe$
custody$ only$ or$ for$ any$ other$ purpose$ whatever$ or$ which$ may$
hereinafter$be$deposited$by$me/us$in$lieu$of$or$in$addition$to$the$Stocks$
Shares$ and$ Securities$ now$ deposited$ or$ for$ any$ other$ purposes$
whatsoever."$$
'
Issue:' Whether$ or$ not$ the$ stock$ certificate$ should$ be$ returned$ to$ Mrs.$
Santamaria.$
'
Held:'NO.$Santamaria$was$negligent$in$the$transaction.$Mrs.$Santamaria$
could$ have$ asked$ the$ corporation$ that$ had$ issued$ said$ certificate$ to$
cancel$ it$ and$ issue$ another$ in$ lieu$ thereof$ in$ her$ name$ to$ apprise$ the$
holder$that$she$was$the$owner$of$said$certificate.$This$she$failed$to$do,$
)
!
transfer$ book.$ Neugene) Marketing,) Inc.) v.) Court) of) Appeals,)
303)SCRA)295)(1999).)
and$instead$she$delivered$said$certificate$to$R.J.$Campos$&$Co.$indorsed$
in$ blank,$ thereby$ clothing$ the$ latter$ with$ apparent$ title$ to$ the$ shares$
represented$by$said$certificate$including$apparent$authority$to$negotiate$
it.$This$was$the$proximate$cause$of$the$damage$suffered$by$her.$She$is,$
therefore,$estopped$from$claiming$further$title$to$or$interest$therein$as$
against$a$bona$fide$pledgee$or$transferee$thereof.$
$
HSBC$was$justified$in$believing$that$R.J.$Campos$and$Company$had$title$
thereto$ considering$ it$ was$ indorsed$ in$ blank,$ and,$ therefore,$ deemed$
quasi@$negotiable.$Thus,$HSBC$cannot$be$blamed$for$believing$that$such$
belonged$to$the$holder$and$transferor.$Furthermore,$the$bank$was$not$
obligated$ to$ look$ beyond$ the$ certificate$ to$ ascertain$ the$ ownership$ of$
Facts:'NEUGENE$had$authorized$capital$stock$of$P3$MILLION$(eventually$
became$P7$MILLION),$P600K$of$which$is$subscribed$and$P150K$of$those$
subscribed$were$paid$up.$On$October$24,$1987,$the$private$respondents,$
Charles$O.$Sy,$Arsenio$Yang,$Jr.$and$Lok$Chun$Suen,$constituting$2/3$of$
the$ total$ shares,$ sent$ notice$ to$ the$ directors$ of$ NEUGENE$ for$ a$ board$
meeting$to$be$held$on$November$30,$1987.$They$also$sent$notice$for$a$
special$stockholders$meeting$on$the$same$day,$November$30,$1987,$to$
the$ stock$ at$ the$ time$ it$ received$ the$ same$ from$ R.J.$ Campos$ and$
Company.$
'
Doctrine:' A$ bona$ fide$ pledgee$ or$ transferee$ of$ a$ stock$ from$ the$
apparent$ owner$ is$ not$ chargeable$ with$ knowledge$ of$ the$ limitations$
placed$ on$ it$ by$ the$ real$ owner,$ or$ of$ any$ secret$ agreement$ relating$ to$
the$ use$ which$ might$ be$ made$ of$ the$ stock$ by$ the$ holder$ (12$ Fletcher,$
consider$ the$ dissolution$ of$ NEUGENE$ in$ which$ they$ voted$ in$
AFFIRMATIVE.$Tan$et$al,$brought$an$action$to$annul$or$set$aside$the$said$
Securities$and$Exchange$Commission$Certification$on$the$Dissolution$of$
Neugene$ on$ the$ ground$ that$ Yang,$ Jr.$ et$ al.$ could$ not$ validly$ vote$ for$
dissolution$of$NEUGENE$because$they$had$divested$themselves$of$their$
stockholdings$ when$ they$ endorsed$ their$ stock$ certificates$ in$ blank$ and$
delivered$the$same$to$the$Uy$Family$who$subsequently$transferred$the$
Corporations,$section$5562,$p.$521).$"Where$one$of$two$innocent$parties$
must$suffer$by$reason$of$a$wrongful$or$unauthorized$act,$the$loss$must$
fall$on$the$one$who$first$trusted$the$wrongdoer$and$put$in$his$hands$the$
means$of$inflicting$such$loss.")
certificates$to$Johnny$Uy$and$later$to$Tan$et$al.$
$
Yang,$ Jr.$ et$ al.$ contends$ that$ there$ never$ was$ any$ agreement$ entered$
into$ by$ the$ Uy$ family$ to$ award$ NEUGENES$ stock$ certificates,$ because$
subject$stock$certificates$were$endorsed$in$blank$by$Yang$et$al$to$the$Uy$
family$for$safe$keeping.$
'
Issue:' Whether$ or$ not$ there$ was$ a$ valid$ transfer$ of$ shares,$ divesting$
When$ the$ stock$ certificates$ have$ been$ endorsed$ in$ blank$ for$
purposes$ of$ showing$ the$ nominee$ relations,$ the$ eventual$
delivery$ and$ registration$ of$ the$ shares$ in$ violation$ of$ the$ trust$
relationship$ and$ after$ their$ having$ been$ stolen,$ would$ be$ void,$
even$when$such$transfers$have$been$registered$in$the$stock$and$
Neugene)Marketing,)Inc.)v.)Court)of)Appeals)
'
Yang$Jr.$et$al$of$their$stockholdings$as$of$the$date$of$the$meeting$when$
they$voted$for$the$resolution$dissolving$NEUGENE.$
)
!
'
Held:'NO.$The$Court$found$that$the$certificates$of$stock$were$stolen$and$
therefore$not$validly$transferred,$and$the$transfers$of$stock$relied$upon$
by$Tan$et$al$were$fraudulently$recorded$in$the$Stock$and$Transfer$Book$
of$NEUGENE$under$the$column$Certificates$Cancelled.$As$nominees$of$
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'
the$ Uy$ family,$ the$ approval$ by$ the$ Charles$ O.$ Sy,$ Lok$ Chun$ Suen$ and$
Arsenio$Yang,$Jr.,$Jr.,$was$necessary$for$the$validity$and$effectivity$of$the$
transfer$ of$ the$ stock$ certificates$ registered$ under$ their$ (Yang$ Jr$ et$ al)$
names.$ In$ the$ case$ under$ consideration,$ not$ only$ did$ the$ transfers$ of$
stock$in$question$lack$the$requisite$approval,$Yang$Jr$et$al$categorically$
declared$ under$ oath$ that$ subject$ certificates$ of$ stock$ of$ theirs$ were$
stolen$ from$ the$ confidential$ vault$ of$ the$ Uy$ family$ and$ illegally$
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.'
'
transferred$to$the$names$of$petitioners$in$the$Stock$and$Transfer$Book$
of$ NEUGENE.$ Lastly,$ there$ is$ no$ reliable$ showing$ of$ any$ valuable$
consideration$for$the$supposed$transfer$of$subject$stocks$to$Tan$et$al.$
'
Doctrine:' To$ constitute$ a$ valid$ transfer,$ a$ stock$ certificate$ must$ be$
delivered$ and$ its$ delivery$ must$ be$ coupled$ with$ an$ intention$ of$
constituting$the$person$to$whom$the$stock$is$delivered$the$transferred$
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'
thereof.$Furthermore,$in$order$that$there$is$a$valid$transfer,$the$person$
to$ whom$ the$ stock$ certificates$ are$ endorsed$ must$ be$ a$ bona$ fide$
transferee$and$for$value.)
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'
)
X.'STOCK'AND'TRANSFER'BOOK'(Sections'63,'72'and'74):'
'
Section'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'
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' 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.'
transfer$ books.$ The$ remedy$ of$ the$ one$ who$ wants$ such$ claim$
over$the$unpaid$shares$to$be$recorded$is$to:)
a. Require$the$owner$to$pay$the$shares$completely.'
b. Resort$to$subrogation$(i.e.$substitution$of$debtors)$may$
be$ allowed$ if$ the$ consent$ of$ the$ corporation$ (Board$ of$
Directors),$as$creditor,$is$secured.'
'
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'bySlaws'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.)'
'
Atty.$ Hofilea$ !$ No$ claim$ over$ unpaid$ shares$ for$ which$ the$
corporation$ has$ a$ claim$ will$ be$ recorded$ in$ the$ stock$ and$
Sales$ and$ other$ dispositions$ of$ shares$ of$ stock$ must$ under$
Section$ 63$ be$ registered$ in$ the$ stock$ and$ transfer$ book:$ (a)$ to$
enable$the$corporation$to$know$at$all$times$who$are$the$actual$
stockholders;$ (b)$ to$ afford$ the$ corporation$ an$ opportunity$ to$
object$or$refuse$its$consent$to$such$transfer$when$it$has$claims$
against$ such$ shares;$ and$ (c)$ to$ avoid$ fictitious$ or$ fraudulent$
transfers.$ Escao' v.' Filipinas' Mining' Corporation,' 74' Phil.' 71'
(1944).)
)
Escao'v.'Filipinas'Mining'Corporation)
'
Facts:' In$ the$ original$ case,$ the$ Court$ ordered$ Salvosa$ to$ transfer$ and$
deliver$ to$ Escao$ 116$ active$ shares$ and$ an$ undetermined$ number$ of$
shares$ in$ escrow$ of$ Filipinas$ Mining.$ A$ writ$ of$ garnishment$ was$ served$
to$ Filipinas$ Mining$ to$ satisfy$ judgment,$ and$ the$ shares$ were$
subsequently$ sold$ in$ a$ public$ auction.$ HOWEVER,$ the$ said$ shares$ of$
stocks$ were$ sold$ to$ Bengzon$ then$ to$ Standard$ investment$ of$ the$
Philippines$ during$ the$ pendency$ of$ the$ said$ case.$ The$ transfers,$
however,$were$not$recorded$in$the$books$of$Filipinas$Mining$and$it$was$
only$ after$ around$ 3$ years$ that$ the$ sale$ to$ Standard$ Investment$ was$
recorded.$ On$ January$ 24,$ 1941$ Filipinas$ Mining$ issued$ in$ favour$ of$
)
!
Standard$ Investment$ certificate$ of$ stocks$ for$ 18,580$ shares$ formerly$
held$ in$ escrow.$ This$ then$ prompted$ Escao$ to$ file$ this$ present$ case$
against$Filipinas$Mining$Corp$and$Standard$and$Investment.$
'
Issue:'Whether$or$not$the$issuance$by$Filipinas$Mining$of$the$said$shares$
of$ stock$ to$ Standard$ was$ valid$ as$ against$ the$ attaching$ judgment$
creditor$(Escao)$of$the$original$owner,$Salvosa.$
$
Held:'NO.$The$transfer$of$the$escrow$shares$in$question$from$Salvosa$to$
Bengzon$ and$ from$ Bengzon$ to$ the$ Standard$ Investment$ of$ the$
Philippines,$not$having$been$recorded$in$the$books$of$the$corporation$as$
required$ by$ Section$ 35$ of$ the$ Corporation$ Law,$ could$ not$ prevail$ over$
the$garnishment$previously$made$by$the$plaintiff$of$the$said$shares.$
'
Doctrine:' In$ accordance$ with$ Section$ 35,$ for$ transfer$ of$ shares$ to$ be$
valid$against$the$corporation$and$third$parties$it$must$be$recorded$in$the$
book$of$records$of$the$corporation.$Even$if$the$law$expressly$stated$that$
this$ is$ for$ issued$ shares,$ the$ Court$ held$ that$ through$ analogy$ such$
requirement$also$applies$to$unissued$shares$held$in$escrow.$There$is$no$
valid$reason$for$treating$unissued$shares$held$in$escrow$differently$from$
the$issued$shares$insofar$as$the$sale$and$transfer$is$concerned.$In$both$
cases$ the$ possibility$ of$ fraudulent$ transfers$ exists$ and$ the$ aim$ of$
requiring$ such$ recording$ of$ transfer$ is$ to$ prevent$ this.$ In$ this$ case,$
therefore,$ the$ transfer$ of$ shares$ (whether$ issued$ shares$ or$ unissued$
shares$ held$ in$ escrow)$ must$ be$ recorded$ in$ the$ book$ of$ record$ of$ the$
corporation$ in$ order$ to$ be$ valid$ against$ the$ corporation$ and$ third$
parties.'
)
Shares$ for$ which$ no$ certificate$ of$ stock$ has$ been$ issued$ may$
validly$be$mortgaged$in$whole$(and$not$just$with$respect$to$the$
portion$paid@up)$and$the$corporation$receiving$notice$thereof$is$
bound$ to$ respect$ the$ security$ arrangement.$ Fua) Cun) v.)
Summers,)44)Phil.)704)(1923).)
)
Fua)Cun)v.)Summers)
'
Facts:' Chua$ Soco$ subscribed$ for$ 500$ shares$ of$ stock$ of$ China$ Bank$ at$
P100$per$share$and$paid$25,000$representing$half$of$the$subscription$for$
which$ a$ receipt$ was$ issued.$ Subsequently,$ Chua$ Soco$ issued$ a$
promissory$note$in$favor$of$the$plaintiff,$Fua$Cun$and$secured$the$note$
with$ a$ chattel$ mortgage$ on$ the$ said$ shares$ of$ stock.$ There$ came$ the$ a$
point$that$Chua$Soco$became$indebted$to$China$Bank$and$failed$to$pay$
such$which$lead$to$the$attachment$of$the$same$shares$of$stock$in$favor$
of$ the$ bank.$ Fua$ Cun$ contested$ this$ and$ claims$ that$ he$ acquired$ the$
right$to$the$250$fully$paid$shares$and$he$must$be$given$priority$over$the$
ownership$ plus$ damages.$ The$ bank$ argues$ that$ the$ interest$ held$ by$
Chua$Soco$was$merely$an$equity$which$could$not$be$made$the$subject$of$
a$chattel$mortgage.$
'
Issue:'Whether$or$not$Fua$Cun$has$better$rights$over$the$bank.$
'
Held:'YES.$Chua$Soco$does$not$own$half$of$the$shares.$His$right$consists$
only$ in$ an$ equity$ entitling$ him$ to$ a$ certificate$ for$ the$ total$ number$ of$
shares$subscribed$for$by$him$upon$payment$of$the$remaining$portion$of$
the$subscription$price.$There$can$be$no$doubt$that$an$equity$in$shares$of$
stock$may$be$assigned$and$that$the$assignment$is$valid$as$between$the$
parties$ and$ as$ to$ persons$ to$ whom$ notice$ is$ brought$ home.$ Such$ an$
)
!
assignment$exists$here,$though$it$was$made$for$the$purpose$of$securing$
a$debt.$The$attachment$was$levied$after$the$bank$had$received$notice$of$
the$ assignment$ of$ Chua$ Soco's$ interests$ to$ the$ plaintiff$ and$ was$
therefore$ subject$ to$ the$ rights$ of$ the$ latter.$ It$ follows$ that$ as$ against$
these$rights$the$defendant$bank$holds$no$lien$whatever.$
thereof.$ Monserrat$ assigned$ to$ Ceron$ a$ usufruct$ of$ half$ of$ his$ shares$
under$ a$ usurfruct$ agreement.$ Monserrat$ reserved$ for$ himself$ and$ his$
heirs$he$right$to$vote$derived$from$said$shares$of$stock$and$to$recover$
the$ownership$thereof$at$the$termination$of$the$usufruct.$Certificate$of$
Stock$No.$7$was$then$issued$in$the$name$of$Ceron.$It$was$also$recorded$
'
Doctrine:' In$ the$ absence$ of$ special$ agreement$ to$ the$ contrary,$ a$
subscriber$ for$ a$ certain$ number$ of$ shares$ of$ stock$ does$ not,$ upon$
payment$ of$ one@half$ of$ the$ subscription$ price,$ become$ entitled$ to$ the$
issuance$ of$ certificates$ for$ one@half$ the$ number$ of$ shares$ subscribed$
for;$ the$ subscriber's$ right$ consists$ only$ in$ an$ equity$ entitling$ him$ to$ a$
certificate$ for$ the$ total$ number$ of$ shares$ subscribed$ for$ by$ him$ upon$
on$the$Stock$and$Transfer$Book$of$the$company.$Despite$the$agreement,$
Ceron$ mortgaged$ to$ Matuto$ the$ shares$ he$ held$ (but$ were$ actually$
owned$ by$ Monserrat).$ Ceron$ showed$ Matute$ the$ Stock$ and$ Transfer$
Book$of$the$company.$Matute$saw$that$the$stocks$were$in$the$name$of$
Ceron,$free$from$any$lien$or$encumbrance.$When$Ceron$mortgaged$the$
stocks,$he$did$not$inform$Matute$of$Monserrats$reservation.$
'
payment$of$the$remaining$portion$of$the$subscription$price.)
Issue:' Whether$ or$ not$ it$ is$ necessary$ to$ enter$ upon$ the$ books$ of$ the$
corporation$a$mortgage$constituted$on$common$shares$of$stock$in$order$
for$the$mortgage$to$be$valid$
'
Held:' NO.$ Ceron$ testified$ that$ when$ he$ mortgaged$ his$ shares,$ he$ said$
nothing$to$Erma,$Inc.,$about$the$existence$of$the$deed,$for$fear$he$might$
not$ succeed$ in$ obtaining$ the$ loan$ he$ applied$ for.$ Erma,$ Inc.,$ as$ a$
When$the$shares$are$covered$by$a$stock$certificate$issued$in$the$
name$ of$ the$ usufructuary$ by$ the$ original$ owner$ with$ the$
agreement$ between$ them$ that$ they$ should$ not$ be$ disposed$ or$
sold,$ but$ the$ registered$ owner$ had$ pledged$ the$ shares$ by$
endorsement$ and$ delivery$ of$ the$ certificate$ to$ one$ who$ took$
them$ in$ good$ faith$ and$ for$ value,$ the$ latter$ shall$ be$ preferred$
since$ registration$ of$ a$ security$ arrangement$ covering$ shares$ of$
stock$does$not$require,$for$its$validity$and$binding$effect$on$the$
world,$ to$ be$ registered$ in$ the$ stock$ and$ transfer$ book.$
Monserrat)v.)Ceron,)58)Phil.)469)(1933).)
)
Monserrat)v.)Ceron)
'
Facts:' Monserrat$ was$ the$ president$ and$ manager$ of$ Manila$ Yellow$
Taxicab$ Co.,$ Inc.,$ and$ the$ owner$ of$ P1,200$ common$ shares$ of$ stock$
conditional$purchaser$of$the$shares$of$stock$in$question$given$as$security$
for$ the$ payment$ of$ his$ credit,$ acquired$ in$ good$ faith$ Ceron's$ right$ and$
title$ to$ the$ 600$ common$ shares$ of$ stock$ of$ the$ Manila$ Yellow$ Taxicab$
Co.,$Inc.,$and$as$such$conditional$purchaser$in$good$faith,$it$is$entitled$to$
the$protection$of$the$law.$
'
Doctrine:' A$ chattel$ mortgage$ refers$ to$ personal$ property$ given$ as$
security$ for$ payment$ of$ a$ debt.$ Such$ personal$ property$ has$ to$ be$
delivered.$ But$ the$ transfer$ is$ not$ absolute,$ being$ a$ mere$ security.$ A$
chattel$mortgage$is$not$a$transfer$because$there$is$no$intent$of$passing$
)
!
the$rights$the$transferor$has$to$the$transferee.$A$chattel$mortgage$is$not$
the$ transfer$ referred$ to$ in$ the$ (old)$ corporation$ law,$ which$ transfer$
should$be$entered$and$noted$upon$the$books$of$a$corporation$in$order$
to$be$valid.$Only$the$transfer$or$absolute$conveyance$of$the$ownership$
of$the$title$to$shares$needs$to$be$entered$and$noted$upon$the$books$of$
the$ corporation.$ Hence,$ inasmuch$ as$ a$ chattel$ mortgage$ is$ not$ a$

complete$ and$ absolute$ alienation$ of$ the$ dominion$ and$ ownership$
thereof,$its$entry$and$notation$upon$the$books$of$the$corporation$is$not$
a$necessary$requisite$to$its$validity.)
Ecija.$ It$ was$ represented$ by$ 9$ certificates$ which$ Toco$ mortgaged$ to$
Chiu.$ Chiu$ registered$ the$ mortgaged$ stocks$ in$ the$ register$ of$ deeds$ in$
Manila.$Later,$Chiu$assigned$all$his$rights$and$interest$to$Chua$Guan$who$
registered$ it$ in$ the$ register$ of$ deeds$ in$ Manila$ and$ in$ the$ office$ of$ the$
corporation.$ When$ Toco$ defaulted$ in$ payment,$ the$ shares$ were$
foreclosed$ by$ Chua$ Guan$ who$ was$ thereafter$ declared$ as$ the$ highest$
bidder.$When$he$tendered$the$certificates$of$cancellation$and$asked$for$
Summary$of$Points$(Atty.$Hofilea))
o
Much$ of$ the$ disputes$ come$ in$ when$ there$ are$

competing$ interests$ involved.$ Because$ shares$ are$
property,$ they$ can$ be$ dealt$ with$ (sold,$ mortgaged,$
attached,$etc.))
General$ Rule:$ for$ disposition/sale$ of$ shares,$ they$ are$
valid$as$against$third$persons$only$when$recorded$in$the$
stock$and$transfer$book$of$the$corporation.)
Between$ an$ assignee$ and$ a$ creditor,$ who$ has$ a$ better$
right?$Whoever$performs$all$the$acts$required$by$law$to$
be$binding$on$the$world$first$has$better$right.)
Chua)Guan)v.)Samahang)Magsasaka,)Inc.)
'
Facts:' Toco,$ a$ resident$ of$ Manila,$ owns$ 5,894$ shares$ of$ capital$ stock$
with$ Samahang$ Magsasaka$ Inc.,$ which$ has$ principal$ office$ in$ Nueva$
the$issuance$of$new$shares$in$his$name,$the$officers$of$the$Corporation$
refused$ because$ prior$ to$ Chua$ Guans$ demand,$ and$ even$ before$ the$
notice$ of$ mortgage$ of$ Chiu,$ several$ attachments$ against$ the$ shares$
covered$ by$ the$ certificates$ had$ been$ recorded$ in$ its$ books$ (the$
corporation$ received$ the$ notice$ of$ mortgage$ only$ after$ 2$ years$ from$
date$of$registration).$Chua$Guan$filed$a$writ$of$mandamus$to$require$the$
officers$ to$ transfer$ the$ shares$ of$ stock$ to$ him$ by$ cancelling$ the$ old$
binding$ on$ third$ parties,$ registration$ thereof$ in$ the$ stock$ and$
transfer$ book$ is$ not$ required$ and$ not$ legally$ effective.$ What$ is$
necessary$ is$ that$ the$ chattel$ mortgage$ over$ the$ shares$ be$
registered$ in$ the$ Registry$ of$ Deeds$ of$ the$ principal$ place$ of$
business$of$the$corporation,$as$well$as$in$the$Registry$of$Deeds$
certificates$and$issuing$new$ones$in$their$stead.$
'
Issue:' Whether$ or$ not$ the$ mortgage$ takes$ priority$ over$ the$ writ$ of$
attachments.$
$
Held:' NO.$ The$ Corporation$ received$ the$ writ$ of$ attachments$ on$ the$
shares$prior$to$the$notice$of$registration$of$the$mortgage.$The$basis$for$
notice$ is$ the$ actual$ notice$ because$ there$ was$ no$ valid$ constructive$
of$ the$ stockholders$ domicile.$ Chua) Guan) v.) Samahang)

Magsasaka,)Inc.,)62)Phil.)472)(1935).)
notice.$ Chattel$ mortgage$ of$ shares$ should$ be$ registered$ both$ at$ the$
owners$ domicile$ and$ in$ the$ province$ where$ the$ corporation$ has$ its$
In$order$for$the$chattel$mortgage$on$shares$of$stock$be$valid$and$
)
!
principal$office.$Thus,$the$mortgage$should$have$been$registered$in$the$
Register$ of$ Deeds$ of$ Manila$ and$ Nueva$ Ecija.$ (It$ should$ be$ understood$
that$the$property$mortgaged$is$not$the$certificate$but$the$participation$
and$share$of$the$owner$in$the$assets$of$the$corporation.)$
'
the$ books$ of$ the$ corporation,$ is$ valid$ as$ against$ a$ subsequent$ lawful$
attachment$of$said$shares,$regardless$of$whether$the$attaching$creditor$
had$actual$notice$of$said$transfer$or$not.$
'
Held:'NO.$Section$35$requires$that$for$a$disposition$of$shares$to$be$valid$
Doctrine:' The$ registration$ of$ the$ chattel$ mortgage$ in$ the$ office$ of$ the$
corporation$is$not$necessary$and$has$no$legal$effect.)
as$against$third$parties,$the$same$must$be$recorded$in$the$books$of$the$
corporation.$Therefore,$the$transfer$of$the$75$shares$in$the$Corporation$
made$by$the$Diosomito$to$Barcelon$was$not$valid$as$to$Uson,$on$January$
18,$ 1932,$ the$ date$ on$ which$ she$ obtained$ her$ attachment$ lien$ on$ said$
shares$of$stock$which$still$stood$in$the$name$of$Diosomito$on$the$books$
of$the$Corporation.$
'
The$failure$to$register$a$sale$or$disposition$of$shares$of$stock$in$
the$books$of$the$corporation$would$render$the$same$invalid$to$
all$persons,$including$the$attaching$creditors$of$the$seller.$Uson)
v.)Diosomito,)61)Phil.)535)(1935).)
)
Uson)v.)Diosomito)
'
Facts:' Uson$ filed$ a$ civil$ action$ for$ debt$ against$ Diosomito,$ and$ an$
attachment$ was$ duly$ issued$ and$ levied$ upon$ Diosomitos$ property$
including$his$75$shares$in$the$North$Electric$Co.,$Inc.$Uson$won$the$case$
and$so$the$shares$were$sold$in$a$public$auction$to$satisfy$the$judgment.$
Uson$was$the$highest$bidder,$but$not$H.P.L.$Jollye$now$claims$to$be$the$
owner$of$the$75$shares.$He$presented$a$certificate$of$stock$issued$to$him$
by$ the$ company.$ Apparently,$ Diosomito,$ the$ original$ owner$ of$ the$
Doctrine:' All$ transfers$ of$ shares$ not$ so$ entered$ are$ invalid$ as$ to$
attaching$ or$ execution$ creditors$ of$ the$ assignors,$ as$ well$ as$ to$ the$
corporation$and$to$subsequent$purchasers$in$good$faith,$and$indeed,$as$
to$ all$ persons$ interested,$ except$ the$ parties$ to$ such$ transfers.$ 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.)
)
shares,$ sold$ the$ same$ to$ Barcelon$ and$ delivered$ to$ the$ latter$ the$
corresponding$certificates$Nos.$2$and$19.$Barcelon$later$sold$the$shares$
to$ Jollye.$ It$ must$ be$ noted$ that$ the$ transfer$ of$ shares$ by$ Diosomito$ to$
Barcelon$ was$ registered$ and$ noted$ on$ the$ books$ of$ the$ corporation$ 9$
months$AFTER$the$attachment$had$been$levied$on$the$said$shares.$
$
Issue:' Whether$ or$ not$ a$ transfer$ of$ shares,$ not$ registered$ or$ noted$ on$
)
The$ pledge$ of$ shares$ of$ stock$ covered$ by$ a$ certificate$ is$ valid$
and$ binding$ on$ third$ parties,$ when$ the$ certificate$ of$ stock$ has$
been$ endorsed$ and$ delivered$ to$ the$ creditor,$ notwithstanding$
the$fact$that$the$contract$does$not$appear$in$a$public$instrument$
(chattel$mortgage).$Certificates$of$stockare$quasi@$negotiable$
instruments$ in$ the$ sense$ that$ they$ may$ be$ given$ in$ pledge$ or$
mortgage$ to$ secure$ an$ obligation.$ Bachrach) Motor) Co.) v.)
Lacson)Ledesma,)64)Phil.)681)(1937).)
)
!
Bachrach)Motor)Co.)v.)Lacson)Ledesma)
'
Facts:' Bachrach$ Motors$ and$ Philippine$ National$ Bank$ were$ both$
creditors$of$Lacson$Ledesma,$battling$over$his$properties$in$Bacolod$for$
the$ purpose$ of$ satisfying$ their$ claims.$ Subject$ to$ the$ controversy$ are$
Ledesmas$stocks$with$the$Talisay@Silay$Milling$Co.$$
$
Around$1923,$Ledesma$mortgaged$various$real$properties$to$PNB$for$the$
purpose$of$securing$his$debts,$and$in$the$same$transactions,$he$pledged$
Stock$ Certificate$ No.772$ containing$ stocks$ and$ stock$ dividends$ in$ favor$
of$PNB.$$On$the$other$hand,$around$1927,$Bachrach$Motors$obtained$a$
favorable$judgment$in$civil$case$against$Ledesma.$A$writ$of$execution$of$
said$judgment$was$issued$on$the$same$year,$and$Jose$Y.$Orosa$(special$
sheriff),$in$compliance$with$the$writ$of$execution,$attached$on$the$stocks$
of$ Ledesma.$ That$ notice$ of$ said$ attachment$ was$ served$ not$ only$ upon$
the$Ledesma$but$also$upon$Talisay@Silay$Milling$Co.,$Inc.$Bachrachs$was$
claiming$that$it$had$a$preferred$right$over$PNB,$and$they$argued$that$the$
stock$ certificate$ pledged$ to$ PNB$ were$ not$ the$ shares$ themselves.$ And$
the$ shares$ being$ intangible$ in$ character$ cannot$ be$ delivered$ by$ pledge$
to$the$possession$of$PNB.$
'
Issue:'Whether$or$not$the$certificate$of$stocks$or$of$stock$dividends$may$
be$pledged.$
$
Held:' YES.$ There$ was$ a$ valid$ transfer$ and$ PNB$ had$ the$ preferred$ right$
over$ the$ stocks/stock$ dividends$ of$ Ledesma.$ The$ stock$ dividends$ in$
question$were$pledged$to$the$bank$5$months$prior$to$the$garnishment$
of$Bachrach.$It$is$admitted$that$the$delivery$of$the$certificate$in$question$
and$the$pledge$thereof$were$not$made$to$appear$in$a$public$instrument.$
It$is$true,$according$to$Article$1865$of$the$Civil$Code,$that$in$order$that$a$
pledge$ may$ be$ effective$ as$ against$ third$ person,$ evidence$ of$ its$ date$
must$ appear$ in$ a$ public$ instrument$ in$ addition$ to$ the$ delivery$ of$ the$
thing$ pledged$ to$ the$ creditor.$ HOWEVER,$ Section$ 4$ of$ the$ Chattel$
Mortgage$ Law$ implicitly$ modified$ Article$ 1865$ of$ the$ Civil$ Code$ in$ the$
sense$ that$ a$ contract$ of$ pledge$ and$ that$ of$ chattel$ mortgage$ to$ be$
effective$ as$ against$ third$ persons,$ need$ not$ appear$ in$ a$ public$
instrument.$Provided,$that$the$thing$pledged$or$mortgaged$be$delivered$
or$placed$in$the$possession$of$the$creditor.$
'
Doctrine:'See$above.2
)
Only$fully$paid$shares$for$which$certificates$of$stock$have$been$
issued$ are$ subject$ to$ the$ registration$ requirement$ in$ the$ stock$
and$transfer$book$in$cases$dealing$with$their$sales$and$absolute$
disposition.$Nava)v.)Peers)Marketing)Corp.,)74)SCRA)65)(1976).)
)
Nava)v.)Peers)Marketing)Corp.)
'
Facts:' Teofilo$ Po$ subscribed$ to$ 80$ shares$ of$ Peers$ Marketing$ and$ paid$
25%$of$the$amount$of$his$subscription.$Po$then$sold$to$Nava$20$of$his$80$
shares.$ Nava$ requested$ the$ officers$ of$ Peers$ Marketing$ to$ register$ the$
sale$ in$ the$ books$ of$ the$ corporation$ but$ the$ corporation$ refused$
because$ Po$ was$ delinquent$ in$ the$ payment$ of$ the$ balance$ of$ his$
subscription.$ Nava$filed$a$mandamus$action$to$compel$the$corporation$
to$ register$ the$ shares$ in$ Navas$ name.$ The$ respondents$ (executive$ VP$
and$secretary)$pleaded$the$defense$that$no$shares$of$stock$which$holds$
an$unpaid$claim$are$transferable$in$the$books$of$the$corporation.'
'
)
!
which$ ordinarily$ are$ or$ should$ be$ written$ therein.$ Lanuza) v.)
Court)of)Appeals,)454)SCRA)54)(2005).)
Issue:'Whether$or$not$the$officers$of$Peers$Marketing$can$be$compelled$
by$mandamus$to$register$the$sale$in$the$books$of$the$corporation$
'
Held:'NO.$The$transfer$made$by$Po$to$Nava$is$not$the$alienation,$sale,$
or$ transfer$ of$ stock$ that$ is$ supposed$ to$ be$ recorded$ in$ the$ stock$ and$
The$books$and$records$of$a$corporation,$which$include$even$the$
stock$and$transfer$book,$are$generally$admissible$in$evidence$in$
favor$ of$ or$ against$ the$ corporation$ and$ its$ members$ to$ prove$
the$ corporate$ acts,$ its$ financial$ status$ and$ other$ matters$
including$ ones$ status$ as$ a$ stockholder.$ They$ are$ ordinarily$ the$
best$evidence$of$corporate$acts$and$proceedings.$However,$the$
books$ and$ records$ of$ a$ corporation$ are$ not$ conclusive$ even$
against$ the$ corporation$ but$ prima2 facie2 evidence$ only.$ Parol$
transfer$book,$as$contemplated$in$section$52$of$the$Corporation$Law.$As$
a$ rule,$ only$ those$ shares$ covered$ by$ certificates$ of$ stock$ may$ be$
alienated.$ In$ this$ case,$ there$ is$ no$ clear$ legal$ duty$ on$ the$ part$ of$ the$
officers$of$the$corporation$to$register$the$twenty$shares$in$Navas$name,$
There$ is$ no$ cause$ of$ action$ for$ mandamus$ as$ no$ stock$ certificate$ was$
issued$ to$ Po.$ Without$ stock$ certificate,$ which$ is$ the$ evidence$ of$
ownership$ of$ corporate$ stock,$ the$ assignment$ of$ corporate$ shares$ is$
effective$only$between$the$parties.$
'
Doctrine:' Only$ those$ shares$ covered$ by$ certificates$ of$ stock$ may$ be$
alienated.$Without$stock$certificate,$the$assignment$of$corporate$shares$
is$effective$only$between$the$parties$to$the$transaction)
evidence$ may$ be$ admitted$ to$ supply$ omissions$ in$ the$ records,$
explain$ambiguities,$or$show$what$transpired$where$no$records$
were$ kept,$ or$ in$ some$ cases$ where$ such$ records$ were$
contradicted.$ The$ effect$ of$ entries$ in$ the$ books$ of$ the$
corporation$ which$ purport$ to$ be$ regular$ records$ of$ the$
proceedings$ of$ its$ board$ of$ directors$ or$ stockholders$ can$ be$
destroyed$ by$ testimony$ of$ a$ more$ conclusive$ character$ than$
'
A.'Probative'Value'of'Stock'and'Transfer'Book'
mere$ suspicion$ that$ there$ was$ an$ irregularity$ in$ the$ manner$ in$
which$the$books$were$kept.$1)
BUT:$ The$ stock$ and$ transfer$ book$ 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$records,$is$not$in$any$sense$a$public$record,$
and$ thus$ is$ not$ exclusive$ evidence$ of$ the$ matters$ and$ things$
The$ Securities$ and$ Exchange$ Commission$ has$ opined$ that$

corporate$ books$ and$ records$ are$ merely$ private$ books$ and$
records,$ and$ as$ such,$ they$ are$ subject$ to$ the$ general$ rule$ of$
evidence$ which$ are$ commonly$ applicable$ to$ documentary$
evidence.2)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2Bitong2v.2Court2of2Appeals,$292$SCRA$304,$96$SCAD$205$(1998).$$
$SECURITIES$ AND$ EXCHANGE$ COMMISSION$ Opinion,$ 12$ January$ 1994,$ XXVIII$
1994),$ citing$ I5$ FLETCHER$ CYC.$ CORP.,$ 1976$ rev.$ vol.,$ Securities$ and$ Exchange$
Commission.$ 2196$ at$ p.$ 643;$ FLETCHER$ Securities$ and$ Exchange$ Commission.$
2
)
!
'
B.'Validity'of'Transfers:'
Under$ Section$ 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$concernedas$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).)
)
Batangas)Laguna)Tayabas)Bus)Co.)v.)Bitanga)
'
Facts:' The$ Potenciano$ group$ owned$ 87.5%$ of$ the$ outstanding$ capital$
stock$ of$ Batangas$ Laguna$ Tayabas$ Bus$ Company,$ Inc.$ (BLTB).$ The$
Potenciano$ group$ sold$ to$ BMB$ Property$ Holdings,$ Inc.,$ represented$ by$
its$ President,$ Benjamin$ Bitanga,$ their$ shares$ of$ stock$ representing$
47.98%$ of$ the$ total$ outstanding$ capital$ stock$ of$ BLTB.$ Barely$ a$ month$
after$ the$ Sale$ Agreement$ was$ executed,$ at$ a$ meeting$ of$ the$
stockholders$ of$ BLTB,$ members$ of$ the$ Bitanga$ group$ were$ elected$ as$
directors$ of$ the$ corporation,$ replacing$ the$ Potenciano$ group.$ During$ a$
meeting$of$the$Board$of$Directors,$the$newly$elected$directors$of$BLTB$
(Bitanga$group)$scheduled$the$annual$stockholders$meeting$on$May$19,$
1998,$ to$ be$ held$ at$ the$ principal$ office$ of$ BLTB$ in$ San$ Pablo,$ Laguna.$
Potenciano$ requested$ for$ postponement$ but$ it$ was$ not$ acted$ upon$ by$
Bitanga.$ On$ the$ scheduled$ day$ of$ the$ meeting,$ the$ majority$ of$ the$
stockholders$present$rejected$the$postponement$and$voted$to$proceed$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2196,$at$p.$644;$and$FLETCHER,$Securities$and$Exchange$Commission.$2197,$at$p.$
648.$
with$the$meeting.$The$Potenciano$group$was$re@elected$to$the$Board$of$
Directors,$ and$ a$ new$ set$ of$ officers$ was$ thereafter$ elected.$ However,$
the$Bitanga$groups$refused$to$relinquish$their$positions$and$this$caused$
unrest$in$the$company.$It$is$not$disputed$that$the$transfer$of$the$shares$
of$ the$ group$ of$ Dolores$ Potenciano$ to$ the$ Bitanga$ group$ has$ not$ yet$
been$recorded$in$the$books$of$the$corporation.$
$
Issue:' Whether$ or$ not$ the$ Potenciano$ group,$ in$ whose$ names$ those$
shares$ still$ stand,$ were$ the$ ones$ entitled$ to$ attend$ and$ vote$ at$ the$
stockholders$meeting$of$the$BLTB$on$19$May$1998.$
$
Held:' YES.$ The$ Potenciano$ group,$ in$ whose$ names$ those$ shares$ still$
stand,$ were$ the$ ones$ entitled$ to$ attend$ and$ vote$ at$ the$ stockholders$
meeting.$Indeed,$until$registration$is$accomplished,$the$transfer,$though$
valid$ between$ the$ parties,$ cannot$ be$ effective$ as$ against$ the$
corporation.$Thus,$the$unrecorded$transferee,$the$Bitanga$group$in$this$
case,$cannot$vote$nor$be$voted$for.$
'
Doctrine:' The$purpose$of$registration,$therefore,$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$ 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$stockholder$
)
!
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$ proceeding,$ a$
stockholder$of$record$has$a$right$to$participate$in$any$meeting;$
his$ vote$ can$ be$ properly$ counted$ to$ determine$ whether$ a$
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$outsider.'
)
As$ between$ the$ General$ Information$ Sheet$ and$ the$ corporate$

books,$ it$ is$ the$ latter$ that$ is$ controlling.$ Lao) v.) Lao,) 567) SCRA)
558)(2008).)
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)
A$ transfer$ of$ shares$ which$ is$ not$ recorded$ in$ the$ books$ of$ the$
corporation$ is$ valid$ only$ as$ between$ the$ parties,$ hence,$ the$
transferor$has$the$right$to$dividends$as$against$the$corporation$
without$ notice$ of$ transfer$ but$ it$ serves$ as$ trustee$ of$ the$ real$
owner$ of$ the$ dividends,$ subject$ to$ the$ contract$ between$ the$
transferor$ and$ transferee$ as$ to$ who$ is$ entitled$ to$ receive$ the$
dividends.$Cojuangco)v.)Sandiganbayn,)586)SCRA)790)(2009).)
The$ view$ that$ under$ Section$ 63$ of$ the$ Corporation$ Code,$ the$
sale$ of$ the$ stocks$ shall$ not$ be$ recognized$ as$ valid$ unless$
registered$in$the$books$of$the$corporation$is$valid$only$insofar$as$
third$ persons,$ including$ the$ corporation,$ are$ concernedas$
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$Section$63$that$the$transfer$must$be$registered$to$affect$
the$ corporation$ and$ third$ persons.$ MagsaysayILabrador) v.)
COURT)OF)APPEALS,)180)SCRA)266)(1989).)
Company,) Inc.) v.) Bitanga,) 362) SCRA) 635) (2001).) [CLVI) I) agree)
with)the)dissenting)opinion)of)Justice)Puno:)The)rule)[Section)
63]) is) intended) to) protect) the) interest) of) the) corporation) and)
third) 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)the)corporation.])
The$purpose$of$registration$is$two@fold:$to$enable$the$transferee$
to$exercise$all$the$rights$of$a$stockholder,$including$the$right$to$
)
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).)
)
!
Garcia)v.)Jomouad)
'
Facts:'Spouses$Jose$and$Sally$Atinon$won$a$collection$case$against$Jaime$
Dico$ so$ sheriff$ Nicolas$ Jomouad$ proceeded$ to$ execute$ the$ Propriety$
Ownership$ Certificate$ in$ the$ Cebu$ Country$ Club$ which$ was$ in$ Dicos$
name.$Claiming$ownership$over$the$subject$certificate,$Nemesio$Garcia$
filed$ the$ aforesaid$ action$ for$ injunction$ with$ prayer$ for$ preliminary$
injunction$to$enjoin$respondents$from$proceeding$with$the$auction.$
$
Garcia$avers$that$Dico$was$his$manager$at$Young$Auto$Supply.$To$assist$
him$ in$ entertaining$ clients,$ Garcia$ lent$ his$ POC,$ then$ bearing$ the$
number$1459,$in$the$Cebu$Country$Club$to$Dico$so$the$latter$could$enjoy$
of$the$levy$on$execution.$
$
Doctrine:' Said$ provision$ of$ law$ strictly$ required$ the$ recording$ of$ the$
transfer$in$the$books$of$the$corporation$and$not$elsewhere,$to$be$valid$
against$third$parties.$
))
the$signing$of$privileges$of$its$members.$The$Club$issued$POC$No.$0668$
in$ the$ name$ of$ Dico.$ Thereafter,$ Dico$ resigned$ as$ manager.$ Upon$
demand$ of$ Garcia,$ Dico$ returned$ the$ POC.$ The$ latter$ then$ executed$ a$
Deed$of$Transfer$$in$favor$of$Garcia.$The$Club$was$furnished$with$a$copy$
of$said$deed$but$the$transfer$was$not$recorded$in$the$books$of$the$club$
because$ Garcia$ failed$ to$ present$ proof$ of$ payment$ of$ the$ requisite$
capital$gains$tax.$
$
Issue:' Whether$ or$ not$ a$ bona$ fide$ transfer$ of$ the$ shares$ of$ a$
corporation,$not$registered$or$noted$in$the$books$of$the$corporation,$is$
valid$ as$ against$ a$ subsequent$ lawful$ attachment$ of$ said$ shares,$
regardless$ of$ whether$ the$ attaching$ creditor$ had$ actual$ notice$ of$ said$
transfer$or$not.$
'
Held:'NO.$The$transfer$of$the$subject$certificate$made$by$Dico$to$Garcia$
was$ not$ valid$ as$ to$ the$ spouses$ Atinon,$ the$ judgment$ creditors,$ as$ the$
same$still$stood$in$the$name$of$Dico,$the$judgment$debtor,$at$the$time$
)
Atty.$ Hofilea$ !$ youre$ not$ required$ to$ have$ a$ public$

instruments$to$support$your$transaction,$but$ideally$you$should$
always$have$one$in$order$to$support$your$transaction.)
Pursuant$ to$ Section$ 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).)
The$ absence$ of$ a$ deed$ of$ sale$ evidencing$ the$ sale$ of$ shares$ of$
stock$does$not$necessarily$show$irregularity$since$Section$63$of$
the$ Corporation$ Code$ itself$ does$ not$ require$ any$ deed$ for$ the$
validity$ of$ the$ transfer$ of$ shares$ stock,$ it$ being$ sufficient$ that$
such$ transfer$ be$ effected$ by$ delivery$ of$ the$ stock$ certificates$
duly$ endorsed.$ The$ Corporation$ Code$ acknowledges$ that$ the$
delivery$ of$ a$ duly$ indorsed$ stock$ certificate$ is$ sufficient$ to$
transfer$ ownership$ of$ shares$ of$ stock$ in$ stock$ corporations.$
Such$mode$of$transfer$is$valid$between$the$parties.$In$order$to$
bind$ third$ persons,$ however,$ the$ transfer$ must$ be$ recorded$ in$
the$ books$ of$ the$ corporation.$ Clearly$ then,$ the$ absence$ of$ a$
deed$of$assignment$is$not$a$fatal$flaw$which$renders$the$transfer$
invalid$as$the$Republic$posits.$In$fact,$as$has$been$held$in$Rural)
!
Bank) of) Lipa) City,) Inc.) v.) Court) of) Appeals,) [366) SCRA) 188)
(2001)]$ the$ execution$ not$ a$ deed$ of$ sale$ does$ not$ necessarily$
make$the$transfer$effective.$Republic)v.)Estate)of)Hans)Menzi,)
475)SCRA)20,)38)(2005).)
the$ Revised$ Rules$ of$ Court$ and$ the$ Corporation$ Code$ do$ not$
require$annotation$in$the$corporations$stock$and$transfer$books$
for$ the$ attachment$ of$ shares$ to$ be$ valid$ and$ binding$ on$ the$
corporation$and$third$parties.' Chemphil) Export) &) Import) Corp.)
v.)COURT)OF)APPEALS,)251)SCRA)257)(1995).'
'
C.'Who'May'Make'Entries:$$
Entries$ made$ on$ the$ stock$ and$ transfer$ book$ by$ any$ person$
other$than$the$corporate$secretary,$such$as$those$made$by$the$
President$ and$ Chairman,$ cannot$ be$ given$ any$ valid$ effect.$
Torres,)Jr.)v.)Court)of)Appeals,)278)SCRA)793)(1997).'
'
G.'Meaning'of'Unpaid'Claims:''
'
D.'Registration'with'Securities'and'Exchange'Commission'changes'
corporations$ must$ set@up$ and$ register$ their$ stock$ and$ transfer$

book$with$the$Securities$and$Exchange$Commission$within$thirty$
(30)$days$from$receipt$of$their$certificate$of$incorporation.$
503)(1997).'
'
H.'Equitable'Mortgage'Assignment:$$
'
E.'BIR'Certification'to'Effect'Transfer'of'Shares'
the$ corporate$ secretary$ is$ not$ authorized$ to$ effect$ transfer$ of$
shares$to$any$new$owner$in$the$books$of$a$corporation,$unless$
accompanied$ by$ a$ certification$ from$ the$ Commissioner$ of$
Internal$ Revenue$ that$ the$ taxes,$ either$ estate$ tax,$ donor's$ tax,$
have$been$paid.'
'
F.'Attachments:$$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$XX$ SECURITIES$ AND$ EXCHANGE$ COMMISSION$ QUARTERLY$ BULLETIN$ 125$

(Nos.$3$&$4,$Sept.$&$Dec$1986).$
It$ seems$ that$ the$ assignment$ of$ voting$ shares$ as$ security$ for$ a$
loan$operates$to$give$the$assignee$not$only$the$right$to$vote$on$
the$ shares,$ but$ would$ also$ treat$ the$ assignee$ as$ the$ owner$ of$
the$shares$(not$just$an$equitable$mortgage):$It$is$true$that$the$
assignment$was$predicated$on$the$intention$that$it$would$serve$
as#security#vis@@vis$DBPs$financial$accommodation$extended$to$
PJI,$but$it$was$a$valid$and$duly$executed$assignment,$subject$to$a$
resolutory$ condition,$ which$ was$ the$ settlement$ of$ PJIs$ loan$
Under$ Section$ 97$ of$ the$ 1997$ National$ Internal$ Revenue$ Code,$
Unpaid$ claims$ under$ Section$ 63$ refers$ to$ any$ unpaid$

subscription,$ and$ not$ to$ any$ indebtedness$ which$ a$ stockholder$
may$ owe$ the$ corporation$ arising$ from$ any$ other$ transactions,$
like$ unpaid$ monthly$ dues.' Fua) Cun) v.) Summers,) 44) Phil.) 704)
(1923);) China) Banking) Corp.) v.) COURT) OF) APPEALS,) 270) SCRA)
The$ Securities$ and$ Exchange$ Commission$ Rules$ Requiring$ the$

Maintenance$of$Stock$and$Transfer$Book,1$require$that$all$stock$
Attachments$ of$ shares$ of$ stock$ are$ not$ included$ in$ the$ term$
transfer$as$provided$in$Section$63$of$Corporation$Code.$Both$
obligation$ with$ DBP.$ APT) v.) Sandiganbayan,) 341) SCRA) 551,)

560)(2000).'
$
XI.'Situs'of'Shares'of'Stocks'(Section'55)'
)
!
'
Section'55.'Right'to'vote'of'pledgors,'mortgagors,'and'administrators.'
In' case' of' pledged' or' mortgaged' shares' in' stock' corporations,' the'
pledgor' or' mortgagor' shall' have' the' right' to' attend' and' vote' at'
meetings'of'stockholders,'unless'the'pledgee'or'mortgagee'is'expressly'
given' by' the' pledgor' or' mortgagor' such' right' in' writing' which' is'
recorded'on'the'appropriate'corporate'books.'(n)'
'
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)'
'
Situs$ of$ shares$ of$ stock$ is$ the$ domicile$ of$ the$ corporation$ to$
which$they$pertain$to.$Wells)Fargo)Bank)and)Union)v.)Collector,)
70)Phil.)325)(1940).1)
)
SUMMARY'OF'CURRENT'DOCTRINAL'RULINGS'ON'SHARES'OF'STOCK'
$
If$we$analyze$the$doctrinal$rules$laid$down$by$the$Supreme$Court$in$the$
various$decisions$is$has$rendered$covering$dealings$with$shares$of$stock,$
we$can$draw$up$the$following$summary:$
1. A$mortgage$or$pledge$of$shares$of$stock$that$would$involve$the$
outright$ assignment$ or$ delivery$ and$ indorsement$ of$ the$
certificates$ of$ stock$ to$ the$ pledgee$ or$ mortgagee$ would$
constitute$ a$ valid$ mortgage$ even$ without$ registration$ with$ the$
register$ of$ deeds,$ but$ it$ would$ always$ be$ subject$ to$ prior$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Tayag$v.$Benguet$Consolidated,$Inc.,$26$SCRA$242$(1968);$cf.$Perkins$v.$Dizon,$
69$Phil.$186$(1939).$
)
attachment$or$levy$of$the$shares$duly$effected$pursuant$to$the$
Rules$ of$ Court$ by$ the$ judgment$ creditors$ of$ the$ registered$
stockholder;$
2. Outside$ of$ physical$ transfer$ of$ delivery$ of$ the$ certificates$ of$
stock,$ a$ chattel$ mortgage$ over$ the$ shares$ of$ stock,$ whether$ or$
not$covered$certificates$of$stock,$would$be$valid$and$binding$on$
third$ parties$ only$ if$ the$ mortgage$ was$ registered$ with$ the$
register$ of$ deeds$ or$ registers$ of$ deeds,$ as$ the$ case$ may$ be,$ of$
the$ province$ or$ city$ where$ the$ mortgagor$ has$ his$ domicile$ and$
where$the$corporation$has$its$principal$place$of$business;$
3. A$ writ$ of$ attachment/execution$ against$ the$ shares$ of$ stock$ of$
the$judgment$debtor$would$be$valid$and$binding$on$the$shares$
and$against$third$parties,$the$moment$there$is$proper$service$of$
the$ writ$ to$ the$ proper$ officer$ of$ the$ corporation$ pursuant$ to$
Section$7(d),$Rule$57$of$the$Rules$of$Court;$$
4. In$ any$ of$ the$ three$ (3)$ cases$ above,$ the$ pledge,$ mortgage,$
attachment$ or$ levy$ of$ the$ shares$ of$ stock$ would$ thereupon$ be$
valid$and$binding$on$the$entire$world$upon$their$constitution$or$
completion$of$process;$no$registration$of$the$pledge,$mortgage,$
attachment$ or$ levy$ in$ the$ stock$ and$ transfer$ book$ of$ the$
corporation$ is$ required$ either$ to$ make$ any$ of$ them$ valid$ or$
binding;$ and$ their$ registration$ in$ the$ stock$ and$ transfer$ book$
would$have$no$legal$effect$at$all$and$such$registration$does$not$
produce$the$effect$of$notice$to$third$parties;$
5. As$ between$ two$ contending$ judgment$ creditor,$ it$ would$ seem$
that$the$first$to$have$the$writ$served$upon$the$proper$officer$of$
the$corporation$would$be$preferred;$
6. As$ between$ contending$ pledgee/mortgagee$ and$ an$ attaching$
creditor,$ if$ the$ registration$ requirement$ for$ the$ pledge$ or$
!
mortgage$happened$first$in$point$of$time$prior$to$service$of$the$
writ$ to$ the$ proper$ corporate$ officer,$ the$ pledge$ or$ mortgage$
shall$ be$ preferred;$ whereas,$ if$ the$ service$ of$ the$ writ$ to$ the$
proper$ court$ officer$ happened$ ahead$ of$ the$ registration$ of$ the$
pledge$ or$ mortgage,$ then$ the$ attaching$ creditor$ would$ be$
$
In$effect,$by$the$strict$application$of$Section$63$of$the$Corporation$Code$
to$ cover$ only$ the$ sale,$ assignment$ or$ absolute$ disposition$ of$ shares$ of$
stock,$ the$ Supreme$ Court$ has$ placed$ a$ bias$ against$ voluntary$ sales,$
assignments$ or$ dispositions$ of$ shares$ of$ stock$ vis@@vis$ pledges,$
preferred;$
7. As$ between$ a$ pledge/mortgage$ duly$ constituted$ (even$ when$
not$registered$in$the$stock$and$transfer$book)$and$the$buyer$or$
assignee$ of$ the$ shares,$ if$ the$ pledge$ or$ mortgage$ was$
constituted$and$registered$ahead$of$the$registration$of$the$sale$
or$ assignment$ in$ the$ stock$ and$ transfer$ book$ (even$ when$ the$
sale$ or$ assignment$ was$ perfected$ and$ consummated$ ahead$ of$
mortgages,$attachment$or$levy$thereof.$To$be$valid$and$binding$on$third$
parties,$ the$ voluntary$ sale,$ assignment$ or$ disposition$ of$ the$ shares$
requires$ the$ essential$ element$ of$ registration$ in$ the$ stock$ and$ transfer$
book;$ otherwise$ the$ sale,$ assignment$ or$ disposition$ is$ considered$ void$
as$to$third$parties,$even$when$they$have$actual$notice.$Whereas,$when$it$
comes$to$pledge,$mortgage,$encumbrance,$attachment$or$levy$of$shares,$
registration$thereof$in$the$stock$and$transfer$book$is$not$essential$either$
the$pledge$or$mortgage)$the$pledge$or$mortgage$would$still$be$
preferred$because$the$registration$of$the$sale$or$assignment$in$
the$ stock$ and$ transfer$ book$ is$ a$ necessary$ ingredient$ to$ make$
the$ sale$ or$ assignment$ binding$ on$ third$ parties,$ including$ the$
pledgee/mortgagee;$$
8. As$between$an$attaching/levying$creditor$where$there$has$been$
proper$service$of$the$writ$to$the$proper$corporate$officer$(even$
for$validity$or$as$a$species$of$notifying$third$parties.$
$
Consequently,$ a$ buyer$ or$ assignee$ would$ always$ have$ to$ declare$ the$
contract$ to$ the$ entire$ world$ by$ registration$ in$ the$ stock$ and$ transfer$
book$ in$ order$ to$ be$ valid,$ whereas$ all$ others$ who$ deal$ with$ the$ same$
shares$ can$ complete$ their$ priority$ claim$ in$ private$ outside$ of$ the$ stock$
and$transfer$book$unknown$to$the$rest$of$the$world$who$may$want$to$
when$ not$ registered$ in$ the$ stock$ and$ transfer$ book)$ and$ the$
buyer$ or$ assignee$ of$ the$ shares,$ if$ writ$ was$ properly$ served$
upon$the$corporate$officer$ahead$of$the$registration$of$the$sale$
or$ assignment$ in$ the$ stock$ and$ transfer$ book$ (even$ when$ the$
sale$ or$ assignment$ was$ perfected$ and$ consummated$ ahead$ of$
the$ service$ of$ the$ writ)$ the$ attachment/levy$ would$ still$ be$
preferred$because$the$registration$of$the$sale/assignment$in$the$
stock$ and$ transfer$ book$ is$ a$ necessary$ ingredient$ to$ make$ the$
voluntarily$deal$with$the$shares$but$would$be$in$no$position$to$ever$be$
fully$assured$on$whether$there$is$no$lien$completed$against$the$shares.$
$
We$ would$ have$ therefore$ the$ clearly$ inequitable$ situation$ where$ the$
attaching$ or$ levying$ creditors$ using$ the$ stock$ and$ transfer$ book$ as$ the$
conclusive$ basis$ by$ which$ to$ enforce$ the$ writ$ against$ shares$ still$
standing$in$the$name$of$the$judgment$debtor$(although$he$has$sold$the$
shares$to$another$person),$whereas$$a$buyer$in$good$faith$and$for$value$
sale$ or$ assignment$ binding$ on$ third$ parties,$ including$ on$

attaching/$levying$creditor.$$
who$actually$registers$his$purchase$in$the$stock$and$transfer$book$at$the$
time$ when$ nothing$ was$ annotated$ therein$ of$ any$ lien,$ would$ be$
)
!
precluded$from$using$the$stock$and$transfer$book$as$his$conclusive$basis$
to$determine$the$clean$title$of$his$registered$seller$as$a$basis$for$securing$
his$title$to$the$shares$of$stock.$
$
In$the$same$manner$a$pledgee$or$mortgagee$who$registers$his$pledge$or$
order$ to$ foster$ economic$ development.$ The$ transfer$ by$ endorsement$

and$ delivery$ of$ a$ certificate$ with$ the$ intention$ to$ pledge$ the$ shares$
covered$ thereby$ should$ be$ sufficient$ to$ give$ legal$ effect$ to$ that$
intention$ and$ to$ consummate$ the$ juristic$ act$ without$ necessity$ of$
registration."1$
mortgage$in$the$register$of$deeds$may$rely$upon$the$stock$and$transfer$
book$ as$ the$ conclusive$ basis$ by$ which$ to$ determine$ the$ validity$ and$
priority$ of$ the$ pledge$ or$ mortgage$ of$ the$ shares$ still$ standing$ in$ the$
name$of$the$pledgor$and$mortgagor,$and$yet$a$buyer$in$good$faith$and$
for$ value,$ and$ even$ to$ whom$ the$ clean$ certificate$ of$ stock$ have$ been$
duly$endorsed$and$delivered,$and$who$actually$registers$his$purchase$in$
the$ stock$ and$ transfer$ book$ at$ the$ time$ when$ they$ stood$ clean$ in$ the$
)
$
name$ of$ the$ registered$ seller,$ is$ precluded$ from$ using$ the$ stock$ and$
transfer$book$as$his$conclusive$basis$to$determine$the$clean$title$of$his$
registered$seller$as$the$basis$for$securing$his$title$to$the$shares$of$stock.$
$
In$ these$ cases,$ the$ registration$ requirements$ under$ stock$ and$ transfer$
books,$ instead$ of$ becoming$ the$ basis$ by$ which$ title$ to$ shares$ of$ stock$
can$ clearly$ and$ conclusively$ be$ voluntarily$ sold$ and$ bought,$ and$ the$
basis$ for$ assurance$ and$ protection$ to$ the$ investing$ public,$ has$ been$
transformed$ into$ the$ very$ stumbling$ block$ to$ achieving$ the$ ideal$
situation$ by$ which$ shares$ of$ stock$ can$ voluntarily$ be$ dealt$ with,$
accompanied$with$a$reasonable$assurance$of$the$clean$title$thereto.$$
$
Making$ registration$ in$ the$ stock$ and$ transfer$ book$ as$ the$ mandatory$
means$by$which$dealings$with$shares$of$stock$can$be$valid$and$effective$
as$ against$ both$ the$ corporation$ and$ third$ parties$ would$ make$ the$
procedure$ simple$ and$ easier$ to$ verify.$ After$ all$ as$ the$ Supreme$ Court$
said$in$Chua2Guan$"Loans$upon$stock$securities$should$be$facilitated$in$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2Chua2Guan2v.2Samahang2Magsasaka,2Inc.,$supra,$at$p.$482.$
)
ACQUISITIONS,+MERGERS+AND+CONSOLIDATIONS+
!
I.+ACQUISITIONS+AND+TRANSFERS+
+
A.+ Concept+ of+ Business+ Enterprise,+ Economic+ Unit+ or+ Going+
Concern+(Section+40)+
+
Section+40.+Sale+or+other+disposition+of+assets.+
Subject+to+the+provisions+of+existing+laws+on+illegal+combinations+and+
monopolies,+ a+ corporation+ may,+ by+ a+ majority+ vote+ of+ its+ board+ of+
directors+ or+ trustees,+ sell,+ lease,+ exchange,+ mortgage,+ pledge+ or+
otherwise+dispose+of+all+or+substantially+all+of+its+property+and+assets,+
including+ its+ goodwill,+ upon+ such+ terms+ and+ conditions+ and+ for+ such+
consideration,+ which+ may+ be+ money,+ stocks,+ bonds+ or+ other+
instruments+ for+ the+ payment+ of+ money+ or+ other+ property+ or+
consideration,+ as+ its+ board+ of+ directors+ or+ trustees+ may+ deem+
expedient,+ when+ authorized+ by+ the+ vote+ of+ the+ stockholders+
representing+at+least+twoTthirds+(2/3)+of+the+outstanding+capital+stock,+
or+ in+ case+ of+ nonTstock+ corporation,+ by+ the+ vote+ of+ at+ least+ to+ twoT
thirds+ (2/3)+ of+ the+ members,+ in+ a+ stockholder's+ or+ member's+ meeting+
duly+called+for+the+purpose.+Written+notice+of+the+proposed+action+and+
of+ the+ time+ and+ place+ of+ the+ meeting+ shall+ be+ addressed+ to+ each+
stockholder+ or+ member+ at+ his+ place+ of+ residence+ as+ shown+ on+ the+
books+ of+ the+ corporation+ and+ deposited+ to+ the+ addressee+ in+ the+ post+
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+ nonTstock+ 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)+
+
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+
)
Business!enterprise!constitutes!the!goodwill,!the!customer!lists!
and!all!factors!that!make!a!business!profitable.!Villa%Rey%Transit,%
Inc.%v.%Ferrer,%25%SCRA%845%(1968).!
!
Villa%Rey%Transit,%Inc.%v.%Ferrer%
!
+
Facts:+Villarama!entered!into!a!Contract!of!Sale!with!PANTRANCO!for!2!
certificates!of!public!convenience!(first!set)!which!authorizes!the!owner!
to!operate!32!units!of!buses!along!the!Pangasinan!to!Manila!route.!The!
contract!contains!a!stipulation!that!prohibits!Villarama!from!applying!for!
pay! for! his! own! obligations,! and! that! he! also! bought! money! into! the!
corporations! coffers.! Evidence! further! shows! that! the! initial! cash!
capitalization! of! the! corporation! of! P105,000! was! mostly! financed! by!
Villarama.!Further,!the!evidence!shows!that!when!the!Corporation!was!
in!its!initial!months!of!operation,!Villarama!purchased!and!paid!with!his!
new!TPUs!for!10!years!identical!or!competing!with!the!buyers.!
!
3!months!alter,!a!corporation!called!Villa!Rey!Transit!Inc.!was!organized!
with! a! capital! stock! of! P500,000.! The! incorporators! are! Natividad!
Villarama!(wife)!and!other!relatives.!After!registering!with!the!SEC,!Villa!
Rey!bought!five!TPUs!(second!set)!from!Fernando!along!with!49!buses,!
tools! and! other! equipment.! Villa! Rey! prayed! for! the! Public! Service!
personal! checks! Ford! trucks! for! the! Corporation.! Villarama! had! coU
mingled! his! personal! funds! and! transactions! with! those! made! in! the!
name!of!the!Corporation.!
!
The! clear! intention! of! the! parties! was! to! prevent! the! seller! from!
conducting! any! competitive! line! for! 10! years! since,! anyway,! he! has!
bound!himself!not!to!apply!for!authorization!to!operate!along!such!lines!
Commission! (PSC)! to! grant! it! provisional! authority! to! operate.! Before!
the!PSC!could!take!action!on!the!application,!two!of!the!five!TPUs!were!
levied! in! favor! of! Ferrer! in! cases! against! Fernando.! Ferrer! then! sold!
these! two! TPUs! to! PANTRANCO.! Subsequently,! the! PSC! ordered! that!
PANTRANCO! would! have! the! authority! to! operate! on! the! two! TPUs!
acquired!from!Ferrer.!Villa!Rey!now!questioned!this!order!and!initiated!
an!action!in!the!CFI!of!Manila!to!annul!these!two!TPUs.!PANTRANCO!on!
for!the!duration!of!such!period.!If!the!prohibition!is!to!be!applied!only!to!
the! acquisition! of! new! certificates! of! public! convenience! thru! an!
application! with! the! Public! Service! Commission,! this! would,! in! effect,!
allow!the!seller!just!the!same!to!compete!with!the!buyer!as!long!as!his!
authority! to! operate! is! only! acquired! thru! transfer! or! sale! from! a!
previous!operator,!thus!defeating!the!intention!of!the!parties.!
+
the! other! hand! initiated! a! thirdUparty! complaint! alleging! that!

Villarama/Villa!Rey!Inc.!was!disqualified!from!operating!on!the!two!TPUs!
by!virtue!of!their!original!contract!of!Sale.!
+
Issue:+ Whether!or!not!the!stipulation!on!the!original!contract!between!
PANTRANCO!and!Villarama!binds!Villa!Rey!Inc.!as!well.!
!
Held:+ YES.! Evidence! discloses! that! for! someone! claiming! he! is! only! a!
Doctrine:!
partUtime!manager,!the!evidence!on!record!shows!Villarama!practically!
controlled! the! corporation! because! he! used! the! corporation! funds! to!
As! a! rule! Personal! Liabilities! remain! with! the! company! even!

where! assets! are! disposed.! But! those! liabilities! that! attach! to!
the! object! disposed! of! follow! that! object! and! become! the!
liability!of!the!purchaser/transferee.%
!
B.+Types+of+Acquisitions\Transfers+
)
As!a!rule,!a!corporation!that!purchases!the!assets!of!another!will!
not! be! liable! for! the! debts! of! the! selling! corporation,! provided!
!
the!former!acted!in!good!faith!and!paid!adequate!consideration!
for!such!assets,!except!when!any!of!the!following!circumstances!
is! present:! (1)! where! the! purchasers! expressly! or! impliedly!
agrees! to! assume! the! debts;! (2)! where! the! selling! corporation!
fraudulently! enters! into! the! transactions! to! escape! liability! for!
those! debts! (3)! where! the! purchasing! corporation! is! merely! a!
continuation! of! the! selling! corporation,! and! (4)! where! the!
transaction! amounts! to! a! consolidation! or! merger! of! the!
corporations.!Edward%J.%Nell%Co.%v.%Pacific,%15%SCRA%415%(1965).1%
%
Edward%J.%Nell%Co.%v.%Pacific%
including! the! pumping! equipment! it! sold! to! Insular! Farms.! The! sale!
transaction!was!not!entered!into!fraudulently.!The!sale!between!Insular!
and! Pacific! took! place! nearly! 6! months! before! the! rendition! of! the!
judgment! sought! to! be! collected.! In! addition,! Pacific! purchased! the!
shares!of!stock!of!Insular!as!the!highest!bidder!at!an!action!sale!at!the!
instance!of!a!bank.!The!claim!that!the!amount!paid!(P10,000)!is!grossly!
inadequate! cannot! be! assailed! because! the! sale! was! submitted! to! and!
approved!by!the!SEC!and!as!such,!presumed!fair!and!reasonable.!
+
Doctrine:+See!above.!
%
+
Facts:+ Edward! J.! Nell! Company! (EJNC)! secured! a! judgment! against!
Insular!Farms,!Inc.!representing!unpaid!balance!of!the!price!of!a!pump!
sold!by!EJNC!to!the!former.!The!writ!of!execution!was!returned!stating!
that! Insular! Farms! had! no! leviable! property.! A! few! months! later,! EJNC!
filed! this! present! action! against! Pacific! Farms,! Inc.! for! the! collection! of!
the!judgment!against!Insular!Farms,!upon!the!theory!that!Pacific!Farms!
is!the!alter!ego!of!Insular!Farms.!
!
Issue:+Whether!or!not!Pacific!Farms!is!liable!for!the!unpaid!obligation!of!
Insular!Farms.!
!
Held:+NO.!The!theory!of!EJNC!that!Pacific!Farms!is!an!alter!ego!of!Insular!
Farms,!arose!because!the!former!purchased!all!or!substantially!all!of!the!
shares!of!stock,!as!well!as!the!real!and!personal!properties!of!the!latter,!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Philippines!National!Bank!v.!Andrada!Electric!&!Engineering!Co.,!381!SCRA!244!
(2002);! McLeod! v.! NLRC,! 512! SCRA! 222! (2007);! Jiao! v.! NLRC,! 670! SCRA! 184!
(2012).!
Even!under!the!provisions!of!the!Civil!Code,!a!creditor!has!a!real!
interest!to!go!after!any!person!to!whom!the!debtor!fraudulently!
transferred!its!assets.!Caltex%(Phils.),%Inc.%v.%PNOC%Shipping%and%
Transport%Corp.,%498%SCRA%400%(2006).%
%
Caltex%(Phils.),%Inc.%v.%PNOC%Shipping%and%Transport%Corp.%
+
Facts:+ The! PNOC! Shipping! and! Transport! Corporation! (PSTC)! and! the!
Luzon! Stevedoring! Corporation! (LUSTEVECO)! entered! into! an!
Agreement!of!Assumption!of!Obligations,!which!provides!that!PSTC!shall!
assume! all! obligations! of! LUSTEVECO! with! respect! to! certain! claims!
enumerated! in! the! Annexes! of! the! Agreement.! This! Agreement! also!
provides! that! PSTC! shall! control! the! conduct! of! any! litigation! pending!
which! may! be! filed! with! respect! to! such! claims,! and! that! LUSTEVECO!
appoints! and! constitutes! PSTC! as! its! attorneyUinUfact! to! demand! and!
receive!any!claim!out!of!the!countersuits!and!counterclaims!arising!from!
said! claims.! Among! the! actions! mentioned! is! Caltex! (Phils)! v.! Luzon!
Stevedoring! Corporation,! which! was! then! pending! appeal.! Caltex! won!
)
In!the!"assetsUonly"!acquisition,!the!purchaser!is!only!interested!
in! the! "raw"! assets! and! properties! of! the! business,! perhaps! to!
be!used!to!establish!his!own!business!enterprise!or!to!be!used!
for!his!onUgoing!business!enterprise.!In!such!an!acquisition,!the!
purchaser!is!not!interested!in!the!entity!of!the!corporate!owner!
of! the! assets,! nor! of! the! goodwill! and! other! factors! relating! to!
the!business!itself.!!
+
Held:+ YES.! The! Agreement! provides! that! PSTC! shall! assume! all! the!
obligations! of! LUSTEVECO.! LUSTEVECO! transferred,! conveyed! and!
assigned! to! PSTC! all! of! LUSTEVECOs! business,! properties! and! assets!
pertaining! to! its! tanker! and! bulk! business! together! with! all! the!
obligations! relating! to! the! said! business,! properties! and! assets.! The!
assumption!of!obligations!was!stipulated!not!only!in!the!Agreement!of!
In! other! instances,! the! purchaser! is! interested! only! in!
purchasing!the!assets!to!ensure!that!he!would!not!be!embroiled!
in! issues! relating! to! the! liabilities! and! other! contractual!
commitments!of!the!business!enterprise!or!those!pertaining!to!
the!transferor.!
2. "BusinessTEnterprise"+Level.+2+
Assumption!of!Obligations!but!also!in!the!Agreement!of!Transfer.!!
!
Even!without!the!Agreement,!PSTC!is!still!liable.!While!the!Corporation!
Code! allows! the! transfer! of! all! or! substantially! all! the! properties! and!
assets!of!a!corporation,!the!transfer!should!not!prejudice!the!creditors!
of! the! assignor! by! holding! the! assignee! liable! for! the! formers!
obligations.!!
In!the!"businessUenterprise"!level,!the!purchaser's!interest!goes!
beyond!the!assets!or!properties!of!the!business!enterprise.!The!
purchasers!primary!interest!is!essentially!to!obtain!the!earning!
capability!of!the!venture.!However,!the!purchaser!in!such!is!not!
interested! in! obtaining! the! juridical! entity! that! owns! the!
business! enterprise,! and! therefore! purchases! directly! the!
business!from!the!corporate!entity.!
+
Doctrine:!To!allow!an!assignor!to!make!a!transfer!without!the!consent!
of! its! creditors! and! without! requiring! the! assignee! to! assume! the!
formers!obligations!will!defraud!creditors.+
As! will! be! shown! in! the! discussions! hereunder,! the! essence! of!
the! "businessUenterprise"! transfer! is! that! the! effect! is! that! the!
transferee! merely! continues! the! same! business! of! the!
transferor.!
%
PSALM!took!ownership!over!most!of!NPCs!assets!by!operation!
of! lawthese! properties! may! be! used! to! satisfy! the! Courts!
judgment,!and!such!being!the!case,!the!employees!may!go!after!
such! properties.! NPC% Drivers% and% Mechanics% Association% (NPC%
DAMA)%v.%NPC,%606%SCRA%409%(2009).%
1. "AssetsTOnly"+Level.1+
the! case! and! a! writ! of! execution! was! issued! in! its! favor! but! was! not!
satisfied.! When! it! learned! about! the! agreement! between! PSTC! and!
LUSTEVECO,!it!sued!PSTC!and!brought!an!action.!
!
Issue:+Whether!or!not!Caltex!may!recover!from!PTSC.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Villanueva,!C.!L.,!&!VillanuevaUTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
2
)
!
3. "Equity"+Level.+1+
business! enterprise! as! it! is! owned! and! operated! by! the!
corporation.!The!purchaser!takes!control!and!ownership!of!the!
business! by! purchasing! the! shareholdings! of! the! corporate!
owner.! The! control! of! the! business! enterprise! is! therefore!
indirect,!since!the!corporate!owner!remains!the!direct!owner!of!
the!business,!and!what!the!purchaser!has!actually!purchased!is!
the!ability!to!elect!the!members!of!the!board!of!the!corporation!
who!run!the!business.!
In! an! assetsUonly! transfer,! the! transferee! is! not! liable! for! the!
When! another! corporation! takes! over! the! assets! of! another!
corporation! which! is! dissolved,! the! succeeding! corporation! is!

liable! for! the! claims! against! the! dissolved! corporation! to! the!
extent!of!the!fair!value!of!the!assets!assumed.!!
4. Voluntary+Assumption+of+Liabilities.7+
The! other! instance! in! an! assetsUonly! transfer! when! the!

transferee!becomes!liable!for!the!obligations!of!the!transferor!is!
when!by!contract,!express!or!implied,!the!transferee!voluntarily!
assumes!such!obligations!of!the!transferor.!!
+
D.+Business+Enterprise+Transfers:++
1. Nature+of+BusinessTEnterprise.8+
debts! and! liabilities! of! the! transferor,! except! where! the!

transferee!expressly!or!impliedly!agrees!to!assume!such!debts.!
2. Coverage+of+the+Bulk+Sales+Law.3+
title!of!the!transferee!over!the!assets!would!be!void,!even!if!he!
were!a!purchaser!in!good!faith.5!
3. Special+Rule+in+Corporate+Dissolution.6+
The! "equity"! level! constitutes! looking! at! the! entirety! of! the!
+
C.+Assets+Only+Transfers+
1. Rationale+for+NonTAssumption+of+Liability.2+
An!assetsUonly!transfer!if!constituting!"bulk!sale"!under!the!Bulk!
A!business!enterprise,!apart!from!the!juridical!personality!under!
which! is! operates,! has! a! "separate! being"! of! its! own.! Properly!
speaking,! a! business! enterprise! comprises! more! than! just! the!
Sales! Law,4!would! affect! the! transferee! in! the! sense! that! if! the!
sale! has! not! complied! with! the! requirements! of! the! Law,! the!
sale! could! be! classified! as! fraudulent! and! void,! and! therefore!
properties!of!the!business,!but!includes!a!"concern"!that!covers!
the!employees,!the!goodwill,!list!of!clientele!and!suppliers,!etc.,!
which!give!it!value!separate!and!distinct!from!its!owners!or!the!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
3
4
!Act!No.!3952,!as!amended!by!Rep.!Act!No.!111.!
!The!Court!of!Appeals!in!People!v.!Wong,!50!O.G.!4867,!has!held!that!the!Bulk!
Sales!Law!applies!only!to!merchandising!business!or!establishments,!and!has!no!
application! to! other! forms! of! activities! such! as! in! that! case! the! sale! of! the!
equipment,!tools!and!machineries!of!a!foundry!shop.!
6
7
8
)
!
juridical!entity!under!which!it!operates.!This!is!what!is!termed!as!
the! "economic! unit",! "the! enterprise",! "the! going! concern",! or!
the! "financial! unit",! recognized! in! other! disciplines,! such! as!
Economics!and!Accounting.!
Although,! jurisprudence! refuses! to! recognize! a! separate!
existence! of! the! business! enterprise! apart! from! the! juridical!

personality! which! the! State! grants! in! corporations, 1 !and!
partnerships, 2 !such! separate! existence! of! the! business!
enterprise!does!exist!and!is!recognized!in!the!business!world.!
2. Statement+of+Doctrine.+3+
Jurisprudence! has! held! that! in! a! businessUenterprise! transfer,!

the! transferee! is! liable! for! the! debts! and! liabilities! of! his!
transferor.!!
The! purpose! of! the! jurisprudential! doctrine! is! to! protect! the!
creditors!of!the!business!by!allowing!them!a!remedy!against!the!
new!controller!or!owner!of!the!business!enterprise.!
3. Application+of+Doctrine+
A.D.%Santos%v.%Vasquez,%22%SCRA%1156%(1968)+
++
A.D.%Santos%v.%Vasquez%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Tayag! v.! Benguet! Consolidated! Inc.,! 26! SCRA! 242! (1968).! It! rejected! the!
genossenchaft!theory!of!Friedman!that!would!recognize!the!corporate!entity!as!
"the! reality! of! the! group! as! a! social! and! legal! entity! independent! of! state!
recognition!and!concession."!!
2
!Ang!Pue!&!Co.!v.!Section!of!Commerce!and!Industry,!5!SCRA!645!(1962).!The!
formation! of! a! corporate! entity! or! a! partnership! is! not! a! matter! of! right,! but!
rather!of!a!privilege.!
3
Facts:+ A.D.!Santos,!Inc.!operates!taxicabs.!Ventura!Vasquez!was!one!of!
his! taxi! drivers.! While! driving! A.D.! Santos,! Inc.s! taxi! cab,! Vasquez!
vomited! blood.! The! companys! physician,! Dr.! Roman,! treated! him.! He!
was!sent!to!and!confined!in!Santo!Tomas!Hospital.!Afterwards,!he!was!
admitted! at! the! Quezon! Institute! where! he! was! diagnosed! with!
pulmonary!tuberculosis.!He!did!not!resume!work.!Vasquez!filed!a!claim!
with! the! Workmens! Compensation! Commission.! A.D.! Santos,! Inc.! was!
ordered! to! pay! compensation! and! reimburse! Vasquez! the! amount! he!
spent!for!his!treatment.+
+
Issue:+Whether!or!not!A.D.!Santos!is!liable!for!the!expenses!of!Vasquez!
+
Held:+YES.!Vasquez!cause!of!action!against!A.D.!Santos,!Inc.!is!complete.!
In!its!answer!to!Vasquezs!claim,!A.D.!Santos,!Inc.!categorically!admitted!
that!Vasquez!was!its!taxi!driver.!Further,!Vasquez!contracted!pulmonary!
tuberculosis!by!reason!of!his!employment.!
!
Vasquez!cited!in!his!testimony!that!he!worked!for!City!Cab,!a!company!
operated!by!a!certain!Amador!Santos.!This!does!not!detract!the!validity!
of!Vasquez!right!to!compensation.!Amador!Santos!was!the!sole!owner!
and! operator! of! City! Cab! (sole! proprietorship).! It! was! subsequently!
transferred!to!A.D.!Santos,!Inc.!in!which!Amador!Santos!was!a!majority!
stockholder.!In!business!enterprise!transfers,!the!transferee!is!liable!for!
the! liabilities! of! his! transferor! arising! from! the! business! enterprise!
transferred.! Mentioning! Amador! Santos! as! his! employer! should! not!
confuse!the!facts!relating!to!the!employerUemployee!relationship.!In!this!
case,!the!veil!of!the!corporate!fiction!is!used!as!a!shield!to!perpetrate!a!
fraud!or!confuse!legitimate!issues.!
+
)
!
Doctrine:!In!business!enterprise!transfers,!the!transferee!is!liable!for!the!
liabilities! of! his! transferor! arising! from! the! business! enterprise!
transferred.!
+
Where!a!corporation!is!formed!by,!and!consisted!of!members!of!
a! partnership! whose! business! and! property! was! conveyed! and!
transferred!to!the!corporation!for!the!purpose!of!continuing!its!
business,! in! payment! for! which! corporate! capital! stock! was!
issued,! such! corporation! is! presumed! to! have! assumed!
partnership! debts,! and! is! prima! facie! liable! therefore.% Laguna%
Trans.%Co.,%Inc.%v.%SSS,%107%Phil.%833%(1960).+
+
Laguna%Trans.%Co.,%Inc.%v.%SSS%
+
Facts:+ In# 1940# the# Bian# Transportation# Co.,# a# corporation# duly#
registered!with!the!SEC,!sold!part!of!the!lines!and!equipment!it!operates!
to!G.!Mercado,!A.!Mercado,!Mata!and!Vera!Cruz.!After!this,!the!vendees!
formed! an! unregistered! partnership! under! the! name! of! Laguna&
Transportation* Company* which* continued* to* operate* the* lines* and*
equipment)bought)from)Bian)Transportation)Co.)Later)on,)the)original)
partners! forming! Laguna! Transport! Company! along! with! 2! new!
members!organized!a!corporation!known!as!the!Laguna!Transportation!
Co.,!Inc.!and!the!corporation!was!registered!in!the!SEC!on!June!20,!1956,!
which! continued! the! same! transportation! business! of! the! unregistered!
partnership.! Laguna! Trans.! Co.! Inc.! requested! for! exemption! from!
coverage!by!the!System!on!the!ground!that!it!started!operation!only!on!
June!20,!1956,!when!it!was!registered!with!the!Securities!and!Exchange!
Commission! but! on! November! 11,! 1957,! the! Social! Security! System!
notified!plaintiff!that!it!was!covered.!
+
Issue:+ Whether! or! not! Laguna! Trans! Co.! Inc.! was! bound! by! the!
compulsory!coverage!of!the!Social!Security!Act!
!
Held:+YES.!While!it!is!true!that!a!corporation!once!formed!is!conferred!a!
juridical!personality!separate!and!district!from!the!persons!composing!it,!
it! is! but! a! legal! fiction! introduced! for! purposes! of! convenience! and! to!
subserve!the!ends!of!justice.!To!adopt!Laguna!Trans.!Co.!Inc.s!argument!
would! defeat,! rather! than! promote,! the! ends! for! which! the! Social!
Security! Act! was! enacted.! An! employer! could! easily! circumvent! the!
statute! by! simply! changing! his! form! of! organization! every! other! year,!
and!then!claim!exemption!from!contribution!to!the!System!as!required,!
on! the! theory! that,! as! a! new! entity,! it! has! not! been! in! operation! for! a!
period!of!at!least!2!years.!In!this!case,!it!can!be!said!that!there!was!only!
a!change!in!the!form!of!organization!of!the!entity!in!the!common!carrier!
business.! This! is! said! to! be! so! because! when! the! unregistered!
partnership! was! turned! into! a! corporation,! the! firm! name! was! not!
altered! save! for! the! fact! that! Inc.! was! added! to! show! that! it! was! duly!
incorporated!under!existing!laws.!!
+
Doctrine:! The! law! provides! that! the! Commission! may! not! compel! any!
employer!to!become!a!member!of!the!System!unless!he!shall!have!been!
in! operation! for! at! least! two! years,! such! is! not! applicable! to! a!
corporation!that!merely!changed!its!form!of!organization.!
+
)
A! business! enterprise! operated! under! a! partnership! and! later!

incorporated,! or! where! a! corporation! assumed! all! the! assets!
and!liabilities!of!the!partnership,!then!the!corporation!cannot!be!
regarded,! for! purposes! of! the! SSS! Law,! as! having! come! into!
!
being!only!on!the!date!of!its!incorporation!but!from!the!date!the!
partnership!started!the!business.!Oromeca%Lumber%Co.%v.%SSS,%4%
SCRA%1188%(1962);%San%Teodoro%Dev.%v.%SSS,%8%SCRA%96%(1963).%
When! a! corporation! transferred! all! its! assets! to! another!

corporation!to!settle!its!obligations!that!would!not!amount!to!
a!fraudulent!transfer.!McLeod%v.%NLRC,%512%SCRA%222%(2007).!
!
McLeod%v.%NLRC%
+
Facts:+ John! F.! McLeod! filed! a! complaint! for! unpaid! benefits! and!
damages,! against! Filipinas! Synthetic! Corporation! (Filsyn),! Far! Eastern!
Textile! Mills,! Inc.,! Sta.! Rosa! Textiles,! Inc.,! Patricio! Lim! and! Eric! Hu!
(respondents).!McLeod!said!that!he!is!an!expert!in!textile!manufacturing!
process,!and!was!hired!as!the!Manager!of!Universal!Textiles,!Inc.!(UTEX)!
under!its!President,!Patricio!Lim.!Lim!later!formed!Peggy!Mills,!Inc.!(with!
Filsyn!having!controlling!interest),!and!it!absorbed!McLeod.!Filsyn!then!
counsel!holds!office!in!the!same!address,!and!that!all!respondents!have!
the!same!key!personnel!such!as!Lim.!
+
Issue:+ Whether! or! not! an! employerUemployee! relationship! exists!
between!private!respondents!and!McLeod!
!
Held:+ YES! BUT! he! was! an! employee! of! Peggy! Mills! ONLY.! What!
happened! between! Peggy! Mills! and! Sta.! Rosa! textile! was! dation! in!
payment! with! lease.! Peggy! Mills! had! ceded,! conveyed! and! transferred!
all!of!its!rights,!title!and!interests!in!and!to!the!assets!to!Sta.!Rosa!Textile!
to!settle!its!obligations.!
!
!
sold! Peggy! Mills! to! Far! Eastern! Textile! Mills! with! Lim! as! the! chairman!
and! president.! Peggy! Mills! was! renamed! Sta.! Rosa! Textile.! When!
McLeod!reached!retirement!age,!he!was!only!given!a!reduced!13!month!
pay.!Lim!offered!McLeod!a!compromise!settlement!but!was!rejected.!
!
UTEX!!!Peggy!Mills!!!Far!Eastern!Textile!Mills!!!Sta.!Rosa!Textile!
!
Respondents! allege! that! Filsyn! and! Far! Eastern! Textiles! are! separate!
legal!entities!and!have!no!employer!relationship!with!McLeod.!Sta.!Rosa!
only! acquired! the! assets! and! NOT! the! liabilities! of! Peggy! Mills.! In!
McLeods!reply,!he!alleged!that!all!the!respondents!are!solidarily!liable!
for! all! salaries! and! benefits! he! is! entitled! to,! being! one! and! the! same!
entity.!McLeod!said!that!their!offices!were!all!in!the!same!building,!their!
)
When! the! bus! operations! belonging! to! the! estate! of! the!
deceased! spouses! is! duly! incorporated! by! the! administratrix!
with! the! intention! to! make! the! corporation! liable! for! past! and!
pending!obligations!of!the!estate!as!the!transportation!business!
itself,!then!that!liability!on!the!part!of!the!corporation,!visUUvis!
the! estate,! should! continue! to! remain! with! it! even! after! the!
percentage! of! the! estates! shares! of! stock! in! the! corporation!
should! have! been! diluted.! Buan% v.% Alcantara,% 127% SCRA% 845%
(1984).%
Settled! now! is! the! rule! that! where! one! corporation! sells! or!
otherwise! transfers! all! its! assets! to! another! corporation! for!
value,! the! latter! is! not,! by! that! fact! alone,! liable! for! the! debts!
and! liabilities! of! the! transferor.! Pantranco% Employees%
Association%(PEAZPTGWO)%v.%NLRC,%581%SCRA%598%(2009).%
%
!
Pantranco%Employees%Association%(PEAZPTGWO)%v.%NLRC%
+
Facts:+The!Gonzales!family!owned!two!corporations,!PANTRANCO!North!
Express! Inc.! (PNEI)! and! Macris! Realty! Corporation! (Macris).! PNEI!
provided! transportation! services! and! its! terminals! were! on! the!
Pantranco! properties! registered! under! the! name! of! Macris.! Due! to!
financial! losses,! creditors! took! over! both! corporations! and! later!
transferred! to! the! National! Investment! Development! Corporation!
(NIDC),! a! subsidiary! of! the! Philippine! National! Bank.! Macris! was! later!
renamed! and! merged! to! another! corporation! to! form! the! new! PNB!
subsidiary,! the! PNBUMadecor.! NIDC! sold! PNEI! to! North! Express!
Transport,!Inc.!(NETI),!PNEI!was!later!placed!under!sequestration!by!the!
PCGG.!Eventually!PNEI!ceased!its!operation!which!came!with!the!various!
labor! claims! commenced! by! the! former! employees! of! PNEI! where! the!
employees! won.! The! employees! now! seek! to! attach! on! the! properties!
registered!to!PNBUMadecor!to!satisfy!their!claim.!
+
Issue:+ Whether! or! not! the! former! PNEI! employees! can! attach! the!
properties!(specifically!the!Pantranco!properties)!of!PNB,!PNBUMadecor!
and!Mega!Prime!to!satisfy!their!unpaid!labor!claims!against!PNEI!
+
Held:+ NO.! First,! the! subject! property! is! not! owned! by! the! judgment!
debtor,!PNEI.!The!properties!were!owned!by!Macris,!the!predecessor!of!
PNBUMadecor.! Hence,! they! cannot! be! pursued! against! by! the! creditors!
of!PNEI.!It!is!a!settled!rule!that!the!court!in!executing!judgments!extends!
only! to! properties! unquestionably! belonging! to! the! judgment! debtor!
alone.! Second,! the! general! rule! is! that! a! corporation! has! a! personality!
separate! and! distinct! from! those! of! its! stockholders! and! other!
corporations! to! which! it! may! be! connected.! Obviously,! PNB,! PNBU
Madecor,! Mega! Prime,! and! PNEI! are! corporations! with! their! own!
personalities.! PNB! was! only! a! stockholder! of! PNBUMadecor! which! later!
sold!its!shares!to!Mega!Prime;!and!that!PNBUMadecor!was!the!owner!of!
the!Pantranco!properties.!Neither!can!we!merge!the!personality!of!PNEI!
with!PNB!simply!because!the!latter!acquired!the!former.!
+
Doctrine:+See!above.%
+
4. Rationale+of+Doctrine+in+Business+Enterprise+Transfers+
The! doctrine! in! businessUenterprise! transfers! recognizes! the!

reality!in!the!business!world!that!although!no!formal!mortgage!
contract! is! executed,! creditors! and! suppliers! extend! credit! to!
the!business!enterprise!because!they!see!the!business's!earning!
capacity!and!assets!as!a!"security"!to!the!undertaking!that!they!
will! eventually! be! paid! back.1!The! doctrine! therefore! puts! the!
burden!on!the!shoulder!of!the!person!who!is!in!the!best!position!
to! protect! himself,! namely! the! transferee,! by! obtaining! certain!
guarantees!and!protection!from!his!transferor.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!It!would!be!instructive!to!see!the!judicial!attitude!to!the!extension!of!credit!as!
underpinning!a!clear!intention!to!establish!a!longUterm!business.! On!the!issue!
of! whether! a! foreign! corporation! intended! to! engage! in! business! in! the!
Philippines,! in! Eriks! Pte.! Ltd.! v.! Court! of! Appeals,! 267! SCRA! 567! (1997),! the!
Supreme! Court! found! that! the! extension! of! credit! terms! to! be! indicative! of!
intent! to! do! business! in! the! Philippines! for! an! indefinite! period,! thus:! "More!
than!the!sheer!number!of!transactions!entered!into,!a!clear!and!unmistakable!
intention! on! the! part! of! petitioner! to! continue! the! body! of! its! business! in! the!
Philippines!is!more!than!apparent.!.!.!Further,!its!grant!and!extension!of!90Uday!
credit!terms!to!private!respondent!for!every!purchase!made,!unarguably!shows!
an!intention!to!continue!transaction!with!private!respondent,!since!in!the!usual!
course!of!commercial!transactions,!credit!is!extended!only!to!customers!in!good!
standing! or! to! those! on! whom! there! is! an! intention! to! maintain! longEterm!
relationship.!!
)
!
+
E.+Equity+Transfers+
1. Rationale+of+Doctrine.+1+
In!an!equity!transfers,!the!transferee!is!not!liable!for!the!debts!
and! liabilities! of! the! transferor,! except! where! the! transferee!
expressly!or!impliedly!agreed!to!assume!such!debts.!
The!logic!of!the!doctrine!in!equity!transfer!finds!support!in!the!
main! doctrine! of! separate! juridical! personality,! that! by!

purchasing!the!shares!in!a!corporation!that!owns!a!business,!the!
stockholder! does! not! by! that! reason! alone! become! the! owner!
directly!of!the!business!assets!and!does!not!become!personally!
liable!for!the!debts!and!liabilities!of!the!business.!
2. Application+of+the+Doctrine+
The!transfer!by!the!controlling!shareholder!of!all!of!its!equity!in!
the! corporation! warrants! the! application! of! the! alter! ego!
piercing! doctrine! since! it! shows! that! the! transferor! had!
complete! control! of! the! corporation.! Phividec% v.% Court% of%
Appeals,%181%SCRA%669%(1990).%
%
Phividec%v.%Court%of%Appeals%
+
Facts:+On!March!29,!Violeta!M.!Borres!was!injured!in!an!accident!which!
the! trial! court! ruled! was! due! to! the! negligence! of! PHIVIDEC! Railways,!
Inc.!(PRI).!Prior,!on!May!25,!PHIVIDEC!sold!all!its!rights!and!interests!in!
operate!the!railway!assets!of!PHIVIDEC.!Borres!sued!PRI!and!Panay,!and!
Panay! disclaimed! liability! on! the! ground! that! in! the! Agreement!
concluded! between! PHIVIDEC! and! PHILSUCOM,! it! was! provided! that!
PHIVIDEC!holds!PHILSUCOM!free!from!any!action!that!might!arise!from!
any!act!of!omission!prior!to!the!turnUover.!
+
Issue:+Whether!or!not!PHIVIDEC!should!be!held!liable.!
+
Held:+ YES.! It! is! clear! from! the! evidence! of! record! that! by! virtue! of! the!
agreement! between! PHIVIDEC! and! PHILSUCOM,! particularly! the!
stipulation!exempting!the!latter!from!any!claim!or!liability!arising!out!of!
any! act! or! transaction! prior! to! the! turnUover,! PHIVIDEC! had! expressly!
assumed!liability!for!any!claim!against!PRI.!Since!the!accident!happened!
before! that! agreement! and! PRI! ceased! to! exist! after! the! turnUover,! it!
should! follow! that! PHIVIDEC! cannot! evade! its! liability! for! the! injuries!
sustained! by! the! private! respondent.! In! the! interest! of! justice! and!
equity,!and!to!prevent!the!veil!of!corporate!fiction!from!denying!her!the!
reparation! to! which! she! is! entitled,! that! veil! must! be! pierced! and!
PHIVIDEC!and!PRI!regarded!as!one!and!the!same!entity.!
+
%
the! PRI! to! the! PHILSUCOM.! Two! days! later,! PHILSUCOM! caused! the!
creation! of! a! whollyUowned! subsidiary,! the! Panay! Railways! Inc.! to!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
The!general!rule!therefore!is!that!in!an!equity!transfer,!
the!transferee!does!not!become!personally!liable!for!the!
obligations! of! the! corporate! enterprise! under! the! main!
doctrine! of! separate! juridical! personality,! unless! either!
!
the!transferee!by!contract!assumes!such!obligations,!or!
there!is!basis!for!piercing!the!veil!of!corporate!fiction.+1!
Proper+ Doctrine:+ 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).2%
!
II.+MERGER+AND+CONSOLIDATIONS+
+
A.+Concepts+(McLeod%v.%NLRC,%512%SCRA%222%[2007]).+
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).%
+
B.+Procedure:+
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
!PNB!v.!Ritratto!Group,!Inc.,!362!SCRA!216!(2001).!
1. Plan+of+Merger+or+Consolidation+(Section+76)+
+
Section+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+ 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)+
+
2. Stockholders+or+Members+Approvals+(Section+77)+
+
Section+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+
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+twoTthirds+(2/3)+of+the+outstanding+
capital+stock+of+each+corporation+in+the+case+of+stock+corporations+or+at+
the+ president+ or+ viceTpresident+ 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+nonTstock+corporations,+the+number+of+members;+and+
least+ twoTthirds+ (2/3)+ of+ the+ members+ in+ the+ case+ of+ nonTstock+
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.+
+
+
3.+As+to+each+corporation,+the+number+of+shares+or+members+voting+for+
and+against+such+plan,+respectively.+(n)+
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+twoTthirds+(2/3)+of+the+outstanding+capital+stock+
or+ of+ twoTthirds+ (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)+
not! earlier! than! 120! days! prior! to! the! date! of! filing! of! the!
application! and! the! longUform! 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).!
5. Approval+by+SEC+(Section+79)+
+
3. Articles+of+Merger+or+Consolidation+(Section+78)+
Section+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+
+
4. Submission+ of+ Financial+ Statements+ Requirements:! For!
applications! of! merger,! the! audited! financial! statements! of! the!
constituent!corporations!(surviving!and!absorbed)!as!of!the!date!
+
Section+79.+Effectivity+of+merger+or+consolidation.+
The+ articles+ of+ merger+ or+ of+ consolidation,+ signed+ and+ certified+ as+
herein+ above+ required,+ shall+ be+ submitted+ to+ the+ Securities+ and+
)
!
transferred! to! and! vested! in! the! surviving! corporation.! Poliand%
Industrial%Ltd.%V.%NDC,%467%SCRA%500%(2005).1%
Exchange+Commission+in+quadruplicate+for+its+approval:+Provided,+That+
in+the+case+of+merger+or+consolidation+of+banks+or+banking+institutions,+
building+and+loan+associations,+trust+companies,+insurance+companies,+
public+utilities,+educational+institutions+and+other+special+corporations+
governed+ by+ special+ laws,+ the+ favorable+ recommendation+ of+ the+
appropriate+ government+ agency+ shall+ first+ be+ obtained.+ If+ the+
Commission+ is+ satisfied+ that+ the+ merger+ or+ consolidation+ of+ the+
corporations+concerned+is+not+inconsistent+with+the+provisions+of+this+
Code+ and+ existing+ laws,+ it+ shall+ issue+ a+ certificate+ of+ merger+ or+ of+
consolidation,+ at+ which+ time+ the+ merger+ or+ consolidation+ shall+ be+
effective.+
+
If,+ upon+ investigation,+ the+ Securities+ and+ Exchange+ Commission+ has+
reason+ to+ believe+ that+ the+ proposed+ merger+ or+ consolidation+ is+
contrary+to+or+inconsistent+with+the+provisions+of+this+Code+or+existing+
laws,+ it+ shall+ set+ a+ hearing+ to+ give+ the+ corporations+ concerned+ the+
opportunity+to+be+heard.+Written+notice+of+the+date,+time+and+place+of+
hearing+shall+be+given+to+each+constituent+corporation+at+least+two+(2)+
weeks+ before+ said+ hearing.+ The+ Commission+ shall+ thereafter+ proceed+
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).%
+
C.+Effects+of+Merger+or+Consolidation+(Section+80):+Associated%Bank%v.%
CA,%291%SCRA%511%(1998).+
+
Section+80.+Effects+of+merger+or+consolidation.+
The+merger+or+consolidation+shall+have+the+following+effects:+
+
1.+ The+ constituent+ corporations+ shall+ become+ a+ single+ corporation+
The! issuance! by! the! SEC! of! the! certificate! of! merger! is! crucial!
because!not!only!does!it!bear!out!SECs!approval!but!also!marks!
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;+
+
the! moment! whereupon! the! consequences! of! a! merger! take!

place.! By! operation! of! law,! upon! the! effectivity! of! the! merger,!
the! absorbed! corporation! ceases! to! exist! but! its! rights,! and!
properties! as! well! as! liabilities! shall! be! taken! and! deemed!
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;+
+
as+provided+in+this+Code.+(n)+
+
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Mindanao!Savings!and!Loan!Asso.!V.!Willkom,!634!SCRA!291!(2010).!
)
!
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+ all+ and+ every+
!
Issue:+ Whether!or!not!Associated!Bank,!the!surviving!corporation,!may!
enforce! the! promissory! note! made! by! private! respondent! in! favor! of!
CBTC,!the!absorbed!company.!
+
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+
Held:+ YES.! Ordinarily,! in! the! merger! of! two! or! more! existing!
corporations,!one!of!the!combining!corporations!survives!and!continues!
the!combined!business,!while!the!rest!are!dissolved!and!all!their!rights,!
properties! and! liabilities! are! acquired! by! the! surviving! corporation.!
Although!there!is!a!dissolution!of!the!absorbed!corporations,!there!is!no!
winding! up! of! their! affairs! or! liquidation! of! their! assets,! because! the!
surviving! corporation! automatically! acquires! all! their! rights,! privileges!
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)+
and! powers,! as! well! as! their! liabilities.! The! merger,! however,! does! not!
become! effective! upon! the! mere! agreement! of! the! constituent!
corporations.! The! procedure! to! be! followed! is! prescribed! under! the!
Corporation!Code.!Assuming!that!the!effectivity!date!of!the!merger!was!
the!date!of!its!execution,!we!still!cannot!agree!that!petitioner!no!longer!
has! any! interest! in! the! promissory! note.! The! agreement! itself! clearly!
provides! that! all! contracts! ! irrespective! of! the! date! of! execution! !
+
Associated%Bank%v.%CA%
+
Facts:+Associated!Banking!Corporation!(ABC)!and!Citizens!Bank!and!Trust!
Company!(CBTC)!merged!to!form!just!one!banking!corporation!known!as!
Associated! Citizens! Bank! (ACB),! which! changed! its! name! to! Associated!
Bank! (AB).! Lorenzo! Sarmiento! Jr.! executed! in! favor! of! AB! a! promissory!
note!whereby!the!former!undertook!to!pay!on!or!before!March!6,!1978.!
Sarmiento! still! owes! AB! today! despite! repeated! demands.! He! alleges!
that!AB!is!not!the!proper!party!in!interest!because!the!promissory!note!
was!executed!in!favor!of!Citizens!Bank!and!Trust!Company.!
entered!into!in!the!name!of!CBTC!shall!be!understood!as!pertaining!to!
the! surviving! bank,! herein! petitioner.! Clause! have! been! deliberately!
included! in! the! agreement! in! order! to! protect! the! interests! of! the!
combining! banks;! specifically,! to! avoid! giving! the! merger! agreement! a!
farcical!interpretation!aimed!at!evading!fulfillment!of!a!due!obligation.!
!
Doctrine:+ The! merger,! however,! does! not! become! effective! upon! the!
mere!agreement!of!the!constituent!corporations!Section!79!requires:!
)
1. Approval!by!the!SEC!of!the!articles!of!merger!!
2. Must! have! been! duly! approved! by! a! majority! of! the! respective!
!
stockholders!of!the!constituent!corporations.!
3. Merger!shall!be!effective!only!upon!the!issuance!by!the!SEC!of!a!
certificate!of!merger.!!
4. The! effectivity! date! of! the! merger! is! crucial! for! determining!
when!the!merged!or!absorbed!corporation!ceases!to!exist;!and!
when! its! rights,! privileges,! properties! as! well! as! liabilities! pass!
on!to!the!surviving!corporation.!
+
Atty.!Hofilea!!!The!assumption!of!rights!is!a!matter!of!law.%
Global!is!bound!by!the!terms!of!the!contract!entered!into!by!its!
predecessorUinUinterest,! Asian! Bank.! Due! to! Globals! merger!
with!Asian!Bank!and!because!it!is!the!surviving!corporation,!it!is!
as!if!it!was!the!one!which!entered!into!contract!with!Surecomp.!
In! the! merger! of! two! existing! corporation,! 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.!In!the!same!way,!Global!
also!has!the!right!to!exercise!all!defenses,!rights,!privileges,!and!
counterUclaims!of!every!kind!and!nature!which!Asian!Bank!may!
have!or!invoke!under!the!law.!Global% Business% Holdings% Inc.% v.%
Surecompsoftware,%B.V.,%633%SCRA%94%(2010)%
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.%
CA,%350%SCRA%341%(2001).%
III.+EFFECTS+ON+EMPLOYEES+OF+CORPORATION+
+
A.+Assets+Only+Transfers:+Sundowner%Dev.%Corp.%v.%Drilon,%180%SCRA%14%
(1989).+
+
Sundowner%Dev.%Corp.%v.%Drilon%
+
Facts:+Hotel!Mabuhay,!Inc.!(Mabuhay)!leased!the!premises!belonging!to!
Santiago! Syjuco,! Inc.! (Syjuco)! but! failed! to! pay! their! rentals,! and! so!
Syjuco! instituted! and! ejectment! case.! They! settled! the! case! with! the!
surrender! of! the! premises! to! Syjuco.! The! assets! of! Mabuhay! within! it!
were!sold!to!Sundowner!who!also!leased!the!property!from!Syjuco.!The!
National! Union! of! Workers! in! Hotel,! Restaurant! and! Allied! Services!
(NUWHRAIN)! picketed! the! leased! premises,! barricaded! the! entrance!
and! denied! Sundowners! officers,! employees! and! guests! access.! The!
Secretary! of! Labor! ordered! the! workers! to! return! and! for! Mabuhay! to!
accept!them!pending!final!determination!of!the!issue!of!the!absorption!
of! the! former! employees! of! Mabuhay.! Mabuhay! argues! that! such! is!
impossible! because! it! has! ceased! operations.! NUWHRAIN! alleged! that!
Mabuhay! and! Sundownder! connived! to! sell! the! assets! and! close! the!
hotel! to! escape! its! obligations! to! the! employees! and! asked! that!
Sundowner!accept!the!workforce!of!Mabuhay!and!pay!backwages.!
+
Issue:+ Whether! or! not! the! purchaser! of! the! assets! of! an! employer!
corporation! can! be! considered! a! successor! employer! of! the! latters!
employees.!
!
Held:+ NO.! It! was! only! when! Mabuhay! offered! to! sell! its! assets! and!
personal! properties! in! the! premises! to! Sundowner! that! they! came! to!
)
!
deal! with! each! other.! Thus,! the! absorption! of! the! employees! of!
Mabuhay!may!not!be!imposed!on!Sundowner.!In!a!tripartite!agreement!
that!was!entered!into!by!Sundowner!with!NUWHRAIN!and!Mabuhay,!it!
is!clear!that!Sundowner!has!no!liability!whatsoever!to!the!employees!of!
Mabuhay!and!its!responsibility!if!at!all,!is!only!to!consider!them!for!reU
B.+ BusinessTEnterprise+ Transfers:+ Central% Azucarera% del% Danao% v.% CA,%

137% SCRA% 295% (1985);% Complex% Electronics% Employees% Assn.% v.% NLRC,%
310%SCRA%403%(1999).1+
+
employment! in! the! operation! of! the! business! in! the! same! premises.!
There! is! no! implied! acceptance! of! the! employees! of! Mabuhay! by!
Sundowner!and!no!commitment!or!duty!to!absorb!them.!
!
Doctrine:! Also,! while! it! is! true! that! Sundowner! is! using! the! leased!
property!for!the!same!type!of!business!as!that!of!Mabuhay,!there!can!be!
no! continuity! of! the! business! operations! from! Mabuhay! to! Sundowner!
+
Facts:+ BanaUay,! Cosculluela,! and! Palma! were! among! the! regular! and!
permanent! employees! of! Central! Danao,! the! owner! and! operator! of! a!
sugar! mill.! Central! Danao! later! sold! its! sugar! mill! to! DADECO.! DADECO!
actually!took!over!operations!of!the!mill!pursuant!to!the!Deed!of!Sale.!
!
Although!the!Deed!made!no!mention!of!currently!employed!employees,!
because!Mabuhay!had!not!retained!control!of!the!business.!Sundowner!
is!a!corporation!entirely!different!from!Mabuhay!and!has!no!controlling!
interest!whatever!in!the!same.!What!is!obvious!is!that!the!Sundowner,!
by!purchasing!the!assets!in!the!hotel!premises,!enabled!Mabuhay!to!pay!
its! obligations! to! its! employees.! There! being! no! employerUemployee!
relationship! between! the! Sundowner! and! the! Mabuhay! employees,! it!
cannot!be!compelled!to!absorb!the!latter!and!to!pay!them!backwages.!
DADECO!did!hire!regular!and!permanent!employees!pursuant!to!its!own!
hiring! and! selection! processes,! including! BanaUAy,! Cosculluela,! and!
Palma.!During!the!period!of!their!employment,!they!were!terminated!by!
DADECO.! BanaUAy,! Cosculluela,! and! Palma! filed! a! complaint! against!
Central!Danao!and!DADECO.!
!
Central!Danao!claimed!that!DADECO!was!the!employer!during!that!time!
since! the! former! had! already! transferred! its! assets! to! DADECO! at! the!
time!of!termination.!DADECO!claims!that!it!was!Central!Danao!who!was!
liable! since! the! termination! happened! during! the! time! that! Central!
Danao!was!there!employer.!
+
Issue:!Whether!or!not!Central!Danao!is!liable+
+
There! is! no! law! requiring! that! the! purchaser! of! MDIIs! assets!
should!absorb!its!employees!.!.!.!the!most!that!the!NLRC!could!
do,!for!reasons!of!public!policy!and!social!justice,!was!to!direct!
[the! buyer]! to! give! preference! to! the! qualified! separated!
employees!of!MDII!in!the!filling!up!of!vacancies!in!the!facilities.!
MDII% Supervisors% &% Confidential% Employees% Asso.% v.% Pres.%
Assistance%on%Legal%Affairs,%79%SCRA%40.%
Central%Azucarera%del%Danao%v.%CA%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Yu! v.! NLRC,! 245! SCRA! 134! (1995);! Sunio! v.! NLRC,! 127! SCRA! 390! (1984);! San!
Felipe!Neri!School!of!Mandaluyong,!Inc.!v.!NLRC,!201!SCRA!478!(1991).!
)
!
Held:! YES,! CENTRAL! DANAO! IS! LIABLE.! The! Deed! reveals! no! express!
stipulation! whatsoever! relative! to! the! continued! employment! by!
Dadeco!of!the!former!employees!of!Central!Danao.!There!was!in!fact,!an!
interruption!of!the!employment!of!the!private!respondents!in!the!sugar!
central.! In! reality! then,! they! were! rehired! anew! by! Dadeco,! their! new!
the!employees!that!it!was!left!with!no!alternative!but!to!close!down!the!
operations! of! LiteUOn.! The! Union! pushed! for! a! retrenchment! pay!
equivalent! to! 1! month! salary! for! every! year! of! service,! which! Complex!
refused.!!
!
employer.! The! records! also! reveal! that! negotiations! for! the! sale! were!
made! behind! the! back! of! the! employees! who! were! taken! by! surprise!
upon! its! consummation.! Technically! then,! the! employees! were!
terminated!on!the!date!of!the!sale.!Worse,!they!were!not!even!given!the!
required!notice!of!termination.!
+
Doctrine:+ The! sale! or! disposition! must! be! motivated! by! good! faith.!
The! machinery,! equipment! and! materials! being! used! for! production! at!
Complex! were! pulledUout! from! the! company! premises! and! transferred!
to! Ionics! Circuit,! Inc.! (Ionics)! at! Cabuyao,! Laguna.! The! following! day,! a!
total!closure!of!company!operation!was!effected.!
!
A! complaint! was! filed! with! the! Labor! Arbitration! Branch! of! the! NLRC.!
Ionics!was!impleaded!as!a!party!because!the!officers!and!management!
Indeed,! an! innocent! transferee! of! a! business! establishment! has! no!

liability!to!the!employees!of!the!transferor!to!continue!employing!them.!
Nor!is!the!transferee!liable!for!past!unfair!labor!practices!of!the!previous!
owner,! except,! when! the! liability! therefor! is! assumed! by! the! new!
employer!under!the!contract!of!sale.!!
personnel! were! also! holding! office! there.! Ionics! contended! that! it! was!
an!entity!separate!and!distinct!from!Complex!and!had!been!in!existence!
8! years! before! the! labor! dispute! arose.! Ionics! further! argued! that! the!
hiring! of! some! displaced! workers! of! Complex! was! an! exercise! of!
management!prerogatives.+
+
Issue:+Whether!or!!not!there!was!transfer!of!business!from!Complex!to!
+
Complex%Electronics%Employees%Assn.%v.%NLRC%
+
Facts:+Complex!was!engaged!in!the!manufacture!of!electronic!products.!
There! were! different! lines,! including! Ionics! and! LiteUOn.! The! rank! and!
file! workers! of! Complex! were! organized! into! the! Complex! Electronics!
Employees!Association!(Union).!Complex!received!a!fax!message!from!
LiteUOn,!requiring!it!to!lower!its!price!by!10%.!!
!
Complex! informed! its! LiteUOn! personnel! that! such! request! of! lowering!
their!selling!price!was!not!feasible!as!they!were!already!incurring!losses!
at! the! present! prices! of! their! products.! Complex! regretfully! informed!
Ionics+
+
Held:+ NO.! There! was! no! transfer! of! business.! A! runaway! shop! is!
defined!as!an!industrial!plant!moved!by!its!owners!from!one!location!to!
another!to!escape!union!labor!regulations!or!state!laws,!but!the!term!is!
also! used! to! describe! a! plant! removed! to! a! new! location! in! order! to!
discriminate!against!employees!at!the!old!plant!because!of!their!union!
activities.! A! runaway! shop! in! this! sense,! is! a! relocation! motivated! by!
antiUunion!animus!rather!than!for!business!reasons.!!
!
)
!
earlier! firm.! PepsiZCola% Bottling% Co.,% v.% NLRC,% 210% SCRA% 277%
(1992).%
%
In! this! case,! however,! Ionics! was! not! set! up! merely! for! the! purpose! of!
transferring! the! business! of! Complex.! At! the! time! the! labor! dispute!
arose! at! Complex,! Ionics! was! already! existing! as! an! independent!
company.! It! cannot,! therefore,! be! said! that! the! temporary! closure! in!
Complex!and!its!subsequent!transfer!of!business!to!Ionics!was!for!antiU
union! purposes.! The! Union! failed! to! show! that! the! primary! reason! for!
the!closure!of!the!establishment!was!due!to!the!union!activities.!!
!!
Doctrine:! The! mere! fact! that! one! or! more! corporations! are! owned! or!
controlled! by! the! same! or! single! stockholder! is! not! a! sufficient! ground!
for! disregarding! separate! corporate! personalities.! Ionics! may! be!
engaged!in!the!same!business!as!that!of!Complex,!but!this!fact!alone!is!
Facts:+ Private! respondent! Encabo! was! employed! as! a! maintenance!

manager! in! Pepsi! Cola! Distributors! (PCD).! His! employment! was!
terminated! because! of! his! negligence! in! repairing! the! beverage! plants!
CEMU72!soaker!machine!which!needed!rehabilitation.!According!to!PCD,!
his! delays! in! repairing! the! machine! caused! the! company! to! incur!
significant!losses.!!
!
not! enough! reason! to! pierce! the! veil! of! corporate! fiction! of! the!
corporation.!WellUsettled!is!the!rule!that!a!corporation!has!a!personality!
separate!and!distinct!from!that!of!its!officers!and!stockholders.+
Encabo! filed! a! complaint! for! illegal! dismissal! and! unfair! labor! practice!
claiming! that! he! was! denied! due! process.! The! NLRC! found! in! favor! of!
Encabo!and!issued!a!writ!of!execution!addressed!to!Pepsi!Cola!Bottling!
Corp! (PBC)! ordering! PCD! to! reinstate! him.! The! writ! was! delivered! to!
PepsiUCola! Products! Philippines! (PCPPI).! PCCPI! alleged! that!
reinstatement! is! no! longer! possible! since! PCD! had! closed! down! its!
business!on!the!ground!of!serious!business!losses!and!the!new!franchise!
Furthermore,! under! the! principle! of! absorption,! a! bona! fide!

buyer!or!transferee!of!all,!or!substantially!all,!the!properties!of!
the! seller! or! transferor! is! not! obliged! to! absorb! the! latters!
employees.!The!most!that!the!purchasing!company!may!do,!for!
reasons!of!public!policy!and!social!justice,!is!to!give!preference!
of! reemployment! to! the! selling! companys! qualified! separated!
employees,!who!in!its!judgment!are!necessary!to!the!continued!
Although! a! corporation! may! have! ceased! business! operations!

and! an! entirely! new! company! has! been! organized! to! take! over!
holder,!PCPPI,!is!a!new!entity.!
+
Issue:+Whether!or!!not!PCPPI!is!liable+
+
Held:+ YES.! PCPPI! is! liable! and! must! reinstate! Encabo.! PCD! may! have!
ceased! business! operations! and! PCPPI! may! be! a! new! company! but! it!
does!necessarily!follow!that!one!may!now!be!held!liable!for!illegal!acts!
committed! by! the! earlier! firm.! The! complaint! was! filed! when! PCD! was!
the!same!type!of!operations,!it!does!not!necessarily!follow!that!
no!one!may!now!be!held!liable!for!illegal!acts!committed!by!the!
still! in! existence.! PepsiUCola! never! stopped! doing! business! in! the!
Philippines.! The! same! soft! drink! products! sold! in! 1988! when! the!
operation! of! the! business! establishment.! Barayoga% v.% Asset%

Privation%Trust,%473%SCRA%690%(2005).%
PepsiZCola%Bottling%Co.,%v.%NLRC%
)
!
complaint! was! initiated! continue! to! be! sold! now.! The! sale! of! products!
did! not! stop! at! the! time! PCD! bowed! out! and! PCPPI! came! into! being.!
There!is!no!evidence!presented!showing!that!PCCPI,!as!the!new!entity!or!
purchasing! company! is! free! from! any! liabilities! incurred! by! the! former!
company.!!
!
In! fact,! in! the! surety! bond! put! up! by! petitioners,! both! PCD! and! PCPPI!
bound!themselves!to!answer!for!monetary!awards!which!clearly!implies!
that!the!PCPPI!as!a!result!of!the!transfer!of!the!franchise!bound!itself!to!
answer!for!the!liability!of!PCD!to!its!employees.+
+
%
Where! a! corporation! is! closed! for! alleged! losses! and! its!

equipment!are!transferred!to!another!company!which!engaged!
in!the!same!operations,!the!separate!juridical!personality!of!the!
latter!can!be!pierced!to!make!it!liable!for!the!labor!claims!of!the!
employees! of! the! closed! company.! National% Federation% of%
Labor%Union%v.%Ople,%143%SCRA%124%(1986).%
transgressions!of!his!or!her!precedessor.!Peafrancia*Tours*and*
Travel%Transport%v.%Sarmiento,%634%SCRA%279%(2010).%
!
C.+ Equity+ Transfers:+ Pepsi% Cola% Distributors% v.% NLRC,% 247% SCRA% 386%
(1995);%Manlimos%v.%NLRC,%242%SCRA%145%(1995).1%
%
Pepsi%Cola%Distributors%v.%NLRC%
+
Facts:+Private!respondent!Yute!started!working!with!PepsiUCola!Bottling!
Company! (PCBCP)! as! contractual! maintenance! electrician! and! when!
Pepsi! Cola! Distributors! (PCD)! took! over! the! companys! manufacturing!
operations,! he! was! absorbed! as! a! regular! employee.! PCD! terminated!
Yute!for!alleged!abandonment!of!work!and/or!absence!without!leave!so!
he! filed! a! complaint! for! illegal! dismissal! before! the! NLRC! wherein! the!
labor!arbiter!declared!the!dismissal!illegal!and!ordered!PCD!to!reinstate!
him.!However,!33!days!after!his!reinstatement,!PCD!stopped!payment!of!
Yutes! salary! on! the! ground! that! it! allegedly! sold! its! business! interest!
with!Pepsi!Cola!Products!Philippines,!Inc.!(PCPPI)!
!
a! corporation! (i.e.,! business! enterprise! transfers),! the! liabilities!

of! the! previous! owners! to! its! employees! are! not! enforceable!
against! the! buyer! or! transferee,! unless! (a)! the! latter!
unequivocally! assumes! them;! or! (b)! the! sale! or! transfer! was!
made! in! bad! faith.! Barayoga% v.% Asset% Privatization% Trust,% 473%
SCRA%690%(2005).%
NLRC!issued!a!writ!of!execution!ordering!PCD!to!pay!the!salaries.!PCPPI!
filed!in!the!case!a!motion!praying!that!the!change!of!ownership!of!the!
company! be! taken! cognizance! of! by! the! NLRC! saying! that! PCPPI! has! a!
separate! personality! from! PCD! and! therefore,! not! a! party! to! the! cases!
filed.! Not! being! a! party,! they! cannot! be! subjected! to! the! issue! writ! of!
execution.! NLRC! in! resolving! the! MR! modified! its! decision! by! ordering!
both!PCD!and!PCPPI!to!reinstate!Yute.!PCD!was!further!ordered!to!pay!
Where!the!change!of!ownership!is!done!in!bad!faith,!or!is!used!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
In!the!case!of!a!transfer!of!all!or!substantially!all!of!the!assets!of!
to!defeat!the!rights!of!labor,!the!successorUemployer!is!deemed!
to! have! absorbed! the! employees! and! is! held! liable! for! the!
!Robledo! v.! NLRC,! 238! SCRA! 52! (1994);! PepsiUCola! Bottling! Co.! v.! NLRC,! 210!
SCRA!277!(1992);!DBP!v.!NLRC,!186!SCRA!841!(1990);!Coral!v.!NLRC,!258!SCRA!
704!(1996);!Avon!Dale!Garments,!Inc.!v.!NLRC,!246!SCRA!733!(1995).!
)
!
Yutes!separation!pay.!
+
Issue:+ Whether! or! not! the! dismissal! of! Yute! on! the! ground! that! the!
company!already!sold!its!business!interest!to!PCCPI!was!proper!!
+
petitioners!continued!to!work!for!the!new!owner!and!were!considered!
terminated,!with!their!conformity!much!later!when!they!received!their!
separation! pay! and! all! other! benefits! due! them.! Each! of! them! then!
executed! a! Release! and! Waiver! which! they! acknowledged! before! Atty.!
Nolasco! Discipulo,! Hearing! Officer! of! the! Butuan! City! District! Office! of!
Held:+ NO.! The! contention! that! the! second! dismissal! of! private!
respondent!presents!an!issue!separate!and!distinct!from!the!issue!of!the!
earlier! dismissal! on! December! 15,! 1988! is! nothing! but! an! attempt! of!
PCD! to! evade! liability.! Pepsi! Cola! Distributors! of! the! Philippines! may!
have! ceased! business! operations! and! PepsiUCola! Products! Philippines,!
Inc.! may! be! a! new! company! but! it! does! not! necessarily! follow! that! no!
one! may! now! be! held! liable! for! illegal! acts! committed! by! the! earlier!
DOLE.!!
!
The! new! owner! caused! the! publication! of! a! notice! for! the! hiring! of!
workers,! indicating! therein! who! of! the! separated! employees! could! be!
accepted! on! probationary! basis.! The! petitioners! were! hired! on!
probationary! basis! for! six! months! as! patchers! or! tapers,! but! were!
compensated!on!pieceUrate!or!task!basis.!!
firm.!The!complaint!was!filed!when!PCD!was!still!in!existence.!PepsiUCola!
never! stopped! doing! business! in! the! Philippines.! The! same! soft! drinks!
products!sold!in!1988!when!the!complaint!was!initiated!continue!to!be!
sold!now.!!
+
Doctrine:! The! sale! of! products,! purchases! of! materials,! payment! of!
obligations,!and!other!business!acts!did!not!stop!at!the!time!PCD!bowed!
!
For!their!alleged!absence!without!leave,!Perla!Cumpay!and!Virginia!Etic!
were! considered! to! have! abandoned! their! work.! The! rest! were!
dismissed!later!because!they!allegedly!committed!acts!prejudicial!to!the!
interest! of! the! new! management! which! consisted! of! their! "including!
unrepaired! veneers! in! their! reported! productions! on! output! as! well! as!
untaped! corestock! or! whole! sheets! in! their! supposed! taped!
out!and!PCPPI!came!into!being.!There!is!no!evidence!presented!showing!
that! PCPPI,! as! the! new! entity! or! purchasing! company! is! free! from! any!
liabilities!incurred!by!the!former!corporation.%
veneers/corestock."!!
!
The!employeeUpetitioners!allege!that!they!remained!regular!employees!
of! the! corporation! because! the! change! in! ownership! and! management!
of! Super! Mahogany! left! its! separate! juridical! personality! unaffected.!In!
their! defense,! the! corporation! claims! that! it! was! within! their!
management! prerogative! to! terminate! the! employeeUpetitioners,! as!
they!were!reU!hired!by!the!new!management!under!probationary!status.!
%
Manlimos%v.%NLRC%
+
Facts:+ Manlimos! along! with! 15! others! were! employees! of! Mahogany!
Plywood! Corporation.! A! new! owner/management! group! headed! by!
Alfredo! Roxas! acquired! complete! ownership! of! the! corporation.! The!
petitioners! were! advised! of! such! change! of! ownership;! however,! the!
+
Issue:+ Whether! or! not! an! innocent! transferee! of! a! business!
)
!
establishment! has! liability! to! the! employees! of! the! transfer! or! to!
continue!employing!them.!!
+
Held:+NO.!The!change!in!ownership!of!the!management!was!done!bona!
fide!and!the!petitioners!did!not!for!any!moment!before!the!filing!of!their!
complaints! raise! any! doubt! on! the! motive! for! the! change.! On! the!
contrary,! upon! being! informed! thereof! and! of! their! eventual!
termination! from! employment,! they! freely! and! voluntarily! accepted!
their! separation! pay! and! other! benefits! and! individually! executed! the!
Release! or! Waiver! which! they! acknowledged! before! no! less! than! a!
hearing!officer!of!the!DOLE.!!
!
Since! the! petitioners! were! effectively! separated! from! work! due! to! a!
bona! fide! change! of! ownership! and! they! were! accordingly! paid! their!
separation!pay,!which!they!freely!and!voluntarily!accepted,!the!private!
respondent! corporation! was! under! no! obligation! to! employ! them;! it!
may,! however,! give! them! preference! in! the! hiring.! The! private!
respondent! in! fact! hired,! but! on! probationary! basis,! was! legally!
permissible.!!
!
The! hiring! of! employees! on! a! probationary! basis! is! an! exclusive!
management! prerogative.! The! employer! has! the! right! or! privilege! to!
choose!who!will!be!hired!and!who!will!be!denied!employment.!
+
Doctrine:+ Where! such! transfer! of! ownership! is! in! good! faith,! the!
transferee!is!under!no!legal!duty!to!absorb!the!transferor!employees!as!
there! is! no! law! compelling! such! absorption.! The! most! that! the!
transferee! may! do,! for! reasons! of! public! policy! and! social! justice,! is! to!
give! preference! to! the! qualified! separated! employees! in! the! filling! of!
vacancies!in!the!facilities!of!the!purchaser.!!
%
D.+ Mergers+ and+ Consolidations:+ Filipinas% Port% Services% v.% NLRC,% 177%
SCRA%203%(1989).1+
+
Filipinas%Port%Services%v.%NLRC%
+
Facts:+On!Feb.!16,!1977,!the!government!adopted!a!policy!in!Davao!that!
only!one!company!can!operate!stevedoring!and!arrastre!services!in!the!
ports!of!Davao.!Because!of!this,!the!companies!providing!such!services!
consolidated! together! and! formed! a! corporation! named! Davao!
Dockhandlers,! Inc.! which! was! later! renamed! Filipinas! Port! Services.!
Among! the! corporations! in! the! consolidation! agreement! was! Davao!
Maritime!Stevedoring!Corporation!(DAMASTICOR).!
!
In!the!articles!of!incorporation!of!the!new!corporation,!it!provided!that!
all! labor! force! together! with! its! necessary! personnel! complement,! of!
the! merging! operators! shall! be! absorbed! by! the! merged! or! integrated!
organization!to!constitute!its!labor!force.!
!
Private! respondent,! an! employee! of! DAMASTICOR,! upon! retirement!
from!Filipinas,!was!paid!his!retirement!fee!from!1977U1987.!He!however!
contends!that!his!employment!from!DAMASTICOR!should!be!counted!in!
computing!his!retirement!fee.!
+
Issue:+Whether!or!not!the!successorUinUinterest!of!an!employer!is!liable!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Reiterated! in! Filipinas! Port! Services! v.! NLRC,! 200! SCRA! 773! (1991);! National!
Union! Bank! Employees! v.! Lazaro,! 156! SCRA! 123! (1988);! First! Gen.! Marketing!
Corp.!v.!NLRC,!223!SCRA!337!(1993).!
)
!
for!the!differential!retirement!pay!of!an!employee!earned!by!him!when!
he!was!still!under!the!employment!of!the!predecessorUinUinterest.!
!
Held:+ NO.! Petitioner! cannot! be! held! liable! for! the! payment! of! the!
retirement! pay! of! private! respondent! while! in! the! employ! of!
DAMASTICOR.! It! is! the! latter! who! is! responsible! for! the! same! as! the!
labor!contract!of!private!respondent!with!DAMASTICOR!is!in!personam!
and!cannot!be!passed!on!to!the!petitioner.!
+
Doctrine:!Unless!expressly!assumed,!labor!contracts!are!not!enforceable!
against!a!transferee!of!an!enterprise,!labor!contracts!being!in!personam.+
+
It! is! more! in! keeping! with! the! dictates! of! social! justice! and! the!
State! policy! of! according! full! protection! to! labor! to! deem!
employment! contracts! as! automatically! assumed! by! the!
surviving! corporation! in! a! merger,! even! in! the! absence! of! an!
express!stipulation!in!the!articles!of!merger!or!the!merger!plan.!
By! upholding! the! automatic! assumption! of! the! nonUsurviving!
corporations! existing! employment! contracts! by! the! surviving!
corporation! in! a! merger,! the! Court! strengthens! judicial!
protection! of! the! right! to! security! of! tenure! of! employees!
affected!by!a!merger!and!avoids!confusion!regarding!the!status!
of!their!various!benefits.!Bank% of% P.I.% v.% BPI% Employees% UnionZ
Davao%Chapter,%etc.,%658%SCRA%828%(2011).%
o Atty.!Hofilea!!!the!surviving!corporation,!in!a!merger!
situation,! is! absorbing! everything! including! employees.!
As! such,! there! is! no! interruption.! This! case! seems! to!
suggest! that! the! employees! have! a! choice! whether! to!
join!the!new!company!or!not.! However,!the!rule!still!is!
that! employment,! because! they! are! obligations,! are!

carried!over.%
!
E.+SpinTOffs:+SMC%Employees%UnionZPTGWO%v.%Confessor,%262%SCRA%81%
(1996).+
+
SMC%Employees%UnionZPTGWO%v.%Confessor%
+
Facts:+ SMCUUnion!entered!into!a!Collective!Bargaining!Agreement!with!
SMC.! SMC! management! informed! its! employees! in! a! letter! that! the!
company! U! which! was! composed! of! 4! operating! divisions! (1)! beer,! (2)!
packaging,!(3)!feed!and!livestocks!and!(4)!Magnolia!and!AgriUbusiness!U!
would! undergo! a! restructuring.! Magnolia! and! Feeds! and! Livestock!
divisions! were! spunUoff! and! became! 2! separate! and! distinct!
corporations:!Magnolia!Corp.!(Magnolia)!and!San!Miguel!Foods!(SMFI).!
Because! of! this,! the! CBA! was! renegotiated.! During! the! negotiations,!
SMCUUnion!insisted!that!the!bargaining!unit!of!SMC!should!still!include!
the! employees! of! the! spunUoff! corporation! and! the! CBA! shall! be!
effective! for! 2! years.! SMC,! on! the! other! hand,! contended! that! the!
members/employees! who! had! moved! to! Magnolia! and! SMFI,!
automatically!ceased!to!be!part!of!the!bargaining!unit!at!the!SMC.!
+
Issue:+ Whether! or! not! the! bargaining! unit! of! SMC! includes! also! the!
employees!of!Magnolia!and!SMFI.!
+
Held:+ NO.! Magnolia! and! SMFI! were! spunUoff! to! operate! as! distinct!
companies.! Undeniably,! the! transformation! of! the! companies! was! a!
management! prerogative! and! business! judgment! which! the! courts!
cannot! look! into! unless! it! is! contrary! to! law,! public! policy! or! morals.!
)
!
Neither!can!we!impute!any!bad!faith!on!the!part!of!SMC!so!as!to!justify!
the!application!of!the!doctrine!of!piercing!the!corporate!veil.!Magnolia!
and! SMFI! became! distinct! entities! with! separate! juridical! personalities.!
Thus,!they!cannot!belong!to!a!single!bargaining!unit.!
+
Doctrine:+ In! determining! an! appropriate! bargaining! unit,! the! test! of!
grouping!is!mutuality!or!commonality!of!interests.!Considering!the!spinU
offs,! the! companies! would! consequently! have! their! respective! and!
distinctive! concerns! in! terms! of! the! nature! of! work,! wages,! hours! of!
work!and!other!conditions!of!employment.+
+
)
CORPORATE(DISSOLUTION(AND(LIQUIDATION(
!
I.(No(Vested(Rights(to(Corporate(Fiction:((
No! person! who! has! a! claim! against! a! juridical! entity! can! claim!
any! constitutional! right! to! the! perpetual! existence! of! such!
entity.!Gonzales)v.)SRA,)174)SCRA)377)(1989).))
However,!the!Court!emphasized!that!the!termination!of!the!life!
still! retaining! its! primary! franchise! to! be! a! corporation.!

This! is! actually! a! dissolution! only! of! the! "business!
enterprise,"!while!leaving!intact!the!juridical!entity.!
2. Obtaining(of(Tax(Clearance(
of! a! juridical! entity! does! not! by! itself! imply! the! diminution! or!
extinction! of! rights! demandable! against! a! juridical! entity.!
Consequently,! when! the! assets! of! a! dissolved! entity! are! taken!
over!by!another!entity,!the!successor!entity!must!be!held!liable!
(
A.(Nature(of(Dissolution2(
Dissolution! of! a! corporation! signifies! the! extinguishment! of! its!
franchise! and! the! termination! of! its! corporate! existence! for!

business! purpose.! The! mere! fact! that! the! corporation! has!
ceased! to! do! business! does! not! necessarily! constitute! a!
dissolution,!if!it!is!still!solvent!and!has!not!gone!into!liquidation.!
1. Dissolution:(de)jure(v.(de)facto(
o
A!de#jure!dissolution!is!one!adjudged!and!determined!by!
administrative!or!judicial!sentence,!or!brought!about!by!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
#Gonzales#v.#Sugar#Regulatory#Administration,#174!SCRA!377!(1989).!
2
!!Villanueva,!C.!L.,!&!VillanuevaTTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
Under! Section! 2! of! BIRTSEC! Regulations! No.! 1,! whenever! a!

corporation! undergoes! dissolution,! whether! voluntarily! or!
involuntarily,!a!tax!clearance!must!be!obtained!from!the!Bureau!
of! Internal! Revenue,! by! filing! with! the! Bureau! an! income! tax!
returns!covering!the!income!earned!by!them!from!the!beginning!
of! the! taxable! year! to! the! date! of! dissolution.! The! SEC! is!
required! to! furnish! the! Commissioner! of! Internal! Revenue! a!
for! the! obligations! of! the! dissolved! entity! pertaining! to! the!
assets! so! assumed,! to# the# extent# of# the# fair# value# of# assets#
actually#taken#over.1!
an!act!of!the!sovereign!power,!or!which!results!from!the!
expiration!of!the!charter!period!of!corporate!life.!!
A! de# facto! dissolution! is! one! which! takes! place! in!
substance! and! in! fact! when! the! corporation! by! reason!
of!insolvency,!cessation!of!business,!or!suspension!of!all!
its!operations,!as!the!case!may!be,!goes!into!liquidation,!
copy! of! any! order! of! involuntary! dissolution! or! suspension! of!
the! primary! franchise! or! certificate! of! registration! of! a!
corporation.3!
!
B.(Methods(of(Dissolution(
1. Voluntary(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
!A! corporation! whose! corporate! powers! cease! and! are! deemed! dissolved!
because!it!was!not!formally!organized!and!did!not!commence!the!transaction!of!
its! business! within! two! (2)! years! from! its! incorporation! need! not! secure! a!
certificate!of!tax!clearance.!BIR!Ruling!No.!242,!10!November!1986.!
)
!
a. Where! no! creditors! are! affected! by! the! dissolution,! by!
an! administrative! application! for! dissolution! filed! with!
the!SEC;1!
b. Where!creditors!are!affected!by!dissolution,!by!a!formal!
petition! for! dissolution! filed! with! the! SEC,! with! due!
notice,!and!hearing!to!be!duly!conducted;2!and!
c. Shortening!of!corporate!term!by!the!amendment!of!the!
articles!of!incorporation.3!
2. Involuntary(
(
II.(Voluntary(Dissolution((Section(117)(
!
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)(
!
Section(117.(Methods(of(dissolution.(
A( corporation( formed( or( organized( under( the( provisions( of( this( Code(
may(be(dissolved(voluntarily(or(involuntarily.((n)(
!
A.(No(Creditors(Affected((Section(118)(
!
must!also!be!complied!with.4!
Section(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( twoVthirds( (2/3)( of( the( outstanding( capital( stock( or( of( at( least(
twoVthirds((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(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Section!118,!Corporation!Code.!
2
!Sec.!119,!Corporation!Code.!
3
!Sec.!120,!Corporation!Code.!
When! no! creditors! are! involved,! only! a! SEC! application! for!

dissolution! is! required.! The! process! is! equivalent! to! the!
application!for!the!amendment!of!the!articles!of!incorporation,!
except! that! in! addition,! publication! of! the! notice! of! dissolution!
The!SEC!will!not!deny!an!application!for!dissolution!when!there!
are! no! creditors! involved! because! of! the! constitutional!
prohibition! against! involuntary! servitude! or! the! constitutional!
guarantee!of!association,!and!the!right!to!refuse!to!continue!an!
association.! Since! other! than! the! stockholders! or! members! of!
the! corporation,! no! third! parties! are! involved,! the! State,!
through! the! SEC,! will! generally! grant! the! request! for! the!
dissolution!of!the!corporation.5!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
!Villanueva,!C.!L.,!&!VillanuevaTTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
5
)
!
!
B.(There(Are(Creditors(Affected((Sections(119(and(122).(
(
Section(119.(Voluntary(dissolution(where(creditors(are(affected.(
Where(the(dissolution(of(a(corporation(may(prejudice(the(rights(of(any(
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(allegations(
of( the( petition( are( true,( it( shall( render( judgment( dissolving( the(
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( twoVthirds(
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)(
(
Section(122.(Corporate(liquidation.(
Every( corporation( whose( charter( expires( by( its( own( limitation( or( is(
annulled(by(forfeiture(or(otherwise,(or(whose(corporate(existence(for(
(2/3)(of(the(outstanding(capital(stock(or(by(at(least(twoVthirds((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(
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.(
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(
(
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(
city.(
(
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.(
Section(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(
(
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)(
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)(
If! there! are! creditors! involved,! there! is! a! need! to! file! a! formal!
petition!for!dissolution!with!the!SEC.!The!proceedings!are!quasiT
judicial!in!nature!and!conducted!to!ensure!that!the!rights!of!the!
creditors!are!fully!protected.!In!such!proceedings,!the!SEC!is!not!
mandated!to!dissolve!the!corporation,!especially!when!it!would!
required!to!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.!Bank)of)P.I.)v.)Court)of)Appeals,)
363)SCRA)840)(2001).)
be! detrimental! to! the! interests! of! the! creditors,! who! may! wish!
to!rehabilitate!the!operations!of!the!corporation!to!ensure!that!
it!would!be!able!to!payToff!all!of!its!debts.!This!authority!of!the!
SEC!is!also!provided!for!in!Presidential!Decree!902TA.1!
Where! a! corporation! is! contemplating! dissolving! itself,! it! is!
When!a!corporation!is!contemplating!dissolution,!it!must!submit!
Under!its!internal!rules,!the!SEC!would!require!the!following:2!
a. Notice! of! the! dissolution! of! the! corporation! by!
shortening! of! the! corporate! term! be! published! in! a!
newspaper! of! general! circulation! for! three! (3)!
consecutive!weeks;!
b. Listing!of!the!corporate!creditors,!with!their!consent!to!
the!shortening!of!the!corporate!term;!
c. Submission! by! the! majority! stockholders! or! principal!
officers!of!the!corporation!of!an!undertaking!under!oath!
that! they! shall! personally! answer! for! any! outstanding!
obligations!of!the!corporation;!and!
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).)
!
C.(Shortening(of(Corporate(Term((Section(120)(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!Please! see! discussions! on! corporate! rehabilitation! in! Chapter! 14,! Suspension#
of#Payments,#Rehabilitation#and#Insolvency#Proceedings.!!
)
!
d. The! latest! audited! financial! statements! of! the!
corporation!which!must!not!be!earlier!than!the!date!of!
the!stockholders'!or!membership!meeting!approving!the!
amendment! to! the! articles! of! incorporation,! and! a! BIR!
clearance!on!the!tax!liabilities!of!the!corporation.!1!
(
III.( Involuntary( Dissolution( (Section( 121;( Section( 6(l),( P.D.( 902VA;(
Section(2,(Rule(66,(Rules(of(Court)(
(
Section(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)(
(
PRESIDENTIAL(DECREE(NO.(902VA(
Section(6.(
x(x(x(
(i)( To( suspend,( or( revoke,( after( proper( notice( and( hearing,( the(
franchise(or(certificate(of(registration(of(corporations,(partnerships(or(
associations,( upon( any( of( the( grounds( provided( by( law,( including( the(
following:(
(
1.(Fraud(in(procuring(its(certificate(of(registration;(
(
(
3.(Refusal(to(comply(or(defiance(of(any(lawful(order(of(the(Commission(
restraining( commission( of( acts( which( would( amount( to( a( grave(
violation(of(its(franchise;(
(
4.(Continuous(inoperation(for(a(period(of(at(least(five((5)(years;(
(
5.(Failure(to(file(byVlaws(within(the(required(period;(
(
6.(Failure(to(file(required(reports(in(appropriate(forms(as(determined(
by(the(Commission(within(the(prescribed(period;(
x(x(x(
(
CIVIL(CODE(
Section( 2.( When( Solicitor( General( or( public( prosecutor( must(
commence(action.((
The( Solicitor( General( or( a( public( prosecutor,( when( directed( by( the(
President(of(the(Philippines,(or(when(upon(complaint(or(otherwise(he(
has( good( reason( to( believe( that( any( case( specified( in( the( preceding(
section(can(be(established(by(proof,(must(commence(such(action.(
(
A.(Quo(Warranto(
2.( Serious( misrepresentation( as( to( what( the( corporation( can( do( or( is(
doing(to(the(great(prejudice(of(or(damage(to(the(general(public;(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!SEC!Opinion,!5!July!1979,!the!XIII!SEC!QUARTERLY!BULLETIN!3!(No.!4,!Oct.!1979).!
)
Dissolution! is! a! serious! remedy! granted! by! the! courts! only! in!
extreme!cases!and!only!to!ensure!that!there!is!an!avoidance!of!
prejudice!to!the!public.!Even!when!the!prejudice!were!public!in!
nature,!the!remedy!is!to!enjoin!or!correct!the!mistake;!and!only!
when!it!cannot!be!remedied!anymore!that!dissolution!should!be!
imposed.!Republic)v.)Bisaya)Land)Transportation)Co.,)81)SCRA)
9)(1978).)Government)v.)El)Hogar)Filipino,)50)Phil.)399)(1927).)
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.)
Thus,! in! Republic) v.) Security) Credit) &) Acceptance) Corp.,) 19)
SCRA)58)(1967),)dissolution!was!imposed!on!a!corporation!that!
was! engaging! in! banking! activities! without! a! license! from! the!
Central!Bank,!and!risking!the!savings!of!the!public.!
!
B.(NonVuser(of(Charter(and(Continuous(InVOperation((Section(22)(
(
Section( 22.( Effects( on( nonVuse( of( corporate( charter( and( continuous(
inoperation(of(a(corporation.(
dissolve!a!corporation!but!is!now!considered!only!a!ground!for!
such!dissolution.!Chung)Ka)Bio)v.)IAC,)163)SCRA)534)(1988).)
!
C.(Expiration(of(Term(
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(
ed.),)p.)841.)
legal!entity!with!the!capacity!to!transact!the!legitimate!business!
for! which! the! corporation! was! created.! Organization! relates!
)
A!corporation!cannot!extend!its!life!by!amendment!of!its!articles!
of! incorporation! to! be! effected! during! the! three! (3)! year!
statutory! period! for! liquidation! when! its! original! term! had!
already! expired.! The! three! (3)! year! statutory! period! for!
corporate! liquidation! is! not! for! the! purpose! of! continuing! the!
business! for! which! it! was! established,! but! strictly! limited! to!
liquidation.! The! extension! of! corporate! life! of! a! corporation! is!
deemed! to! constitute! new! business! and! cannot! be! validly!
pursued! during! the! liquidation! stage.! Alhambra) Cigar) and)
Cigarette) Manufacturing) Corp.) v.) Securities) and) Exchange)
(
Organize! involves! the! election! of! officers,! providing! for! the!
subscription! and! payment! of! the! capital! stock,! the! adoption! of!
byTlaws,! and! such! other! steps! as! are! necessary! to! endow! the!
Where!the!corporate!life!of!a!corporation!as!stated!in!its!articles!
of!incorporation!expired,!without!a!valid!extension!having!been!
effected,! it! was! deemed! dissolved! by! such! expiration! without!
need!of!further!action!on!the!part!of!the!corporation.!Majority)
Stockholders) of) Ruby) Industrial) Corp.) v.) Lim,) 650) SCRA) 461)
(2011),)citing)VILLANUEVA,)PHILIPPINE)CORPORATE)LAW)(2010)
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(
continuously( operate( is( due( to( causes( beyond( the( control( of( the(
corporation( as( may( be( determined( by( the( Securities( and( Exchange(
Commission.(
The!failure!to!file!the!byTlaws!does!not!automatically!operate!to!
Commission)24)SCRA)269)(1968).)
Under! Section! 11! of! the! Corporation! Code,! the! corporate! term!
as! originally! stated! in! the! articles! of! incorporation! may! be!
extended!in!any!single!instance!by!an!amendment!of!the!articles!
!
of!incorporation,!but!cannot!be!made!earlier!than!five!(5)!years!
prior!to!the!original!or!subsequent!expiry!date.1!
o The! privilege! of! extension! of! corporate! term! is! purely!
statutory! and! that! all! statutory! conditions! precedent!
must!be!complied!with!in!order!that!the!extension!may!
be!effectuated.!
!
D.(Demand(of(Minority(Stockholders(for(Dissolution.(
brought!in!a!private!suit!filed!by!stockholders!or!officers!
on!cases!within!the!jurisdiction!of!the!SEC.3!
When! it! comes! to! close! or! family! corporations,! there! was!
recognition!under!the!Corporation!Law!of!an!equitable!right!to!
demand! dissolution! of! the! corporation.! Financing) Corp.) of) the)
Phil.)v.)Teodoro,)93)Phil.)404)(1953).)
o The! Court! said! that! although! as! a! rule,! minority!
stockholders! of! a! corporation! may! not! ask! for! its!
dissolution!in!a!private!suit,!and!that!such!action!should!
be!brought!by!the!Government!through!its!legal!officer!
in! a! quo! warranto! case,! at! their! instance! and! request,!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
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).)
!
IV.(Legal(Effects(of(Dissolution(
A!corporations!board!of!directors!is!not!rendered!funtus!officio!
by! its! dissolution,! since! Section! 122! of! the! Corporation! Code!
prohibits! a! dissolved! corporation! from! continuing! its! business,!
but! allows! it! to! continue! with! a! limited! personality! in! order! to!
settle! and! close! it! affairs,! including! its! complete! liquidation.!
Necessarily!there!must!be!a!board!that!will!continue!acting!for!
there! might! be! exceptional! cases! wherein! the!

intervention! of! the! State,! for! one! reason! or! another,!
cannot!be!obtained,!as!when!the!State!is!not!interested!
because! the! complaint! is! strictly! a! matter! between! the!
stockholders!and!does!not!involve,!in!the!opinion!of!the!
legal! officer! of! the! Government,! any! of! the! acts! or!
omissions! warranting! quo! warranto! proceedings,! in!
which! minority! stockholders! are! entitled! to! have! such!
dissolution.!When!such!action!or!private!suit!is!brought!
by!them,!the!trial!court!has!jurisdiction!and!may!or!may!
not! grant! the! prayer,! depending! upon! the! facts! and!

circumstances!attending!it.2!!
This!doctrine!has!eventually!became!part!of!Presidential!
Decree! 902TA! which! grants! to! the! SEC! the! power! to!
decree! the! dissolution! of! the! corporation! upon! the!
appointment! of! a! management! committee! or! receiver!
and! on! behalf! of! the! dissolved! corporation! for! that! purpose.!
Aguirre)II)v.)FQB+7,)Inc.,)688)SCRA)242)(2013).)
The!dissolution!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!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
)Financing)Corp.)of)the)Phil.)v.)Teodoro,)93)Phil.)404)(1953).)
3
)
!
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).)
settlement!and!adjustment!of!claims!against!it!and!the!payment!
of!its!just!debts.)Yu)v.)Yukayguan,)589)SCRA)588)(2009).1)
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(UnionVN.U.B.E.(v.(Vega,(360(SCRA(33((2001).(
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)(2002).)
1. No(Authority(to(Enter(into(New(Business(
A!corporation!cannot!extend!its!life!by!amendment!of!its!articles!
of!incorporation!effected!during!the!threeTyear!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).)
o 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).)
o
!
VI.(Methods(of(Liquidation((Section(122)(
!
A.( The( Board( of( Trustees( Pursuing( Liquidation;( Subject( to( the( 3Vyear(
Period(
There!is!nothing!in!the!Corporation!Law!which!bars!an!action!for!
the! recovery! of! the! debts! of! the! corporation! against! the!
liquidator!thereof,!after!the!lapse!of!the!said!threeTyear!period.!
It! immaterial! that! the! present! action! was! filed! after! the!
expiration! of! the! three! yearsfor! 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!
A!corporation!that!has!reached!the!stage!of!dissolution!
is! no! longer! qualified! to! receive! a! secondary! franchise.!
Buenaflor)v.)Camarines)Industry,)108)Phil.)472)(1960).)
not!terminated!and!the!one!in!charge!thereof!is!still!holding!the!
assets! of! the! corporation,! obviously! for! the! benefit! of! all! the!
Following! the! dissolution! of! a! corporation,! liquidation! or! the!

settlement! of! its! affairs! consists! of! adjusting! the! debts! and!
claims,! i.e.,! collecting! all! that! is! due! to! the! corporation,! the!
A!derivative!suit!is!fundamentally!distinct!and!independent!from!
liquidation! proceedings! ! they! are! neither! part! of! each! other!
nor!the!necessary!consequence!of!the!other.!There!is!therefore!
no! basis! from! one! action! to! result! in! the! other.! Yu) v.)
Yukayguan,)589)SCRA)588)(2009).)
!
V.(Meaning(of(Liquidation(
Liquidation,! in! corporation! law,! connotes! a! winding! up! or!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Majority!Stockholders!of!Ruby!Industrial!Corp.!v.!Lim,!650!SCRA!461!(2011).!
)
!
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).) Reiterated) under) the) Corporation)
Code)in)Paramount)Insurance)Corp.)v.)A.C.)Ordonez)Corp.,)561)
B.(Liquidation(Pursued(Thru(a(CourtVAppointed(Receiver(
appointment! of! the! receiver.! The! receiver! is! actually! an! officer!
of!the!court!and!must!therefore!be!accountable!to!the!court.2!
SCRA)327)(2008).)
NOW:!Even!after!the!expiration!of!the!3Tyear!period,!corporate!
creditors! can! still! pursue! their! claims! against! corporate! assets!
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!advantage!of!
his! position! as! general! manager! and! applied! the! corporation's!
assets!in!payment!exclusively!to!his!own!claims.!De) Guzman) v.)
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! facts! and! weigh! the! relative!
advantages!and!disadvantages!of!appointing!a!receiver!to!wind!
NLRC,)211)SCRA)723)(1992).)
up!the!corporate!business.!China)Banking)Corp.)v.)M.)Michelin)
&)Cie,)58)Phil.)261)(1933).)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
There! can! be! no! doubt! that! under! the! 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,! by! having! 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.!
against! the! officers! or! stockholders! who! have! taken! over! the!
properties! of! the! corporation.! Tan) Tiong) Bio) v.) Commissioner,)
100)Phil.)86)(1956).1)
When!the!liquidation!of!a!dissolved!corporation!has!been!placed!
in! the! hands! of! a! receiver! or! assignee,! the! 3Tyear! period!
prescribed!by!law!for!liquidation!cannot!be!made!to!apply,!and!
that! the! receiver! or! trustee! may! institute! all! actions! leading! to!
the! liquidation! of! the! assets! of! the! corporation! even! after! the!
expiration! of! said! period.! Sumera) v.) Valencia,) 67) Phil.) 721)
(1939).)
Old( Rule:( Since! the! old! Corporation! Law! did! not! contain! any!
provision! that! allowed! any! action! after! the! 3Tyear! period! for!
liquidation,! then! all! actions! for! or! against! the! corporation! as!
abated! after! the! expiration! thereof.! National) Abaca) Corp.) v.)
Pore,)2)SCRA)989)(1961).)
A! receivership,! is! created! by! means! of! judicial! or! quasiTjucidial!
!Reiterated!in!Republic!v.!Marsman!Dev.!Co.,!44!SCRA!418!(1972).!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
)
!
!
C.(Liquidation(Pursued(Through(a(Trustee(
A!trusteeship!is!basically!a!contractual!relationship!governed!by!
the! Law! on! Trust,! and! generally! centered! upon! property,! such!
that! the! trustee! assumes! naked! title! to! the! property! placed! in!
trust.! It! is! therefore! a! relationship! that! can! be! created! by! a!
corporation! through! its! Board! of! Directors,! without! need! of!
judicial!authorization.!The!trustee!in!liquidation!is!not!appointed!
by!any!court,!but!he!is!actually!a!transferee!who!holds!legal!title!
to! the! corporate! assets! and! he! is! accountable! under! the! terms!
of! the! trust! agreement.! The! trustee's! fiduciary! obligations! are!
provided! in! the! trust! instrument! and! by! applicable! legal!
provisions.1!
When! upon! dissolution! the! affairs! of! the! corporation! were!

placed!in!a!Board!of!Liquidators,!they!were!duly!constituted!as!
trustees! for! the! liquidation! of! the! corporate! affairs,! and! there!
being! no! term! placed! on! the! Board,! their! power! to! pursue!
liquidation!did!not!terminate!upon!the!expiration!of!the!3T!year!
period.!Board)of)Liquidators)v.)Kalaw,)20)SCRA)987)(1967))
For!purposes!of!dissolution!and!liquidation!of!a!corporation,!the!
term! trustee! should! include! counsel! of! record! who! may! be!
deem! to! have! authority! to! pursue! pending! litigation! after! the!
expiration! of! the! 3Tyear! liquidation! period.! Gelano) v.) Court) of)
Appeals,)103)SCRA)90)(1981).)
)
Gelano)v.)Court)of)Appeals)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
#
Facts:! Insular! Sawmill! is! a! corporation! organized! for! the! primary!
purpose! of! carrying! on! a! general! lumber! and! sawmill! business.! It! was!
leasing! property! of! the! Spouses! Gelano,! and! the! latter! owed! the!
company! certain! sums! of! money! arising! from! cash! advances! of! the!
husband,! a! loan! in! China! Bank! which! Insular! executed! jointly! with! the!
husband,! and! credit! purchases! of! lumber! materials! for! the! spouses!
residence.! Insular! then! filed! a! complaint! for! collection! against! the!
spouses.! While! the! case! was! on! going,! Insular! amended! its! Articles! of!
Incorporation!to!shorten!its!corporate!existence!of!up!to!December!31,!
1960! only.! The! amended! Articles! of! Incorporation! was! filed! with! and!
approved! by! the! Securities! and! Exchange! Commission,! but! the! trial!
court! was! not! notified! of! the! amendment! shortening! the! corporate!
existence! and! no! substitution! of! party! was! ever! made.! Almost! 4! years!
after! the! dissolution! of! the! corporation,! the! trial! court! rendered! a!
decision!holding!spouses!liable.!On!appeal,!the!spouses!filed!a!motion!to!
dismiss!based!on!the!grounds!that!the!case!was!prosecuted!even!after!
dissolution! of! Insular! as! a! corporation! and! that! a! defunct! corporation!
cannot! maintain! any! suit! for! or! against! it! without! first! complying! with!
the!requirements!of!the!winding!up!of!the!affairs!of!the!corporation!and!
the! assignment! of! its! property! rights! within! the! required! period.!
Incidentally,!after!the!receipt!of!the!spouses!motion!to!dismiss,!Insular!
through! its! former! directors! filed! a! Petition! for! Receivership,! which!
petition!remains!pending!before!the!lower!court.!
(
Issue:( Whether! a! corporation! whose! corporate! life! had! ceased! by! the!
expiration!of!its!terms!of!existence,!could!still!continue!prosecuting!and!
defending! suits! after! its! dissolution! and! beyond! the! period! of! 3! years!
and! without! having! undertaken! any! step! to! transfer! its! assets! to! a!
)
!
in!the!assets,!including!the!shareholders!and!the!creditors!of!the!
corporation,! acting! for! and! in! its! 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).1)
trustee!or!assignee!
(
Held:( YES.! It! can! continue! prosecuting.! When! Insular! Sawmill,! Inc.! was!
dissolved! on! December! 31,! 1960,! under! Section! 77! of! the! Corporation!
Law,! it! still! has! the! right! until! December! 31,! 1963! to! prosecute! in! its!
name! the! present! case.! Although! private! respondent! did! not! appoint!
any!trustee,!yet!the!counsel!who!prosecuted!and!defended!the!interest!
of!the!corporation!in!the!instant!case!and!who!in!fact!appeared!in!behalf!
of! the! corporation! may! be! considered! a! trustee! of! the! corporation! at!
least!with!respect!to!the!matter!in!litigation!only.!Said!counsel!had!been!
handling! the! case! when! the! same! was! pending! before! the! trial! court!
until! it! was! appealed! before! the! Court! of! Appeals! and! finally! to! this!
whose! corporate! existence! is! terminated! in! any! manner!

continues! to! be! a! body! corporate! for! three! (3)! years! after! its!
dissolution! for! purposes! of! prosecuting! and! defending! suits! by!
and! against! it! and! to! enable! it! to! settle! and! close! its! affairs,!
culminating! in! the! disposition! and! distribution! of! its! remaining!
assets.! If! the! threeTyear! extended! life! has! expired! without! a!
trustee! or! receiver! having! been! expressly! designated! by! the!
corporation! within! that! period,! the! board! of! directors! (or!
trustee)! itself,! may! be! permitted! to! continue! as! trustees! by!
legal!implication!to!complete!the!corporation!liquidation.!
Court.!We!therefore!hold!that!there!was!a!substantial!compliance!with!
Section! 78! of! the! Corporation! Law! and! as! such,! private! respondent!
Insular! Sawmill,! Inc.! could! still! continue! prosecuting! the! present! case!
even! beyond! the! period! of! three! (3)! years! from! the! time! of! its!
dissolution.!!
(
Doctrine:(A!corporation!that!has!a!pending!action!and!which!cannot!be!
terminated! within! the! threeTyear! period! after! its! dissolution! is!
authorized! under! Section! 78! to! convey! all! its! property! to! trustees! to!
enable! it! to! prosecute! and! defend! suits! by! or! against! the! corporation!
beyond!the!threeTyear!period.)
!
VII.(Reincorporation:((
If! the! 3Tyear! extended! life! has! expired! without! a! trustee! or!
receiver! having! been! designated,! the! Board! of! Directors! itself,!
following! the! rationale! of! the! decision! in! Gelano,! may! be!
permitted!to!so!continue!as!trustees!to!complete!liquidation;!
and!in!the!absence!of!a!Board,!those!having!pecuniary!interest!
A! trustee! appointed! for! purposes! of! liquidation! does! not!

become!personally!liable!for!the!outstanding!obligations!of!the!
corporation.!Republic)v.)Tancinco,)394)SCRA)386)(2003).)
Under! Section! 122! of! the! Corporation! Code,! a! corporation!
By!following!the!procedures!on!the!sale!of!all!or!substantially!all!
of!the!assets!of!the!corporation,!the!stockholders!may!transfer!
the!assets!and!business!enterprise!of!the!dissolved!corporation!
to!a!newly!registered!entity!bearing!the!same!corporate!name.!
Chung)Ka)Bio)v.)IAC,)163)SCRA)534)(1988).)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Reiterated!in!Reburiano!v.!Court!of!Appeals,!301!SCRA!342!(1999);!Knecht!v.!
United!Cigarette!Corp.,!384!SCRA!48!(2002);!PepsiT!Cola!Products!Phils.,!Inc.!v.!
Court!of!Appeals,!443!SCRA!571!(2004).!
)
!
)
Chung)Ka)Bio)v.)IAC)
)
Facts:( Philippine! Blooming! Mills! Company,! Inc.! was! incorporated! for! a!
term!of!25!years.!The!members!of!its!board!of!directors!executed!a!deed!
finding,! the! penalty! is! not! necessarily! revocation! but! may! be! only!
suspension!of!the!charter.!In!fact,!under!the!rules!and!regulations!of!the!
SEC,!failure!to!file!the!byTlaws!on!time!may!be!penalized!merely!with!the!
imposition! of! an! administrative! fine! without! affecting! the! corporate!
existence!of!the!erring!firm.(
of!assignment!of!all!of!the!accounts!receivables,!properties,!obligations!
and!liabilities!of!the!old!PBM!in!favor!of!Chung!Siong!Pek!in!his!capacity!
as! treasurer! of! the! new! PBM,! then! in! the! process! of! reincorporation.!
The!new!PMB!was!issued!a!certificate!of!incorporation!by!the!Securities!
and! Exchange! Commission.! Chung! Ka! Bio! and! the! other! petitioners!
herein,!all!stockholders!of!the!old!PBM,!filed!with!the!SEC!a!petition!for!
liquidation! of! both! the! old! PBM! and! the! new! PBM.! The! allegation! was!
(
Doctrine:(
that!the!former!had!become!legally!nonTexistent!for!failure!to!extend!its!
corporate!life!and!that!the!latter!had!likewise!been!ipso!facto!dissolved!
for! nonTuse! of! the! charter! and! continuous! failure! to! operate! within! 2!
years!from!incorporation.(
(
Issue:( Whether! or! not! the! new! corporation! has! not! substantially!
complied! with! the! twoTyear! requirement! of! Section! 22! of! the! new!
Corporation!Code!on!nonTuser!because!its!stockholders!never!adopted!a!
set!of!byTlaws.(
(
Held:! NO.! NonTfiling! of! the! byTlaws! will! not! result! in! automatic!
dissolution!of!the!corporation.!Under!Section!6(i)!of!PD!902TA,!the!SEC!is!
empowered! to! suspend! or! revoked,! after! proper! notice! and! hearing,!
the! franchise! or! certificate! of! registration! of! a! corporation! on! the!
ground!inter!alia!of!failure!to!file!byTlaws!within!the!required!period.!It!
is! clear! from! this! provision! that! there! must! first! of! all! be! a! hearing! to!
determine! the! existence! of! the! ground,! and! secondly,! assuming! such!
)
1. Applicable(Legal(Provisions(
Section!121!and!122,!Corporation!Code(
Section!6(l),!of!Pres.!Decree!902TA!
2. Extension(of(Corporate(Life(During(Period(of(Dissolution(
The! Supreme! Court! has! consistently! taken! the! position! that! it!
would! be! illegal! for! the! corporation,! when! it! has! reached! the!
stage! of! dissolution,! to! seek! to! extend! its! corporate! life,! even!
with! the! amendment! of! the! articles! of! incorporation,! because!
the! same! would! constitute! "new! business"! contrary! to! the!

injunction! of! the! law! that! upon! dissolution! the! corporation!
cannot!go!into!a!transaction!"for!the!purpose!of!continuing!the!
business!for!which!it!was!established."1!
3. Distinctions(Between(Extension(of(Corporate(Life,(Revival(and(
Reincorporation2(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
!8! FLETCHER! CYCLOPEDIA! CORPORATIONS,! Perm.! Ed.,! Sec.! 4092.! Fletcher! also! holds!
that! "[w]hether! a! charter! creates! a! new! corporation! or! merely! continues! the!
existence! of! an! old! one! is! to! be! determined! from! its! terms,! construed! in!
accordance! with! the! legislative! intent! and! the! intent! of! the! corporators.!
Ordinarily!neither!an!extension!nor!a!revival!creates!a!new!corporation."!Ibid,!
Sec.!4093.!
)
corporation,! is! not! prohibited,! even! when! the! old! corporation!

has!reached!the!state!of!dissolution.!
"To!renew!a!charter!is!to!revive!a!charter!which!has!expired,!or,!
in!other!words,!to!give!a!new!existence!to!one!which!has!been!
forfeited,!or!which!has!lost!its!vitality!by!lapse!of!time.!!
o The! renewal! of! a! corporate! charter! by! extending! the!
term! of! corporate! life! has! been! considered,! in! legal!
effect,!as!amounting!to!the!grant!of!a!new!charter!so!as!
to! subject! the! corporation! to! the! laws! in! effect! at! the!
time!of!renewal.!
"[R]eincorporation!consists!in!the!taking!out!of!a!new!charter!by!
a!corporation!in!order!to!correct!errors!or!defects!in!the!original!
incorporation,!or!to!enlarge!the!power!or!limit!the!liabilities!of!
the!corporation,!or!to!lengthen!or!revive!the!corporate!life.!In!a!
sense! it! is! but! an! amendment! of! the! charter,! and! generally,!
under! the! statutes,! there! is! no! new! corporation! but! the!
company!is!the!same!as!before!the!reincorporation.!
As! has! already! been! pointed! out,! under! Philippine!

jurisprudence! the! reincorporation! of! a! corporation!
which!has!the!legal!effect!of!extended!the!old!corporate!
entity! is! not! authorized! when! this! is! sought! to! be!
achieved!after!the!original!term!has!expired.!!
4. Process(of(Reincorporating1(
o
While! extension! of! corporate! life! of! a! corporation! which! has!

reached!the!stage!of!dissolution,!is!not!permitted,!the!Supreme!
Court! has! recognized! that! "reincorporation"! of! an! old!
Even! under! the! provisions! of! the! present! Corporation! Code,!

nothing! prohibits! the! old! board! of! directors! of! a! dissolved!
corporation!to!negotiate!and!transfer!the!assets!of!the!dissolved!
corporation! to! the! new! corporation! intended! to! be! created! as!
long! as! the! stockholders! have! given! their! consent,! and! such!
consent!by!stockholders!is!expressly!allowed!in!Section!40!of!the!
said!Code.!
To!extend!a!charter!is!to!increase!the!time!for!the!existence!of!
one!which!would!otherwise!reach!its!limit!at!an!earlier!period.!
(E.g.!amendment!made!within!5!years!before!term!expiration)!
)
Summary(on(Dissolution(and(Liquidations(Proceedings(
!
Recently,#Clemente#v.#Court#of#Appeals2!revisited!the!procedures!
of! dissolution! and! liquidation.! In! that! case,! the! Supreme! Court! refused!
the!petition!filed!by!alleged!stockholders!of!a!sociedad#anonima!for!the!
declaration!of!the!corporate!assets!to!pertain!to!them!in!the!absence!of!
showing! any! transfer! or! disposition! by! the! corporation! in! their! favor.!
The! Court! said! that! in! the! absence! of! a! corporate! liquidation,! it! is! the!
corporation,!not!the!stockholders,!which!can!assert,!if!at!all,!any!title!to!
the!corporate!assets.!"If!indeed,!the!sociedad!has!long!become!defunct,!
it! should! behoove! petitioners,! or! anyone! else! who! may! have! any!
interest! in! the! corporation,! to! take! appropriate! measures! before! a!
proper!forum!for!a!peremptory!settlement!of!its!affairs."3!
!
The! Court! then! proceeded! to! lay! down! the! procedures! and!
effects!of!dissolution!and!liquidation!of!a!corporation!as!provided!for!in!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!242!SCRA!717!(1995).!
#Ibid,!at!p.!722.!
)
!
Sections!117!to!122!of!the!Corporation!Code,!and!existing!jurisprudence,!
thus:!
1. 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!creditor;1!
2. The!corporation!continues!to!be!a!body!corporate!for!three!(3)!
years! after! its! dissolution! for! purposes! of! prosecuting! and!
defending!suits!by!and!against!it!and!for!enabling!it!to!settle!and!
close! its! affairs,! culminating! in! the! disposition! and! distribution!
of!its!remaining!assets;!
3. It! may,! during! the! threeTyear! term,! appoint! a! trustee! or! a!
receiver!who!may!act!beyond!that!period;!
Corporation!Code,!thus:!
!
In! Gelano! case,! the! counsel! of! the! dissolved!
corporation! was! considered! a! trustee.! In! the! later! case!
of!Clemente#v.#Court#of#Appeals#[242!SCRA!717!(1995)],!
we!held!that!the!board!of!directors!may!be!permitted!to!
complete! the! corporate! liquidation! by! continuing! as!
4. If!the!threeTyear!extended!life!has!expired!without!a!trustee!or!
receiver! having! been! expressly! designated! by! the! corporation!
within! that! period,! the! board! of! directors! or! trustees!
themselves,! following! the! rationale! of! the! Supreme! Court's!
decision!in!Gelano#v.#Court#of#Appeals2!may!be!permitted!to!so!
continue! as! "trustees"! by! legal! implication! to! complete! the!
corporate!liquidation;!
trustees!by!legal!implication.!Under!Section!145!of!the!
Corporation! Code,! 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!
5. Still! in! the! absence! of! a! board! of! directors! or! trustees,! those!
having! any! pecuniary! interest! in! the! assets,! including! not! only!
the! shareholders! but! likewise! the! creditors! of! the! corporation,!
acting!for!and!in!its!behalf,!might!make!proper!representations!
with!the!SEC,!which!has!primary!and!sufficient!broad!jurisdiction!
in! matters! of! this! nature,! for! working! out! a! final! settlement! of!
the!corporate!concerns.!
pending!litigation.!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
#
Reburiano# v.# Court# of# Appeals, 3 !reiterated! the! ruling! of! the!
Supreme!Court!that!seeks!to!allow!the!full!liquidation!of!the!corporate!
affairs!even!beyond!the!threeTyear!period!provided!for!in!the!Code,!and!
invoked! in! addition! the! transitory! provision! of! Section! 145! of! the!
#See!Gonzales#v.#Sugar#Regulatory#Administration,!174!SCRA!377!(1989).!
!103!SCRA!90!(1981).!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
!301!SCRA!342,!102!SCAD!285!(1999).!!
)
CLOSE&CORPORATIONS&
&
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$ as$ a$ rallying$ point$ for$ family$ unity$ and$
prosperity,$not$as$a$flashpoint$for$familial$strife.$It$is$hoped$that$
I.&Definition&(Section&96)&
&
Section&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&
twoSthirds& (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.&
&
The$concept$of$a$close$corporation$organized$for$the$purpose$of$
running$ a$ family$ business$ or$ managing$ family$ property$ has$
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).$
Atty.$Hofilea$!$What$is$required$is$not$only$the$concurrence$of$
the$ three$ requisites$ present$ in$ Section$ 96,$ but$ such$
status/limitation$ must$ also$ be$ expressed$ in$ the$ Articles$ of$
Incorporation.$
$
A.&De&Jure&Close&Corporations:&Articles&of&Incorporation&Requirements&
(Section&97)&
&
Section&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&
called$a$"right$of$first$refusal;"$and$from$the$wordings$of$Section$
98,$it$would$be$the$most$onerous$restriction$allowed.$The$right$
of$ first$ refusal$ is$ a$ control$ scheme$ essential$ to$ a$ close$
corporation$which$allows$the$existing$stockholders$the$power$to$
maintain$ the$ character$ of$ delectus$ personae$ and$ thereby$
prevent$ an$ outsider$ from$ coming$ into$ and$ interfering$ with$ the$
affairs$of$the$corporation.1&
&
3.& For& a& greater& quorum& or& voting& requirements& in& meetings& of&
stockholders&or&directors&than&those&provided&in&this&Code.&
&
The& articles& of& incorporation& of& a& close& corporation& may& provide& that&
the&business&of&the&corporation&shall&be&managed&by&the&stockholders&
of&the&corporation&rather&than&by&a&board&of&directors.&So&long&as&this&
&
of$ profit$ distribution$ is$ based$ not$ only$ on$ the$ equity$ holdings,$
but$ is$ also$ tied$ to$ management$ performance,$ in$ the$ form$ of$
salaries,$per$dicus,$and$expensive$account$privileges.2$
Section&97,&Paragraph&1&
(3)&! $The$specific$grant$of$authority$to$allow$super=majority$for$
quorum$ reflects$ the$ Corporation$ Codes$ policy$ that$ in$ a$ close=
corporation$ setting,$ the$ property$ rights$ are$ not$ only$ tied$ with$
dividend$ rights;$ that$ parties$ are$ able$ to$ employ$ the$ corporate$
set=up$ to$ improve$ their$ management$ prerogatives$ by$ having$ a$
greater$ say$ in$ the$ affairs$ of$ the$ corporation.$ Since$ in$ a$ close=
corporation$ setting,$ participation$ in$ management$ may$ be$
agreed$ to$ be$ a$ manner$ by$ which$ corporation$ profits$ shall$ be$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
(2)& ! & The$ classification$ of$ directors$ provision$ in$ a$ close$

corporation$ setting$ allows$ the$ group$ to$ parcel$ out$ among$
themselves$ various$ management$ aspects$ in$ the$ corporate$
enterprises.$ The$ provision$ indicate$ an$ inherent$ closeness$
between$equity$and$management,$especially$when$the$scheme$
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.&
(1)&! &The$restriction$on$the$transferability$of$shares$of$stock$in$
a$ close$ corporation$ is$ limited$ to$ what$ in$ general$ parlance$ is$
$Villanueva,$C.$L.,$&$Villanueva=Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
2
)
!
distributed,$ therefore$ the$ parties$ are$ allowed$ leeway$ by$ which$
minority$ shareholders$ are$ given$ a$ say$ by$ requiring$ super=
majority$requirements$for$corporate$acts.1$
Section& 97,& Paragraph& 2& !& The$ feature$ of$ a$ close$ corporation$
whereby$ there$ is$ a$ merger$ of$ stock$ ownership$ and$ active$
management$ is$ what$ significantly$ distinguished$ it$ from$ other$
corporations.$ An$ ordinary$ corporation$ is$ managed$ and$
controlled$ by$ its$ board$ of$ directors.$ In$ de# facto$ close$
corporations$ even$ if$ there$ is$ an$ actual$ merger$ of$ stock$
ownership$and$corporate$management$in$the$same$group,$if$the$
acts$ are$ not$ those$ of$ the$ board$ of$ directors,$ the$ act$ would$ be$
invalid$because$of$the$clear$and$restrictive$provision$of$Sections$
23$ and$ 27.$ The$ Supreme$ Court$ held$ that$ "contracts$ between$ a$
corporation$ and$ third$ persons$ must$ be$ made$ by$ or$ under$ the$
authority$of$its$board$of$directors$and$not$by$its$stockholders,"$
and$ that$ the$ action$ of$ its$ stockholders$ in$ such$ matters$ is$ only$
advisory$ and$ is$ not$ binding$ on$ the$ corporation.# Barreto$ v.$ La$
Previsora$Filipina$57$Phil.$649$(1932).2&&
1. Restriction&on&Transfer&of&Shares&(Sections&98&and&99)&
&
Section&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& bySlaws& 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&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
#Also$Ramirez#v.#Orientalist#Co.,$38$Phil.$634$(1918).$
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.&
&
Section& 99.& Effects& of& issuance& or& transfer& of& stock& in& breach& of&
qualifying&conditions.&
1.&If&stock&of&a&close&corporation&is&issued&or&transferred&to&any&person&
who&is&not&entitled&under&any&provision&of&the&articles&of&incorporation&
to&be&a&holder&of&record&of&its&stock,&and&if&the&certificate&for&such&stock&
conspicuously& shows& the& qualifications& of& the& persons& entitled& to& be&
holders& of& record& thereof,& such& person& is& conclusively& presumed& to&
have&notice&of&the&fact&of&his&ineligibility&to&be&a&stockholder.&
&
2.& If& the& articles& of& incorporation& of& a& close& corporation& states& the&
number&of&persons,&not&exceeding&twenty&(20),&who&are&entitled&to&be&
holders& of& record& of& its& stock,& and& if& the& certificate& for& such& stock&
conspicuously& states& such& number,& and& if& the& issuance& or& transfer& of&
stock& to& any& person& would& cause& the& stock& to& be& held& by& more& than&
such& number& of& persons,& the& person& to& whom& such& stock& is& issued& or&
transferred&is&conclusively&presumed&to&have&notice&of&this&fact.&
&
3.&If&a&stock&certificate&of&any&close&corporation&conspicuously&shows&a&
restriction& on& transfer& of& stock& of& the& corporation,& the& transferee& of&
the& stock& is& conclusively& presumed& to& have& notice& of& the& fact& that& he&
has& acquired& stock& in& violation& of& the& restriction,& if& such& acquisition&
violates&the&restriction.&
&
)
!
4.& Whenever& any& person& to& whom& stock& of& a& close& corporation& has&
been&issued&or&transferred&has,&or&is&conclusively&presumed&under&this&
section&to&have,&notice&either&(a)&that&he&is&a&person&not&eligible&to&be&a&
holder&of&stock&of&the&corporation,&or&(b)&that&transfer&of&stock&to&him&
would&cause&the&stock&of&the&corporation&to&be&held&by&more&than&the&
number& of& persons& permitted& by& its& articles& of& incorporation& to& hold&
stock&of&the&corporation,&or&(c)&that&the&transfer&of&stock&is&in&violation&
of&a&restriction&on&transfer&of&stock,&the&corporation&may,&at&its&option,&
refuse&to&register&the&transfer&of&stock&in&the&name&of&the&transferee.&
&
5.&The&provisions&of&subsection&(4)&shall&not&applicable&if&the&transfer&of&
stock,& though& contrary& to& subsections& (1),& (2)& of& (3),& has& been&
consented&to&by&all&the&stockholders&of&the&close&corporation,&or&if&the&
close& corporation& has& amended& its& articles& of& incorporation& in&
accordance&with&this&Title.&
&
6.& The& term& "transfer",& as& used& in& this& section,& is& not& limited& to& a&
transfer&for&value.&
&
7.& The& provisions& of& this& section& shall& not& impair& any& right& which& the&
transferee& may& have& to& rescind& the& transfer& or& to& recover& under& any&
applicable&warranty,&express&or&implied.&
&
Subject$to$one$or$more$specified$restrictions$(Section$96$vis=a=
vis$ Section$ 98)$ !$ the$ restriction$ must$ not$ unnecessarily/$
absolutely$prevent$the$holder$from$exercising$acts$of$ownership$
over$his$shares.$
o Atty.$ Hofilea$ !$ the$ law$ allows,$ as$ a$ maximum$
restriction,$ a$ right$ of$ first$ refusal.$ As$ long$ as$ the$
restriction$ is$ not$ more$ onerous$ than$ a$ right$ of$ first$

refusal,$the$restriction$will$be$valid.$
&
2. PreSEmptive&Rights&(Section&102)&
&
Section&102.&PreSemptive&right&in&close&corporations.&
The& preSemptive& 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.&
&
Pre=emptive$rights$for$close$corporations$are$not$included$under$
the$ circumstances$ in$ Section$ 39$ where$ stockholders$ may$ be$
denied$the$exercise$of$their$pre=emptive$rights.1&
&
3. Amendment&(Section&103)&
&
Section&103.&Amendment&of&articles&of&incorporation.&
Any&amendment&to&the&articles&of&incorporation&which&seeks&to&delete&
or& remove& any& provision& required& by& this& Title& to& be& contained& in& the&
articles&of&incorporation&or&to&reduce&a&quorum&or&voting&requirement&
stated& in& said& articles& of& incorporation& shall& not& be& valid& or& effective&
unless&approved&by&the&affirmative&vote&of&at&least&twoSthirds&(2/3)&of&
the& outstanding& capital& stock,& whether& with& or& without& voting& rights,&
or&of&such&greater&proportion&of&shares&as&may&be&specifically&provided&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
in&the&articles&of&incorporation&for&amending,&deleting&or&removing&any&
of&the&aforesaid&provisions,&at&a&meeting&duly&called&for&the&purpose.&
&
B.&De&Facto&Close&Corporation:&
Manuel$R.$Dulay$Enterprises$v.$Court$of$Appeals,$225$SCRA$678$
(1993).$$
o Dean$ CLV$ !$ other$ than$ a$ description$ of$ the$
composition$ of$ the$ corporation,$ nothing$ at$ all$ was$
indicated$in$the$decision$to$show$how$the$Court$arrived$
at$ the$ conclusion$ that$ the$ corporation$ was$ a$ close$
corporation.$ Neither$ was$ there$ any$ attempt$ at$ all$ to$
square$ with$ the$ definition$ under$ Section$ 96$ of$ the$
Corporation$Code.1$
$
Manuel$R.$Dulay$Enterprises$v.$Court$of$Appeals$
&
Facts:& The$ corporation$ was$ described$ to$ have$ its$ controlling$
stockholders,$ members$ of$ the$ Dulay$ family,$ to$ compose$ the$ board$ of$
directors$ and$ officers,$ with$ nominal$ shares$ listed$ in$ the$ names$ of$ two$
other$nominees,$and$which$corporation$was$the$registered$owner$of$the$
Dulay$ Apartments.$ The$ corporation$ obtained$ various$ loans$ for$ the$
construction$of$its$hotel$project,$Dulay$Continental$Hotel,$and$borrowed$
money$from$one$of$its$directors,$Virgilio$Dulay$to$continue$the$project.$
As$ a$ result,$ Virgilio$ Dulay$ occupied$ one$ of$ the$ apartment$ units$ since$
1973$while$at$the$same$time$managed$the$Dulay$Apartments.$
$
In$ 1976,$ the$ corporation$ through$ its$ President,$ sold$ the$ Dulay$
Apartments$under$a$sale$with$option$to$purchase$within$2$years,$to$one$
Veloso$ who$ mortgaged$ the$ property$ in$ favor$ of$ one$ Torres,$ who$
eventually$foreclosed$on$the$property$and$become$the$highest$bidder$at$
the$auction$sale.$When$the$redemption$period$expired,$Torres$sought$to$
consolidate$ title$ and$ filed$ an$ action$ to$ recover$ possession$ of$ the$
property.$The$corporation$filed$an$action$against$Torres$and$Veloso$for$
the$cancellation$of$the$sale$at$foreclosure$on$the$ground$that$the$sale$of$
the$property$to$Veloso$was$done$by$the$President$without$actual$board$
approval.$
$
Issue:&Whether$or$not$the$sale$is$binding$upon$the$corporation.&
&
Held:& YES.$ Manuel$ Dulay$ Enterprises$ Inc.$ is$ a$ close$ corporation$ so$ a$
board$resolution$authorizing$the$sale$or$mortgage$of$the$property$is$not$
necessary$to$bind$the$corporation$for$the$action$of$its$president.$[At$any$
rate,$corporate$action$taken$at$a$board$meeting$without$proper$call$or$
notice$ in$ a$ close$ corporation$ is$ deemed$ ratified$ by$ the$ absent$ director$
unless$the$latter$promptly$files$his$written$objection$with$the$secretary$
of$the$corporation$after$having$knowledge$of$the$meeting$which,$in$his$
case,$petitioner$Virgilio$Dulay$failed$to$do.]$
&
Doctrine:&
$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
Sergio$F.$Naguiat$v.$NLRC,$269$SCRA$564$[1997]$
o
Dean$ CLV$ !$ The$ Dulay$ and$ Sergio$ F.$ Naguiat$ rulings$

demonstrate$ a$ tendency$ that$ may$ be$ followed$ in$ the$
future:$ (a)$ the$ coverage$ of$ "close$ corporation"$ may$
expand$ beyond$ the$ definition$ provided$ for$ in$ the$
!
Corporation$Code;$or$(b)$principles$pertaining$peculiarly$
to$close$corporations$under$Title$XII$of$the$Corporation$
Code$ would$ be$ expanded$ to$ apply$ even$ to$ non=close$
corporation,$ i.e.,$ de$ facto$ close$ corporations,$ or$ even$
publicly=held$ corporations.$ At$ any$ rate,$ with$ the$
statutory$ recognition$ of$ the$ strict$ close$ corporation,$ it$
(NOWM),$they$filed$a$complaint$against$Sergio$Naguiat$under$the$name$
and$style$Naguiat$Enterprises,$AAFES$and$AAFES$union.$
&
Issue:& Whether$ or$ not$ Naguiat$ Enterprises,$ Sergio$ Naguiat$ and$ Antolin$
Naguiat$are$liable.$
&
&
Held:& Naguiat$ Enterprises$ is$ not$ liable,$ Antolin$ Naguiat$ isnt$ personally$
liable$whereas$Sergio$Naguiat$is$solidarily$liable.$The$respondents$were$
regular$ employees$ of$ CFTI$ who$ received$ wages$ on$ a$ boundary$ basis.$
They$offered$no$evidence$that$Naguiat$Enterprises$managed,$supervised$
and$ controlled$ their$ employment.$ They$ instead$ submitted$ documents$
which$ had$ to$ do$ with$ CFTI,$ not$ Naguiat$ Enterprises.$ Both$ CFTI$ and$
Facts:& Clark$ Field$ Taxi,$ Inc.$ (CFTI)$ held$ a$ concessionaires$ contract$ with$
the$Army$Air$Force$Exchange$Services$(AAFES)$for$the$operation$of$taxi$
services$within$Clark$Air$Base.$Sergio$Naguiat$was$the$president$of$CFTI$
while$ Antolin$ Naguiat$ was$ its$ vice$ president.$ Like$ Naguiat$ Enterprises,$
Inc.,$ which$ was$ a$ trading$ firm,$ it$ was$ also$ a$ family=owned$ corporation.$
Respondents$ (Leonardo$ T.$ Galang,$ et$ al.$ !$ all$ employees)$ were$
employed$by$the$CFTI$as$taxicab$drivers.$Respondents$were$terminated$
Naguiat$Enterprises$were$close$family$corporations$owned$by$the$same$
family.$ To$ the$ extent$ that$ stockholders$ are$ actively$ engaged$ in$ the$
management$or$business$affairs$of$a$close$corporation,$the$stockholders$
shall$ be$ held$ to$ strict$ fiduciary$ duties$ to$ each$ other$ and$ among$
themselves.$ Sergio$ Naguiat$ was$ a$ stockholder$ and$ director$ of$ Naguiat$
Enterprises$ but,$ in$ supervising$ the$ taxi$ driver$ and$ determining$ their$
employment$ terms,$ he$ was$ carrying$ out$ his$ responsibility$ as$ president$
because$of$the$phase=out$of$the$military$bases$in$the$Philippines.$AAFES$
Taxi$Drivers$Association,$the$drivers$union,$and$CFTI$held$negotiations$as$
regards$ separation$ benefits.$ They$ arrived$ at$ an$ agreement$ that$ the$
separated$drivers$would$be$given$P500$for$ever$year$as$severance$pay.$
Most$of$the$drivers$accepted$this$but$some$refused$to$do$so.$Those$who$
did$ not$ accept$ the$ initial$ severance$ pay$ disaffiliated$ themselves$ with$
drivers$ union$ and$ through$ the$ National$ Organization$ of$ Workingmen$
of$CFTI.$
&
Doctrine:& A$ director$ or$ officer$ may$ be$ held$ solidarly$ liable$ with$ a$
corporation$by$a$specific$provision$of$law$because$a$corporation,$being$a$
juridical$ entity,$ may$ act$ only$ through$ its$ directors$ and$ officers.$
Obligations$incurred$by$them,$acting$as$such$corporation$agents,$are$not$
theirs$but$the$direct$accountabilities$of$the$corporation$they$represent.$
In$ the$ absence$ of$ definite$ proof$ of$ who$ clearly$ are$ the$ officers$ of$ the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
corporation,$the$assumption$falls$on$the$President$of$the$corporation.$
can$ be$ anticipated$ that$ the$ Supreme$ Court$ would$ by$

jurisprudence$ expand$ the$ doctrines$ into$ and$ recognize$
the$de$facto$close$corporations.1$
$
Sergio$F.$Naguiat$v.$NLRC$
)
BUT$SEE:$San$Juan$Structural$v.$Court$of$Appeals,$296$SCRA$631$
(1998).$
o
Nevertheless,$ in$ 1998,$ in$ San$ Juan$ Structural$ and$ Steel$

Fabricators,$ Inc.$ v.$ Court$ of$ Appeals,$ the$ Court$ looked$
into$ the$ requisites$ under$ Section$ 96$ to$ determine$
whether$ to$ consider$ a$ corporation$ a$ close$ corporation,$
and$thereby$would$allow$the$enforcement$of$corporate$
liability$upon$its$corporate$officers.$The$Court$sought$to$
distinguish$ its$ ruling$ in$ Dulay$ thus:$ The$ principle$ in$
Manuel$ R.$ Dulay$ Enteprises,$ Inc.$ v.$ Court$ of$ Appeals,$
225$SCRA$678$(1993),$do$not$apply$because$in$Dulay$the$
sale$of$real$property$was$contracted$by$the$president$of$
a$ close$ corporation$ with$ the$ knowledge$ and$
acquiescence$of$its$board$of$directors.1$
$
San$Juan$Structural$v.$Court$of$Appeals$
&
Facts:& San$ Juan$ Structural$ and$ Steel$ Fabricators$ entered$ into$ an$
agreement$ with$ Motorich$ Sales$ Corporation$ (which$ 99.866%of$ its$
subscribed$ capital$ stock$ is$ owned$ by$ Spouses$ Gruenberg)$ for$ the$
transfer$of$a$parcel$of$land.$San$Juan$Inc.,$wrote$a$letter$to$defendant=
appellee$ requesting$ for$ a$ computation$ of$ the$ balance$ to$ be$ paid.$
Representatives$ of$ San$ Juan$ Inc.$ and$ Motorich$ Sales$ Corporation$ were$
supposed$ to$ meet$ in$ the$ office$ of$ plaintiff=appellant$ but$ defendant=
appellee's$ treasurer,$ Nenita$ Lee$ Gruenberg,$ did$ not$ appear.$ Despite$
repeated$demands$and$in$utter$disregard$of$its$commitments,$Motorich$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Sales$had$refused$to$execute$the$Transfer$of$Rights/Deed$of$Assignment.$
irmative$ defense$ that$ the$ President$ and$ Chairman$ of$ Motorich$ did$ not$
sign$ the$ agreement$ and$ that$ Mrs.$ Gruenbergs$ signature$ on$ the$
agreement$is$inadequate$to$bind$Motorich.$
&
Issue:& Whether$ or$ not$ Motorich$ Sales$ can$ be$ treated$ as$ a$ close$
corporation$which$can$be$bound$by$the$acts$of$its$principal$stockholder$
who$needs$no$specific$authority$
&
Held:& NO.$The$Court$held$just$because$the$corporate$treasurer$and$her$
husband$ together$ owned$ 99.866%$ of$ the$ outstanding$ capital$ stock$ of$
the$ corporation$ does$ not$ justify$ a$ conclusion$ that$ it$ is$ a$ close$
corporation$which$can$be$bound$by$the$acts$of$its$principal$stockholder$
who$ need$ no$ specific$ authority.$ The$ determination$ of$ when$ a$
corporation$ is$ a$ close$ corporation$ is$ determined$ by$ the$ requisites$
provided$in$Section$96$of$the$Corporation$Code.$In$this$case,$the$articles$
of$ incorporation$ do$ not$ contain$ any$ provision$ stating$ that$ (1)$ the$
number$ of$ stockholders$ shall$ not$ exceed$ 20,$ or$ (2)$ a$ preemption$ of$
shares$is$restricted$in$favor$of$any$stockholder$or$of$the$corporation,$or$
(3)$listing$its$stocks$in$any$stock$exchange$or$making$a$public$offering$of$
such$ stocks$ is$ prohibited.$ The$ corporation$ does$ not$ become$ a$ close$
corporation$ by$ the$ mere$ fact$ that$ the$ spouses$ owned$ $ 99.866%$ of$ the$
capital$stock.$$
&
Doctrine:$ The$ mere$ ownership$ by$ a$ single$ stockholder$ or$ by$ another$
corporation$of$all$or$nearly$all$of$the$capital$stock$of$a$corporation$is$not$
of$ itself$ sufficient$ ground$ for$ disregarding$ the$ separate$ corporate$
personalities.$ So,$ too,$ a$ narrow$ distribution$ of$ ownership$ does$ not,$ by$
itself,$make$a$close$corporation.$$$
)
!
$
II.&Binding&Agreements&by&Stockholders&(Section&100)&
&
Section&100.&Agreements&by&stockholders.&
1.& Agreements& by& and& among& stockholders& executed& before& the&
directors:& Provided,& That& such& agreement& shall& impose& on& the&

stockholders&who&are&parties&thereto&the&liabilities&for&managerial&acts&
imposed&by&this&Code&on&directors.&
&
5.& To& the& extent& that& the& stockholders& are& actively& engaged& in& the&
formation& and& organization& of& a& close& corporation,& signed& by& all&
stockholders,& shall& survive& the& incorporation& of& such& corporation& and&
shall& continue& to& be& valid& and& binding& between& and& among& such&
stockholders,& if& such& be& their& intent,& to& the& extent& that& such&
agreements& are& not& inconsistent& with& the& articles& of& incorporation,&
irrespective& of& where& the& provisions& of& such& agreements& are&
contained,&except&those&required&by&this&Title&to&be&embodied&in&said&
management& or& operation& of& the& business& and& affairs& of& a& close&
corporation,&the&stockholders&shall&be&held&to&strict&fiduciary&duties&to&
each& other& and& among& themselves.& Said& stockholders& shall& be&
personally& liable& for& corporate& torts& unless& the& corporation& has&
obtained&reasonably&adequate&liability&insurance.&
articles&of&incorporation.&
&
2.&An&agreement&between&two&or&more&stockholders,&if&in&writing&and&
signed& by& the& parties& thereto,& may& provide& that& in& exercising& any&
voting& rights,& the& shares& held& by& them& shall& be& voted& as& therein&
provided,&or&as&they&may&agree,&or&as&determined&in&accordance&with&a&
procedure&agreed&upon&by&them.&
that$ relates$ to$ the$ conduct$ of$ the$ business$ affairs$ of$ the$
corporation$ as$ to$ restrict$ or$ interfere$ with$ the$ discretion$ or$
powers$ of$ the$ board$ of$ directors$ would$ be$ invalid$ because$ of$
the$ restrictive$ provisions$ of$ Sections$ 23$ and$ 27$ of$ the$
&
3.&No&provision&in&any&written&agreement&signed&by&the&stockholders,&
relating& to& any& phase& of& the& corporate& affairs,& shall& be& invalidated& as&
between& the& parties& on& the& ground& that& its& effect& is& to& make& them&
partners&among&themselves.&
&
4.& A& written& agreement& among& some& or& all& of& the& stockholders& in& a&
close& corporation& shall& not& be& invalidated& on& the& ground& that& it& so&
relates&to&the&conduct&of&the&business&and&affairs&of&the&corporation&as&
to& restrict& or& interfere& with& the& discretion& or& powers& of& the& board& of&
&
An$ agreement$ among$ stockholders$ in$ an$ ordinary$ corporation$
Corporation$ Code.$ On$ the$ other$ hand,$ in$ the$ realism$ of$ close$
corporation$thereof,$the$law$recognizes$the$ability$of$parties$to$
arrange$their$affairs$by$specific$contract$terms$operating$within$
the$ corporate$ structure.$ In$ a$ close$ corporation,$ the$ sanctity$ of$
the$ corporate$ entity$ is$ given$ less$ emphasize$ to$ allow$ the$
parties$ to$ primarily$ be$ governed$ by$ the$ specific$ contracts$ they$
enter$into$at$the$time$of$incorporating$their$enterprise.1$
&
III.&No&Necessity&of&Board&(Section&101).&
&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
Section&101.&When&board&meeting&is&unnecessary&or&improperly&held.&
Unless&the&bySlaws&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&make&no&prompt&objection&thereto&in&writing;&or&
&
3.& The& directors& are& accustomed& to& take& informal& action& with& the&
directors$must$be$made$by$"at$least$a$majority$of$the$directors$
or$trustees$present$at$a$meeting$at$which$there$is$a$quorum."1$
o Exception:$Ultra$Vires$Acts$
&
IV.&Deadlocks&(Section&104):$Ong$Yong$v.$Tiu,$401$SCRA$1$(2003).&&
&
Section&104.&Deadlocks.&
Notwithstanding&any&contrary&provision&in&the&articles&of&incorporation&
or&bySlaws&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&
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&
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,& bySlaws,& or& any&
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.&
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&
&
For$ ordinary$ corporations,$ it$ is$ mandated$ under$ Section$ 25$ of$
the$ Corporation$ Code$ that$ every$ decision$ of$ the$ board$ of$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
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&
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&
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&
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&
wasted.&
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.&
&
&
V.&Withdrawal&and&Dissolution&(Section&105)&
&
Section&105.&Withdrawal&of&stockholder&or&dissolution&of&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&
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&
)
Even$prior$to$the$passage$of$Corporation$Code$which$recognized$
close$corporations,$the$Supreme$Court$had$on$limited$instances$
recognized$ the$ common$ law$ rights$ of$ minority$ stockholders$ to$
seek$dissolution$of$the$corporation.$Financing$Corp.$of$the$Phil.$
v.$Teodoro,$93$Phil.$404$(1953).$
Atty.$Hofilea$!$The$corporation$may$be$compelled$to$buy$back$
shares$from$the$shareholder$even$if$it$doesnt$have$unrestrained$
earnings$so$long$as$at$the$time$of$the$sale,$the$corporation$has$
sufficient$assets$to$cover$its$debts$and$liabilities$(Put$Option).$
!
NON#STOCK(CORPORATIONS(AND(FOUNDATIONS(
A.(Eleemosynary(Purpose(and(Non#Distribution(of(Profits1(
(
I.(Essence(of(Non#Stock(Corporations(
The$ Corporation$ Code$ definition$ and$ treatment$ of$ non0stock$
non0profit$ corporations$ are$ counter0intuitive$ to$ the$

nomenclature$used$for$such$juridical$entities.(
1. The$ non0existence$ of$ capital$ stock$ is$ not$ determinative$ on$
whether$ the$ entity$ is$ a$ non0stock$ corporation;$ and$ it$ is$ legally$
possible$ for$ a$ corporation$ having$ capital$ stock$ to$ still$ be$
considered$ a$ non0stock$ corporation.$ In$ fact,$ under$ pertinent$
jurisprudence,$ as$ discussed$ hereunder,$ the$ existence$ of$ stocks$
in$ an$ eleemosynary0purposed$ company$ has$ not$ disqualified$ it$
(
Section(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(
from$being$considered$as$a$non0stock$non0profit$corporation.(
2. The$non0incurring$of$profits$is$not$likewise$determinative$for$an$
entity$ to$ be$ classified$ as$ non0profit$ corporation.$ The$ codal$
definition$recognizes$that$non0stock$and$non0profit$corporations$
may$ actually$ earn$ profits$ as$ an$ incident$ to$ their$ primary$
operations,$ and$ so$ long$ as$ the$ profits$ are$ devoted$ for$ their$
eleemosynary$ purpose.$ The$ SEC$ has$ ruled$ that$ the$ mere$ fact$
specific(provisions(of(this(Title.((n)(
(
Section(88.(Purposes.(
Non#stock( corporations( may( be( formed( or( organized( for( charitable,(
religious,( educational,( professional,( cultural,( fraternal,( literary,(
scientific,(social,(civic(service,(or(similar(purposes,(like(trade,(industry,(
agricultural(and(like(chambers,(or(any(combination(thereof,(subject(to(
the(special(provisions(of(this(Title(governing(particular(classes(of(non#
that$a$non0stock$corporation$may$earn$profit$does$not$make$it$a$
profit0making$ corporation$ where$ such$ profit$ or$ income$ is$ used$
to$carry$out$the$purpose$set$forth$in$the$articles$of$incorporation$
and$is$not$distributed$to$its$incorporators,$members,$trustees$or$
officers.2(
o It$ is$ not$ inconsistent$ with$ the$ nature$ of$ a$ non0stock$
corporation$for$it$to$incidentally$earn$profits$in$pursuing$
its$ eleemosynary$ purpose.$ What$ is$ prohibited$ is$ to$
stock(corporations.((n)(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Villanueva,$C.$L.,$&$Villanueva0Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
2
$SEC$ Opinion,$ 13$ November$ 1990,$ XXIV$ SEC$ QUARTERLY$ BULLETIN$ 63$ (No.$ 1,$
March,$1990).$
)
!
operate$ the$ company$ for$ profit$ and/or$ distribute$ any$

profits$so$earned$to$its$officers$and$members.$Collector(
of( Internal( Revenue( v.( Club( Filipino( Inc.( de( Cebu,( 5(
SCRA( 321( (1962);( Collector( of( Internal( Revenue( v.(
University(of(Visayas,(1(SCRA(669((1961).(
The$ incurring$ of$ profit$ or$ losses$ does$ not$ determine$
In$a$mutual$life$insurance$company$organized$as$a$non0
stock$ nonprofit$ corporation,$ the$ so0called$ dividend$
that$ is$ received$ by$ members0policyholders$ is$ not$ a$
portion$ of$ profits$ set$ aside$ for$ distribution$ to$ the$
stockholders$ in$ proportion$ to$ their$ subscription$ to$ the$
capital$ stock$ of$ a$ corporation.$ One,$ a$ mutual$ company$
has$no$capital$stock$to$which$subscription$is$necessary;$
there$ are$ no$ stockholders$ to$ speak$ of,$ but$ only$
members.$ Two,$ the$ amount$ they$ receive$ does$ not$
partake$ of$ the$ nature$ of$ a$ profit$ or$ income.$ The$ quasi0
appearance$ of$ profit$ will$ not$ change$ its$ character;$ it$
remains$ an$ overpayment,$ a$ benefit$ to$ which$ the$
member0policyholder$ is$ equitably$ entitled.$ Republic( v.(
Sunlife( Assurance( Company( of( Canada,( 473( SCRA( 129(
(2005).$
B.(Distribution(of(Net(Assets(and(Profits(Upon(Dissolution1(
Although$ a$ non0stock$ corporation$ cannot$ distribute$ profits$ or$

dividends$ to$ its$ members,$ officers$ and$ trustees$ during$ its$
corporate$term,$in$the$event$of$dissolution,$after$the$payment$of$
all$liabilities$and$return$of$assets$received$subject$to$limitations$
permitting$their$use,$the$remaining$assets$may$be$distributed$to$
the$ members,$ or$ any$ class$ or$ classes$ of$ members,$ as$ provided$
for$ in$ its$ articles$ of$ incorporation$ and$ by0laws;$ and$ in$ the$
absence$of$distribution$rules$in$the$articles$of$incorporation$and$
by0laws,$ the$ remaining$ assets$ may$ be$ distributed$ to$ such$
whether$ an$ activity$ is$ for$ profit$ or$ non0profit,$ 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.$Manila(Sanitarium(and(Hospital(v.(Gabuco,(
7(SCRA(14((1963).(
o
persons,$societies,$organizations$or$corporations,$whether&or&not&
organized&for&profit,$as$may$be$specified$in$a$plan$of$distribution$
as$ adopted$ by$ the$ board$ of$ trustees$ and$ ratified$ by$ the$
members.2$
Therefore,$in$a$regular$non0stock$corporation$it$is$possible$for$its$
net$ assets,$ as$ well$ as$ the$ accumulated$ profits$ from$ its$ years$ of$
operations,$ to$ inure$ to$ the$ benefit$ of$ private$ individuals$ or$
entities$for$profit$but&only&as&a&consequence&of&dissolution.$
(
II.( Theory( on( Non#Stock( Corporation( (Sections( 14(2),( 43,( 87,( 88( and(
94[5])(
(
Section(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(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
$Sections$94$and$95,$Corporation$Code.$
)
!
incorporators,( containing( substantially( the( following( matters,( except(
as(otherwise(prescribed(by(this(Code(or(by(special(law:(
x(x(x(
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;(
x(x(x(
(
Section(43.(Power(to(declare(dividends.(
contingencies.((n)(
(
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$non0stock$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.(115054N66,(12(
September(1999([unrep.])(
less(than(two#thirds((2/3)(of(the(outstanding(capital(stock(at(a(regular(
(
excess( of( one( hundred( (100%)( percent( of( their( paid#in( capital( stock,(
A$ non0stock$ corporation$ may$ only$ be$ formed$ or$ organized$ for$
The$ rationale$ for$ the$ use$ of$ the$ non0profit$ form$ for$
eleemosynary$ endeavors,$ such$ as$ activities$ for$ charitable,$
religious,$scientific,$educational,$or$similar$activities,$"lies$in$the$
chief$function$of$the$non0distribution$constraint,$namely,$that$it$
helps$ to$ overcome$ contractual$ failure$ in$ situations$ where$ such$
failure$ is$ quite$ likely$ to$ occur."1$In$ other$ words,$ the$ non0profit$
corporation$ is$ employed$ in$ activities$ where$ there$ would$ be$
difficulties$ in$ properly$ monitoring$ and$ quantifying$ the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$CLARK,$CORPORATE$LAW$(Little,$Brown$and$Company,$1986$ed.),$at$pp.$6990700.$$
)
!
effectiveness$ and$ quality$ of$ the$ services$ rendered,$ which$ in$
essence$is$covered$by$the$concept$of$"contractual$failure."1(
o "Contractual$ failure"$ is$ characterized$ by$ the$ inability$ of$
a$ buyer$ of$ services$ to$ assure$ himself$ that$ he$ is$ getting$
what$ he$ intends$ to$ be$ contracting$ for;$ in$ more$ general$
terms,$ it$ denotes$ high$ monitoring$ and$ enforcement$
2
costs. $
$
products,$the$product$itself$is$
services$bargained$for$have$been$
an$objective$gauge$of$whether$ properly$and$adequately$delivered$or$
the$purchaser$thereof$is$
performed,$or$whether$the$providers$
receiving$equal$value$for$the$ thereof,$in$order$to$increase$their$profit$
amount$he$has$paid$
margin,$have$in$fact$cut$corners.$
therefore.$
(
III.(Non#Applicability(of(the(Nationalization(Laws(
Stock(Corporation(
Non#Stock(Corporation(
All$net$earnings$and$residual$
value$of$the$business$in$a$
stock$corporation$can$be$
Expressed$legal$prohibition$from$
making$such$distributions$
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$ non0$
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(
distributed$to$its$stockholders$
Both$the$shareholders$and$the$
officers,$who$control$the$
provision$of$the$service$
bought,$have$an$incentive$not$
only$to$be$as$efficient$as$
The$prohibition$in$non0stock$
corporations$against$distribution$of$
profits$to$its$members$and$officers$"is$
supposed$to$be$helpful$in$such$
situations$because$it$gives$the$buyer$
possible$and$thus$to$
outperform$competitors,$but$
also$to$take$advantage$of$all$
market$imperfections.$
$
some$reason$to$believe$that$those$who$
appoint$and$control$the$actual$
providers$of$service$and$goods$will$not$
have$an$incentive$to$take$advantage$of$
his$vulnerability$as$consumer."3$
In$case$of$an$activity$such$as$
the$delivery$of$tangible$
In$an$$enterprise$such$as$education,$it$is$
very$difficult$to$monitor$whether$the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A$ foreigner$ may$ a$ member$ or$ an$ officer$ of$ a$ non0stock$
2002,(21(November(2002).(
Nonetheless,$ the$ equity$ requirements$ when$ it$ comes$ to$

nationalization$ rules$ would$ still$ apply$ to$ a$ corporation$ when$
operating$within$the$regulated$area,$for$example,$even$when$a$
true$non0stock$and$non0profit$corporation$is$engaged$in$a$purely$
eleemosynary$purpose,$it$would$not$be$qualified$to$hold$private$
lands$when$its$membership$is$not$at$least$60%$held$by$Filipino$
citizens.4(
$
IV.(Delinquency(of(Membership(Dues(
2
3
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
)
Section$68.$Indeed,$there$are$fundamental$differences$that$defy$
equivalence$ or$ even$ an$ analogy$ between$ sale$ of$ delinquent$
stock$ under$ Section$ 68$ and$ sale$ that$ occurred$ in$ this$ case.$
Calatagan(Golf(Club,(Inc.(v.(Clemente,(Jr.,(585(SCRA(300((2009).(
Neither$ Article$ 1146$ or$ Article$ 1149$ is$ applicable$ but$ Article$
1140$of$the$Civil$Code$which$provides$that$an$action$to$recover$
movables$shall$prescribe$in$eight$(8)$years.$Calatagan(Golf(Club,(
Inc.(v.(Clemente,(Jr.,(585(SCRA(300((2009).(
The$utter$bad$faith$exhibited$by$Calatagan$brings$into$operation$
Articles$ 19,$ 20$ and$ 21$ of$ the$ Civil$ Code$ under$ the$ Chapter$ on$
Human$Relations;$The$obligation$of$a$corporation$to$treat$every$
person$ honestly$ and$ in$ good$ faith$ extends$ even$ to$ its$
shareholders$ or$ members,$ even$ if$ the$ latter$ find$ themselves$
contractually$ bound$ to$ perform$ certain$ obligations$ to$ the$
corporation.$ Calatagan( Golf( Club,( Inc.( v.( Clemente,( Jr.,( 585(
SCRA(300((2009).(
membership$ shall$ be$ terminated$ in$ the$ manner$ and$ for$ causes$
provided$in$the$articles$of$incorporation$or$the$by0laws$of$a$non0
stock$ corporation.$ Valley( Golf( &( Country( Club( v.( Vda.( De(
Caram,(585(SCRA(218((2009).(
Section$69$of$the$Corporation$Code$refers$specifically$to$unpaid$
subscriptions$ to$ capital$ stock,$ the$ sale$ of$ which$ is$ governed$ by$
A$ non0stock$ corporation$ may$ seize$ and$ dispose$ of$ the$

membership$ share$ of$ a$ fully0paid$ member$ on$ account$ of$ its$
unpaid$ debts$ to$ the$ corporation$ (i.e.,$ unpaid$ monthly$ dues)$
when$it$is$authorized$to$do$so$under$the$corporate$by0laws$(not$
by$ the$ articles$ of$ incorporation),$ and$ in$ spite$ of$ the$ fact$ that$
Section$67$of$Corporation$Code$on$delinquency$sale$pertains$to$
payment$ of$ shares$ subscription.$ The$ right$ of$ a$ non0stock$
corporation$ to$ expel$ a$ member$ through$ the$ forfeiture$ of$ such$
members$ share$ may$ be$ established$ in$ the$ by0laws$ alone,$ and$
need$ not$ be$ embodied$ in$ the$ articles$ of$ incorporation.$ This$ is$
authorized$under$Section$91$of$Corporation$Code$providing$that$
$
Valley(Golf(&(Country(Club(v.(Vda.(De(Caram(
(
Facts:(Valley$Golf$is$a$duly$constituted$non0stock,$non0profit$corporation$
which$operates$a$golf$course.$The$members$and$their$guests$are$entitled$
to$ use$ its$ facilities$ and$ privileges,$ provided$ that$ the$ shareholders$
regularly$ pay$ their$ monthly$ dues.$ Congressman$ Fermin$ Caram,$ Jr.$
owned$a$golf$share$since$1961.$Due$to$his$delinquency$despite$collection$
letters,$ Valley$ Golf$ suspended$ his$ account$ and$ subsequently$ sold$ his$
share$ in$ order$ to$ collect$ his$ outstanding$ dues,$ without$ knowing$ that$
Caram$ already$ died$ since$ 1986.$ It$ was$ not$ until$ his$ estate$ was$ settled$
and$the$shares$given$to$Vda.$De$Caram$that$the$heirs$were$informed$of$
the$sale.$She$was$told$that$she$can$only$claim$the$remaining$balance$out$
of$ the$ sale$ after$ deducting$ the$ outstanding$ membership$ dues$ that$ Mr.$
Caram$ had$ not$ paid.$ The$ SEC$ and$ CA,$ ruling$ in$ favor$ of$ Mrs.$ Caram,$
noted$ that$ under$ Section$ 67,$ paragraph$ 2$ of$ the$ Corporation$ Code,$ a$
share$ stock$ could$ only$ be$ deemed$ delinquent$ and$ sold$ in$ an$
extrajudicial$ sale$ at$ public$ auction$ only$ upon$ the$ failure$ of$ the$
stockholder$to$pay$the$unpaid$subscription$or$balance$for$the$share.$The$
section$ could$ not$ have$ applied$ in$ Carams$ case$ since$ he$ had$ fully$ paid$
for$the$Golf$Share$and$he$had$been$assessed$not$for$the$share$itself$but$
for$ his$ delinquent$ club$ dues.$ Also,$ pursuant$ to$ Section$ 6$ of$ the$
Corporation$Code,$"a$provision$creating$a$lien$upon$shares$of$stock$for$
unpaid$ debts,$ liabilities,$ or$ assessments$ of$ stockholders$ to$ the$
corporation,$ should$ be$ embodied$ in$ the$ Articles$ of$ Incorporation,$ and$
)
!
not$ merely$ in$ the$ by0laws.$ In$ the$ same$ vein,$ it$ was$ opined$ that$ since$
Section$98$of$the$Corporation$Code$provides$that$restrictions$on$transfer$
of$shares$should$appear$in$the$articles$of$incorporation,$by0laws$and$the$
certificate$ of$ stock$ to$ be$ valid$ and$ binding$ on$ any$ purchaser$ in$ good$
faith,$there$was$more$reason$to$apply$the$said$rule$to$club$delinquencies$
HOWEVER,$ In$ order$ that$ the$ action$ of$ a$ corporation$ in$ expelling$ a$
member$ for$ cause$ may$ be$ valid,$ it$ is$ essential,$ in$ the$ absence$ of$ a$
waiver,$that$there$shall$be$a$hearing$or$trial$of$the$charge$against$him,$
with$reasonable$notice$to$him$and$a$fair$opportunity$to$be$heard$in$his$
defense.$ If$ the$ method$ of$ trial$ is$ not$ regulated$ by$ the$ by0laws$ of$ the$
to$constitute$a$lien$on$golf$shares.$
(
Issue:(Whether$or$not$a$non0stock$corporation$seize$and$dispose$of$the$
membership$ share$ of$ a$ fully0paid$ member$ on$ account$ of$ its$ unpaid$
debts$ to$ the$ corporation$ when$ it$ is$ authorized$ to$ do$ so$ under$ the$
corporate$by0laws$but$not$by$the$Articles$of$Incorporation.$
(
association,$ it$ should$ at$ least$ permit$ substantial$ justice.$ Valley$ Golf$
acted$in$clear$bad$faith$when$it$sent$the$final$notice$to$Caram$under$the$
pretense$they$believed$him$to$be$still$alive,$when$in$fact$they$had$very$
well$known$that$he$had$already$died.$That$it$was$in$the$final$notice$that$
Valley$ Golf$ had$ perpetrated$ the$ duplicity$ is$ especially$ blameworthy,$
since$it$was$that$notice$that$carried$the$final$threat$that$his$Golf$Share$
would$be$sold$at$public$auction$should$he$fail$to$settle$his$account$on$or$
Held:( YES.$ BUT$ there$ should$ have$ been$ notice$ and$ hearing$ concerning$
his$expulsion$and$therefore$the$sale$was$void.$
$
Under$ Section$ 91,$ membership$ shall$ be$ terminated$ in$ the$ manner$ and$
for$ the$ causes$ provided$ in$ the$ articles$ of$ incorporation$ or$ the$ by0laws.$
The$prevailing$rule$is$that$the$provisions$of$the$articles$of$incorporation$
or$by0laws$of$termination$of$membership$must$be$strictly$complied$with$
before$31$May$1987.$
(
Doctrine:( Section$ 91$ of$ the$ Corporation$ Code$ authorizes$ the$ sale$ of$
membership$ shares$ on$ account$ of$ delinquency$ if$ such$ ground$ is$
specifically$stated$in$the$articles$of$incorporation$or$by0laws$of$the$non0
stock$ corporation.$ However,$ in$ accordance$ with$ public$ policy,$ the$
termination$of$membership$in$a$non0stock$corporation$should$be$done$
and$ applied$ to$ the$ letter.$ Thus,$ an$ association$ whose$ member$ fails$ to$
pay$his$membership$due$and$annual$due$as$required$in$the$by0laws,$and$
which$provides$for$the$termination$or$suspension$of$erring$members$as$
well$ as$ prohibits$ the$ latter$ from$ intervening$ in$ any$ manner$ in$ the$
operational$activities$of$the$association,$must$be$observed$because$by0
laws$ are$ self0imposed$ private$ laws$ binding$ on$ all$ members,$ directors$
and$officers$of$the$corporation.$These$conditions$found$in$by0laws$duly$
approved$by$the$SEC$warrant$due$respect$and$we$are$disinclined$to$rule$
in$accordance$with$substantial$justice.$
$
V.(Board(of(Trustees(and(Corporate(Officers(
against$the$validity$of$the$by0law$provisions.$
$
)
The$second$paragraph$of$Section$108$of$the$Corporation$Code,$
although$ setting$ the$ term$ of$ the$ members$ of$ the$ Board$ of$
Trustees$ at$ five$ years,$ contains$ a$ proviso$ expressly$ subjecting$
the$ duration$ to$ what$ is$ otherwise$ provided$ in$ the$ articles$ of$
incorporation$ or$ by0laws$ of$ the$ educational$ corporationthat$
contrary$ provision$ control$ on$ the$ term$ of$ office.$ Barayuga( v.(
Advestist(University(of(the(Philippines,(655(SCRA(640((2011).(
A$ trustee$ occupying$ his$ office$ in$ a$ hold0over$ capacity$ could$ be$

removed$ at$ any$ time,$ without$ cause,$ upon$ the$ election$ or$
appointment$of$his$successor.$Barayuga(v.(Advestist(University(
of(the(Philippines,(655(SCRA(640((2011).(
1. Right(and(Manner(of(Voting(for(Trustees1(
General(Rule:(Straight$Voting$(Section(24,(Corporation(Code)(
Exception:( Cumulative$ voting$ can$ apply$ only$ in$ a$ non0stock$

corporation$ setting$ when$ it$ is$ provided$ for$ in$ the$ articles$ of$
incorporation$or$the$by0laws.$
o However,$ the$ language$ of$ Section$ 24$ does$ not$
necessarily$ mean$ that$ in$ the$ absence$ of$ stipulation$ in$
the$articles$or$by0laws,$there$is$no$cumulative$voting$in$a$
non0stock$ corporation.$ It$ is$ true$ that$ a$ corporation$
which$has$capital$stock$may$by$its$nature$(prohibition$to$
distribute$profits$and$eleemosynary$purpose)$be$a$non0
stock$ corporation$ according$ to$ jurisprudence.$
Nevertheless,$ although$ it$ fulfills$ the$ twin$ requisites$ of$
non0stock$ and$ non0profit$ corporation,$ by$ virtue$ of$ the$
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)(
$
fact$ that$ it$ is$ a$ corporation$ that$ has$ capital$ stock$

provided$ for$ in$ its$ articles$ of$ incorporation,$ Section$ 24$
provides$that$cumulative$voting$would$apply.$
2. Number(and(Election(of(Trustees((Section(92)(
$
Section(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(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
3. Juridical(persons(as(Members(of(Board(of(Trustees(
to$ or$ similar$ to$ the$ one$ being$ used$ in$ videoconferencing$ or$
teleconferencing,$where$a$participant$can$see$or$hear$the$actual$
proceedings$ of$ a$ board$ meeting$ and$ actively$ participate$ in$ the$
deliberation$ of$ the$ Board;$ but$ that$ a$ trustee$ may$ not$ validly$
vote$by$email$along,$which$was$deemed$an$inadequate$medium$
because$ a$ user0participants$ role$ in$ such$ case$ is$ passive$
The$ SEC$ has$ also$ rendered$ opinions$ to$ the$ effect$ that$ juridical$
persons$ may$ become$ members$ of$ the$ Board$ of$ Trustees$ of$ a$
non0stock$ corporation.$ A$ non0stock$ corporation$ whose$
membership$is$composed$of$juridical$persons$was$allowed$to$be$
registered,$ provided$ that$ a$ provision$ for$ the$ classification$ of$
members$ shall$ include$ duly$ designated$ or$ authorized$
representatives$ of$ juridical$ persons$ as$ members$ of$ the$
corporation,$for$purposes$of$qualifying$them$as$members$of$the$
Board$ of$ Directors,$ which$ shall$ be$ provided$ in$ the$ articles$ of$
incorporation$or$by0laws.1$
considering$ that$ his$ access$ to$ the$ entire$ proceedings$ is$ limited$
to$the$information$in$print$transmitted$through$the$internet.4(
5. Election(of(Officers(
non0stock$ corporation,$ similar$ to$ the$ rules$ under$ stock$

corporations.$ However,$ in$ a$ non0stock$ corporation,$ unless$
otherwise$provided$for$in$the$articles$of$incorporation$or$the$by0
laws,$officers$of$a$non0stock$corporation$may$be$elected$directly$
by$the$members.5$
In$ the$ case$ of$ a$ condominium$ corporation$ where$ all$ the$

members$ thereof$ are$ corporate$ members$ or$ juridical$ person,$
the$SEC$ruled$that$an$officer$or$duly$authorized$agent$or$trustee$
who$has$been$designated$by$a$corporate$unit$owner/member$or$
a$condominium$corporation$as$its$representative$for$the$express$
purpose$ of$ qualifying$ him$ as$ director,$ may$ be$ eligible$ to$ be$
elected$ as$ director;$ since$ to$ rule$ otherwise$ would$ create$ a$
situation$when$there$would$be$no$Board$of$Directors.2(
4. Meetings(of(the(Board(of(Trustees(
SEC$has$ruled$that$Section$53$applies,$which$states:$meetings$of$
directors$ or$ trustees$ may$ be$ held$ anywhere$ in$ or$ outside$ the$
Philippines,$unless$the$by0laws$provide$otherwise.3(
(
VI.(Conversion(of(Non#Stock(Corporation(to(Stock(Corporation(
internet,$ provided$ that$ the$ internet$ medium$ to$ be$ used$ is$ akin$
1
$SEC$Opinion,$12$May$1995,$XXIX$SEC$QUARTERLY$BULLETIN$16$(No.$4,$Dec.$1995).$
2
$SEC$Opinion,$16$April$191,$citing$2$FLETCHER$ CYC.$OF$ CORP.,$1982$Rev.$Vol.,$Sec.$
300$at$93.$$
3
$SEC$Opinion$No.$27,$series$of$2003,$addressed$to$Mr.$Arthur$Mar$O.$Alivio;$SEC$
Opinion$No.$26,$series$of$2003,$addressed$to$Ms.$Jaycel$E.$Sato.$
If$the$officers$in$a$non0stock$corporation$are$directly$elected$by$
the$ members,$ as$ allowed$ under$ Section$ 92$ of$ the$ Corporation$
Code,$ the$ power$ to$ remove$ them$ is$ vested$ directly$ in$ the$
members.6$$
SEC$held$that$a$trustee$may$now$be$allowed$to$vote$through$the$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
It$is$usually$the$board$of$trustees$that$appoints$the$officers$of$a$
The$ conversion$ of$ a$ non0stock$ educational$ institution$ into$ a$

stock$corporation$is$not$legally$feasible,$as$it$violates$Section$87$
of$Corporation$Code$that$no$part$of$the$income$of$a$non0stock$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
$SEC$ Opinion$ No.$ 26,$ addressed$ to$ Ms.$ Jaycel$ E.$ Sato;$ SEC$ Opinion$ No.$ 27,$
series$of$2003,$addressed$to$Mr.$Arthur$Mar$O.$Alivio.$
5
$SEC$Opinion,$16$April$191,$citing$2$FLETCHER$ CYC.$OF$ CORP.,$1982$Rev.$Vol.,$Sec.$
300$at$93.$$
6
$SEC$Opinion,$24$April$1995,$XXIX$SEC$QUARTERLY$BULLETIN$52$(No.$3,$Sept.$1995).$$
)
!
corporation$ may$ be$ distributable$ as$ dividends$ to$ its$ members,$
trustees$or$officers.$Thus,$the$Commission$has$previously$ruled$
that$ a$ non0stock$ 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$ non0stock$ 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.$(SEC(
Opinion( dated( 24( February( 2003;( SEC( Opinion( dated( 10(
December(1992).(
The$ conversion$ of$ an$ existing$ "non0stock$ non0profit"$

corporation$into$a$"stock$corporation"$without$dissolving$it$first$
would$ be$ tantamount$ to$ distribution$ of$ its$ assets$ or$ income$ to$
its$members$inasmuch$as$after$its$conversion,$the$assets$of$the$
non0stock$corporation$would$now$be$treated$as$payment$to$the$
subscriptions$ of$ the$ members$ who$ will$ now$ become$ the$
stockholders$of$the$stock$corporation.1$
$
VII.( What( Is( a( Foundation?( (Sections( 30( and( 34(H),( NIRC( of( 1997;(
Section( 24,( Rev.( Reg.( No.( 2;( BIR#NEDA( Regulations( No.( 1#81,( as(
amended)(
(
1. Foundations(Not(a(Special(Category(under(Corporation(Code(
The$Corporation$Code$contains$no$separate$provisions,$nor$does$
it$even$refer$to$"foundations"$as$separate$types$of$corporations$
different$ from$ non0stock$ corporations.$ Foundations$ are$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$SEC$Opinion,$24$February$1989,$SEC$QUARTERLY$BULLETIN$(No.$2,$June$1989);$SEC$
Opinion,$13$May$1992,$XXVI$SEC$QUARTERLY$BULLETIN$12$(No.$3,$Sept.$1992).$
essentially$non0stock$corporations$governed$by$the$same$Title$XI$
of$the$Code.$What$therefore$makes$foundations$different$from$
regular$ non0stock$ corporations$ are$ the$ privileges$ granted$ to$ it$
by$special$laws,$essentially$in$the$field$of$Taxation.$
2. Tax#Exempt(Status(
(
NATIONAL(INTERNAL(REVENUE(CODE(
Sec.(30.(Exemptions(from(Tax(on(Corporations.(
The( following( organizations( shall( not( be( taxed( under( this( Title( in(
respect(to(income(received(by(them(as(such:(
(
(A)( Labor,( agricultural( or( horticultural( organization( not( organized(
principally(for(profit;(
(
(B)( Mutual( savings( bank( not( having( a( capital( stock( represented( by(
shares,( and( cooperative( bank( without( capital( stock( organized( and(
operated(for(mutual(purposes(and(without(profit;(
(
(C)( A( beneficiary( society,( order( or( association,( operating( fort( he(
exclusive( benefit( of( the( members( such( as( a( fraternal( organization(
operating(under(the(lodge(system,(or(mutual(aid(association(or(a(non#
stock(corporation( organized( by( employees( providing( for( the( payment(
of(life,(sickness,(accident,(or(other(benefits(exclusively(to(the(members(
of(such(society,(order,(or(association,(or(non#stock(corporation(or(their(
dependents;(
(
(D)(Cemetery(company(owned(and(operated(exclusively(for(the(benefit(
of(its(members;(
(
)
!
(E)( Non#stock( corporation( or( association( organized( and( operated(
exclusively( for( religious,( charitable,( scientific,( athletic,( or( cultural(
purposes,( or( for( the( rehabilitation( of( veterans,( no( part( of( its( net(
income( or( asset( shall( belong( to( or( inures( to( the( benefit( of( any(
member,(organizer,(officer(or(any(specific(person;(
Notwithstanding( the( provisions( in( the( preceding( paragraphs,( the(

income(of(whatever(kind(and(character(of(the(foregoing(organizations(
from( any( of( their( properties,( real( or( personal,( or( from( any( of( their(
activities( conducted( for( profit( regardless( of( the( disposition( made( of(
such(income,(shall(be(subject(to(tax(imposed(under(this(Code.(
(
(F)( Business( league( chamber( of( commerce,( or( board( of( trade,( not(
organized(for(profit(and(no(part(of(the(net(income(of(which(inures(to(
the(benefit(of(any(private(stock#holder,(or(individual;(
(
(G)(Civic(league(or(organization(not(organized(for(profit(but(operated(
exclusively(for(the(promotion(of(social(welfare;(
(
Section(34.(Deductions(from(Gross(Income(
x(x(x(
(H)(Charitable(and(Other(Contributions.(
(
(1)(In(General.(#(Contributions(or(gifts(actually(paid(or(made(within(the(
taxable(year(to,(or(for(the(use(of(the(Government(of(the(Philippines(or(
(
(H)(A(non#stock(and(nonprofit(educational(institution;(
(
(I)(Government(educational(institution;(
(
(J)( Farmers'( or( other( mutual( typhoon( or( fire( insurance( company,(
mutual( ditch( or( irrigation( company,( mutual( or( cooperative( telephone(
any( of( its( agencies( or( any( political( subdivision( thereof( exclusively( for(
public(purposes,(or(to(accredited(domestic(corporation(or(associations(
organized(and(operated(exclusively(for(religious,(charitable,(scientific,(
youth(and(sports(development,(cultural(or(educational(purposes(or(for(
the( rehabilitation( of( veterans,( or( to( social( welfare( institutions,( or( to(
non#government( organizations,( in( accordance( with( rules( and(
regulations( promulgated( by( the( Secretary( of( finance,( upon(
company,( or( like( organization( of( a( purely( local( character,( the( income(
of(which(consists(solely(of(assessments,(dues,(and(fees(collected(from(
members(for(the(sole(purpose(of(meeting(its(expenses;(and(
(
(K)(Farmers',(fruit(growers',(or(like(association(organized(and(operated(
as( a( sales( agent( for( the( purpose( of( marketing( the( products( of( its(
members( and( turning( back( to( them( the( proceeds( of( sales,( less( the(
necessary( selling( expenses( on( the( basis( of( the( quantity( of( produce(
recommendation( of( the( Commissioner,( no( part( of( the( net( income( of(
which(inures(to(the(benefit(of(any(private(stockholder(or(individual(in(
an( amount( not( in( excess( of( ten( percent( (10%)( in( the( case( of( an(
individual,( and( five( percent( (5%)( in( the( case( of( a( corporation,( of( the(
taxpayer's( taxable( income( derived( from( trade,( business( or( profession(
as( computed( without( the( benefit( of( this( and( the( following(
subparagraphs.(
(
finished(by(them;(
(
(2)( Contributions( Deductible( in( Full.( #( Notwithstanding( the( provisions(

of(the(preceding(subparagraph,(donations(to(the(following(institutions(
)
!
or(entities(shall(be(deductible(in(full;(
(
(a)( Donations( to( the( Government.( #( Donations( to( the(
Government( of( the( Philippines( or( to( any( of( its( agencies( or(
political( subdivisions,( including( fully#owned( government(
corporations,( exclusively( to( finance,( to( provide( for,( or( to( be(
used( in( undertaking( priority( activities( in( education,( health,(
youth( and( sports( development,( human( settlements,( science(
and( culture,( and( in( economic( development( according( to( a(
National( Priority( Plan( determined( by( the( National( Economic(
and( Development( Authority( (NEDA),( In( consultation( with(
appropriate( government( agencies,( including( its( regional(
domestic(corporation:(
(
(1)( Organized( and( operated( exclusively( for( scientific,(
research,( educational,( character#building( and( youth(
and( sports( development,( health,( social( welfare,(
cultural( or( charitable( purposes,( or( a( combination(
thereof,( no( part( of( the( net( income( of( which( inures( to(
the(benefit(of(any(private(individual;(
(
(2)( Which,( not( later( than( the( 15th( day( of( the( third(
month( after( the( close( of( the( accredited(
nongovernment( organizations( taxable( year( in( which(
development( councils( and( private( philantrophic( persons( and(

institutions:(Provided,(That(any(donation(which(is(made(to(the(
Government( or( to( any( of( its( agencies( or( political( subdivisions(
not( in( accordance( with( the( said( annual( priority( plan( shall( be(
subject( to( the( limitations( prescribed( in( paragraph( (1)( of( this(
Subsection;(
contributions( are( received,( makes( utilization( directly(

for(the(active(conduct(of(the(activities(constituting(the(
purpose( or( function( for( which( it( is( organized( and(
operated,(unless(an(extended(period(is(granted(by(the(
Secretary( of( Finance( in( accordance( with( the( rules( and(
regulations(to(be(promulgated,(upon(recommendation(
of(the(Commissioner;(
(
(b)( Donations( to( Certain( Foreign( Institutions( or( International(
Organizations.( #( donations( to( foreign( institutions( or(
international( organizations( which( are( fully( deductible( in(
pursuance( of( or( in( compliance( with( agreements,( treaties,( or(
commitments( entered( into( by( the( Government( of( the(
Philippines( and( the( foreign( institutions( or( international(
organizations(or(in(pursuance(of(special(laws;(
(
(
(3)(The(level(of(administrative(expense(of(which(shall,(
on( an( annual( basis,( conform( with( the( rules( and(
regulations( to( be( prescribed( by( the( Secretary( of(
Finance,( upon( recommendation( of( the( Commissioner,(
but( in( no( case( to( exceed( thirty( percent( (30%)( of( the(
total(expenses;(and(
(
(c)( Donations( to( Accredited( Nongovernment( Organizations.( #(

the( term( 'nongovernment( organization'( means( a( non( profit(
)
(4)( The( assets( of( which,( in( the( even( of( dissolution,(
would( be( distributed( to( another( nonprofit( domestic(
!
corporation(organized(for(similar(purpose(or(purposes,(
or( to( the( state( for( public( purpose,( or( would( be(
distributed( by( a( court( to( another( organization( to( be(
used( in( such( manner( as( in( the( judgment( of( said( court(
shall( best( accomplish( the( general( purpose( for( which(
years,( and( the( project( is( one( which( can( be( better( accomplished( by(
setting(aside(such(amount(than(by(immediate(payment(of(funds.(
(
(3)(Valuation.(#(The(amount(of(any(charitable(contribution(of(property(
other( than( money( shall( be( based( on( the( acquisition( cost( of( said(
the(dissolved(organization(was(organized.(
property.(
(
(4)( Proof( of( Deductions.( #( Contributions( or( gifts( shall( be( allowable( as(
deductions(only(if(verified(under(the(rules(and(regulations(prescribed(
by( the( Secretary( of( Finance,( upon( recommendation( of( the(
Commissioner.(
(
Subject(to(such(terms(and(conditions(as(may(be(prescribed(by(
the(Secretary(of(Finance,(the(term('utilization'(means:(
(
(i)( Any( amount( in( cash( or( in( kind( (including(
administrative(expenses)(paid(or(utilized(to(accomplish(
one( or( more( purposes( for( which( the( accredited(
nongovernment( organization( was( created( or(
organized.(
(
(Important(Points(from(the(Provision((Summary(from(CLV(Book)(
(
(ii)(Any(amount(paid(to(acquire(an(asset(used((or(held(
for(use)(directly(in(carrying(out(one(or(more(purposes(
for( which( the( accredited( nongovernment( organization(
was(created(or(organized.(
(
An(amount(set(aside(for(a(specific(project(which(comes(within(one(or(
more(purposes(of(the(accredited(nongovernment(organization(may(be(
treated(as(a(utilization,(but(only(if(at(the(time(such(amount(is(set(aside,(
the( accredited( nongovernment( organization( has( established( to( the(
satisfaction(of(the(Commissioner(that(the(amount(will(be(paid(for(the(
specific( project( within( a( period( to( be( prescribed( in( rules( and(
regulations( to( be( promulgated( by( the( Secretary( of( Finance,( upon(
recommendation( of( the( Commissioner,( but( not( to( exceed( five( (5)(
)
Under$Section$30$of$the$National$Internal$Revenue$Code$of$1997$
("NIRC"),$the$following$corporations,$among$others,$are$exempt$
from$corporate$income$taxation:$
a. Non0stock$ corporations$ or$ associations$ organized$ and$
operated$ exclusively$ for$ religious,$ charitable,$ scientific,$
athletic,$or$cultural$purposes,$or$for$the$rehabilitation$of$
veterans,$no$part$of$its$net$income$or$asset$shall$belong$
to$ or$ inure$ to$ the$ benefit$ of$ any$ member,$ organizer,$
officer$or$any$specific$person;$
b. Business$ leagues,$ chamber$ of$ commerce,$ or$ board$ of$
trade,$ not$ organized$ for$ profit$ and$ no$ part$ of$ the$ net$
income$ of$ which$ inures$ to$ the$ benefit$ of$ any$ private$
stockholder$or$individual;$
c. Civic$league$or$organization$not$organized$for$profit$but$
operated$ exclusively$ for$ the$ promotion$ of$ social$
welfare;$
!
Therefore$ both$ a$ regular$ non0stock$ corporation$ and$ a$
foundation$ are$ tax0exempt$ institution$ under$ Section$ 30$ of$ the$
NIRC$ when$ they$ are$ organized$ for$ the$ eleemosynary$ purposes$
specified$ therein$ and$ no$ profit$ inures$ to$ the$ benefit$ of$ their$
members,$officers$and$trustees.$Nevertheless,$the$same$section$
provides$that$the$income$of$whatever$kind$and$character$of$the$
foregoing$ organizations$ from$ any$ of$ their$ properties,$ real$ or$
personal,$ or$ from$ any$ of$ their$ activities$ conducted$ for$ profit,$
regardless& of& the& disposition& made& of& such& income,$ shall$ be$
Section$26$of$the$NIRC.$$
subject$to$tax$imposed$under$this$Code."$
Under$ Section$ 34(H)(2)(c)$ of$ the$ NIRC,$ the$ definition$ of$

foundation$is$preceded$by$the$qualifying$term$"non$government$
organization"$ which$ means$ a$ non0profit$ domestic$ corporation.$
Under$Section$34(H)(1)$of$the$NIRC$governing$the$computation$
of$ taxable$ net$ income,$ taxpayers$ are$ allowed$ to$ deduct$ from$
their$taxable$gross$income$contributions$and$gifts$actually$paid$
and$made$within$the$taxable$year$"to$domestic$corporations$or$
associations$ organized$ and$ operated$ exclusively$ for$ religious,$
charitable,$scientific,$youth$and$sports$development,$cultural$or$
educational$purposes$or$for$the$rehabilitation$of$veterans,$or$to$
social$ welfare$ institutions,$ no$ part$ of$ the$ net$ income$ of$ which$
inures$to$the$benefit$of$any$private$stockholder$or$individual."$$$
Under$ existing$ revenue$ regulations,$ in$ order$ for$ regular$ non0

stock$ corporations$ and$ foundations$ to$ establish$ their$ tax0
exempt$status,$and$thus$be$relieved$of$the$duty$of$filing$income$
tax$returns$and$paying$income$tax,$it$is$necessary$that$they$file$
an$affidavit$with$the$Commissioner$of$Internal$Revenue$showing$
the$character$of$their$organizations,$the$purpose$for$which$they$
are$organized,$their$actual$activities,$the$source$of$their$income$
and$ the$ disposition$ thereof,$ and$ whether$ or$ not$ any$ of$ the$
income$ is$ credited$ to$ surplus$ or$ inures$ or$ may$ inure$ to$ the$
From$the$point$of$view$of$tax0exemption,$foundations$enjoy$the$
same$ privilege,$ and$ must$ undertake$ the$ same$ application$
process$ with$ the$ BIR$ to$ enjoy$ such$ privilege,$ as$ with$ regular$
non0stock$corporations.$
3. Tax(Deductibility(of(Charitable(Contributions3(
This$ tax0exempt$ status$ of$ ordinary$ non0stock$ corporations$ and$

foundations$only$pertain$to$income$earned$from$pursuing$their$
eleemosynary$purposes,$and$not$to$other$profit0seeking$venture$
outside$of$their$main$purpose.$
benefit$ of$ any$ private$ stockholder$ or$ individual.1$It$ has$ been$

held,$ however,$ in$ Collector& v.& V.G.& Sinco& Educational&
Corporation, 2 $that$ the$ formal$ requirements$ of$ Revenue$
Regulations$ No.$ 2$ are$ not$ mandatory$ and$ that$ an$ entity$
concerned$ may,$ in$ the$ absence$ of$ compliance$ with$ such$
requirements,$ still$ show$ that$ it$ falls$ under$ the$ provisions$ of$
d. Non0stock$and$non0profit$educational$institution;$
The$extent$by$which$a$taxpayer$may$deduct$from$his$taxable$net$
income$ the$ charitable$ contributions$ and$ gifts$ to$ regular$ non0
stock$ corporations$ organized$ for$ any$ of$ the$ purposes$
enumerated$in$Section$34(H)(1)$is$as$follows:$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
$Section$24,$Revenue$Regulations$No.$2.$
$100$Phil.$127$(1956).$
3
2
)
!
a. For$ individual$ taxpayer,$ 10%$ of$ his$ taxable$ net$ income$
derived$from$business;$and$$
b. For$ corporate$ taxpayers,$ 5%$ of$ taxable$ net$ income$
derived$from$business.$
to$ be$ prescribed$ by$ the$ Secretary$ of$ Finance$ but$ in$ no$
case$ to$ exceed$ thirty$ percent$ (30%)$ of$ the$ total$
expenses;$and$
e. The$assets$of$which$in$the$event$of$dissolution$would$be$
distributed$ to$ another$ non0profit$ domestic$ corporation$
organized$ for$ similar$ purpose$ or$ purposes$ or$ to$ the$
On$the$other$hand,$under$Section$34(H)(2)(c)$contributions$and$
gifts$ made$ to$ "foundations"$ or$ nongovernment$ organization$
may$be$deductible$in$full$by$the$taxpayer$from$his$taxable$gross$
income.$ It$ actually$ is$ Section$ 34(H)(2)(c),$ which$ now$ refers$ to$
"foundations"$ as$ "accredited$ nongovernment$ organizations,"$
and$ defines$ and$ distinguishes$ them$ from$ other$ corporate$
entities,$as$follows:$
a. Non0profit$domestic$corporation,$formed$and$organized$
under$Philippine$laws$
b. Organized$ and$ operated$ exclusively$ for$ scientific,$
research,$educational,$character0building$and$youth$and$
sports$ development,$ health,$ social$ welfare,$ cultural$ or$
charitable$ purposes,$ or$ a$ combination$ thereof,$ no$ part$
State$ for$ public$ purpose,$ or$ would$ be$ distributed$ by$ a$

court$ to$ another$ organization$ to$ be$ used$ in$ such$
manner$ as$ in$ the$ judgment$ of$ said$ court$ shall$ best$
accomplish$the$general$purpose$for$which$the$dissolved$
organization$was$organized.$
nongovernment$organization$is$for$practical$purposes$a$creature$
fashioned$ under$ NIRC$ for$ purposes$ of$ tax$ administration.$ The$
requirements$ laid0down$ by$ Section$ 34(H)(2)(c)$ put$ more$
stringent$ requirements$ on$ the$ foundation$ as$ compared$ to$ a$
regular$non0stock$corporation,$namely:$
of$the$net$income$of$which$inures$to$the$benefit$of$any$
private$individual;$
c. Which,$ not$ later$ than$ the$ 15th$ day$ of$ the$ third$ month$
after$ the$ close$ of$ the$ corporation's$ taxable$ year$ in$
which$ contributions$ are$ received,$ makes$ utilization$
directly$ for$ the$ active$ conduct$ of$ the$ activities$
constituting$ the$ purposes$ or$ function$ for$ which$ it$ is$
organized$ and$ operated,$ unless$ an$ extended$ period$ is$
granted$by$the$Secretary$of$Finance$in$accordance$with$
the$rules$and$regulations$promulgated;$
d. The$ level$ of$ administration$ expense$ of$ which,$ shall$ on$
an$annual$basis,$conform$with$the$rules$and$regulations$
)
It$ will$ be$ noted$ therefore$ that$ a$ foundation$ or$ accredited$
a. The$limitation$of$administration$expenses$to$30%$of$the$
corporation's$total$expenses;$and$$
b. The$ strict$ form$ of$ distribution$ of$ the$ net$ assets$ of$ the$
corporation$ in$ the$ event$ of$ dissolution$ to$ similar$ non0
stock$ corporations$ or$ to$ the$ State$ (whereas,$ it$ is$ legal$
for$regular$non0stock$corporation$to$distribute$their$net$
assets$to$the$members$or$event$other$entities$organized$
for$profit).$
In$ exchange$ for$ such$ stringent$ requirements,$ donations,$

contributions$and$gifts$to$foundations$are$totally$deductible$by$
the$ taxpayer$ from$ his$ tax$ gross$ income,$ while$ those$ to$ regular$
non0stock$corporation$are$subject$to$the$10%05%$limitations$for$
their$ deduction$ from$ the$ taxable$ gross$ income$ of$ a$ taxpayer.$

Theoretically$ therefore,$ taxpayers$ would$ have$ greater$
motivations$ to$ donate$ and$ contribute$ to$ foundations$ than$ to$
regular$ non0stock$ corporation$ because$ of$ the$ greater$ tax$
benefits$to$them.$
SECTION(24.(Proof(of(exemption.(
In(order(to(establish(its(exemption,(and(thus(be(relieved(of(the(duty(of(
filing( returns( of( income( and( paying( the( tax,( it( is( necessary( that( every(
organization( claiming( exemption( file( an( affidavit( with( the(
Commissioner( of( Internal( Revenue,( showing( the( character( of( the(
The$ direct$ benefit$ granted$ under$ Section$ 34(H)(2)(c)$ is$ to$ the$
organization,( the( purpose( for( which( it( was( organized,( its( actual(
activities,(the(sources(of(its(income(and(its(disposition,(whether(or(not(
any( of( its( income( is( credited( to( surplus( or( inures( or( may( inure( to( the(
benefit( of( any( private( shareholder( or( individual,( and( in( general,( all(
facts(relating(to(its(operations(which(affect(its(right(to(exemption.(To(
such( affidavit( should( be( attached( a( copy( of( the( charter( or( articles( of(
incorporation,(the(by#laws(of(the(organization,(and(the(latest(financial(
contributing$ or$ donating$ taxpayer$ and$ not$ to$ the$ foundation$

itself.$Whether$the$entity$is$a$foundation$or$a$regular$non0stock$
corporation$ does$ not$ really$ matter$ since$ all$ donations$ to$ them$
are$ equally$ tax0exempt.$ In$ fact,$ the$ foundation$ is$ at$ a$ greater$
disadvantage$ as$ compared$ to$ a$ regular$ non0stock$ corporation,$
since$ a$ foundation$ is$ subject$ to$ the$ 30%$ limitation$ on$ its$
administration$ expenses,$ whereas$ a$ regular$ non0stock$
corporation$ is$ not$ saddled$ by$ such$ limitation.$ In$ addition,$ a$
foundation$ is$ mandated$ with$ greater$ reportorial$ obligations$ to$
the$ BIR$ than$ the$ regular$ non0stock$ corporation$ since$ it$ has$ to$
make$not$later$than$the$15th$of$the$third$month$after$the$close$
of$its$taxable$year$a$detailed$report.$
In$addition,$unlike$in$the$ordinary$non0stock$corporation$where$
it$ is$ possible$ upon$ dissolution$ for$ the$ net$ assets$ to$ be$
distributed$to$the$members,$for$foundations,$the$net$assets$are$
required$ to$ be$ distributed$ to$ another$ non0profit$ domestic$
corporation$organized$for$similar$purpose$or$purposes,$or$to$the$
State$for$public$ purpose,$ or$ would$ be$distributed$by$a$court$to$
another$ organization$ to$ be$ used$ in$ such$ manner$ as$ in$ the$
judgment$ of$ said$ court$ shall$ best$ accomplish$ the$ general$
purpose$for$which$the$dissolved$organization$was$organized.(
statement(showing(the(assets,(liabilities,(receipts,(and(disbursement(of(
the(organization.(
Upon(receipt(of(the(affidavit(and(other(papers(by(the(Commissioner(of(
Internal(Revenue,(the(organization(will(be(informed(whether(or(not(it(
is( exempt.( When( an( organization( has( established( its( right( to(
exemption,(it(need(not(thereafter(make(and(file(a(return(of(income(as(
required(under(Section(46(of(the(Tax(Code.(However,(the(organization(
should( file( on( or( before( April( 15( of( each( year,( an( annual( information(
return( under( oath,( stating( its( gross( income( and( expenses( incurred(
during(the(preceding(year,(and(a(certificate(showing(that(there(has(not(
been( any( substantial( change( in( its( By#Laws,( Articles( of( Incorporation,(
manner( of( operation( and( activities( as( well( as( sources( and( disposition(
of( income.( (As( amended( by( Revenue( Regulations( No.( 7#64,( approved(
November(25,(1964.)(
(
(
REVENUE(REGULATION(NO.(2(
)
Formal$requirements$of$Rev.$Reg.$No.$2$are$not$mandatory$and$
an$ entity$ may,$ in$ the$ absence$ of$ compliance$ with$ such$
!
requirements,$ still$ show$ that$ it$ falls$ under$ the$ provisions$ of$
Section$of$NIRC.$Collector( v.( V.G.( Sinco( Educational( Corp.,( 100(
Phil.(127((1956).(
4. Registration(as(Qualified(Donee#Institutions1(
non0stock$ corporations.$ $ In$ fact,$ a$ foundation$ would$ suffer$ a$

diminution$of$the$extent$of$power$by$which$to$distribute$its$net$
assets$in$the$event$of$dissolution,$as$compared$to$a$regular$non0
stock$corporation.$
BIR#NEDA(Regulations(No.(1#81,(as(amended(
stock$corporation$can$equally$enjoy$tax0exempt$status.$
Regulations$ No.$ 1081,$ as$ amended,$ it$ must$ file$ with$ the$
Government$ and$ Tax$ Exempt$ Corporation$ Division$ of$ the$ BIR$ a$
sworn$statement$showing$the$character$or$the$organization,$the$
purpose$ for$ which$ it$ is$ organized,$ its$ actual$ activities,$ the$
sources$of$income$and$its$disposition;$and$other$facts$relating$to$
their$ operations$ which$ are$ relevant$ to$ their$ qualification$ as$
donee$institutions.$Once$the$foundation$is$qualified$as$a$donee$
institution$ by$ the$ issuance$ of$ BIR$ Certificate$ of$ Registration,$ it$
For$ purposes$ of$ Corporate$ Law,$ with$ respect$ to$ corporate$

powers$and$capabilities,$and$rules$on$internal$management$and$
membership$ relations,$ there$ are$ no$ distinctions$ between$
foundations$and$regular$non0stock$corporations,$and$there$is$no$
advantage$ enjoyed$ in$ this$ realm$ by$ foundations$ over$ regular$
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
When$ it$ comes$ to$ charitable$ contributions,$ a$ foundation$ is$

limited$ in$ the$ manner$ by$ which$ it$ disburses$ the$ same$ by$ the$
30%$limitation$on$its$administrative$expenses,$whereas$no$such$
limitation$applies$to$regular$non0stock$corporations.$In$addition,$
both$ the$ donors$ to,$ and$ the$ management$ of,$ foundations$ are$
saddled$ with$ reportorial$ requirements$ on$ donations$ given$ and$
received,$ as$ the$ case$ may$ be.$ On$ the$ other$ hand,$ because$
donations$ to$ foundations$ which$ have$ qualified$ as$ donee0
For$ a$ foundation$ to$ qualify$ for$ full$ deduction,$ under$ BIR0NEDA$
must$ issue$ certificates$ of$ donations$ in$ the$ form$ prescribed$ by$
the$ BIR$ on$ every$ donation$ or$ gift$ it$ receives$ within$ thirty$ (30)$
days$from$receipt$of$the$donation.$
5. In(Summary2(
In$the$realm$of$income$taxation,$both$a$foundation$and$a$non0
institutions$ are$ deductible$ in$ full,$ there$ may$ be$ greater$

motivation$from$benefactors$to$give$to$foundations$rather$than$
to$a$regular$non0stock$corporation.$
(
VIII.( Dissolution:( Right( of( Members( to( Proportionate( Share( of(
Remaining(Assets((Sections(94(and(95;(Section(34(H)(2)(c),(1997(NIRC).(
(
Section(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;(
the(provisions(of(this(Title,(may(be(adopted(by(a(non#stock(corporation(
in(the(process(of(dissolution(in(the(following(manner:(
(
The( board( of( trustees( shall,( by( majority( vote,( adopt( a( resolution(
recommending( a( plan( of( distribution( and( directing( the( submission(
(
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(
thereof( to( a( vote( at( a( regular( or( special( meeting( of( members( having(
voting( rights.( Written( notice( setting( forth( the( proposed( plan( of(
distribution(or(a(summary(thereof(and(the(date,(time(and(place(of(such(
meeting( shall( be( given( to( each( member( entitled( to( vote,( within( the(
time(and(in(the(manner(provided(in(this(Code(for(the(giving(of(notice(
of( meetings( to( members.( Such( plan( of( distribution( shall( be( adopted(
upon( approval( of( at( least( two#thirds( (2/3)( of( the( members( having(
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(
voting(rights(present(or(represented(by(proxy(at(such(meeting.((n)(
(
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)(
(
Section(95.(Plan(of(distribution(of(assets.(
A( plan( providing( for( the( distribution( of( assets,( not( inconsistent( with(
)
As$provided$for$under$Sections$94$and$95$of$Corporation$Code,$
in$the$event$of$dissolution$of$a$non0stock$corporation,$its$assets$
shall$be$distributed$in$accordance$with$the$rules.$Unless,$it$is$so$
provided$ in$ the$ Articles$ of$ Incorporation$ or$ By0Laws,$ the$
members$ are$ not$ entitled$ to$ any$ beneficial$ or$ vested$ interest$
over$ the$ assets$ of$ the$ non0stock$ corporation.$ In$ other$ words,$
non0stock,$ non0profit$ 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).(
FOREIGN(CORPORATIONS(
branch" with" regard" to" external" matters," but" the"

governing"law"for"internal"matters"would"be"the"law"of"
their" home" country" (e.g." where" foreign" company"
decides" to" sell" all" its" Philippine" assets," such" cannot" be"
questioned" because" it" is" an" internal" matter" that" is"
governed" by" the" laws" of" the" home" country" of" the"
(
I.(Definition;(Nature(of(a(Foreign(Corporation(
(
A.(Definition((Section(123)(
(
Section(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)(
foreign"corporation.)%
(
B.(Two(requirements(to(be(considered(a(foreign(corporation:%
1. Organized(in(another(country.(
o Regardless" of" the" ownership" (e.g." a" corporation"
organized" under" foreign" laws" even" if" wholly" owned" by"
Filipinos)(
2. The( laws( of( the( corporations( home( state( allows( for( Filipino(
citizens( and( corporations( to( do( business( thereat( (policy( of(
reciprocity).(
o The" presence" of" absence" of" reciprocity" affects" its"
capacity"to"do"business"in"the"Philippines."
A" foreign" corporation" is" one" which" owes" its" existence" to" the"
laws" of" another" state," and" generally," has" no" legal" existence"
within" the" State" in" which" it" is" foreign." Avon% Insurance% PLC% v.%
Court%of%Appeals,%278%SCRA%312%(1997)%
(
C.(Nature(of(the(Corporate(Creature(
Atty." Hofilea" !" this" part" of" the" Corporation" Code" deals" with"
foreign" corporations" who" establish" a" presence" here" on" their"
own" as" such" (i.e." branch)," thereby," there" is" only" one" juridical"
entity."This"does"not"contemplate"situations"wherein"the"foreign"
corporation"establishes"a"domestic"corporation"as"its"subsidiary,"
thereby,"there"are"two"juridical"entities.%
o Foreign" Corporations" who" apply" for" a" license" would"
thereby" establish" a" branch." It" does" not" acquire" a" new"
personality." The" Corporation" Code" will" apply" on" the"
A" corporation" is" essentially" a" creature" of" the" state" under" the"
laws" of" which" it" has" been" granted" its" juridical" personality;" and"
strictly"speaking,"beyond"the"territories"of"such"creating"state,"a"
corporation" has" no" legal" existence," since" the" powers" of" the"
creating"laws"do"not"extend"beyond"the"territorial"jurisdiction"of"
the"state"under"which"it"is"created.1""
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Marshall(Wells!Co.!v.!Henry!W.!Elser!&!Co.,!46"Phil."70,"at"p."74"(1924)."
)
A" foreign" corporation" is" one" which" owes" its" existence" to" the"
laws" of" another" state," and" generally," has" no" legal" existence"
within"the"state"in"which"it"is"foreign.1"
It"is"a"fundamental"rule"of"international"jurisdiction"that"no"state"
can" by" its" laws," and" no" court" (which" is" only" a" creature" of" the"
state)" can" by" its" judgments" or" decrees," directly" bind" or" affect"
effect" within" the" state.7"For" example," the" filing" of" an"

action"by"a"foreign"corporation"before"Philippine"courts"
would" mean" that" by" voluntary" appearance," the" local"
courts" have" actually" obtained" jurisdiction" over" the"
"person""of"the"foreign"corporation.8"
2. Doctrine(of("doing(business"(within(the(territorial(jurisdiction(
of( the( host( state.( It" is" an" established" doctrine" that" when" a"
property" or" persons" beyond" the" limits" of" that" state.2"However,"

under" the" doctrine" of" comity" in" international" laws," "a"
corporation"created"by"the"laws"of"one"state"is"usually"allowed"
to" transact" business" in" other" states" and" to" sue" in" the" courts" of"
the"forum."3"
1. Consent.( The"legal"standing"of"foreign"corporations"in"the"host"
state" therefore" is" founded" on" international" law" on" the" basis" of"
consent,4"and"the"extent"by"which"a"hosting"state"can"enforce"its"
foreign" corporation" undertakes" business" activities" within" the"

territorial"jurisdiction"of"a"host"state,"then"it"ascribes"to"the"host"
states"laws,"rules"and"regulations."In"the"same"manner,"in"order"
to"regulate"the"basis"by"which"a"foreign"corporation"seeks"to"do"
business"and"the"manner"by"which"it"would"seek"redress"within"
the"judicial"and"administrative"authorities"within"the"host"state,"
have" given" rise" to" the" requirement" that" a" license" be" obtained"
laws" and" jurisdiction" over" corporations" created" by" other" states"

has" been" the" subject" of" jurisprudential" rules" and" municipal"
legislations," especially" in" the" fields" of" taxation, 5 "foreign"
investments," and" capacity" to" obtain" reliefs" in" local" courts" and"
administrative"bodies.6(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
under" the" penalty" that" failure" to" do" so" would" not" give" it" legal"
standing" to" sue" in" local" courts" and" administrative" bodies"
exercising"quasi`judicial"powers.9(
!Avon!Insurance!PLC!v.!Court!of!Appeals,!278"SCRA"312,"86"SCAD"401"(1997).""
!Times,!Inc.!v.!Reyes,"39"SCRA"303"(1971),"citing!Perkins!v.!Dizon,"69"Phil."186"
(1939)."
3
!Times,! Inc.! v.! Reyes," 39" SCRA" 303" (1971)," citing! Paul! v.! Virginia," 8" Wall." 168"
(1869);! Sioux! Remedy! Co.! v.! Cape! and! Cope," 235" U.S." 197" (1914);! ! Cyclone!
Mining!Co.!v.!Baker!Light!&!Power!Co.,"165"Fed."996"(1908)."
4
"SALONGA,"PRIVATE"INTERNATIONAL"LAW,"1979"ed.,"p."344."
5
"The"chapter"does"not"cover"nor"discuss"the"concept"of""doing"business""in"the"
field" of" taxation," as" the" subject" is" itself" a" technical" matter" that" deserves" a"
separate"discussion."
6
"Villanueva,"C."L.,"&"Villanueva`Tiansay,"T."S."(2013)."Philippine"Corporate"Law."
(2013"ed.)."Manila,"Philippines:"Rex"Book"Store."
Consent," as" a" requisite" for" jurisdiction" over" foreign"

corporations," is" founded" on" considerations" of" due"
process"and"fair"play."
A" foreign" corporation" may" be" subjected" to" jurisdiction"
by"reason"of"consent,"ownership"of"property"within"the"
State," or" by" reason" of" activities" within" or" having" an"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
7
"SALONGA,!supra,"citing"Goodrich"(Scoles),"136."
!Communication!Materials!and!Design,!Inc.!v.!Court!of!Appeals,"260"SCRA"673,"
73"SCAD"374"(1996)."
9
8
)
!
o
On" the" other" hand," when" a" foreign" corporation's"

activities" within" the" host" state" do" not" fall" within" the"
concept" of" "doing" business,"" the" requirements" of"
obtaining" a" license" to" engage" in" business" are" generally"
not"applicable"to"it,"and"it"would"still"have"legal"standing"
to" sue" in" local" courts" and" administrative" agencies" to"
obtain" relief." In" such" an" instance," the" jurisdiction" by"
local" courts" and" administrative" bodies" over" a" foreign"
corporation" seeking" relief" would" be" the" clear" consent"
manifested"by"the"filing"of"the"suit.1"
"
II.(License(to(Do(Business(in(the(Philippines(
(
A.( Application( for( License( (Sections( 124( and( 125;( Art.( 48,( Omnibus(
Investment(Code)((
(
Section(124.(Application(to(existing(foreign(corporations.(
Every( foreign( corporation( which( on( the( date( of( the( effectivity( of( this(
Code( is( authorized( to( do( business( in( the( Philippines( under( a( license(
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:(
(
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(
therefore(issued(to(it,(shall(continue(to(have(such(authority(under(the(
terms( and( condition( of( its( license,( subject( to( the( provisions( of( this(
Code(and(other(special(laws.((n)(
(
Section(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(
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(
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(
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(
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)(
(
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(
B.(Rationale(for(Requiring(License:(
existing(corporation(in(good(standing.(If(such(certificate(is(in(a(foreign(
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(
Section"69"of"old"Corporation"Law"was"intended"to"subject"the"
foreign" corporation" doing" business" in" the" Philippines" to" the"
jurisdiction" of" our" courts" and" not" to" prevent" the" foreign"
corporation"from"performing"single"acts,"but"to"prevent"it"from"
acquiring" domicile" for" the" purpose" of" business" without" taking"
the" necessary" steps" to" render" it" amenable" to" suit" in" the" local"
courts."MarshallBWells%v.%Elser,%46%Phil.%71%(1924).%
%
MarshallBWells%v.%Elser%
(
Facts:( Marshall`Wells" Company" (an" Oregon," U.S." corporation)" sued"
Henry"W."Elser"&"Co.,"Inc."(a"domestic"corporation)"in"CFI"Manila"for"the"
unpaid"balance"on"goods"it"sold"to"the"latter."Henry"W."Elser"&"Co.,"Inc."
averred"that"Marshall`Wells"Company"has"no"legal"capacity"to"sue"since"
there" is" no" showing" that" it" has" complied" with" the" laws" of" Philippines,"
particularly" Section" 69" of" the" Corporation" Law" where" it" states:" No"
)
!
foreign"corporation"shall"be"permitted"to"maintain"by"itself"or"assignee"
any"suit"for"the"recovery"of"any"debt,"claim,"or"demand"whatever,"unless"
it"shall"have"the"license"prescribed"in"section"68"of"the"law."
(
Issue:(Whether"or"not"the"obtaining"of"the"license"prescribed"in"section"
68,"as"amended,"of"the"Corporation"Law"is"a"condition"precedent"to"the"
maintaining"of"any"kind"of"action"in"the"courts"of"the"Philippine"Islands"
by"a"foreign"corporation."
(
Held:(NO."The"SC"decided"in"favor"of"Marshall"Wells"Co."The"implication"
of"the"law"is"that"it"was"never"the"purpose"of"the"Legislature"to"exclude"
a" foreign" corporation" which" happens" to" obtain" an" isolated" order" for"
business" from" the" Philippines," from" securing" redress" in" the" Philippine"
courts," and" thus," in" effect," to" permit" persons" to" avoid" their" contracts"
made"with"such"foreign"corporations."
(
Doctrine:(The"effect"of"the"statute"preventing"foreign"corporations"from"
doing"business"and"from"bringing"actions"in"the"local"courts,"except"on"
compliance"with"elaborate"requirements,"must"not"be"unduly"extended"
or"improperly"applied."It"should"not"be"construed"to"extend"beyond"the"
plain"meaning"of"its"terms,"considered"in"connection"with"its"object,"and"
in"connection"with"the"spirit"of"the"entire"law.(
%
Otherwise," a" foreign" corporation" illegally" doing" business" here"

because" of" its" refusal" or" neglect" to" obtain" the" required" license"
to" do" business" may" successfully" though" unfairly" plead" such"
neglect"or"illegal"act"so"as"to"avoid"service"and"thereby"impugn"
the"jurisdiction"of"the"local"courts."Avon%Insurance%PLC%v.%Court%
of%Appeals,%278%SCRA%312%(1997).%
The" same" danger" does" not" exist" among" foreign" corporations"

that"are"indubitably"not"doing"business"in"the"Philippines:"there"
would"be"no"reason"for"it"to"be"subject"to"the"States"regulation;"
for"in"so"far"as"the"State"is"concerned,"such"foreign"corporation"
has" no" legal" existence." Therefore," to" subject" such" foreign"
corporation" to" the" local" courts" jurisdiction" would" violate" the"
essence" of" sovereignty" of" the" creating" state." Avon% Insurance%
PLC%v.%Court%of%Appeals,%278%SCRA%312%(1997).%
"
C.(Appointment(of(a(Resident(Agent((Section(127(and(128)(
(
Section(127.(Who(may(be(a(resident(agent.(
A(resident(agent(may(be(either(an(individual(residing(in(the(Philippines(
or( a( domestic( corporation( lawfully( transacting( business( in( the(
Philippines:(Provided,(That(in(the(case(of(an(individual,(he(must(be(of(
good(moral(character(and(of(sound(financial(standing.((n)(
(
Section(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(written(power(of(attorney(
designating(some(person(who(must(be(a(resident(of(the(Philippines,(on(
whom( any( summons( and( other( legal( processes( may( be( served( in( all(
actions( or( other( legal( proceedings( against( such( corporation,( and(
consenting( that( service( upon( such( resident( agent( shall( be( admitted(
and(held(as(valid(as(if(served(upon(the(duly(authorized(officers(of(the(
foreign( corporation( at( its( home( office.( Any( such( foreign( corporation(
shall( likewise( execute( and( file( with( the( Securities( and( Exchange(
)
!
Commission( an( agreement( or( stipulation,( executed( by( the( proper(
authorities(of(said(corporation,(in(form(and(substance(as(follows:(
(
"The((name(of(foreign(corporation)(does(hereby(stipulate(and(agree,(in(
consideration( of( its( being( granted( by( the( Securities( and( Exchange(
against" forum" shoppingwhile" a" resident" agent" may" be" aware"

of"actions"filed"against"his"principal"(a"foreign"corporation"doing"
business" in" the" Philippines)," he" may" not" be" aware" of" actions"
initiated" by" its" principal," whether" in" the" Philippines" or" abroad."
Expertravel% &% Tours,% Inc.% v.% Court% of% Appeals,% 459% SCRA% 147%
(2005).%
Commission(a(license(to(transact(business(in(the(Philippines,(that(if(at(
any( time( said( corporation( shall( cease( to( transact( business( in( the(
Philippines,( or( shall( be( without( any( resident( agent( in( the( Philippines(
on(whom(any(summons(or(other(legal(processes(may(be(served,(then(
in(any(action(or(proceeding(arising(out(of(any(business(or(transaction(
which( occurred( in( the( Philippines,( service( of( any( summons( or( other(
legal( process( may( be( made( upon( the( Securities( and( Exchange(
Commission(and(that(such(service(shall(have(the(same(force(and(effect(
as(if(made(upon(the(duly\authorized(officers(of(the(corporation(at(its(
home(office."(
(
Whenever( such( service( of( summons( or( other( process( shall( be( made(
upon(the(Securities(and(Exchange(Commission,(the(Commission(shall,(
within( ten( (10)( days( thereafter,( transmit( by( mail( a( copy( of( such(
summons( or( other( legal( process( to( the( corporation( at( its( home( or(
principal(office.(The(sending(of(such(copy(by(the(Commission(shall(be(
necessary( part( of( and( shall( complete( such( service.( All( expenses(
incurred( by( the( Commission( for( such( service( shall( be( paid( in( advance(
by(the(party(at(whose(instance(the(service(is(made.(
(
In(case(of(a(change(of(address(of(the(resident(agent,(it(shall(be(his(or(
its( duty( to( immediately( notify( in( writing( the( Securities( and( Exchange(
Commission(of(the(new(address.((72a;(and(n)(
(
Being"a"resident"agent"of"a"foreign"corporation"does"not"mean"
that" he" is" authorized" to" execute" the" requisite" certification"
A"complaint"filed"by"a"foreign"corporation"is"fatally"defective"for"
failing" to" allege" its" duly" authorized" representative" or" resident"
agent" in" Philippine" jurisdiction." New% York% Marine% Managers,%
Inv.%c.%Court%of%Appeals,%249%SCRA%416%(1995)."
When"a"corporation"has"designated"a"person"to"receive"service"
of" summon" pursuant" to" the" Corporation" Code," the" designation"
is" exclusive" and" service" of" summons" on" any" other" person" is"
inefficacious." H.B.% Zachry% Company% Intl% v.% Court% of% Appeals,%
232%SCRA%329%(1994)%
"
D.( Issuance( of( License( (Section( 126;( Art.( 49,( Omnibus( Investment(
Code)(
(
Section(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.(
(
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(
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(
indebtedness( of( the( Government( of( the( Philippines,( its( political(
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(
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,(
to( Philippine( residents,( including( the( Government( of( the( Republic( of(
the(Philippines.((n)(
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(
A" foreign" corporation" licensed" to" do" business" should" be"

subjected" to" no" harsher" rules" that" is" required" of" domestic"
corporation"and"should"not"generally"be"subject"to"attachment"
on"the"pretense"that"such"foreign"corporation"is"not"residing"in"
the" Philippines." Claude% Neon% Lights% v.% Phil.% Advertising% Corp.,%
57%Phil.%607%(1932).%
"
E.(Effects(of(Being(Issued(License(
market( value( at( the( time( they( were( deposited.( The( Securities( and(
Exchange( Commission( may( at( its( discretion( release( part( of( the(
)
The" Corporation" Code" therefore" takes" pain" to" ensure" that" in"
allowing"a"foreign"corporation"to"engage"in"business"activities"in"
the"Philippines,"proper"safeguards"are"taken"to"allow"obtaining"
jurisdiction" over" such" foreign" corporation" in" case" of" suit" and"
that" proper" securities" are" present" within" Philippine" jurisdiction"
to" answer" for" a" foreign" corporation's" obligations" to" locals." The"
!
Supreme" Court" has" held:" "The" purpose" of" the" law" is" to" subject"
the"foreign"corporation"doing"business"in"the"Philippines"to"the"
jurisdiction" of" our" courts." It" is" not" to" prevent" the" foreign"
corporation"from"performing"single"or"isolated"acts,"but"to"bar"it"
from" acquiring" a" domicile" for" the" purpose" of" business" without"
first"taking"steps"necessary"to"render"it"amenable"to"suits"in"the"
1
local"courts." "
1. Licensed(Foreign(Corporation(Deemed(Domesticated(
The"harmony"and"balance"sought"to"be"achieved"by"our""doing"
business"" requirements" for" obtaining" license" are" best"
exemplified" by" the" fact" that" once" a" foreign" corporation" has"
obtained" a" license" to" do" business," then" it" is" deemed"
domesticated,"and"should"be"subject"to"no"harsher"rules"that"is"
required"of"domestic"corporations.2"
(
F.(Amendment(of(License((Section(131)((
(
Section(131.(Amended(license.(
A( foreign( corporation( authorized( to( transact( business( in( the(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Eriks! Pte.! Ltd.! v.! Court! of! Appeals," 267" SCRA" 567," 76" SCAD" 70" (1997)." The"
Court" also" held" in" that" case:" "It" was" never" the" intent" of" the" legislature" to" bar"
court" access" to" a" foreign" corporation" or" entity" which" happens" to" obtain" an"
isolated" order" for" business" in" the" Philippines." Neither," did" it" intend" to" shield"
debtors" from" their" legitimate" liabilities" or" obligations." But" it" cannot" allow"
foreign" corporations" or" entities" which" conduct" regular" business" any" access" to"
courts" without" the" fulfillment" by" such" corporation" of" the" necessary" requisites"
to" be" subjected" to" our" government's" regulation" and" authority." By" securing" a"
license," the" foreign" entity" would" be" giving" assurance" that" it" will" abide" by" the"
decisions"of"our"courts,"even"if"adverse"to"it.""
2
Philippines(shall(obtain(an(amended(license(in(the(event(it(changes(its(
corporate( name,( or( desires( to( pursue( in( the( Philippines( other( or(
additional( purposes,( by( submitting( an( application( therefor( to( the(
Securities( and( Exchange( Commission,( favorably( endorsed( by( the(
appropriate(government(agency(in(the(proper(cases.((n)(
(
G.(Effects(of(Failure(to(Obtain(License:(
1. On( the( Contract( Entered( Into:( Home% Insurance% Co.% v.% Eastern%
Shipping%Lines,%123%SCRA%424%(1983).(
(
Home%Insurance%Co.%v.%Eastern%Shipping%Lines%
(
Facts:( S." Kajita" &" Co.," on" behalf" of" Atlas" Consolidated" Mining" &"
Development" Corporation," shipped" on" board" the" SS" Eastern" Jupiter"
(owned" by" Eastern" Shipping" Lines)" from" Osaka," Japan," 2,361" coils" of"
Black"Hot"Rolled"Copper"Wire"Rods."The"shipment"was"insured"with"the"
Home"Insurance"Company"against"all"risks"in"favor"of"the"recipient"of"the"
shipment,"Phelps"Dodge"Copper"Products"Corporation"of"the"Philippines"
at"Manila."The"coils"discharged"from"the"ship"were"in"bad"order."Home"
Insurance"paid"the"Phelps"Dodge"under"its"insurance"policy"by"virtue"of"
which"Home"Insurance"became"subrogated"to"the"rights"and"actions"of"
the"Phelps"Dodge."Home"Insurance"made"demands"for"payment"against"
the" Eastern" Shipping" and" the" Angel" Jose" Transportation" for"
reimbursement"of"the"aforesaid"amount"but"each"refused"to"pay."
(
Issue:( Whether" or" not" Home" Insurance," a" foreign" corporation" licensed"
to"do"business"at"the"time"of"the"filing"of"the"case,"has"the"capacity"to"
sue" for" claims" on" contracts" made" when" it" has" no" license" yet" to" do"
business"in"the"Philippines."
)
!
"[t]he"requirement"of"registration"affects"only"the"remedy,""and"
that" "the" lack" of" capacity" at" the" time" of" the" execution" of" the"
contracts"was"cured"by"the"subsequent"registration."(1"
2. Standing(to(Sue((Section(133)(
(
Held:( YES." The" lack" of" capacity" at" the" time" of" the" execution" of" the"
contracts"was"cured"by"the"subsequent"registration"is"also"strengthened"
by"the"procedural"aspects"of"these"cases."Home"Insurance"averred"in"its"
complaints"that"it"is"a"foreign"insurance"company,"that"it"is"authorized"to"
do"business"in"the"Philippines,"that"its"agent"is"Mr."Victor"H."Bello,"and"
that" its" office" address" is" the" Oledan" Building" at" Ayala" Avenue," Makati."
These"are"all"the"averments"required"by"Section"4,"Rule"8"of"the"Rules"of"
Court."Home"Insurance"sufficiently"alleged"its"capacity"to"sue."
(
Doctrine:"The"Corporation"Law"is"silent"on"whether"or"not"the"contract"
executed" by" a" foreign" corporation" with" no" capacity" to" sue" is" null" and"
Section(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(
void" ab" initio." Still," there" is" no" question" that" the" contracts" are"
enforceable." The" requirement" of" registration" affects" only" the" remedy."
Significantly," Batas" Pambansa" 68," the" Corporation" Code" of" the"
Philippines" has" corrected" the" ambiguity" caused" by" the" wording" of"
Section"69"of"the"old"Corporation"Law."
laws.((69a)(
license"to"do"business"when"one"is"required,"does"not"affect"the"
validity" of" the" transactions" of" such" foreign" corporation," but"
simply"removes"the"legal"standing"of"such"foreign"corporation"to"
sue." Although" such" foreign" corporation" may" still" be" sued," the"
Corporation"Code"fails"to"indicate"that"once"sued,"if"such"foreign"
corporation"can"interpose"counterclaims"in"the"same"suit.2"
3. Criminal( Liability( under( Section( 144:% Home% Insurance% Co.% v.%
Section"133"of"the"present"Corporation"Code"provides"that:"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" in" 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"laws."
Home!Insurance!Company"therefore"held"that"contracts"entered"
into" by" a" foreign" corporation" doing" business" in" the" Philippines"
without" the" requisite" license" remain" valid" and" enforceable" and"
It"seems"clearly"implied"from"the"languages"of"both"Sections"133"
and" 134," that" the" failure" of" a" foreign" corporation" to" obtain" a"
Eastern%Shipping%Lines,%123%SCRA%424%(1983).(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
)
!
Section(144.(Violations(of(the(Code.(
Violations(of(any(of(the(provisions(of(this(Code(or(its(amendments(not(
otherwise(specifically(penalized(therein(shall(be(punished(by(a(fine(of(
not( less( than( one( thousand( (P1,000.00)( pesos( but( not( more( than( ten(
thousand( (P10,000.00)( pesos( or( by( imprisonment( for( not( less( than(
thirty( (30)( days( but( not( more( than( five( (5)( years,( or( both,( in( the(
discretion(of(the(court.(If(the(violation(is(committed(by(a(corporation,(
the( same( may,( after( notice( and( hearing,( be( dissolved( in( appropriate(
proceedings( before( the( Securities( and( Exchange( Commission:(
Provided,( That( such( dissolution( shall( not( preclude( the( institution( of(
appropriate( action( against( the( director,( trustee( or( officer( of( the(
corporation( responsible( for( said( violation:( Provided,( further,( That(
nothing( in( this( section( shall( be( construed( to( repeal( the( other( causes(
for(dissolution(of(a(corporation(provided(in(this(Code.((190(1/2(a)(
license," it" can" sue" before" Philippine" courts" on" any" transaction."
MR.%Holdings,%Ltd.%V.%Bajar,%380%SCRA%617%(2002).1%
"
III.( Concepts( of( Doing( Business( in( the( Philippines;( Effects( of( Not(
Obtaining(the(License((
(
A.( Statutory( Concept( of( Doing( Business( (R.A.( No.( 7042,( Foreign(
Investment(Act(of(1991).(
(
FOREIGN(INVESTMENT(ACT(OF(1991(
Section(3.(Definitions.(
x(x(x(
4. Summary( of( Rulings( on( Doing( Business:" The" principles"

regarding" the" right" of" a" foreign" corporation" to" bring" suit" in"
Philippine"courts"may"thus"be"condensed"in"four"statements:"(1)"
if"a"foreign"corporation"does"business"in"the"Philippines"without"
d)( The( praise( "doing( business"( shall( include( soliciting( orders,( service(
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( totalling( 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(
a"license,"it"cannot"sue"before"Philippine"courts;"(2)"if"a"foreign"
corporation"is"not"doing"business"in"the"Philippines,"it"needs"no"
license" to" sue" before" Philippine" courts" on" an" isolated"
transaction"or"on"a"cause"of"action"entirely"independent"of"any"
business" transaction;" (3)" if" a" foreign" corporation" does" business"
in"the"Philippines"without"a"license,"a"Philippine"citizen"or"entity"
which" has" contracted" with" said" corporation" may" be" estopped"
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(
from"challenging"the"foreign"corporations"corporate"personality"
in"a"suit"brought"before"the"Philippine"courts;"and"(4)"if"a"foreign"
corporation" does" business" in" the" Philippines" with" the" required"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
"Agilent" Technologies" Singapore" (PTE)" Ltd." v." Integrated" Silicon" Technology"

Phil."Corp.,"427"SCRA"593"(2004)."
)
!
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(interests(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;(
x(x(x(
what" constitutes" doing" business." Case" law" provides"

for"the"proper"interpretation.%
Under" Section" 123" of" Corporation" Code," a" foreign" corporation"

must"first"obtain"a"license"and"a"certificate"from"the"appropriate"
government" agency" before" it" can" transact" business" in" the"
Philippines." Where" a" foreign" corporation" does" business" in" the"
Philippines" without" the" proper" license," it" cannot" maintain" any"
action" or" proceeding" before" Philippine" courts" as" provided" in"
Section"133"of"the"Corporation"Code."Cargill,%Inc.%v.%Intra%Strata%
Assurance%Corp.,%615%SCRA%304%(2010).%
The"DTI"Implementing"Rules"and"Regulations,"in"defining""doing"
business,""not"only"carry"the"same"language"as"appearing"in"the"
Act,"but"also"includes"the"following"items"as"not"being"included"
in"the"term""doing"business":"
a. The"publication"of"a"general"advertisement"through"any"
print"or"broadcast"media;"
b. Maintaining"a"stock"of"goods"in"the"Philippines"solely"for"
the" purpose" of" having" the" same" processed" by" another"
entity"in"the"Philippines;""
The"Foreign"Investments"Act"of"1991,"repealed"Articles"44`56"of"
Book"II"of"the"Omnibus"Investments"Code"of"1987,"enumerated"
in" Section" 3(d)" not" only" the" acts" or" activities" which" constitute"
doing"business"but"also"those"activities"which"are"not"deemed"
doing" business." Cargill,% Inc.% v.% Intra% Strata% Assurance% Corp.,%
c. Consignment" by" a" foreign" entity" of" equipment" with" a"

local"company"to"be"used"in"the"processing"of"products"
for"export;"
d. Collecting"information"in"the"Philippines;"and"
e. Performing" services" auxiliary" to" an" existing" isolated"
contract" of" sale" which" are" not" on" a" continuing" basis,"
such" as" installing" in" the" Philippines" machinery" it" has"
615%SCRA%304%(2010).%
o Under" Section" 3(d)" of" the" Foreign" Investments" Act" of"
1991," as" supplemented" by" Rule" I," Section" 1(f)" of" its"
Implementing" Rules" and" Regulations," the" appointment"
of" a" distributor" in" the" Philippines" is" not" sufficient" to"
constitute" doing" business" unless" it" is" under" the" full"
control"of"the"foreign"corporation."In"the"same"manner,"
if" the" distributor" is" an" independent" entity" which" buys"
and" distributes" products," other" than" those" of" the"
foreign" corporation," for" its" own" name" and" its" own"

account," the" latter" cannot" be" considered" to" be" doing"
business" in" the" Philippines." Steelcase,% Inc.% v.% Design%
International%Selections,%Inc.,%670%SCRA%64%(2012).%
Atty." Hofilea" !" The" Foreign" Investments" Act" of" 1991"
provided"the"standards"and/or"guidelines"for"identifying"
manufactured" or" exported" to" the" Philippines," servicing"

the" same," training" domestic" workers" to" operate" it," and"
similar"incidental"services.""""
"
)
!
B.(Jurisprudential(Concepts(of(Doing(Business:"It"implies"a"continuity"
of"commercial"dealings"and"arrangements"and"the"performance"of"acts"
or" works" or" the" exercise" of" some" of" the" functions" normally" incident" to"
the" purpose" or" object" of" a" foreign" corporations" organization."
Mentholatum%v.%Mangaliman,%72%Phil.%525%(1941)."
The"characterization"by"Mentholatum"of""doing"business""in"the"
Philippines" covers" transactions" or" series" of" transactions" in"
pursuit"of"the"main"business"goals"of"the"corporation,"and"done"
with"intent"to"continue"the"same"in"the"Philippines.(1"
"
1. Twin(Characterization(Test.2(
a. Nature( of( the( act( or( transaction:" the" performance" of"
acts" or" works" or" the" exercise" of" some" of" the" functions"
normally" incident" to," and" in" progressive" prosecution" of"
the" purpose" and" object" of" its" organization" and"
considered" as" the" true" test" of" doing" business" in" the"
Philippines" is" whether" a" foreign" corporation" is"
maintaining" or" continuing" in" the" Philippines" "the" body"
or" substance" of" the" business" or" enterprise" for" which" it"
was" organized" or" whether" is" has" substantially" retired"
from"it"and"turned"it"over"to"another.(
b. Existence( of( Continuing( Intent:( In" doing" the" act" or"
transaction" there" was" an" intent" on" the" part" of" the"
foreign" corporation" to" undertake" a" continuity" of"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
commercial"dealings"and"arrangement"in"the"Philippines"
as"to"distinguish"it"from"an"isolated"transaction.(
(
Mentholatum%v.%Mangaliman%
(
Facts:" The" Mentholatum" Co.," Inc.," is" a" Kansas" corporation" which"
manufactures" "Mentholatum,"" a" medicament" and" salve" for" the"
treatment" of" irritation" and" other" external" ailments" of" the" body." The"
PhilippineÀmerican" Drug" Co.," Inc." is" its" exclusive" distributing" agent" in"
the"Philippines"authorized"by"it"to"look"after"and"protect"its"interests."On"
26" June" 1919" and" on" 21" January" 1921," the" Mentholatum" Co.," Inc.,"
registered" with" the" Bureau" of" Commerce" and" Industry" the" word,"
"Mentholatum","as"trademark"for"its"products.""
"
The" Mangaliman" brothers" prepared" a" medicament" and" salve" named"
"Mentholiman"" which" they" sold" to" the" public" packed" in" a" container" of"
the" same" size," color" and" shape" as" "Mentholatum."" As" a" consequence,"
Mentholatum,"etc."suffered"damages"from"the"diminution"of"their"sales"
and"the"loss"of"goodwill"and"reputation"of"their"product"in"the"market."
On" 1" October" 1935," the" Mentholatum" Co.," Inc.," and" the" Philippine`
American" Drug," Co.," Inc." instituted" an" action" in" the" Court" of" First"
Instance" (CFI)" of" Manila" against" Anacleto" Mangaliman," Florencio"
Mangaliman" and" the" Director" of" the" Bureau" of" Commerce" for"
infringement"of"trademark"and"unfair"competition."
"
Issue:( Whether" or" not" Mentholatum," etc." could" prosecute" the" instant"
action"without"having"secured"the"license"required"in"Section"69"of"the"
Corporation"Law."
"
)
!
activity"undertaken"in"the"Philippines"amounts"to"doing"business"
as"to"require"the"foreign"corporation"to"obtain"such"license.1(
o Isolated" transactions," even" when" perfected" and/or"
consummated" within" Philippine" territory," do" not"
constitute" doing" business" in" the" Philippines," and" do"
not" constitute" the" essential" element" of" presence"
Held:( NO." Mentholatum" Co.," Inc.," being" a" foreign" corporation" doing"
business"in"the"Philippines"without"the"license"required"by"section"68"of"
the" Corporation" Law," it" may" not" prosecute" this" action" for" violation" of"
trade" mark" and" unfair" competition." Neither" may" the" Philippine`
American" Drug" Co.," Inc.," maintain" the" action" here" for" the" reason" that"
the" distinguishing" features" of" the" agent" being" his" representative"
character" and" derivative" authority," it" cannot" now," to" the" advantage" of"
its"principal,"claim"an"independent"standing"in"court."
(
Doctrine:"No"general"rule"or"governing"principle"can"be"laid"down"as"to"
what" constitutes" "doing"" or" "engaging" in"" or" "transacting"" business."
Indeed," each" case" must" be" judged" in" the" light" of" its" peculiar"
required" under" due" process" considerations." The" legal"

basis"by"which"local"courts"can"legally"obtain"jurisdiction"
over"the"person"of"a"foreign"corporation"on"an"isolated"
transaction" would" be" consent" or" the" voluntary"
surrender"of"tis"person"to"the"jurisdiction"of"the"courts.2"
environmental" circumstances." The" true" test," however," seems" to" be"

whether"the"foreign"corporation"is"continuing"the"body"or"substance"of"
the"business"or"enterprise"for"which"it"was"organized"or"whether"it"has"
substantially" retired" from" it" and" turned" it" over" to" another." The" term"
implies" a" continuity" of" commercial" dealings" and" arrangements," and"
contemplates," to" that" extent," the" performance" of" acts" or" works" or" the"
exercise" of" some" of" the" functions" normally" incident" to," and" in"
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." Far% East% Int'l.% v.%
Nankai%Kogyo,%6%SCRA%725%(1962).(
o It" is" not" really" the" fact" that" there" is" only" a" single" act"
done" that" is" material" for" determining" whether" a"
corporation" is" engaged" in" business" in" the" Philippines,"
since"other"circumstances"must"be"considered."Where"a"
single"act"or"transaction"of"a"foreign"corporation"is"not"
merely" incidental" or" casual" but" is" of" such" character" as"
distinctly" to" indicate" a" purpose" on" the" part" of" the"
foreign" corporation" to" do" other" business" in" the" state,"
progressive"prosecution"of,"the"purpose"and"object"of"its"organization."
"
2. Single( Transaction( " Whether" a" foreign" corporation" needs" to"
obtain"a"license,"and"fails"to"do"so,"whether"it"should"be"denied"
legal" standing" to" obtain" remedies" from" local" courts" and"
administrative" agencies," depends" therefore" on" the" issue"
whether"it"will"engage"in"business"in"the"Philippines."Not"every"
Where" a" single" act" or" transaction," however," is" not" merely"
such" act" will" be" considered" as" constituting" business."
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
)
!
Litton% Mills,% Inc.% v.% Court% of% Appeals,% 256% SCRA% 696%
(1996).%
Participating" in" a" bidding" process" constitutes" doing" business"

because"it"shows"the"foreign"corporations"intention"to"engage"
in" business" in" the" Philippines." In" this" regard," it" is" the"
performance" by" a" foreign" corporation" of" the" acts" for" which" it"
was"created,"regardless"of"volume"of"business,"that"determines"
whether" a" foreign" corporation" needs" a" license" or" not."
European% Resources% and% Technologies,% Inc.% v.% Ingenieuburo%
Birkhanh%+%Nolte,%435%SCRA%246%(2004).%
Atty." Hofilea" !" At" the" moment," the" Court" has" ruled"
that" at" the" time" one" bids," you" need" to" have" a" license"
under" the" presumption" that" you" bid" because" you" want"
to" pursue" your" business" here." Disagrees," because" the"
act"of"doing"business"begins"when"you"actually"win"the"
bidding.%
3. Territoriality(Rule(((Contract(Test1)(
o
To" be" doing" business" in" the" Philippines" requires" that" the"
contract"must"be"perfected"or"consummated"in"Philippine"soil."A"
c.i.f." West" Coast" arrangement" makes" delivery" outside" of" the"
Philippines." Pacific% Vegetable% Oil% Corp.% v.% Singson,% Advanced%
Decision% Supreme% Court,% April% 1955% Vol.,% p.% 100BA;% Aetna%
Casualty%&%Surety%Co.%v.%Pacific%Star%Line,%80%SCRA%635%(1977).2"
"
Pacific%Vegetable%Oil%Corp.%v.%Singson%
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
"Universal"Shipping"Lines,"Inc."v."IAC,"188"SCRA"170"(1990)."
Facts:( Pursuant"to"a"contract,"Angel"Singzon"promised"to"sell"to"Pacific"
Vegetable" Oil" Corporation," a" foreign" corporation," copra." Singzon" failed"
to"deliver,"but"promised"to"do"so"in"the"amicable"settlement"it"executed"
with" Pacific." Failure" would" entitle" Pacific" to" damages" from" Singzon."
However," Singzon" again" failed" to" deliver" and" announced" by" telegram"
that" he" would" not" be" able" to" ship" said" copra." As" such," Pacific" filed" for"
damages" but" Singzon" filed" a" motion" to" dismiss" on" the" ground" that"
Pacific" failed" to" obtain" a" license" to" transact" business" in" the" Philippines"
and"consequently,"it"had"no"personality"to"file"the"action."The"trial"court"
held"that"Pacific"had"no"personality"to"institute"the"present"case"even"if"
it" afterwards" obtained" a" license" to" transact" business" upon" the" theory"
that" this" belated" act" did" not" have" the" effect" of" curing" the" defect" that"
existed"when"the"case"was"instituted."
(
Issue:(Whether"or"not"Pacific"can"maintain"the"present"action"
(
Held:(YES."The"agreement"between"Singzon"and"Pacific"was"c.i.f."Pacific"
Coast." This" means" that" the" vendor" was" to" pay" not" only" the" cost" of" the"
goods," but" also" the" freight" and" insurance" expenses" and," as" it" was"
judicially"interpreted,"this"is"to"indicate"that"the"delivery"is"to"be"made"
at"the"port"of"destination."It"follows"that"the"appellant"corporation"has"
not" transacted" business" in" the" Philippines" in" contemplation" of" Section"
68" and" 69" of" the" Corporation" Law." It" appearing" that" appellant"
corporation"has"not"transacted"business"in"the"Philippines"and"as"such"is"
not"required"to"obtain"a"license"before"it"could"have"personality"to"bring"
a" court" action," it" may" be" stated" that" said" appellant," even" if" a" foreign"
corporation," can" maintain" the" present" action" because" as" aptly" said" by"
this" Court," it" was" never" the" purpose" of" the" Legislature" to" exclude" a"
foreign" corporation" which" happens" to" obtain" an" isolated" order" for"
)
!
business" from" the" Philippines," from" securing" redress" in" the" Philippine"
courts," and" this," in" effect," to" permit" persons" to" avoid" their" contracts"
made"with"such"foreign"corporation."
(
Doctrine:(CLV"OPINION:"The"Pacific"Vegetable"Oil"doctrine"does"consider"
Defendants"refused"to"pay"for"the"damage,"so"the"surety"company"paid."
"
Defendants" Manila" Port" Service" and" Manila" Railroad" Company," Inc."
alleged"that"the"plaintiff,"Aetna"casualty"&"Surety"Company,"is"a"foreign"
corporation" not" duly" licensed" to" do" business" in" the" Philippines" and,"
the" twin" characterization" tests" of" Mentholatum" of" substance" of" the"
transactions"pertaining"to"the"main"business"and"the"continuity"or"intent"
to" continue" such" activities." It" would" seem" that" even" if" the" twin"
characterization" tests" of" Mentholatum" obtained" in" a" case," under" the"
Pacific"Vegetable"doctrine,"so"long"as"the"perfection"and"consummation"
of" a" series" of" transactions" are" done" outside" the" Philippine" jurisdiction,"
the"same"would"not"constitute"doing"business"in"the"Philippines,"even"if"
therefore" without" capacity" to" sue" and" be" sued." This" was" supported" by"
certifications" from" the" Office" of" the" Insurance" Commission" and" the"
Securities" and" Exchange" Commission" showing" that" the" Aetna" Casualty"
and" Surety" Company" has" not" been" licensed" nor" incorporated" to" do"
business" in" the" Philippines" as" foreign" corporation." The" trial" court" ruled"
against"surety"company"on"the"ground"that"it"has"been"doing"business"in"
numerous"the"Philippines"contrary"to"Philippine"laws."
the" products" themselves" should" be" manufactured" or" processed" in" the"
Philippines"by"locals."The"implication"of"this"doctrine"is"that"if"the"salient"
points"of"a"contract"do"not"find"themselves"in"the"Philippines,"Philippine"
authorities"have"no"business"subjecting"the"parties"to"local"registration"
and"licensing"requirements."
(
Issue:(Whether"or"not"the"appellant,"Aetna"Casualty"&"Surety"Company,"
has"been"doing"business"in"the"Philippines."
(
Held:(NO."It"is"merely"collecting"a"claim"assigned"to"it"by"the"consignee,"
it"is"not"barred"from"filing"the"instant"case"although"it"has"not"secured"a"
license"to"transact"insurance"business"in"the"Philippines."While"plaintiff"
"
Aetna%Casualty%&%Surety%Co.%v.%Pacific%Star%Line%
(
Facts:( I." Shalom" &" Co." Inc." were" supposed" to" receive" a" shipment" of"
goods"carried"on"board"SS"Ampal"whose"operator"was"Pacific"Star"Line."
The" Bradman" Co." Inc.," was" the" ship" agent" in" the" Philippines" for" the" SS"
Ampal,"while"the"Manila"Railroad"Co."Inc."and"Manila"Port"Service"were"
the" arrastre" operators" in" the" port" of" Manila" and" were" authorized" to"
delivery"cargoes"discharged"into"their"custody."Aetna"Surety"Casualty"&"
Surety"Co."Inc."insured"the"cargo"in"for"I."Shalom."The"SS"Ampal"arrived"
in" Manila" but" due" to" the" negligence" of" the" defendants," the" shipment"
sustained" damages" representing" pilferage" and" seawater" damage."
is" a" foreign" corporation" without" license" to" transact" business" in" the"
Philippines,"it"does"not"follow"that"it"has"no"to"bring"the"present"action."
Such"license"is"not"necessary"because"it"is"not"engaged"in"business"in"the"
Philippines."
(
Doctrine:(Object"of"Sections"68"and"69"of"the"Corporation"Law"was"not"
to" prevent" the" foreign" corporation" from" performing" single" acts," but" to"
prevent"it"from"acquiring"a"domicile"for"the"purpose"of"business"without"
taking" the" steps" necessary" to" render" it" amenable" to" suit" in" the" local"
courts."It"was"never"the"purpose"of"the"Legislature"to"exclude"a"foreign"
)
!
business." !" standard" in" the" FIA" requires" physical"
presence"%
" Issue:" What" about" in" the" time" of" internet" and"
telephone" solicitations" where" there" is" no"
physical"presence"in"the"state?%
4. Transactions( Seeking( Profit( ( Although" each" case" must" be"
corporation" which" happens" to" obtain" an" isolated" order" for" business"
from"the"Philippines,"from"securing"redress"in"the"Philippine"courts."
"
o
To" be" transaction" business" in" the" Philippines" for"

purposes" of" Section" 133" of" the" Corporation" Code," the"
foreign" corporation" must" actually" transact" business" in"
the" Philippines," that" is," perform" specific" business"
transactions" within" the" Philippine" territory" on" a"
continuing" basis" in" its" own" name" and" for" its" own"
account." B.% Van% Zuiden% Bros.,% Ltd% v.% GTVL%
Manufacturing% Industries,% Inc.,% 523% SCRA% 233% (2007),%
citing% VILLANUEVA,% PHILIPPINE% CORPORATE% LAW% 813%
judged"in"light"of"its"attendant"circumstances,"jurisprudence"has"
evolved" several" guiding" principles" for" the" application" of" these"
tests." By" and" large," to" constitute" doing" business," the" activity"
to" be" undertaken" in" the" Philippines" is" one" that" is" for" profit`
making."Agilent%Technolgies%Singapore%(PTE)%Ltd.%v.%Integrated%
Silicon% Technology% Phil.% Corp.,% 427% SCRA% 593% (2004),% citing%
VILLANUEVA,% PHILIPPINE% CORPORATE% LAW% 596% et% seq.% (1998%
(2001).%
ed.);%Cargill,%Inc.%v.%Intra%Strata%Assurance%Corp.,%615%SCRA%304%
(2010),% citing% VILLANUEVA,% PHILIPPINE% CORPORATE% LAW% 801B
802%(2001).(
(
Exception:" Acts" of" Solicitations" " Solicitation" of" business"

contracts" constitutes" doing" business" in" the" Philippines."
Marubeni%Nederland%B.V.%v.%Tensuan,%190%SCRA%105.%
Examples:((Atty.(Hofilea)(
o Where" a" domestic" corporation" initiated" a" supply"
agreement" with" a" foreign" corporation" and" all" of" it" was"
executed" abroad," there" is" no" doing" business" because"
there" no" act" of" solicitation" on" the" part" of" the" foreign"
company" and" in" accordance" with" the" territoriality" rule,"
none"of"it"happened"here.%
o
Where"the"negotiations"happened"here"upon"request"of"
the" domestic" corporation," that" is" still" not" doing"
business"within"the"contemplation"of"the"law.%
Where" the" foreign" corporation" sends" a" representative"
to" approach" a" domestic" corporation" to" offer" a"
transaction," such" would" be" considered" as" doing"
Agilent%Technolgies%Singapore%(PTE)%Ltd.%v.%Integrated%Silicon%
Technology%Phil.%Corp%
(
Facts:( Integrated"Silicon"entered"into"a"Value"Added"Assembly"Services"
Agreement" ("VAASA")," with" HP`Singapore." Under" the" contract,"
Integrated"Silicon"was"to"locally"manufacture"and"assemble"fiber"optics"
for" export" to" HP`Singapore," who" in" turn" would" provide" raw" materials"
and" machinery" and" pay" Integrated" Silicon" the" purchase" price" of" the"
finished"products."The"VAASA"had"a"five`year"term,"with"a"provision"for"
annual"renewal"by"mutual"written"consent."In"1999,"with"the"consent"of"
Integrated"Silicon,"HP`Singapore"assigned"all"its"rights"and"obligations"in"
the"VAASA"to"Agilent."Agilent"is"not"licensed"to"do"business"here."
)
!
"
In" 2001," Integrated" Silicon" filed" a" complaint" for" "Specific" Performance"
and" Damages"" against" Agilent," alleging" that" Agilent" breached" the"
parties" oral" agreement" to" extend" the" VAASA." Agilent" filed" a" separate"
replevin"case"against"Integrated"Silicon,"praying"that"the"defendants"be"
transaction"or"on"a"cause"of"action"entirely"independent"of"any"
business"transaction;"
3. If"a"foreign"corporation"does"business"in"the"Philippines"without"
a" license," a" Philippine" citizen" or" entity" which" has" contracted"
with" said" corporation" may" be" estopped" from" challenging" the"
ordered" to" immediately" return" its" equipment," machineries" and" the"

materials"to"be"used"for"fiberòptic"components"which"were"left"in"the"
plant"of"Integrated"Silicon."Integrated"Silicon"argues"that"since"Agilent"is"
an" unlicensed" foreign" corporation" doing" business" in" the" Philippines," it"
lacks"the"legal"capacity"to"file"suit."The"replevin"case"was"dismissed."
(
Issue:(Whether"or"not"the"Agilent"has"legal"capacity"to"sue."
foreign" corporations" corporate" personality" in" a" suit" brought"

before"Philippine"courts;"and"
4. If"a"foreign"corporation"does"business"in"the"Philippines"with"the"
required" license," it" can" sue" before" Philippine" courts" on" any"
transaction."
(
(
Held:( YES." By" the" clear" terms" of" the" VAASA," Agilents" activities" in" the"
Philippines" were" confined" to" (1)" maintaining" a" stock" of" goods" in" the"
Philippines" solely" for" the" purpose" of" having" the" same" processed" by"
Integrated" Silicon;" and" (2)" consignment" of" equipment" with" Integrated"
Silicon"to"be"used"in"the"processing"of"products"for"export."As"such,"we"
hold"that,"based"on"the"evidence"presented"thus"far,"Agilent"cannot"be"
deemed" to" be" "doing" business"" in" the" Philippines." As" a" foreign"
corporation" not" doing" business" in" the" Philippines," it" needed" no" license"
before"it"can"sue"before"our"courts."
(
Doctrine:( The"principles"regarding"the"right"of"a"foreign"corporation"to"
bring"suit"in"Philippine"courts"may"be"condensed"in"four"statements:"
1. If"a"foreign"corporation"does"business"in"the"Philippines"without"
a"license,"it"cannot"sue"before"the"Philippine"courts;"
2. If"a"foreign"corporation"is"not"doing"business"in"the"Philippines,"
it"needs"no"license"to"sue"before"Philippine"courts"on"an"isolated"
)
Examples:"
o
Insurance( Business( " A" foreign" corporation" with" a"

settling" agent" in" the" Philippines" which" issues" twelve"
marine" policies" covering" different" shipments" to" the"
Philippines"is"doing"business"in"the"Philippines."General%
Corp.%of%the%Phil.%v.%Union%Insurance%Society%of%Canton,%
Ltd.,%87%Phil.%313%(1950).%
A" foreign" corporation" which" had" been" collecting"
premiums" on" outstanding" policies" is" doing" business" in"
the" Philippines." Manufacturing% Life% Ins.% v.% Meer,% 89%
Phil.%351%(1951).%
Air( Carriers( " Off`line" air" carriers" having" general" sales"
agents"in"the"Philippines"are"engaged"in"business"in"the"
Philippines"and"that"their"income"from"sales"of"passage"
here" (i.e.," uplifts" of" passengers" and" cargo" occur" to" or"
from" the" Philippines)" is" income" from" within" the"
Philippines." South% African% Airways% v.% Commissioner% of%
Internal%Revenue,%612%SCRA%665%(2010)."
Exception:" Transactions" with" Agents" and" Brokers" " Granger%

Associates%v.%Microwave%Systems,%Inc.,%189%SCRA%631%(1990).1"
"
Granger%Associates%v.%Microwave%Systems,%Inc.%
(
Facts:( Granger" Associates" (foreign" corporation)" sued" Microwave"
Systems," Inc." (domestic" corporation)" for" recovery" of" a" sum" of" money"
arising"from"a"series"of"agreements"concluded"between"the"two."In"the"
principal" contract," Granger" licensed" MSI" to" manufacture" and" sell" its"
products" in" the" Philippines" and" extended" to" the" latter" certain" loans,"
equipment"and"parts,"a"contract"for"the"sale"of"equipment."Payment"of"
these"contracts"not"having"been"made"as"agreed"upon,"Granger"filed"a"
complaint"against"MSI"and"the"other"private"respondents."In"its"answer,"
MSI"alleged"the"affirmative"defense"that"the"plaintiff"had"no"capacity"to"
sue" in" accordance" with" Section" 133" of" the" Corporation" Code." Granger"
insists" that" it" has" dealt" only" with" MSI" and" not" the" general" public" and"
contends" that" dealing" with" the" public" itself" is" an" indispensable"
ingredient" of" transacting" business." It" contends" that" its" various"
transactions"with"MSI"were"mere"facets"of"the"basic"agreement"licensing"
MSI" to" manufacture" and" sell" Granger's" products" in" the" Philippines." All"
subsequent"agreements"were"merely"auxiliary"to"that"first."
"
Issue:( Whether" Grangers" agreements" with" MSI" covered" only" one"
isolated" transaction" for" which" it" did" not" have" to" secure" a" license" to" be"
able"to"file"its"complaint."
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
"La"Chemise"Lacoste,"S.A."v."Fernandez,"129"SCRA"373"(1984);"Schmid"&"Oberly"
v."RJL,"166"SCRA"493"(1988);"Wang"Laboratories,"Inc."v."Mendoza,"156"SCRA"44"
(1974)."
Held:( NO." We" are" convinced" from" an" examination" of" the" terms" and"
conditions" of" the" contracts" and" agreements" entered" into" between"
Granger" and" MSI" indicate" that" they" established" within" our" country" a"
continuous"business,"and"not"merely"one"of"a"temporary"character."Such"
agreements"did"not"constitute"only"one"isolated"transaction,"as"Granger"
contends," but" a" succession" of" acts" signifying" the" intent" of" Granger" to"
extend"its"operations"in"the"Philippines."
(
Doctrine:( The" purpose" of" the" rule" requiring" foreign" corporations" to"
secure" a" license" to" do" business" in" the" Philippines" is" to" enable" us" to"
exercise" jurisdiction" over" them" for" the" regulation" of" their" activities" in"
this"country,"If"a"foreign"corporation"operates"in"the"Philippines"without"
submitting" to" our" laws," it" is" only" just" that" it" not" be" allowed" to" invoke"
them" in" our" courts" when" it" should" need" them" later" for" its" own"
protection." While" foreign" investors" are" always" welcome" in" this" land" to"
collaborate"with"us"for"our"mutual"benefit,"they"must"be"prepared"as"an"
indispensable" condition" to" respect" and" be" bound" by" Philippine" law" in"
proper"cases,"as"in"the"one"at"bar."
"
C.( The( Special( Cases( on( Infringement( of( Business( Names( and(
Trademarks:( Western% Equipment% &% Supply% Co.% v.% Reyes,% 51% Phil.% 115%
(1927).(
"
Western%Equipment%&%Supply%Co.%v.%Reyes%
(
Facts:( Western" Equipment" and" Western" Electric" are" both" foreign"
corporation"organized"under"the"laws"of"the"State"of"Nevada"and"New"
York," respectively." Western" Equipment" is" engaged" in" the" selling" and"
importing" electrical" and" telephone" apparatus" and" supplies"
)
!
manufactured"by"Western"Electric."
"
Herman,"OBrien,"Diaz,"Mapoy"and"Zamora"(defendants)"were"residents"
of" the" Philippines." They" filed" articles" of" incorporation" of" a" domestic"
corporation" to" be" known" as" Western" Electric" Company," Inc." for" the"
manufactured" articles," and" it" is" very" apparent" that" the" whole" purpose"
and" intent" of" the" defendants" in" seeking" to" incorporate" another"
corporation" under" the" identical" name" of" Western" Electric" Company,"
Inc.,"and"for"the"same"identical"purpose"as"that"of"Western"Electric,"is"
to"trespass"upon"and"profit"by"its"good"name"and"business"reputation."
purpose" of" principally" of" manufacturing," buying," selling" and" generally"

dealing"in"electrical"and"telephone"apparatus"and"supplies."Smith,"who"
was"authorized"by"the"Board"of"Directors"of"Western"Electric"to"process"
all" legal" proceedings" for" the" corporation," lodged" a" complaint" with" the"
Bureau" his" protest" against" the" attempted" incorporation." It" was" alleged"
that"the"corporate"name"by"which"said"defendants"desire"to"be"known,"
being" identical" with" that" of" the" plaintiff" Western" Equipment," will"
The"very"fact"that"the"defendants"have"sought"the"use"of"that"particular"
name"for"that"identical"purpose"is"conclusive"evidence"of"the"fraudulent"
intent"with"which"it"is"done."
(
Doctrine:(It"is"well"accepted"that"the"right"to"the"use"of"corporate"name"
and"trade"name"is"a"property"right"a"right"in"rem,"which"may"assert"and"
protect"against"all"the"world,"in"any"of"the"courts"of"the"world""even"in"
deceive" and" mislead" the" public" purchasing" electrical" and" telephone"

apparatus"and"supplies."
(
Issue:( Whether" or" not" Western" Equipment" has" a" right" to" maintain" an"
action" to" restrain" residents" of" the" Philippines" from" organizing" a"
corporation"bearing"the"same"name"as"such"foreign"corporation(
(
jurisdictions"where"it"does"not"transact"business."
Held:(YES."It"is"true"that"Western"Electric"had"never"done"business"in"the"
Philippines" and" had" not" obtained" license" to" do" business" in" the"
Philippines." However," it" is" not" here" seeking" to" enforce" any" legal" or"
contract"rights"arising"from,"or"growing"out"of,"any"business"which"it"has"
transacted" in" the" Philippines." The" sole" purpose" of" the" action" is" to"
protect"its"reputation,"its"corporate"name"and"goodwill."
"
Western" Electric" has" been" in" existence" as" a" corporation" for" over" fifty"
years," during" which" time" it" has" established" a" reputation" all" over" the"
world" including" the" Philippine" Islands," for" the" kind" and" quality" of" its"
"
Infringement" of" trade" name.% General% Garments% Corp.% v.%

Director% of% Patens,% 41% SCRA% 50% (1971);% Universal% Rubber%
Products,%Inc.%v.%Court%of%Appeals,%130%SCRA%104%(1988).%
1. Under(the(Trademark(Law(
The"matter"as"to"trademarks"and"tradenames"had"become"moot"
with" the" adoption" of" Section" 21À 1"of" then" Republic" Act" 166"
(The" Trademark" Law)," which" expressly" provided" that" a" foreign"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
"Section" 21À" states:" "Any" foreign" corporation" or" juristic" person" to" which" a"
mark"or"tradename"has"been"registered"or"assigned"under"this"Act"may"bring"an"
action"hereunder"for"infringement,"for"unfair"competition,"or"false"designation"
of" origin" and" false" description," whether" or" not" it" has" been" licensed" to" do"
business" in" the" Philippines" under" Act" numbered" Fourteen" Hundred" and" Fifty`
Nine," as" amended," otherwise" known" as" the" Corporation" Law," at" the" time" it"
brings" the" complaint;" Provided," That" the" country" of" which" the" said" foreign"
corporation"or"juristic"person"is"a"citizen,"or"in"which"it"is"domiciled,"by"treaty,"
convention"or"law,"grants"a"similar"privilege"to"corporate"or"juristic"persons"of"
the"Philippines.""
)
!
corporation," whether" licensed" to" do" business" or" not" in" the"
Philippines," with" a" mark" or" tradename" registered" in" the"
Philippines," may" bring" an" action" before" Philippine" courts" for"
infringement,"unfair"competition,"false"designation"of"origin"and"
false"description,"if"the"country"of"which"the"foreign"corporation"
is"a"citizen,"or"in"which"it"is"domiciled,"by"treaty,"convention,"or"
Trademark" Law," and" the" new" qualification" that" such"

foreign"corporation"must"not"be"engaged"in"business"in"
the"Philippines"contradicts"the"provision"that"dispenses"
with"the"need"to"obtain"a"license"to"do"business"in"the"
Philippines" to" qualify" a" foreign" corporation" to" seek"
remedy"under"the"Code."It"can"therefore"be"reasonably"
law,"grants"a"similar"privilege"to"corporations"or"juristic"persons"
of"the"Philippines.1"
2. Under(the(Intellectual(Property(Code(
anticipated" that" the" courts" will" eventually" interpret"

Section"160"of"the"Code"to"have"the"same"meaning"and"
application" as" Section" 21À" of" The" Trademark" Law,"
which"would"qualify"any"foreign"corporation,"even"when"
doing" business" in" the" Philippines" without" appropriate"
license,"to"be"able"to"obtain"remedies"and"reliefs"under"
the"Code."""
In" 1997," the" Intellectual" Property" Code" was" promulgated" to"

consolidate" all" laws" relating" to" intellectual" properties." Section"
160"of"the"Code,"which"effectively"replaced"Section"21À"of"The"
Trademark" Law," provides" that" Any" foreign" national" or" judicial"
person" who" meets" the" requirements" of" Section" 32"of" this" Act"
and!does!not!engage!in!business!in!the!Philippines"may"bring"a"
civil" or" administrative" action" hereunder" for" opposition,"
cancellation," infringement," unfair" competition," or" false"
(
D.(Doctrine(on(Unrelated(or(Isolated(Transactions:((
designation" of" origin" and" false" description," whether! or! not! it! is!
licensed!to!do!business!in!the!Philippine!under"existing"laws."
o CLV( Comment:( The" wordings" of" Section" 160" do" not"
seem"to"comprehend"the"thrust"of"Section"21À"of"The"
transaction"or"series"of"transactions"set"apart"from"the"common"
business" of" a" foreign" enterprise" in" the" sense" that" there" is" no"
intention"to"engage"in"a"progressive"pursuit"of"the"purpose"and"
object"of"the"business"organization."3"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
"Section"3"provides:".".".Any"person"who"is"a"national"or"who"is"domiciled"or"
has"a"real"and"effective"industrial"establishment"in"a"country"which"is"a"party"to"
any"convention,"treaty"or"agreement"relating"to"intellectual"property"rights"or"
the"repression"of"unfair"competition,"to"which"the"Philippines"is"also"a"party,"or"
extends"reciprocal"rights"to"nationals"of"the"Philippines"by"law,"shall"be"entitled"
to" benefits" to" the" extent" necessary" to" give" effect" to" any" provision" of" such"
convention," treaty" or" reciprocal" law," in" addition" to" the" rights" to" which" any"
owner"of"an"intellectual"property"right"is"otherwise"entitled"by"this"Act."""
In" one" case," the" Court" held" that" the" phrase" "isolated"
transaction"" has" a" definite" and" fixed" meaning," i.e.," "a"
Antam%Consolidated%v.%Court%of%Appeals,%143%SCRA%288%(1986).4"
%
Antam%Consolidated%v.%Court%of%Appeals%
(
Facts:( Stokely"Van"Camp"and"Capital"City"Product"Company"are"foreign"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
4
!Ericks!Pte.!Ltd.!v.!Court!of!Appeals,"267"SCRA"567,"76"SCAD"70"(1997)."
"Eastboard"Navigation,"Ltd."v."Juan"Ysmael"and"Co.,"Inc.,"102"Phil."1"(1957)."
)
!
corporations" not" engaged" in" business" in" the" Philippines" and" not"
licensed." Capital" City" entered" into" a" contract" with" Coconut" Oil"
Manufacturing"(Comphil)"wherein"Comphil"undertook"to"sell"and"deliver"
and"Capital"City"agreed"to"buy"500"long"tons"of"crude"coconut"oil"to"be"
delivered"at"c.i.f."price."but"Comphil"failed"to"deliver"the"coconut"oil"so"
petitioners" to" deliver" the" crude" coconut" oil" under" the" first" transaction"
and" in" order" to" give" the" latter" a" chance" to" make" good" on" their"
obligation.1(
(
Doctrine:(The"doctrine"of"lack"of"capacity"to"sue"based"on"failure"to"first"
that" Capital" City" sustained" a" loss." As" a" result," herein" respondents"
entered"into"two"more"contracts"in"an"attempt"to"recover"the"loss"they"
sustained" from" the" first" one." Stokely" prayed" that" a" writ" of" attachment"
be" issued" against" any" and" all" the" properties" of" the" petitioners" in" an"
amount" sufficient" to" satisfy" any" lien" of" judgment" that" the" respondent"
may"obtain"in"its"action."Herein"petitioners"alleged"that"the"respondent"
has" no" personality" to" sue." Petitioners" argue" that" to" maintain" the" suit"
acquire"a"local"license"is"based"on"consideration"of"sound"public"policy."
It" was" never" intended" to" favor" domestic" corporations" who" enter" into"
solitary"transactions"with"unwary"foreign"firms"and"then"repudiate"their"
obligations"simply"because"the"latter"are"not"licensed"to"do"business"in"
this"country.2"
filed" with" the" trial" court," the" respondent" should" have" secured" the"
requisite" license" to" do" business" in" the" Philippines" because," in" fact," it" is"
doing"business."
(
Issue:(Whether"or"not"the"respondent"should"have"secured"the"requisite"
license"because"it"was"doing"business"in"the"Philippines."
(
courts" on" an" isolated" transaction." Lorenzo% Shipping% v.% Chubb%

and%Sons,%Inc.,%431%SCRA%266%(2004).%
Held:( NO." The" Supreme" Court" sustained" the" lower" court" in" not"
dismissing" a" complaint" filed" by" a" foreign" corporation" on" the" basis" of"
three" contracts" of" purchase" and" sale" of" coconut" oil" from" local"
companies." The" Court" found" that" from" the" facts" alone" it" could" be"
deduced" that" there" was" only" one" agreement" between" the" petitioners"
and"the"respondent"and"that"was"the"delivery"by"the"former"of"500"long"
tons" of" crude" coconut" oil" to" the" latter," who" in" turn," must" pay" the"
corresponding"price"for"the"same."The"only"reason"why"the"respondent"
entered"into"the"second"and"third"transactions"with"the"petitioners"was"
because"it"wanted"to"recover"the"loss"it"sustained"from"the"failure"of"the"
"
A"foreign"corporation"needs"no"license"to"sue"before"Philippine"
Single" or" isolated" acts," contracts," or" transactions" of" foreign"

corporations" are" not" regarded" as" a" carrying" on" of" business."
Typical" examples" of" these" are" the" making" of" a" single" contract,"
sale" with" the" taking" of" a" note" and" mortgage" in" the" state" to"
secure" payment" thereof," purchase," or" note," or" the" mere"
commission"of"a"tort."In"these"instances,"there"is"no"purpose"to"
do"any"other"business"within"the"country.%MR.%Holdings,%Ltd.%V.%
Bajar,%380%SCRA%617%(2002).%
o Even" a" series" of" transactions" which" are" occasional,"
incidental" and" casualnot" of" a" character" to" indicate" a"
purpose" to" engage" in" businessdo" not" constitute" the"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
)
!
doing" or" engaging" in" business" as" contemplated" by" law."
Lorenzo%Shipping%v.%Chubb%and%Sons,%Inc.,%431%SCRA%266%
(2004).%
sue"in"our"courts:""Otherwise"we"will"be"hampering"the"
growth"and"development"of"business"relations"between"
Filipino"citizens"and"foreign"nationals."Worse,"we"will"be"
allowing" the" law" to" serve" as" a" protective" shield" for"
unscrupulous" Filipino" citizens" who" have" business"
relationships"abroad."1"
Case\Law(Examples(of(Isolated(Transactions:(
o
o
o
Recovery" on" the" collision" of" two" vessels" at" the" Manila"
Harbor."Dampfschieffs% Rhederei% Union"v.# La# Campaia#
Transatlantica,%8%Phil.%766%(1907).%
Loss" of" goods" bound" for" Hongkong" but" erroneously"
discharged"in"Manila."The%Swedish%East%Asia%Co.,%Ltd.%v.%
Manila%Port%Service,%25%SCRA%633%(1968).%
"
DOING(BUSINESS(SYNTHESIS:((Atty.(Hofilea)(
intent"to"pursue"your"line"of"business"in"the"Philippines"
Recovery"of"damages"sustained"by"cargo"shipped"to"the"
Philippines."Bulakhidas%v.%Navarro,%142%SCRA%1%(1986)."
Sale"of"construction"equipment"to"the"Government"with"
no" intent" of" continuity" of" transaction." Gonzales% v.%
Raquiza,%180%SCRA%254%(1989).%
Recovery" on" a" Hong" Kong" judgment" against" a" Manila"
resident." Hang% Lung% Bak% v.% Saulog,% 201% SCRA% 137%
Even" if" you" intend" to" derive" profit," there" must" be" some"
connection" with" your" business." Just" because" youre" being" paid"
for" an" activity" does" not" mean" you" are" doing" business" in" the"
Philippines."
o Doing" business" is" generating" income" from" the"
Philippines"(Agilent"v."Integrated"Silicon)"
o If" its" a" cost" on" the" part" of" the" foreign" company," such"
transaction"is"not"considered"as"doing"business"
(1991).%
Appointment" of" local" lawyer" by" foreign" movie"
companies" who" have" registered" intellectual" property"
rights" over" their" movies" in" the" Philippines," to" protect"
such" rights" for" piracy:" We" fail" to" see" how" exercising"
one's"legal"and"property"rights"and"taking"steps"for"the"
vigilant" protection" of" said" rights," particularly" the"
appointment" of" an" attorneyìn`fact," can" be" deemed" by"
and"of"themselves"to"be"doing"business"here.%Columbia%
Pictures%Inc.%v.%Court%of%Appeals,%261%SCRA%144%(1996)."
Rationale:( rationale" for" the" allowing" foreign"
corporations" not" doing" business" in" the" Philippines" to"
If" you" pursue" your" business" in" a" continuous" basis" showing" an"
If"you"dont"want"to"be"accused"of"doing"business,"bring"out"as"
much"of"the"business"abroad"as"much"as"possible."
Isolated"Transaction"v."Continuity"of"Actions"
o
o
There" are" cases" where" the" Court" forgave" the"

corporations"who"did"business"at"least"once."
However," there" are" cases" that" due" to" the" volume" or"
magnitude" of" the" matter" involved," that" the" Court" has"
ruled"as"constituting"doing"business"
Where"a"corporation"wants"to"do"business"in"the"Philippines,"it"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Hang!Lung!Bank,!Ltd.!v.!Saulog,!201"SCRA"137"(1991).""
)
!
should"get"a"license."
o Where" a" party" contracts" with" a" foreign" corporation"
which" is" without" a" license," and" such" party" has" derived"
benefits," such" party" will" be" estopped" from" posing" such"
lack"of"license"as"a"defense"from"a"suit"initiated"by"the"
corporation" has" property" here," you" can" attach" the"

property"and"thereby"bind"the"FC.""
" What" if" hes" gone" completely" or" he" has" no"
property" at" all" in" the" Philippines" !" you" wont"
be" able" to" acquire" jurisdiction" over" him." BUT"
corporation."
If"a"foreign"corporation"is"not"considered"doing"business"in"the"
Philippines," can" the" foreign" corporation" sue" in" Philippine"
Courts?"
o
YES."If"youre"not"deemed"to"be"doing"business"in"the"
Philippines," but" you" have" certain" transactions" in" the"
country," such" foreign" corporation" may" still" sue" in"
Philippine" Courts." In" this" case," the" corporations" only"
connection" with" the" Philippines" may" be" that" it"
contracted"with"a"Philippine"citizen."
Can" suits" against" foreign" corporations" be" filed" and" prosper" in"
Philippine"Courts?"
o YES." Foreign" Corporations" doing" a" business" without" a"
can" be" sued" regardless" of" whether" they" have" a" license"
or"not."
Service"of"Summons"in"order"to"acquire"jursdiction"
o FC" doing" business" in" the" Philippines" with" a" license" !"
summons" shall" be" served" either" on" the" resident" agent"
or"in"the"absence"thereof,"to"the"SEC."
o
FC" doing" business" in" the" Philippines" with" a" license" !"
summons" shall" be" served" either" through" an" agent,"
publication,"or"courts"in"the"corporations"home"country"
with"the"assistance"of"the"DFA."
FC" not" doing" business" in" the" Philippines" !" if" the"
you"can"go"to"the"FCs"home"country"and"file"an"
action" there" subject" to" the" rules" of" their"
jurisdiction."
Jurisdiction" may" also" be" acquired" if" the" FC" voluntarily"
submits" to" the" jurisdiction" of" our" Courts" such" as" by"
appearance"through"counsel."
" Remember" that" not" all" appearances" are"
submissions" to" the" jurisdiction," such" as" when"
you"appear"precisely"to"question"the"jurisdiction"
of"the"court."
"
IV.(Suits(Brought(by(Foreign(Corporations(
(
A.(Need(to(Allege(Capacity(to(Sue:"The"fact"that"a"foreign"corporation"is"
not" doing" business" in" the" Philippines" must" be" alleged" if" a" foreign"
corporation" desires" to" sue" in" Philippines" courts" under" the" isolated"
transactions" rule." In" this" case," although" the" Supreme" Court" sustained"
the" principle" upon" which" the" plaintiffs" appealed" the" dismissal," it"
nevertheless" upheld" the" dismissal" since" the" complaint" filed" with" the"
lower" court" only" alleged" that" the" plaintiffs" are" foreign" corporation,"
without"further"indicating"that"they"are"exempt"from"the"requisite"of"a"
)
!
license" because" they" are" not" engaged" in" business" in" the" Philippines."
Atlantic%Mutual%Inc.%Co.%v.%Cebu%Stevedoring%Co.,%17%SCRA%1037%(1966).1(
"
Atlantic%Mutual%Inc.%Co.%v.%Cebu%Stevedoring%Co%
(
Facts:( Atlantic" Mutual" Insurance" Company" and" Continental" Insurance"
Company" (Atlantic)," both" foreign" corporations" sued" Cebu" Stevedoring"
Co.,"Inc."(Cebu),"a"domestic"corporation,"for"recovery"of"a"sum"of"money"
alleging" that" Cebu" undertook" to" carry" a" shipment" of" copra" and" that"
upon"discharge,"a"portion"of"the"copra"was"found"damaged;"that"since"
the"copra"had"been"insured"with"Atlantic"they"paid"the"shipper"and/or"
consignee;" and" that" as" subrogee" to" the" shipper's" and/or" consignee's"
rights,"Atlantic"demanded,"but"Cebu"did"not"pay."Cebu"moved"to"dismiss"
based" on:" (a)" that" Atlantic" had" "no" legal" personality" and" with" no"
capacity" to" sue;"" and" (b)" that" the" complaint" did" not" state" a" cause" of"
action."
(
Issue:(Whether"or"not"Atlantic"has"the"capacity"to"sue(
(
Held:(NO."But"where"as"in"the"present"case,"the"law"denies"to"a"foreign"
corporation"the"right"to"maintain"suit"unless"it"has"previously"complied"
with" a" certain" requirement," then" such" compliance," or" the" fact" that" the"
suing"corporation"is"exempt"therefrom,"becomes"a"necessary"averment"
in"the"complaint."These"are"matters"peculiarly"within"the"knowledge"of"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
"This" overturned" the" previous" doctrine" in" Marshall`Wells" (as" well" as" in" In" re"
Liquidation"of"the"Mercantile"Bank"of"China,"etc.,"65"Phil."385"(1938),"that"the"
lack"of"authority"of"foreign"corporation"to"sue"in"Philippine"courts"for"failure"to"
obtain" the" license" is" a" matter" of" affirmative" defense." Also" Commissioner" of"
Customs"v."K.M.K."Gani,"182"SCRA"591"(1990)."
appellants" alone," and" it" would" be" unfair" to" impose" upon" appellee" the"
burden" of" asserting" and" proving" the" contrary." It" is" enough" that" foreign"
corporations" are" allowed" by" law" to" seek" redress" in" our" courts" under"
certain"conditions:"the"interpretation"of"the"law"should"not"go"so"far"as"
to"include,"in"effect,"an"inference"that"those"conditions"have"been"met"
from"the"mere"fact"that"the"party"suing"is"a"foreign"corporation."
(
Doctrine:"
"
o
In" any" event," Rule" 8," Section" 4," of" the" 1997" Rules" of" Civil"
Procedure" now" require" that" in" case" of" foreign" corporations,"
"facts"showing"the"capacity"of"a"party"to"sue"or"be"sued"."."."must"
be"averred."(2"
"
B.( Estoppel( Doctrine:" Under" the" principle" of" estoppel," a" foreign"
corporation" doing" business" in" the" Philippines" may" sue" in" Philippine"
courts" even" without" license" to" do" business" against" a" Philippine" citizen"
who" had" contracted" with" and" been" benefited" by" said" corporation" and"
knew" it" to" be" without" the" necessary" license" to" do" business." Merrill%
Lynch%Futures,%Inc.%v.%Court%of%Appeals,%211%SCRA%824%(1992).3%
%
Merrill%Lynch%Futures,%Inc.%v.%Court%of%Appeals%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
3
"Georg"Grotjahn"GMBH"&"C."v."Isnani,"235"SCRA"216"(1994);"Communications"
Material" and" Design," Inc." v." Court" of" Appeals," 260" SCRA" 673" (1996);" Agilent"
Technologies" Singapore" (PTE)" Ltd." v." Integrated" Silicon" Technology" Phil." Corp.,"
427" SCRA" 593" (2004);" Global" Business" Holdings," Inc." v." Surecomp" Software,"
B.V.," 633" SCRA" 470" (2010);" Steelcase," Inc." v." Design" International" Selections,"
Inc.,"670"SCRA"64"(2012)."
)
!
(
Facts:( Merrill"Lynch"Futures,"Inc.,"through"a"domestic"corporation,"was"
found"to"be"engaging"in"business"(commodity"futures)"in"the"Philippines"
without" obtaining" the" proper" license." It" brought" a" suit" in" Philippine"
courts"to"enforce"a"claim"against"local"investors."
(
Issue:( Whether" or" not" Merril" Lynch" engaged" in" business" in" the"
Philippines"without"the"requisite"license."
(
Held:( YES." Although" the" Court" found" the" foreign" corporation" to" have"
engaged" in" business" in" the" Philippines" without" the" requisite" license," it"
overturned" the" dismissal" of" the" suit," on" the" ground" that" if" the" local"
investors" knew" that" the" foreign" corporation" had" no" license" to" do"
business"in"the"Philippines,"then"they"are"estopped"from"using"the"lack"
of"license"to"avoid"their"obligations."
(
Doctrine:( The" rule" is" that" a" party" is" estopped" to" challenge" the"
personality" of" a" corporation" after" having" acknowledged" the" same" by"
entering" into" a" contract" with" it." And" the" "doctrine" of" estoppel" to" deny"
corporate" existence" applies" to" foreign" as" well" as" to" domestic"
corporations;"" one" who" has" dealt" with" a" corporation" of" foreign" origin"
as" corporate" entity" is" estopped" to" deny" its" corporate" existence" and"
capacity.""The"principle""will"be"applied"to"prevent"a"person"contracting"
with" a" foreign" corporation" from" later" taking" advantage" of" its"
noncompliance"with"the"statutes,"chiefly"in"cases"where"such"person"has"
received"the"benefits"of"the"contract.1"
%
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!The""estoppel""doctrine"was"also"reiterated"in"Georg!Grotjahn!GMBH!&!Co.!v.!
Isnani,"235"SCRA"216,"54"SCAD"289"(1994).""
Proper( Doctrine:( Eriks% Ltd.% v.% Court% of% Appeals,% 267% SCRA% 567%
(1997).(
(
Eriks%Ltd.%v.%Court%of%Appeals%
(
Facts:( Eriks" Pte.," Ltd." is" a" non" resident" foreign" corporation" engaged" in"
the" manufacture" and" sale" of" elements" used" in" sealing" pumps." Delfin"
Enriquez," Jr.," doing" business" under" the" name" and" style" of" Delrene" EB"
Controls" Center" and/or" EB" Karmine" Commercial," ordered" and" received"
from" petitioner" various" elements" used" in" sealing" pumps," valves," pipes"
and" control" equipment," PVC" pipes" and" fittings" within" a" period" of" 4"
months." The" transfer" of" goods" were" perfected" in" Singapore" for" private"
respondents" account" with" a" 90`day" credit" term." Subsequently,"
demands"were"made"by"petitioner"upon"private"respondent"to"settle"his"
account,"but"the"latter"failed/refused"to"do"so."Eriks"Pte.,"Ltd."filed"with"
the" RTC" a" complaint" for" the" recovery" of" US$41,939.63." Private"
respondent" responded" with" a" Motion" to" Dismiss," contending" that"
petitioner" corporation" had" no" legal" capacity" to" sue." The" trial" court"
dismissed" the" action" on" the" ground" that" Eriks" Pte.," Ltd." is" a" foreign"
corporation"doing"business"in"the"Philippines"without"a"license.(
(
Issue:( Whether" or" not" Eriks" Pte.," Ltd" is" deemed" to" be" a" foreign"
corporation"doing"business"in"the"Philippines"without"a"license"
(
Held:( YES." The" series" of" transactions" in" question" could" not" have" been"
isolated" or" casual" transactions." What" is" determinative" of" doing"
business" is" not" really" the" number" or" the" quantity" of" the" transactions,"
but"more"importantly,"the"intention"of"an"entity"to"continue"the"body"of"
its" business" in" the" country." Accordingly," petitioner" must" be" held" to" be"
)
!
to" first" go" to" the" process" of" obtaining" a" license" to" do" business"
from" the" SEC," and" then" file" the" proper" suits" before" the" local"
courts;"otherwise,"they"run"the"risk,"as"it"should"be,"that"the"suit"
would" be" dismissed," but" not" on" the" merits," but" as" a"
consequence"of"its"failure"to"obtain"a"license,"without"prejudice"
to"obtaining"such"license"and"re`filing"the"suit.1(
incapacitated"to"maintain"the"action"a"quo"against"private"respondent."
By" this" judgment," we" are" not" foreclosing" petitioners" right" to" collect"
payment." Res" judicata" does" not" set" in" a" case" dismissed" for" lack" of"
capacity" to" sue," because" there" has" been" no" determination" on" the"
merits." Moreover," this" Court" has" ruled" that" subsequent" acquisition" of"
the"license"will"cure"the"lack"of"capacity"at"the"time"of"the"execution"of"
the" contract." By" securing" a" license," a" foreign" entity" would" be" giving"
assurance" that" it" will" abide" by" the" decisions" of" our" courts," even" if"
adverse"to"it."
(
Doctrine:( The" test" to" determine" whether" a" foreign" company" is" doing"
business"in"the"Philippines,"thus:"x"x"x"The"true"test,"however,"seems"
to" be" whether" the" foreign" corporation" is" continuing" the" body" or"
substance" of" the" business" or" enterprise" for" which" it" was" organized" or"
whether" it" has" substantially" retired" from" it" and" turned" it" over" to"
another." The" term" implies" a" continuity" of" commercial" dealings" and"
arrangements," and" contemplates," to" that" extent," the" performance" of"
acts"or"works"or"the"exercise"of"some"of"the"functions"normally"incident"
to," and" in" progressive" prosecution" of," the" purpose" and" object" of" its"
organization" (Mentholaturn" Co.," Inc." v." Mangaliman)." The" purpose" of"
the" law" is" to" subject" the" foreign" corporation" doing" business" in" the"
Philippines" to" the" jurisdiction" of" our" courts." It" is" not" to" prevent" the"
foreign"corporation"from"performing"single"or"isolated"acts,"but"to"bar"it"
from" acquiring" a" domicile" for" the" purpose" of" business" without" first"
taking" the" steps" necessary" to" render" it" amenable" to" suits" in" the" local"
courts.(
(
Under" the" Eriks" doctrine," it" would" compel" every" foreign"

corporation" doing" business" in" the" Philippines" without" a" license"
(
C.( On( Isolated( Transactions:" A" foreign" corporation" not" licensed" to" do"
business" in" the" Philippines" is" not" absolutely" incapacitated" from" filing" a"
suit" in" local" court." Aboitiz% Shipping% Corp.% v.% Insurance% Company% of%
North%America,%561%SCRA%262%(2008).%
"
V.(Suits(Against(Foreign(Corporations:(
A" fundamental" rule" of" international" law" on" state" jurisdiction" is"
that" no" state" can" by" its" laws," and" no" court" which" is" only" a"
creature"of"the"state,"can"by"its"judgments"and"decrees,"directly"
bind" or" affect" property" or" persons" beyond" the" limits" of" that"
state."Times,%Inc.%v.%Reyes,%39%SCRA%303%(1971).%
"
A.(Jurisdiction(Over(Foreign(Corporations((Section(14,(Rule(14,(Rules(of(
Court;(General%Corp.%of%the%Phil.%v.%Union%Insurance%Society%of%Canton,%
Ltd.,%87%Phil.%313%(1950).2(
(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2
"Johnlo"Trading"Co.,"v"Flores,"88"Phil."741"(1951);"Johnlo"Trading"Co."v."Zulueta,"
88" Phil." 750" (1951);" Pacific" Micronisian" Line," Inc." v." Del" rosario," 96" Phil." 23"
(1954);"Far"East"Intl"Import"and"Export"Corp."v."Nankai"Kogyo"Co.,"Ltd.,"6"SCRA"
725"(1962)."
)
!
RULES(OF(COURT((RULE(14(
Section( 14.( Service( upon( defendant( whose( identity( or( whereabouts(
are(unknown.((
In( any( action( where( the( defendant( is( designated( as( an( unknown(
owner,( or( the( like,( or( whenever( his( whereabouts( are( unknown( and(
shipment"of"merchandise"from"the"United"States"to"the"Philippines."All"
claims"were"forwarded"to"the"courts"in"Seattle"except"for"one,"wherein"
on"appeal"Fireman"claims"that"the"trial"court"did"not"acquire"jurisdiction"
over"it."The"summons"to"Fireman"was"served"on"Union"which"was"then"
the" formers" settling" agent" in" PH" because" Fireman" had" not" yet" been"
cannot( be( ascertained( by( diligent( inquiry,( service( may,( by( leave( of(
court,(be(effected(upon(him(by(publication(in(a(newspaper(of(general(
circulation( and( in( such( places( and( for( such( time( as( the( court( may(
order.(
registered" in" the" PH." Said" registration" came" two" months" later." Union"
claimed"that"Fireman"was"not"doing"business"in"the"Philippines,"and"that"
it" had" no" authority" from" its" co`defendant" to" receive" summons" on" its"
behalf.(
(
Issue:( Whether" or" not" summons" was" validly" served" upon" Fireman" as"
would"confer"jurisdiction"over"said"corporation."
Atty." Hofilea" !" The" Rules" of" Court" dont" make" a" distinction"
about" the" service" of" summons." As" long" as" the" foreign"
corporation" is" doing" business" in" the" Philippines," whether" it" is"
licensed" or" not," service" of" summons" is" sufficient" to" acquire"
jurisdiction"over"the"corporate"entity.(
(
General%Corp.%of%the%Phil.%v.%Union%Insurance%Society%of%Canton,%Ltd.%
(
Facts:( General" Corporation" and" Mayon" Investment" are" domestic"
corporations." Union" Insurance" is" a" foreign" insurance" corporation," duly"
authorized"to"do"business"in"the"PH,"with"head"office"in"Hong"Kong,"and"
a" branch" office" in" Manila." Fireman's" Fund" Insurance" is" a" foreign"
insurance" corporation" organized" under" the" laws" of" California," and" duly"
registered" with" the" Insurance" Commissioner" of" the" Bureau" of"
Commerce."Union"has"been"acting"as"a"settling"agent"for"claims"against"
Fireman's"Fund"Insurance.""
"
General"Corp"and"Mayon"Investment"Co."sued"Union"(HK)"and"Fireman"
(USA)" for" the" payment" of" 12" marine" insurance" policies" arising" from" a"
(
Held:( YES." Service" of" summons" for" appellant" Fireman" on" its" settling"
agent" Union" was" legal" and" gave" the" court" jurisdiction" over" Fireman."
"Doing"business"in"the"Philippines""makes"no"distinction"as"to"whether"
said" business" was" being" done" legally" or" without" authority" from" the"
Government."As"long"as"a"foreign"private"corporation"does"or"engages"in"
business" in" this" jurisdiction," it" should" and" will" be" amenable" to" process"
and"the"jurisdiction"of"the"local"courts."Hence"service"upon"any"agent"of"
said" foreign" corporation" constitutes" personal" service" upon" the"
corporation"and"accordingly"judgment"may"be"rendered"against"said."
"
Even" then," Fireman" was" adjudged" of" doing" business" in" the" Philippines."
The" subject" transactions" were" not" casual" or" isolated" business"
transactions." According" to" the" evidence," since" before" the" war," the"
Fireman's"Fund"Insurance"Co."would"appear"to"have"engaged"in"this"kind"
of" business" and" had" employed" its" co`defendant" Union" as" its" settling"
agent."
)
!
(
Doctrine:( That" service" of" summons" on" a" foreign" corporation" may" be"
made"only"upon"an"agent"of"said"corporation"residing"in"the"Philippines"
refers" to" those" doing" business" in" the" Philippines" which" has" complied"
with" the" law" and" obtained" the" corresponding" license" and" not" to" those"
functions" or" the" place" where" its" business" is" done." State%
Investment% House% v.% Citibank,% 203% SCRA% 9% (1991);% Northwest%
Orient%Airlines%v.%Court%of%Apppeals,%241%SCRA%192%(1995).%
2. Nexus(of("Doing(Business(in(the(Philippines"(
actually" doing" business" here" but" without" the" corresponding" license" or"
authority.(
corporation" under" the" old" Section" 14," Rule" 14" of" the" Rules" of"
Court," the" Court" held" that" "in" order" that" services" may" be"
effected"in"the"manner"above"stated,"said"section"also"requires"
that" the" foreign" corporation" be" one" which" is" doing! business! in!
the! Philippines.! This" is" a" sine! qua! non" requirement." This" fact"
(
1. Service( of( Summons( under( the( Rules( of( Court( Hinged( Upon(
Doing(Business(in(the(Philippines(
must" first" be" established" in" order" that" summons" can" be" made"
and"jurisdiction"acquired."This"is"not"only"clear"in"the"rule"but"is"
reflected" in" a" recent" decision" of" this" Court." We" there" said" that"
às" long" as" a" foreign" private" corporation" does" or" engages" in"
business" in" this" jurisdiction," it" should" and" will" be" amenable" to"
process"and"the"jurisdiction"of"local"courts.'"1"
For" purpose" serving" summons" a" foreign" corporation" in"

accordance" with" Rule" 14," Section" 14," it" is" sufficient" that" it" be"
alleged" in" the" complaint" that" it" is" doing" business" in" the"
Philippines."Hahn%v.%Court%of%Appeals,%266%SCRA%537%(1997)."
When"it"is"shown"that"a"foreign"corporation"is"doing"business"in"
the" Philippines," summons" may" be" served" on" (a)" its" resident"
agent" designated" in" accordance" with" law;" (b)" if" there" is" no"
resident" agent," the" government" official" designated" by" law" to"
that" effect;" or" (c)" any" of" its" officers" or" agent" within" the"
Philippines." The" mere" allegation" in" the" complaint" that" a" local"
company"is"the"agent"of"the"foreign"corporation"is"not"sufficient"
to" allow" proper" service" to" such" alleged" agent;" it" is" necessary"
that" there" must" be" specific" allegations" that" establishes" the"
connection" between" the" principal" foreign" corporation" and" its"
alleged" agent" with" respect" to" the" transaction" in" question."
French% Oil% Mills% Machinery% Co.v.% Court% of% Appeals,% 295% SCRA%
462%(1998).%
For" purposes" of" venue" involving" a" foreign" corporation," its"

residence" includes" the" country" where" it" exercises" corporate"
In" construing" the" proper" service" of" summons" for" a" foreign"
"
B.( Objection( to( Jurisdiction:" Appearance" of" a" foreign" corporation" to" a"
suit"precisely"to"question"the"tribunals"jurisdiction"over"its"person"is"not"
equivalent" to" service" of" summons," nor" does" it" constitute" an"
acquiescence"to"the"courts"jurisdiction."Avon%Insurance%PLC%v.%Court%of%
Appeals,%278%SCRA%312%(1997).%
(
C.(Discredited(Pari(Delicto(Doctrine:"The"local"party"to"a"contract"with"a"
foreign"corporation"that"does"business"in"the"Philippines"without"license"
cannot"maintain"suit"against"the"foreign"corporation"just"as"the"foreign"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
!Pacific! Micronisian! Line,! Inc.! v.! Del! Rosario," 96" Phil." 23" (1954)." quoting! also"
General! Corporation! of! the! Philippines! v.! Union! Insurance! Society! of! Canton,!
Ltd.,49"Off."Gaz.,"73,"September"14,"1950."
)
!
corporation" cannot" maintain" suit," under" the" principle" of" pari" delicto."
TopBWeld%Mfg.%v.%ECED,%119%SCRA%118%(1985).%
%
(
(
Held:( YES." From" the" evidence," it" is" apparent" that" the" 2" foreign"
corporations" are" doing" business" in" the" Philippines." They" were" carrying"
out"here"the"purposes"for"their"creation"(manufacture"and"marketing"of"
welding" products)" and" even" negotiated" with" other" groups" for" the"
Facts:(Top`weld"entered"into"separate"contracts"with"2"different"foreign"
entities:"(1)"A"license"and"technical"assistance"agreement"with"IRTI"and"
(2)" distributor" agreement" with" ECED." Upon" learning" that" the" 2" foreign"
entities"were"negotiating"with"another"group"to"replace"the"Top`weld"as"
their" licensee" and" distributor," Top`weld" instituted" a" civil" case" against"
IRTI," ECED," EUTECTIC," and" Gaerlan," a" Filipino" citizen" alleged" to" be" the"
representative" and" employee" of" these" 3" corporations." IRTI" and" ECED"
transfer" of" franchising" rights." HOWEVER," Top`Weld" is" not" entitled" to"
relief."It"does"not"come"to"court"with"clean"hands."It"is"chargeable"with"
knowledge" of" the" law," which" by" the" way" it" in" fact" invokes" before" the"
court."It"was"incumbent"upon"Top`Weld"to"know"whether"IRTI"or"ECED"
are" authorized" to" transact" business." Since" all" are" parties" to" an" illegal"
agreement,"the"court"will"leave"them"where"it"finds"them.""
(
later" on" terminated" the" agreement" for" breaches" committed" by" Top`
Weld"like"failure"to"pay"interest,"use"of"substandard"or"wrong"materials,"
and" re`labelling." Subsequently," Top`Weld" asked" for" a" preliminary"
mandatory"injunction"to"compel"ECED"to"ship"and"deliver"various"items"
covered"by"the"distributorship"contract,"and"to"prohibit"the"corporations"
from" importing" into" the" Philippines" directly" or" indirectly" any" EUTECTIC"
materials,"supplies"or"equipment"except"to"and"through"Top`Weld."
Doctrine:"No"remedy"could"be"afforded"to"the"parties"because"of"their"
presumptive"knowledge"that"the"transaction"was"tainted"with"illegality."
Equity"cannot"lend"its"aid"to"the"enforcement"of"an"alleged"right"claimed"
by"virtue"of"an"agreement"entered"into"in"contravention"of"law.%
TopBWeld%Mfg.%v.%ECED%
"
Top`Weld" now" invokes" R.A." No." 5455" (Aliens" doing" business" in" the"
Philippines)" prohibiting" foreign" corporations" from" transacting" business"
and"engaging"in"economic"activity"in"the"Philippines"without"permit"and"
from"terminating"any"franchise"or"agreement"with"a"resident"unless"for"
just"cause"and"upon"compensation."
(
Issue:( Whether" or" not" respondent" corporations" can" be" considered" as"
"doing" business"" in" the" Philippines" and," therefore," subject" to" the"
provisions"of"R.A."No."5455."
Atty." Hofilea" !" the" party" in" Top`Weld" Mfg." v." ECED" cannot"
complain"on"the"ground"of"pari"delicto."Also,"such"contract"was"
void"for"being"against"public"policy.(
o It"seems"a"little"strange"for"the"Court"to"go"that"length."
Despite"the"situation,"the"contracts"were"still"valid."The"
only" limitation" is" that" they" cannot" avail" of" remedies"
through"Philippine"Courts.(
BUT( SEE:( Communication% Materials% v.% Court% of% Appeals,% 260%

SCRA%673%(1996).((
(
Communication%Materials%v.%Court%of%Appeals%
(
)
!
Facts:( CMDI" and" ASPAC" are" domestic" corporations," while" Francisco" S."
Aguirre" is" their" President" and" majority" stockholder." Respondent" ITEC"
International" is" a" foreign" corporations" from" Alabama." There" is" no"
dispute"that"ITEC"is"a"foreign"corporation"not"licensed"to"do"business"in"
the"Philippines.""
raising"this"fact"to"bar"ITEC"from"instituting"this"injunction"case"against"
it."
"
Doctrine:( A" party" is" estopped" to" challenge" the" personality" of" a"
corporation" after" having" acknowledged" the" same" by" entering" into" a"
"
ITEC" entered" into" a" Representative" Agreement" with" ASPAC" whereby" it"
would"be"the"exclusive"representative"in"the"Philippines"for"the"sale"of"
ITECs" products." Through" a" License" Agreement" entered" into" by" the"
same"parties,"ASPAC"became"legally"and"publicly"known"as"ASPACÌTEC"
(Philippines)."By"virtue"of"said"contracts,"ASPAC"sold"electronic"products,"
exported" by" ITEC," to" their" sole" customer," PLDT." ITEC" decided" to"
contract"with"it."
terminate" the" same," because" petitioner" ASPAC" allegedly" violated" its"

contractual"commitment"as"stipulated"in"their"agreements."ITEC"charges"
the" ASPAC" and" another" Philippine" Corporation," DIGITAL," the" President"
of" which" is" also" Aguirre," of" using" knowledge" and" information" of" ITECs"
products" specifications" to" develop" their" own" line" of" equipment" and"
product"support,"which"are"similar,"if"not"identical"to"ITECs."
(
Issue:(Whether"or"not"ITEC"is"doing"business"in"the"Philippines"
(
Held:( YES." The" Court" held" that" private" respondent" had" been" engaged"
in"or"doing"business"in"the"Philippines"for"some"time"now."A"perusal"
of" the" agreements" between" petitioner" ASPAC" and" the" respondents"
shows" that" there" are" provisions" which" are" highly" restrictive" in" nature,"
such" as" to" reduce" petitioner" ASPAC" to" a" mere" extension" or" instrument"
of"the"private"respondent."The"No"Competing"Product"provision"of"the"
Representative" Agreement." Notwithstanding" such" finding" that" ITEC" is"
doing" business" in" the" country," ASPAC" is" nonetheless" estopped" from"
Atty."Hofilea"!"the"foreign"company"was"found"doing"business"
without" a" license" with" a" Philippine" party" who" was" aware" of"
such." But" the" Court" did" not" declare" the" contract" void" and" pari"
delicto."The"suit"was"allowed."(
(
D.(Odd(But(Prevailing(Doctrine:(
Indeed,"if"a"foreign"corporation,"not"engaged"in"business"in"the"
Philippines,"is"not"barred" from"seeking"redress"from"the"courts"
in"the"Philippines,"a"fortiori,"that"same"corporation"cannot"claim"
exemption" from" being" sued" in" Philippine" courts" for" acts" done"
against" a" person" or" persons" in" the" Philippines." Facilities%
Management%Corp.%v.%De%la%Osa,%89%SCRA%131%(1979).1"
"
Facilities%Management%Corp.%v.%De%la%Osa%
(
Facts:(Facilities"Management"Corporation"and"J."S."Dreyer"are"domiciled"
in" Wake" Island" while" J." V." Catuira" is" an" employee" of" FMC" stationed" in"
Manila." Leonardo" dela" Osa" was" employed" by" FMC" in" Manila," but"
rendered"work"in"Wake"Island,"with"the"approval"of"the"Department"of"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
"FBA"Aircraft"v."Zosa,"110"SCRA"1"(1981);"Royal"Crown"Intl"v."NLRC,"178"SCRA"
569"(1989);"Wang"Laboratories,"Inc."v."Mendoza,"156"SCRA"44"(1987)."
)
!
Labor"of"the"Philippines."Dela"Osa"later"filed"for"reinstatement"with"back"
wages" and" recovery" of" his" overtime" compensation," swing" shift" and"
graveyard" shift" differentials." FMC," et" al." filed" a" motion" to" dismiss" the"
subject"petition"on"the"ground"that"the"Court"has"no"jurisdiction."
(
contracts"are"actually"reduced"to"writing,"shall"constitute"doing"business"
even" if" the" enterprise" has" no" office" or" fixed" place" of" business" in" the"
Philippines;" (2)" appointing" a" representative" or" distributor" who" is"
domiciled" in" the" Philippines," unless" said" representative" or" distributor"
has"an"independent"status,"i.e.,"it"transacts"business"in"its"name"and"for"
Issue:( Whether" the" mere" act" by" a" non`resident" foreign" corporation" of"
recruiting"Filipino"workers"for"its"own"use"abroad,"in"law"doing"business"
in"the"Philippines."
(
Held:(YES."FMC"may"be"considered"as""doing"business"in"the"Philippines""
within" the" scope" of" Section" 14" (Service" upon" private" foreign"
corporations),"Rule"14"of"the"Rules"of"Court."Indeed,"FMC,"in"compliance"
its"own"account,"and"not"in"the"name"or"for"the"account"of"the"principal;"
xxx" (4)" Opening" offices," whether" called" 'liaison'" offices," agencies" or"
branches," unless" proved" otherwise." xxx" (10)" 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," or" in" the"
progressive" prosecution" of," commercial" gain" or" of" the" purpose" and"
with"Act"2486"as"implemented"by"Department"of"Labor"Order"IV"dated"
20" May" 1968" had" to" appoint" Jaime" V." Catuira," 1322" A." Mabini," Ermita,"
Manila" "as" agent" for" FMC" with" authority" to" execute" Employment"
Contracts"and"receive,"in"behalf"of"that"corporation,"legal"services"from"
and" be" bound" by" processes" of" the" Philippine" Courts" of" Justice," for" as"
long" as" he" remains" an" employee" of" FMC."" It" is" a" fact" that" when" the"
summons" for" FMC" was" served" on" Catuira" he" was" still" in" the" employ" of"
objective"of"the"business"organization.""
the"FMC."
(
Doctrine:(Under"the"rules"and"regulations"promulgated"by"the"Board"of"
Investments"which"took"effect"3"February"1969,"implementing"RA"5455,"
which"took"effect"30"September"1968,"the"phrase""doing"business""has"
been"exemplified"with"illustrations,"among"them"being"as"follows:"""(1)"
Soliciting" orders," purchases" (sales)" or" service" contracts." Concrete" and"
specific" solicitations" by" a" foreign" firm," not" acting" independently" of" the"
foreign" firm," amounting" to" negotiation" or" fixing" of" the" terms" and"
conditions" of" sales" or" service" contracts," regardless" of" whether" the"
"
CONTRA:"The"sine"qua"non"requirement"for"service"of"summons"
and"other"legal"processes"or"any"such"agent"or"representative"is"
that"the"foreign"corporation"is"doing"business"in"the"Philippines."
Hyopsung%Maritime%Co.,%Ltd.%v.%Court%of%Appeals,%165%SCRA%258%
1988);% Signetics% Corp.% v.% Court% of% Appeals,% 225% SCRA% 737%
(1993).%
%
Signetics%Corp.%v.%Court%of%Appeals%
(
Facts:( Signetics" was" organized" under" the" laws" of" the" United" States" of"
America." Through" Signetics" Filipinas" Corporation" (SigFil)," a" wholly`
owned"subsidiary,"Signetics"entered"into"lease"contract"over"a"piece"of"
land" with" Fruehauf" Electronics" Phils.," Inc." (Freuhauf)." Freuhauf" sued"
Signetics" for" damages," accounting" or" return" of" certain" machinery,"
equipment"and"accessories,"as"well"as"the"transfer"of"title"and"surrender"
)
!
of" possession" of" the" buildings," installations" and" improvements" on" the"
leased" land." Service" of" summons" was" made" on" Signetics" through"
Technology" Electronics" Assembly" &" Management" Pacific" Corp." on" the"
basis"of"the"allegation"that"Signetics"is"a" subsidiary"of"US"Philips"Corp.,"
and"may"be"served"summons"at"Philips"Electrical"Lamps,"Inc."
Facts:( Yupangco" Cotton" Mills" engaged" to" secure" with" Worldwide"

Security" and" Insurance" Co." Inc.," several" of" its" properties" totaling" P200"
Million."These"contracts"were"covered"by"reinsurance"treaties"between"
Worldwide" Surety" and" Insurance," and" several" foreign" reinsurance"
companies" including" the" petitioners" through" CJ" Boatrwright" acting" as"
(
Issue:( Whether" or" not" the" lower" court," had" correctly" assumed"
jurisdiction" over" the" petitioner," a" foreign" corporation," on" its" claim" in" a"
motion" to" dismiss," that" it" had" since" ceased" to" do" business" in" the"
Philippines."
(
Held:( YES." The" term" "agent"," in" the" context" it" is" used" in" Section" 14,"
agent" of" Worldwide" Surety" and" Insurance." A" Fire" then" razed" the"
properties" insured." A" Deed" of" Assignment" made" by" Worldwide" Surety"
and"Insurance"acknowledged"a"remaining"balance"still"due"and"assigned"
to"Yupangco"all"reinsurance"proceeds"still"collectible"from"all"the"foreign"
reinsurance" companies." Yupangco" then" filed" a" collection" suit" on" the"
above" petitioners." The" service" of" summons" were" made" through" the"
office" of" the" Insurance" Commissioner" but" since" the" international"
refers"to"its"general"meaning,"i.e.,"one"who"acts"on"behalf"of"a"principal."
The" allegations" in" the" complaint" have" thus" been" able" to" amply" convey"
that" not" only" is" TEAM" Pacific" the" business" conduit" of" the" petitioner" in"
the"Philippines"but"that,"also,"by"the"charge"of"fraud,"is"none"other"than"
the"petitioner"itself."
(
Doctrine:( The"rule"is"that,"a"foreign"corporation,"although"not"engaged"
reinsurers" question" the" jurisdiction" the" trial" court" the" case" has" not"
proceeded" to" trial" on" the" merits." The" reinsurer" is" questioning" also" the"
service"of"summons"through"extraterritorial"service"under"Sect"17"Rule"
14"of"the"Rules"of"Court"nor"through"the"Insurance"Commissioner"under"
Sec" 14." Yupangco" also" contends" that" since" the" reinsurers" question" the"
jurisdiction" of" the" court" they" are" deemed" to" have" submitted" to" the"
jurisdiction"of"the"court."
in" business" in" the" Philippines," may" still" look" up" to" our" courts" for" relief;"
reciprocally,"such"corporation"may"likewise"be""sued"in"Philippine"courts"
for" acts" done" against" a" person" or" persons" in" the" Philippines"" (Facilities"
Management"Corporation"v."De"la"Osa).%
"
Issue:"Whether"or"not"the"international"reinsurers"are"doing"business"in"
the"Philippines."
(
Held:( NO." International" reinsurers" are" not" doing" business" in" the"
Philippines" and" the" Philippine" court" has" not" acquired" jurisdiction" over"
them."The"reinsurance"treaties"between"the"petitioners"and"Worldwide"
Surety" and" Insurance" were" made" through" an" international" insurance"
BUT( NOW( SEE:( Avon% Insurance% PLC% v.% Court% of% Appeals,% 278%
SCRA%312%(1997).(
(
Avon%Insurance%PLC%v.%Court%of%Appeals%
(
broker"and"NOT"through"any"entity"or"means"remotely"connected"with"
the"Philippines."Reinsurance"company"is"not"doing"business"in"a"certain"
)
!
state" even" if" the" property" or" lives" which" are" insured" by" the" original"
insurer" company" are" located" in" that" state." Reinsurance" Contract" is"
generally" separate" and" distinct" arrangement" from" the" original" contract"
of"insurance."There"was"no"allegation"or"demonstration"of"the"existence"
of" petitioners" domestic" agent" but" avers" simply" that" they" are" doing"
business" not" only" abroad" but" in" the" Philippines." Petitioners" had" not"
performed"any"act"which"would"give"the"general"public"the"impression"
that"it"had"been"engaging"or"intends"to"engage"in"its"ordinary"and"usual"
business"undertaking"in"the"country."
(
Doctrine:( Reinsurance"company"is"not"doing"business"in"a"certain"state"
even" if" the" property" or" lives" which" are" insured" by" the" original" insurer"
company" are" located" in" that" state." Reinsurance" Contract" is" generally"
separate" and" distinct" arrangement" from" the" original" contract" of"
insurance.(
(
Atty."Hofilea"!"Signetics% Corp.% v.% Court% of% Appeals"and"Avon%

Insurance% PLC% v.% Court% of% Appeals" established" what" is" a"
sufficient" complaint" in" order" for" the" Court" to" acquire"
jurisdiction?" The" fact" of" doing" business" must" be" established" by"
appropriate" allegations" in" the" complaint," and" thereafter,"
extraterritorial" service" of" summons" may" be" done" pursuant" to"
the"provisions"of"Section"17,"Rule"14,"of"the"Rules"of"Court.""The"
propriety" of" such" service" however" may" be" contravened" by" the"
defense"that"the"foreign"corporation"is"not"doing"business"in"the"
Philippines.! It"is"a"defense"that"requires"the"contravention"of"the"
allegations"of"the"complaint,"as"well"as"full"ventilation,"in"effect,"
of"the"main"merits"of"the"case,"which"should"not"thus"be"within"
the"province"of"a"mere"motion"to"dismiss.1(
(
E.( Stipulation( on( Venue:" When" the" contract" sued" upon" has" a" venue"
clause"within"the"Philippines,"it"is"deemed"a"confirmation"by"the"foreign"
corporation," even" though" not" doing" business" in" the" Philippines," to" be"
sued"in"local"courts."Linger%&%Fisher%GMBH%v.%IAC,%125%SCRA%522%(1983)."
"
VI.(Laws(Applicable(to(Foreign(Corps.((Section(129)(
(
Section(129.(Law(applicable.(
Any(foreign(corporation(lawfully(doing(business(in(the(Philippines(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)(
(
The" provision" in" the" New" York" law" which" allowed" only"
stockholders"with"a"minimum"number"of"shareholdings"(3%)"to"
be"entitled"to"exercise"the"right"of"inspection"is"valid"in"the"case"
of" a" foreign" corporation" licensed" to" do" business" in" the"
Philippines" which" in" its" internal" relationship" was" bound" by" the"
New"York"law."Grey%v.%Insular%Lumber%Co.,%67%Phil.%139%(1938)%
"
VII.(Amendment(of(Articles(of(Incorporation((Section(130)(
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
)
!
(
Section( 130.( Amendments( to( articles( of( incorporation( or( by\laws( of(
foreign(corporations.(
Whenever( the( articles( of( incorporation( or( by\laws( of( a( foreign(
corporation( authorized( to( transact( business( in( the( Philippines( are(
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(
amended,( such( foreign( corporation( shall,( within( sixty( (60)( days( after(
the( amendment( becomes( effective,( file( with( the( Securities( and(
Exchange( Commission,( and( in( the( proper( cases( with( the( appropriate(
government( agency,( a( duly( authenticated( copy( of( the( articles( of(
incorporation( or( by\laws,( as( amended,( indicating( clearly( in( capital(
letters(or(by(underscoring(the(change(or(changes(made,(duly(certified(
by( the( authorized( official( or( officials( of( the( country( or( state( of(
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)(
incorporation.(The(filing(thereof(shall(not(of(itself(enlarge(or(alter(the(
purpose( or( purposes( for( which( such( corporation( is( authorized( to(
transact(business(in(the(Philippines.((n)(
branch,"the"SEC"has"authority"to"ensure"requirements"are"met."
However," the" law" does" not" provide" allowance" of" a" merger"
whereby" the" surviving" corporation" is" that" of" the" foreign"
corporation"without"a"branch"in"the"Philippines.(
(
VIII.(Merger(and(Consolidation((Section(132;(Art.(51,(Omnibus(Code)(
(
Section( 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.(
(
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(
Atty." Hofilea" !" where" two" corporations," one" of" which" is" a"
(
IX.( Revocation( of( License( (Sections( 134( and( 135;( Art.( 50,( Omnibus(
Investment(Code)((
(
Section(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(
(
Section(135.(Issuance(of(certificate(of(revocation.(
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(
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;(
(
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)(
5.( A( misrepresentation( of( any( material( matter( in( any( application,(

report,( affidavit( or( other( document( submitted( by( such( corporation(
pursuant(to(this(Title;(
(
6.(Failure(to(pay(any(and(all(taxes,(imposts,(assessments(or(penalties,(if(
any,(lawfully(due(to(the(Philippine(Government(or(any(of(its(agencies(
or(political(subdivisions;(
(
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)(
(
X.(Withdrawal(of(Foreign(Corporation((Section(136)(
Section(136.(Withdrawal(of(foreign(corporations.(
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(
subdivisions(have(been(paid;(and(
(
3.( The( petition( for( withdrawal( of( license( has( been( published( once( a(
week( for( three( (3)( consecutive( weeks( in( a( newspaper( of( general(
)
!
circulation(in(the(Philippines.(
(
Atty." Hofilea" !" foreign" companies" are" allowed" to" withdraw,"

but" they" must" settle" all" credits," taxes" and" other" obligations" to"
the"satisfaction"of"the"SEC.(
(
)
PENALTY(PROVISIONS(OF(THE(CODE(
(
I.(Penalty(Clause(for(Violations(of(the(Provisions(of(the(Code((Section(
144)(
(
Section(144.(Violations(of(the(Code.(
Violations(of(any(of(the(provisions(of(this(Code(or(its(amendments(not(
otherwise(specifically(penalized(therein(shall(be(punished(by(a(fine(of(
not( less( than( one( thousand( (P1,000.00)( pesos( but( not( more( than( ten(
thousand( (P10,000.00)( pesos( or( by( imprisonment( for( not( less( than(
thirty( (30)( days( but( not( more( than( five( (5)( years,( or( both,( in( the(
discretion(of(the(court.(If(the(violation(is(committed(by(a(corporation,(
the( same( may,( after( notice( and( hearing,( be( dissolved( in( appropriate(
proceedings( before( the( Securities( and( Exchange( Commission:(
Provided,( That( such( dissolution( shall( not( preclude( the( institution( of(
appropriate( action( against( the( director,( trustee( or( officer( of( the(
corporation( responsible( for( said( violation:( Provided,( further,( That(
nothing( in( this( section( shall( be( construed( to( repeal( the( other( causes(
for(dissolution(of(a(corporation(provided(in(this(Code.((190(1/2(a)(
(
Atty.% Hofilea% !% Theres% a% school% of% thought% that% says% that%

unless% the% Code% states% that% youre% subject% to% penal% provisions,%
then% Section% 144% applies.% If% there% is% a% provision% providing% for% a%
particular%penalty,%then%you%will%be%punished%in%accordance%with%
that.(
(
II.(CrossVreference((Section(27).(
(
Section(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.(
(
III.(Specific(application((Section(74).(
(
Section(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(
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(
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(
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.)(
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( 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.(
(
IV.(Strict(Principles(in(Criminal(Law;(the(issue(of(malice.(
(
V.( Historical( Background( of( Section( 144( (Section( 190( 1/7( of( the(
Corporation(Law)(
one% of% the% Corporation% Law% provisions% ground% for% involuntary%

dissolution%of%the%corporation%and%that%the%court%was%entitled%to%
exercise% discretion% in% such% matters.% Government) of) P.I.) v.) El)
Hogar)Filipino,)50)Phil.)399)(1927).)
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(byVlaws(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(
Section%190%was%not%intended%to%make%every%casual%violation%of%
Penalties% imposed% in% Section% 190(A)% for% the% violation% of% the%
prohibition% in% question% are% of% such% nature% that% they% can% be%
enforced%only%by%a%criminal%prosecution%or%by%an%action%of%quo%
warranto.%But%these%proceedings%can%be%maintained%only%by%the%
AttorneyNGeneral%in%representation%of%the%Government.%Harden)
v.)Benguet)Consolidated)Mining)Co.,)58)Phil.)141)(1933).)
(
VI.(Violation(of(Section(133(by(Foreign(Corporations(
)
!
Section% 133,% which% unlike% its% counterpart% Section% 69% of%

Corporation% Law% provided% specifically% for% penal% sanctions% for%
foreign% corporations% engaging% in% business% in% the% Philippines%
without% obtaining% the% requisite% license,% should% be% deemed% to%
have% a% penal% sanction% by% virtue% of% Section% 144% of% the%
Corporation% Code.% Home) Insurance) Co.) v.) Eastern) Shipping)
Lines,)123)SCRA)424)(1983).)
)
)
MISCELLANEOUS+
+
I.+SEC+Power+and+Supervision+(Sections+108+and+143;+PD+902FA)+
+
Section+108.+Board+of+trustees.+
Trustees+ of+ educational+ institutions+ organized+ as+ nonFstock+
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+ byF
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+ oneFfifth+ (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+byFlaws.+
+
For+institutions+organized+as+stock+corporations,+the+number+and+term+
of+directors+shall+be+governed+by+the+provisions+on+stock+corporations.+
(169a)+
+
Section+ 143.+ RuleFmaking+ power+ of+ the+ Securities+ and+ Exchange+
Commission.+
The+ Securities+ and+ Exchange+ Commission+ shall+ have+ the+ power+ and+
authority+to+implement+the+provisions+of+this+Code,+and+to+promulgate+
rules+and+regulations+reasonably+necessary+to+enable+it+to+perform+its+
duties+ hereunder,+ particularly+ in+ the+ prevention+ of+ fraud+ and+ abuses+
on+ the+ part+ of+ the+ controlling+ stockholders,+ members,+ directors,+
trustees+or+officers.+(n)+
+
II.+Special+Corporations+(Section+4)+
+
Section+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.+
+
III.+New+Requirements+on+Existing+Corporations+(Section+148).+
+
Section+148.+Applicability+to+existing+corporations.+
All+corporations+lawfully+existing+and+doing+business+in+the+Philippines+
on+the+date+of+the+effectivity+of+this+Code+and+heretofore+authorized,+
licensed+ or+ registered+ by+ the+ Securities+ and+ Exchange+ Commission,+
shall+be+deemed+to+have+been+authorized,+licensed+or+registered+under+
the+provisions+of+this+Code,+subject+to+the+terms+and+conditions+of+its+
license,+and+shall+be+governed+by+the+provisions+hereof:+Provided,+That+
if+ any+ such+ corporation+ is+ affected+ by+ the+ new+ requirements+ of+ this+
Code,+ said+ corporation+ shall,+ unless+ otherwise+ herein+ provided,+ be+
given+ a+ period+ of+ not+ more+ than+ two+ (2)+ years+ from+ the+ effectivity+ of+
this+Code+within+which+to+comply+with+the+same.+(n)+
+
)
)
IV.+ Applicability+ of+ Other+ Provision+ of+ old+ Corporation+ Law+ (Sections+
145+and+146).+
+
Section+145.+Amendment+or+repeal.+
No+ right+ or+ remedy+ in+ favor+ of+ or+ against+ any+ corporation,+ its+
stockholders,+members,+directors,+trustees,+or+officers,+nor+any+liability+
incurred+ by+ any+ such+ corporation,+ stockholders,+ members,+ directors,+
trustees,+ or+ officers,+ 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.+(n)+
+
Section+146.+Repealing+clause.+
Except+ as+ expressly+ provided+ by+ this+ Code,+ all+ laws+ or+ parts+ thereof+
inconsistent+with+any+provision+of+this+Code+shall+be+deemed+repealed.+
(n)+
+
)

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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

Why* Drawn:* When!attention!was!drawn!to!the!fact!that!there!

Although! we! have! a! Corporation! Code! that! provides! for!

The! first! corporate! statute,! the! 1906! Corporation! Law! became!

It! had! pieceQmeal! amendments! during! its! 74Qyear! history,! but!

A! little! more! detailed! in! certain! aspect.! This! is! very!

Partnerships( and( associations( for( private( interest( or( purpose( are(

Artificial) being) !) essentially) means) that) it) has) a)

strong) legal) personality) of) the) corporation) is) an)

The) corporation) has) the) capacity) for) continuous)

individuals) forming) the) corporation) upon) which) the)

Theory$ of$ Concession( ! ( Since)a)corporation)is)created)by)law,)

It) is) a) basic) postulate) that) before) a) corporation) may) acquire)

fiction) alone) that) creates) a) corporate) entity.) Any) State) grant)

Theory$ of$ Enterprise$ Entity( ! ( The) enterprise) theory) hinges)

But) once) granted,) and) the) entity) acquires) juridical)

assets,) liabilities) and) operations) of) the) corporation) are)

by) the) agreement) of) the) individuals) to) establish) the)

corporate) assets) and) properties.) Stockholders$ of$ F.$ Guanzon$

A) corporation) is) but) an) association) of) individuals,) allowed) to)

only) final) and) executory) judgment.) Manacop$ v.$ Equitable$

Corporations) are) composed) of) natural) persons) and) their)

A) corporation) is) an) entity) separate) and) distinct) from) its)

partnership) where) the) death) of) a) partner) dissolves) the)

As) distinguished) from) a) partnership,) it) has) a) strong) legal)

stockholders) approval) for) certain) specific) acts.) Great$ Asian$

bind) the) corporations,) unlike) in) a) partnership) setting,) where)

Obligations) incurred) by) the) corporation) acting) through) its)

However,) the) statutorily) granted) privilege) of) a) corporate) veil)

company) but) also) all) stockholders) to) reach) their) unpaid)

Note( on( disadvantages:( Anything)can)be)abused.)Anything)can)

A) corporation) established) in) accordance) with) the) Corporation)

common) grants) of) privileges) and) immunities;) and) its)

This) has) been) countered) by) the) development) of) jurisprudence)

Sole) proprietorships) are) less) saddled) with) the) many)

The) corporation) is) relatively) complicated) in) formation) and)

relatively) high) cost) of) formation) and) operation.) There) is) a)

Sole) proprietorships) work) well) only) for) carryingGon) simple) or)

Dividends) received) by) individuals) from) domestic) corporations)

InterGcorporate) dividends) between) domestic) corporations,)

There) is) reGimposition) of) the) 10%) improperly) accumulated)

A) sole) proprietorship) is) not) vested) with) juridical) personality) to)

The) corporation) is) required) to) have) a) primary) purpose)

General( Rule:( Parties) who) had) intended) to) participate) or)

Under) Philippine) law,) a) joint) venture) is) a) form) of) partnership)

Cooperatives) are) established) to) provide) a) strong) social) and)

A) sociedad( annima) was) considered) a) commercial) partnership)

The$ sociedades$ annimas$ were$ introduced) in) Philippine)

The$ old$ Corporation$ Law$ recognized$ the$ difference$ between$

A) cuentas& en& participacion) is) an) accidental) partnership)

a( special( charter,( and( it( follows( that( Congress( can( create(

GOCC.( If( it( is( transformed( into( a( private( corporation,(

P.D.( 1717( creating( New( Agrix,( Inc.( violated( the( constitutional(

A( corporation( is( but( an( association( of( individuals( under( an(

follow( that( a( corporation,( vested( with( special( privileges( and(

A( corporation( is( protected( by( the( constitutional( guarantee(

A( warrant( of( arrest( cannot( be( issued( against( a( corporation(

Freedom( of( Religion( !( YES.( Where( the( corporation( is(

Right( against( Involuntary( Servitude( !( MAYBE.( What( can(

confidentiality( of( the( communications( of( the( corporations(

Confidentiality/Privacy( of( Communication( !( YES.( Because( the(

4.* The* names* and* addresses* of* the* personswhoaretosupervisethe