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CORPORATION LAW and severally liable for all obligations of

the partnership.
 Corporation is one of the types of business
organizations. It is also the most important in Definition and Attributes
economic development.
 4 Attributes of a Corporation

1. Artificial being
INTRODUCTION
2. Created by operation of law
 Sole Proprietorship
3. Right of succession
- One man form of business entity, personally
answers all liabilities, but enjoys all the profits 4. Powers, attributes and properties expressly
with the exclusion of others authorized by law or incident to its
existence.
- Limited shareholders responsibility
 Doctrine of limited capacity
- Paid subscription in full, you are no longer
liable - Only such powers as are expressly granted
 Partnership to it by law and by its articles of
incorporation including others which are
- Based on mutual trust and confidence incidental to such conferred powers, those
reasonably necessary to accomplish its
 Joint venture purpose and those which may be incidental
- one time grouping of persons whether they be to its existence
natural or juridical
- Can do things as the law asks or allows it to
- does not entail continuity because after the do
undertaking is completed it is already the end
- If it does anything beyond, it shall be
- particular partnership and joint venture would considered as ULTRA VIRES
be similar, but there is already a decision of
the Supreme Court declaring them as different  General rule: Moral damages cannot be
- when they do not register, it does not exist granted to corporations

- Foreign corporations enters into an agreement  Exception: Filipinas Broadcasting Network


with a domestic corporation, it must be Inc. vs. Ago Med
registered. Generally they do not need to be
registered. - In cases of slander, libel and other forms of
defamation (should not qualify because the
 Corporations code does not qualify whether natural or
- They may enter into joint venture, but juridical) Art. 2219 of the civil code:
generally they cannot enter into a partnership,
but there are exceptions allowed by the SEC: Art. 2219. Moral damages may be
the 3 exceptions must go hand in hand recovered in the following and analogous
cases:
1. The articles of incorporation expressly
authorized the corporation to enter into (1) A criminal offense resulting in physical
contracts of partnership; injuries;
2. The agreement or articles of partnership
must provide that all the partners will (2) Quasi-delicts causing physical injuries;
manage the partnership; and
(3) Seduction, abduction, rape, or other
3. The articles of partnership must stipulate lascivious acts;
that all the partners are and shall be jointly
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(4) Adultery or concubinage; theoretical because of disinterested in
management, wide-scale ownership
(5) Illegal or arbitrary detention or arrest; and inaccessible place of meeting;
7. "Double taxation" may be imposed on
(6) Illegal search; corporate income;
8. Corporation are subject to many
(7) Libel, slander or any other form of legal controls and restrictions.
defamation;
 A corporation is a person, therefore
(8) Malicious prosecution;
protected by the due process clause and
equal protection clause of the Constitution
(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21,


26, 27, 28, 29, 30, 32, 34, and 35. CLASSIFICATION OF CORPORATIONS

The parents of the female seduced, abducted, Section 3 Stock and non-stock
raped, or abused, referred to in No. 3 of this
article, may also recover moral damages. - Importance of knowing, determining what
provisions of the code or the law may be
The spouse, descendants, ascendants, and applicable
brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order
Section 3. Classes of corporations. -
named.
Corporations formed or organized under
this Code may be stock or non-stock
 Advantages: corporations. Corporations which have
capital stock divided into shares and are
1. Capacity to act as a single unit authorized to distribute to the holders of
2. Limited shareholder's liability such shares dividends or allotments of
3. Continuity of existence the surplus profits on the basis of the
4. Feasibility of greater undertaking shares held are stock corporations. All
5. Transferability of shares other corporations are non-stock
corporations. (3a)
6. Centralized Management
7.Standardized method of organization,
 Non-stock- (title 10)
management, and finance.
Non-stock corporation - of those where no part of
- No. 2 may also be a disadvantage their income is distributable as dividends to its
members, trustees or officers subject to provisions
- No. 5 may also be a disadvantage
on dissolution.
Disadvantages:
- primarily exist for purposes other than for profit, it
1. Formal proceeding (such as board of does not follow that they cannot make profits as an
meetings) are required; incident to their operations.
2. Business transactions limited to the
- profits obtained cannot be distributed as dividends
State unless authorized by foreign State;
but are used merely for the furtherance of their
3. Credit is limited in view of shareholder's
purpose or purposes.
limited liability;
4. Unity of incompatible and conflicting  Stock (Section 51)
elements in view of transferability of shares;
5. Minority shareholders have practically no Two (2) requisites must be complied with,
say in the conduct of corporate affairs;
6. In large scale enterprises, stockholders' 1. a capital stock divided into shares,
voting rights may become merely fictitious and and

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2. authorized to distribute dividends or - Immediate benefit, aim or advantage of
allotments as surplus profits to its stockholders private individuals
on the basis of the shares held by each
of them. - Those formed for some private purpose,
benefit, aim or end
 Stockholders must generally cast their votes in
the meeting; section 4 governed primarily by - Distinction: public for governmental purpose
the law creating them
 Corporation Sole
Section 4. Corporations created by special - Exemption to the rule because it is
laws or charters. - Corporations created by
composed only of one person
special laws or charters shall be governed
primarily by the provisions of the special law or
- An incorporator may also be a juridical
charter creating them or applicable to them,
supplemented by the provisions of this Code, person
insofar as they are applicable. (n)
 Close corporation
 Section 3
- There is exclusivity of shares of stock
- The two (2) requisites must always concur
- Section 96-105
1. That they have a capital stock divided into
- Restrictions to transfer shares
shares; and,
- Only those indicated can own shares
2. That they are authorized to distribute
dividends or allotments as surplus profits to its - Article must provide that there will be no
stockholders on the basis of the shares held public offering
by each of them.
 Open corporation
 Section 4
- openly admit investors
- Created by a special law, they have their own
character - example: stock exchange

- They are not immune from suit unless  Domestic/ Foreign


provided by the law of their creation
 Test
- Primarily governed by the law creating them
- Incorporation test
- Their subsidiaries are entirely different or
independent from that of the other - If incorporated under the laws of the
Philippines it is a domestic corporation
 Close corporation
 ME Gray vs. CA
- There is no exemption it is absolute
- Parent or Holding/ subsidiaries and affiliates
 Public corporation
- Affiliates- no majority vote
- Political or governmental purposes
SMC 12%
- Those formed or organized for the government
or a portion of the State or any of its political
subdivision and which have for their purpose HERSHEY CBP CBPl 12%
the general good and welfare
12%
 Private Corporation
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Affiliate is subject to common control by the 12 % and cannot transact business. Promoters
owners cannot act for a projected corporation

 De jure - Metro Manila - paid up capital requirement


is 10 M
- cannot be attached by the state even in a quo
warranto proceeding - Non- stock- mere mention of the operating
capital
 De facto
- Mention the authorized capital
- exists by virtue of colorable compliance
- Restrictions
- Attached directly only by the state in a quo
warranto proceeding - Mandatory in close

 Corporation by estoppel - Not mandatory in ordinary

- So defectively formed, but still considered - Non-stock


corporation, but only in relation to those who
- If value is not more than 100,000
cannot deny their existence section 20 and 21
 A corporation cannot use any other name
unless it has been amended
FORMATION AND ORGANIZATION
 Section 19
 3 stages
- If confusingly similar it will not be allowed to
1. Creation be registered

2. Re-organization or quasi-reorganization - Verification slip from the records officer

3. Dissolution/winding-up Section 19. Commencement of


corporate existence. - A private corporation
 Purpose clause formed or organized under this Code
commences to have corporate existence
- Defining the scope of authority of the and juridical personality and is deemed
corporate enterprise or undertaking. Both incorporated from the date the Securities
confirmed and limited and Exchange Commission issues a
certificate of incorporation under its official
 4 limitations of purpose clause seal; and thereupon the incorporators,
stockholders/members and their successors
1. Lawful shall constitute a body politic and corporate
under the name stated in the articles of
2. Specific or stated concisely incorporation for the period of time
mentioned therein, unless said period is
3. More than one, the primary and secondary extended or the corporation is sooner
dissolved in accordance with law. (n)
must be specified

4. Lawfully combined - Words corporation or inc. either in full or


abbreviated form must be included
- Provision that states, cannot be issued less
than par, exception is treasury shares because Section 18. Corporate name. - No
it can be issued less than par corporate name may be allowed by the
Securities and Exchange Commission if the
- A corporation commences only upon issuance proposed name is identical or deceptively or
of the certificate, prior thereto it has no being confusingly similar to that of any existing
corporation or to any other name already
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protected by law or is patently deceptive, - section 51 meetings may only be within the
confusing or contrary to existing laws. When a boundaries of the city where the principal
change in the corporate name is approved, the office
Commission shall issue an amended
certificate of incorporation under the amended - non-stock may be held anywhere in the
name. (n)
Philippines, if provided in its by-laws
 Doctrine of secondary meaning - where summons may be served
- A word or phrase originally incapable of - registration of chattel mortgage must be
exclusive appropriation [usually generic] with registered in the register of deeds where the
reference to an article in the market, because principal office is located
of geographically or otherwise descriptive,
might nevertheless have been used so long  Clavecilla Radio System vs. Antillon
and so exclusively by one producer with
reference to his article that, in that trade and to - action not upon a written contract
that branch of the purchasing public, the word
- city where the defendant resides
or phrase has become to mean that the article
was his product.  Term of existence
 Section 18 - corporate term required
- Lyceum of the Philippines case, the additional - determining what point in time the juridical
geographical name does not make it personality will cease to exist
confusingly similar
- enter into contract only when it has juridical
- actual confusion is not necessary- Philips case personality
“it is enough that there is probable confusion”
- once it ceases to exist, it no longer has
 2 requisites must be proven personality
- that the complainant corporation acquired a - exist for another 3 years only for purposes
prior right over the use of such corporate of liquidation
name
- Dissolution - it is automatic
- identical, deceptively or confusingly, patently
deceptive  When should extension be made?

 Principal Office - General rule: Not earlier than 5 years

- statement of principal office is required - Exception: unless there are justifiable


reasons
- city and municipality not only province must be
specified  May it be extended after expiration?

- principal office NOT operations office - Alhambra cigar vs. SEC once it ceases to
exist it has no vested politic, exist only for a
- necessary because it will establish the period of 3 years only for liquidation and for
residence of corporations that purpose only
- venue of actions for or against the  How many incorporators should there be?
corporations
- 5-15
- venue of meetings
 May a corporation be an incorporator?

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- General rule: only natural persons  May a corporation be a corporator?

- Exception: cooperatives and corporation - YES. There is nothing to prevent a


primarily organized to hold equities in rural corporation from being a stockholder
banks
- Incorporator must subscribe to 1 share
 How about minors?
- There are those that are exclusively
- NO, because they must be of legal age reserved to Filipinos

- May a corporation organized by incorporators - An incorporator maybe a corporator as long


consisting solely of foreigners as he is a stockholder

- Yes, there is no nationality requirement only  section 6


residence, as long as majority are residents of
the Phil Section 6. Classification of shares.
- The shares of stock of stock corporations
 Define incorporators <sec.5> may be divided into classes or series of
shares, or both, any of which classes or
- Those person mentioned in the articles as series of shares may have such rights,
originally forming the corporation and who are privileges or restrictions as may be stated in
signatories of the articles of incorporation. the articles of incorporation: Provided, That
no share may be deprived of voting rights
- Must be signatories to be incorporators except those classified and issued as
"preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided,
Section 5. Corporators and further, That there shall always be a class
incorporators, stockholders and members. - or series of shares which have complete
Corporators are those who compose a voting rights. Any or all of the shares or
corporation, whether as stockholders or as series of shares may have a par value or
members. Incorporators are those have no par value as may be provided for in
stockholders or members mentioned in the the articles of incorporation: Provided,
articles of incorporation as originally forming however, That banks, trust companies,
and composing the corporation and who are insurance companies, public utilities, and
signatories thereof. building and loan associations shall not be
permitted to issue no-par value shares of
Corporators in a stock corporation are stock.
called stockholders or shareholders.
Corporators in a non-stock corporation are Preferred shares of stock issued by
called members. (4a) any corporation may be given preference in
the distribution of the assets of the
 Define corporators <sec.5> corporation in case of liquidation and in the
distribution of dividends, or such other
- All persons who compose the corporation at preferences as may be stated in the articles
any given time and need not be among those of incorporation which are not violative of
who execute the articles of incorporation at the the provisions of this Code: Provided, That
start of its formation and organization. preferred shares of stock may be issued
only with a stated par value. The board of
directors, where authorized in the articles of
- Originally or subsequently
incorporation, may fix the terms and
conditions of preferred shares of stock or
- Section 5 provides:
any series thereof: Provided, That such
terms and conditions shall be effective upon
Corporators in a stock corporation are
the filing of a certificate thereof with the
called stockholders or shareholders. Securities and Exchange Commission.
Corporators in a non-stock corporation are
called members. (4a) Shares of capital stock issued
without par value shall be deemed fully paid
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and non-assessable and the holder of such - General rule: Not less than 5 not more than
shares shall not be liable to the corporation or 15
to its creditors in respect thereto: Provided;
That shares without par value may not be - Exceptions:
issued for a consideration less than the value
of five (P5.00) pesos per share: Provided, 1. Educational corporations registered as non
further, That the entire consideration received stock corporation whose number of
by the corporation for its no-par value shares
trustees, though not less than five and not
shall be treated as capital and shall not be
available for distribution as dividends. more than [15] should be divisible by five
[5], meaning they must have either five, ten,
A corporation may, furthermore, or fifteen trustees and no other;
classify its shares for the purpose of insuring
compliance with constitutional or legal 2. In close corporations where all the
requirements. stockholders are considered as members of
the board of directors thereby effectively
Except as otherwise provided in the allowing twenty members in the board.
articles of incorporation and stated in the
certificate of stock, each share shall be equal 3. The by-laws of a corporation may provide
in all respects to every other share. for additional qualifications and
disqualifications of its members of the board
Where the articles of incorporation of directors or trustees. However it may not
provide for non-voting shares in the cases do away with the minimum disqualifications
allowed by this Code, the holders of such
lay down by the Code.
shares shall nevertheless be entitled to vote
on the following matters:
 Qualifications of the governing board
1. Amendment of the articles of incorporation; - Requires mere residency <sec. 23>

2. Adoption and amendment of by-laws;


Section 23. The board of directors
or trustees. - Unless otherwise provided in
3. Sale, lease, exchange, mortgage, pledge or this Code, the corporate powers of all
other disposition of all or substantially all of the corporations formed under this Code shall
corporate property; be exercised, all business conducted and all
property of such corporations controlled and
4. Incurring, creating or increasing bonded held by the board of directors or trustees to
indebtedness; be elected from among the holders of
stocks, or where there is no stock, from
5. Increase or decrease of capital stock; among the members of the corporation,
who shall hold office for one (1) year until
6. Merger or consolidation of the corporation their successors are elected and qualified.
with another corporation or other corporations; (28a)

7. Investment of corporate funds in another Every director must own at least


corporation or business in accordance with one (1) share of the capital stock of the
this Code; and corporation of which he is a director, which
share shall stand in his name on the books
of the corporation. Any director who ceases
8. Dissolution of the corporation.
to be the owner of at least one (1) share of
the capital stock of the corporation of which
Except as provided in the immediately he is a director shall thereby cease to be a
preceding paragraph, the vote necessary to director. Trustees of non-stock corporations
approve a particular corporate act as provided must be members thereof. A majority of the
in this Code shall be deemed to refer only to directors or trustees of all corporations
stocks with voting rights. (5a) organized under this Code must be
residents of the Philippines.
 How many directors should there be?

7
 May a domestic corporation have a governing C 250K
board consisting solely of foreigners?
D
- YES, section 23 majority of them must be
residents of the Philippines, no nationality E
requirement
PAID UP =62,500
 Anti-dummy act <sec.2-A>
Corporation cannot exceed more than 1 M it is the
- If the business undertaking or activity is only maximum amount it cannot issue more unless
partially nationalized, aliens can be elected as amended
such directors, [unless the law provides
Maximum shares it can issue is 1M shares unless
otherwise] but their number shall only be in
amended
proportion to their equity or participation in the
capital stock of the corporation.  How much shares should be subscribed?
 Disqualifications <sec.27> - Must be at least 25% of the authorized
capital stock
- The disqualifications provided for is absolute
and may not be done away with. Corporate by-  Paid- up must be at least 25%-minimum
laws may, however, provide for additional
qualifications and disqualifications.  Section 13

Section 27. Disqualification of - Total subscription compliance with minimum


directors, trustees or officers. - No person 25% total
convicted by final judgment of an offense
punishable by imprisonment for a period - Any combination would comply with the
exceeding six (6) years, or a violation of this minimum required by section 30
Code committed within five (5) years prior to
the date of his election or appointment, shall Section 30. Compensation of
qualify as a director, trustee or officer of any directors. - In the absence of any provision
corporation. (n) in the by-laws fixing their compensation, the
directors shall not receive any
 Section 27 and 23 minimum disqualifications compensation, as such directors, except for
and qualifications reasonable per diems: Provided, however,
That any such compensation other than per
 Lee vs. CA diems may be granted to directors by the
vote of the stockholders representing at
- By laws may provide for additional least a majority of the outstanding capital
stock at a regular or special stockholders'
 Gov’t vs. El hogar Filipino, Gokongwei vs. meeting. In no case shall the total yearly
SMC compensation of directors, as such
directors, exceed ten (10%) percent of the
Capital structure net income before income tax of the
corporation during the preceding year. (n)
Foundation- minimum paid-up capital 3M
 Minimum for a domestic corporation?
Authorized capital 1 M No. of shares 1M shares par
value 1.00 - In no case shall the paid- up capital be less
than 5k
Amount of shares subscribed
 Is there a minimum authorized capital
50 K A imposed by the code?

50 K B - If there is minimum paid-up logically there


should also be a minimum capital =5000
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 Minimum paid-up capital for a financing Section 137. Outstanding capital
company metro manila 10 M if located in MM stock defined. - The term "outstanding
capital stock", as used in this Code, means
 Shares of stock the total shares of stock issued under
binding subscription agreements to
 Purpose of classification subscribers or stockholders, whether or not
fully or partially paid, except treasury
- To specify and define the rights and privileges shares. (n)
of the stockholders;
- Voting and dividend rights, it refers to the
- For regulation and control of the issuance of outstanding capital stocks
sale of corporate securities for the protection
of purchasers and stockholders. - Only outstanding stocks are allowed to vote
and receive dividends
- As a management control device.
- Actually the same
- To comply with statutory requirements
particularly those which provide for certain  Treasury shares
limitations on foreign ownership and shares
- are also subscribed shares
like overseas employment agencies requiring
to own at least 75% of the shares of stock - while they remain in the treasury, no voting
thereof. and dividend rights
- To better insure return on investment which - may be reissued by the corporation
can be affected through the issuance of
redeemable shares or preferred shares, i.e., - once reissued they become outstanding
granting the holders thereof, preference as to stocks again
dividends and/or distribution of assets in case
of liquidation; and,  Common shares

- For flexibility in price, particularly, no par - carry the right to vote


shares may be issued or sold from time to time
 Preferred shares
at different price depending on the net worth of
the company since they do not purport to - grants the holder preference
represent an actual of fixed value.
- preference as to dividends
 Section 6
- preference as to distribution of the
- Each shall be equal in all respects to every remaining assets upon dissolution or
other share
- both
 Preferred shares
- YOU MUST STATE THE PREFERENCE
- Specific preference BECAUSE IF NOT THEY ARE PRESUMED
TO BE EQUAL
- Dividends or during liquidation
- It may include such other preferences not
 No par
inconsistent with the Code. This is so
- Can sell it with the network of the corporation because Section 6 of the said law allows a
stock corporation to issue preferred shares
 Distinction between the subscribed and subject only to the limitations imposed
outstanding stocks? therein which are:

- Section 137

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a. They can be issued only with sated par value; when the corporation is prohibited under
and, any loan agreement with any financial
institution or creditor, whether local or
b. The preferences must be stated in the articles foreign, from declaring dividends without
of incorporation and in the certificate of stock, its/his consent, and such consent has not
yet been secured; or (3) when it can be
otherwise, each share shall be, in all respect,
clearly shown that such retention is
equal to every other share. necessary under special circumstances
obtaining in the corporation, such as when
 Participating there is need for special reserve for
probable contingencies. (n)
- Must be stated because the presumption is
that it is participating - It depends because there are three types of
non-cumulative preferred shares
 Cumulative
- Discretionary dividend type
- Irrespective of whether or not they where
earned - Mandatory if earned
 Preferred - Earned cumulative or dividend credit type
- May be denied  Compare cumulative share from non-
cumulative, earned cumulative or dividend
- Unless denied they are still entitled
credit type
 What if hindi i-declare kahit na may dividends
- Cumulative share –whether or not earned
rights for the previous years? May they be
denied dividend rights because they are non
- Non-cumulative earned cumulative or
holders of non-cumulative? NOTE: YOU dividend credit type- only if earned
CANNOT COMPEL THE CORPORATION TO
DECLARE DIVIDENDS UNLESS IT  Par
EXCEEDS 100 % PAID UP CAPITAL SEC. 43
- stated par value; shall not be issued less
Section 43. Power to declare than par
dividends. - The board of directors of a stock
corporation may declare dividends out of the  No par
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all - without stated par value
stockholders on the basis of outstanding stock
held by them: Provided, That any cash - once fully paid no longer liable
dividends due on delinquent stock shall first be
applied to the unpaid balance on the  Corporations cannot use its capitals in
subscription plus costs and expenses, while declaring dividends; not all can issue no par
stock dividends shall be withheld from the value section 6
delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,  Voting
That no stock dividend shall be issued without
the approval of stockholders representing not - entitled to vote at any motion brought up in
less than two-thirds (2/3) of the outstanding
writing
capital stock at a regular or special meeting
duly called for the purpose. (16a)
 Non-voting

Stock corporations are prohibited from - not entitled to vote


retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital  What types of shares may be denied of the
stock, except: (1) when justified by definite
right to vote?
corporate expansion projects or programs
approved by the board of directors; or (2)
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- Preferred and redeemable shares - They are treasury while in the treasury
account of the corporation
 Is it correct to state that common shares can
never be denied the right to vote?  May they be reissued by the corporation?

- Only preferred and redeemable shares are - YES


denied unless provided in this code
 If they are reissued will they be denied the
- PWEDENG MA-DENY YUNG COMMON right to vote?
SHARES, KASI YUNG FOUNDER’S SHARES
MERON SILANG EXCLUSIVE RIGHTS NA - Once reissued they shall become
SILA LANG ANG MERON, SO PWEDE outstanding stocks again and purchasers
SILANG BUMOTO WITH REGARDS TO shall be entitled to all the rights and
SOMETHING NA HINDI NA SAKOP NG privileges as the other holders have
COMMON SHARE RIGHTS
 Section 57 treasury shares have no voting
- Example: founders shares- may be given and dividend rights. Why not?
certain rights and privileges
Section 57. Voting right for treasury
- Even common shares may be denied the right shares. - Treasury shares shall have no
to vote of founders’ shares issued <sec.7> voting right as long as such shares remain
in the Treasury. (n)
Section 7. Founders' shares. -
Founders' shares classified as such in the - Answer: commissioner vs. manning page
articles of incorporation may be given certain 62 first par.
rights and privileges not enjoyed by the
owners of other stocks, provided that where “Although authorities may differ on
the exclusive right to vote and be voted for in the exact legal and accounting status of so-
the election of directors is granted, it must be called treasury shares, they are more or
for a limited period not to exceed five (5) years less in agreement that treasury shares are
subject to the approval of the Securities and stocks issued and fully paid for and
Exchange Commission. The five-year period
reacquired by the corporation either by
shall commence from the date of the aforesaid
approval by the Securities and Exchange purchase, donation, forfeiture or other
Commission. (n) means. Treasury shares are therefore
issued shares but being in the treasury they
 Do you include non-voting shares in passing a do not have the status of outstanding
valid corporate act? shares. Consequently, although a treasury
share, not having been retired by the
- Even non-voting shares are entitled to vote corporation re-acquiring it, may be re-issued
under section 6 or sold again, such shares, as long as it is
held by the corporation as a treasury share,
 Redeemable shares
participates neither in dividends, because
- Discretionary/optional dividends cannot be declared by the
corporation to itself, nor in meetings of the
- Obligatory or mandatory corporation as voting stock, for otherwise
equal distribution of voting powers among
 Generally a corporation can reacquire its own stockholders will be effectively lost and the
shares if it has unrestricted retained earnings directors will be able to perpetrate their
control of the corporation, though it still
 Exception: redeemable shares may be represents a paid for interest in the property
reacquired irrespective of retained earnings of the corporation. The foregoing essential
features of a treasury stocks are lacking in
 Treasury shares
the questioned shares.

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In this case, and under the terms of  Treasurer affidavit part of the articles of
the trust agreement, the shares of stock of incorporation
Reese participated in dividends which the
trustee received and the said shares were  Section 23-27 minimum qualifications, but
voted upon by the trustee in all corporation there may be additional
meetings. They were not, therefore, treasury
 Grounds for disapproval
shares.”
- Only substantial and not strict is required
 When the law speaks of outstanding rights it
does not include treasury shares  May the SEC refuse or reject registration?
 Treasury shares may be reissued - <Section 17>
- They are actually assets of the corporation
Section 17. Grounds when articles
- Once re-issued they become outstanding of incorporation or amendment may be
rejected or disapproved. - The Securities
stocks again
and Exchange Commission may reject the
articles of incorporation or disapprove any
- The corporation may cancel them; in effect
amendment thereto if the same is not in
there will be a reduction in the outstanding compliance with the requirements of this
capital stocks Code: Provided, That the Commission shall
give the incorporators a reasonable time
- The code does not require ordinary within which to correct or modify the
corporations to provide for restrictions, but it objectionable portions of the articles or
does not likewise prohibit restrictions amendment. The following are grounds for
such rejection or disapproval:
- Example: right of first refusal
1. That the articles of incorporation or any
- The restriction must be contained in the amendment thereto is not substantially in
articles of incorporation accordance with the form prescribed herein;

- If provided in by-laws but not in the articles of 2. That the purpose or purposes of the
incorporation then it will not be binding corporation are patently unconstitutional,
illegal, immoral, or contrary to government
- Restrictions and preferences are mandatorily rules and regulations;
required in close corporations
3. That the Treasurer's Affidavit concerning
- If it does not provide restrictions it is not a the amount of capital stock subscribed
close corporation and/or paid is false;

- Specified persons- close corporations 4. That the percentage of ownership of the


capital stock to be owned by citizens of the
- If not one of those specified you are not Philippines has not been complied with as
included because there is exclusivity in close required by existing laws or the
Constitution.
corporations

- Should also be in the by-laws not only in the No articles of incorporation or


articles of incorporation amendment to articles of incorporation of
banks, banking and quasi-banking
 No transfer clause institutions, building and loan associations,
trust companies and other financial
intermediaries, insurance companies, public
 Execution clause
utilities, educational institutions, and other
corporations governed by special laws shall
 Acknowledgment
be accepted or approved by the
Commission unless accompanied by a

12
favorable recommendation of the appropriate temporalities, estate and properties of the
government agency to the effect that such religious denomination, sect or church
articles or amendment is in accordance with theretofore administered or managed by
law. (n) him as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder
- But the grounds in section 17 are not exclusive shall be held in trust by him as a corporation
sole, for the use, purpose, behalf and sole
 When will the corporation commence to exist? benefit of his religious denomination, sect or
church, including hospitals, schools,
- Section 19 colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
Section 19. Commencement of
corporate existence. - A private corporation - CORPORATION SOLE- upon filing of the
formed or organized under this Code verified articles of incorporation, once filed it
commences to have corporate existence and is vested with a judicial capacity
juridical personality and is deemed
incorporated from the date the Securities and  General rule section 19
Exchange Commission issues a certificate of
incorporation under its official seal; and - Vested with judicial capacity upon issuance
thereupon the incorporators, of the certificate by the SEC
stockholders/members and their successors
shall constitute a body politic and corporate o However it is not accurate
under the name stated in the articles of according to atty. Ladia because
incorporation for the period of time mentioned there are those that can issue for
therein, unless said period is extended or the
example cooperatives- BUREAU
corporation is sooner dissolved in accordance
with law. (n) OF COOPERATIVES which
register, home insurance guaranty
 A corporation de jure can come into existence corporation- HOME OWNERS
only upon the issuance of the certificate of
 Cagayan Fishing vs. Sandika
registration by the SEC? TRUE OR FALSE?
- Corporations are created by law
- TRUE
- Commence to exist upon issuance by the
- EXCEPTION: CORPORATION SOLE <sec.
CONCERNED government corporation or
112>
agency
Section 112. Submission of the - Prior there to it has no being
articles of incorporation. - The articles of
incorporation must be verified, before filing, by - The transfer of the property was not valid, it
affidavit or affirmation of the chief archbishop,
likewise did not have the right to transfer
bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied
 De jure
by a copy of the commission, certificate of
election or letter of appointment of such chief
- Strict or substantial compliance
archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by
any notary public.  De facto

- 4 requisites must go hand in hand take out


From and after the filing with the
anyone of them there can be no de facto
Securities and Exchange Commission of the
said articles of incorporation, verified by corporation
affidavit or affirmation, and accompanied by
the documents mentioned in the preceding 1. There is a valid statute under which the
paragraph, such chief archbishop, bishop, corporation could have been created as a
priest, minister, rabbi or presiding elder shall de jure corporation.
become a corporation sole and all

13
2. An attempt, in good faith, to form a corporation - The certificate was not yet issued by the
according to the requirements of law, which SEC, the members knew and therefore they
goes far enough to amount to a “colorable were not acting in good faith, therefore
compliance” with the law; anybody can question its existence

3. A user of corporate powers, the transaction of  Corporation by estoppel


business in some way as if it were a
corporation; and, - So defectively formed so that they are not to
be considered a de jure or de facto
4. Good faith in claiming to be and doing
business as a corporation. - General partners- liable even beyond his
promise even his personal properties are
 Are the rights and obligations between officers prone to attachment
and directors of a de jure and de facto the
same?  Lozano vs. Delos Santos

- YES. Governed by the same law, rules and - Founded on principle of equity
regulations
- Exercise corporate powers
 Only important in determining, is for the rd
- Enters with business with 3 parties
purpose of applying the rules with regards to
the direct and collateral attack -
rd
When there is no 3 persons involved and
the problem arises between there members,
 The existence of a de jure cannot be
therefore they themselves know that there
questioned even by the State, either directly or
is no corporation by estoppel
indirectly
 Albert vs. University
 Existence of a de facto can be questioned only
by the State directly in a quo warranto - 1965 case, no section 21 yet
proceeding only
- Applied where the rules governing agency
 Municipality of Malabang vs. Benito
- A person purporting in behalf of a non
- What is the missing link so as to consider it a existing corporation
de facto? A law, because the executive order
is unconditional - Section 21, you arrive at the same decision

- An unconditional act affords no rights, creates  Chiang Kai Siek vs. CA


no office
- SC based its decision from the provision of
- Legal contemplation it was never passed at all the education act

- It can therefore be questioned by any person - It cannot immune itself by virtue of its non
compliance with the law
 If the certificate of registration has not been
issued, may a corporation de facto exist?  Assuming there was no law?

- NO! - YES, it may still be sued as a school for the


past 32 years the school represented itself
- Number 4 requirement, good faith in claiming as possessed of juridical personality
to be and doing business as a corporation
rd
 General rule: a 3 party transacting with a
 Hall vs. Piccio non existent corporation shall be estopped
to deny
- Missing link is good faith

14
 Asia banking vs. standard products contemplation, as inoperative as though it
had never been passes
- General rule: absence of fraud a person who
has dealt with a non incorporated corporation  Hall vs. Piccio
shall be stopped to deny from actions in which
it had benefited - No good faith

- Exemptions: when there is fraud the general  Corporation by estoppel


rule shall not apply
- Admission, conduct or agreement
 Salvatierra vs. Garlitos
- Will not apply among members themselves
rd
- As a general rule a person who has contracted there must be a 3 party
it a corporation lacking personality
- Cannot escape when benefited
- Doctrine is not applicable where fraud takes
- General rule: you deal with a corporation,
part in the transaction
as to estop it
 Another exemption
- Exceptions: 1. fraudulently misrepresents
 International express travel and tours vs. CA the third person may file an action directly to
rd
those members, 2. 3 party will not be
- No fraud in this case estopped if he is not trying to escape liability

- How come Kahn was made liable?  2 possible remedies

- Doctrine of incorporation - Chiang kai siek case

- Applies only if that person is trying to escape - Albert case


from a contract where he is benefited
 What would be the effect if the corporation
- In this case petitioner is not trying to escape failed to commence transaction?
liability, but rather the one claiming from the
contract - Automatic

 Would this apply to foreign corporation?  Operated but becomes subsequently


inoperative for 5 years only a ground for
- YES, it may apply suspension, proper notice and hearing

- Georg Grotjahn vs. Isnami  Commencement

 A foreign corporation cannot gain access to - Example realty company


our courts unless they attain a license to
engage in business in the Philippines but CORPORATE CHARTER AND ITS
applying corporation by estoppels, the court AMENDMENTS
allowed
 What do you understand by the word
 Municipality of Malabang case charter? Is it the same as articles of
incorporation?
- No law, hence may be questioned by any
person - Corporate charter is broader

- An unconstitutional act is not a law, t confers  Franchise


no rights, it imposes no duties, it affords no
- Primary power granted by the state to be
protections, it crates o office, it is in legal
and act as a corporation

15
- Secondary franchise is the right or privilege - Liabilities incurred by the corporation cannot
that the corporation may exercise be enforced against stockholders, etc., even
if stockholders, etc. happens to own a
 You cannot issue investment contracts without substantial interest in the corporation, mere
a secondary franchise, kailangan primary ownership does not disregard the corporate
muna hindi pwede mauna secondary kasi sa entity theory
section 19 it does not exist until issued with a
certificate of registration or incorporation  Corporate entity for legal or legitimate
purposes only
 Corporate entity
 Two or more corporations, one of them will
- Corporation exist separately and be treated as a mere alter-ego
independently from the stockholders
 You cannot pierce the veil of corporate
- Stockholders cannot bring an action, to bring fiction when there are no facts attendant in
back the properties of a corporation the case

- Corporation has no interest in the individual  Corporate Entity Theory


properties of its members
- The corporation is possessed with a
personality separate and distinct from the
individual stockholders or members and is
 Sulo ng Bayan vs. Araneta
not affected by the personal rights,
- Corporation cannot bring an action for the obligations or transactions of the latter
recovery of the properties of its members
 Instrumentality rule
 Caram vs. CA
- Where one corporation is so organized and
- Stockholders cannot be held liable for the controlled and its affairs are conducted so
legitimate obligations of the corporation, they that it is, in fact, a mere instrumentality or
exist separately and independently from one adjunct of the other, the fiction of the
another corporate entity of the “instrumentality” may
be disregarded
 Cruz vs. Dalisay
- Courts are concerned with reality and not
- Final judgment against a corporation cannot form
be enforced against stockholders
- Mere ownership of all or substantially all of
 Rustan Pulp vs. CA the shares of stock of a corporation is not,
in itself, insufficient ground for disregarding
- Corporation exist separately and the separate corporate personality. And for
independently the separate personality of the corporation
to be disregarded, the wrong doing must be
- Corporation are juridical entities, they exist
clearly and convincingly established
only in legal contemplation, can act only
through its authorized representatives - Fraud must be proven by clear and
convincingly evidence amounting to more
 Soriano vs. CA
than preponderance. It cannot be justified
- They are not personally liable by speculation and can never be presumed.
And only if it sought to hold the stockholders
- They where signed for and in behalf of the liable directly for corporate debt
corporation
 Palacio vs. Fely
 Palay inc. vs. Clave
16
- Piercing the veil of corporate fiction adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may
- Fely trans and the other corporation is one and be disregarded.”
the same
- Has no separate mind of its own. What is
 Marvel bldg. vs. David the degree of control?

- There must be facts before the court will be 1. Control, not mere majority or complete
justified in piercing the veil of corporate fiction stock control, but complete domination, not
only of finances but of policy and business
- Corporation was a mere extension of the
practice in respect to the transaction
personality of the person
attacked so that the corporate entity as to
 Yutivo and sons vs. Court of Tax Appeals this transaction had at the time no separate
mind, will or existence of its own.
- What where the facts or circumstances arrived
by the court here? 2. Such control must have been used by the
defendant to commit fraud or wrong, to
- Subscribed capital where all advanced by perpetuate the violation of a statutory or
Yutivo, the board where the same as Yutivo other positive legal duty or dishonest and
unjust act in contravention of plaintiff’s legal
 Commissioner of Internal Revenue vs. Norton rights; and,
and Harrison
3. The aforesaid control and breach of duty
- Court applied the general rule must proximately cause the injury or unjust
loss complained of.
- Mere substantial ownership does not
mean that it has a same corporate entity - The absence of one of the elements
prevents “piercing the corporate veil.” In
 La Campana Coffee Factory, Inc. vs. KKM
applying the “instrumentality” or “alter ego”
- Two corporations managed by the same doctrine, the courts are concerned with
family, workers were made interchangeably reality and not form, with how the
corporation operated and the individual
 Emilio Cano vs. CIR defendant’s relationship to that operation.

- Sued in there official capacity  There must facts and circumstances before
warrant piercing the veil of corporate fiction
- Reverse of Soriano vs. CA (signed in their
official capacity)  The control necessary does not mean stock
ownership
 Tesco vs. WCC
 MCConnel vs. CA
- The two corporations where located in the
same office - were located in the same floor

 Claparols vs. CIR - “while the mere ownership of all or nearly all
of the capital stock of a corporation does
- Same as NAFLU and A.C. Ransom not necessary mean that it is a mere
business conduit of the stockholder, that
 Concept builders vs. NLRC conclusion is amply justified where it is
shown, as in the case before us, that the
- Instrumentality rule. What is the instrumentality
operations of the corporation were so
rule? “where one corporation is so organized
merged with the stockholders as to be
and controlled and its affairs are conducted so
practically indistinguishable from them. To
that it is, in fact, a mere instrumentality or
hold the latter liable for the corporation’s
17
obligations is not to ignore the corporation’s  PNB vs. Ritratto Group
separate entity, but merely to apple the
established principle that such entity cannot be - Control test
invoked or used for purposes that could not
- Not mere majority but rather complete
have been intended by the law that created
that separate personality.” - Twin ace was only a subsequent interested
party
 Tan boon bee vs. Jarencio
- Assets and machineries
- Why would a drug company need a printing
machine  Amendment of the articles of incorporation
- The property must be in pursuance of a - Express power granted to a corporation
company business
 Section 16
 Cease vs. CA
- Appraisal right
- Alter-ego or the extension of the person of
forest ware does the court pierced the veil of - Section 81 to object on certain acts and
corporate fiction transactions

- As to not deprive the holders of their Section 81. Instances of appraisal


successional rights right. - Any stockholder of a corporation
shall have the right to dissent and demand
- Mere ownership of all or substantially all is not payment of the fair value of his shares in
a justification of piercing the veil of corporate the following instances:
fiction
1. In case any amendment to the articles of
 Fraud must be proven by clear and convincing incorporation has the effect of changing or
evidence cannot presume or speculate, there restricting the rights of any stockholder or
must be facts and circumstances class of shares, or of authorizing
preferences in any respect superior to those
 Fraud must be clear and convincing evidence of outstanding shares of any class, or of
more than preponderance extending or shortening the term of
corporate existence;
 Remo Jr. vs. IAC
2. In case of sale, lease, exchange,
- The resolution was not entered to defraud transfer, mortgage, pledge or other
anyone disposition of all or substantially all of the
corporate property and assets as provided
 Del Rosario vs. National Labor Commission in the Code; and

- The wrongdoing must be clearly established 3. In case of merger or consolidation. (n)

- There must be facts to support - Right granted only in specified instances

- Payment of claims cannot thus be presumed Are non-voting shares included in amending the
articles of incorporation
 Indophil Textile Mill vs. CALICA
1 100/s XYZ-----
- How do you distinguish this ruling to La ABC
Campana, having the same issues:
2 100/s
- La campana, one payroll, employees were
made interchangeable. Acrylic had its own To
standards
18
10 100/s may exercise his appraisal right under the
conditions provided in this code. (n)
=1M/S what would
be the 2/3? Section 38. Power to increase or
decrease capital stock; incur, create or
Section 6 last paragraph increase bonded indebtedness. - No
corporation shall increase or decrease its
Voting shares are excluded except the foregoing capital stock or incur, create or increase any
instances bonded indebtedness unless approved by a
majority vote of the board of directors and,
1 1 at a stockholder's meeting duly called for
the purpose, two-thirds (2/3) of the
2 2 outstanding capital stock shall favor the
increase or diminution of the capital stock,
3 3 or the incurring, creating or increasing of
any bonded indebtedness. Written notice of
the proposed increase or diminution of the
4 4 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
5 5
diminution of the capital stock or the
incurring or increasing of any bonded
6 6 indebtedness is to be considered, must be
addressed to each stockholder at his place
1 & 2=absent of residence as shown on the books of the
1&2=absent but gave their written assent corporation and deposited to the addressee
in the post office with postage prepaid, or
3 & 4= objected served personally.
3&4=objected
A certificate in duplicate must be
5 & 6= approved the amendment signed by a majority of the directors of the
5&6=approved corporation and countersigned by the
chairman and the secretary of the
Would there be a valid amendment stockholders' meeting, setting forth:

 Special amendments 37 & 38 shortening that (1) That the requirements of this section
would result to dissolution require prior have been complied with;
approval by the SEC
(2) The amount of the increase or
Section 37. Power to extend or diminution of the capital stock;
shorten corporate term. - A private corporation
may extend or shorten its term as stated in the (3) If an increase of the capital stock, the
articles of incorporation when approved by a amount of capital stock or number of shares
majority vote of the board of directors or of no-par stock thereof actually subscribed,
trustees and ratified at a meeting by the the names, nationalities and residences of
stockholders representing at least two-thirds the persons subscribing, the amount of
(2/3) of the outstanding capital stock or by at capital stock or number of no-par stock
least two-thirds (2/3) of the members in case subscribed by each, and the amount paid
of non-stock corporations. Written notice of the by each on his subscription in cash or
proposed action and of the time and place of property, or the amount of capital stock or
the meeting shall be addressed to each number of shares of no-par stock allotted to
stockholder or member at his place of each stock-holder if such increase is for the
residence as shown on the books of the purpose of making effective stock dividend
corporation and deposited to the addressee in therefor authorized;
the post office with postage prepaid, or served
personally: Provided, That in case of extension (4) Any bonded indebtedness to be
of corporate term, any dissenting stockholder incurred, created or increased;
19
(5) The actual indebtedness of the corporation authority to determine the sufficiency of the
on the day of the meeting; terms thereof. (17a)

(6) The amount of stock represented at the  The vote must be cast at the meeting called
meeting; and for that purpose

(7) The vote authorizing the increase or  Written assent would not suffice
diminution of the capital stock, or the incurring,
creating or increasing of any bonded  When do amendments become valid and
indebtedness. effective?

Any increase or decrease in the - Only upon the approval of the SEC TRUE
capital stock or the incurring, creating or OR FALSE?
increasing of any bonded indebtedness shall
require prior approval of the Securities and - FALSE because it can be valid upon the
Exchange Commission. date of filing if not acted upon within 6
months without fault attributable to the
One of the duplicate certificates shall corporation
be kept on file in the office of the corporation
and the other shall be filed with the Securities  Why is it retroactive?
and Exchange Commission and attached to
the original articles of incorporation. From and  What provision may be amended, altered or
after approval by the Securities and Exchange
repealed
Commission and the issuance by the
Commission of its certificate of filing, the
capital stock shall stand increased or  Can you change name, address for
decreased and the incurring, creating or example she married or changed address?
increasing of any bonded indebtedness
authorized, as the certificate of filing may - NO. you cannot change that
declare: Provided, That the Securities and
Exchange Commission shall not accept for  Fait accompli, are beyond the powers or
filing any certificate of increase of capital stock authority of the corporation to change, alter
unless accompanied by the sworn statement or modify. These would include the
of the treasurer of the corporation lawfully following:
holding office at the time of the filing of the
certificate, showing that at least twenty-five - Names of the incorporators and
(25%) percent of such increased capital stock
has been subscribed and that at least twenty- - The incorporating directors or trustees,
five (25%) percent of the amount subscribed
has been paid either in actual cash to the - The name of the treasurer originally or first
corporation or that there has been transferred
elected by the subscribers or members to
to the corporation property the valuation of
which is equal to twenty-five (25%) percent of act as such until his successor has been
the subscription: Provided, further, That no duly elected and qualified,
decrease of the capital stock shall be
approved by the Commission if its effect shall - The number of shares and amount originally
prejudice the rights of corporate creditors. subscribed and paid out of the original
authorized capital stock of the corporation,
Non-stock corporations may incur or
create bonded indebtedness, or increase the - The date and place of execution of the
same, with the approval by a majority vote of articles of incorporation,
the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called - The signatories and acknowledgment
for the purpose. thereof.

Bonds issued by a corporation shall - All other provisions or matters stated or


be registered with the Securities and contained in the articles are subject to
Exchange Commission, which shall have the amendment.
20
 Founder’s or signatories hindi pwede palitan - Mere change in the name of a corporation
or by merely complying with the law is
 Names, nationalities- you cannot general amendment
 Capital- right granted by law to all corporation - It does not change its personality. It is the
same person in a different name. the
 Paid up capital- NO
charter is the same
 Restriction and transfer of shares in ordinary
 Amendment of a corporate term
stock corporations
- Extending the same can never be made 7
- You can, but close corporation cannot
years prior? TRUE or FALSE
- Section 96, otherwise it will not be a close
- FALSE. It can be if there are justifiable
corporation
reasons for earlier extension as may be
determined by the SEC
Section 96. Definition and applicability
of Title. - A close corporation, within the  Can you extend the corporate term if it has
meaning of this Code, is one whose articles of
already expired?
incorporation provide that: (1) All the
corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of - Once the term expires without an
record by not more than a specified number of amendment having happen it ceases to
persons, not exceeding twenty (20); (2) all the exist as a body politic. It is dissolved
issued stock of all classes shall be subject to automatically on the day it expires.
one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation  Alhambra cigar and PNB case
shall not list in any stock exchange or make
any public offering of any of its stock of any  Instances when the SEC allowed extension
class. Notwithstanding the foregoing, a whose term has already expired
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its - All of them involved are institutions of
voting stock or voting rights is owned or learning, it was the case in order to avoid
controlled by another corporation which is not
confusion that would arise later on.
a close corporation within the meaning of this
Code.
BOARD OF DIRECTORS/TRUSTEES
Any corporation may be incorporated  Section 23
as a close corporation, except mining or oil
companies, stock exchanges, banks,
insurance companies, public utilities, Section 23. The board of directors
educational institutions and corporations or trustees. - Unless otherwise provided in
declared to be vested with public interest in this Code, the corporate powers of all
accordance with the provisions of this Code. corporations formed under this Code shall
be exercised, all business conducted and all
property of such corporations controlled and
The provisions of this Title shall
held by the board of directors or trustees to
primarily govern close corporations: Provided,
be elected from among the holders of
That the provisions of other Titles of this Code
stocks, or where there is no stock, from
shall apply suppletorily except insofar as this
among the members of the corporation,
Title otherwise provides.
who shall hold office for one (1) year until
their successors are elected and qualified.
 Transfer clause, executor clause, (28a)
acknowledgment, treasury affidavit-NO
Every director must own at least
 Philippine First Insurance case 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

21
of the corporation. Any director who ceases to - Actions of the stockholders in such matters
be the owner of at least one (1) share of the is only advisory and not in any way binding
capital stock of the corporation of which he is a in the corporation
director shall thereby cease to be a director.
Trustees of non-stock corporations must be  Barreto vs. La previsora Filipina
members thereof. A majority of the directors or
trustees of all corporations organized under - Everything emanates from the board of
this Code must be residents of the Philippines.
directors
- Controlled by the board of directors - Stockholders action is merely advisory
except their approval or vote is necessary
- Authority are however restricted to the day to
to prove a valid corporate act
day
 Qualifications:
- Stockholders may have all the profit but will
turn over the management to the governing - No citizenship requirement, at least majority
board must be residents
- But unless the law provides the power may be - Can have a governing board consisting
delegated solely of foreigners
 General rule - But we have to take into consideration
partly nationalized industries and other laws
- Corporations must sit and act as a body
which prohibits or limits foreign ownership
- Will be bound by corporate officers if they
- Anti-dummy act
acted within the 5 classification page 150
- Utilization development of natural resources
 Ramirez vs. Orientalist co.
60% must be owned by Filipino citizens,
- What was the position of Fernandez in this therefore they only own 40%---10 members
case? TREASURER they can only have 4 seats, but not entirely
correct because the law may provide
- Why did the court rule that actions of otherwise; educational institutions restricted
Fernandez bound the corporation when he is to Filipinos, but there are exceptions when
not even a board of director? created by religious and charitable
institutions.
“if a man is found acting for a
corporation with the external indicia of - By-laws may provide additional
authority, any person not having notice of want qualifications and disqualifications
of authority, may usually rely upon those
appearances; and if it be found that the - To qualify as a director he must own at least
directors had permitted the agent to exercise 1 share
that authority and thereby held him out as a
 Should the stockholder be the equitable or
person competent to bind the corporation, or
beneficial owner in order to qualify as a
had acquiesced in a contract and retained the
director?
benefit supposed to have been conferred by it,
the corporation will be bound, notwithstanding - NO, it is not necessary, as long as you are
the actual authority may never have been listed in the books as owner of one share
granted.”
 Lee vs. CA
- Contracts must be made by the director and
not the stockholders - As long as you are listed in the books as
owner of one share

22
- Under the old law he must be the beneficial 3-100T/S
owner and legal owner thereof but in the new
law it is not required as long as it stands in his to 10=1M/S
name he is qualifies
 Do you include the vote of 1 & 2 to have a
1 A-100t/S B (own in the trust of X) is B qualified quorum to have a valid meeting?
to be a director?
- NO, quorum requirements is 401,000
2
Quorum requirement is 501k
3-10
Holders of non-voting shares are only entitled to
2– transferring there voting rights in favor of VT vote in last par. Of section 6

Other rights will accrue in favor of them, but not the 1-200k
voting rights
2-200k
voting rights must be recorder in the books of the
3-200k
corporation that it is transferred
4-100k
PNB-IFL- wholly owned subsidiary of PNB
5-100k
PNB will assign to PNB-IFL nominal shares and PNB-
IFL now will be able to be nominated 6-100k
 Gen. Rule: 7-50k
- Term of one year who will serve as such until 8-40k
there successors are elected and qualified
9-5k
 Exception:
10-5k
- Non-stock corporation can serve for a term of
3 years =1MS

- Educational non-stock- term of the governing 1&2 is absent, 3&4 ayaw tumakbo and hindi
board can be 5 years nagvote 6-10, tumakbo and ninominate nila yung
sarili nila and cast all their shares on themselves
 May this term exceed one year?
 Who wins? Or who gets elected?
- Yes, they may serve in a hold over capacity
until their successors have been duly elected - No vote requirement, the one who gets the
and qualified most number of votes gets elected,
section24.
 Detective and protective bureau vs.
Cloribel  What is cumulative voting?

- In the by-laws, managing director must be - Process of multiplying the number of shares
elected from among themselves to the number of director to be elected

- Must be duly elected and qualified - Matter of right granted to stockholders in a


stock corporation
How are the directors elected?
1 to 5 has 200k/s and members of the same family-
1-100T/S majority 800k they have 4M votes they are
guaranteed 4 seats
2-100T/S
23
6 to 10 are not related- 1 seat 1M votes transaction of corporate business, and
every decision of at least a majority of the
 Cumulative to allow the minority to have a directors or trustees present at a meeting at
rightful representation in the board which there is a quorum shall be valid as a
corporate act, except for the election of
 Is it allowed in a non-stock corporation? officers which shall require the vote of a
majority of all the members of the board.
- Not generally available
Directors or trustees cannot attend
- Section 89 unless the articles or by-laws allow or vote by proxy at board meetings. (33a)
cumulative voting
 Is the president required to be a
Section 89. Right to vote. - The right stockholder? YES
of the members of any class or classes to vote
may be limited, broadened or denied to the  The chairman may be another person
extent specified in the articles of incorporation
or the by-laws. Unless so limited, broadened  The president may also be another person
or denied, each member, regardless of class,
shall be entitled to one vote.  Prohibited is president to be secretary or
treasurer at the same time
Unless otherwise provided in the
articles of incorporation or the by-laws, a  Board of director must sit and act as a body
member may vote by proxy in accordance with to arrive at a corporate act
the provisions of this Code. (n)
 What would constitute a quorum if 5 then 3
Voting by mail or other similar means must be present
by members of non-stock corporations may be
authorized by the by-laws of non-stock  May the vote of 2 members past a 5 man
corporations with the approval of, and under governing board pass a valid corporate act?
such conditions which may be prescribed by,
the Securities and Exchange Commission. - YES. Voting requirement is majority of
directors present at which there where a
 Other corporate officers other than the quorum
governing board section 25
1 1 and 2 present=valid voting requirement
Section 25. Corporate officers,
quorum. - Immediately after their election, the 2 1 and 2 voted yes
directors of a corporation must formally
organize by the election of a president, who 3 3 voted no
shall be a director, a treasurer who may or
may not be a director, a secretary who shall be 4
a resident and citizen of the Philippines, and
such other officers as may be provided for in 5
the by-laws. Any two (2) or more positions
may be held concurrently by the same person,  Is it absolute?
except that no one shall act as president and
secretary or as president and treasurer at the - NO, except in the election because it
same time. requires the majority of all the members of
the board
The directors or trustees and officers
to be elected shall perform the duties enjoined - If by-laws or articles provide a higher voting
on them by law and the by-laws of the requirement
corporation. Unless the articles of
incorporation or the by-laws provide for a  Artificial beings must act through its
greater majority, a majority of the number of members and act as a body to have a valid
directors or trustees as fixed in the articles of
corporate act
incorporation shall constitute a quorum for the
24
 Exception: - The contract here is so onerous that it
would throw the corporation into insolvency
- Delegation
 Francisco vs. GSIS
- Expressly conferred
- GSIS cannot evade the binding effect of the
- Where the officer or agent is clothed with telegram
actual or apparent authority
- Only 15 months later that the corporation
- Otherwise it will not bind the corporation said there was a mistake

 Yao Ka Sin Trading case “already asked in - The silence coupled with the unconditional
the bar” acceptance of the other subsequent
remittances is binding to the corporation
- Only bind the corporation to the extent of
authority confined to him or virtue of customs,  Board of Liquidators vs. Kalaw
usage and policy
“Settled jurisprudence has it that
- Must pass first the controller and counsel where similar acts have been approved by
the directors as a matter of general practice,
 What if the notice requirement is not complied
custom and policy, the general manager
with?
may bind the company without formal
 Lopez Realty vs. Fotencha authorization of the board of directors. In
varying language, existence of such
- Notice requirement must be complied with authority is established, by proof of the
hence it should have been with force and course of business, the usages and
effect, but according to the SC, it may be practices of the company and by the
ratified expressly if there is a subsequent knowledge which the board of directors has,
meeting called for that purpose or must be presumed to have, of acts and
doings of its subordinates in and about the
- Impliedly through acts affairs of the corporation. So also, “xx
authority to act for and bind a corporation
- Asuncion was aware of the corporations
may be presumed from acts of recognition
obligation
in other instances where the power was in
- There was implied ratification or she was fact exercised.” “xx Thus, when, in the usual
estopped course of business of a corporation, an
officer has been allowed in his official
 Pua Casim & Co. vs. W. Neumark and Co. capacity to manage its affairs, his authority
to represent the corporation may be implied
- Considered 3 circumstanced from the manner in which he has been
permitted by the directors to manage its
- Check which was the proceed of the loan business.”
which was endorsed and deposit in the
corporate account In the case at bar, the practice of
the corporation has been to allow its
- W. Neumark as president and also stockholder general manager to negotiate and execute
contracts in its copra trading activities for
 Yu Chuck vs. Kong Li Po
and in NACOCO’s behalf without prior
- General manager usually has the power to board approval. If the by-laws were to be
hire but the SC said the contract must be literally followed, the board should give its
reasonable stamp of prior approval on all corporate
contracts. But that Board itself, by its acts
and through acquiescence, practically laid

25
aside the by-law requirement of prior approval. 9-5

- Kalaw signed alone and said contracts were 10-5 outstanding director
submitted to the board of directors after its
consummation and not before Meetings called by the president or the
secretary ordered by the president
 Buenaseda vs. Bowen
 It depends if the removal is without cause
- Express ratification is made through a formal they cannot do so because removal without
board action cause shall not deprive the minority
stockholders or members of the right of
- Implied ratification is through: silence or representative
acquiescence, acceptance benefits and lastly
recognition or adoption  If with cause they can even if it will
prejudice the rights of the minority, provided
- An unauthorized act may nevertheless be of course additional requirements by-laws
binding either by express or implied by and articles of incorporation
estoppels
 Who will fill up the vacancy created due to
- By virtue of silence the board had impliedly the ouster of a member of the board of
accepted the act directors <section 29>

- By recognition or adoption
Section 29. Vacancies in the
office of director or trustee. - Any
- By virtue of payment of obligations arising
vacancy occurring in the board of directors
therefore- Lopez realty or trustees other than by removal by the
stockholders or members or by expiration of
May directors or trustees be disqualified to act as term, may be filled by the vote of at least a
such? majority of the remaining directors or
trustees, if still constituting a quorum;
- YES, crime, etc. disqualifications in book otherwise, said vacancies must be filled by
the stockholders in a regular or special
- Possess or dispossess any of the meeting called for that purpose. A director
qualifications or disqualifications , cease to or trustee so elected to fill a vacancy shall
hold at least one share be elected only or the unexpired term of his
predecessor in office.
May directors be ousted from office?
Any directorship or trusteeship to
- At least 2/3 of members representing be filled by reason of an increase in the
outstanding capital stock. Again notice number of directors or trustees shall be
requirement must be complied with filled only by an election at a regular or at a
special meeting of stockholders or members
1-200 1-5 same family duly called for the purpose, or in the same
meeting authorizing the increase of
2-200 directors or trustees if so stated in the
notice of the meeting. (n)
3-200
 Other than by removal or expiration of term
4-100 they do not have the power

5-100 electing  When will the vacancies be filled up?

6-100 6 to 10 not related  Is notice required, to fill up vacancies due to


removal?
7-50

8-40
26
 What if the vacancy is due to an increase, can - By-laws may allow, stockholders may also
it be filled up in the same meeting where in the allow such
number is increased?
 What do you understand by the phrase “as
 Election due to removal-in the same meeting such directors”
notice is not required
 Western Institute vs. Salas
 Election due to increase in number- it must be
so stated in the meeting - Compensation was granted without by-laws
authority
 Section 30
- Prohibition is not a sweeping rule
Section 30.Compensation of
directors. - In the absence of any provision in - Members of the board may receive when
the by-laws fixing their compensation, the they receive in a special capacity
directors shall not receive any compensation,
as such directors, except for reasonable per - Mere act of the board will suffice
diems: Provided, however, That any such
compensation other than per diems may be  Is the 10% ceiling applicable to other
granted to directors by the vote of the officers?
stockholders representing at least a majority of
the outstanding capital stock at a regular or - NO. the phrase “as such director” was used
special stockholders' meeting. In no case shall twice <Section 30>
the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of - The SC ruled that the 10% ceiling will not
the net income before income tax of the likewise apply if they acted in a capacity
corporation during the preceding year. (n)
other than “as such directors”

- Generally not entitled to receive compensation  Government vs. El Hogar


because they render it gratuitously
- Judicial intervention is not proper
- Unless the by-laws allows
- The appropriates remedy is to those who
- Stockholders may also grant pursuant to a can make or unmake the by-laws
majority vote
 Liability of corporate officers
- Must not exceed net income of 10% tax of the
preceding year - Obligations incurred by those acting for and
in behalf of the corporations are not there’s
- Acting in special capacity BUT there are exceptions even if they are
acting for and in behalf of the corporation
- In, sum directors may receive compensation
when  Tramat vs. CA

1. there is a provision in the by-laws to that - General rule was applied in the case
effect
- Ong acted as officers and acted within the
2. When the stockholders, by a majority vote of scope of his authority
the outstanding capital stock grant the same;
and, - Court laid down 4 instances when even if
acting within the scope of his authority he is
3. If the director renders extra-ordinary or unsual held solidarily liable
service
1. He assents (a) to a patently unlawful act of
 Central Cooperative Exchange vs. Tibe the corporation, or (b) for bad faith, or gross
negligence in directing its affairs, or (c) for
27
conflict of interest, resulting in damages to the - questions of policy and management are
corporation, its stockholders or other persons; left solely to the board of directors

2. He consents to the issuance of watered stocks - BOD, business manager of the corporation
or who, having knowledge thereof, does not and as long as they act in good faith, its
forthwith file with the corporate secretary his actuations are not subject to judicial review
written objection thereto;
- They are not insurer of the property of the
3. He agrees to hold himself personally and company, they were guarantors that the
solidarily liable with the corporation; enterprise undertaken by the corporation
shall be successful
4. He is made, by a specific provision of law, to
personally answer for his corporate action.  Montelibano vs. Bacolod Murcia Milling
Co.
- Watered stocks- issued, fully paid up when in
fact they have not been fully paid or promised - Directors are not liable due to imprudence
as such or honest error of judgment

 Llamado vs. CA - Duty of loyalty of corporate directors

- The corporate entity theory cannot be used as - 31,32,33,34


a defense to escape liability in violation of B.P.
22 - 31,32,33- specific instances when corporate
officers may violate loyalty
- Where the check is drawn by a corporation the
persons who signed the check shall be liable. - 32,33 self-dealing and interlocking director

 Uichico vs. NLRC  Corporate opportunity doctrine

- Labor case corporate directors and officers are - It places a director of a corporation in the
solidarily liable with the corporation for the position of a fiduciary and prohibits him form
termination of employment of corporate seizing a business opportunity and/or
employee done with malice and bad faith developing it at the expense and with the
facilities of the corporation. He cannot
 3 fold duty of directors appropriate to himself a business
opportunity which in fairness should belong
- obedient to the corporation.
- diligent  Last paragraph of section 31 and the
provision of section 34 make reference to
- loyal
recovery of “forbidden profits”
 Business judgment rule
 Distinction between section 31 and 34
- Questions of policy and management are left relative to the ratification by the
solely to the honest decision of the board of stockholders
directors and the courts are without authority
- The second paragraph of section 31 which
to substitute its judgment as against the
makes a director liable to account for profits
former. The directors are the business
if he attempts to acquire or acquires any
managers of the corporation and as long as
interest adverse to the corporation in
they act in good faith, its actuations are not
respect to any matter reposed in him in
subject to judicial review. Montelibano vs.
confidence as to which equity imposes a
Bacolod Murcia Milling
disability upon him to deal in his own behalf
is not subject to ratification by the
stockholders. Whereas, in section 34 if a
28
director acquires for himself a business - The law would be impotent if the sale were
opportunity which should belong to the not invalidated
corporation, he is bound to account for such
profits unless his act is ratified by the - Self-dealing director and interlocking
stockholders owning ore representing at least director
2/3 of the outstanding capital stock.
What is a self-dealing director?
- If reposed in him in confidence, not subject to
- Director of a corporation dealing or
ratification
transacting business with his corporation
- If the acquisition is merely that of a business
Are the contracts and dealing of a self-dealing
opportunity which has not been reposed in him
director valid?
in confidence, the same may be subject to
ratification by the stockholders.  General rule: voidable
Director x co. May the contracts of a self-dealing director be valid
per se.
A-REALTY
- YES. If all the 4 conditions are present they
B
will be valid per se
C Z owns property and is going
1. That the presence of such director or
abroad never to Return, he
trustee in the board meeting in which the
wants to sell for 25M the fair
contract was approved was not necessary
market value is 30M
to constitute a quorum for such meeting;
D
2. That the vote of such director or trustee was
E not necessary for the approval of the
contract;
E goes to Z and offers to pay the property for 26 M and
later he sells it for 30M making 4M profit, one of the 3. That the contract is fair and reasonable
stockholders learned and complains that he should under the circumstances; and
submit the profits. E said that he will move for
4. That in case of an officer, the contract has
ratification of his actuation. Can it be ratified?
been previously authorized by the board of
- It can be ratified he merely acquired a directors.
business owning to the corporation
When do they become voidable?
- It would be different if it was entrusted in his
- When any of the two requisites are absent it
confidence
is voidable, but subject to ratification by 2/3
Another scenario: of the outstanding capital stock or 2/3 of the
member
Had A not attended the meeting he would not have
known of the sale it is then a matter reposed in him in  Requisites for ratification (subject to
confidence ratification by the stockholders holding or
representing at least 2/3 of the outstanding
 A corporation cannot reaquire its share if it has capital stock or 2/3 of the members.)
no restricted unretained earnings
- it must be at a meeting called for the
 Strong vs. Rapide purpose

- What duty did he violate? - full disclosure of the adverse interest of the
director concerned must be made
- He violated his duty of loyalty
29
- the contract is fair and reasonable under the interest of the corporation to his own
circumstances advantage

 Problem if self-dealing director involved owns - as a director he should have acted in a


all or substantially all of the shares of stock of manner as not to unduly prejudice the
the corporation thereby making it easily corporation
possible to have the contract ratified
- he cannot be allowed to enrich himself
- last sentence of section 32 should be made to
apply by determining the reasonableness and  May corporate directors purchase the
fairness of the contract corporate property?

 Mead vs. Mccullogh


Section 32. Dealings of directors,
trustees or officers with the corporation. - A - interlocking director- a director of one
contract of the corporation with one or more of
its directors or trustees or officers is voidable, corporation who deals and transacts
at the option of such corporation, unless all the business with another corporation who is
following conditions are present: himself a director

1. That the presence of such director or A- director of X company also a director of Y


trustee in the board meeting in which the corporation
contract was approved was not necessary to
constitute a quorum for such meeting; B-

2. That the vote of such director or trustee was C-


not necessary for the approval of the contract;
D-
3. That the contract is fair and reasonable
E-
under the circumstances; and
 Both companies enter into a contract and A
4. That in case of an officer, the contract has sits, is the contract valid?
been previously authorized by the board of
directors.
- Yes on the ground of fraud or if it is unfair

Where any of the first two conditions - May be subject to the provision of section
set forth in the preceding paragraph is absent, 32
in the case of a contract with a director or
trustee, such contract may be ratified by the
- Section 32 contract may become voidable,
vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock hence it may also be ratified
or of at least two-thirds (2/3) of the members in
a meeting called for the purpose: Provided, X Co. Y Co.
That full disclosure of the adverse interest of
the directors or trustees involved is made at A owe 20% A owe 20%
such meeting: Provided, however, That the
contract is fair and reasonable under the Is it generally valid or voidable? VALID
circumstances. (n)
25% 25% VALID
 Prime White Cement vs. IAC
15% 25% VOIDABLE SUBJECT TO
- a director of a corporation owes a position in section 32
trust
More than 20 substantial
- in case of conflict between himself and that of
 BOD mismanages corporate officers. Who
the corporation, he cannot sacrifice the
may file a suit?

30
- General rule: BOD which can institute a case  The corporation must be made a party in
because it has all the powers. To allow the case whatever side will not matter
stockholders to file would violate the doctrine because under Philippine law misjoinder is
of corporate entity and may result to not a ground for dismissal
multiplicity of suits
 Non-joinder is a ground for dismissal
- Stockholders cannot therefore generally file a
case EXCEPT of course in a DERIVATIVE  Any benefit should inure to the corporation
SUIT
 Stockholder bringing the action is entitled to
 Derivative suit reimbursement such as attorney’s fee
ONLY IF the case is SUCCESSFUL to
- An action based on injury to the corporation-to avoid harassment suit to their management
enforce a corporate right- wherein the
corporation itself is joined as a necessary  Pascual vs. Orozco
party, and recovery is in favor of and for the
- By virtue of the fact that he is a stockholder,
corporation.
may maintain a derivative suit
- Remedy granted by law to stockholders to
- Depend on how, when and what reason
institute a case to remedy a wrong done
directly to the corporation and indirectly to the - Seeking for the years 1898 all the way 1907
stockholders, if the board refuses to do so.
Otherwise if not they would be left without any - Only became a stockholder in 1903
recourse
- He can sue only in 1903 forward because
 Available suits he must be a stockholder

Individual or Personal - The right of action is personal in nature. He


became a stockholder only in 1902
- Wrong done against his person as a
stockholder  Derivative suit

 Class suit - By a stockholder to address a wrong done


against the corporation and the stockholder
- Filed by a stockholder in representation of indirectly
other stockholders
- Essential requisite must have been a
- A wrong or redress done, a derivative suit in stockholder from the time the act
nature complained of took place
 Intra-corporate remedies - Cannot institute an action from the years he
was still not a stockholder
- Demand to the BOD to institute such action
 Everett vs. Asia Banking
- Negated by the BOD
- Stockholders cannot ordinarily commence
- The one who instituted must be a stockholder
suit in equity and such is in the hands of its
at the date when the act was done, must have
BOD however there are exceptions when
been a stockholder by that time
the BOD will not sue since they are
 Demand will not be required if the majority of themselves principals to the fraud.
the BOD are the one’s guilty of the wrong
 Republic vs. Cuaderno
charged
- The facts constitute sufficient cause of
action
31
- It is not the corporate interest to shield one - Is derivative suit appropriate in this case
from criminal prosecution which is personal
interest - They are not vindicatory damage done to
the corporation, but rather they where
- Perez is not suing in his behalf, but in behalf of vindicating damage against him
the corporation
- Violation of their rights as individuals, hence
 Western Institute vs. Salas derivative suit is not the remedy

- Assuming it was filed in the proper forum  Evangelista vs. Santos


would there argument that it is a derivative suit
prosper? NO. it is people of the Philippines vs. - Derivative suit is not proper
individual director, it must be stated in the
- Claim is not for the benefit of the
complaint that it is being instituted as a
corporation, but rather his individual benefit
derivative suit and for and in behalf of the
corporation  From the cases above cited, these are the
requirements and the procedures that must
- Granting arguendo, that this is a derivative
be followed in order that a derivative suit
suit, the same is still outrightly dismissible for
may prosper
having been wrongfully filed in the regular
court devoid of any jurisdiction to entertain the 1. That the party bringing the suit should be a
complaint. The case should have been filed stockholder as of the time the act or
with the SEC which exercises original and transaction complained of took place, or
exclusive jurisdiction over derivative suits, they whose shares have evolved upon him since
being intra-corporate disputes, per Section 5 by operation of law. This rule, however,
(b) of P.D. 902-A does not apply if such act or transaction
continues and is injurious to the stockholder
 San Miguel vs. Khan
or affect him specifically in some other way.
- Was a demand made? NO
The number of his hares is immaterial since
- It is not necessary because he objected in the he is not suing in his own behalf or for the
board meeting, but still it was adopted protection or vindication of his own right, or
therefore it was useless the redress of a wrong done against him,
individually, but in behalf and for the benefit
 Chase vs. Buencamino of the corporation.

- Argument that he should be in estoppels since 2. He has tried to exhaust intra-corporate


he filed in the U.S. remedies, he has made a demand on the
board of directors for the appropriate relief
- Assuming the case prospered in the U.S. but the latter had failed or refused to heed
would not estoppels apply as against him? NO his plea. Demand, however, is not required
for estoppels to step in it must be a case by if the company is under the complete
the corporation control of the directors who are the very
ones to be sued (or where it becomes
 Reyes vs. Tan
obvious that a demand upon them would
- Corporate director are guilty of breach of trust have been futile and useless) since the law
does not require a litigant to perform
- A stockholder may institute an action to useless acts;
remedy a wrong done
3. The stockholder bringing the suit must
- Fraud in the conduct of corporate affairs allege in his complaint that he is suing on a
derivative cause of action on behalf of the
 Gamboa vs. Victoriano corporation and all other stockholders
32
similarly situated, otherwise, the case is by its express terms is not so amendable or
dismissible. This is because the cause of repealable; and (5) a distribution of cash
action actually devolves on the corporation dividends to the shareholders.
and not to a particular stockholder.
- Said committee may act and bind the
4. The corporation should be made a party, corporation by the majority vote of all its
either as party-plaintiff or defendant, in order members except with respect to those
to make the court’s judgment binding upon it, matters provided for in sec. 35 these are:
and thus, bar future litigation of the same
issues. On what side the corporation appears 1. Approval of any action for which
loses importance when it is considered that it shareholders’ approval is also required
lay within the power of the court to direct the
2. The filing of vacancies in the board;
making of amendment of the pleading, by
adding or dropping parties, as may be required 3. Amendment or repeal of by-laws or the
in the interest of justice. Misjoinder of parties is adoption of new by-laws;
not a ground to dismiss action; and,
4. Amendment or repeal of any resolution of
5. Any benefit or damages recovered shall the board which by its express terms is not
pertain to the corporation. This is so because so amenable or repealable; and,
in all instances, derivative suit is instituted for
and in behalf of the corporation and not for the 5. Distribution of cash dividends to the
protection or vindication of a right or rights of a shareholders.
particular stockholder, otherwise, the
aggrieved stockholder should institute,  May the board alone create an executive
instead, an individual or personal suit to committee without any authority provided
vindicate his personal or individual right. Or, for the by-laws?
for that matter, representative or class suit for
- NO board of directors must sit and act as a
all other stockholders whose rights are
body to have a valid transaction
similarly situated, injured or violated,
personally or individually.  May a non-member of the board of directors
be a member of the executive committee?
 Executive committee
- NO, all of them must be members of the
- Not allowed under the OLD law
board of directors
 How may executive committee created and
- BOD cannot act by proxy it would be
constituted?
abdication of powers
- Section 35
 Purpose clauses necessary because it
confers and also limits the actual authority
Section 35. Executive committee. -
of the corporation
The by-laws of a corporation may create an
executive committee, composed of not less
CORPORATE POWERS AND AUTHORITY
than three members of the board, to be
appointed by the board. Said committee may
 Corporate authority may be classified into
act, by majority vote of all its members, on
such specific matters within the competence of three classes namely:
the board, as may be delegated to it in the by-
laws or on a majority vote of the board, except 1. Those expressly granted or authorized by
with respect to: (1) approval of any action for law inclusive of the corporate charter or
which shareholders' approval is also required; articles of incorporation;
(2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the
adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which
33
2. Those impliedly granted as are essential or 10. To establish pension, retirement, and
reasonably necessary to the carrying out of other plans for the benefit of its directors,
the express powers; trustees, officers and employees; and

3. Those that are incidental to its existence. 11. To exercise such other powers as may
be essential or necessary to carry out its
 Section 36 to 45- POWER GRANTED BY purpose or purposes as stated in the
LAW articles of incorporation. (13a)

Section 37. Power to extend or shorten


Section 36. Corporate powers and capacity. -
corporate term. - A private corporation may extend
Every corporation incorporated under this Code has
the power and capacity: 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
1. To sue and be sued in its corporate name; meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by
2. Of succession by its corporate name for the at least two-thirds (2/3) of the members in case of
period of time stated in the articles of non-stock corporations. Written notice of the
incorporation and the certificate of proposed action and of the time and place of the
incorporation; meeting shall be addressed to each stockholder or
member at his place of residence as shown on the
3. To adopt and use a corporate seal; books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
4. To amend its articles of incorporation in served personally: Provided, That in case of
accordance with the provisions of this Code; extension of corporate term, any dissenting
stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this Code; Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
6. In case of stock corporations, to issue or
decrease its capital stock or incur, create or
sell stocks to subscribers and to sell stocks to
increase any bonded indebtedness unless approved
subscribers and to sell treasury stocks in
by a majority vote of the board of directors and, at a
accordance with the provisions of this Code;
stockholder's meeting duly called for the purpose,
and to admit members to the corporation if it
two-thirds (2/3) of the outstanding capital stock shall
be a non-stock corporation;
favor the increase or diminution of the capital stock,
or the incurring, creating or increasing of any
7. To purchase, receive, take or grant, hold, bonded indebtedness. Written notice of the
convey, sell, lease, pledge, mortgage and proposed increase or diminution of the capital stock
otherwise deal with such real and personal or of the incurring, creating, or increasing of any
property, including securities and bonds of bonded indebtedness and of the time and place of
other corporations, as the transaction of the the stockholder's meeting at which the proposed
lawful business of the corporation may increase or diminution of the capital stock or the
reasonably and necessarily require, subject to incurring or increasing of any bonded indebtedness
the limitations prescribed by law and the is to be considered, must be addressed to each
Constitution; stockholder at his place of residence as shown on
the books of the corporation and deposited to the
8. To enter into merger or consolidation with addressee in the post office with postage prepaid, or
other corporations as provided in this Code; served personally.

9. To make reasonable donations, including A certificate in duplicate must be signed by a


those for the public welfare or for hospital, majority of the directors of the corporation and
charitable, cultural, scientific, civic, or similar countersigned by the chairman and the secretary of
purposes: Provided, That no corporation, the stockholders' meeting, setting forth:
domestic or foreign, shall give donations in aid
of any political party or candidate or for (1) That the requirements of this section
purposes of partisan political activity; have been complied with;
34
(2) The amount of the increase or diminution approved by the Commission if its effect shall
of the capital stock; prejudice the rights of corporate creditors.

(3) If an increase of the capital stock, the Non-stock corporations may incur or create bonded
amount of capital stock or number of shares of indebtedness, or increase the same, with the
no-par stock thereof actually subscribed, the approval by a majority vote of the board of trustees
names, nationalities and residences of the and of at least two-thirds (2/3) of the members in a
persons subscribing, the amount of capital meeting duly called for the purpose.
stock or number of no-par stock subscribed by
each, and the amount paid by each on his Bonds issued by a corporation shall be registered
subscription in cash or property, or the amount with the Securities and Exchange Commission,
of capital stock or number of shares of no-par which shall have the authority to determine the
stock allotted to each stock-holder if such sufficiency of the terms thereof. (17a)
increase is for the purpose of making effective
stock dividend therefor authorized; Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
(4) Any bonded indebtedness to be incurred, enjoy pre-emptive right to subscribe to all issues or
created or increased; disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
(5) The actual indebtedness of the corporation denied by the articles of incorporation or an
on the day of the meeting; amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued
(6) The amount of stock represented at the in compliance with laws requiring stock offerings or
meeting; and minimum stock ownership by the public; or to
shares to be issued in good faith with the approval
of the stockholders representing two-thirds (2/3) of
(7) The vote authorizing the increase or
the outstanding capital stock, in exchange for
diminution of the capital stock, or the incurring,
property needed for corporate purposes or in
creating or increasing of any bonded
payment of a previously contracted debt.
indebtedness.

Section 40. Sale or other disposition of


Any increase or decrease in the capital stock or the
assets. - Subject to the provisions of existing laws
incurring, creating or increasing of any bonded
on illegal combinations and monopolies, a
indebtedness shall require prior approval of the
corporation may, by a majority vote of its board of
Securities and Exchange Commission.
directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
One of the duplicate certificates shall be kept on file in substantially all of its property and assets, including
the office of the corporation and the other shall be filed its goodwill, upon such terms and conditions and for
with the Securities and Exchange Commission and such consideration, which may be money, stocks,
attached to the original articles of incorporation. From bonds or other instruments for the payment of
and after approval by the Securities and Exchange money or other property or consideration, as its
Commission and the issuance by the Commission of board of directors or trustees may deem expedient,
its certificate of filing, the capital stock shall stand when authorized by the vote of the stockholders
increased or decreased and the incurring, creating or representing at least two-thirds (2/3) of the
increasing of any bonded indebtedness authorized, as outstanding capital stock, or in case of non-stock
the certificate of filing may declare: Provided, That the corporation, by the vote of at least to two-thirds (2/3)
Securities and Exchange Commission shall not accept of the members, in a stockholder's or member's
for filing any certificate of increase of capital stock meeting duly called for the purpose. Written notice
unless accompanied by the sworn statement of the of the proposed action and of the time and place of
treasurer of the corporation lawfully holding office at the meeting shall be addressed to each stockholder
the time of the filing of the certificate, showing that at or member at his place of residence as shown on
least twenty-five (25%) percent of such increased the books of the corporation and deposited to the
capital stock has been subscribed and that at least addressee in the post office with postage prepaid, or
twenty-five (25%) percent of the amount subscribed served personally: Provided, That any dissenting
has been paid either in actual cash to the corporation stockholder may exercise his appraisal right under
or that there has been transferred to the corporation the conditions provided in this Code.
property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further,
That no decrease of the capital stock shall be
35
A sale or other disposition shall be deemed to cover approved by a majority of the board of directors or
substantially all the corporate property and assets if trustees and ratified by the stockholders
thereby the corporation would be rendered incapable representing at least two-thirds (2/3) of the
of continuing the business or accomplishing the outstanding capital stock, or by at least two thirds
purpose for which it was incorporated. (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's
After such authorization or approval by the meeting duly called for the purpose. Written notice
stockholders or members, the board of directors or of the proposed investment and the time and place
trustees may, nevertheless, in its discretion, abandon of the meeting shall be addressed to each
such sale, lease, exchange, mortgage, pledge or other stockholder or member at his place of residence as
disposition of property and assets, subject to the rights shown on the books of the corporation and
of third parties under any contract relating thereto, deposited to the addressee in the post office with
without further action or approval by the stockholders postage prepaid, or served personally: Provided,
or members. That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however,
Nothing in this section is intended to restrict the power That where the investment by the corporation is
of any corporation, without the authorization by the reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation,
stockholders or members, to sell, lease, exchange,
the approval of the stockholders or members shall
mortgage, pledge or otherwise dispose of any of its
not be necessary. (17 1/2a)
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 Section 43. Power to declare dividends. -
disposition of such property and assets be The board of directors of a stock corporation may
appropriated for the conduct of its remaining business. declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property,
In non-stock corporations where there are no members or in stock to all stockholders on the basis of
with voting rights, the vote of at least a majority of the outstanding stock held by them: Provided, That any
cash dividends due on delinquent stock shall first be
trustees in office will be sufficient authorization for the
applied to the unpaid balance on the subscription
corporation to enter into any transaction authorized by
plus costs and expenses, while stock dividends
this section.
shall be withheld from the delinquent stockholder
until his unpaid subscription is fully paid: Provided,
Section 41. Power to acquire own shares. - A further, That no stock dividend shall be issued
stock corporation shall have the power to purchase or without the approval of stockholders representing
acquire its own shares for a legitimate corporate not less than two-thirds (2/3) of the outstanding
purpose or purposes, including but not limited to the capital stock at a regular or special meeting duly
following cases: Provided, That the corporation has called for the purpose. (16a)
unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
1. To eliminate fractional shares arising out of stock percent of their paid-in capital stock, except: (1)
dividends; when justified by definite corporate expansion
projects or programs approved by the board of
2. To collect or compromise an indebtedness to the directors; or (2) when the corporation is prohibited
corporation, arising out of unpaid subscription, in a under any loan agreement with any financial
delinquency sale, and to purchase delinquent shares institution or creditor, whether local or foreign, from
sold during said sale; and declaring dividends without its/his consent, and
such consent has not yet been secured; or (3) when
3. To pay dissenting or withdrawing stockholders it can be clearly shown that such retention is
entitled to payment for their shares under the necessary under special circumstances obtaining in
provisions of this Code. (a) the corporation, such as when there is need for
special reserve for probable contingencies. (n)
Section 42. Power to invest corporate funds in
another corporation or business or for any other Section 44. Power to enter into
purpose. - Subject to the provisions of this Code, a management contract. - No corporation shall
private corporation may invest its funds in any other conclude a management contract with another
corporation or business or for any purpose other than corporation unless such contract shall have been
the primary purpose for which it was organized when approved by the board of directors and by
stockholders owning at least the majority of the
36
outstanding capital stock, or by at least a majority of  Upon whom service of summons be made?
the members in the case of a non-stock corporation, of
both the managing and the managed corporation, at a - Section 11. Service upon domestic private
meeting duly called for the purpose: Provided, That (1) juridical entity- when the defendant is a
where a stockholder or stockholders representing the corporation, partnership or association
same interest of both the managing and the managed
organized under the laws of the Philippines
corporations own or control more than one-third (1/3)
of the total outstanding capital stock entitled to vote of with a juridical personality, service may be
the managing corporation; or (2) where a majority of made upon the president, managing
the members of the board of directors of the managing partner, general manager, corporate
corporation also constitute a majority of the members secretary, treasurer, or in house counsel.
of the board of directors of the managed corporation,
then the management contract must be approved by  Delta motor vs. Mangosing
the stockholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding capital - strict compliance is necessary
stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. - should be served to those named in the
No management contract shall be entered into for a statute
period longer than five years for any one term.
- secretary of a dep’t are not those included
The provisions of the next preceding paragraph shall in the statute
apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all  E.B. Villarosa vs. Benito
of the business of another corporation, whether such
contracts are called service contracts, operating - decision En Banc repeals all other
agreements or otherwise: Provided, however, That
pronouncement
such service contracts or operating agreements which
relate to the exploration, development, exploitation or
- section 13 Rule 14 was repealed
utilization of natural resources may be entered into for
such periods as may be provided by the pertinent laws
- the old rules was ambiguous and broad and
or regulations. (n)
at all time illogical
Section 45. Ultra vires acts of corporations. -
 the particular revision under Section 11 of
No corporation under this Code shall possess or
exercise any corporate powers except those conferred Rule 14 was explained by retired Supreme
by this Code or by its articles of incorporation and Court Justice Florenz Regalado, thus:
except such as are necessary or incidental to the
exercise of the powers so conferred. (n) “xxx the then section 13 of this Rule
allowed service upon a defendant
Section 36 corporation to “be made on the
president, manager, secretary,
 Where should the corporation be sued? cashier, agent or any of its
directors.” The aforesaid terms
- principal office is important because it
were obviously ambiguous and
establishes the residence of the corporation
susceptible of broad and
and determining service of summons, venue of
sometimes illogical interpretations,
action
especially the word “agent” of the
- it can be sued in the city or municipality where corporation. The Filoil case,
involving the litigation lawyer of the
its principal office is found
corporation who precisely appeared
 Principal office is also important for venue of to challenge the validity of service
meetings of summons but whose very
appearance for that purpose was
 Non-stock corporation may provide in its by- seized upon to validate the
laws that the venue of meeting be anywhere in defective service, is an illustration
the Philippines of the need for this revised section

37
with limited scope and specific  Luneta vs. A.D. Santos
terminology. Thus the absurd result in
the Filoil case necessitated the - Importance of the purpose clause
amendment permitting service only on
It confers and determine the limits the actual
the in-house counsel of the
authority of the corporation.
corporation who is in effect an
employee of the corporation, as - Cannot have the power to acquire
distinguished from an independent
practitioner.” - Cannot engage in land transportation

o notes: additional knowledge - Doctrine of limited capacity

- special appearance enter for that particular  Gov’t vs. El Hogar


appearance you are not the counsel in the
case - As the lawful transaction of its business
may reasonably represent
- would apply only if it does not involve an intra-
corporate controversy (controversy between  Director of Lands vs. CA
and among the stockholders)
- Exception to the rule in the constitution
- upon any of the statutory officers or officers
- Alienable public land
fixed in the by-laws any secretary, any of the
directors; any managers in the by-laws - Converts the property to a private land
automatically once converted it can now be
 Seal
registered
- merely ministerial or permissive
 Power to make donation
 Power to amend
- Limitation Section 36 par.9
- section 16
Provided, That no corporation, domestic or foreign
- special 37,38,120 shall give donations in aid of any political party or
candidate or for purposes of partisan political
 Power to adopt by-laws activity.

- section 46-48 - These are circumstances, however, under


which a donation by a corporation may be
 Power to issue or sell stocks and to admit to its benefit as a means of increasing its
members business or promoting patronage. Thus,
paragraph 9 of section 36 expressly
- stock of stockholders and provision governing
authorizes a corporation to make
non-stock
donations. The only limitations imposed are
 Power to acquire or alienate real or personal the following:
property
1. The donation must be “reasonable”;
- is there any limitation? YES
2. It must be for public welfare, or for hospital,
- Two specific limitation charitable, scientific, cultural or similar
purpose; and,
1. Section 36, as lawful transactions of business
of the corporation may reasonably and 3. It shall not be in aid of political party or
necessarily require candidate, or for purposes of partisan
political activity.
2. Constitution and law
38
 Power to establish pension - The court must decide whether or not a
logical and necessary relation exists
- Include any act to promote and improve the between the act questioned and the
convenience, welfare and benefit of the corporate purpose expressed in the NPC
employees or offices charter
 Republic vs. Acoje  Importance of PLACE of registration

- While as a rule an ultra-vires act is one - Residence


committed outside the object for which a
corporation is created as defined by law, there - Venue
are however certain corporate acts that may
be performed outside of the scope of the - Place of meetings
powers expressly conferred if they are
- Place or registration of chattel mortgage
necessary to promote the interest or
welfare of the corporation. Thus, it has been  Powers vs. Marshall
held that “although not expressly
authorized to do so a corporation may  Power to extend its terms
become a surety where the particular
transaction is reasonably necessary or - Once its term expires, already dissolved
proper to the conduct of its business,” and automatically, thus can no longer ask for
here it is undisputed that the establishment extension
local post office is a reasonable and proper
- After dissolution, it has 3 years to windup
adjunct to the conduct of the business of
appellant company. Indeed, such post office is  What are the modes of increasing capital
a vital improvement in the living condition of stock?
its employees and laborers who came to settle
in its mining camp which is far removed from 1. Increasing the par value of the existing
the postal facilities or means of number of shares without increasing the
communication accorded to people living in a number of shares;
city or municipality.
2. Increasing the number of existing shares
 Power to exercise such other powers without increasing the par value thereof;
essential or necessary to carry out its and,
purpose (implied power)
3. Increasing the number of existing shares
1. Acts in the usual course of business; and at the same time increasing the par
value of the shares.
2. Acts to protect debts owing to the corporation;
 Why a corporation increases it capital
3. Embarking in a different business; stock?
4. Acts in part or wholly to protect or aid - Generate funds, business expansion, or
employees; and, payment of liabilities, purposes of acquiring
other business. (example: to buy cars for
5. Acts to increase business
the officers, purpose of acquiring other
 Teresa Electric and Power Co. vs. P.S.C. business, expansion, other valid reasons)

- Examined the articles of incorporation to arrive  How do you decrease capital stock and
at its decision why a corporation decreases?

 National Power vs. Vera - Reduce or wipeout existing deficit where no


creditors would thereby be effected
- For purpose of prohibiting the NAPOCOR
39
- When capital is more than necessary to subscription in order to realize assets for
procreate the business or reduction of capital the payment of its debts.
surplus
 Madrigal vs. Zamora
- To write down the value of its fixed assets to
reflect those present and actual - Decrease in capital has a subterfuge to
evade payment
o NOTE: any increase or decrease of capital
stock requires approval of government agency - Thus not valid and effective
like SEC it can never take place unless SEC
- Must not prejudice creditors which includes
approves the same
the employees
 Relevance of decrease of capital?
 Bond
1. To reduce or wipe out existing deficit where no
- Commonly understood as an obligation of a
creditors would thereby be affected;
state, its subdivision or a private
2. When the capital is more than what is corporation, represented by a certificate or
necessary to procreate the business or an instrument for the principal and by
reduction of capital surplus; or, detachable coupons for the payment of
interests. In its simplest term, it is one
3. To write down the value of its fixed assets to where an obligor obliges himself to pay a
reflect there present actual value in case certain sum of money to another at a day
where there is a decline in the value of the named.
fixed assets of the corporation.
- There are different kinds of bond but before
- Examples: Php 10M capital for grocery they may be issued or floated by the
business, mayor didn’t want to issue corporation, the same must be registered
license/permit because mayor has 3 other and approved by the SEC subject to the
grocery stores, only allowed sari-sari store rules and regulations that may be adopted
permit, reduce capital for sari-sari so that the by that agency. The procedure and
money will not sleep in bank requirements set forth in section 38 is the
same as in increasing or decreasing the
- Example: car rental agencies-Php 10M capital capital stock except that the certificate does
for 20 taxi’s, after some time each taxi is only not have to state the matters required in
250K, nagmura ang taxi, to reduce capital is to sub-section 2 & 3 thereof.
show actual assets
 Pre-emptive rights
 Limitation imposed by law
- A right granted by law to all existing
- Decrease shall not in any way affect the rights stockholders of a stock corporation to
of the creditors subscribe to all issues or disposition of
shares of any class, in proportion to their
 Philippine Trust Company vs. Rivera
respective stockholdings, subject only to the
- Without the appraisal of SEC, a decrease in limitations imposed under section 39 of the
capital stocks has no effect Code.

 TRUST FUND DOCTRINE: - Internationally granted

- Subscription to capital stock of a corporation  Pre-emptive rights, why it is granted?


constitute a fund to which the creditors have a
- In order that the existing stockholders may
right to look upon for satisfaction of their
maintain their proportionate right as not to
claims and that the assignee in insolvency can
dilute their right
maintain an action upon any unpaid stock
40
 Power to deny pre-emptive rights articles of incorporation provide otherwise, if
not entirely absolute, in that it extends to all
Section 39. Power to deny pre- issuance and disposition of shares
emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to - Such right of pre-emption may be lost by
subscribe to all issues or disposition of shares waiver of the stockholder, expressly or
of any class, in proportion to their respective impliedly by his inability or failure to
shareholdings, unless such right is denied by exercise it after having been notified of the
the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right proposed issuance or disposition of shares
shall not extend to shares to be issued in
compliance with laws requiring stock offerings  When is it unavailable?
or minimum stock ownership by the public; or
to shares to be issued in good faith with the - In shares traded openly in stock
approval of the stockholders representing two- exchange/market
thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate  Is it applicable to close corporations?
purposes or in payment of a previously
contracted debt. - See section 96, close corporations must
provide it first on its articles of incorporation,
 May it be denied? How? that its articles does not really deny such
pre-emptive rights.
- Yes, if provided by articles of incorporation or
by an amendment  Section 102, will not apply to close
corporations
- However, pre-emptive rights is unavailable to
shares in trading in stock exchange otherwise The right of pre-emptive rights is absolute in close
stockholders must waive first their right before corporations
they may sell such.
“All issues or depositing shares of any class” form
 Exceptions part of ACS

1. When the shares to be issued is in  Certain instances when a stockholder


compliance with laws requiring stock may nevertheless be unable to exercise
offerings or minimum stock ownership by this right:
the public
- Issued for public ownership
2. Shares to be issued in good faith with the
approval of the stockholders representing - Issued in good faith, with approval of 2/3 of
2/3 of the outstanding capital stock either outstanding capital stock either a) in
exchange for property needed or b) for
a. In exchange for property needed for payment of a previously contracted debt
corporate purpose or,
 Pre- emptive rights of stockholders in
b. In payment of a previously contracted ordinary stock corporations may be
debt denied

- The exceptions, however will not apply to - if the shares are to be issued in compliance
stockholders of a close corporation by virtue of with laws requiring stock offering or
a subsequent and specific provision of the minimum stock ownership by the pubic
Code which provides that the “pre-emptive
right of a stockholder in a close corporation - In exchange for property needed for
shall extend to all stock to be issued, including corporate purposes
reissuance of treasury shares, whether for
- In payment of previously contracted debts
money, property or personal services or in
payment of a corporate debt, unless the
41
 This rule, however, does not apply in a - Generally no, corporate entity theory
close corporation as the pre-emptive rights because there may be instances when
of the stockholders thereof is broadened to purchasing corporation may be held liable
include all issues without exceptions
unless, of course, denied or limited by the  May a corporation acquire its own
articles of incorporations. Section 102 shares?
provides:
- Yes

Section 102. Pre-emptive right in  Is there any restriction provided for by


close corporations. - The pre-emptive right of law in reacquiring its own shares?
stockholders in close corporations shall extend
to all stock to be issued, including reissuance
- Yes, it must have been unrestricted retained
of treasury shares, whether for money,
property or personal services, or in payment of earnings appearing in the books of
corporate debts, unless the articles of corporation
incorporation provide otherwise.
 A corporation can never acquire its own
 Denial will not apply to a close corporation, shares if it has no unrestricted retained
ABSOLUTE earnings

- section 96 - Definition and Applicability of - False, exception close corporation and


Close Corporation. redeemable shares

 May a stock holder in a close corporation


insist in the exercise of his pre-emptive
EXAMPLE:
rights?
ACS 2M
- Yes, section 102
SUBSCRIBED 1M
 What type or shares are covered by pre-
emptive rights? PAID UP 1M
 Does it include those originally 1 100K
unsubscribed?
2 100K
- NO. Benito vs. SEC
TO
 Will the stockholders be able to exercise
their pre-emptive right with respect to the 10 100K
old unissued shares? No.
 If 1-5 became 200K each, may 6-10
- Pre-emptive rights is applicable only to new demand the exercise their pre-emptive
issued shares and not to the old unissued right?
shares because it is presumed that the original
subscribers is deemed to have taken his - YES
shares knowing that they form a definite
 May 1-5 subscribe to the unsubscribed
proportionate part of the whole number of
capital stock to the exclusion of 6-10?
authorized shares
- If a corporation makes 2M unrestricted
- When the shares, left unsubscribed are re-
retained earnings, it is the shares and not
offered, he cannot therefore claim. DILUTION
the number of persons that matters
OF INTEREST
 May 6-10 complain for a dilution of their
 Will the acquiring purchaser be liable for
interest?
debts of the former corporation?
42
- YES, it’s an internationally recognized right ACS 1M
because it includes “all issues and disposition
of shares of any class” and all kinds of shares SUBSRIBED 1M
new or old
PAID-UP 1M
- If the remaining unsubscribed shares are
issued, it’s an issuance of any class ASSETS 500K

 May a corporation sell/dispose all or 1M PROFITS


substantially all of its corporate assets and
- 500K LIABILITIES
liabilities?
____________________
- YES
500K RESERVES IN A
- 1) RESOLUTION 2) AUTHORIZATION 3)
CLOSE CORPORATION IT CAN USE THIS TO
RATIFICATION 4) PRIOR WRITTEN NOTICE
REACQUIRE ISSUED STOCKS
5) SALE SUBJECT TO PROVISIONS OF
EXITING LAWS 6) DISSENTING X – REALTY CORPORATION
STOCKHOLDERS HAVE THE RIGHT TO
EXERCISE THEIR APPRAISAL RIGHT  THE ONLY PROPERTY OF THE
CORPORATION
 If a corporation sells substantially all of it
assets and properties, will the buyer  BOARD OF DIRECTORS DECIDED TO
assume liability? SELL IT

- NO, EXCEPT  Will it need the approval of the


stockholders?
1) Express or implied agreement to the purchase
- NO, if the same is necessary in the usual
2) Where the transaction amounts to and regular course of business of said
consolidation or merger of the corporations corporation or if the proceeds of the sale or
other disposition of such property and
3) When purchasing corporation is merely a
assets be appropriated for the conduct of its
continuation of the selling corporation
remaining business
4) Where the transaction is entered into
- If X is a manufacturing company, then it can
fraudulently in order to escape liability for such
sell its only property upon approval of the
debt
stockholders because it will render itself
 Legitimate purpose: for a corporation to capable of continuing its business, BUT if
reacquire its own shares the proceeds will be used to purchase a
better one for the continuance of its
- Limitation: it must have surplus/unrestricted business, then it does not need the
retained earnings approval of the stockholders

- Exception: may redeem irrespective of  Conditions for the valid exercise of this
unrestricted retained earnings power are the following

1) Exercise of stockholders’ right to compel 1. Resolution by the majority vote of the board
“close corporation” to purchase his shares of directors/trustees

2) Where corporation has sufficient assets in its 2. Authorization from the stockholders
books to cover its debts and liabilities representing at least 2/3 of the outstanding
exclusive of capital stock capital stock or 2/3 of the members;

43
3. The ratification of the stockholders or 2. To collect or compromise an
members must be made at a meeting duly indebtedness to the corporation, arising out
called for that purpose of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
4. Prior written notice of the proposed action and sold during said sale; and
of the time and place of meeting must be
made addressed to all stockholders of record, 3. To pay dissenting or withdrawing
stockholders entitled to payment for their
either by mail or personal service;
shares under the provisions of this Code.
(a)
5. The sale of the assets shall be subject to the
provisions of existing laws on illegal
 The corporation must at all times have
combinations and monopolies “unrestricted retained earnings” to
exercise this corporate power
6. Any dissenting stockholder shall have the
option to exercise his appraisal right  Steinberg vs. Velasco
- For as long as there are debts and
 IDP vs. CA
liabilities, a corporation may not reacquire
- Consent of the members was not secured its shares (subject to exceptions)

 Edward Nell Co. vs. Pacific Farms - Creditors of a corporation have the right to
assume that so long as there are
- Generally where one corporation sells or outstanding debts and liabilities, the board
otherwise transfers all of its assets to another of directors will not use the assets of the
corporation, the latter is not liable for the debts corporation to purchase its own stock, and
and liabilities of the transferor, except: that it will not declare dividends to
stockholders when the corporation is
1. Where the purchaser expressly or insolvent.
impliedly agrees to assume such debts;
 Power to invest funds <sec.42>
2. Where the transaction amounts to a
consolidation or merger of the Section 42. Power to invest
corporations; corporate funds in another corporation
or business or for any other purpose. -
3. Where the purchasing corporation is Subject to the provisions of this Code, a
merely a continuation of the selling private corporation may invest its funds in
corporation; any other corporation or business or for any
purpose other than the primary purpose for
4. Where the transaction is entered into which it was organized when approved by a
fraudulently in order to escape liability for majority of the board of directors or trustees
and ratified by the stockholders
such debts.
representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two
 Power to acquire own shares
thirds (2/3) of the members in the case of
non-stock corporations, at a stockholder's
Section 41. Power to acquire own or member's meeting duly called for the
shares. - A stock corporation shall have the purpose. Written notice of the proposed
power to purchase or acquire its own shares investment and the time and place of the
for a legitimate corporate purpose or meeting shall be addressed to each
purposes, including but not limited to the stockholder or member at his place of
following cases: Provided, That the residence as shown on the books of the
corporation has unrestricted retained earnings corporation and deposited to the addressee
in its books to cover the shares to be in the post office with postage prepaid, or
purchased or acquired: served personally: Provided, That any
dissenting stockholder shall have appraisal
1. To eliminate fractional shares arising out of right as provided in this Code: Provided,
stock dividends; however, That where the investment by the
44
corporation is reasonably necessary to purchase of shares of another corporation is
accomplish its primary purpose as stated in done solely for investment and not to
the articles of incorporation, the approval of accomplish the purpose of its incorporation,
the stockholders or members shall not be
the vote of approval of the stockholders is
necessary. (17 1/2a)
necessary.
- For any other purpose other than the primary  Gokongwei vs. SEC
purpose, stockholder’s consent or approval is
necessary - Investments made by SMC is necessarily
connected with its primary purpose and this
- Thus, if it’s for the secondary purpose, it is was ratified in a meeting
necessary
- Submission of previous action is a sound
- If it’s in connection with the primary purpose, corporate practice
only board resolution is necessary
 Redeemable shares
 Requirements and steps to be followed for
a valid investment of corporate funds are:  Closed corporation (see section 105)

1. Resolution by the majority of the board of - For any reason, compel the value of shares
directors or trustees; “withdrawal shares” provided corporation
has sufficient funds to cover its debts and
2. Ratification by the stockholders representing liabilities
at least 2/3 of the outstanding capital stock or
2/3 of the members in case of non-stock
Section 105. Withdrawal of
corporations; stockholder or dissolution of
corporation. - In addition and without
3. The ratification must be made at a meeting prejudice to other rights and remedies
duly called for that purpose; available to a stockholder under this Title,
any stockholder of a close corporation may,
4. Prior written notice of the proposed investment for any reason, compel the said corporation
and the time and place of the meeting shall be to purchase his shares at their fair value,
made, addressed to each stockholder or which shall not be less than their par or
member by mail or by personal service, and; issued value, when the corporation has
sufficient assets in its books to cover its
5. Any dissenting stockholder shall have the debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a
option to exercise his appraisal right
close corporation may, by written petition to
the Securities and Exchange Commission,
 Dela rama vs. Ma-ao Sugar
compel the dissolution of such corporation
whenever any of acts of the directors,
- There is a substantial and not remote
officers or those in control of the corporation
connection between the sugar bags and the is illegal, or fraudulent, or dishonest, or
sugar manufacture, thus stockholder’s oppressive or unfairly prejudicial to the
approval is not necessary for validity corporation or any stockholder, or whenever
corporate assets are being misapplied or
- A private corporation, in order to accomplish wasted.
its purpose as stated in its articles of
incorporation, and imposed by the Corporation  If shares are reacquired, what happens?
Law, has the power to acquire, hold,
mortgage, pledge, or dispose of shares bonds, - It becomes treasury shares
securities and other evidences of
- Stockholder’s consent/ approval is not
indebtedness of any domestic or foreign
necessary and mere board action is
corporation. Such an act, if done in pursuance
sufficient if in accordance with primary
of the corporate purpose, does not need the
purpose
approval of the stockholders; but when the
45
- The logical relation of act done and primary  Where should dividends come from?
purpose of corporation and between the board
of directors to undertake submission of acts is - Stock dividends are declared as stocks
a sound corporate practice coming from corporation

 Dividends  Who declares dividends to be declared?


Do stockholders have any say?
Section 43. Power to declare
- Board of Directors, if stock approval of 2/3
dividends. - The board of directors of a stock
corporation may declare dividends out of the outstanding capital stock
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all ACS-1M SUB-1M P.U.-1M
stockholders on the basis of outstanding stock 1M-U.R.E. (surplus profits of the corporation)
held by them: Provided, That any cash
dividends due on delinquent stock shall first be 1-100k
applied to the unpaid balance on the
subscription plus costs and expenses, while 2-100k
stock dividends shall be withheld from the
delinquent stockholder until his unpaid To
subscription is fully paid: Provided, further,
That no stock dividend shall be issued without 10-100k
the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding 1M
capital stock at a regular or special meeting
duly called for the purpose. (16a)  Board decides to declare 1M, how much
will each receive? May the board declare
Stock corporations are prohibited from stock dividend
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital - NO. that would be over issuance of shares,
stock, except: (1) when justified by definite violation of securities regulation code
corporate expansion projects or programs
approved by the board of directors; or (2) - It must have a free portion
when the corporation is prohibited under any
loan agreement with any financial institution or - The corporation may increase its capital
creditor, whether local or foreign, from
declaring dividends without its/his consent,  Z co. 1M to X Co. is 2/3 of X Co.
and such consent has not yet been secured;
Stockholders reacquired?
or (3) when it can be clearly shown that such
retention is necessary under special
- No, because in property 2/3 is not required
circumstances obtaining in the corporation,
such as when there is need for special reserve
 What is the effect of declaration of
for probable contingencies. (n)
dividends with regards to the assets of a
 What are dividends? company?

- Corporate profits set aside, declared and - As compared to stock dividends, the
ordered by the Board of Directors to be paid to declaration of cash or property dividends
the stockholders. have the effect of reducing corporate assets
to the extent of dividends declared.
 What are property dividends?
- Neither would stock dividends increase the
- Those paid in property surplus proportionate interest of the stockholders of
the corporation although it will have the
 Like tables and chairs? Can tables and effect of increasing the subscribed and
chairs make surplus profits? paid-up capital of the corporation. It gives
the stockholders nothing in the way of
- No, they do not make surplus, bonds, etc.

46
distribution of assets but merely divides his TO
existing shares into smaller units.
10 100K
- Earnings belong to the corporation until
declared or given 1M

 Revocation  May they be compelled?

- No revocation of dividend may be has unless it - NO. You cannot declare if it does not come
has not been officially communicated to the from unrestricted retained earnings.
stockholders or is in the form of stock
1. 1M-U.R.E. (is it true there is no way to
dividends which is revocable at any time prior
compel?)
to distribution.
2. 2M-U.R.E.
 Stock dividends- no reduction, you
capitalize your restricted retained earnings,  May they be compelled to declare dividends
what is issued is a piece of paper. The
restricted earnings remain in the - Mandatory if earned, the board may be
corporation compelled to declare dividends

 Cash and property- reduces corporate - if exceeds 100% of the paid-up capital the
assets boards may be compelled

 Stock dividends increase corporate ACS 2M 1M U.R.E.


assets? No, it will only have the effect of
increasing the subscribed and paid-up capital SUB 1M
of the corporation
PU 800K
 Will there be a corresponding increase in
1-100K 50K PU
their proportionate interest?
2-100K 50K
- REMAINS THE SAME
TO
Exception: when stock dividends will result in a
fractional share 10-100K
ACS-2M 1-100K 200 (10%) 1M
*VOTING AND DIVIDEND RIGHTS STILL
THE SAME  Will 1 and 2 receive full amount of
dividends?
SUB-1M TO 10%
- YES. They are entitled however if they are
PU-1M 10-100K declared delinquent, the amount due them
shall first be applied to his delinquency plus
ACS 2M
expenses.
SUB 1M
 Delinquency occurs, you are called to
PU 1M pay, but you failed to pay. In case of
stock dividend, the delinquent stock
1M RE holder will not be entitled thereto until he
has paid his subscription in full.
1 100K
 Are non-stockholders entitled to receive
2 100K dividends?

47
- No, tock dividends are civil fruits of the original - Entitled to dividends
investment, and to the owners of the shares
belong the civil fruits. - Irrespective of whether the subscription is
full
 How did the court decide dividends in the
case of Neilsen - Illegally declared

- Stock dividends cannot be issued to a person - Declare dividend with the belief that it
who is not a stockholder in payment of formed part of the U.R.E., but yun pala sa
services rendered. capital

- Whether cash, property or stock, only  Directors are not liable, unless sec31 acted
stockholders may receive dividends. Dividends in bad faith or gross negligence in the
are fruits of investments. They come from the conduct of corporate affairs
U.R.E. or surplus profits of the corporation.
 Directors even if acting in behalf of the
ACS 2M 1M U.R.E. corporation, may still be held solidarily liable

SUB 1M JULY 24 DECLARATION  Power to enter into management contract


JULY 31
- New provision
PU 1M
Section 44. Power to enter into
1 100K 100T JULY 26-Y (NEW ONE management contract. - No corporation
WAS DECLARED TO Y) JULY 30- 100K shall conclude a management contract with
another corporation unless such contract
2 shall have been approved by the board of
directors and by stockholders owning at
TO HAVE THE TRANSFER RECORDED least the majority of the outstanding capital
stock, or by at least a majority of the
10 100K members in the case of a non-stock
corporation, of both the managing and the
1M managed corporation, at a meeting duly
called for the purpose: Provided, That (1)
 Insofar as 1 and Y who has a better right? where a stockholder or stockholders
representing the same interest of both the
Already declared, but not yet paid?
managing and the managed corporations
own or control more than one-third (1/3) of
- Right to receive vest upon declaration. Who
the total outstanding capital stock entitled to
ever owns at the time of declaration owns the vote of the managing corporation; or (2)
dividends where a majority of the members of the
board of directors of the managing
- Unless there is a stipulation to the contrary corporation also constitute a majority of the
members of the board of directors of the
 TRUST FUND DOCTRINE managed corporation, then the
management contract must be approved by
- The power to declare it if paid-up capital is not the stockholders of the managed
maintained or is impaired corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled
- Trust fund must be kept intact for the to vote, or by at least two-thirds (2/3) of the
protection of creditors who have the right to members in the case of a non-stock
rely on such subscription and the paid-up corporation. No management contract shall
be entered into for a period longer than five
capital for the satisfaction of their claims
years for any one term.
- Cannot accumulate surplus unreasonably
The provisions of the next
- Basis is the paid-up capital preceding paragraph shall apply to any

48
contract whereby a corporation undertakes to substantially all of the business of another
manage or operate all or substantially all of the corporation, whether such contracts are
business of another corporation, whether such called service contracts. If it will not
contracts are called service contracts,
constitute the management of all or
operating agreements or otherwise: Provided,
however, That such service contracts or substantially all of the business of another
operating agreements which relate to the corporation the first paragraph of section 44
exploration, development, exploitation or will apply and not that of the second, that is,
utilization of natural resources may be entered only the vote of the stockholders holding or
into for such periods as may be provided by representing at least a majority of the
the pertinent laws or regulations. (n) outstanding capital stock or majority of the
members in the case of non-stock
 The requirement for a valid management
corporation will be required.
contract are as follows:
 How long?
1. Resolution of the board of directors
2. Approval by the stockholders holding or - Not longer than 5 years for any one term
representing a majority of the outstanding
capital stock or majority of the members in - Exception: exploration, development or
case of non-stock corporation of both the
utilization of natural resources
managing and the managed corporation
3. The approval of the stockholders or members
 What is an ultra-vires act or contract?
must be made at the meeting called for that
purpose
- Doctrine of limited capacity. Corporation
4. The contract shall not be for a period longer
than 5 years for any one term, except those can do such acts and things as it is allowed
which relate to exploration, development or to do
utilization of natural resources which may be
entered into for such periods as may be - Acts beyond it will be ultra vires, allowing a
provided by pertinent laws and regulations collateral attack

 Every corporate act emanates from the - If not illegal per se merely voidable. Can be
BOARD ratified expressly or impliedly or even
stopped as equitable grounds
 Is the voting requirements of a majority
stockholder ABSOLUTE? - Ultra-vires acts which are not illegal per se
may become binding and enforceable either
- Not only a majority but 2/3 of the outstanding by satisfaction, estoppels or equitable
capital stock or 2/3 of the members in a non- grounds
stock corporation would be required for the
approval of a management contract in the  Consequences of ultra-vires acts?
following instances:
1. On the corporation itself
1. Where the stockholders representing the same
interest of both the managing and managed - The proper forum, in accordance with the
corporation own or control more than 1/3 of provisions of PD 902-A, as amended and
the total outstanding capital stock of the R.A. No. 8799 may suspend or revoke, after
managing corporation; and proper notice and hearing, the franchise or
certificate of registration of the corporation
2. Where a majority of the members of the board for serious misrepresentation as to what the
of directors of the managing corporation also corporation can do or is doing to the great
constitute a majority of the directors of the damage or prejudice of the general public
managed corporation
2. On the rights of the stockholders
3. Where the contract would constitute the
management or operation of all or - A stockholder may bring either an individual
or derivative suit to enjoin a threatened
49
ultra-vires act or contract. If the act or contract  Carlos vs. Mindoro sugar Co.
has already been performed, a derivative suit
for damages against the directors may be - PTC- trust company as such, it also has
filed, but their liability will depend on whether implied powers as to make them more
they acted in good faith and with reasonable attractable
diligence in entering into the contract.
- Not ultra-vires in pursuance of its legitimate
3. On the immediate parties business

- The courts have not agreed as to the legal  Japanese war notes vs. SEC
effect of a corporate contract outside of its
- Non-stock corporations cannot make profits
authorized business but Ballatine gives the
and distribute profits to its shareholders
following summary of the doctrines evolved:
- Ultra-vires because Japanese war notes is
a. If the contract is fully executed on both
a non-stock corporation
sides, the contract is effective and the
courts will no interfere to deprive either  Crisologo-Jose vs. CA (ALWAYS ASKED
party of what has been acquired under it BY DEAN SUNDIANG)
b. If the contract is executory on both sides, - The negotiable instruments law which holds
as a rule, neither party can maintain an an accommodation party liable on the
action for its non-performance instrument to a holder for value, although
such holder at the time of taking the
c. Where the contract is executor on one
instrument knew him to be only an
side only, and has been fully performed on
accommodation party, does not include nor
the other, the courts differ as to whether
apply to corporations which are
an action will lie on the contract against
accommodation parties. This is because the
the party who has received benefits of
issue or indorsement of negotiable paper by
performance under it. Majority of the
a corporation without consideration and for
courts, however, hold that the party who
the accommodation of another is ultra-vires
has received benefits from the
performance is estopped to set up that the - Corporate officers may guarantee or
contract is ultra-vires to defeat an action endorse an accommodation only if
on the contract. This is more in conformity specifically authorized
with the doctrine that no person shall be
allowed to enrich himself at the expense of Section 36 paragraph 11
another
Section 10
 Privano vs. Dela Rama
Section 14 and 15
- Court looked into the purpose clause
 Corporate powers depend on the
- The purpose clause empowers and limits agreement of the stockholders rather
than any director
- Articles likewise provide that it may deal with
any of its money - It may sell and it may guarantee, contract
not necessarily illegal, it will in the absence
- “deal” broad enough to cover the donation it is of proof to the contrary presumed within its
not then ultra-vires power. Corporations are presumed to
contract with in its powers- CARLOS CASE
- Not illegal per se hence (law of agency)
excess powers are subject to ratification - Purpose clause may be stretched to cover
PLDT internet. It may be within its business.
- Ratified by passing the resolution in question

50
- May it sell computers? NO! other line of - Until and unless the SEC gives it stamped
business. Its trading! of approval

BY-LAWS - Suspension of any government agency. The


permission must first be secured- section 46
 By-Laws
 Elements of a valid by-law
- Rule adopted by the corporation for its internal
governance 1. It must not be contrary to law, public policy
or morals;
 Is the adoption of by-laws mandatory?
2. It must not be inconsistent with the articles
 When should the by-laws be adopted or of incorporation;
filed? Can it not be adopted earlier?
3. It must be general and uniform in its effect
- After incorporation- within 1 month (emanates or applicable to all alike or those similarly
from the BOARD) situated;

- Prior-more convenient (signed by the 4. It must not impair obligations and contracts
incorporators) or vested rights; and’

 Who will sign the adoption clause? 5. It must be reasonable.

- Majority of the stockholders or members - Must not be inconsistent with existing laws.
attested to by the corporate secretary Not be inconsistent with articles of
incorporation
 What happens if the corporation fails to
adopt the by-laws from the tie provided by  By-laws
the law? Would there be an automatic
revocation or suspension? - None filing would not affect the status of the
corporation, Loyola grand villas case
- Proper notice and hearing, must first be
complied with - The word “must” is not always imperative

 Loyola grand villas vs. CA - Stockholders are conlusively presumed to


know the provisions of the by-laws
- Not the SEC, but the HIGC
rd
 How about 3 persons?
- Must – not always imperative
- NO. unless there is actual knowledge of the
- Filing of by-laws mandatory same they are not presumed to know of the
provisions of the by-laws
- Empowered by SEC
 Fleischer vs. Botika Nolasco
- Merely a ground, there must be proper notice
and hearing - Shares of stock are personal properties

- Not affect the status of the corporation as a - Shares of stock may transfer to whom ever
juridical person he wishes

- Subject the corporation to a fine, as may be - The by-laws is contrary to law


issued by the SEC
 Articles of incorporation
 When do by-laws become effective?
- May provide reasonable restriction

- By-laws merely internal laws


51
- Articles is the contract between and among - This delegated power, however, is
the parties and corporation considered revoked whenever a majority of
the outstanding capital stock or members
 Gov’t vs. El Hogar shall so vote at a regular or special meeting.

- Did the court categorically ruled here that the  If it is to be amended what is the
th
provision in the 5 cause of action is valid? proceeding?

- Rules governing equity, considering the fact - Section 48 2


nd
paragraph provides:
that there was always lack of quorum
Section 48. Amendments to by-
- Section 29 BOD if still constituting a quorum laws. - The board of directors or trustees,
may fill up a vacancy other than by removal, by a majority vote thereof, and the owners
etc. of at least a majority of the outstanding
capital stock, or at least a majority of the
 Gokongwei vs. SEC members of a non-stock corporation, at a
regular or special meeting duly called for
- Section 48 allows a corporation to amend it the purpose, may amend or repeal any by-
by-laws laws or adopt new by-laws. The owners of
two-thirds (2/3) of the outstanding capital
- Section 47 of the code, the by-laws may stock or two-thirds (2/3) of the members in a
provide for the qualification and disqualification non-stock corporation may delegate to the
board of directors or trustees the power to
- It cannot be said Gokongwei has a vested amend or repeal any by-laws or adopt new
rights by-laws: Provided, That any power
delegated to the board of directors or
trustees to amend or repeal any by-laws or
- Prevent directors from taking advantage of
adopt new by-laws shall be considered as
position to promote his individual interest to revoked whenever stockholders owning or
the damage of others representing a majority of the outstanding
capital stock or a majority of the members in
- The validity or reasonableness of a by-laws is non-stock corporations, shall so vote at a
a question of law regular or special meeting.

- Subject to the limitations that reasonableness Whenever any amendment or new


of a by-law is a mere matter of judgment by-laws are adopted, such amendment or
new by-laws shall be attached to the
- Rule of the majority and not the tyranny of the original by-laws in the office of the
minority corporation, and a copy thereof, duly
certified under oath by the corporate
 May the by-laws be amended altered or secretary and a majority of the directors or
appealed? trustees, shall be filed with the Securities
and Exchange Commission the same to be
- YES. HOW? Two modes attached to the original articles of
incorporation and original by-laws.
1. By a majority vote of the directors or trustees
and the majority vote of the outstanding capital The amended or new by-laws shall
stock or members in a non-stock corporation, only be effective upon the issuance by the
Securities and Exchange Commission of a
at a regular or special meeting called for that
certification that the same are not
purpose; inconsistent with this Code. (22a and 23a)
2. By the board of directors alone when
 Baretto vs. La Previsora
delegated by 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock - Any corporate act emanates from the board
corporation.

52
- Directors themselves cannot amend the by-  What if in the date specified in the by-
laws if they were not granted the same laws or by the law itself the meeting was
not convened, for instance lack of
 Section 48 quorum or force majeure?

 The power granted is not subject to - It may be postponed on a reasonable date


revocation T or F?
 Notice requirement?
- FALSE
- Regular- 2 weeks prior notice
 If the by-laws are amended when will they
become valid? - Special- 1 week

- Upon issuance of the SEC that they are not  May the notice requirement be
inconsistent lessened?

 What if the SEC failed to act within 10 - By-laws may provide a longer or a shorter
months without fault attributable to the duration
corporation?
 What if the notice requirement is not
 T or F any amendment of the by-laws will complied with?
never become valid until it gives its stamp
of approval even after 1 year  What happened to any act passed in a
meeting when notice requirement was
- TRUE. Articles of incorporation and by-laws not required with?
are different
- Voidable, subject to ratification
MEETINGS
 Board of directors vs. Tan
 Meetings
- Notice requirement is the by-laws is a
- Meetings of stockholders 1. mandatory requirement
Date fixed in the by-laws or by-law
- Improperly served, any action will be
- Meetings of director or trustees invalidated at the objection of any
stockholder or member
- Meetings are regular and special
 Must be held in the proper place
- Meetings of stockholders
 Where should it be held?
 What is regular and what is special?
- Apparent from the foregoing provision is
 When are regular meetings of the that meetings of stockholders must, at all
stockholders held? times, be held in the city or municipality
where the principal office of the corporation
- Fixed date provided by the by-laws
is located and, as far as practicable, in the
 What if there is no date? principal office of the corporation.

- April  May the by-laws of a corporation provide


that meetings be held anywhere in the
 Why april? Philippines?

- Point in time the audited financial statement - While there is no provision authorizing a
have been prepared stock corporation to hold stockholders’
meetings outside of the City of Municipality
where the principal office is located, the law
53
allows a non-stock corporation to provide in its Section 28. Removal of directors
by-laws any place of members’ meeting or trustees. - Any director or trustee of a
provided that proper notice is sent to all corporation may be removed from office by
a vote of the stockholders holding or
members indicating the date, time and place of
representing at least two-thirds (2/3) of the
the meeting which shall be within the outstanding capital stock, or if the
Philippines. corporation be a non-stock corporation, by a
vote of at least two-thirds (2/3) of the
 T or F the by-laws of a stock corporation members entitled to vote: Provided, That
may validly provide that meetings shall be such removal shall take place either at a
held anywhere in the Philippines? regular meeting of the corporation or at a
special meeting called for the purpose, and
- FALSE. Non-stock corporations lang pwede in either case, after previous notice to
provided nakalagay sa by-laws and provided stockholders or members of the corporation
proper notice is given of the intention to propose such removal at
the meeting. A special meeting of the
 Corporation can do only such things as the stockholders or members of a corporation
for the purpose of removal of directors or
law allows it to do, DOCTRINE OF LIMITED trustees, or any of them, must be called by
CAPACITY the secretary on order of the president or on
the written demand of the stockholders
 San Miguel office located in Ortigas Center. representing or holding at least a majority of
May stockholders meeting be held in PICC the outstanding capital stock, or, if it be a
center? non-stock corporation, on the written
demand of a majority of the members
- YES. Metro Manila, one single city entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such
 Must be called by the proper party demand or fail or refuse to give the notice,
or if there is no secretary, the call for the
 Who calls? meeting may be addressed directly to the
stockholders or members by any
- President until and unless there is a provision , stockholder or member of the corporation
secretary on order of the president signing the demand. Notice of the time and
place of such meeting, as well as of the
 What if there is nobody who can call? intention to propose such removal, must be
given by publication or by written notice
- The petitioner, stockholder may petition the prescribed in this Code. Removal may be
with or without cause: Provided, That
court
removal without cause may not be used to
deprive minority stockholders or members
 What if there is a person who can call, but
of the right of representation to which they
he fails or neglects to call the meeting? may be entitled under Section 24 of this
May a stockholder petition to authorize a Code. (n)
meeting?
 Cases of removal or ouster of a director
- Ponce case only applies when there is NO
person authorized to call the meeting. If there  Mandamus would be appropriate remedy if
is a person, but neglects his duty. Ponce will there is a person authorized but refuses
not apply.
 Quorum and voting requirement
 Writ of injunction may never be issued ex
parte - Majority stockholders or members constitute
a quorum
 Is there any exception?
 Is the presence of the majority owners of
- Section 28 only instance the outstanding capital stock
ABSOLUTE to have a quorum?

54
- NO. when the code requires a higher quorum  May that be restricted (within or outside
it must also be equivalent to the vote required the Phil)

 Do you include non-voting shares in - YES. unless the by-laws provide otherwise.
arriving at the voting requirement to have a
valid corporate act?  Is there any notice requirement?

- It depends. - YES. 1 day unless otherwise provided by


the by-laws
- Section 6 last par. If it falls within the
penultimate par. Of section 6  What happens if notice is not complied
with?
 Five requisites of a valid meeting
- If the notice requirement is not complied
1. It must be held on the date fixed in the by-laws with the meeting is illegal and will not bind
or in accordance with law the corporation except when subsequently
ratified or in the case of a close corporation
2. Prior notice must be given where the act of any one director may bind
the corporation even without a meeting
3. It must be held at he proper place
under the special provision of Section 101
4. It must be called by the proper party of the Code.

5. Quorum and voting requirements must be met  Can notice be waived? <sec.53>

 Date not complied with, notice, place, not Section 53. Regular and special
complied with and the person who called meetings of directors or trustees. - Regular
not authorized, what happens to any meetings of the board of directors or
resolution called? trustees of every corporation shall be held
monthly, unless the by-laws provide
otherwise.
- Section 51, any meeting shall be valid
provided all the stockholders are present or
Special meetings of the board of
duly represented and provided it is within the
RD directors or trustees may be held at any
power of the corporation. 3 paragraph of 324 time upon the call of the president or as
provided in the by-laws.
- If the voting requirement is met, any resolution
passed in the meeting, even if improperly held Meetings of directors or trustees of
or called will be valid if all the stockholders or corporations may be held anywhere in or
members are present or duly represented outside of the Philippines, unless the by-
thereat. The last paragraph of section 51 is laws provide otherwise. Notice of regular or
clear on the matter when it provides: special meetings stating the date, time and
place of the meeting must be sent to every
“all proceedings had and any business director or trustee at least one (1) day prior
transacted at any meeting of the to the scheduled meeting, unless otherwise
provided by the by-laws. A director or
stockholders or members, if within the trustee may waive this requirement, either
powers or authority of the corporation, expressly or impliedly. (n)
shall be valid even if the meeting be
improperly held or called, provided all - YES. Expressly and impliedly
the stockholders or members of the
corporation are present or duly - SEC ruling
represented at the meeting.”
A special meeting is valid without
 Directors/trustees meeting notice where the directors are all
present or where they consent to
 Regular (monthly) and special (anytime) the meeting. Presence at the
55
meeting waives the want of notice.  If A is a director and a meeting is called
Moreover, it has been ruled that the for the purpose of electing a new set of
meeting of the directors without a BOD can A vote by proxy?
formal call first being had, and notice
thereof given to the members, did not - YES. Because it is a stockholders meeting
operate to invalidate it or to render the
 If directors meeting, cannot vote by
proceedings which were taken at it
proxy
void, for every member of the board
were present, and their joint action  Stockholder’s right to vote
had completely bound the corporation
as if the meeting has been called with - Inherent in stock ownership
due formality, and everyone of the
directors had received proper notice. - However this right is not always inherent,
because it may be denied:
 What is the quorum and voting requirement
in the directors meeting? 1. Redeemable and preferred shares,
however if founders shares are issued
- Majority of the members of the board of others may be denied the right to vote.
directors (entire membership)
2. May be denied by the articles of
 Vote required to pass a valid corporate incorporation or contracts
act?
- When not denied they may do so in person
- Majority of those present at which there is a or by proxy
quorum (3 present, vote of 2 sufficient)
 May the right to vote by proxy be
- Exception, majority of all the members of the denied?
board in case of election of corporate officers,
unless the articles provide for a greater  May the articles of incorporation deny?
quorum or voting requirement
 May the by-laws validly provide that
 Should the director or trustees be proxy voting is not allowed?
physically present?
- NO
- General rule, must sit and act as a body to
have a valid corporate act  Only non-stock may be denied proxy
voting (may be broaden, limited or
 Five man member board, a meeting was denied)
called today, should the physical presence
or warm bodies requires to constitute a  Proxy voting is a matter of right granted
quorum? by law

 Requirements of a valid proxy?


- NO. it is not required. Teleconference or video
conference is allowed, E- commerce law
- Section 58
Membership subject to laws
Section 58. Proxies. -
Stockholder not yet Stockholders and members may vote in
person or by proxy in all meetings of
 May director vote by proxy? stockholders or members. Proxies shall in
writing, signed by the stockholder or
- NO 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
56
it is intended. No proxy shall be valid and and continuity in management in situations
effective for a period longer than five (5) years where it is needed.
at any one time. (n)
 What is the effect of a voting trust
 How long may a proxy exist? agreement relative to the rights?

- Maximum of 5 years - Lee vs. CA must pass these criteria

- Valid for the meeting in which it is intended 1. That the voting rights of the stock are
separated from the other attributes of
 Is proxy revocable? ownership;

- Generally revocable, unless coupled with 2. That the voting rights granted are intended
interest to be irrevocable for a definite period of
time; and,
 Revocation
3. That the principal purpose of the grant of
- A proxy, like agency in general is revocable
voting rights is to acquire voting control of
unless coupled with an interest and revocation
the corporation.
need not be made by formal notice in writing.
Revocation may be expressed to the proxy  During the duration of the trust they are
holder, to the election committee, by a irrevocable unless there is a violation
subsequent proxy to another or by sale of the either by fraud
shares. Thus it may be revoke orally by
conduct such that appearing and asserting the  Requisites
right to vote at a meeting by the registered
owner of the shares revokes a proxy - Section 59
previously given.
Section 59. Voting trusts. - One or
 Must be submitted to a validation more stockholders of a stock corporation
committee may create a voting trust for the purpose of
conferring upon a trustee or trustees the
 By-laws of non-stock corporations may right to vote and other rights pertaining to
deny proxy voting the shares for a period not exceeding five
(5) years at any time: Provided, That in the
case of a voting trust specifically required
 What is voting trust agreement?
as a condition in a loan agreement, said
voting trust may be for a period exceeding
- One created by an agreement between a
five (5) years but shall automatically expire
group of stockholders of a corporation and a upon full payment of the loan. A voting trust
trustee, or a group of identical agreements agreement must be in writing and notarized,
between individual stockholders and a and shall specify the terms and conditions
common trustee, whereby it is provided that thereof. A certified copy of such agreement
for a term o years or for a period contingent shall be filed with the corporation and with
upon a certain event, or until the agreement is the Securities and Exchange Commission;
otherwise, said agreement is ineffective and
terminated, control over the stock owned by
unenforceable. The certificate or certificates
such stockholders, shall be lodged in the of stock covered by the voting trust
trustee, either with or without reservation to agreement shall be cancelled and new ones
the owners or persons designated by them the shall be issued in the name of the trustee or
power to direct how such control shall be trustees stating that they are issued
issued. pursuant to said agreement. In the books of
the corporation, it shall be noted that the
- It is a devise of binding stockholders to vote as transfer in the name of the trustee or
trustees is made pursuant to said voting
a unit and thus assuring a desirable stability
trust agreement.

57
The trustee or trustees shall execute - The voting trust agreement filed with the
and deliver to the transferors voting trust corporation shall be subject to examination
certificates, which shall be transferable in the by any stockholder of the corporation in the
same manner and with the same effect as
same manner as any other corporate book
certificates of stock.
or record. Provided, that both the transfer
and the trustee or trustees may exercise the
The voting trust agreement filed with
the corporation shall be subject to examination right of inspection of all corporate books
by any stockholder of the corporation in the and records in accordance with the
same manner as any other corporate book or provisions of this Code.
record: Provided, That both the transferor and
the trustee or trustees may exercise the right  Legal title is transferred to the voting
of inspection of all corporate books and trustee
records in accordance with the provisions of
this Code.  May the voting trustee vote by proxy?

Any other stockholder may transfer his - Yes, legal owner may vote by proxy
shares to the same trustee or trustees upon
the terms and conditions stated in the voting  May the proxy holder vote by proxy?
trust agreement, and thereupon shall be
bound by all the provisions of said agreement. - NO, (AGENT) an agent can have no other
agent unless specifically allowed by the
No voting trust agreement shall be principal
entered into for the purpose of circumventing
the law against monopolies and illegal  Stockholder executing as a proxy, is he
combinations in restraint of trade or used for qualified to be voted as a director?
purposes of fraud.
 Why is he qualified to act as a director if
Unless expressly renewed, all rights the stockholder executes as a director?
granted in a voting trust agreement shall
automatically expire at the end of the agreed - The beneficial owner of the shares in a
period, and the voting trust certificates as well
voting trust is disqualified to be a director in
as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed a voting trust whereas in a proxy, the owner
cancelled and new certificates of stock shall of the shares may be elected as such since
be reissued in the name of the transferors. legal title thereof remains with him

The voting trustee or trustees may - YES he remains to be the owner


vote by proxy unless the agreement provides
otherwise. (36a)  Is the stockholder executing in a voting
trust agreement, is he qualified to act as
 Does it need to be notarized? a director?

- Yes, otherwise it is ineffective and - NO. ceases to be stockholder of record, no


unenforceable longer the legal owner of shares

 Only legal ownership is transferred  May the corporation enforce the voting
trust agreements executed by its
 Being still the beneficial owner they may stockholders?
transfer these rights
- NO. NIDC vs. AQUINO
 Is the right granted to a voting trust
agreement absolute? (to inspect) - Not a privy to the contract

- NO. - Rights liabilities of a stockholder are there in


their individual capacity- corporate entity
theory

58
 Voting trust agreements - Purchaser can neither require the issuance

- Normally executed in favor of banking and X Co. Inc.


financial institutions

- So that they can vote a certain set of directors


P
- They will be more secured
Authorized capital 1M
 Voting pull agreement
500 SUBSCRIBED
- Enters into an agreement
500 UNISSUED STOCKS (AS LONG AS
- Pull all their shares to cast one vote GALING DITO)

- Covered by rules governing contracts Z wants to acquire 100K

- By pulling their votes they can decline the Entered in June 50% shall be down payment
resolution passed by the board remainder December 08

END OF MIDTERMS o he will not be considered a stockholder


unless he has paid in full

August 08 property is ravaged by fire all are turned


STOCKS AND STOCKHOLDERS into shares

 3 modes  Is Z liable to pay the balance of his


acquisitions?
1. By a contract of subscription with the
corporation; - YES, no matter how the party refer to it, it is
considered subscription
2. By purchase of treasury shares from the
corporation; and, - Once you subscribe, you become a
stockholder which is entitled to all the
3. By purchase or acquisition of shares from
liabilities of a stockholder
existing stockholders.
Z- subscribed to 100T/S of XCo.
 Section 60 subscription
Amount he paid 50k
- Any contract
Z did not pay on the date called and was declared a
- Whether existing or still to be formed
delinquent share

Section 60. Subscription contract. - Any  Corporation paid 100T/S therefore the
contract for the acquisition of unissued stock in an corporation reacquired the shares again,
existing corporation or a corporation still to be
what are they called?
formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that
- Treasury shares
the parties refer to it as a purchase or some other
contract. (n)
Y- 80T/S DECEMBER 08
th
 Under the old law the 4 mode is PURCHASE 40 % (AUGUST) WAS DESTROYED BY FIRE, IS
HE STILL LIABLE TO PAY THE UNPAID
 Purchase
PORTION?
- Reciprocal in nature
 IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A
59
STOCKHOLDER ONLY IF PAID IN FULL IS 4. Previously incurred indebtedness of the
HE LIABLE? corporation;

- NO, because that was a purchase 5. Amounts transferred from unrestricted


retained earnings to stated capital; and
- First example galing sa unissued stock
nd
6. Outstanding shares exchanged for stocks
- 2 example galling sa treasury shares hindi sa in the event of reclassification or
unissued share conversion.

 NO such thing as purchase of unissued stocks Where the consideration is other


than actual cash, or consists of intangible
 A subscription contract can be conditional property such as patents of copyrights, the
provided there is nothing in the charter or valuation thereof shall initially be
statute prohibiting it and not against public determined by the incorporators or the
order, law, etc. board of directors, subject to approval by
the Securities and Exchange Commission.
 Must it be in writing?
Shares of stock shall not be issued
- NO, it may be oral in exchange for promissory notes or future
service.
 5M should it be in writing to be valid and
binding as a subscription? The same considerations provided
for in this section, insofar as they may be
- NO, statutes of frauds only applies to SALES applicable, may be used for the issuance of
bonds by the corporation.
 Trillana vs. Quezon College
The issued price of no-par value
- Counter proposal, therefore there was a need shares may be fixed in the articles of
for an acceptance incorporation or by the board of directors
pursuant to authority conferred upon it by
- Facultative because it is in his own free will, it the articles of incorporation or the by-laws,
is void or in the absence thereof, by the
stockholders representing at least a majority
 What may be used as a consideration and of the outstanding capital stock at a meeting
how much should be the consideration? duly called for the purpose. (5 and 16)

- Section 62 provides:  “Amounts transferred from unrestricted


retained earnings to stated capital” what
Section 62. Consideration for stocks. does it mean?
- Stocks shall not be issued for a consideration
less than the par or issued price thereof. - Stock dividends will in effect capitalize the
Consideration for the issuance of stock may unrestricted retained earnings
be any or a combination of any two or more of
the following:  After 5 years the founders shares may be
converted into common shares or other
1. Actual cash paid to the corporation; kinds of shares

2. Property, tangible or intangible, actually  May shares of stocks be issued without


received by the corporation and necessary or consideration? Why?
convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value - NO, two reasons by the SC, discriminatory
of the stock issued; against other stockholders and second
unlawful, it prejudices the right of the
3. Labor performed for or services actually creditors “Trust Fund Doctrine”
rendered to the corporation;

60
 If issued without a consideration  Is the issuance of a certificate of stock
necessary to consider the subscriber a
- Section 65, they will be considered as watered stockholder?
stocks
- NO, shall be considered a stockholder even
Section 65. Liability of directors for without a certificate of stock
watered stocks. - Any director or officer of a
corporation consenting to the issuance of  Instances when he may not be able to
stocks for a consideration less than its par or exercise his rights as such stockholder
issued value or for a consideration in any form
other than cash, valued in excess of its fair - Declared delinquent
value, or who, having knowledge thereof, does
not forthwith express his objection in writing - When he exercises his appraisal right
and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder  Are certificate of stocks transferrable?
concerned to the corporation and its creditors
for the difference between the fair value - YES
received at the time of issuance of the stock
and the par or issued value of the same. (n)  Are certificate of stocks considered
negotiable?
- Subscribers may be compelled to pay the
value - Quasi-negotiable

 Issuance of a certificate of stock is another  Why are they considered quasi-negotiable


thing when it may be transferred through
endorsement and delivery?
 What are the requisites for the issuance of a
valid certificate of stock?
100t/s 001 10/s
1. It must be signed by the president or vice-
president and countersigned by the secretary Abc co.
or assistant secretary;

2. It must be sealed with the corporate seal; and B stole and forged the signature
the entire value thereof (together with interest C is purchaser in good faith and for value will C
acquire title
or expenses, if any) should have been paid.

While it appears, that a subscriber to shares of


stock cannot be entitled to the issuance of a
certificate of stock until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares) if any
is due, has been paid, a subscriber to shares
of stock, even if not yet fully paid, is entitled to
exercise all the rights of a stockholder and the
Endorsement from
corresponding liability that attach thereunder. When issued by owner
Thus, the Code provides: Endorsed by owner- strict compliance

Section 72. Rights of unpaid shares. -


Holders of subscribed shares not fully paid ANSWER: a certificate of stock is not regarded as
which are not delinquent shall have all the negotiable in the same sense that a bill or note is
rights of a stockholder. (n) negotiable, even if it is endorsed in blank. Thus,
while it may be transferred by endorsement coupled
with delivery thereof, and therefore merely quasi-
negotiable, it is nonetheless non-negotiable in that
61
the transferees takes it without prejudice to all the despite a previous transfer of which it had
rights and defenses which the true and lawful owner no knowledge. The purpose of registration
may have except in so far as the principles governing therefore is twofold: to enable the transferee
estoppels may apply. to exercise all the rights of a stockholder
and to inform the corporation of any change
He acquired it by virtue of a forged instrument; no in shares ownership so that it can ascertain
matter how innocent the purchaser is because it is the persons entitled to the rights and
subject to all the rights and defenses subject to the liabilities of a stockholder.”
 What if A endorsed it? Thus, it was also ruled by the High
Court in Nautica Canning Corp. vs.
- He is estopped, unless there are other
Yumul that “A transfer of shares not
available defenses
recorded in the stock and transfer
 Transfer is required to be recorded in the book of the corporation is non-
books of the corporation, however even if not existent in so far as the corporation
recorded, it will be valid between the parties. is concerned.” This is so because
Non-registration will not however, affect the “the corporation looks only through
validity thereof at least in so far as the its books for the purpose of
contracting parties are concerned. determining who its stockholders
are.”
Section 63. Certificate of stock and
 Registration is necessary for the following:
transfer of shares. - The capital stock of stock
corporations shall be divided into shares for
1. To enable the corporation to know who its
which certificates signed by the president or
vice president, countersigned by the secretary stockholders are;
or assistant secretary, and sealed with the
seal of the corporation shall be issued in 2. To enable the transferee to exercise his
accordance with the by-laws. Shares of stock rights a s stockholders;
so issued are personal property and may be
transferred by delivery of the certificate or 3. To afford the corporation an opportunity to
certificates indorsed by the owner or his object or refuse registration of the transfer
attorney-in-fact or other person legally in case allowed by law;
authorized to make the transfer. No transfer,
however, shall be valid, except as between the 4. To avoid fictitious and fraudulent transfers;
parties, until the transfer is recorded in the and,
books of the corporation showing the names of
the parties to the transaction, the date of the 5. To protect creditors who have the right to
transfer, the number of the certificate or
look upon stockholders, in case of no-
certificates and the number of shares
transferred. payment or watered shares, for the
satisfaction of their claims.
No shares of stock against which the
corporation holds any unpaid claim shall be  Duty of the secretary is ministerial, hence
transferable in the books of the corporation. mandamus will lie if the secretary refuses to
(35) record the transfer, but he cannot be
compelled when the transferee’s title to the
 “Until registration is accomplished, the said shares has no prima facie validity or
transfer, though valid between the parties, uncertain
cannot be effective as against the corporation.
Thus the, unrecorded transfer cannot enjoy  Transfer- absolute and unconditional
the status of a stockholder; he cannot vote nor transfer to warrant registration in the books
be voted for, and he will not be entitled to of the corporation in order to bind the latter
dividends. The corporation will be protected and other third persons.
when it pays dividend to the registered owner

62
 Other restrictions on the right to transfer - Was the mortgage valid and effective as
shares would include: against subsequent third parties

1. It is not valid, except as between the parties, - Register of deeds where the corporation
until recorded in the books of the corporation; resides and if different in the register of
deeds of owner’s domicile
2. Shares of stock against which the corporation
holds any unpaid claim shall not be  Unson vs. Dinamito
transferable in the books of the corporation;
unpaid claims, refer to claims arising from - All transferred not register will not have a
unpaid subscription and not to any valid force and effect
indebtedness which a stockholder may owe
 Right to transfer may be regulated
the corporation such as monthly dues;
 May not be unreasonably restricted
3. Restrictions required to be indicated in the
articles of incorporation, by-laws and stock  Violation of nationalization law- Central
certificates of a close corporation; Bank
4. Restrictions imposed by special law, such as  Lambert vs. Fox
the Public Service Act requiring the approval
of the government agency concerned if it will - Valid , may be reasonably regulated,
vest unto the transferee 40% of the capital of restricted by agreement of parties
the public service company;
- Reasonable agreement by the parties
5. Sale to aliens in violation of maximum
ownership of shares under the Nationalization - Reasonable as to length of time
Laws;
 Padgett vs. Babcock
6. Those covered by reasonable agreement of
- Any attempt to restrain transfer
the parties.

 Monserat vs. Ceron - SC, in the absence of a valid lien upon its
shares
- Does it include mortgage?
- Valid restrictions shares are applicable
- NO, it is not an absolute transfer
- Any restriction on a stockholder’s right to
- Will not affect the transfer through mortgage dispose of his shares must be construed
strictly; and any attempt to restrain a
- Absolute and unconditional transfer transfer of shares is regarded as being in
restraint of trade, in the absence of a valid
- Only the transfer or absolute conveyance of lien upon its shares, and except to the
the ownership of the title to a share need be extent that valid restrictive regulations and
entered and noted upon the books of the agreements exist and are applicable.
corporation in order that such transfer may be Subject only to such restrictions, a
valid, therefore, inasmuch as a chattel stockholder cannot be controlled in or
mortgage of the aforesaid title is not a restrained from exercising his right to
complete and absolute alienation of the transfer by the corporation or its officers or
dominion and ownership thereof, its entry and by other stockholders, even though the sale
notation upon the books of the corporation is is to a competitor of the company, or to an
not necessary requisite to its validity insolvent person, or even though a
controlling interest is sold to one purchaser.
 Chua guan vs. Magsasaka
 Certificate of stocks are transferrable

63
- By endorsement and delivery of the stock - In a contract of pledge there must be
certificate to the transferee foreclosure

 In order to be valid, must be registered in the - In the case there was no attempt to
books. If not, will only be binding among foreclose
parties
- Petitioner must have a prima facie right
 How may shares of stock be transferred?
 Nava vs. Peers Marketing
- Endorsement of stock certificate by owner or
attorney-in-fact with delivery - A stock subscription is a subsisting liability
from the time the subscription is made
 Embassy farms vs. CA
- The subscriber is as much bound to pay his
- Must be endorsed by owner or attorney-in-fact subscription as he would be to pay any
coupled with delivery other debt

- Endorsed not delivered - No stock certificate was issued. Without


stock certificate, which is the evidence of
- Proper mode and manner must be complied ownership of corporate stock, the
with assignment of corporate shares is effective
only between the parties to the transaction
 Razon vs. IAC
 Exception to the general rule
- Delivered not endorsed
 Rural Bank of Lipa vs. CA
- Reverse of Embassy Farms
- By notarized deed
- Endorsement alone is not sufficient nor
delivery without endorsement is not allowed - Certificate of stocks already issued must be
coupled with delivery, exception (TAN vs.
- Endorsement plus delivery is mandatory
SEC)
 Is there any other mode of transferring stock?
 Stock certificate has already been issued it
- Notarized deed must be coupled with the delivery

- Deed of assignment  After certificate of stock is issued, may it be


effectively transferred even without
 Rural bank of Salinas vs. CA endorsement or delivery of the stock
certificate?
- If denied or refused without good cause,
mandamus will lie - Person sought to be a stockholder is an
officer and has custody
 Tay vs. CA
 Endorsement and delivery is not necessary
- Mandamus may issue if petition has a clear (TAN vs. SEC)
legal right
 Tan vs. SEC (FULL KNOWLEDGE, HE IS
- Never issued in doubtful cases ESTOPPED)

- Petitioner failed to establish a clear legal right - Persons sought to be stockholder is officer
and alleged ownership is without merit and has custody of the book (estopped)

- Did not acquire ownership by virtue of the  General Rule for valid transfer
contract of pledge

64
- Certificate of stock must be endorsed by subject to the limitations imposes by the
owner or attorney-in-fact coupled with delivery principles governing estoppels.

 Exceptions  Unauthorized issuance of stock certificates

- Section 63 uses the word “may”


100/s 100
- Showing that there may be other modes of
transferring shares
XYZCo

 Is there a time frame or fixed period as when 100 pesos per share
transfer can be made? Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
- NO, (WON vs. WACK WACK)

 Won vs. Wack Wack

- Valid between contracting parties even if not


recorded in corporation books

- Right accrues only if refused


ENDORSEMENT FORM
- Statute of limitations does not apply in
 C armed with the endorsement form
registration of shares of stock
certificate, sold to D (innocent purchaser for
- Must determined from the time of refusal value), will D acquire title?

 Why are they non-negotiable when they may - NO, subject to such rights and defenses as
be transferred? the true and lawful owner may have

- Transferees pays it without prejudice to all the  What if C now goes to the corporation and
rights and defenses as the true and lawful presents the form?
owner may have under the law except insofar
- Then the corporation shall cancel the old
as such rights and defenses are subject to the
certificate and issues a new one, now in the
limitations imposed by the principles governing
name of C, now registered in the name of
estoppels
C, will C acquire title?
 Delos Santos vs. Republic
 A found out what happened and goes to the
- Why is he, not considered as the owner of corporation who has a better title C or A?
shares? When it has been said that when
- A, A cannot be deprived of his right by virtue
endorsed by the owner it is considered as
of an unauthorized transfer
strict certificate? Because certificate of stocks
are non-negotiable  Corporation can compel C to deliver the
new stock certificate because he made a
- Although a stock-certificate is sometimes
representation that the certificate where
regarded as quasi-negotiable, in the sense
good.
that it may be transferred by endorsement,
coupled with delivery, it is well settled that the  Armed with the new certificate issued to C,
instrument is non-negotiable, because the C delivers to D a purchaser in good faith
holder thereof takes it without prejudice to and for value will D acquire title?
such rights or defenses as the registered
owner or creditor may have under the law, - D will acquire title took the shares not by
except insofar as such rights or defenses are virtue of a forged or unauthorized transfer,

65
but on the reliance that the stock certificate is  All are subscribed who will the corporation
valid and owned by C recognize as rightful owner A or D? if both
will be recognized there will be over
 Stock certificate now in possession of D. A issuance
knew of what happened and went to the
corporation and complains. Who will have a - only A citing citizens national bank vs. state
better title? (but if recognition of both stockholders
would result in an over issue of shares, then
- the corporation may be compelled to recognize only the original and true owner can be
both, A as stockholder (non-negotiable) D, recognized as a stockholder)
reliance that the stock certificate is valid and
existing and owned by C - by virtue of the doctrine of non-negotiability of
certificate of stocks
 Forged transfers
 The true and lawful owner will never be
- If the corporation should issue a new deprived of his rights
certificate in pursuance of a forged transfer,
the corporation incurs no liability to the person  What happens to D?
in whose favor it is issued and it may demand
its return for cancellation. The corporation in - D will have a cause of action against the
such case has been guilty of no corporation for the value of his acquisition
misrepresentation. On the other hand, it is the cost inclusive of damages, attorney’s fees
duty of the purchaser to determine that the and cost of suit
indorsement of the owner is genuine.
 D sues the corporation for the value of his
However, if the new certificate issued to the
acquisition cost, inclusive of damages,
purchaser comes into the hands of a bona fide
attorney’s fees and cost of suit. What may
purchaser for value, the corporation will be
the corporation do?
stopped from denying validity thereof, since by
issuing such new certificate it represents that - NO defense, no valid defense, because it was
the person named therein is a stockholder of represented to other parties that the
the corporation. The corporation is thus forced certificate of stocks is valid, subsisting, etc.
to recognize both the original certificate and
nd
new certificate-the original, because the true  2 situation, what cause of action may the
owner could not be deprived of his title by a corporation have? Remedy?
forged transfer, and the new, because of its
representation that the person named therein - Third party complaint against C, but what if he
th
is the owner of shares in the corporation. But if is a purchaser for value? 4 party claim
the recognition of both stockholders would against B
result in an over issue of shares, then only the
 When may certificate of stocks be issued?
original and true owner can be recognized as
a stockholder. The bona fide purchaser of the - Section 64 provides:
new certificate will however have a right of
damages against the corporation. The Section 64. Issuance of stock
corporation, in turn, would have a right of certificates. - No certificate of stock shall be
action against the person who made false issued to a subscriber until the full amount
representations and in whose favor it issued a of his subscription together with interest and
new certificate. The true owner of the shares expenses (in case of delinquent shares), if
any is due, has been paid. (37)
which were wrongfully transferred would of
course have a right to compel the corporation
 A certificate of stock cannot be issued
to issue him a certificate in lieu of the original
unless he fully paid the amount subscribed
one which was wrongfully cancelled.

 Authorized capital stock 1M shares


66
 Subscription to the capital stocks of the - One which is issued by the corporation as
corporation are indivisible fully paid-up shares, when in fact the whole
amount of the value thereof has not been
 Clear mandate of section 148 of the code is paid.
that the ruling of the court in Baltazar vs.
Lingayen Gulf, no longer holds true - Basis is par value and not the fair market
value
Section 148. Applicability to existing
corporations. - All corporations lawfully  Section 62 states that stocks shall not be
existing and doing business in the Philippines issued for a consideration less than par or
on the date of the effectivity of this Code and issued price thereof, while section 13 states
heretofore authorized, licensed or registered that in no case shall be paid-up capital be
by the Securities and Exchange Commission,
less than five thousand [P5000] pesos.
shall be deemed to have been authorized,
licensed or registered under the provisions of
 If issued below par, issued value
this Code, subject to the terms and conditions
of its license, and shall be governed by the considered as water
provisions hereof: Provided, That if any such
corporation is affected by the new  How may watered stocks be issued?
requirements of this Code, said corporation
shall, unless otherwise herein provided, be 1. For a monetary consideration less than its
given a period of not more than two (2) years par or issued value;
from the effectivity of this Code within which to
comply with the same. (n) 2. For a consideration in property, tangible or
intangible, valued in excess of its fair
 Subscription to shares of stocks are indivisible market value;

 Also apparent is that once a subscriber has 3. Gratuitously or under an agreement that
paid his subscription in full, he becomes nothing shall be paid at all; or
entitled to be issued a stock certificate and in
the event that the corporation refuses to do so, 4. In the guise of stock dividends when there
the stockholder my institute a case for are no surplus profits of the corporation.
mandamus with damages. Thus, it has been
 Why is stock watering illegal?
said that the duty of the corporate officers to
issue stock certificates to those entitled thereto 1. The corporation is deprived of its capital
is a ministerial duty enforceable by thereby hurting its business prospects,
mandamus. financial capability and responsibility;

 Fua Cun vs. Summers and China Banking 2. Stockholders who paid their subscriptions in
Corp. full, or promised to pay the same, are
injured and prejudiced by the reduction of
- The court erred in holding the plaintiff as the
their proportionate interest in the
owner of 250 shares of stock; “the plaintiff’s
corporation; and,
rights consist in equity in 500 shares and upon
payment of the unpaid portion of the 3. Present and future creditors are deprived of
subscription price he becomes entitled to the the corporate assets for the protection of
issuance of certificate for said 500 shares in their interest.
his favor.”
- Corporation is prejudiced
- No certificate of stock until the full amount has
been paid. - Stockholders, dilution of interest

 Watered stock - Creditors are prejudiced, virtue of right to


look upon corporations properties for the
satisfaction of their claims

67
 What is the effect of issuance of watered acquired the same without notice, either as
stocks purchaser or donee. If he had knowledge
thereof, he is subject to the same liability as
1. As to the corporation - when a corporation is his transferor.
guilty of ultra-vires or illegal acts which
constitute an injury to or fraud upon the public,  What is the nature of the liability of the
or which will tend to injure or defraud the corporate directors consenting to the
public, the State may institute a quo-warranto issuance of watered stocks and the extent
proceeding to forfeit its charter for the misuse of their liabilities?
or abuse of its franchise.
- Solidarily liable with the holder of the
2. As between the corporation and the watered stocks to the extent of the water
subscriber- The subscription is void. Such from said shares of stocks
being the case, the subscriber is liable to pay
the full par or issued value thereof, to render it  Will all the directors be liable? What if you
valid and effective. objected will you also be liable?

3. As to the consenting stockholders - They are - If you do not issue a written objection, you
stopped from raising any objection thereto; are still liable

4. As to dissenting stockholders - In view of the - Even passive directors may be liable


dilution of their proportionate interest in the
- Those having knowledge thereof, but did
corporation, they may compel the payment of
not interpose their objection shall be liable
the “water” in the stock solidarily against the
responsible and consenting directors and - Section 65 provides:
officers inclusive of the holder of the watered
stocks; Section 65. Liability of directors for
watered stocks. - Any director or officer of a
5. As to creditors - They may enforce payment of corporation consenting to the issuance of
the difference in the price, or the water in the stocks for a consideration less than its par
stock, solidarily against the responsible or issued value or for a consideration in any
directors/officers and the stockholders form other than cash, valued in excess of its
concerned; and’ fair value, or who, having knowledge
thereof, does not forthwith express his
6. As against transferees of the watered stock – objection in writing and file the same with
the corporate secretary, shall be solidarily,
His right is the same as that of his transferor.
liable with the stockholder concerned to the
If, however, a certificate of stock has been corporation and its creditors for the
issued and duly indorsed to a bona fide difference between the fair value received
purchaser, without knowledge, actual or at the time of issuance of the stock and the
constructive, the latter cannot be held liable, at par or issued value of the same. (n)
least as against the corporation, since he took
the shares on reliance of the  ACS-100M 100M/S PAR
misrepresentation made by the corporation VALUE-1.00
that the stock certificate is valid and
SUBSCRIBED-50M FAIR
subsisting. This is because a corporation is
MARKET VALUE-12.00/S
prohibited from issuing certificates of stock
until the full value of the subscriptions have UNSUBSCRIBED-50M
been paid and could not, therefore, deny the
validity of the stock certificate it issued as A
against a purchaser in good faith. Thus,
Ballentine states that whether there is any B
liability on the part of the transferee of watered
stock is made to depend upon whether he C

68
D thereof, in either case with accrued interest,
if any, as it may deem necessary.
E
Payment of any unpaid subscription or any
There is a denial of pre-emptive rights and
percentage thereof, together with the
directors A,B,C,D,E decided to issue the remaining interest accrued, if any, shall be made on
50M and subscribed for 10M each at 2 per share. the date specified in the contract of
subscription or on the date stated in the call
 Is there stock watering if the fair market value made by the board. Failure to pay on such
is 12.00? date shall render the entire balance due and
payable and shall make the stockholder
- No stock watering liable for interest at the legal rate on such
balance, unless a different rate of interest is
- The basis is the par value provided in the by-laws, computed from
such date until full payment. If within thirty
- The shares where in fact paid more than the (30) days from the said date no payment is
par value indicated in the articles of made, all stocks covered by said
incorporation subscription shall thereupon become
delinquent and shall be subject to sale as
3 days later they sold their 10M share for P11.00 hereinafter provided, unless the board of
directors orders otherwise. (38)
each, therefore making a profit.

 Can you question there actuations? What  Remedies of the corporation to enforce
payment of unpaid subscription
would be the cause of action?

- It may be questioned. 1. By board action in accordance with the


procedure laid down in sections 67 to 69 of
- Duty of loyalty or fiduciary duty as such the code
2. By a collection case in court as provided for
directors
in section 70
- They cannot advance their own motives to the
 Are subscribers of shares of stocks not fully
damage prejudice of the corporation which
paid, liable to pay interest?
they represents and stockholders as a whole
instead of it being sold outside
- General rule is they are not liable to pay
interest because the code says unless
- 500M would have gone to the coffers of the requires in the by-laws
corporation, 500M should be there for the - Aside from the mandate of the law that
protection of creditors subscribers to shares of stock must pay the
full value of their subscription, they may
- They are placed in a fiduciary relationship likewise be required to pay interest on all
unpaid subscriptions if so imposed in the
- Sila lang ba ang kikita, pano naman yung contract or in the corporate by-laws at such
corporation, opportunity na yun para kumita rate as may be indicated thereat or the legal
rate if not so fixed. Unless so required or
 When are unpaid subscriptions due and provided, however, subscribers to shares of
payable? stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The
- Section 67. Payment of balance of code thus provides:
subscription. - Subject to the provisions of the
contract of subscription, the board of directors Section 66. Interest on unpaid
subscriptions. - Subscribers for stock shall
of any stock corporation may at any time
pay to the corporation interest on all unpaid
declare due and payable to the corporation subscriptions from the date of subscription,
unpaid subscriptions to the capital stock and if so required by, and at the rate of interest
may collect the same or such percentage fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
69
 Until a call is made, they are not due and said corporation in accordance with the
payable, but still subject to the provisions of provisions of this Code. (39a-46a)
the contracts
 Procedures in case of sale of delinquent  Who is the winning bidder in a delinquency
stocks sale?

Section 68. Delinquency sale. - The board of directors - Bidder who shall “offer to pay the full
may, by resolution, order the sale of delinquent stock amount of the balance on the subscription
and shall specifically state the amount due on each together with accrued interest, cost of
subscription plus all accrued interest, and the date, advertisement and expenses of sale, for the
time and place of the sale which shall not be less than smallest number of shares or fraction of a
thirty (30) days nor more than sixty (60) days from the share.”
date the stocks become delinquent.
X Co. has 1M authorized capital stock
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
500 thousand is already subscribed
stockholder either personally or by registered
mail. The same shall furthermore be published
once a week for two (2) consecutive weeks in A subscribed to 100 thousand shares, 50
a newspaper of general circulation in the thousand is already paid leaving 50
province or city where the principal office of thousand unpaid
the corporation is located.
The corporation is at a loss of 250
Unless the delinquent stockholder thousand, the board decides to make a call
pays to the corporation, on or before the date for the payment of the unpaid subscriptions,
specified for the sale of the delinquent stock, however A could not paid, hence declared
the balance due on his subscription, plus delinquent and decides to sell his share at a
accrued interest, costs of advertisement and public auction
expenses of sale, or unless the board of
directors otherwise orders, said delinquent 55 thousand is to be paid, remaining
stock shall be sold at public auction to such balance plus cost and expenses
bidder who shall offer to pay the full amount of
the balance on the subscription together with BIDDERS:
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of X-55K FOR 99,900 shares
shares or fraction of a share. The stock so
purchased shall be transferred to such
Y-55K FOR 99,500 shares
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 Z-55K FOR 99,000 shares (winning bidder)
be credited in favor of the delinquent
stockholder who shall likewise be entitled to  Assume there is no bidder, may the
the issuance of a certificate of stock covering corporation bid?
such shares.
- NO. It cannot bid because the law says,
Should there be no bidder at the subject to the provisions of this CODE.
public auction who offers to pay the full Section 68 and 41 should be reconciled.
amount of the balance on the subscription Section 68 states that:
together with accrued interest, costs of
advertisement and expenses of sale, for the Should there be no bidder at the
smallest number of shares or fraction of a public auction who offers to pay the full
share, the corporation may, subject to the amount of the balance on the subscription
provisions of this Code, bid for the same, and together with accrued interest, costs of
the total amount due shall be credited as paid advertisement and expenses of sale, for the
in full in the books of the corporation. Title to smallest number of shares or fraction of a
all the shares of stock covered by the share, the corporation may, subject to the
subscription shall be vested in the corporation provisions of this Code, bid for the same,
as treasury shares and may be disposed of by and the total amount due shall be credited
70
as paid in full in the books of the corporation. corporation cannot bid, is the corporation
Title to all the shares of stock covered by the left without any recourse?
subscription shall be vested in the corporation
as treasury shares and may be disposed of by Section 70. Court action to recover unpaid
said corporation in accordance with the subscription. - Nothing in this Code shall prevent the
provisions of this Code. (39a-46a) corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid
- There was no unrestricted retained earnings in subscription, with accrued interest, costs and
the example given therefore the corporation expenses. (49a)
cannot bid , section 41, it states that:
 Velasco vs. Poizat
Section 41. Power to acquire own
shares. - A stock corporation shall have the - The subscriber is as much bound to pay the
power to purchase or acquire its own shares amount of the share subscribed by him as
for a legitimate corporate purpose or he would be to pay any other debt, and the
purposes, including but not limited to the right of the company to demand payment is
following cases: Provided, That the no less incontestable.
corporation has unrestricted retained - Two available remedies: the first and most
earnings in its books to cover the shares to be special remedy given by the statute consist
purchased or acquired: in permitting the corporation to put up the
unpaid stock and dispose of it for the
1. To eliminate fractional shares arising out of account of the delinquent subscriber. The
stock dividends; other remedy is by action in court.

2. To collect or compromise an indebtedness  De Silva vs. Aboitiz and Co.


to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to - Discretionary on the part of the board of
purchase delinquent shares sold during said directors to do whatever is provided in the
sale; and said article relative to the application of the
part of the 70 percent of the profit
3. To pay dissenting or withdrawing distributable in equal parts on the payment
stockholders entitled to payment for their of the shares subscribed to and fully paid
shares under the provisions of this Code. (a)
 Lingayen Gulf vs. Baltazar
 What if the shares of A were sold without
compliance of the requirements? May A - Exception: pursuant to a bona fide
question the sale? compromise or to set off a debt due from
the corporation, a release supported by
- The law prescribes two conditions before an consideration, will be effectual as against
action to recover delinquent stocks irregularly dissenting stockholders and subsequent
sold may be allowed. These are: and existing creditors. A release which
might originally have been held invalid may
1. The party seeking to maintain such action first be sustained after a considerable lapse of
pays or tenders to the party holding the stock time
the sum for which the same was sold, with
interest from the date of the sale at the legal  Apocada vs. NLRC
rate; and,
2. The action shall be commenced by the filing of - Set-off is without any legal basis
a complaint within six months from the date of - It was premature
the sale. - Unpaid subscriptions will become due and
payable only upon certain instance
- The reason for such is the stability of - Call or if there is a stipulation in contract
transactions of the shares of stock - If no call and no stipulation in contract then
it will not be demandable or payable at all
 Suppose in the example, since there are no
unrestricted retained earnings, hence the  Lumanlan vs. Cura

71
- Trust Fund Doctrine- subscription to the capital  If declared delinquent, what would be the
of a corporation constitute a fund to which the effect as to the owner of said shares?
creditors have a right to look for satisfaction of
their claims and that the assignee in Section 71. Effect of delinquency. - No delinquent
insolvency can maintain an action upon any stock shall be voted for or be entitled to vote or to
unpaid stock subscription in order to realize representation at any stockholder's meeting, nor
assets for the payment of its debts. shall the holder thereof be entitled to any of the
rights of a stockholder except the right to dividends
 PNB vs. Bitulak in accordance with the provisions of this Code, until
and unless he pays the amount due on his
- Where it not for the promise, the defendants subscription with accrued interest, and the costs
would have not subscribed and expenses of advertisement, if any. (50a)
- However if the shares are not delinquent,
- Trust Fund Doctrine, it is established doctrine
subscribers to the capital of a corporation,
that subscriptions to the capital of a
though not fully paid, are entitled to all the
corporation constitute a fund to which creditors
rights of a stockholder, according to section
have a right to look for satisfaction of their
72
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock
subscription in order to realize assets for the Section 72. Rights of unpaid
payment of its debts. shares. - Holders of subscribed shares not
fully paid which are not delinquent shall
- A corporation has no power to release an have all the rights of a stockholder. (n)
original subscriber to its capital stock from the
obligation of paying for his shares, without a  May the rules governing delinquency sale
valuable consideration for such release; and apply to a non-stock corporation? Are there
as against creditors a reduction of the capital unpaid shares in a non-stock corporation?
stock can take place only in the manner and
under the conditions prescribed by the statute - Rules governing stock corporations, when
or the charter or the articles of incorporation. applicable, also applies to a non-stock
corporation
 Edward Keller and Co. vs. COB - There are delinquent shareholders also in a
non-stock corporation. Example is
- May the stockholder be held liable for the membership dues
debts of the corporation? YES. To the extent
of their unpaid subscription  A corporation paid 50% of subscription and
was later on declared delinquent when he
- As to the liability of the stockholders, it is could not pay upon call; A is also a director
settled that a stockholder is personally liable of the corporation. Will A, upon declaration
for the financial obligations of a corporation to of delinquency , still be able to exercise his
the extent of his unpaid subscriptions right as a director?

 Is there a prescriptive period wherein a - Yes, he loses all his right as a stockholder
demand for unpaid subscription should be except his right to receive dividends
made? - He remains to be a director, only
qualification to be a director is he must own
- NO. Garcia vs. Suarez case at least 1 share and since it still stands in
his name pending the sale, he remains to
 Garcia vs. Suarez be and act as a director
- Even if there is sale, he may still be director
because the winning bidder may not bid or
- Never became due and payable until there is a
pay for all the shares or there might be
call made
remaining shares, which would be credited
- Prescription will not run until and unless there
in favor of the delinquent stockholder
is demand
- Section 43 provides:
- Prescription should be determined from the
time demand has been made and not from the
time of subscription Section 43. Power to declare
dividends. - The board of directors of a
72
stock corporation may declare dividends out of notice in a newspaper of general circulation
the unrestricted retained earnings which shall published in the place where the
be payable in cash, in property, or in stock to corporation has its principal office, once a
all stockholders on the basis of outstanding week for three (3) consecutive weeks at the
stock held by them: Provided, That any cash expense of the registered owner of the
dividends due on delinquent stock shall first be certificate of stock which has been lost,
applied to the unpaid balance on the stolen or destroyed. The notice shall state
subscription plus costs and expenses, while the name of said corporation, the name of
stock dividends shall be withheld from the the registered owner and the serial number
delinquent stockholder until his unpaid of said certificate, and the number of shares
subscription is fully paid: Provided, further, represented by such certificate, and that
That no stock dividend shall be issued without after the expiration of one (1) year from the
the approval of stockholders representing not date of the last publication, if no contest has
less than two-thirds (2/3) of the outstanding been presented to said corporation
capital stock at a regular or special meeting regarding said certificate of stock, the right
duly called for the purpose. (16a) to make such contest shall be barred and
said corporation shall cancel in its books the
Stock corporations are prohibited from certificate of stock which has been lost,
retaining surplus profits in excess of one stolen or destroyed and issue in lieu thereof
hundred (100%) percent of their paid-in capital new certificate of stock, unless the
stock, except: (1) when justified by definite registered owner files a bond or other
corporate expansion projects or programs security in lieu thereof as may be required,
approved by the board of directors; or (2) effective for a period of one (1) year, for
when the corporation is prohibited under any such amount and in such form and with
loan agreement with any financial institution or such sureties as may be satisfactory to the
creditor, whether local or foreign, from board of directors, in which case a new
declaring dividends without its/his consent, certificate may be issued even before the
and such consent has not yet been secured; expiration of the one (1) year period
or (3) when it can be clearly shown that such provided herein: Provided, That if a contest
retention is necessary under special has been presented to said corporation or if
circumstances obtaining in the corporation, an action is pending in court regarding the
such as when there is need for special reserve ownership of said certificate of stock which
for probable contingencies. (n) has been lost, stolen or destroyed, the
issuance of the new certificate of stock in
lieu thereof shall be suspended until the
 When a certificate of stock is loss or
final decision by the court regarding the
destroyed, what must be done by the owner
ownership of said certificate of stock which
thereof?
has been lost, stolen or destroyed.
Section 73. Lost or destroyed certificates. - The
Except in case of fraud, bad faith,
following procedure shall be followed for the issuance
or negligence on the part of the corporation
by a corporation of new certificates of stock in lieu of
and its officers, no action may be brought
those which have been lost, stolen or destroyed:
against any corporation which shall have
issued certificate of stock in lieu of those
1. The registered owner of a certificate lost, stolen or destroyed pursuant to the
of stock in a corporation or his legal procedure above-described. (R.A. 201a)
representative shall file with the corporation an
affidavit in triplicate setting forth, if possible,
the circumstances as to how the certificate - The rationale of the above-quoted law is to
was lost, stolen or destroyed, the number of avoid duplication of certificates of stock and
shares represented by such certificate, the the avoidance of fictitious and fraudulent
serial number of the certificate and the name transfers.
of the corporation which issued the same. He
shall also submit such other information and  When will the replacement certificate be
evidence which he may deem necessary; issued?

2. After verifying the affidavit and other - The code provides that:
information and evidence with the books of the
corporation, said corporation shall publish a
73
after the expiration of one (1) year who are guilty of gross negligence or bad
from the date of the last publication, if no faith in directing the affairs of the
contest has been presented to said corporation or acquire any personal or
corporation regarding said certificate of stock, pecuniary interest in conflict with their duty
the right to make such contest shall be barred as such directors or trustees shall be liable
and said corporation shall cancel in its books jointly and severally for all damages
the certificate of stock which has been lost, resulting there from suffered by the
stolen or destroyed and issue in lieu thereof corporation, its stockholders or members
new certificate of stock, and other persons.

 Could it be issued earlier than 1 year? When a director, trustee or officer


attempts to acquire or acquires, in violation
- Yes it can be, the code states that: of his duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
unless the registered owner files a
to which equity imposes a disability upon
bond or other security in lieu thereof as may
him to deal in his own behalf, he shall be
be required, effective for a period of one (1)
liable as a trustee for the corporation and
year, for such amount and in such form and
must account for the profits which otherwise
with such sureties as may be satisfactory to
would have accrued to the corporation. (n)
the board of directors, in which case a new
certificate may be issued even before the
expiration of the one (1) year period  Certificate of stock was lost, the owner
provided herein: Provided, That if a contest transfers his shares by way of a notarized
has been presented to said corporation or if an deed will it be valid?
action is pending in court regarding the
ownership of said certificate of stock which - He cannot do so, if a certificate of stock is
has been lost, stolen or destroyed, the issued by a corporation, a mere notarized
issuance of the new certificate of stock in lieu deed will not suffice
thereof shall be suspended until the final - Deed of assignment was not sufficient since
decision by the court regarding the ownership there was no endorsement (Rural Bank of
of said certificate of stock which has been lost, Lipa vs. CA)
stolen or destroyed.
 Rights and liabilities of stockholders
 May corporate officers be held liable for the
unauthorized issuance? - RIGHTS

- YES, the code provides that: 1. Participation in the management of the


corporate affairs by exercising their right to
Except in case of fraud, bad faith, or vote and be voted upon either personally or
negligence on the part of the corporation and by proxy as provided for under sections 50
its officers, no action may be brought against and 58 of the code;
any corporation which shall have issued 2. To enter into a voting trust agreement
certificate of stock in lieu of those lost, stolen subject to the procedure, requirements and
or destroyed pursuant to the procedure above- limitations imposed under section 50;
described. (R.A. 201a) 3. To receive dividends and to compel their
declaration if warranted under section 43;
 Assuming the last paragraph is not there; 4. To transfer shares of stock subject only to
would it be not the same, that they should be reasonable restrictions such as options and
held liable due to fraud, bad faith or preferences as may be allowed by law
negligence? inclusive of the right of the transferee to
compel the registration of the transfer in the
books of the corporation as provided for in
- YES. Section 31 provides that:
section 63;
5. To be issued a certificate of stock for fully
Section 31. Liability of directors, paid-up shares in accordance with 64;
trustees or officers. - Directors or trustees who 6. To exercise pre-emptive rights as provided
willfully and knowingly vote for or assent to for in section 39;
patently unlawful acts of the corporation or

74
7. To exercise their appraisal right in accordance
with the provision of section 81 and in those
instance allowed by law such as section 42
and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for
delinquency as may be allowed under section
69;
10. To inspect the books of the corporation subject
only to the limitations imposed by section 73;
11. To be furnished by the most recent financial
statement of the corporation as by section 75;
12. To be issued a new stock certificate in lieu of
the lost or destroyed one subject to the
procedure laid down in section 73;
13. To have the corporation dissolved under
section 118 to 121, and section 105 in a close
corporation;
14. To participate in the distribution of the assets
of the corporation upon dissolution under
section 122;
15. In the case of a close corporation, to petition
the SEC to arbitrate in the event of a deadlock
as allowed under section 104; and,
16. Also in the case of a close corporation, to
withdraw therefrom, for my reason, and
compel the corporation to purchase his shares
as provided for under section 105.

75
LIABILITIES Any officer or agent of the
corporation who shall refuse to allow any
1. To pay to the corporation the balance of his director, trustees, stockholder or member of
unpaid subscriptions subject to the provision of the corporation to examine and copy
section 67 to 70; excerpts from its records or minutes, in
2. To pay interest on his unpaid subscription if accordance with the provisions of this Code,
required by the by-laws or by the contract of shall be liable to such director, trustee,
subscription in accordance with section 66; stockholder or member for damages, and in
3. To answer to the creditors for the unpaid addition, shall be guilty of an offense which
portion of his subscription under the TRUST shall be punishable under Section 144 of
FUND DOCTRINE; this Code: Provided, That if such refusal is
4. To answer the “water” in his stocks as made pursuant to a resolution or order of
provided for in section 65; the board of directors or trustees, the
5. To be liable, as general partners, for all debts, liability under this section for such action
liabilities and damages of a determinable shall be imposed upon the directors or
corporation as envisioned under section 21 trustees who voted for such refusal: and
(corporation by estoppel); and, Provided, further, That it shall be a defense
6. To be personally liable for torts, in the event to any action under this section that the
that a stockholder in a close corporation person demanding to examine and copy
actively participates in the management of the excerpts from the corporation's records and
corporate affairs. minutes has improperly used any
information secured through any prior
CORPORATE BOOKS AND RECORDS examination of the records or minutes of
such corporation or of any other
corporation, or was not acting in good faith
 What are these books and records that are or for a legitimate purpose in making his
required to be kept? demand.

Section 74. Books to be kept; stock transfer agent. - Stock corporations must also keep
Every corporation shall keep and carefully a book to be known as the "stock and
preserve at its principal office a record of all transfer book", in which must be kept a
business transactions and minutes of all meetings record of all stocks in the names of the
of stockholders or members, or of the board of stockholders alphabetically arranged; the
directors or trustees, in which shall be set forth in installments paid and unpaid on all stock for
detail the time and place of holding the meeting, which subscription has been made, and the
how authorized, the notice given, whether the date of payment of any installment; a
meeting was regular or special, if special its statement of every alienation, sale or
object, those present and absent, and every act transfer of stock made, the date thereof,
done or ordered done at the meeting. Upon the and by and to whom made; and such other
demand of any director, trustee, stockholder or entries as the by-laws may prescribe. The
member, the time when any director, trustee, stock and transfer book shall be kept in the
stockholder or member entered or left the meeting principal office of the corporation or in the
must be noted in the minutes; and on a similar office of its stock transfer agent and shall be
demand, the yeas and nays must be taken on any open for inspection by any director or
motion or proposition, and a record thereof stockholder of the corporation at reasonable
carefully made. The protest of any director, hours on business days.
trustee, stockholder or member on any action or
proposed action must be recorded in full on his
demand. No stock transfer agent or one
engaged principally in the business of
registering transfers of stocks in behalf of a
The records of all business stock corporation shall be allowed to
transactions of the corporation and the operate in the Philippines unless he secures
minutes of any meetings shall be open to a license from the Securities and Exchange
inspection by any director, trustee, stockholder Commission and pays a fee as may be
or member of the corporation at reasonable fixed by the Commission, which shall be
hours on business days and he may demand, renewable annually: Provided, That a stock
in writing, for a copy of excerpts from said corporation is not precluded from
records or minutes, at his expense. performing or making transfer of its own
stocks, in which case all the rules and
76
regulations imposed on stock transfer agents, a financial report of the operations of the
except the payment of a license fee herein corporation for the preceding year, which
provided, shall be applicable. (51a and 32a; shall include financial statements, duly
P.B. No. 268.) signed and certified by an independent
certified public accountant.
 To summarize:
However, if the paid-up capital of the
1. Records of all business transactions which corporation is less than P50,000.00, the
include, among others, journals, ledger, financial statements may be certified under
contracts, vouchers and receipts, financial oath by the treasurer or any responsible
statements and other books of accounts, officer of the corporation. (n)
income tax returns, and voting trust
agreements which must be kept and carefully  May books and records be examined? Who
preserved at its principal office; may examine? Can they copy them? In
2. Minutes of all meetings of stockholders or whose expense?
members and of the directors or trustees
setting forth in detail the date, time, and place - Yes, according to the code:
of meeting, how authorized, the notice given
whether the same be regular or special, and if
“The records of all business
special, the purpose thereof shall be specified,
transactions of the corporation and the
those present and absent, and every act done minutes of any meetings shall be open
or ordered done there at which ,must likewise
to inspection by any director, trustee,
be kept at the principal office of the
stockholder or member of the
corporation; and,
corporation at reasonable hours on
3. Stock and transfer book showing the names of
business days and he may demand, in
the stockholders, the amount paid or unpaid
writing, for a copy of excerpts from said
on all stocks for which subscription has been
records or minutes, at his expense. “
made, a statement of every alienation, sale or
transfer of stock made, if any the date thereof,
and by whom and to whom made which must  Is there any defense available that could be
also be kept at the principal office of the raised? By the corporate officers to justify
corporation or in the office of its stock transfer the refusal?
agent.
- Yes, the code provides that:
These corporate books and records, inclusive
of all business transactions and minutes of “and Provided, further, That it shall
meetings, are subject to inspection by any of be a defense to any action under this
the directors, trustees, stockholders or section that the person demanding to
members of the corporation at reasonable examine and copy excerpts from the
hours on business days and a copy of corporation's records and minutes has
excerpts of said records may be demanded. In improperly used any information
fact, in so far as financial statement is secured through any prior examination
concerned, the Code clearly provides: of the records or minutes of such
corporation or of any other corporation,
Section 75. Right to financial or was not acting in good faith or for a
statements. - Within ten (10) days from receipt legitimate purpose in making his
of a written request of any stockholder or demand.”
member, the corporation shall furnish to him
its most recent financial statement, which shall  What is the stock and transfer? Where
include a balance sheet as of the end of the should stock and transfer be kept? Can it be
last taxable year and a profit or loss statement kept elsewhere?
for said taxable year, showing in reasonable
detail its assets and liabilities and the result of “Stock corporations must also keep
its operations. a book to be known as the "stock and
transfer book", in which must be kept a
At the regular meeting of stockholders or record of all stocks in the names of the
members, the board of directors or trustees stockholders alphabetically arranged;
shall present to such stockholders or members the installments paid and unpaid on all

77
stock for which subscription has been - Audited financial statement filed in the SEC,
made, and the date of payment of any 120 days from the end of the final year, or
installment; a statement of every must be filed on or before April of each year
alienation, sale or transfer of stock made, - Must be stamp received by the BIR
the date thereof, and by and to whom
made; and such other entries as the by-  Those in the stock exchange
laws may prescribe. The stock and transfer
book shall be kept in the principal office of
- Disclosure of any matter that have to do
the corporation or in the office of its stock
with increasing and decreasing
transfer agent and shall be open for
- If not “kulong” violation of securities and
inspection by any director or stockholder of the
regulation act
corporation at reasonable hours on
business days. “
 Why is this right of inspection granted to a
stockholder?
 Stock and transfer agent
- The basis of the right of the stockholder to
- Records every movement
inspect the books and records of the
- Person who monitors movement by the
corporation for a proper purpose is to
minutes or by the hours
protect his interest as a stockholder. Thus, it
- Non-stock corporation- stock and transfer
has been said that:
books
- Club share- membership
“The right of the shareholders to
ascertain how the affairs of his
 Are stockholders entitled to financial
company are being conducted by
statements?
its directors and officers is founded
by his beneficial interest through
- Yes, they are entitled to a copy, the code ownership of shares and the
provides that: necessity of self-protection.
Managers of some corporations
Section 75. Right to financial deliberately keep the shareholders
statements. - Within ten (10) days from receipt in ignorance or under
of a written request of any stockholder or misapprehension as to the true
member, the corporation shall furnish to him condition of its affairs. Business
its most recent financial statement, which shall prudence demands that the investor
include a balance sheet as of the end of the keep a watchful eye on the
last taxable year and a profit or loss statement management and the condition of
for said taxable year, showing in reasonable the business. Those in charge of
detail its assets and liabilities and the result of the company may be guilty of gross
its operations. incompetence or dishonesty for
years and escape liability if the
At the regular meeting of stockholders shareholders cannot inspect the
or members, the board of directors or trustees records and obtain information.”
shall present to such stockholders or members
a financial report of the operations of the  Is there any distinction of the right of
corporation for the preceding year, which shall inspection of a stockholder and that of a
include financial statements, duly signed and director?
certified by an independent certified public
accountant. - Yes, as compared to a stockholder or
member, the right of a director or trustee to
However, if the paid-up capital of the inspect and examine corporate books and
corporation is less than P50,000.00, the records is considered absolute and
financial statements may be certified under unqualified and without regard to motive.
oath by the treasurer or any responsible officer This is because a director supervises,
of the corporation. (n) directs and manages corporate business
and it is necessary that he be equipped with
all the information and data with regard to
the affairs of the company in order that he
may manage and direct its operations
78
intelligently and according to his best judgment 1. That the person demanding has improperly
in the interest of all the stockholders he used any information secured through any
represents. Thus, while stockholders and prior examination of the records or minutes
members are entitled to inspect and examine of such corporation or of any other
the books and records as provided in sections corporation;
74 and 75 they may not gain access to highly 2. That he was not acting in good faith or for a
sensitive and confidential information. In the legitimate purpose in making his demand;
case of directors. “it is not denied” that they 3. The right is limited or restricted by special
have such access. This would include, among law or the law of it creation.
others,
 W.G. Philpotts vs. Philippine Manufacturing
a. Marketing strategies and pricing structure; Co.
b. Budget for expansion and diversification;
c. Research and development; - The right of inspection given to a
d. Sources of funding, availability of stockholder can be exercised either by
personnel, proposals of mergers or tie-ups himself or by any proper representative or
with other firms attorney-in-fact, and either with or without
the attendance of the stockholder
 May this right be exercised, other than by the - The right may be regarded as personal, in
stockholders themselves? the sense that only a stockholder may enjoy
it; but the inspection and examination may
- Yes, while the right is founded on stock be made by another. Otherwise it would be
ownership thus personal in nature it may be unavailing in many instances.
made by the stockholder’s agent or
representative since it may be unavailing in o Note: Usually hires an auditor or
many instances accountant to safeguard his interest

 What if the right of the stockholder to inspect is  Pardo vs. Hercules Lumber Co.
denied? What is his remedy?
- The law is clear, it may be exercised during
1. Mandamus reasonable hours on any business days, the
2. Damages either against the corporation or by-laws cannot deny this right all together
responsible officer who refused the inspection - The general right given by the statute may
3. Criminal complaint for violation of his right to not be lawfully abridged to the extent
inspect and copy excerpts of all business attempted in this resolution. It may be
transactions and minutes of meeting. Section admitted that the officials in charge of a
74 provides that Any officer or agent of the corporation may deny inspection when
corporation who shall refuse to allow any sought at unusual hours or under other
director, trustees, stockholder or member of improper conditions; but neither the
the corporation to examine and copy excerpts executive officers nor the board of directors
from its records or minutes, in accordance with have the power to deprive a stockholder of
the provisions of this Code, shall be liable to the right altogether.
such director, trustee, stockholder or member - The corporation, or its responsible directors
for damages, and in addition, shall be guilty of and officers cannot unduly restrict this right
an offense which shall be punishable under of inspection and may not arbitrarily set a
Section 144 of this Code. The latter provision few days of the year within which the
imposes a penalty of a fine of not less than stockholder may make the inspection.
P1,000 but not more than P10,000 or an - A by-law unduly restricting the right of
imprisonment for not less than 30 days but not inspection is undoubtedly invalid
more than 5 years, or both, at the discretion of
the court. If the refusal is pursuant to a  Vegaruth vs. Isabela Sugar Co.
resolution or order of the board, the liability
shall be imposed upon the directors or
- Directors of a corporation have the
trustees who voted for such refusal.
unqualified right to inspect the books and
records of the corporation at all reasonable
 Defense of the responsible corporate officer hours.
- We do not conceive, however, that a
director or stockholder has any absolute
79
right to secure certified copies of the minutes - However, whole seemingly enlarging the
of the corporation until these minutes have right of inspection, the new code has
been written up and approved by the directors. prescribed limitations to the same. It is now
expressly required as a condition for such
 May a stockholder of a holding company examination that the one requesting it must
inspect the books and records of a subsidiary? not have been guilty of using improperly any
information secured through a prior
examination and that the person asking for
- It depends
such examination must be acting in good
- The right of the stockholders to examine
faith and for a legitimate purpose in making
corporate books extends to wholly-owned
his demand
subsidiary which is completely under the
control and management of the parent - Admittedly, he sought to be a stockholder in
company where he is such a stockholder. But order to pry into transactions entered into by
the respondent bank even before he
if the two entities (subsidiary and parent) are
became a stockholder. His obvious purpose
legally being operated as separate and distinct
was to arm himself with materials he can
entities, there is no such right of inspection on
use against the respondent bank for acts
the part of the stockholder of the parent
company. done by the latter when the petitioner was a
total stranger to the same.
- Bank was created by a special law, it has its
AYALA- HOLDING COMPANY/PARENT own charter and primarily governed by the
COMPANY law creating them
- The bank is only subject to the inspection of
SUBSIDIARIES: BPI/GLOBE/AYALA LAND the Central Bank and any information
(not wholly-owned subsidiary) pertaining to the bank is confidential and
shall not be revealed to any person other
o HOLD ATLEAST 50 +1 shares in order to than the President of the Philippines, the
be a PARENT COMPANY Secretary of Finance and the Board of
Directors, nor shall any information relative
 A, is a stockholder of Ayala, does he have a to the funds in its custody, its current
right to inspect the records of its subsidiaries? accounts or deposits belonging to private
individuals, corporations or other entities
except by order of a Court of Competent
- If wholly owned pwede, but its subsidiaries are
Jurisdiction, hence inspection sought to by
not wholly owned kaya hindi pwede
the petitioner is violative of the provisions of
its charter and is even subject to penal
 Gokongwei vs. SEC sanctions

- San Miguel corporation owns all of the shares  Assuming you are a stockholder of PNB,
of stock of San Miguel International and then it was privatized, may you already
- It is wholly-owned have the right to inspect?
- It would be in accord with equity, good faith
and fair dealing to construe the statutory right
- No, unless its charter has been altered or
of petitioner as stockholder to inspect the
repealed it is still subject to the same law
books and records of such wholly-owned
subsidiary which are in respondent
corporation’s possession and control  3 stages in the life of a corporation

 If being operated as separate and distinct - Formation or birth


corporations, there is no such right - We now discuss the union of the
 Telecommunications- special franchise, it is a corporation
legislative grant - The last would be its death or dissolution

 Gonzales vs. PNB MERGER AND CONSOLIDATION

- Provisions of the old law was unqualified,  Merger and consolidation


when it granted stockholders the right to
inspect - In corporate parlance it is called spin-off

80
- Almost a year ago San Miguel separated its - A union effected by absorbing one or more
brewery business existing corporations by another which
- San Miguel Corporation is now a full time survives and continues the combined
holding company; it can later on absorb the business
company - It is the uniting of two or more corporations
- Corporations are granted by the code to by the transfer of property to one of them
merge or consolidate which continue in existence, the other or the
- most common type of corporate recognition others being dissolved and merged therein.
- not the same in every case
- but most common in the weal financial or A B
insolvent condition, aim is to bring it back to its
financial capability A transfers all assets, properties, rights,
- also a method of recapitalization obligations, liabilities to B

o purchase and sale of corporate assets is B issues shares of stocks in exchange of


another form of corporate reorganization the transfer

 How do you value the assets of the merging A is then dissolved and B SURVIVES
corporation, do you consider goodwill?
 First secure favorably recommendation of
government agency o Parties to a merger are called
constituent corporation
Section 79. Effectivity of merger or
consolidation. - The articles of merger or of  Consolidation
consolidation, signed and certified as herein above
required, shall be submitted to the Securities and - The uniting or amalgamation of two or more
Exchange Commission in quadruplicate for its existing corporations to form a new
approval: Provided, That in the case of merger or corporation
consolidation of banks or banking institutions, - In merger there is a surviving corporation,
building and loan associations, trust companies, the others are dissolved, while in
insurance companies, public utilities, educational consolidation, all constituent are dissolved
institutions and other special corporations and a new one organized
governed by special laws, the favorable
recommendation of the appropriate government A B
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
C
a certificate of merger or of consolidation, at which
time the merger or consolidation shall be effective.
 Like all other corporate acts, it emanates
from the board
If, upon investigation, the Securities
and Exchange Commission has reason to
believe that the proposed merger or 1. The board of directors or trustees of each
consolidation is contrary to or inconsistent with constituent corporations shall approve a
the provisions of this Code or existing laws, it plan of merger or consolidation setting forth
shall set a hearing to give the corporations the matters required in section 76;
concerned the opportunity to be heard. Written 2. Approval of the plan by the stockholders
notice of the date, time and place of hearing representing 2/3 of the outstanding
shall be given to each constituent corporation capital stock or 2/3 of the member in
at least two (2) weeks before said hearing. non-stock corporations of each of such
The Commission shall thereafter proceed as corporations at separate corporate
provided in this Code. (n) meetings called for the purpose;
3. Prior notice of such meeting, with a copy
or summary of the plan of merger or
 Merger
consolidation shall be given to all
stockholders or members at least two (2)
weeks prior to the scheduled meeting,

81
either personally or registered mail stating not be impaired by the merger or
the purpose thereof; consolidation.
4. Execution of the articles of merger or
consolidation by each constituent corporations  Is there a liquidation process in case of
to be signed by the president or vice- merger or consolidation?
president and certified by the corporate
secretary or assistant secretary setting
- None, there is nothing to distribute
forth the matters required in section 78;
5. Submission of the articles of merger or
consolidation in quadruplicate to the SEC  Associated Bank vs. CA
subject to the requirement of section 79 that if
it involve corporations under the direct - By virtue of a specific provision in the
supervision of any other government agency merger agreement
or governed by special laws the favorable - Although the subject promissory note
recommendation of the government agency names CBTC as the payee, the reference to
concerned shall first be secured and; CBTC in the note shall be construed, under
6. Issuance of the certificate of merger or the very provision of the merger agreement,
consolidation by the SEC at which time the as a reference to petitioner bank, “as if such
merger or consolidation shall be effective. If reference (was a) direct reference to the
the plan, however, is believed to be contrary to latter for all intents and purposes
law, the SEC shall set a hearing to give the - Section 80 par. 4 states:
corporations concerned an opportunity to be
heard upon proper notice and thereafter, the The surviving or the consolidated
Commission shall proceed as provided in the corporation shall thereupon and thereafter
Code. possess all the rights, privileges, immunities
and franchises of each of the constituent
 Although merger and consolidation is an corporations; and all property, real or
express power granted to corporation, it is personal, and all receivables due on
subject to limitations, as maybe proscribed by whatever account, including subscriptions to
law shares and other choses in action, and all
and every other interest of, or belonging to,
 What would be the effect of merger or or due to each constituent corporation, shall
consolidation? <sec. 80> be deemed transferred to and vested in
such surviving or consolidated corporation
1. There will only be a single corporation. In case without further act or deed; and
of merger, the surviving corporation or the
consolidated corporation in case of - Without further acts, meaning it is automatic
consolidation;
2. The termination of the corporate existence of  When do merger and consolidation become
the constituent corporations, except that of the effective? What if the SEC fails to act on it
surviving corporation or the consolidated without fault attributable to the corporation
corporation; involved?
3. The surviving corporation or the consolidated
corporation will possess all the rights, - It will never become valid until and unless
privileges, immunities and powers and shall be the SEC gives its stamp of approval
subject to all the duties and liabilities of a - It will be up to the constituent corporation to
corporation organized under the Code; follow it up
4. The surviving or consolidated corporation shall - It will never take effect until the SEC gives
possess all the rights, privileges, immunities its approval and issues the articles of
and franchises of the constituent corporations, merger
and all property and all receivables due,
including subscriptions to shares and other
choses in action, and every other interest of, o Granted 3 years to wing up unless there
or belonging to or due to the constituent is a trustee to wing up its affairs
corporations shall be deemed transferred to
and vested in such surviving or consolidated  Could there be liquidators and winding up
corporation without further act and deed; and, with respect to the corporation in
5. The rights of creditors or any lien on the consolidation and merger?
property of the constituent corporations shall
82
- No, there is none X Co. inc
- No assets properties or rights to collect, they
are transferred Principal office is in Quezon city, it was
- No debts and liabilities to pay because they changed to Paranaque
become the liabilities of the surviving
corporations A objects and makes a written demand.
- No properties transferred because they will be May he exercise his right of appraisal?
the properties of the surviving corporations
- It is not available in all amendments of the
o Hardest part is the financial act, regarding corporation
how many shares would be issued, - It must be changing or restricting the rights
probability of collection and the like of any stockholder
o In merger and consolidation, there is due
diligence and an economist is usually
hired  What if the principal office is changed from
QC to TAWI-TAWI, will it change or affect
the rights of A?
APPRAISAL RIGHT
- To some it may change or restrict the rights
 Define appraisal to others it may not

- Right to withdraw from the corporation and  How is the right exercised?
demand payment of the fair value of his
shares after dissenting from certain corporate
acts involving fundamental changes in - According to section 82 of the code:
corporate structure <sec. 81>
Section 82. How right is exercised.
 What property? When may this right be - The appraisal right may be exercised by
exercises? any stockholder who shall have voted
against the proposed corporate action, by
making a written demand on the corporation
- Section 81 provides: within thirty (30) days after the date on
which the vote was taken for payment of the
Section 81. Instances of appraisal fair value of his shares: Provided, That
right. - Any stockholder of a corporation shall failure to make the demand within such
have the right to dissent and demand payment period shall be deemed a waiver of the
of the fair value of his shares in the following appraisal right. If the proposed corporate
instances: action is implemented or affected, the
corporation shall pay to such stockholder,
1. In case any amendment to the articles of upon surrender of the certificate or
incorporation has the effect of changing or certificates of stock representing his shares,
restricting the rights of any stockholder or the fair value thereof as of the day prior to
class of shares, or of authorizing preferences the date on which the vote was taken,
in any respect superior to those of outstanding excluding any appreciation or depreciation
shares of any class, or of extending or in anticipation of such corporate action.
shortening the term of corporate existence;
If within a period of sixty (60) days
2. In case of sale, lease, exchange, transfer, from the date the corporate action was
mortgage, pledge or other disposition of all or approved by the stockholders, the
substantially all of the corporate property and withdrawing stockholder and the corporation
assets as provided in the Code; and cannot agree on the fair value of the shares,
it shall be determined and appraised by
3. In case of merger or consolidation. (n) three (3) disinterested persons, one of
whom shall be named by the stockholder,
another by the corporation, and the third by
 May it be exercised by a stockholder who
the two thus chosen. The findings of the
dissents to the act of a business other than a
majority of the appraisers shall be final, and
primary purpose?
their award shall be paid by the corporation
within thirty (30) days after such award is

83
made: Provided, That no payment shall be certificate or certificates of stock
made to any dissenting stockholder unless the representing his shares, the fair value
corporation has unrestricted retained earnings thereof as of the day prior to the date on
in its books to cover such payment: and which the vote was taken, excluding any
Provided, further, That upon payment by the appreciation or depreciation in anticipation
corporation of the agreed or awarded price, of such corporate action.
the stockholder shall forthwith transfer his
shares to the corporation. (n) If within a period of sixty (60) days
from the date the corporate action was
X Co. approved by the stockholders, the
withdrawing stockholder and the corporation
Principal Office- QC, it was changed to Manila cannot agree on the fair value of the shares,
it shall be determined and appraised by
three (3) disinterested persons, one of
A objects and makes a written demand for
payment of fair value of shares. Can he make whom shall be named by the stockholder,
a demand of payment of shares? another by the corporation, and the third by
the two thus chosen. The findings of the
majority of the appraisers shall be final, and
 True or False, no stockholder in a stock their award shall be paid by the corporation
corporation can ever demand if the principal within thirty (30) days after such award is
office is amended, changing it from QC to made: Provided, That no payment shall be
Manila made to any dissenting stockholder unless
the corporation has unrestricted retained
- False, a stockholder in a close corporation earnings in its books to cover such
may for any reason compel the close payment: and Provided, further, That upon
corporation that he be paid the fair value of his payment by the corporation of the agreed or
shares awarded price, the stockholder shall
forthwith transfer his shares to the
Can he exercise his appraisal rights in the first corporation. (n)
place? He hasn’t even paid his subscription in
full. Section 86. Notation on
certificates; rights of transferee. - Within ten
 May a stockholder who hasn’t paid his (10) days after demanding payment for his
subscription in full exercise his appraisal shares, a dissenting stockholder shall
rights? submit the certificates of stock representing
his shares to the corporation for notation
- Yes, he can exercise his appraisal rights, by thereon that such shares are dissenting
reconciling the provisions of section 72, shares. His failure to do so shall, at the
section 82 and section 86 option of the corporation, terminate his
rights under this Title. If shares represented
by the certificates bearing such notation are
Section 72. Rights of unpaid shares. -
transferred, and the certificates
Holders of subscribed shares not fully paid
consequently cancelled, the rights of the
which are not delinquent shall have all the
transferor as a dissenting stockholder under
rights of a stockholder. (n)
this Title shall cease and the transferee
shall have all the rights of a regular
Section 82. How right is exercised. - stockholder; and all dividend distributions
The appraisal right may be exercised by any which would have accrued on such shares
stockholder who shall have voted against the shall be paid to the transferee. (n)
proposed corporate action, by making a
written demand on the corporation within thirty
- Notation is not mandatory, it is even
(30) days after the date on which the vote was
discretionary because the code provides “at
taken for payment of the fair value of his
the option of the corporation” because it
shares: Provided, That failure to make the
never issued one for that matter since the
demand within such period shall be deemed a
subscriptions are not yet fully paid
waiver of the appraisal right. If the proposed
corporate action is implemented or affected,
the corporation shall pay to such  May the corporation be compelled to pay
stockholder, upon surrender of the the interest of A

84
300 T, 150T, 150T and 0 unrestricted retained - It will be suspended, with a limitation of 30
earnings days, as provided for by section 83 of the
code:
 No stockholder may be able to compel the
corporation to pay the value of his shares if the Section 83. Effect of demand and
corporation has no unrestricted retained termination of right. - From the time of
earnings demand for payment of the fair value of a
stockholder's shares until either the
- False, a stockholder of a close corporation abandonment of the corporate action
may for any reason, provided only that the involved or the purchase of the said shares
corporation has sufficient assets to cover its by the corporation, all rights accruing to
debts and liabilities such shares, including voting and
dividend rights, shall be suspended in
accordance with the provisions of this
o General rule: there should be unrestricted
Code, except the right of such
retained earnings
stockholder to receive payment of the
o Exception: section 105 “close corporation”
fair value thereof: Provided, That if the
dissenting stockholder is not paid the
 The procedure and requirements for the valid value of his shares within 30 days after
exercise of this rights are: the award, his voting and dividend rights
shall immediately be restored. (n)
1. The stockholder must have voted against the
proposed corporate action in any of the  How do you compare the rights of a
instances allowed by law for the exercise of stockholder, declared delinquent compared
the right of appraisal; to a dissenting stockholder exercising his
2. The written demand for payment must be appraisal rights
made by the dissenting stockholder within
thirty (30) days after the date on which the
vote was taken thereon. Failure to make the
 What if a stockholder exercising his
demand within the said period shall be
appraisal rights is also a director, will he
deemed a waiver on the part of the
stockholder concerned to exercise his also lose his rights as a stockholder?
appraisal right;
3. Surrender of the certificate of stock by the - The shares remain to stand in his name
dissenting stockholder for notation in the until he is paid, unless there is a stipulation
corporate books and the payment by the in the by-laws
corporation of the fair market value of the said
shares as of the day prior to the date on which  When may the right to be paid the value of
the vote was taken. If the stockholder and the his shares cease? Can he withdraw his right
corporation cannot agree on the fair market of appraisal?
value thereof, the same shall be determined in
accordance with the provision of paragraph 2 - Yes, he may withdraw, but there must be
of section 82; consent by the corporation as provided for
4. The fair value of the shares of the dissenting by section 83 of the code:
stockholder must be paid by the corporation
only if it has “unrestricted retained earnings” in
Section 84. When right to payment
its books to cover such payment. If the
ceases. - No demand for payment under
corporation has no unrestricted retained
this Title may be withdrawn unless the
earnings, the dissenting stockholder may not,
corporation consents thereto. If, however,
therefore, be able to effectively exercise his
such demand for payment is withdrawn with
appraisal rights;
the consent of the corporation, or if the
5. Upon payment of the shares by the
proposed corporate action is abandoned or
corporation, the dissenting stockholder shall
rescinded by the corporation or disapproved
transfer his shares to the corporation.
by the Securities and Exchange
Commission where such approval is
 What would be the effect if the stockholder necessary, or if the Securities and
exercises his appraisal rights? What happens Exchange Commission determines that
to his voting and dividend rights if he exercises such stockholder is not entitled to the
his appraisal rights? appraisal right, then the right of said
85
stockholder to be paid the fair value of his dissenting stockholder shall submit the
shares shall cease, his status as a stockholder certificates of stock representing his shares
shall thereupon be restored, and all dividend to the corporation for notation thereon that
distributions which would have accrued on his such shares are dissenting shares. His
shares shall be paid to him. (n) failure to do so shall, at the option of the
corporation, terminate his rights under this
 Instances when the right of a dissenting Title. If shares represented by the
stockholder to be paid the fair value of his certificates bearing such notation are
shares ceases. transferred, and the certificates
consequently cancelled, the rights of the
transferor as a dissenting stockholder
1. When he withdraws his demand for payment
under this Title shall cease and the
and the corporation consents thereto;
transferee shall have all the rights of a
2. When the proposed action is abandoned or
regular stockholder; and all dividend
rescinded by the corporation;
distributions which would have accrued
3. When the proposed action is disapproved by
on such shares shall be paid to the
the SEC where such approval is necessary;
transferee. (n)
4. When the SEC determines that he is not
entitled to exercise his appraisal right;
5. When he fails to submit the stock certificate NON-STOCK CORPORATIONS
within ten (10) days from demand to the
corporation for notation that such shares are  What is a non-stock corporation?
dissenting shares; and,
6. If the shares are transferred and the certificate - A non-stock corporation is one where no
subsequently cancelled. part of its income is distributable as
dividends to its members, trustees, or
 Who bears the cost of appraisal? officers, subject to the provisions of this
code on dissolution
- It depends
- The corporation bears the cost if  What provision of the code will govern non-
stock corporations? Would the provision
a. The price offered by the corporation is governing stock corporations also apply to
lower than the fair value of the shares of non-stock corporations?
the dissenting stockholder as determined
nd
by the appraisers; - Yes, 2 par. Of section 87 provides:
b. Where an action is filed by the dissenting
stockholder to recover such fair value and The provisions governing stock
the refusal of the stockholder to receive corporation, when pertinent, shall be
payment is found by the court to be applicable to non-stock corporations, except
justified. as may be covered by specific provisions of
this Title. (n)
- Dissenting stockholder will be liable for the
cost and expenses of appraisal when  How is the right to vote exercised in a non-
stock corporation compared to a stock
a. When the price offered by the corporation corporation
is approximately the same as the fair
value ascertained by the appraisers;
b. Where the action filed by the dissenting  May a member in a non-stock corporation
stockholder and his refusal to accept vote cumulatively?
payment is found by the court to be
unjustified.
- General rule is NO

 The dissenting stockholder may also sell,  May it be granted or allowed by the by-
transfer or assign his shares laws?

Section 86. Notation on certificates;


- Yes
rights of transferee. - Within ten (10) days after
demanding payment for his shares, a

86
 May the right to cumulative voting be denied in which may be more than fifteen (15) in
a stock corporation? number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as
- No, Doctrine of Limited Capacity organized, so classify themselves that the
term of office of one-third (1/3) of their
number shall expire every year; and
 May members in a non-stock corporation vote
subsequent elections of trustees comprising
by proxy?
one-third (1/3) of the board of trustees shall
be held annually and trustees so elected
- Yes, section 89 provides that: shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies
“Unless otherwise provided in the occurring before the expiration of a
articles of incorporation or the by-laws, a particular term shall hold office only for the
member may vote by proxy in accordance with unexpired period.
the provisions of this Code. (n) “
No person shall be elected as
 May the right to vote by proxy be validly trustee unless he is a member of the
denied in a stock corporation? corporation.

- No, it is a matter of right in a stock corporation Unless otherwise provided in the


articles of incorporation or the by-laws,
 May member of a non-stock corporation cast officers of a non-stock corporation may be
their vote by text? directly elected by the members. (n)

- Yes, subject to the approval and terms and  Qualifications?


conditions of the SEC <sec. 89>
1. He is a member of the association;
“Voting by mail or other similar means 2. Majority thereof must be residents of the
by members of non-stock corporations may be Philippines; and,
authorized by the by-laws of non-stock 3. Other qualifications as may be provided for
corporations with the approval of, and under in the by-laws.
such conditions which may be prescribed by,
the Securities and Exchange Commission. “  Governing board in a non-stock

 How about in stock? - Board of Trustees, however section 138


provides that:
- Voting by mail or other similar means may also
be authorized and allowed by the by-laws of Section 138. Designation of
non-stock corporations. Generally, in stock governing boards. - The provisions of
corporations, the vote must be cast at a duly specific provisions of this Code to the
constituted meeting. The only exception, in contrary notwithstanding, non-stock or
case of the latter, is in the matter of general special corporations may, through their
amendment of the articles of incorporation articles of incorporation or their by-laws,
where the written assent of the stockholder designate their governing boards by any
may be sufficient. name other than as board of trustees. (n)

 How is the governing board constituted in a  Disqualifications


non-stock corporation? How many members?
- Section 27 also applies to a non-stock
- It may exceed 15 in a non-stock corporation corporation, same holds true to the manner
unless the AOI or by-laws provide otherwise, of removal <sec. 29 ad 30>
as provided for by section 92 of the code:
Section 27. Disqualification of
Section 92. Election and term of directors, trustees or officers. - No person
trustees. - Unless otherwise provided in the convicted by final judgment of an offense
articles of incorporation or the by-laws, the punishable by imprisonment for a period
board of trustees of non-stock corporations, exceeding six (6) years, or a violation of this
87
Code committed within five (5) years prior to - Directors
the date of his election or appointment, shall
qualify as a director, trustee or officer of any  The provision that stock corporations
corporation. (n) cannot validly provide that members cannot
be voted by stockholders is only a general
Section 29. Vacancies in the office of rule because there is an exception section
director or trustee. - Any vacancy occurring in 97 of the code states that:
the board of directors or trustees other than by
removal by the stockholders or members or by The articles of incorporation of a
expiration of term, may be filled by the vote of close corporation may provide that the
at least a majority of the remaining directors or business of the corporation shall be
trustees, if still constituting a quorum; managed by the stockholders of the
otherwise, said vacancies must be filled by the corporation rather than by a board of
stockholders in a regular or special meeting directors. So long as this provision
called for that purpose. A director or trustee so continues in effect:
elected to fill a vacancy shall be elected only
or the unexpired term of his predecessor in
1. No meeting of stockholders need be
office.
called to elect directors;

Any directorship or trusteeship to be


2. Unless the context clearly requires
filled by reason of an increase in the number
otherwise, the stockholders of the
of directors or trustees shall be filled only by
corporation shall be deemed to be directors
an election at a regular or at a special meeting
for the purpose of applying the provisions of
of stockholders or members duly called for the
this Code; and
purpose, or in the same meeting authorizing
the increase of directors or trustees if so
stated in the notice of the meeting. (n) 3. The stockholders of the corporation shall
be subject to all liabilities of directors.
Section 30. Compensation of
directors. - In the absence of any provision in The articles of incorporation may
the by-laws fixing their compensation, the likewise provide that all officers or
directors shall not receive any compensation, employees or that specified officers or
as such directors, except for reasonable per employees shall be elected or appointed
diems: Provided, however, That any such by the stockholders, instead of by the
compensation other than per diems may be board of directors.
granted to directors by the vote of the
stockholders representing at least a majority of  Nature of membership is non-transferrable
the outstanding capital stock at a regular or and personal in nature unless the articles of
special stockholders' meeting. In no case shall incorporation or by-laws provide otherwise
the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of Section 90. Non-transferability of
the net income before income tax of the membership. - Membership in a non-stock
corporation during the preceding year. (n) corporation and all rights arising there from
are personal and non-transferable, unless
 Who elects the other officers? the articles of incorporation or the by-laws
otherwise provide. (n)
- Directly by the general members unless the
by-laws or articles provide otherwise.  How is a membership requirement in a non-
<sec.92> stock corporation

“Unless otherwise provided in the A holds a membership certificate


articles of incorporation or the by-laws, officers
of a non-stock corporation may be directly B goes to the corporation and compels the
elected by the members. (n) “ corporation to record the transfer in his
name
 In stock corporations who elect officers?
- Membership in non-stock corporations may
be acquired by complying with the
88
provisions of its rules prescribed in the by- If the conduct of the member comes within
laws. This is in consonance with the express any of this cases, it is a ground for valid
power granted by law under section 36, expulsion although it may not be expressly
paragraph 6 of the code, authorizing them to made so by the by-laws
admit members thereof and that authority
carries with it the power to prescribe rules on  Chinese YMCA vs. Ching
membership. It has thus been stated that in
the absence of charter or statutory restrictions,
- Right of the corporation to choose who the
non-stock corporations may determine who
members are, cannot be inquired or
shall be admitted to membership and how they
intervened by the court
shall be admitted.
- The appealed decision thus contravened
the establish principle that the courts cannot
Section 36. Corporate powers and strip a member of a non-stock corporation
capacity. - Every corporation incorporated of his membership therein without cause.
under this Code has the power and capacity:
 Lions Club International vs. CA
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell stocks to
- Courts will not generally interfere on matters
subscribers and to sell treasury stocks in
involving the internal affairs of an
accordance with the provisions of this Code;
unincorporated association such as election
and to admit members to the corporation if it
contest unless the acts complained of are
be a non-stock corporation;
arbitrary, oppressive, fraudulent, violative of
civil rights and the like
- They can provide the manner in which to admit
depending on their own rules - General rule is that the courts will not
interfere with the internal affairs of an
 The power or authority to terminate members unincorporated association so as to settle
in non-stock corporations is said to be inherent disputes between the members, or
but strict compliance with the manner and questions of policy, discipline, or internal
procedure laid down in the by-laws must be government, so long as the government of
observed, otherwise it may render the the society is fairly and honestly
expulsion ineffective and invalid. administered in conformity with its by-laws
and the law of the land, and no property or
Section 91. Termination of civil rights are involved.
membership. - Membership shall be
terminated in the manner and for the causes - Exceptions are the following:
provided in the articles of incorporation or the
by-laws. Termination of membership shall a. Where law and justice so require, and
have the effect of extinguishing all rights of a the proceedings of the association are
member in the corporation or in its property, subject to judicial review where there is
unless otherwise provided in the articles of fraud, oppression, or bad faith, or where
incorporation or the by-laws. (n) the action complained of is capricious,
arbitrary, or unjustly discriminatory
 Power is inherent and may be exercised in b. To grant relief in case property or civil
certain situations: rights are invaded, although it has also
been held that the involvement of
1. When an offense is committed which, property rights does not necessarily
although it has no immediate relation to a authorize judicial intervention, in the
member’s duty as such, it is so infamous absence of arbitrariness, fraud or
as to render him unfit for society of honest collusion.
men, which is indictable at common law; c. Are violative of the laws of the society,
2. When the offense is a violation of his duty or the law of the land, as by depriving
as member of the corporation; and, the person of due process of law
3. When the offense is of a mixed nature, d. There is lack of jurisdiction on the part
being both against his duty as a member of the tribunal conducting the
of the corporation, and also indictable at proceedings, where the organization
common law. exceeds its powers, or where the
proceedings are otherwise illegal
89
 Corporations, stock and non-stock, may be not organized for profit, as may be
dissolved in accordance and pursuant to the specified in a plan of distribution
provisions of Sections 118 to 121 of the adopted pursuant to this Chapter. (n)
Corporation Code and the pertinent provisions
of P.D. 902-A, as amended. If such be the  Non-stock corporations with 4Billion funds,
case, the assets of the corporation are to be may it be distributed for and among its
distributed in accordance with law and members?
established jurisprudence.
Section 94 number 3 provides:
 If a non-stock corporation is dissolved how will
its properties be distributed?
3. Assets received and held by the
corporation subject to limitations permitting
Section 94. Rules of distribution. - In
their use only for charitable, religious,
case dissolution of a non-stock
benevolent, educational or similar purposes,
corporation in accordance with the but not held upon a condition requiring
provisions of this Code, its assets shall be return, transfer or conveyance by reason of
applied and distributed as follows:
the dissolution, shall be transferred or
conveyed to one or more corporations,
1. All liabilities and obligations of the societies or organizations engaged in
corporation shall be paid, satisfied and activities in the Philippines substantially
discharged, or adequate provision shall be similar to those of the dissolving corporation
made therefore; according to a plan of distribution adopted
pursuant to this Chapter;
2. Assets held by the corporation upon a
condition requiring return, transfer or - If there is no distributive agreement then
conveyance, and which condition occurs they may do so through a plan of
by reason of the dissolution, shall be distribution under section 95
returned, transferred or conveyed in
accordance with such requirements;
Section 95. Plan of distribution of
assets. - A plan providing for the distribution
3. Assets received and held by the of assets, not inconsistent with the
corporation subject to limitations provisions of this Title, may be adopted by a
permitting their use only for charitable, non-stock corporation in the process of
religious, benevolent, educational or dissolution in the following manner:
similar purposes, but not held upon a
condition requiring return, transfer or
The board of trustees shall, by
conveyance by reason of the dissolution,
majority vote, adopt a resolution
shall be transferred or conveyed to one or
recommending a plan of distribution and
more corporations, societies or
directing the submission thereof to a vote at
organizations engaged in activities in the
a regular or special meeting of members
Philippines substantially similar to those of
having voting rights. Written notice setting
the dissolving corporation according to a
forth the proposed plan of distribution or a
plan of distribution adopted pursuant to
summary thereof and the date, time and
this Chapter;
place of such meeting shall be given to
each member entitled to vote, within the
4. Assets other than those mentioned in time and in the manner provided in this
the preceding paragraphs, if any, shall be Code for the giving of notice of meetings to
distributed in accordance with the members. Such plan of distribution shall be
provisions of the articles of incorporation adopted upon approval of at least two-thirds
or the by-laws, to the extent that the (2/3) of the members having voting rights
articles of incorporation or the by-laws, present or represented by proxy at such
determine the distributive rights of meeting. (n)
members, or any class or classes of
members, or provide for distribution; and
CLOSE CORPORATIONS

5. In any other case, assets may be


 Section 96. Definition and applicability of
distributed to such persons, societies, Title. - A close corporation, within the
organizations or corporations, whether or
90
meaning of this Code, is one whose articles of - Even if another corporation owns or controls
incorporation provide that: (1) All the 2/3 of the voting stocks of a close
corporation's issued stock of all classes, corporation, the latter may still be
exclusive of treasury shares, shall be held considered as such close corporation if the
of record by not more than a specified corporation owning or controlling the shares
number of persons, not exceeding twenty is also a close corporation.
(20); (2) all the issued stock of all classes
shall be subject to one or more specified “Notwithstanding the foregoing, a
restrictions on transfer permitted by this corporation shall not be deemed a close
Title; and (3) The corporation shall not list corporation when at least two-thirds (2/3) of
in any stock exchange or make any public its voting stock or voting rights is owned or
offering of any of its stock of any class. controlled by another corporation which is
Notwithstanding the foregoing, a corporation not a close corporation within the meaning
shall not be deemed a close corporation when of this Code.”
at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another
 What kind of corporations cannot be a close
corporation which is not a close corporation
corporation?
within the meaning of this Code.
1. Mining or oil companies,
- Between and among themselves, they feel 2. Stock exchange
and act alike
3. Banks and insurance companies,
- Not more than 20 stockholders 4. Public utilities
- Specified persons, if you are not specified, you 5. Educational institutions
cannot be a stockholder 6. Corporations vested with public interest
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not  Classification of directors
publicly offered
- 3 qualifying conditions must be contained in - Ordinary stock- no such right
the articles of incorporation, to be considered - Close corporation-yes there is such a right
as a close corporation, if not, it will not be
considered as such and will be governed by  Section 97 is a permissive provision
the general provisions of the code
- Even if 100 % is owned by one person it will Section 97. Articles of
not be considered a close corporation without incorporation. - The articles of incorporation
the 3 qualifying provisions of a close corporation may provide:
- Identity of stockholders, specified persons
- Active management either as directors or
1. For a classification of shares or rights
partners in management
and the qualifications for owning or holding
- Combination of the corporation and the same and restrictions on their transfers
partnership type of business
as may be stated therein, subject to the
provisions of the following section;
 May any type of corporation, be organized as
such close corporation?
2. For a classification of directors into one
or more classes, each of whom may be
- No, the 3 qualifying conditions must be voted for and elected solely by a particular
present class of stock; and

 What if 2/3 of the outstanding capital stock is 3. For a greater quorum or voting
owned by another corporation which is also a requirements in meetings of stockholders or
close corporation, will it be a close directors than those provided in this Code.
corporation?
 After classification what then?
- No, it will only be a closed corporation if 2/3 of
the voting stocks of a close corporation is also
- After classification, qualification and then
owned by a close corporation. It must be restriction as provided for under the 3
“voting” stocks qualifying conditions in section 96

91
 Cumulative voting is restricted in close - Yes, any third person, section 98 provides:
corporations if will be elected solely by a
particular class Section 98. Validity of restrictions
on transfer of shares. - Restrictions on the
 In a close corporation, the articles of right to transfer shares must appear in the
incorporation may provide for a greater articles of incorporation and in the by-laws
quorum and voting requirement in meetings of as well as in the certificate of stock;
both stockholders or directors to increase the otherwise, the same shall not be binding on
veto power of minority stockholders, unlike in a any purchaser thereof in good faith. Said
stock corporation wherein only directors restrictions shall not be more onerous than
meetings may provide for greater quorum granting the existing stockholders or the
requirement and in stockholders meeting corporation the option to purchase the
which may not be altered or increased, as shares of the transferring stockholder with
provide for in section 25, following the doctrine such reasonable terms, conditions or period
of limited capacity stated therein. If upon the expiration of
said period, the existing stockholders or
 The articles of a close corporation may
the corporation fails to exercise the
likewise provide that the business of the
option to purchase, the transferring
corporation shall be managed by the
stockholder may sell his shares to any
stockholders rather than by the board of
third person.
directors. However the same must contain the
continuing provisions required in paragraph 2
of section 97, that is: o ordinary stock corporations are
liable only if acted in Bad faith,
fraud or negligence in performance
1. No meeting of stockholders need be called
of duty
to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the  What if there are already 20 stockholders
corporation shall be deemed to be and they want to add 2 more, may it
directors; and; compel?
3. The stockholders of the corporation shall
be subject to all liabilities of directors. - In ordinary stock corporations, they may
compel by mandamus
 Liability of stockholders acting as directors in a - In close corporations, may not be compelled
close corporation are more extensive since to admit because it breaches the qualifying
they are personally liable for corporate torts conditions
unless the corporation has obtained a
reasonable adequate liability insurance, unlike  Since they cannot be compelled, may they
a ordinary stock corporation, wherein directors admit?
thereof are only liable for corporate torts only if
they have been negligent or acted fraudulently - Yes, provided all the stockholders
in the performance of their functions. consented or instead of consenting they
decide to amend their articles of
 Restrictions incorporation
- Will have to amend the articles of
- In ordinary stock corporations, the restrictions incorporation to accommodate other
must appear in the articles of incorporation as purchasers of share
well as the certificate of stocks - Will cease to be a close corporation if it
- In a close corporation, the restrictions must amends and becomes in excess of 20
appear in the articles of incorporation, the by-
laws and the certificate of stocks. Otherwise, o Unless all the stockholders consent
the same shall not be binding on any they “may”
purchaser thereof in good faith
 What if the other stockholders object to
 What if the stockholders do not want to register? What will be the remedy of the
exercise their right or option to purchase may transferee?
it be sold to any person?

92
- His remedy is rescission. The effect of  Exception to the rule: other officers may be
rescission is mutual restitution directly appointed and hired by the
stockholders
 How about the stockholder, what is his  Close corporations may validly act even
recourse? without a meeting provided the conditions
are obtained
- He may compel the close corporation to
purchase his shares at their fair value for any Section 101. When board meeting
reason, provided the corporation has sufficient is unnecessary or improperly held. - Unless
assets in its books to cover the debts and the by-laws provide otherwise, any action
liabilities exclusive of capital by the directors of a close corporation
- In a close corporation, there is a withdrawing without a meeting shall nevertheless be
stockholder, unlike in an ordinary stockholder deemed valid if:
where there is none, they may only do so in
the exercise of appraisal rights 1. Before or after such action is taken,
written consent thereto is signed by all the
Section 105. Withdrawal of directors; or
stockholder or dissolution of corporation. - In
addition and without prejudice to other rights 2. All the stockholders have actual or
and remedies available to a stockholder under implied knowledge of the action and make
this Title, any stockholder of a close no prompt objection thereto in writing; or
corporation may, for any reason, compel
the said corporation to purchase his 3. The directors are accustomed to take
shares at their fair value, which shall not be informal action with the express or implied
less than their par or issued value, when acquiescence of all the stockholders; or
the corporation has sufficient assets in its
books to cover its debts and liabilities 4. All the directors have express or implied
exclusive of capital stock: Provided, That knowledge of the action in question and
any stockholder of a close corporation may, by none of them makes prompt objection
written petition to the Securities and Exchange thereto in writing.
Commission, compel the dissolution of such
corporation whenever any of acts of the
directors, officers or those in control of the  Pre-emptive rights in a close corporation is
corporation is illegal, or fraudulent, or absolute
dishonest, or oppressive or unfairly prejudicial
to the corporation or any stockholder, or Section 102. Pre-emptive right in
whenever corporate assets are being close corporations. - The pre-emptive right
misapplied or wasted. of stockholders in close corporations shall
extend to all stock to be issued, including
 Agreements may also be entered in a close reissuance of treasury shares, whether for
corporation <sec.100> money, property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
- They can even agree to be partners in
management
- Pre-incorporation  Why is it said to be absolute?
- Manner in which the business of the
corporation shall be managed - Because there is no public offering in a
close corporation, otherwise it will not be
 Board resolution considered as close

 In a close corporation the pre-emptive rights


- Ordinary stock corporations- sit and act as a
body at a duly constituted meeting, they may is broadened to include all issues without
do so by virtue of the E-Commerce Act exception unless denied or limited by the
through teleconference or video conference articles of incorporation

 Section 39 is the governing provision


concerning rights of the stockholder in an
ordinary stock corporation and it may be
93
denied. If it is not denied a stockholder can votes required for any corporate action
exercise his pre-emptive rights for all issues of cannot be obtained, with the consequence
shares whether money, property or previously that the business and affairs of the
incurred indebtedness. corporation can no longer be conducted to
the advantage of the stockholders
Section 39. Power to deny pre- generally, the Securities and Exchange
emptive right. - All stockholders of a stock Commission, upon written petition by any
corporation shall enjoy pre-emptive right to stockholder, shall have the power to
subscribe to all issues or disposition of shares arbitrate the dispute. In the exercise of such
of any class, in proportion to their respective power, the Commission shall have authority
shareholdings, unless such right is denied by to make such order as it deems appropriate,
the articles of incorporation or an amendment including an order: (1) canceling or altering
thereto: Provided, That such pre-emptive right any provision contained in the articles of
shall not extend to shares to be issued in incorporation, by-laws, or any stockholder's
compliance with laws requiring stock offerings agreement; (2) canceling, altering or
or minimum stock ownership by the public; or enjoining any resolution or act of the
to shares to be issued in good faith with the corporation or its board of directors,
approval of the stockholders representing two- stockholders, or officers; (3) directing or
thirds (2/3) of the outstanding capital stock, in prohibiting any act of the corporation or its
exchange for property needed for corporate board of directors, stockholders, officers, or
purposes or in payment of a previously other persons party to the action; (4)
contracted debt. requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
 Are treasury shares covered in the exercise of
unrestricted retained earnings in its books,
pre-emptive rights in ordinary stock
or by the other stockholders; (5) appointing
corporations?
a provisional director; (6) dissolving the
corporation; or (7) granting such other relief
as the circumstances may warrant.
 As regards amendments
A provisional director shall be an
Section 103. Amendment of articles impartial person who is neither a
of incorporation. - Any amendment to the stockholder nor a creditor of the corporation
articles of incorporation which seeks to delete or of any subsidiary or affiliate of the
or remove any provision required by this Title corporation, and whose further
to be contained in the articles of incorporation qualifications, if any, may be determined by
or to reduce a quorum or voting requirement the Commission. A provisional director is
stated in said articles of incorporation shall not not a receiver of the corporation and does
be valid or effective unless approved by the not have the title and powers of a custodian
affirmative vote of at least two-thirds (2/3) of or receiver. A provisional director shall have
the outstanding capital stock, whether with or all the rights and powers of a duly elected
without voting rights, or of such greater director of the corporation, including the
proportion of shares as may be specifically right to notice of and to vote at meetings of
provided in the articles of incorporation for directors, until such time as he shall be
amending, deleting or removing any of the removed by order of the Commission or by
aforesaid provisions, at a meeting duly called all the stockholders. His compensation shall
for the purpose. be determined by agreement between him
and the corporation subject to approval of
 What happens if there is a deadlock? the Commission, which may fix his
compensation in the absence of agreement
- Section 104 provides for a remedy or in the event of disagreement between the
provisional director and the corporation.
Section 104. Deadlocks. -
Notwithstanding any contrary provision in the - Powers of the SEC in intra-corporate
articles of incorporation or by-laws or concerns has been transferred to the proper
agreement of stockholders of a close commercial courts
corporation, if the directors or stockholders are - Prohibit, even if acting in good faith
so divided respecting the management of the - Provisional director appointed by the court
corporation's business and affairs that the
94
- Requiring the purchase, irrespective of from being listed
unrestricted retained earnings in the stock
- The provision of the law above-quoted gives exchange or
the SEC a very wide discretion in respect to offered for sale
management of a close corporation in the to the public
event of a deadlock. It may: 5. Stockholders Management is lodged
may take an in the Board of
1. Cancel or alter any provision in the articles active part in Directors
of incorporation, by-laws or any corporate
stockholders agreement management by
2. Cancel, alter or enjoin any resolution or vesting
other act of the corporation or its board of management to
directors, stockholders or officers them rather than
3. Prohibit any act of the corporation or its a Board of
board of directors, stockholders or officers Director
or other persons party to the action; 6. Those active in Directors are liable for
4. Requiring the purchase of the par value of management are torts only if they have
the shares of any stockholders, either by personally liable acted negligently or
the corporation regardless of availability of for corporate fraudulently
unrestricted earnings, or by the other torts unless the
shareholders, corporation has
5. Appointment of a provisional director obtained an
6. Dissolving the corporation; or adequate liability
7. Other relief as the circumstances may insurance
warrant. 7. Directors can Directors must, as a
validly act even rule, act as a body at a
 Section 105 without a duly constituted
meeting meeting
8. Agreements Not valid and binding
- Dishonesty is a ground for dissolution of a
between since stockholders’
close corporation
stockholders agreement cannot limit
- Even one stockholder may petition for
regarding the the discretion of the
dissolution
operations of the Board to manage
business can corporate affairs
o when there is a relief available, validly be made
dissolution would not be available in 9. To the extent Ordinarily, no such
an ordinary corporation that directors classification and no
may be restrictions on
CLOSE ORDINARY STOCK classified into cumulative voting
CORPORATION CORPORATION one or more
1. The number of No limitation as to classes and to
stockholders number of shareholder be voted solely
cannot exceed by a particular
20 class of stock,
2. To the extent Maximum number of cumulative
that all directors is 15 voting may, in
stockholders can effect, be
be deemed restricted
directors, the 10. The Officers are elected by
number of articles of the Board of Directors
directors can incorporation
effectively be may provide that
more than 15 all officers shall
3. Shares of stock Generally no restriction be elected or
are subject to on transfer of shares appointed by the
specified stockholders
restrictions 11. It may Although the articles of
4. Shares of stock No prohibition provide for incorporation or by-
are prohibited greater quorum laws may provide for
95
and voting greater quorum and 105
requirements in voting requirements in
meetings of directors’ meeting
stockholders and under section 25,  Manuel Dulay Enterprises vs. CA
directors those for stockholders’
meeting cannot - What was the position of Manuel Dulay
generally be altered here? President, General Manager and
12. Restriction Valid and binding if Treasurer
on transfer of indicated in the articles
shares should of incorporation and - Cannot act both as president and treasurer
be indicated in stock certificates at the same time
the articles of - Since it is a close corporation owned by the
incorporation, family of Manuel Dulay, save and except
by-laws and the secretary, it should be governed by Title
stock certificates XII
13. Pre- Pre-emptive rights may - Petitioner is classified as a close
emptive rights of be denied as provided corporation and consequently a board
stockholders is for in section 39 resolution authorizing the sale or mortgage
broader as it of the subject property is not necessary to
include all issues bind the corporation for the action of its
without president. At any rate, a corporate action
exception taken at a board meeting without proper call
14. A Unless he sells his or notice in a close corporation is deemed
stockholder may shares, a stockholder ratified by the absent director unless the
withdraw and cannot get back his latter promptly files his written objection with
compel the investment nor compel the secretary of the corporation after having
corporation to the corporation to buy knowledge of the meeting which, in this
purchase his his shares except in case, petitioner Virgilio Dulay failed to do.
shares for any the exercise of his - Virgilio Dulay is a signatory witness, he
reason with the appraisal right knows very well about the deed of absolute
limitation only sale, he is estopped
that the
corporation has  Naguiat vs. NLRC
sufficient assets
to cover its
- Section 100 par. 5. To the extent that the
liabilities
stockholders are actively engaged in the
exclusive of
management or operation of the business
capital stock
and affairs of a close corporation, the
15. The proper Courts cannot interfere
stockholders shall be held to strict fiduciary
forum may I the business
duties to each other and among
interfere in the judgment of the
themselves. Said stockholders shall be
management of directors/stockholders
personally liable for corporate torts unless
a close “BUSINESS
the corporation has obtained reasonably
corporation in JUDGMENT RULE”
adequate liability insurance.
case of
deadlocks under
Section 104,  Family corporations is not automatically a
even of the close corporation the 3 qualifying conditions
directors/stockho must be present.
lders are acting
in good faith SPECIAL CORPORATIONS
16. Any Dissolution may be
stockholder may had only on the  2 types of special corporations
petition the SEC grounds provided by
for corporate the provisions of the 1. Educational corporations
dissolution on Code on dissolution 2. Religious corporations
grounds among and P.D. 902-A, as 2.1 Corporation Sole
others, provides amended 2.2 Religious Societies
for in section
96
 What provision governs educational there is no provision in the special law, you
corporations? go back to section 25 and 27 of the general
provisions
Section 106. Incorporation. - - Stock- must be a stockholder
Educational corporations shall be governed by - Non-stock- must be a member
special laws and by the general provisions of - By-laws may provide for additional
this Code. (n) qualifications and disqualifications

- Special laws like they Education Act of the Section 25. Corporate officers,
Philippines quorum. - Immediately after their election,
- These institutions of learning, once recognized the directors of a corporation must formally
by the government as such are mandated by organize by the election of a president, who
law to be incorporated within ninety (90) days shall be a director, a treasurer who may or
under the provisions of the Corporation Code may not be a director, a secretary who shall
and must, perforce, comply with the be a resident and citizen of the Philippines,
requirements and procedure laid down there and such other officers as may be provided
under. Their failure to so will not immune the for in the by-laws. Any two (2) or more
educational institution from suit as a positions may be held concurrently by the
corporation. (Chiang Kai Siek Case) same person, except that no one shall act
- Favorable recommendation of government as president and secretary or as president
agency involved and treasurer at the same time.

 Two types of educational corporations The directors or trustees and


officers to be elected shall perform the
duties enjoined on them by law and the by-
- Certificate of completion in the academic field
laws of the corporation. Unless the articles
- Vocational and technical one’s
of incorporation or the by-laws provide for a
greater majority, a majority of the number of
o Recommendation of DECS if directors or trustees as fixed in the articles
certificate of completion in the of incorporation shall constitute a quorum
academic field for the transaction of corporate business,
and every decision of at least a majority of
 How is the governing board of an educational the directors or trustees present at a
institution instituted? meeting at which there is a quorum shall be
valid as a corporate act, except for the
- Non-stock- multiples of 5 only (example: election of officers which shall require the
5,10,15) vote of a majority of all the members of the
- Stock- can be anywhere between 5 to 15 board.

 Can they consist of 7 or 9 members? Directors or trustees cannot attend or vote


by proxy at board meetings. (33a)
- Yes, if stock
Section 27. Disqualification of directors,
 Can they be incorporated also as non-stock? 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
- Yes this Code committed within five (5) years prior to the
- B.P. 232 allows the organization of an date of his election or appointment, shall qualify as
educational institution that is stock corporation, a director, trustee or officer of any corporation. (n)
only if they do not issue a certificate of
completion in the academic field
 Article 14 section 4 par. 2 of the
Constitutions
 Qualifications and disqualifications of the
membership in the board of an educational
corporation Educational institutions, other than
those established by religious groups and
mission boards, shall be owned solely by
- Educational corporations are governed by citizens of the Philippines or corporations or
special laws and general provisions, hence if associations at least sixty per centum of the
97
capital of which is owned by such citizens. The - General rule, 5 to 15 natural persons(except
Congress may, however, require increased cooperatives and corporations primarily
Filipino equity participation in all educational organized to hold equities in rural banks
institutions. The control and administration of and may rightfully become incorporators
educational institutions shall be vested in thereof)
citizens of the Philippines. - Exception, corporation sole, consist of only
one person
No educational institution shall be established
exclusively for aliens and no group of aliens  May any person form or organize a
shall comprise more than one-third of the corporation sole?
enrollment in any school. The provisions of
this sub section shall not apply to schools
- No, not any person can form a corporation
established for foreign diplomatic personnel
sole, section 110 provides:
and their dependents and, unless otherwise
provided by law, for other foreign temporary
residents. Section 110. Corporation sole. -
For the purpose of administering and
managing, as trustee, the affairs, property
- Management is left solely to citizens of the
and temporalities of any religious
Philippines
denomination, sect or church, a corporation
- Board of Directors manages the corporate
sole may be formed by the chief
affairs, foreigners cannot therefore be elected
archbishop, bishop, priest, minister, rabbi or
in the board
other presiding elder of such religious
- Exceptions are, mission boards and religious denomination, sect or church. (154a)
orders, which may have a governing board
consisting of foreigners
 Is it required to file the articles of
incorporation in the SEC?
 Term of office of governing board in an
educational institutions
- Yes
- Can serve a term of 5 years. If that be the
case, 1/5 of their number shall expire every  What should be contained in the articles of
year incorporation?

 Non-stock or stock, can they serve for a 1 year - Section 111 and section 112 provides for
term only? the contents and procedures

- Yes, the articles of incorporation may provide Section 111. Articles of


that it be 1 year only incorporation. - In order to become a
corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding
 What are these religious corporations spoken
elder of any religious denomination, sect or
off?
church must file with the Securities and
Exchange Commission articles of
- Corporation sole and religious societies incorporation setting forth the following:

 What is a corporation sole? 1. That he is the chief archbishop, bishop,


priest, minister, rabbi or presiding elder of
- Consists of one person only and his successor his religious denomination, sect or church
in some particular station, who are and that he desires to become a corporation
incorporated by law in order to give them sole;
some legal capacities and advantages,
particularly that of perpetuity, which in their 2. That the rules, regulations and discipline
natural persons they could not have had of his religious denomination, sect or church
are not inconsistent with his becoming a
 May a corporation be organized by less than 5 corporation sole and do not forbid it;
natural persons?
3. That as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, he
98
is charged with the administration of the - Not required because they are supposed to
temporalities and the management of the exist in perpetuity
affairs, estate and properties of his religious - However, it does not mean that it shall
denomination, sect or church within his continue to exist forever, it merely means
territorial jurisdiction, describing such territorial that it has the capacity of continuous
jurisdiction; existence during a particular period until
dissolved in accordance with law
4. The manner in which any vacancy occurring
in the office of chief archbishop, bishop, priest,  When will it acquire judicial personality?
minister, rabbi of presiding elder is required to How do you compare this to other types of
be filled, according to the rules, regulations or corporation?
discipline of the religious denomination, sect or
church to which he belongs; and - After the filing the verified articles of
incorporation along with the documents
5. The place where the principal office of the required in Section 112 with the SEC,
corporation sole is to be established and immediately becomes endowed with
located, which place must be within the corporate personality, this serves as an
Philippines. exception to the rule that a corporation
acquires juridical personality only upon the
The articles of incorporation may issuance of a certificate of incorporation by
include any other provision not contrary to law the said government agency.
for the regulation of the affairs of the - Upon filing of verified articles of
corporation. (n) incorporation with the SEC, will not require
the approval of SEC
Section 112. Submission of the
articles of incorporation. - The articles of  A corporation sole is possessed with the
incorporation must be verified, before filing, by same power, rights and privileges, to own,
affidavit or affirmation of the chief archbishop, acquire and hold or convey properties like
bishop, priest, minister, rabbi or presiding any other corporation? True or False
elder, as the case may be, and accompanied
by a copy of the commission, certificate of - False, they have the same power rights and
election or letter of appointment of such chief privileges, but when it comes to alienation
archbishop, bishop, priest, minister, rabbi or and acquisition, it must possess a court
presiding elder, duly certified to be correct by order, however when there is a regulated
any notary public. method, a court order may be dispensed
with <sec. 113>
From and after the filing with the
Securities and Exchange Commission of the Section 113. Acquisition and
said articles of incorporation, verified by alienation of property. - Any corporation
affidavit or affirmation, and accompanied by sole may purchase and hold real estate and
the documents mentioned in the preceding personal property for its church, charitable,
paragraph, such chief archbishop, bishop, benevolent or educational purposes, and
priest, minister, rabbi or presiding elder shall may receive bequests or gifts for such
become a corporation sole and all purposes. Such corporation may sell or
temporalities, estate and properties of the mortgage real property held by it by
religious denomination, sect or church obtaining an order for that purpose from the
theretofore administered or managed by him Court of First Instance of the province
as such chief archbishop, bishop, priest, where the property is situated upon proof
minister, rabbi or presiding elder shall be held made to the satisfaction of the court that
in trust by him as a corporation sole, for the notice of the application for leave to sell or
use, purpose, behalf and sole benefit of his mortgage has been given by publication or
religious denomination, sect or church, otherwise in such manner and for such time
including hospitals, schools, colleges, orphan as said court may have directed, and that it
asylums, parsonages and cemeteries thereof. is to the interest of the corporation that
(n) leave to sell or mortgage should be granted.
The application for leave to sell or mortgage
 Is it required to indicate its terms of execution? must be made by petition, duly verified, by
Why not? the chief archbishop, bishop, priest,
99
minister, rabbi or presiding elder acting as - If they still form part of public domain they
corporation sole, and may be opposed by any cannot be owned, but if they are converted
member of the religious denomination, sect or into private land, the constitutional
church represented by the corporation sole: prohibition will not apply
Provided, That in cases where the rules,
regulations and discipline of the religious  If there is vacancy who will fill up the same?
denomination, sect or church, religious society What if there is none, what must the
or order concerned represented by such successor do?
corporation sole regulate the method of
acquiring, holding, selling and mortgaging real
- According to section 114:
estate and personal property, such rules,
regulations and discipline shall control, and the
intervention of the courts shall not be Section 114. Filling of vacancies. -
necessary. (159a) The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or
presiding elder in a corporation sole shall
 Since a corporation sole is consists only of
become the corporation sole on their
one person, will the registration of the property
accession to office and shall be permitted to
in the name of the corporation sole vest unto
transact business as such on the filing with
the head thereof the ownership of the
the Securities and Exchange Commission
property?
of a copy of their commission, certificate of
election, or letters of appointment, duly
- No, it will not vest unto the head, the head is certified by any notary public.
acting merely as a guardian
During any vacancy in the office of
 Roman Catholic Apostolic Adm. Of Davao, inc. chief archbishop, bishop, priest, minister,
vs. Land Reg. Comm, et al. rabbi or presiding elder of any religious
denomination, sect or church incorporated
- Act only as a guardian as a corporation sole, the person or persons
- Ownership devolves upon the congregation or authorized and empowered by the rules,
religious denomination regulations or discipline of the religious
- A corporation consists of one person only and denomination, sect or church represented
his successors (who will always be one at a by the corporation sole to administer the
time, in some particular station), who are temporalities and manage the affairs, estate
incorporated by law in order to give them and properties of the corporation sole
some legal capacities and advantages, during the vacancy shall exercise all the
particularly that of perpetuity, which in their powers and authority of the corporation sole
natural persons they could not have had during such vacancy. (158a)
- Roman Catholic Church has no nationality and
that the framers of the Constitution, as will be  If a corporation exists in equity may it not be
hereunder explained, did not have in mind the dissolved?
religious corporations sole when they provided
that 60 percent of the capital thereof be owned Section 115. Dissolution. - A
by Filipino citizens. corporation sole may be dissolved and its
affairs settled voluntarily by submitting to
 Director of Lands vs. CA the Securities and Exchange Commission a
verified declaration of dissolution.
- Alienable public land is converted into private
land when the same has been openly, The declaration of dissolution shall set forth:
continuously and exclusively in possession of
the property as concept of an owner for 30 1. The name of the corporation;
years, automatically that is
2. The reason for dissolution and winding
 Republic of the Philippines vs. IAC up;

- Determination of the character of the land 3. The authorization for the dissolution of
should be in mind the corporation by the particular religious
denomination, sect or church;
100
4. The names and addresses of the persons forbidden by the constitution, rules,
who are to supervise the winding up of the regulations, or discipline of the religious
affairs of the corporation. denomination, sect or church of which it is a
part, or by competent authority, may, upon
Upon approval of such declaration of written consent and/or by an affirmative
dissolution by the Securities and Exchange vote at a meeting called for the purpose of
Commission, the corporation shall cease to at least two-thirds (2/3) of its membership,
carry on its operations except for the purpose incorporate for the administration of its
of winding up its affairs. (n) temporalities or for the management of its
affairs, properties and estate by filing with
the Securities and Exchange Commission,
- While section 115 of the code provides for the
articles of incorporation verified by the
process and procedure for the dissolution of a
affidavit of the presiding elder, secretary, or
corporate sole, there is nothing in the law itself
clerk or other member of such religious
which would prohibit it from amending its
society or religious order, or diocese, synod,
articles of incorporation
or district organization of the religious
- It is believed that authorization for the
denomination, sect or church, setting forth
dissolution by the particular religious
the following:
denomination, sect or church, as required in
sub-paragraph 3 of section 115 would still be
necessary in the case of amending the articles 1. That the religious society or religious
of incorporation to affect dissolution. order, or diocese, synod, or district
organization is a religious organization of a
religious denomination, sect or church;
o Expiration of a corporate term will not
apply to a religious corporation
2. That at least two-thirds (2/3) of its
membership have given their written
 May a corporation sole be dissolved by judicial
consent or have voted to incorporate, at a
decree?
duly convened meeting of the body;
- General rule: No, because a corporation sole,
3. That the incorporation of the religious
is by its very nature ecclesiastical and religious
society or religious order, or diocese, synod,
(doctrine of separation of church and state)
or district organization desiring to
- Exception: police power of the state, if its
incorporate is not forbidden by competent
purpose is being carried out and is instead
authority or by the constitution, rules,
being used for illegal purpose, it may be so
regulations or discipline of the religious
dissolved
denomination, sect, or church of which it
forms a part;
 What are religious societies?
4. That the religious society or religious
- Under common law, a religious society is a order, or diocese, synod, or district
body of persons associated together for the organization desires to incorporate for the
purpose of maintaining religious worship. administration of its affairs, properties and
estate;
 Is it also required to file its articles of
incorporation to the SEC? 5. The place where the principal office of
the corporation is to be established and
- No <sec. 116> “may” located, which place must be within the
Philippines; and
 What should be contained in the articles of
incorporation? 6. The names, nationalities, and residences
of the trustees elected by the religious
- Section 116 provides: society or religious order, or the diocese,
synod, or district organization to serve for
Section 116. Religious societies. - the first year or such other period as may be
Any religious society or religious order, or any prescribed by the laws of the religious
diocese, synod, or district organization of any society or religious order, or of the diocese,
religious denomination, sect or church, unless synod, or district organization, the board of

101
trustees to be not less than five (5) nor more divide its assets. There is no need for the
than fifteen (15). (160a) institution of a proceeding for quo warranto
to determine the time and date of the
 Is it required to indicate its term of existence? dissolution of a corporation because the
period of corporate existence is provided in
the articles of incorporation. When such
- Likewise to exist in perpetuity, the law does
period expires and without any extension
not require to indicate its term of existence
having been made pursuant to law, the
corporation is dissolved automatically
 When will it acquire juridical personality? insofar as the continuation of its business is
- Only a corporation sole may come into concerned.
existence without SEC approval, section 19 - The rights of the lessor and the lessee over
will thus govern, Vested with judicial capacity the improvements which the latter
upon issuance of the certificate by the SEC constructed on the leased premises are
governed by Article 1678 of the Civil Code.
o However it is not accurate according The provision gives the lessee the right to
to atty. Ladia because there are those remove the improvements if the lessor
chooses not to pay one half of the value
that can issue for example
thereof. However, in the case at bar the law
cooperatives- BUREAU OF will not apply because the parties herein
COOPERATIVES which register, have stipulated in the contract their own
home insurance guaranty corporation- terms and conditions concerning the
HOME OWNERS improvements before the termination of the
lease. Petitioner PNB as assignee of PBM
 How may religious societies be dissolved? succeeded to the obligation of the latter
under the contract of lease. It could not
- Go to the general rules governing dissolution, possess rights more than what PBM had as
because the rules under special corporations lessee under the contract. Hence, petitioner
do not provide for such rule was duly bound to remove the
improvements before the expiration of the
period of lease. Its failure to do so when the
DISSOLUTION
lease was terminated was tantamount to a
waiver of its rights and interest over the
 What is dissolution? improvements on the leased premise.

- Extinguishment of the corporate franchise and o 3 modes of dissolution, 3 modes of


the termination of corporate existence voluntary dissolution and 3 modes
of liquidation and winding up-
 3 modes of dissolution FREQUENTLY ASKED IN THE
FINALS
1. By expiration of its term;
2. By voluntary surrender of its primary franchise  What are the 3 modes of voluntary
(voluntary dissolution); dissolution?
3. By revocation of its corporate franchise
(involuntary dissolution) 1. Voluntary dissolution where no creditors are
affected; <sec.118>
 Philippine National Bank vs. CFI 2. Voluntary dissolution where creditors are
affected; <sec. 119>
- When the period of corporate life expires, the 3. Shortening of corporate term. <sec. 120>
corporation ceases to be a body corporate for
purposes of continuing the business for which  Voluntary dissolution where no creditors are
it is organized. But it shall nevertheless be affected <sec.118>
continued as a body corporate for three years
after the time when it would have be dissolved, - The formal and procedural requirements
for the purpose of prosecuting and defending necessary are the following:
suits by or against it and for enabling it
gradually to settle and close its affairs to
1. Majority vote of the board of directors or
dispose of and convey its property and to
trustees;
102
2. Sending of notice of each stockholders or 2. Petition for dissolution shall be filed with the
member either by registered mail or personal SEC signed by a majority of its board of
delivery at least thirty (30) days prior to the directors or trustees or other officers having
meeting (scheduled by the board for the the management of its affairs, verified by
purpose of submitting the board action to the president or secretary or one of its
dissolve the corporation for approval of the directors or trustees, setting forth all claims
stockholder or members.); and demands against it.
3. Publication of the notice of time, place and 3. Issuance of an order by the SEC reciting
subject of the meeting for three (3) the purpose of the petition and fixing the
consecutive weeks in a newspaper published date on or before which objections thereto
in the place where the principal office of said may be filed by any person, which date
corporation is located or in a newspaper of shall not be less than thirty days nor more
general circulation in the Philippines; than sixty days after entry of the order.
4. Resolution adopted by the affirmative vote of 4. Before such date, a copy of the order must
the stockholders owning at least 2/3 of the be published once a week for three (3)
outstanding capital stock or 2/3 of the consecutive weeks in a newspaper of
members at the meeting duly called for the general circulation published in the city or
purpose; municipality where the principal office is
5. A copy of the resolution authorizing the situated or in a newspaper of general
dissolution must be certified by a majority of circulation in the Philippines.
the board of directors or trustees and 5. Posting of the same order for three (3)
countersigned by the corporate secretary; consecutive weeks in three (3) public places
6. Issuance of a certificate of dissolution by the in such city or municipality.
SEC. 6. Upon five (5) days’ notice, given after the
date on which the right to file objections has
 Should this be strictly complied with? expired, the SEC shall hear the petition and
try any issue made by the objections filed.
7. Judgment dissolving the corporation and
- Yes, compliance with the requirements and
directing of its assets as justice requires
formalities prescribed above is mandatory
and the appointment of a receiver (if
such that failure to comply therewith will have
necessary in its discretion) to collect such
no effect on the legal existence of the
assets and pay the debts of the corporation.
corporation.

o The foregoing are also mandatory


 Will dissolution be effective and valid by a
requirements
mere resolution of the BOD and stockholders?

 Is the appointment of a receiver mandatory?


- No, a mere resolution by the stockholders or
the BOD of a corporation to dissolve the same
does not affect the dissolution but that some - No, it is merely permissive or discretionary
other steps, administrative or judicial is on the part of the court. The code uses the
necessary. (Daguhoy Enterprises vs. Ponce) word “may”; the law intended to let the
- Since it is the State which grants its right to shareholders have the control of the assets
exist, it is only through the State which can of the corporation upon dissolution and
allow the termination of its existence; without winding up.
consent of the State, it will not be dissolved. - The directors may also undertake
liquidation and winding up of its corporate
affairs, and sound business judgment, on
 Voluntary dissolution where creditors are
how they will wind up
affected <sec.119>

 Dissolution by shortening of corporate term


- By virtue of a petition, when there are creditors
<sec.120>
affected
- The following formalities would thus be
required: - Will be valid upon approval of the SEC,
unlike general amendments, which will be
deemed approved if not acted upon by the
1. Affirmative vote of the stockholders
SEC within 6 months from the date of filing
representing at least 2/3 of the outstanding
for a cause not attributable to the
capital stock or at least 2/3 of the members at
corporation.
a meeting duly called for that purpose;
103
- Shortening of the corporate term partakes the 2. Serious misrepresentation as to what the
nature of an amendment of the articles of corporation can do or is doing to the great
incorporation. Section 16 under general prejudice of or damage to the general
amendments allows “written assent” section public;
37 mandates that the vote must be cast at a 3. Refusal to comply or defiance of any lawful
duly constituted meeting. order of the Commission restraining
commission of acts which would amount to
Section 120. Dissolution by a grave violation of its franchise;
shortening corporate term. - A voluntary 4. Continuous inoperation for a period of at
dissolution may be effected by amending the least five (5) years;
articles of incorporation to shorten the 5. Failure to file by-laws within the required
corporate term pursuant to the provisions of period;
this Code. A copy of the amended articles of 6. Failure to file required reports in appropriate
incorporation shall be submitted to the forms as determined by the Commission
Securities and Exchange Commission in within the prescribed period.
accordance with this Code. Upon approval of
the amended articles of incorporation of the - Other grounds are provided for in the
expiration of the shortened term, as the case corporation code itself: among them are:
may be, the corporation shall be deemed
dissolved without any further proceedings, 1. Violation of any provision of the Code under
subject to the provisions of this Code on section 144;
liquidation. (n) 2. In case of deadlock in a close corporation
as provided for in section 105;
o Intra-corporate- special commercial 3. In a close corporation, any acts of directors,
courts officers or those in control of the corporation
which is illegal or fraudulent or dishonest or
 Another way of dissolving a corporation is oppressive or unfairly prejudicial to the
through involuntary dissolution corporation or any stockholder or whenever
corporate assets are being misapplied or
Section 121. Involuntary dissolution. - wasted under section 105.
A corporation may be dissolved by the
Securities and Exchange Commission upon - Mere dishonesty is also a ground in a close
filing of a verified complaint and after proper corporation
notice and hearing on the grounds provided by - Other grounds can be found in other special
existing laws, rules and regulations. (n) laws like the Securities Regulation Code
and the General Banking Act as well as the
- Dissolution is tantamount to the imposition of Insurance Code.
death penalty
- Instead of dissolving the corporation, courts  Government vs. Philippine Sugar Estate
normally enjoin the further commission of the
questioned act - It is necessary in order to secure judicial
- The relief of dissolution will be awarded only foreclosure of respondent’s charter to show
where no other remedy is available and it will a mis-user of its franchise justifying such a
not be allowed where the rights of the forfeiture
stockholders can be, or are, protected in some - Object is to protect the public, and not to
other way (Republic vs. Bisaya Land Trans. redress private grievances, the mis-user
Co. Inc.) must be such as to work or threaten a
substantial injury to the public, or such as to
 What are the grounds for involuntary amount to a violation of the fundamental
dissolution? condition of the contract by which the
franchise was granted and thus defeat the
purpose of the grant
- It is commenced through a verified complaint
or motu proprio by the proper courts - Courts proceed with extreme caution which
has for their object the forfeiture of
- Section 6 of PD 902-A provides for the
corporate franchise, and forfeiture will not
grounds for involuntary dissolution as follows:
be allowed, except under express limitation,
or for plain abuse of power by which the
1. Fraud in procuring its certificate of registration; corporation fails to fulfill the design and
104
purpose of its organization. But when the - The relief of dissolution will be awarded only
abuse or violation constitutes or threatens a where no other remedy is available and it
substantial injury to the public or such as to will not be allowed where the rights of the
amount to a violation of the fundamental stockholders can be, or are, protected in
conditions of its charter, or its conduct is some other way
characterized by obduracy or pertinacity in - Misuse and misapplication of the funds and
contempt of law, dissolution will be granted assets of the respondent were committed
- Did the court dissolve the corporation? No, it particularly by the corporate officers, where
did not, it granted the corporation 6 months to they can instead be held personally liable
cease and desist the performance of the - Since there is another remedy available
questioned act otherwise it will be dissolved dissolution is not warranted

 Government vs. El Hogar  Assuming the above stated corporation is a


close corporation, would the court decree
- 3 causes of action, the first is that the otherwise?
corporation violated the law by holding on the
property beyond that provide for by law, the - Yes, because in a close corporation, mere
second is that the corporation undertook the dishonesty is a ground for the dissolution
management f petitioners belonging to - Can even be dissolved by petition of only
delinquent shareholders of the association, one stockholder on the grounds stated in
and lastly that the by-law provision, which the code < sec. 105>
empowers the BD to cancel shares and to
return to the owners thereof the balance  Financing Corporation of the Philippines vs.
returning from the liquidation Teodoro

 Compare to Philippine Sugar Estate, wherein - Minority stockholders may not ask for the
the court ruled conditional dissolution. Why dissolution of a corporation in private suits
decree conditional dissolution in one and not and that such actions should be brought by
in the other case? the Government through its legal officers,
except in cases where the intervention of
- Because in El Hogar the government was at the State, for one reason or another,
fault, the government wasn’t able to issue the cannot be obtained, as when the State is
certificate of title on time not interested because the complaint is
- When the case was instituted, El Hogar was strictly a matter between the
already able to dispose the properties in stockholders and does not involve, in
question, in Philippine Sugar Estate it was still the opinion of the legal officer of the
the holding the properties in order to enrich Government, any of the acts or
itself at the expense of the taxpayers omissions warranting quo warranto
proceeding , in which minority
 Republic vs. Security Credit and Acceptance stockholders are entitled to have such
Corp. et al. dissolution. It should be exercised if
necessary in order not to entirely ignore and
disregard the rights of said minority
- The corporation here is a lending institution
and not a banking institution stockholders, especially when said minority
stockholders are unable to obtain redress
- Defendant corporation violated the law
and protection of their rights within the
because before a corporation may engage into
a banking activity it must first obtain a corporation itself. Stockholders should not
secondary franchise from the Central Bank be left without recourse
- Defendant corporation threatens substantial
injury to the general public, dissolution is  Present set up
warrant
- If there is a bank run kawawa naman yung - Any stockholder or member of a corporation
depositors can institute a dissolution proceeding
against his own corporation before the
 Republic vs. Bisaya Land Transportation Co. proper forum
Inc - Special Commercial Courts, shall hear and
decide intra-corporate disputes

105
 May a corporation ask for dissolution of the - It cannot apply for a new certificate or a
corporation when there is no prejudice to the secondary franchise for it is incapable of
general public? receiving a grant. It was not even a
corporation de facto. And then, there is no
- Yes, in a close corporation, a petition for the application subscribed by the new
dissolution of the corporation may be instituted corporation
by any one individual shareholder on the - And yet as stated, the new corporation has
ground, even by mere dishonesty not filed any application for certificate of
public convenience in Sabang, and has not
 Effects of dissolution published such application.

 Cebu Port Labor Union vs. State Marine Co


- The dissolution of a corporation not only
terminates its primary franchise to be a
corporation, but generally prevents it from - Even a cursory reading of the provision
further exercising other or secondary would convey the idea clearly manifested in
franchises which have been conferred to its. It the limitation “but not for the purpose of
terminates its power to enter into contracts or t continuing the business for which it was
o continue the business as a going concern. established,” that the 3-year period allowed
- Based on this general rule, the Supreme Court by the law is only for the purpose of winding
held that a corporation, whose corporate life up its affairs.
expired, cannot lawfully pursue the business
for which it was organized. It cannot apply for  Gonzales vs. Sugar Regulatory
a new certificate or a secondary franchise for it Administration
is incapable of receiving a grant. Neither can it
enforce a contract executed prior its - Instead of applying the corporation code,
dissolution for the purpose of continuing the the court applied the constitutional provision
business of its organization. - Cannot be read as permitting to destroy the
- In general the rights and liabilities of the substantive rights
corporation are not extinguished by its - Such would collide with the non-impairment
dissolution. of contracts clause of the constitution
- Complainants will have the right to follow
Section 145. Amendment or repeal. - the assets of the corporation in the hands of
No right or remedy in favor of or against any SRA or any other agency for that matter
corporation, its stockholders, members,
directors, trustees, or officers, nor any liability  After dissolution what next?
incurred by any such corporation,
stockholders, members, directors, trustees, or
- Liquidation and winding up should follow
officers, shall be removed or impaired either
by the subsequent dissolution of said
corporation or by any subsequent amendment  What is the definition of liquidation and
or repeal of this Code or of any part thereof. winding up?
(n)
- Collection of all corporate assets, the
 Buenaflor vs. Camarines Sur Industry Corp. payments of all its debts and settlement of
its obligations and the ultimate distribution
of the corporate assets, if any of it remains,
- From that time on Camarines Sur was plying
to all stockholders in accordance with their
in an activity that was illegal
proportionate stockholdings in the
- A corporation where the corporate life has
corporation or in accordance with their
expired it cannot lawfully pursue the business
respective contracts of subscription.
for which it was organized.
- the Supreme Court held that a corporation,
whose corporate life expired, cannot lawfully  Preference upon liquidation
pursue the business for which it was
organized. It cannot apply for a new certificate - If there are preferred shares, the preference
or a secondary franchise for it is incapable of granted to such should be complied with
receiving a grant. - Preferred shares may give the holder
- Awarding it to Camarines Sur is tantamount to thereof, preference only in the dividends but
a medal for its illegal acts also in the distribution of corporate assets
106
upon liquidation or termination of the corporate 1. By the corporation itself through the BOD
existence. If such is the intent, the contract of
subscription must so indicate lest they are - Usual method or procedure of liquidating a
placed on equal footing with common corporation and although there is no law
shareholders authorizing it, neither is there anything that
- Preference may be participating or non- prohibits the BOD from undertaking the
participating same
- If this method is resorted to, the board will
 Dissolved corporations are granted a period of only have a period of 3 years to finish its
3 years to liquidate task of liquidation
- Claims for or against the corporate entity
Section 122. Corporate liquidation. - not filed within the period will become
Every corporation whose charter expires by its unenforceable as there exist no corporate
own limitation or is annulled by forfeiture or entity against which they can be enforced
otherwise, or whose corporate existence for - Actions pending for or against the
other purposes is terminated in any other corporation when the 3 year period expires,
manner, shall nevertheless be continued as a are abated since after the period, the
body corporate for three (3) years after the corporation ceases for all intents and
time when it would have been so dissolved, for purposes and is no longer capable of suing
the purpose of prosecuting and defending or being sued
suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey 2. By a trustee appointed by the corporation
its property and to distribute its assets, but not
for the purpose of continuing the business for - The corporation may opt to convey all
which it was established. corporate assets to a trustees who will take
charge of liquidation
At any time during said three (3) - If this method is used, the three year period
years, the corporation is authorized and limitation imposed by section 122 will not
empowered to convey all of its property to apply provided the designation of the
trustees for the benefit of stockholders, trustee is made within that period
members, creditors, and other persons in
interest. From and after any such conveyance 3. By appointment of a receiver
by the corporation of its property in trust for the
benefit of its stockholders, members, creditors
- A receiver may be appointed by the proper
and others in interest, all interest which the
forum on petition or motu proprio upon the
corporation had in the property terminates, the
dissolution of the corporation
legal interest vests in the trustees, and the
- The appointment of a receiver is, however,
beneficial interest in the stockholders,
permissive rather than mandatory and the
members, creditors or other persons in
law tends to recognize that in cases of
interest.
voluntary dissolution there is no occasion
for the appointment of a receiver except
Upon the winding up of the corporate under special circumstances and upon
affairs, any asset distributable to any creditor proper showing
or stockholder or member who is unknown or - If a receiver is appointed, the 3 year period
cannot be found shall be escheated to the city fixed by law within which to complete the
or municipality where such assets are located. task of liquidation will not likewise apply
because the dissolved corporation is
Except by decrease of capital stock substituted by the receiver who may sue or
and as otherwise allowed by this Code, no be sued even after that period
corporation shall distribute any of its assets or
property except upon lawful dissolution and o Mere appointment of a receiver
after payment of all its debts and liabilities. without anything more does imply in
(77a, 89a, 16a) the dissolution of a corporation

 However the 3 year period is not absolute  National Abaca other Fibers Co. vs. Pore
 Liquidation may be undertaken in either of the
3 ways

107
- Actions pending for or against the corporation - “Trustee” as used in the corporation statute
when the 3 year period expires, are abated must be understood in its general concept
since after that period, the corporation ceases which could include the counsel to whom
for all intents and purposes and is no longer was entrusted in the instant case, the
capable of suing or being sued prosecution of the suit filed by the
- May be continued by the trustee provided corporation. The purpose in the transfer of
done within the 3 year period the assets of the corporation to a trustee
- Should the corporation, therefore, finds it upon its dissolution is more for the
difficult to finish its liquidation, it may, at any protection of its creditors and stockholders.
time during the three year period, convey all its Debtors like the petitioners herein may not
assets and receivables to a trustee to take advantage of the failure of the
prosecute and defend suits by or against the corporation to transfer its assets to a
corporation begun before the expiration of said trustee, assuming it has any to transfer
period which petitioner has failed to show, in the
- The effect of the conveyance is to make the first place. To sustain petitioners’ contention
trustees the legal owners of the property would be to allow them to enrich
conveyed, subject to the beneficial interest themselves at the expense of another,
therein of creditors and stockholders which all enlightened legal systems
condemn.
 Sumera vs. Valencia - The counsel who prosecuted and defended
the interest of the corporation may be
considered as a “trustee” at least with
- Thus it was held that when a corporation is
respect to the matter in litigation only
dissolved and the liquidation of the assets is
placed in the hands of receiver or assignee,
the period of 3 years prescribed by law is not  May a corporation that is already dissolved,
applicable and the assignee may institute all transfer and assign its assets and
actions leading to the liquidation of the properties to a new corporation which will
corporation even after the expiration of 3 continue the business of the dissolved one?
years.
- If the corporation carries out the liquidation of - Yes, provided all the stockholders gave
its assets through its own officers and their consent (Chung Ka Bio vs. IAC)
continues and defends the actions brought by
or against it, its existence shall terminate at  Republic vs. Marsman Development
the end of three years from the time of Company & Chung Ka Bio vs. IAC
dissolution; but if a receiver or assignee is
appointed, with or without a transfer of its - During the three year period granted to a
properties within 3 years, the legal interest corporation to liquidate or wind up its affairs,
passes to the assignee, the beneficial interest the BOD is not normally permitted to
remaining in the members, stockholders, undertake any activity outside the usual
creditors and other interested persons and liquidation of the corporation. There is,
said assignee may bring an action, prosecute however, nothing to prevent the
that which has already been commenced for stockholders from conveying their
the benefit of the corporation, or defend the respective shareholdings toward the
latter against any other action already creation of a new corporation to continue
instituted or which may be instituted even the business of the old. This is because
outside of the period of three years fixed for winding up is the sole activity of the
the offices of the corporation. dissolved corporation that does not intend
to incorporate a new. If it does, however, it
 Board of Liquidators vs. Kalaw is not unlawful for the old board of directors
to negotiate and transfer the assets of the
- If there is a trustee, assignee or liquidator, it dissolved corporation to the new
can continue prosecuting suit even beyond the corporation intended to be created as long
3 year period fixed by law because he as the stockholders have given their
becomes the legal owner of the rights, assets consent (Republic vs. Marsman
and properties conveyed to him Development Company)
- Winding up is the sole activity of a dissolved
 Gelano vs. CA corporation that does not intend to
incorporate anew. If it does, however, it is

108
not unlawful for the old board of directors to for and in its behalf, might make proper
negotiate and transfer the assets of the representations with the SEC, which has
dissolved corporation to the new corporation primary and sufficiently broad jurisdiction in
intended to be created as long as the matters of this nature, for working out a final
stockholders have given their consent (Chung settlement of the corporate concerns
Ka Bio vs. IAC)
o the ruling is wrong according to
 What happens to the remaining assets and atty. Ladia
properties of the dissolved corporation if
liquidation and winding up as provided in  According to atty Ladia: What happens to a
section 122 is not complied with, as a result of corporation that is already dissolved, that
which the 3 year period has elapsed has not been able to appoint a trustee with
in the 3 year period?
- If the three year extended life has expired
without a trustee or receiver having been - a corporation dissolved which failed to
expressly designated by the corporation within exercise its rights granted in section 122
that period, the board of directors o trustees after the 3 year period has elapsed, ceases
itself, following the rationale of the Supreme to exist for all intents and purposes, it can
Court’s decision in Gelano vs. CA may be no longer sue or be sued
permitted to do so continue as” trustees” by - according to 122 of the code, the property
legal implication to complete the liquidation. should be escheated, accordingly:
Still in the absence of a BOD or BOT, those
having any pecuniary interest in the assets,
Section 122. Corporate liquidation.
including not only the shareholders but
- Every corporation whose charter expires
likewise the creditors of the corporation, acting
by its own limitation or is annulled by
for and in its behalf, might make proper
forfeiture or otherwise, or whose corporate
representations with the SEC, which has
existence for other purposes is terminated
primary and sufficiently broad jurisdiction in
in any other manner, shall nevertheless be
matters of this nature, for working out a final
continued as a body corporate for three (3)
settlement of the corporate concerns
years after the time when it would have
(Clemente vs. CA)
been so dissolved, for the purpose of
prosecuting and defending suits by or
o According to atty. Ladia the ruling of against it and enabling it to settle and close
the Supreme Court in the case of its affairs, to dispose of and convey its
Clemente vs. CA is wrong, opinion is property and to distribute its assets, but not
further discussed after the Clemente for the purpose of continuing the business
Case for which it was established.

 Clemente vs. CA At any time during said three (3)


years, the corporation is authorized and
- Who owns the properties? SOCIEDAD empowered to convey all of its property to
ANONIMA trustees for the benefit of stockholders,
- The termination of the life of a juridical entity members, creditors, and other persons in
does not by itself cause the extinction or interest. From and after any such
diminution of the rights and liabilities of such conveyance by the corporation of its
entity or those of its owners and creditors. If property in trust for the benefit of its
the three year extended life has expired stockholders, members, creditors and
without a trustee or receiver having been others in interest, all interest which the
expressly designated by the corporation within corporation had in the property terminates,
that period, the board of directors o trustees the legal interest vests in the trustees, and
itself, following the rationale of the Supreme the beneficial interest in the stockholders,
Court’s decision in Gelano vs. CA may be members, creditors or other persons in
permitted to do so continue as” trustees” by interest.
legal implication to complete the liquidation.
Still in the absence of a BOD or BOT, those Upon the winding up of the
having any pecuniary interest in the assets, corporate affairs, any asset distributable
including not only the shareholders but to any creditor or stockholder or
likewise the creditors of the corporation, acting member who is unknown or cannot be
109
found shall be escheated to the city or  If a foreign corporation wants to transact
municipality where such assets are business in the Philippines, what must it
located. do?

Except by decrease of capital stock - Obtain a license


and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or  How may it do so?
property except upon lawful dissolution and
after payment of all its debts and liabilities.
- According to sec. 125:
(77a, 89a, 16a)
Section 125. Application for a
FOREIGN CORPORATIONS
license. - A foreign corporation applying for
a license to transact business in the
 Definition Philippines shall submit to the Securities
and Exchange Commission a copy of its
- Section 123. Definition and rights of foreign articles of incorporation and by-laws,
corporations. - For the purposes of this Code, certified in accordance with law, and their
a foreign corporation is one formed, organized translation to an official language of the
or existing under any laws other than those of Philippines, if necessary. The application
the Philippines and whose laws allow Filipino shall be under oath and, unless already
citizens and corporations to do business in its stated in its articles of incorporation, shall
own country or state. It shall have the right to specifically set forth the following:
transact business in the Philippines after it
shall have obtained a license to transact 1. The date and term of incorporation;
business in this country in accordance with
this Code and a certificate of authority from the
2. The address, including the street number,
appropriate government agency. (n)
of the principal office of the corporation in
the country or state of incorporation;
 What if the law of the state of the foreign
corporation does not allow Filipino citizens to
3. The name and address of its resident
do business in their country?
agent authorized to accept summons and
process in all legal proceedings and,
- The phrase “and whose laws allow Filipino pending the establishment of a local office,
citizens and corporations to do business in its all notices affecting the corporation;
own country or state” is not, however, an
accurate inclusion in the definition as ay 4. The place in the Philippines where the
corporation registered or organized under the
corporation intends to operate;
laws of another state is necessarily a foreign
corporation whether or not the state of its
incorporation allow Filipino citizens or 5. The specific purpose or purposes which
corporations to do business in that forum. the corporation intends to pursue in the
- The said phrase was inserted by the framers transaction of its business in the
of the law only as a condition precedent to the Philippines: Provided, That said purpose or
grant of a license of a foreign corporation to do purposes are those specifically stated in the
business in the Philippines. certificate of authority issued by the
appropriate government agency;
 Composed of 100% Americans; organized
under the laws other than the Philippines 6. The names and addresses of the present
directors and officers of the corporation;
- The test is the “incorporation test”
- General rule: the place of its incorporation 7. A statement of its authorized capital stock
irrespective of the nationality and the aggregate number of shares which
- Exception: control test would apply in the corporation has authority to issue,
determining the corporate nationality, i.e., the itemized by classes, par value of shares,
citizenship of the controlling stockholders shares without par value, and series, if any;
determines the nationality of the corporation
8. A statement of its outstanding capital
stock and the aggregate number of shares
110
which the corporation has issued, itemized by engaged in foreign banking or insurance,
classes, par value of shares, shares without shall deposit with the SEC, for the benefit of
par value, and series, if any; creditors, securities consisting of bonds or
other evidence of indebtedness of the
9. A statement of the amount actually paid in; Philippine government or its political
and subdivision, or of government owned or
controlled corporation, shares of stock in
“registered enterprises” as this term is
10. Such additional information as may be
defined in R.A. 5186, shares of stock in
necessary or appropriate in order to enable
the Securities and Exchange Commission to domestic insurance companies and banks
determine whether such corporation is entitled or any combination thereof with an actual
market value of 100,000
to a license to transact business in the
Philippines, and to determine and assess the - Additional securities may be required by the
fees payable. SEC if the actual market value of the
securities on deposit has decreased by at
least 10%. Section 126 of the code
Attached to the application for license provides:
shall be a duly executed certificate under oath
by the authorized official or officials of the
Section 126. Issuance of a license.
jurisdiction of its incorporation, attesting to the
fact that the laws of the country or state of the - If the Securities and Exchange
applicant allow Filipino citizens and Commission is satisfied that the applicant
corporations to do business therein, and that has complied with all the requirements of
the applicant is an existing corporation in good this Code and other special laws, rules and
standing. If such certificate is in a foreign regulations, the Commission shall issue a
language, a translation thereof in English license to the applicant to transact business
under oath of the translator shall be attached in the Philippines for the purpose or
thereto. purposes specified in such license. Upon
issuance of the license, such foreign
corporation may commence to transact
The application for a license to business in the Philippines and continue to
transact business in the Philippines shall do so for as long as it retains its authority to
likewise be accompanied by a statement act as a corporation under the laws of the
under oath of the president or any other country or state of its incorporation, unless
person authorized by the corporation, showing such license is sooner surrendered,
to the satisfaction of the Securities and revoked, suspended or annulled in
Exchange Commission and other accordance with this Code or other special
governmental agency in the proper cases that laws.
the applicant is solvent and in sound financial
condition, and setting forth the assets and
liabilities of the corporation as of the date not Within sixty (60) days after the
exceeding one (1) year immediately prior to issuance of the license to transact business
the filing of the application. in the Philippines, the license, except
foreign banking or insurance corporation,
shall deposit with the Securities and
Foreign banking, financial and Exchange Commission for the benefit of
insurance corporations shall, in addition to the present and future creditors of the licensee
above requirements, comply with the in the Philippines, securities satisfactory to
provisions of existing laws applicable to them. the Securities and Exchange Commission,
In the case of all other foreign corporations, no consisting of bonds or other evidence of
application for license to transact business in indebtedness of the Government of the
the Philippines shall be accepted by the Philippines, its political subdivisions and
Securities and Exchange Commission without instrumentalities, or of government-owned
previous authority from the appropriate or controlled corporations and entities,
government agency, whenever required by shares of stock in "registered enterprises"
law. (68a) as this term is defined in Republic Act No.
5186, shares of stock in domestic
 Is there any deposit or security requirement? corporations registered in the stock
exchange, or shares of stock in domestic
- Yes, within 60 days after the issuance of the insurance companies and banks, or any
license, a foreign corporation, except those combination of these kinds of securities,
111
with an actual market value of at least one transact business in the Philippines by any
hundred thousand (P100,000.) pesos; foreign corporation that such corporation file
Provided, however, That within six (6) months with the Securities and Exchange
after each fiscal year of the licensee, the Commission a written power of attorney
Securities and Exchange Commission shall designating some person who must be a
require the licensee to deposit additional resident of the Philippines, on whom any
securities equivalent in actual market value to summons and other legal processes may
two (2%) percent of the amount by which the be served in all actions or other legal
licensee's gross income for that fiscal year proceedings against such corporation, and
exceeds five million (P5,000,000.00) pesos. consenting that service upon such resident
The Securities and Exchange Commission agent shall be admitted and held as valid as
shall also require deposit of additional if served upon the duly authorized officers
securities if the actual market value of the of the foreign corporation at its home office.
securities on deposit has decreased by at Any such foreign corporation shall likewise
least ten (10%) percent of their actual market execute and file with the Securities and
value at the time they were deposited. The Exchange Commission an agreement or
Securities and Exchange Commission may at stipulation, executed by the proper
its discretion release part of the additional authorities of said corporation, in form and
securities deposited with it if the gross income substance as follows:
of the licensee has decreased, or if the actual
market value of the total securities on deposit "The (name of foreign corporation)
has increased, by more than ten (10%) does hereby stipulate and agree, in
percent of the actual market value of the consideration of its being granted by the
securities at the time they were deposited. The Securities and Exchange Commission a
Securities and Exchange Commission may, license to transact business in the
from time to time, allow the licensee to Philippines, that if at any time said
substitute other securities for those already on corporation shall cease to transact business
deposit as long as the licensee is solvent. in the Philippines, or shall be without any
Such licensee shall be entitled to collect the resident agent in the Philippines on whom
interest or dividends on the securities any summons or other legal processes may
deposited. In the event the licensee ceases to be served, then in any action or proceeding
do business in the Philippines, the securities arising out of any business or transaction
deposited as aforesaid shall be returned, upon which occurred in the Philippines, service of
the licensee's application therefor and upon any summons or other legal process may
proof to the satisfaction of the Securities and be made upon the Securities and Exchange
Exchange Commission that the licensee has Commission and that such service shall
no liability to Philippine residents, including the have the same force and effect as if made
Government of the Republic of the Philippines. upon the duly-authorized officers of the
(n) corporation at its home office."

 Other than section 125 and 126. What other Whenever such service of
requirements are set under Philippine Law summons or other process shall be made
before a foreign corporation may transact upon the Securities and Exchange
business in the Philippines Commission, the Commission shall, within
ten (10) days thereafter, transmit by mail a
- Yes. A Resident agent is required. As a copy of such summons or other legal
condition precedent to the grant of a license to process to the corporation at its home or
do or transact business in the Philippines, the principal office. The sending of such copy
foreign corporation is required to designate its by the Commission shall be necessary part
resident agent on whom summons and other of and shall complete such service. All
legal processes may be served in all actions or expenses incurred by the Commission for
legal proceedings against such corporation such service shall be paid in advance by the
- Section 128 provides: party at whose instance the service is
made.
Section 128. Resident agent; service
of process. - The Securities and Exchange In case of a change of address of
Commission shall require as a condition the resident agent, it shall be his or its duty
precedent to the issuance of the license to to immediately notify in writing the

112
Securities and Exchange Commission of the  If the foreign corporation conducts business
new address. (72a; and n) in the Philippines without the license
requirement. What is the effect?
- The necessity of the appointment of a resident
agent is only for the purpose of receiving - Section 133 provides:
summons and other legal processes in any
legal action or proceeding against the foreign Section 133. Doing business
corporation without a license. - No foreign corporation
transacting business in the Philippines
 Who may be appointed as a resident agent? without a license, or its successors or
assigns, shall be permitted to maintain or
- Section 127 provides that: intervene in any action, suit or proceeding in
any court or administrative agency of the
Philippines; but such corporation may be
Section 127. Who may be a resident
sued or proceeded against before Philippine
agent. - A resident agent may be either an
courts or administrative tribunals on any
individual residing in the Philippines or a
valid cause of action recognized under
domestic corporation lawfully transacting
Philippine laws. (69a)
business in the Philippines: Provided, That in
the case of an individual, he must be of good
moral character and of sound financial - if they do so, the responsible officers may
standing. (n) be subjected to the penal sanctions
provided for in section 144 of the code,
which may either be fine or imprisonment
 May a partnership be appointed as a resident
agent?
 What if it is not doing business without a
license?
- Yes, domestic corporation taken in its general
sense not legal sense
- If it is not transacting business in the
Philippines, even without a license, it can
 If there is a resident agent appointed. May
sue before the Philippine Courts
summons be served to any officers of the
corporation?
 The general rule is that “it is not the lack of
required license but doing business without
- No, if there is a resident agent, the designation
a license which bars a foreign corporation
is exclusive and service must be made only to
form access to our courts.”
the resident agent or else the service is
without force and effect unless made to him
 Exception:
- Thus, while the law allows service upon the
SEC or any of its officers or agents within the
Philippines 1. Foreign corporations can sue before the
- The two modes may become effective only if Philippine Courts if the act or
the foreign corporation failed or neglected to transaction involved is an “isolated
designate such a person or an agent transaction” or the corporation is not
- Summons must be made only to resident seeking to enforce any legal or
agent except when there is no resident agent contractual rights arising from, or
appointed growing out of, any business which it
- Where such foreign corporation actually doing has transacted in the Philippines
business here has not applied for a license to 2. Neither is a license required before a
do and has not designated an agent to receive foreign corporation may sue before the
summons, then service of summons on it will forum if the purpose of the suit is to
be made pursuant to the provisions of the protect its trademark, trade name,
rules of court. If such foreign corporation has a corporate name, reputation or goodwill;
license to do business, then summons to it will 3. Or where it is based on a violation of
be served on the agent designated by it for the the Revised Penal Code;
purpose, or otherwise in accordance with the 4. Or merely defending a suit filed against
Corporation Law (General Corporation of the it
Philippines vs. Union Insurance Soc. Of 5. Or where a party is stopped to
Canton Ltd.) challenge the personality of the

113
corporation by entering into a contract with functions normally incident to, and in
it. progressive prosecution of, the purpose and
object of its organization (Mentholatum Co.
 Rules laid down by the SC Inc. vs. Mangaliman)

A. As to B. As to  Mentholatum vs. Mangaliman


whether or whether or
not it can not it can be - The true test, however, seems to be
sue sued whether the foreign corporation is
A foreign A foreign continuing the body or substance of the
corporation corporation business or enterprise for which it was
transacting or transacting business organized or whether it has substantially
doing business in in the Philippines retired from it and turned it over to another.
the Philippines with the requisite The term implies a continuity of commercial
with a license can license can be sued dealings and arrangements, and
sue before in the Philippine contemplates, to that extent, the
Philippine Courts Courts performance of acts or works or the
Subject to certain A foreign exercise of some of the functions normally
exceptions, a corporation incident to, and in progressive prosecution
foreign corporation transacting business of, the purpose and object of its
doing business in in the Philippines organization
the country without without a license - Whatever transaction the Philippine-
a license cannot can be sued in American Drug Co. had executed in view of
sue in Philippine Philippine Courts the law, the Mentholatum Co. did it itself.
Courts And the Mentholatum Co. being a foreign
If it is not if it is not doing corporation doing business in the
transacting business in the Philippines without the license required by
business in the Philippines, it section 68 of the Corporation Law, it may
Philippines, even cannot be sued in not prosecute this action for violation of
without a license, it Philippine Courts for trade mark and unfair competition
can sue before the lack of jurisdiction
Philippine Courts  Why is foreign corporations barred access
 A foreign corporation not doing business in the from our courts if they do business without a
Philippines, may it be sued? license?

- If it is not transacting business in the country it - Marshall-Wells Co. vs. Henry W. Elser and
cannot be sued for lack of jurisdiction Co.

 Is there any sanction that can be enforced to  Marshall-Wells Co. vs. Henry W. Elser and
foreign corporations which are doing business Co.
without the required license?
- The object of the statute was to subject the
- Penal sanctions under section 144 foreign corporation doing business in the
- Any violation of the code is subject to such Philippines to the jurisdiction of its courts.
penal sanctions The object of the statute was not to prevent
the foreign corporation from performing
 What would constitute doing business? single acts, but to prevent it from acquiring
a domicile for the purpose of business
without taking the steps necessary to render
- The true test, however, seems to be whether
the foreign corporation is continuing the body it amenable to suit in local courts.
or substance of the business or enterprise for
which it was organized or whether it has  Bulakhidas vs. Navarro
substantially retired from it and turned it over
to another. The term implies a continuity of - It is settled that if a foreign corporation is
commercial dealings and arrangements, and not engaged in business in the Philippines,
contemplates, to that extent, the performance it may not be denied the right to file an
of acts or works or the exercise of some of the

114
action in Philippine courts for isolated the failure of the petitioners to deliver the
transactions crude coconut oil under the first transaction
- The object of section 68 and 69 of the and in order to give the latter a chance to
Corporation law was not to prevent the foreign make good on their obligation. From these
corporation from performing single acts, but to facts alone, it can be deducted that in reality
prevent it from acquiring a domicile for the there was only one agreement between the
purpose of business without taking the steps petitioners and the respondent.
necessary to render it amenable to suit in the - The three seemingly different transactions
local courts. It was never the purpose of the were entered into by the parties only in an
Legislature to exclude a foreign corporation effort to fulfill the basic agreement and in no
which happens to obtain an isolated order for way indicate an intent on the part of the
business from the Philippines, from securing respondent to engage in a continuity of
redress in the Philippine courts transactions with petitioners which will
categorize it as a foreign corporation doing
 The Swedish East Asia Co., Ltd. Vs. Manila business in the Philippines
Port Service - 3 contracts, but according to the court was
not doing business in the Philippines
- It must stated that the section is not applicable
to a foreign corporation performing single acts  Far East Int’l import vs. Nankai Kogyo Co.
or “isolated transactions.” There is nothing to Ltd.
show that the petitioner has been in the
Philippines engaged in continuing business or - Only one contract , but according to the
enterprise for which it was organized, when Supreme Court was doing business in the
the sixteen bundles were erroneously Philippines
discharged in manila, for it to be considered as - Every case shall be judged in the light of its
transacting business in the Philippines. The peculiar circumstances, where a single act
fact is that the bundles, the value of which is or transaction however, is not merely
sought to be recovered, were landed not as a incidental or casual but indicates the foreign
result of a business transaction, isolated or corporation’s intention to do other business
otherwise, but due to a mistaken belief that in the Philippines, said single act or
they were part of the shipment of forty similar transaction constitutes “doing” or “engaging
bundles consigned to persons or entities in the in” or “transacting” business in the
Philippines, there is no justification therefore, Philippines
for invoking the section - In the instant case, the testimony of Atty.
Pablo Ocampo, that appellant was doing
 There were 3 contracts entered into, how business in the Philippines corroborated by
come they were still not considered as doing no less than Nabuo Toshida, one of
business? (Antam Consolidted, Inc. vs. CA) appellant’s officers, that he was sent to the
Philippines to look into the operation of
- Every case shall be judged in the light of its mines, thereby revealing the defendant’s
peculiar circumstances, where a single act or desire to continue engaging in business
transaction however, is not merely incidental here, after receiving the shipment of the
or casual but indicates the foreign scrap iron under consideration, making the
corporation’s intention to do other business in Philippines a base thereof.
the Philippines, said single act or transaction - In such a case, the single act of transaction
constitutes “doing” or “engaging in” or is not merely incidental or casual, but is of
“transacting” business in the Philippines such character as distinctly to indicate a
- In the case at bar, the transaction entered into purpose on the part of the operations for the
by the respondent with the petitioners are not conduct of a part of corporation’s ordinary
a series of commercial dealings which signify business
an intent on the part of the respondent to do
business in the Philippines but constitute an  If a corporation appoints a distributor or a
isolated one which does not fall under the representative, will it necessarily imply
category of “doing business.” doing business in the country?
- The records show that the only reason why the
respondent entered into the second and third - If the foreign corporation maintained an
transactions with the petitioner was because it independent status during the existence of
wanted to recover the loss it sustained from the disputed contract.

115
- Appointment of a distributor or representative protect its tangible property, real or
in the Philippines, unless it has an personal, against trespass, or conversion
independent status (transacts and does - Since it is the trade and not the mark that is
business in its own name and for its account to be protected a trademark acknowledges
and not of the foreign corporation) no territorial boundaries or municipalities or
- if that be the case the mere appointment of a states or nations, but extends to every
distributor will not constitute doing business market where the trader’s goods have
become known and identified by the use of
 How do you know if it has an independent the mark
status?
 General Garments Corporation vs. Director
- Communications Materials and Design vs. CA of Patents

 Communications Materials and Design vs. CA - A foreign corporation which has never done
business in the Philippine Islands and which
is unlicensed and unregistered to do
- A perusal of the agreements between
business here, but is widely and favorably
petitioner ASPAC and the respondents show
known in the Islands through the use
that there are provisions which are highly
therein of its products bearing its corporate
restrictive in nature, such as to reduce
and trade name has a legal right to maintain
petitioner ASPAC to a mere extension or
an action in the Islands
instrument of the private respondents
- Mentholatum case was subsequently
- ITEC was doing business without a license,
derogated when Congress, purposely to
however ASPAC is estopped
“counteract the effects” of said case,
- by entering into the Representative
enacted R.A. 638, inserting Section 21-A in
Agreement” with ITEC, petitioner is charge
the Trademark Law, which allows a foreign
with knowledge that ITEC was not licensed to
corporation or juristic person to bring an
engage in business activities in the country,
action in Philippine Courts for infringement
and is thus stopped from raising in defense
of a mark or trade-name, for unfair
such incapacity of ITEC, having chosen to
competition, or false designation of origin
ignore or even presumptively take advantage
and false description, “whether or not it has
of the same
been licensed to do business in the
- In top-weld we ruled that a foreign corporation
Philippines under Act Numbered Fourteen
may be exempted from the license
hundred and fifty-nine, as amended,
requirements in order to institute an action in
otherwise known as Corporation Law, at the
our courts if its representative in the country
time it brings complaint.
maintained an independent status during the
existence of the disputed contract. Petitioner is
deemed to have acceded to such independent  Puma Sporschufabriken Rudolf Dassler,
character when it entered into the K.G. vs. IAC and MIL-ORO MFG. Corp.
Representative Agreement with ITEC
- Treaties for part of the law of the land
 Western Equipment and Supply Co. vs. Reyes - Quoting the Paris Convention and the case
of Vanity Fair Mills Inc. vs. T. Eaton Co. this
court further said:
- The company is not here seeking to enforce
any legal or contract rights arising from, or
growing out of any business which it has “By the same token, the petitioner
transacted in the Philippine Islands. The sole should be given the same treatment
purpose of the action is to protect its in the Philippines as we make
reputation, its corporate name, its goodwill, available to our own citizens. We
whenever that reputation, corporate name or are obliged to assure to nationals of
goodwill have through the natural development countries of the Union an effective
of its trade, established themselves protection against unfair
- And it contends that its rights to the use of its competition on the same way that
corporate and trade name, is a property right, they are obligated to similarly
a right in rem, which may assert and protect protect Filipino Citizen and firms
against all the world, in any of the courts of the
world even in jurisdictions where it does not - The ruling in the aforecited case is in
transact business just the same as it may consonance with the Convention of the
116
Union of Paris for the protection of Industrial compliance, or the fact that the suing
Property to which the Philippines became a corporation is exempt there from, becomes
party. Article 8 thereof provides that a trade a necessary averment in the complaint
name shall be protected in all the countries of - These are matters peculiarly within the
the Union without the obligation of filing or knowledge of appellants alone, and it would
registration, whether or not it forms part of the be unfair to impose upon appellee the
trademark burden of asserting and proving the
contrary. It is enough that foreign
 Le Chemiste Lacoste vs. Fernandez corporations are allowed by law to seek
redress in our courts under certain
conditions: the interpretation of the law
- The French company may gain access to our
courts, in the first place it was not doing should not go so far as to include, in effect,
an inference than those conditions have
business in the Philippines
been met from the mere fact that the party
- The marketing of its products in the Philippines
suing is a foreign corporation
is done through an exclusive distributor,
Rustan Commercial Corporation. The latter is
an independent entity which buys and then  Olympia Business Machines Co. vs. E.
markets not only products of the petitioner but Razon
also many other products bearing equally well-
known and established trademarks and trade- - How do you distinguish this case with
names Atlantic?
- In Atlantic it dismissed the case, while in
 Assuming Rustans had no independent status Olympia it did not
would the SC grant Lacoste access to our
courts?  Time Inc. vs. Reyes

- Even if Lacoste did business in the Philippines - We fail to see how these doctrines can be a
it can bring action because the case involves a propos in the case at bar, since the
violation of our penal code petitioner is not “maintaining any suit” but is
- Such was a violation of article 189 of the RPC, merely defending one against itself; it did
if prosecution follows after the completion of not file any complaint but only a corollary
the preliminary investigation being conducted defensive petition to prohibit the lower court
by the Special Prosecutor the information shall from further proceeding with a suit that it
be in the name of the People of the Philippines had no jurisdiction to entertain
and no longer the petitioner which is only an
aggrieved party since a criminal offense is  What law govern foreign corporation doing
essentially an act against the State. It is the and transacting business in the Philippines
latter which is principally the injured party with a license
although there is a private right violated
- The records show that the goodwill and - Laws of the Republic of the Philippines save
reputation of the petitioner’s products bearing and except that would normally be those
the trademark Lacoste date back even before
matters which concern its formation,
1964 when Lacoste clothing apparels were
organization or dissolution, or those fixing
forst marketed in the Philippines. To allow
the relationship, liabilities, responsibilities,
Hemandas to continue using the trademark
or duties of the stockholders, members or
Lacoste for the simple reason that he was the officers of the foreign corporation or their
first registrant in the Supplemental Register of relations to each other.
a trademark used in international commerce
- In effect, intra-corporate or internal matters
and not belonging to him is to render nugatory
not affecting creditors or the public in
the very essence of the law on trademarks and
general are governed not by Philippine laws
trade names
but the law under which the foreign
corporation was formed or organized
 Atlantic Mutual Insurance Co. vs. Cebu
Stevedoring Co.
Section 129. Law applicable. - Any
foreign corporation lawfully doing business
- The law denies to a foreign corporation the in the Philippines shall be bound by all laws,
right to maintain suit unless it has previously rules and regulations applicable to domestic
complied with a certain requirement, then such corporations of the same class, except such
117
only as provide for the creation, formation, 5. A misrepresentation of any material
organization or dissolution of corporations or matter in any application, report, affidavit or
those which fix the relations, liabilities, other document submitted by such
responsibilities, or duties of stockholders, corporation pursuant to this Title;
members, or officers of corporations to each
other or to the corporation. (73a) 6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
 Will the pre-emptive rights of a foreign due to the Philippine Government or any of
corporation be governed by the same section its agencies or political subdivisions;
of the code? Is the pre-emptive rights of a
stockholder in a domestic corporation same as 7. Transacting business in the Philippines
the pre-emptive of a stockholder of a foreign outside of the purpose or purposes for
corporation. which such corporation is authorized under
its license;
- No
8. Transacting business in the Philippines
 M.E. Grey vs. Insular Lumber Company as agent of or acting for and in behalf of any
foreign corporation or entity not duly
- PNB vs. Gonzales, will this apply to a foreign licensed to do business in the Philippines;
corporation? How do you distinguish this case or
from a Philippine law?
- Since it concerns the rights of stockholders it 9. Any other ground as would render it unfit
is the law of New York that should govern to transact business in the Philippines. (n)

 Is the license to do business of a foreign  SEC does not have the sole authority to
corporation subject to suspension or suspend or revoke the license of a foreign
revocation? What are the grounds? corporation doing business in the
Philippines, other government agencies like
- Section 134 provides: the Central Bank , the Insurance
Commission may also do so within their
respective dominion, despite the provision
Section 134. Revocation of license. -
of section 134
Without prejudice to other grounds provided by
 If the SEC believes that revocation is
special laws, the license of a foreign
warranted, section 135 provides that:
corporation to transact business in the
Philippines may be revoked or suspended by
the Securities and Exchange Commission Section 135. Issuance of certificate
upon any of the following grounds: of revocation. - Upon the revocation of any
such license to transact business in the
Philippines, the Securities and Exchange
1. Failure to file its annual report or pay any
Commission shall issue a corresponding
fees as required by this Code;
certificate of revocation, furnishing a copy
thereof to the appropriate government
2. Failure to appoint and maintain a resident agency in the proper cases.
agent in the Philippines as required by this
Title;
The Securities and Exchange
Commission shall also mail to the
3. Failure, after change of its resident agent or corporation at its registered office in the
of his address, to submit to the Securities and Philippines a notice of such revocation
Exchange Commission a statement of such accompanied by a copy of the certificate of
change as required by this Title; revocation. (n)

4. Failure to submit to the Securities and  Voluntary withdrawal of license


Exchange Commission an authenticated copy
of any amendment to its articles of
- All 3 conditions must be complied with
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title; Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
118
regulations, a foreign corporation licensed to - Allegation corporate officers employing
transact business in the Philippines may be schemes in diverting
allowed to withdraw from the Philippines by
filing a petition for withdrawal of license. No - Not only detrimental to corporation, but
certificate of withdrawal shall be issued by the general membership
Securities and Exchange Commission unless
all the following requirements are met; - Fraud must be stated with particularity

 Abad vs. CFI of Pangasinan


1. All claims which have accrued in the
Philippines have been paid, compromised or - Fraud must be stated with particularity
settled; otherwise it may be filed to any court

2. All taxes, imposts, assessments, and  Intra-corporate


penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political - Exclusive and original jurisdiction of special
subdivisions have been paid; and commercial courts

3. The petition for withdrawal of license has - Sole criteria is there must be an intra-
been published once a week for three (3) corporate relationship
consecutive weeks in a newspaper of general
- Pertaining to a controversy (speaks also of
circulation in the Philippines.
intra-partnership controversy, that
partnership must be registered with the
SEC)

P.D. 902-A  Rule now

 P.D. 902-A was amended by R.A. 8799 or the 1. Necessarily be an intra-corporate


SECURITIES REGULATION CODE in the relationship; and,
year 2000
2. The controversy must arise out of said
 The jurisdiction of SEC for cases falling under relationship
section 5 thereof was transferred to the courts
of general jurisdiction designated by the SC,  Intra-corporate relationship alone will not
they were called special commercial courts, suffice to put it in the ambit of special
the only exceptions were revocation of commercial courts and courts of general
corporate franchise and calling of elections jurisdiction may take cognizance

 However the SEC retained receivership or  Case of a transferee of shares of stock to


suspension payments within June 20,2000 compel the corporation to recognize him as
a stockholder
 Jurisdiction of special commercial courts are
exclusive and original, jurisdiction is conferred  How can it be intra-corporate when he is
by law; 1 Special Commercial Court per region not yet fully paid
except MAKATI and QUEZON CITY which has
two - When the transferee has done all he can be
required to do to render the transfer
 Devices or Schemes effectual and the corporation refuses to
register the transfer, the requirement of the
- Pyramid scheme (misrepresentation)-Special registration is waived and the transferee is
Commercial Courts considered technically a stockholder who
may sue to enforce the right to have the
- Syndicated estafa- not bailable transfer registered

 Alleje case  Florendo vs. rivera, Embassy Farms

- Falls squarely under sec. 5 (a) Special - The transferor withheld the delivery, they
Commercial Courts are not yet prima facie; it will not be
considered intra-corporate

119
 Controversies in the appointment (asked in the the management committee or the
bar) rehabilitation receiver to substitute the
defendant in any pending action against it
- Cases involving election, appointment and before any court, tribunal or body. The real
removal justification is to enable the management
committee or rehabilitation receiver to
 In Andaya the court said that a corporate effectively exercise his powers free from
officer elected or appointed by the BOD is any Judicial or extra-judicial interference
always a corporate act that might unduly hinder or prevent the
“rescue” of the debtor company. To allow
- The fact that petitioner sought payment of his such other actions to continue would only
back wages, other benefits as well as moral add to the burden of the management
and exemplary damages and attorney’s fees in committee pr rehabilitation receiver, whose
his complaint will not operate to prevent the time, effort and resources would be wasted
SEC from exercising its jurisdiction under P.D. in defending claims against the corporation
902-A. The jurisdiction will not wrest on the instead of being directed towards
NLRC just because of that restructuring and rehabilitation.(PAL vs.
Spouses Sadic and Kurangking)
 Tabang vs. NLRC
- To enable the receiver to effectively
- Jurisdiction lies originally and exclusively to
exercise his or her power free form any
special commercial courts and not in the
judicial or extra-judicial that may disturb
NLRC
 3 types of suspension of payments
- SEC has jurisdiction over cases of removal
from employment of corporate officers 1. Simple suspension of payments
- The relationship of a person to a corporation, - where deferment of payment of claims
whether as officer or as agent or employee or against a distress company; ask the court to
not determined by the nature of the servides be given time to the payment of liability by
performed, but by the incidents of the postponing the payment
relationship on they actually exist
- When it has sufficient assets and liabilities
- Corporate officers dismissal is always a but forces the impossibility of meeting them
corporate act or intra-corporate controversy when they respectively fall due
 Midland construction vs. Movilla 2. Suspension of receiver with a management
committee with a rehabilitation play or
- NLRC will be possessed of jurisdiction suspension of payments accompanied by a
exception will not apply to mere recovery proposal for rehabilitation (with or without
rehabilitation)
 Main consideration
- corporation has sufficient assets to cover
- Asserts his right to the office or questions the
its liabilities, but sees the possibility; is or
propriety or validity of his ouster or removal, it
without rehabilitation plans; normally would
will be the special commercial courts and not
attach the rehabilitation plan
the NLRC
- For purpose of economic development
 Securities Regulation Code
3. Suspension of payments when the
- Transferred jurisdiction of the SEC to Special
corporation has no sufficient assets to its
Commercial Courts
liabilities
- Suspension of payment, appointment of
 May it still be revived?
management receivership
- Yes, it may still be revived
 What is the reason for suspension of all
claims?  How can a corporation with more liabilities
than assets continue its operations
- The reason for suspending actions for claims
profitably?
against the corporation is not really to enable
120
- Even if the distressed company has no - No preference shall be given
sufficient assets and liabilities it can go for
suspension  RCBC vs. IAC

- It asked for a management committee without - Decided on motion for reconsideration


a receiver plan (Victorius Milling case)
- It court 7 years to decide authentication
 Convert their claims into equity
 Rule of the thumb
- Their liability was almost wiped out they
became stockholders instead of creditors - Automatic suspension even if not decreed
in the decision itself
- After 5 years those who converted sold it back
to the corporation, thereby making profits - Once lifted the preferred creditors will
regain their preference
 Amendment is for the economic development
of the country  Appointment of a management committee

 What if walang amendment, e mas maraming - Take over the management committee of
liabilities kesa assets the distressed corporation

 Suspension order- all actions for claims - Extraordinary and drastic remedy
against the corporation are accordingly
suspended at whatever stage the proceedings - Without any remedy
maybe
 What is an intra-corporate controversy?
 Effect of suspension- you cannot foreclose
- Section 5(B)
 What are claims?
- Sole criteria is whether there exists an intra-
- Debts or demands of pecuniary nature. corporate dispute is that if there is an intra-
Assertion of a right to have money paid corporate relationship

- Claims against the corporation shall be  Why is there suspension of all actions
suspended, assertion of a right to have money against claims when a receiver is
paid; it must present a monetary claim, appointed?
liquidated or unliquidated
- To enable the management committee to
 Nullification of corporations does not present a exercise its powers
monetary claim of pecuniary nature
 Sy Chim vs. Sy Siy Ho (before a
 Union vs. CA management committee may be opt by a
court)
- It does not allow a mere individual to file the
petition which is limited to corporations - 2 requisites for a valid appointment of
partnership or associations. management committee

- Where no authority is granted to hear petitions 1. Imminent danger of dissipation, loss,


of individuals for suspension of payments, wastage or destruction of assets or other
such petition are beyond the competence of corporate properties
the SEC
2. Paralysis of business operations, the mere
 What happens if there is a suspension order? apprehension of future misconduct based
upon prior management
 Explain the key phrase “quality is equity”
- Save and except in the case of a close
- All creditors stand on equal footing, secure or corporation in case of deadlock
unsecure, holding or lien or without a lien, no management committee is allowed to take
creditor may enforce his lien while over right away
rehabilitation is going (Alemar case)
 Jacinto case

121
nd
- 2 par of page 676  Under old rule, creditors have no right to
institute an action for receivership; now
- 2 requisites where present creditors, if they sold 20% they can institute
an action for receivership
- Wala ng mapautang, there was a paralyzation
 Section 5
 Sy Chim
- Service of summons may be made by fax/e-
- Did not appoint a management committee mail
- In the absence of a strong showing of an  E.B. Villarosa vs. Benito
imminent danger of dissipation, loss wastage
or destruction of assets or other properties of a - Will apply only if it is not an intra-corporate
corporation and paralysis of its business controversy
operations, the mere apprehension of future
misconduct based upon prior mismanagement  If the controversy arose out of an intra-
will not authorize the appointment of a corporate dispute rules on interim rules of
management committee procedure of intra-corporate controversies
shall govern
 Section 5 and 6(D) governed by separate
rules; interim rules and intra-corporate  Rule 4 section 17- immunity from suit
controversy
 Rehabilitation receiver shall not subject to
 Venue of actions any action, claim or demand in connection
with any act done omitted by him in good
- Rules of court- where the parties are residing faith in the exercise of his functions and
powers herein conferred
- Intra-corporate- no matter where the parties
are residing it will be in the city or municipality  Claim
where the principal office is located
- Right to payment, whether or not it is
 Rehabilitation proceedings venue reduced to judgment, liquidated or
unliquidated, fixed or contingent, matured or
- In rem unmatured, disputed or undisputed, legal or
equitable and secured or unsecured
- Acquired upon publication without furnishing
the creditors a copy of the petition and  Investment contracts
attachments thereof
- A contract, transaction or scheme whereby
- A creditor may now file the suspension a person invests his money in a common
proceedings; provides that creditors owns at enterprise and is led to expect profits
least 25% primarily from the effects of others
 Intra-corporate- rule 1 section 6  The management committee and
rehabilitation receiver are empowered to:
 Service of summons- rule 2 section 5
1. Take custody and control of all assets of the
- Summons may be made to anyone corporation
 In case of intra-corporate dispute, elections, 2. Evaluate assets and liabilities, earnings
fraud, etc; if they are governed by interim rules operations of the corporation
of procedure on intra-corporate controversies
3. Determine the best way to protect the
 Venue investors and creditors
- Special commercial courts where principal 4. Study, review evaluate the feasibility of
office is located/established (section 5 rule 1) continuing operation and structures
- Matters of payment/suspension must be filed 5. Submit recommendations to the RTC
in the city/ municipality where corporation is regarding rehabilitation plan
located

122
6. Rehabilitate the corporation if determined to f) Proprietary or non proprietary membership
be feasible by the RTC certificates incorporations; and
g) Shares of stock, bonds, debentures, notes,
7. Report to the RTC until the corporation is evidences of indebtedness, asset-backed
dissolved securities;
THE SECURITIES REGULATION CODE (RA8799) GR: Securities shall not be sold or offered for sale
or distribution within the PH, without a registration
- Also known as the Blue Sky Law since it was statement filed with and approved by SEC. Prior to
enacted to protect the public from unscrupulous such sale, information on the securities, in such
promoters who stake business which have no basis form and with such substance as the Commission
and sell shares and interest therein to investors, who may prescribe, shall be made available to each
are then left holding certificates representing nothing prospective purchaser. (Sec 8)
more than a claim to a square of the blue sky.
EXCEPT: Exempt Securities under Sec 9
-SEC. 2. Declaration of State Policy. – The State shall a) Any security issued or guaranteed
establish a socially conscious, free market that by the Government of the PH, or by any
regulates itself, encourage the widest participation of political subdivision or agency thereof, or by
ownership in enterprises, enhance the democratization any person controlled or supervised by, and
of wealth, promote the development of the capital acting as an instrumentality of said
market, protect investors, ensure full and fair Government.
disclosure about securities, minimize if not totally b) Any security issued or guaranteed
eliminate insider trading and other fraudulent or by the government of any country with
manipulative devices and practices which create diplomatic relations with the PH, or by any
distortions in the free market. state, province or political subdivision
thereof on the basis of reciprocity: Provided,
BROKER - person who buys and sells securities for that the SEC may require compliance with
the account of others. the form and content of disclosures the
Commission may prescribe.
DEALER - person who buys and sells securities for c) Certificates issued by a receiver or
his/her own account in the ordinary course of by a trustee in bankruptcy duly approved by
business. the proper adjudicatory body.
d) Any security or its derivatives the
NOTE: No person shall engage in the sale or transfer of which, by law, is under
business of buying or selling securities in the supervision and regulation of the Office
the Philippines as a broker or dealer, or of the Insurance Commission, Housing and
act as a salesman, or an associated Land Use Regulatory Board, or the Bureau
person of any broker or dealer unless of Internal Revenue.
registered as such with the Commission. e) Any security issued by a bank
(Sec 28) except its own shares of stock.

SECURITES - shares, participation or interests in a AND Exempt Transactions under Sec 10


corporation or in a commercial enterprise or profit- a) A judicial sale, or sale by an
making venture and evidenced by a certificate, executor, administrator, guardian or receiver
contract, instrument, whether written or electronic in or trustee in insolvency or bankruptcy.
character. It includes: b) By or for the account of a pledge
CODE: COFDIPS holder, or mortgagee or any other similar
a) Certificates of assignments, certificates of lien holder selling or offering for sale or
participation, trust certificates, voting trust delivery in the ordinary course of business
certificates or similar instruments; and not for the purpose of avoiding the
b) Other instruments as may in the future be provisions of this Code, to liquidate a bona
determined by the Commission; fide debt, a security pledged in good faith as
c) Fractional undivided interests in oil, gas or security for such debt.
other mineral rights; c) An isolated transaction in which any
d) Derivatives like option and warrants; security is sold, offered for sale,
e) Investment contracts, certificates of interest or subscription or delivery by the owner
participation in a profit sharing agreement, thereof, or by his representative for the
certificates of deposit for a future subscription; owner’s account, such sale or offer for sale,
subscription or delivery not being made in

123
the course of repeated and successive remuneration is paid or given directly or
transactions of a like character by such owner, indirectly for soliciting such exchange.
or on his account by such representative and k) The sale of securities by an issuer
such owner or representative not being the to fewer than twenty (20) persons in the
underwriter of such security. Philippines during any twelve-month period.
d) Distribution by a corporation, actively l) The sale of securities to any
engaged in the business authorized by its AOI, number of the following qualified buyers: (i)
of securities to its stockholders or other Bank; (ii) Registered investment house;
security holders as a stock dividend or other (iii)insurance company; (iv) Pension fund or
distribution out of surplus. retirement plan maintained by the
e) Sale of capital stock of a corporation to Government of the Philippines or any
its own stockholders exclusively, where no political subdivision thereof or managed by
commission or other remuneration is paid or a bank or other persons authorized by the
given directly or indirectly in connection with Bangko Sentral to engage in trust functions;
the sale of such capital stock. (v) investment company or; (vi) Such other
f) Issuance of bonds or notes secured by person as the Commission may by rule
mortgage upon real estate or tangible personal determine as qualified buyers, on the basis
property, where the entire mortgage together of such factors as financial sophistication,
with all the bonds or notes secured thereby are net worth, knowledge, and experience in
sold to a single purchaser at a single sale. financial and business matters, or amount of
g) Issue and delivery of any security in assets under management.
exchange for any other security of the same
issuer pursuant to a right of conversion PROTECTION OF SHAREHOLDERS INTEREST
entitling the holder of the security surrendered
in exchange to make such conversion: 1. Tender Offers (Sec 19)
Provided, That the security so surrendered has 2. Proxy solicitation (Sec 20)
been registered under this Code or was, when 3. Internal record keeping and
sold, exempt from the provisions of this Code, accounting (Sec 22)
and that the security issued and delivered in
exchange, if sold at the conversion price, TENDER OFFER – A publicly announced intention
would at the time of such conversion fall within acting alone or in concert with others to acquire
the class of securities entitled to registration equity securities of a company. (2002 Bar Exams)
under this Code. Upon such conversion the
par value of the security surrendered in such Instances when Tender Offer is Required
exchange shall be deemed the price at which 1. When the person intends to acquire
the securities issued and delivered in such 15% or more of the equity share of a public
exchange are sold. company pursuant to an agreement made
h) Broker’s transactions, executed upon between or among the person and one or
customer’s orders, on any registered more sellers;
Exchange or other trading market. 2. When the person intends to acquire
i) Subscriptions for shares of the capital 30% or more of the equity share of a public
stock of a corporation prior to the incorporation company within a period of 12 months;
thereof or in pursuance of an increase in its 3. When the person intends to acquire
authorized capital stock under the Corporation shares that would result in an ownership of
Code, when no expense is incurred, or no more than 50% of the equity shares of a
commission, compensation or remuneration is public company.
paid or given in connection with the sale or
disposition of such securities, and only when PROXY SOLICITATION
the purpose for soliciting, giving or taking of
such subscriptions is to comply with the NOTE: A broker or dealer who holds or acquires the
requirements of such law as to the percentage proxy for at least ten per centum (10%) or such
of the capital stock of a corporation which percentage as the Commission may prescribe of the
should be subscribed before it can be outstanding share of the issuer, shall submit a report
registered and duly incorporated, or its identifying the beneficial owner within ten (10) days
authorized capital increased. after such acquisition, for its own account or
j) The exchange of securities by the customer, to the issuer of the security, to the
issuer with its existing security holders Exchange where the security is traded and to the
exclusively, where no commission or other Commission. (Sec 20.5)

124
FRAUDULENT TRANSACTIONS AND OTHER different class, of the same issuer or of a
MARKET MANIPULATIONS controlling, controlled company or common
controlled company by others or to create
1. Wash Sale (Sec 24.1(a)(i)) – any transaction active trading to induce the purchase
in a security which involves no change in the beneficial through said devices or schemes.
ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or 8. Circulating or Disseminating Information
orders for the purchase or sale of security with the – circulating an information that any of the security
knowledge that a simultaneous order or orders of listed in the exchange will or is likely to rise or fall
substantially the same size, time and price for the sale because of manipulative market operations of any
or purchase of such security has, or will be entered by one or more persons conducted for the purpose of
or for the same or different parties. raising or depressing the price of the security and
thus inducing the purchase of such security.
Note: Wash sale and matched orders become 9. Making False or Misleading Statements
illegal when they are used as a means to with respect to any material fact which he knew or
create false appearance of active trading in the had reasonable ground to believe was so false or
security concerned. misleading for the purpose of inducing the purchase
or sale of such security.
3. Marking the close – placing the purchase 10. Pegging or Fixing Or Stabilizing the price
order, at or near the close of the trading period. The of security effected either alone or with others
price that was closed will then be the price that will be through any series of transactions for the purchase
posted on the following trading day. or sale thereof, if done for such purpose.
4. Painting the tape – involves a series of 11. Short sale – selling of security which the
transactions that are reported publicly to give the vendor does not own unless done in accordance
impression of an activity in a security. with the rules and regulations of the SEC.
5. Squeezing the float – the part of an 12. Insider Trading – the act of an insider to
outstanding security intentionally held by dealers or buy or sell security of the issuer while in possession
other persons with a view of reselling them later for of material information with respect to such security
profit. that is not generally made known to the public
6. Hype and dump – Act employed by a person unless (a) The insider proves that the information
or group of persons of purchasing the outstanding was not gained from such relationship; or (b) If the
capital stock of a dormant public shell company for a other party selling to or buying from the insider (or
nominal amount and merge it with their privately held his agent) is identified, the insider proves: (i) that he
company. They would then gain control of the majority disclosed the information to the other party, or (ii)
stocks of the merged entity. Stock certificates are that he had reason to believe that the other party
often re-issued in the name of the merged entity to otherwise is also in possession of the information.
relatives and associates who act as nominees of the
person or persons employing the device. They would Note: When is information “material non-
then look for a broker-dealer who would be willing to public”? - if: (a) It has not been generally
make a “hype” of the securities. The broker-dealer disclosed to the public and would likely
then generates volume and advance bid price. When affect the market price of the security after
the market reaches a high price, they would “dump” being disseminated to the public and the
their shareholdings and bail out. lapse of a reasonable time for the market to
7. Boiler Room Operations – involves an absorb the information; or (b) would be
intensive selling campaign through numerous considered by a reasonable person
salesmen by telephone or through direct mail offerings important under the circumstances in
for securities of either a certain type or from a specific determining his course of action whether to
issuer. Investors are induced to purchase through buy, sell or hold a security.
hard-sell based on unfounded predictions and mailing
of misleading market letters. Note: Who is an “insider”? - “Insider”
means: (a) the issuer; (b) a director or
Note: Marking the close, Painting the tape, officer (or person performing similar
Squeezing the float, Hype and dump, Boiler functions) of, or a person controlling the
Room Operations become unlawful if it is issuer; (c) a person whose relationship or
effected to either raise the price or induce the former relationship to the issuer gives or
purchase of a security or of a controlling, gave him access to material information
controlled, or commonly controlled company about the issuer or the security that is not
by others or to depress the price to induce the generally available to the public; (d) a
sale of a security, whether of the same or of a government employee, or director, or officer

125
of an exchange, clearing agency and/or self-  If there are goods involved in the
regulatory organization who has access to multimarket, it is beyond the jurisdiction of SEC (Ex
material information about an issuer or a First Quadrant)
security that is not generally available to the  Criminal charge for violation of SRC is a
public; or (e) a person who learns such specialized dispute, hence it must be first referred
information by a communication from any of with SEC (Baviera vs. Paglinawan G.R. No. 168380
the foregoing insiders. Feb 8, 2007)
 T3 Rule in trading of Securities – Trading
INDEPENDENT DIRECTOR day + 3 more days you must comply with your
Person other than an officer or employee of obligations.
the corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation,
which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a
director.

Corporations which require an Independent


Director
1. An exchange; or
2. Any corporation with a class of equity
securities listed for trading on an Exchange or with
assets in excess of P50M and having 200 or more
holders, at least 200 of which are holding at least 100
shares of a class of its equity securities or which has
sold a class of equity securities to the public pursuant
to an effective registration statement shall have at least
two (2) independent directors or such independent
directors shall constitute at least 20% of the members
of such board, whichever is the lesser.

OPTION TRADING
 Put – a transferrable option or offer to deliver a
given number of shares of stock at a stated price on
any given time during the stated period.
 Call – a transferrable option to buy a specified
number of share at a stated price
 Straddle – a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or
proceeding under this Code, parties being investigated
and/or charged may propose in writing an offer of
settlement with the Commission. The Commission
may only agree to a settlement offer based on its
findings that such settlement is in the public interest.
Any agreement to settle shall have no legal effect until
publicly disclosed. Such decision may be made without
a determination of guilt on the part of the person
making the offer.

DAMAGES
All suits to recover damages shall be brought
before the Regional Trial Court, which shall have
exclusive jurisdiction to hear and decide such suits.
The Court is authorized to award damages in an
amount not exceeding triple the amount of the
transaction plus actual damages.

NOTES
126

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